The Income Fund rose +0.4% in October, inline with its benchmark which rose +0.4%. This took the 12-month return to +5.9% compared to its benchmark of +5.4%. 

Early in the month the RBNZ surprised the market by cutting the official cash rate by 0.5% to 2.5%. This followed a raft of weak macroeconomic indicators, including the particularly weak Q2 GDP result in September. With this cut, the OCR is now less than half of what it was in October last year, shifting it meaningfully into stimulative territory.  

Currently there is just one more ‘full cut’ of 0.25% priced into interest rate markets. We will therefore be on the lookout for signs of a recovery as we near the lows for this cycle, adjusting portfolio positioning accordingly  

A highlight during the month was our exit from Netflix bonds, having held them since January 2020. At the time they were still spending more on content than they were receiving in subscriptions – an investment we viewed as a wise first-mover advantage. Since then, their financial results have grown from strength to strength, their earnings have quadrupled, while their debt levels remained steady. This ultimately led to 5 rating agency upgrades, from BB- to A – and with bonds still on positive outlook.  

Unfortunately for us, this drove a large reduction in the returns we could generate from owning Netflix bonds. At sale, our bonds offered just 0.3% over equivalent government bonds, a great result for the company, but a good sign to sell and find more profitable investments for the fund. 

Another highlight for October was our participation in the inaugural bond issue from Watercare, the Auckland water infrastructure operator. As part of developing efforts to streamline local and central government infrastructure funding, Watercare (owned by Auckland Council) came to the market. Their large pipeline of critical water projects, coupled with a strong credit profile provided an attractive, low risk addition to the portfolio.