The Income fund fell -0.1% in November, less than the benchmark which declined by -0.3%.

The main source of weakness was driven by a shift in interest rate expectations. The Reserve Bank of New Zealand surprised markets by signalling an end to Official Cash Rate (OCR) cuts, holding the rate at 2.25%. This was a more ‘hawkish’ stance than anticipated, particularly as signs of economic recovery are only just beginning to emerge. In fact, the 2-year swap rate (a market traded rate which banks will use to price mortgages) is now higher than it was in August, when the OCR stood at 3%. This highlights the perhaps unintuitive way that interest rate markets, and financial markets respond far more to future expectations than current policy settings.

Elsewhere, a highlight for the month was our position in Scentre Group, the owner and operator of Westfield malls across Australia and New Zealand. The company is benefitting from a strong trend toward premium shopping experiences with their well-placed, experiential focused malls gaining market share. Notably, their bonds are also ‘floating rate’ which means the income the Fund receives adjusts as interest rates go up and down, which helped during the month.

Detractors for the month included positions with longer fixed rate coupons issued by Watercare and Auckland Airport. These issuers are both operationally very secure – offering critical infrastructure for Auckland’s economy, however both have large growth programmes. This has increased their requirement for debt issuance as they fund capital works ahead of time, issuing longer maturity bonds. As such, the value of these positions declined slightly as interest rates rose.