While the country was still riding high on its "rock-star economy" tag this time last year, we were adding to our defensive, fixed income investments in New Zealand, as we didn't share the market's optimism. As you can imagine, holding assets that do best in weak economic conditions wasn't on the minds of many people at that time. However, this contrarian decision has been one of the key contributors to the High Income Fund's solid outperformance over both the broader global bond market and the New Zealand average term deposit rate over the first 11 months of this year. Notwithstanding a mild improvement of late, we still expect New Zealand's growth rate to slow next year on the back of a weak international outlook, dry weather conditions and a leveling off in construction activity. But most importantly for fixed income investors, we expect inflation to remain low. Should this outlook play out as expected we would not be surprised to see New Zealand fixed income assets produce even better returns next year.
It hasn't been the most memorable year for safe-haven assets. With just one month to go the global bond market, as measured by the Barclays Global Aggregate in U.S. dollar terms, has registered its worst performance since 2005. However, as was the case back then, last year's losers can often become next year's winners — and that is exactly what we predict will happen again this time around. Despite the challenging environment this year, the High Income Fund has generated a respectable 5% return (after fees but before tax) with one month still to go. Onwards and upwards, and here's to an even more prosperous 2016!