The Income Fund fell -0.7% in March, slightly behind the benchmark which fell -0.6%.

The biggest contributor to this return was the rise in short term interest rates, driven by the ongoing conflict in Iran. Interest rates rose as inflation concerns increased, driven by fears that oil supply through the Strait of Hormuz would remain far below normal levels. This, in turn, would contribute to higher input prices throughout the global economy, driving headline inflation higher, not just at the petrol pump.

Despite this, the fund still benefitted from some highlights during March. Most notably were our investments in floating rate instruments, where the coupon increases as interest rate rise. These positions, such as those with Commonwealth Bank and National Australia Banks will see their interest income increase, benefitting from the dynamic outlined above. Elsewhere, we invested in Applied Digital, a new AI datacentre project in North Dakota. Applied Digital are leading deployers of facilities used in AI training and inference, with the project being a second phase to an already successful deployment.

Lowlights for the month came from positions with longer fixed coupons, and from business with energy intensive business models. One such position is with OI Glass, a European packaging manufacturer specializing in glass bottles for the drinks industry. Glass requires very high heat, and therefore consumes a large amount of energy, with little substitution ability. It was not surprising therefore to see bonds react by increasing the required yield to own them, leading to a roughly –3.6% return in the month.

Recent market volatility caused by conflict in the Middle East has started to generate potential opportunities in certain parts of the fixed interest market. While we will continue to proceed with caution, we will look to invest in companies that benefit from sector tailwinds at improved yields (such as Applied Digital noted above). Indeed, volatility creates opportunity and we are excited about evolving market conditions and the ability to apply our credit skills for the benefit of future fund returns.