The Income Fund had a solid February, rising +0.5% and outperforming the benchmark which was up +0.3%. Most of this outperformance came from offshore credit exposure where strong economic growth and careful bond selection contributed to returns.

Locally, all eyes were on the RBNZ which continued to reduce the official cash rate, meeting market expectations. Only six months ago, the official cash rate was 5.5%, 1.75% higher than today – a level that, in retrospect, was too high given the widespread difficulties the New Zealand economy is facing. Those with mortgages will be welcoming the interest rate relief.

Grifols (+5.8%) was easily the standout performer for the fund in February after it reported solid results. After a tricky few years navigating the post-COVID operating environment, 2025 looks to be the year Grifols hits its stride. Given Grifols’ lower credit rating (B), cash flow generation is one of the most important metrics for us to analyse. Grifols’ cash flow has begun to accelerate as revenue growth outpaces expenses, driven by increasing demand for their blood plasma products. Late in the month management also hosted their first capital markets day in years which providing a solid roadmap for growth, driving both its bonds and their stock price higher.

British Telecom (+1.5%) was added to the portfolio in February. The UK telecom operator is the incumbent provider of fixed and wireless broadband, with the latter provided via a nationwide fibre optic network (not unlike Chorus). This one-off project required a substantial amount of capital, straining BT’s balance sheet with too much debt. We think the buildout will taper significantly this year, helping to improve credit metrics as cash spend decreases. After adding the bonds in early February they have risen in value, suggesting the market agrees with our analysis.