September, 2023
We witnessed another sizeable bond sell-off in September, as yields reached multi-year highs around the world. US 10yr Treasury yields ended September at 4.57%, the intraday peak on September 28th was as high as 4.68% which we haven’t seen since 2007. Considering Australian 3yr government bond yields finished 40bps higher at 4.09%, we were pleased with this month’s positive return and a further increase in our 1yr net return to 6.23%. Although the risk backdrop has softened throughout September, AUD investment grade corporate bonds have outperformed due to the attractiveness of all in yields currently available in the market.
Strong outperformance in September from the Fund’s positions in Australia & New Zealand Banking Group, Mizuho Financial Group, Telstra, Chorus and Lloyds Banking Group. Modest underperformance came from the Fund’s positions in Goldman Sachs, Bendigo & Adelaide Bank, Rabobank and the Bank of Queensland.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Artesian-Corporate-Bond-Fund-September-2023-Update.pdfAugust, 2023
Another solid month of performance for the Fund in August. There was a notable pick up in volatility due to the renewed stress in the Chinese property market. Although the US was downgraded by Fitch to AA+, this had very little effect on the US or markets more generally. Government bond yields finished marginally higher in the long end of the curve, yet front end yields were unchanged leading to steeper yield curves. Credit spreads drifted marginally tighter and there was a notable spread compression on some corporate bonds issued throughout the month which aided returns.
August falls right after the Australian reporting season and therefore is usually one of the largest months of the year for new issuance, 2023 did not disappoint. Outperformance was achieved by the Fund’s positions in La Trobe University, Natwest Markets, Challenger Life and Ausnet. Underperformance came from the Fund’s positions in Australian Postal Corporation, Telstra, Westpac, Mercury and Computershare.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Artesian-Corporate-Bond-Fund-August-2023-Update.pdfJuly, 2023
If you were to take a glass half-full perspective in July, then you may be finding it easier to foresee a softer landing in some parts of the world. In Australia and the United States, inflation and retail sales came in weaker than forecast. In the case of Australian retail sales, that’s three consecutive falls which has only ever occurred previously during the GFC. So for now, government bonds have started to reverse some of the sell off we saw in June, which has positively aided the Fund’s returns in July. The RBA have been vindicated for leaving the cash rate on hold in July, as the subsequent data throughout the month came in softer than the market had forecast. The softer data has allowed the RBA to pause again in August, the first successive pause since April 2022. Whilst the cash rate is now clearly in restrictive territory, we are still likely to see inflation shocks, so the hiking cycle may not be complete for the RBA just yet.
The Fund’s performance was aided by the increased interest rate duration position which was lengthened in June and July. There were capital gains from +85% of the Fund’s bond positions in July. A strong rally in subordinated bank spreads, meant that the Fund’s best performers for the month were Westpac, BNP Paribas, National Australia Bank and ANZ. Small underperformance from the Fund’s positions in Australia Postal Corporation, DBS Bank, Computershare and McDonald’s.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Artesian-Corporate-Bond-Fund-July-2023-Update.pdfJune, 2023
June was a continuation of the market dynamics we saw in May. Lingering inflation induced higher central bank cash rates and higher government bond yields. The Australian yield curve inverted for the first time since 2008, as the risks of a recession rise. In contrast, the labour market remains robust. With that said, it is usually one of the last indicators of a recession. Economic growth was an anaemic 0.2% in Q1, so there is not much wiggle room to protect us from a technical recession like our friends across the Tasman. Hence, the Fund’s credit duration remains below the mandate target of 4yrs. We continue to run a fairly benign beta portfolio, preferring not to add outright risk, instead adding alpha through active management which is incremental to the 5.35% running yield.
The new issue market continues to deliver strong performance. We are starting to see longer dated deals from both financials and non-financials, which is always a sign of a healthy market. In June, we had significant outperformance from the Australian Postal Corporation, Westpac, Telstra, Optus, BNP Paribas, Woolworths and Mercury. Small underperformance from the Fund’s positions in Bank Australia, OCBC, Export-Import Bank of Korea and McDonald’s.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Artesian-Corporate-Bond-Fund-June-2023-Update.pdfMay, 2023
The Fund performed well in May considering the spike (3yrs +0.38bps) in government bond yields, as the fears of lingering inflation in a low unemployment world continue. The ongoing negotiations in the US regarding their debt ceiling, meant that spreads were kept range bound. Over the month we observed some small outperformance in the AUD market compared to the USD market. Outright buyers of fixed rate bonds also emerged throughout the month, keen to lock in attractive yields at these elevated levels. The new issue market came roaring back after a very quiet April. In May we recorded the most monthly volume for 2023, with AUD 14.35b issued. Encouragingly we are now starting to see non-financial bond issuers return to the AUD market. Australian Post, PACCAR, Transgrid, QIC Finance, Ausnet and Mercedes-Benz all issued in May. Outperformance came from the Fund’s positions in Ausnet, Optus, UBS and Woolworths. Relatively smaller underperformance came from the Fund’s positions in Rabobank, Bendigo & Adelaide Bank and Suncorp-Metway.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Artesian-Corporate-Bond-Fund-May-2023-Update-1.pdfApril, 2023
April was relatively calm across credit and interest rate markets. As were the RBA, who took their first pause since the recent hiking cycle began in May 2022. Combined with no considerable economic data surprises, and the fact that April is seasonally quieter due to holidays; this allowed the market to take a bit of a ‘breather’. Credit spreads edged tighter with very little activity in primary markets, as investors went in search of corporate bonds in secondary markets. We expect the new issue market to come back to life in May, buoyed on by the major banks (Westpac, ANZ and NAB) who come out of mid-year reporting season blackout.
The Fund had strong outperformance in April from its positions in Commonwealth Bank of Australia, Telstra, National Australia Bank, Optus and Woolworths. The Fund had small underperformance from its positions in BNP Paribas, McDonald’s Corporation, Bank of Queensland and SGSP Australia.
File:March, 2023
An eventful month to say the least, as a US regional banking crisis was followed by the collapse of a Swiss banking giant founded in 1856. Whilst it was inevitable that the aggressive hiking of interest rates around the globe would eventually break something, the lack of risk management in the case of SVB was quite astounding. Credit spreads of hybrid securities (no exposure in the Fund), gapped wider as investors took a sell first, ask questions later approach post the UBS merger with Credit Suisse and the zero-value applied to the latter’s hybrid (AT1) securities. The quasi-equity risk of hybrids, which is well understood by institutional investors and conversely mis-understood by retail investors, led to a large dispersion in pricing between listed and unlisted hybrids.
Whilst credit was wider, the Fund’s modest interest rate duration exposure aided the month’s performance. In addition, the Fund’s healthy running yield also provided a nice counterbalance to the widening in credit spreads. Underperformance in March came from the Fund’s positions in BNP, Goldman Sachs, Air New Zealand, Bank Australia and Macquarie Bank. Outperformance came from the Fund’s positions in the Australian Postal Corporation, Nextera, Lendlease, Computershare and Optus.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Artesian-Corporate-Bond-Fund-March-2023-Update.pdfFebruary, 2023
Another solid month of performance for the Fund. The Fund’s underweight positioning to interest rate duration protected some of the downside, as 3yr yields spiked 40bps. Credit continued to rally throughout February, although credit spreads now look reasonably priced. The elevated running yield of the Fund also made a meaningful contribution to this month’s returns.
The Fund participated in a number of new issues throughout the month. Some significant outperformance in primary markets was another positive aspect in February. ANZ issued a 15yr (10yr call date) subordinated debt bond in February which rallied 58bps, so along with the Fund’s other ANZ positions, it was this month’s best performer. The Fund’s other top performing positions were Macquarie Bank, Optus, Woolworths and Bank Australia. No underperformance in February, as every issuer produced capital gains for the Fund.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Artesian-Corporate-Bond-Fund-February-2023-Update.pdfJanuary, 2023
A very solid month of performance for the Fund in January, the best monthly return since February 2017. The Fund’s returns in January were aided by lengthening the Fund’s interest rate duration in late December, prior to January’s ~40bp rally in 3yr yields. However, the largest driver of returns in January was from the impressive rally in AUD credit spreads. Put into context, 5yr financial spreads were 5bps to 10bps tighter and 5yr non-financial spreads were 10bps to 15bps tighter.
As mentioned in last month’s report, non-financials look set to continue their outperformance as they are technically supported by very low levels of primary issuance. Outperformance in January came from the Fund’s positions in Air New Zealand, Australian Postal Corporation, Ausnet, Rabobank and Mercury NZ. The month’s underperformers for the Fund were ANZ, Macquarie Bank, Toronto-Dominion Bank and Woolworths.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Artesian-Corporate-Bond-Fund-January-2023-Update.pdfDecember, 2022
The key evidence is in for 2022; global unwinding of loose monetary policy, elevated fiscal policy, war in Europe, overhanging supply chain issues and inflation. The causes and the responses to runaway inflation fundamentally changed the investing landscape. Transitory it was not, and in 2023 we will start to see the real impacts of considerably higher interest rates and the drag that will have on consumer spending and corporate margins. However, investment grade corporate balance sheets look robust, credit spreads are wide, interest rate volatility is stabilising and the outlook for fixed income and good quality credit is encouraging.
The Fund performed well in December considering 3yr yields and 10yr yields spiked 44bps and 58bps respectively. Credit spreads were mixed over the month, but largely unchanged. The Fund now has a running yield +5%, which not only provides an attractive source of income, it also provides some downside protection against interest rate and credit spread volatility, like what we saw in December. Also worth noting the attractiveness of a +5% running yield with a ~3yr credit duration on a risk/return basis, versus the indicative dividend yield of the S&P/ASX 200 index ~4.40%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Artesian-Corporate-Bond-Fund-December-2022-Update.pdfNovember, 2022
A solid month of performance for the Fund with net returns of 0.90%, which was the best monthly return since July 2020. Credit spreads and interest rates rallied as global central bank’s hawkishness eased and fixed income securities were a major benefactor. The technical widening in credit spreads in October was largely reversed, as investors looked to get positioned for the holidays and subsequently scrambled to buy corporate bonds in primary and secondary markets. The stage is now set for a Santa Claus rally. After the year that has been, it is certainly welcome. A strong month for capital returns across the Fund with 90% of issuers producing positive returns in November. The Fund’s overweight positioning to the recent major bank deals led the outperformance. All 4 major banks along with BNP made up the top 5 performers in November. Small underperformance came from the Fund’s positions in Standard Chartered, McDonald’s and Computershare.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Artesian-Corporate-Bond-Fund-November-2022-Update.pdfOctober, 2022
Markets were mixed in October. The announcement of a new UK PM (Rishi Sunak) combined with a fiscal U-turn led to lower UK government bond yields and some much needed stability. A hawkish Federal Reserve led to higher government bond yields in the US, but in Australia yields finished the month lower even after a stronger than expected inflation print. Whilst credit spreads were rallying globally, they widened significantly in Australia due to an avalanche of bonds issued largely by the major banks (ANZ & CBA). To achieve the targeted deal size given the cautious market tone, the banks needed to issue cheap compared to their existing bonds – which they managed to do. However, the market moved wider and stayed wider, as opposed to drifting back tighter once supply was digested.
Considering the 30bp to 40bp widening in credit spreads over the month, the Fund held up well again which supports the current conservative positioning. The new deals from ANZ and CBA put pressure on all their existing bonds and they were the top two underperformers for the Fund in October. Outperformance came from two floating rate note positions, in the Export-Import Bank of Korea and McDonalds Corporation. Global credit spreads rallied throughout October so we expect the same to happen in the local market when new issuance volumes slow down into the festive season.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Artesian-Corporate-Bond-Fund-October-2022-Update.pdfSeptember, 2022
The wild gyrations in both equity and bond markets around the world increased in intensity towards the end of September. In the final days of the month, the GBP reached its nadir, as the new UK leadership unveiled a mini budget that was derided by virtually everyone; including many in their own party. The BOE was forced into the strange position of raising official rates yet buying long government bonds (effectively tightening and easing monetary policy conditions at the same time) as long duration bond prices plummeted. The doing “all that it takes” moment for the BOE has had the desired effect – the GBP and long bond prices have stabilised. However, the strain felt in the UK was reflected in bond prices and equity markets around the world. Credit spreads were significantly weaker, especially in UK assets, and volatility in all markets remains elevated as the prevailing temperature in geopolitics remains high. Veiled threats of the use of nuclear weapons by Russia, the upcoming CCP plenum and continued inflationary pressures have all contributed.
The portfolio was resilient in the face of the significant market pressures. Whilst there was a general movement outwards in credit spreads, the Fund’s relative performance reflects the conservative positioning in shorter duration, higher credit quality assets. The month started brightly but ended rather differently for credit globally. Facing a wave of volatility, credit spreads in the AUD corporate bond market outperformed, especially in comparison to the CDS market. The subordinated bank market maintained its relative strength and stayed close to its recent tights despite the previous month’s heavy issuance. Anecdotally, Asian private banks are being attracted to the outright yields of 6% plus, and this provides major support to this market. Australian major bank 5yr senior spreads were 5bps to 10bps wider on the month, whereas iTraxx Australia 5yr moved from 1.08% to 1.46% as traders moved into the market to hedge inventory. Last month, the Australian CDS market lagged the move wider in spreads, which meant we had some catching up to do this month – hence the relative underperformance.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Artesian-Corporate-Bond-Fund-September-2022-Update.pdfAugust, 2022
A solid month of performance for the Fund in August, with Class B net returns of 0.38%. Interest rates reversed their July rally and 3yr yields finished the month 45bps higher at 3.28%. The Bloomberg AusBond Composite 0+ Yr Index finished August -2.54%. Considering the strong rally in interest rates in July, in early August we took profit and shortened the Fund’s interest rate duration which aided this month’s returns. The Fund had its highest trading volume month for the year, as we executed several primary and secondary market relative value opportunities. After a very tough 12 months for fixed income, the asset class seems to be back in vogue with investors. Global new fund flows have stimulated market activity and locally supported credit spreads. The AUD credit market outperformed its international peers in August, which led to capital gains in 85% of issuers in the Fund. The strongest monthly performance came from the Fund’s positions in ANZ (subordinated and senior), Optus, NAB (subordinated and senior) and Woolworths. Underperformance was attributed to some of the Fund’s foreign bank exposures, such as BNP Paribas, HSBC and Standard Chartered.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Artesian-Corporate-Bond-Fund-August-2022-Update.pdfJuly, 2022
A better month for the Fund, as interest rates rallied and credit stabilized. Though it was still a wild ride in interest rate markets throughout July, as Australian Government bond yields fell on average ~50bps across the curve. Investors are grappling with the consequences of central banks raising interest rates to combat inflation, with the possibility of triggering a recession. Late in the month, Australian CPI just missed forecast and the US confirmed two successive quarters of contracting GDP, meeting the generally accepted technical definition of a recession. However, that definition is now being questioned by US officials such as Treasury Secretary Janet Yellen. Regardless, the economic news was the catalyst for the rally in yields, which also led to a late month rally in credit spreads. As we have seen previously, the Australian market lagged the offshore moves, but is now playing catch up which adds to the prevailing positive tone. The RBA have been consistent with their forward guidance and policy rate settings, which has been another positive for the market with respect to the future path of interest rates.
The new issue market is presenting some good quality, relative value opportunities. This month’s outperformance came from NAB’s new BBB+ subordinated 5yr call date fixed rate bond with a whopping 6.32% coupon. Toronto-Dominion’s new 3yr AAA covered bond with an attractive 4.5% coupon also performed very well. Underperformance came from the Fund’s European banking positions in BNP Paribas and Lloyds.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Artesian-Corporate-Bond-Fund-July-2022-Update.pdfJune, 2022
Volatility in Australian interest rate markets continued in June, as the RBA caught the market off guard with a 0.50% hike. As a result, 3yr government bond yields traded as high as 4.08% before rallying all the way back to 3.41%. We took advantage of the sell-off in yields to marginally add to the Fund’s interest rate duration. Credit spreads were 5bps to 10bps wider across the curve in June. The move higher in yields and credit spreads has contributed to a 0.52% increase in the Fund’s running yield to 4.65%.
REITs were the Fund’s worst performing sector in June, with Centuria and Goodman leading the underperformance. Subordinated debt also finished the month weaker, which meant the Fund’s positions in CBA and ANZ performed poorly. With that said, Macquarie Bank’s new subordinated bond was the month’s best performer, followed by Lloyds Banking Group PLC new 4yr issue with a 5.39% coupon.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Artesian-Corporate-Bond-Fund-June-2022-Update-1.pdfMay, 2022
In May credit and interest rate markets in Australia were much calmer than the volatility we experienced in March and April. The two most volatile trading periods recently have both coincided with the RBA’s cash rate increases, which on both occasions caught the market off guard. The RBA’s forward guidance has been inconsistent with their actions, which isn’t helping market sentiment. In saying that, the heavy lifting has begun on the cash rate. This a positive development, as unlike the market, the RBA are well and truly behind the curve.
On a positive note, the new issue market seems to be normalising and new deals have performed well. This is an important sign for those who are sitting on cash and considering when to re-enter the market. Outright yields are at very attractive levels. As an example, Macquarie Bank issued a 10yr (5yr call date) subordinated fixed rate bond in May with a 6.082% yield. As has been the case for some time now, we continue to sell longer dated bonds and buy 3yr to 4yr fixed rate bonds which offer a pick up in risk/reward, liquidity and credit quality
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Artesian-Corporate-Bond-Fund-May-2022-Update.pdfApril, 2022
It is clear the path of least resistance currently is towards higher yields (interest rates) and wider credit spreads. Whilst the daily/monthly moves in yields are extreme, the moves in credit spreads are relatively subdued. Further drivers of inflationary pressure continue to mount. Covid supply chain issues, global energy shortages and soaring food costs, the war in Ukraine’s effect on energy and commodities and China’s zero Covid policy. Whilst China’s zero case obsession isn’t new, the lock down of 26 million Shanghai residents and 16 other cities in April, will only add to the global supply chain issues and slower global growth.
To that end, we have been reducing the Fund’s interest rate and credit duration, taking advantage of the high yields offered (>4% ) on short dated bonds. Right now, outright yields on AUD corporate bonds are roughly as high as they have been over the past 10 years. Whilst nearterm volatility poses the biggest risk to price stability and spread mean reversion, taking a longer-term view (6 to 12 months) considering the strength of our portfolio and market technicals, gives us confidence. Central banks have the tough task of reining in inflation without causing stagflation or a recession. However, as cash rates rise (and they need to significantly to reach the levels currently priced into interest rate curves), central banks are rearming their monetary policy toolkits along the way. So, whilst it is certainly possible that aggressive interest rate hikes could lead to negative growth, we believe a shallow recession is more likely than a deep one.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Artesian-Corporate-Bond-Fund-April-2022-Update.pdfMarch, 2022
March was a brutal month for AUD fixed income investors, credit spreads were wider and interest rates were considerably higher (Bloomberg AusBond Composite 0+ Yr Index -3.75% in March). The AUD corporate bond market underperformed the European and US markets and currently appears good value compared to peers. European and US credit spreads finished the month tighter due to a strong relief rally into month end. However, in the AUD market credit spreads finished the month noticeably wider. In contrast, the ASX has outperformed European and US equity indices and we expect the same pattern to emerge in the AUD corporate bond market as spreads mean revert. Interest rates shot up another 60bps to 80bps across the curve in quick succession. The market has priced in an implied cash rate of 1.75% by year end, which seems overly aggressive, and we expect some retracement in the front end of the yield curve.
However, the silver lining is that the Fund’s running yield is now 3.32%. Over the past 5 years of the Fund’s life, it is times like these when we generally outperform. Spreads are at their wides of the past 12 months and there are lots of relative value opportunities in the primary and secondary market. So, whilst performance has been very challenging the past 12 months, we feel like 2022 is set to be a much better year based on where credit spreads, fundamentals, technicals and yields currently stand.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Artesian-Corporate-Bond-Fund-March-2022-Update.pdfFebruary, 2022
Russia invades Ukraine. Those three words upended the geopolitical framework set since the end of WW2. For the first time a European nuclear power invaded a neighboring country and a “hot” war ensued. Most of the world’s reaction was one of shock and disgust, despite the preparation for war being clear and Putin’s grievances being longstanding. Leaving aside for a moment the distressing actions and consequences on the ground in Ukraine, world markets seem to accept that everything had changed – but everything somehow remained the same. This was due to the countervailing forces at work. Inflation and energy prices led by oil would surely go up leading to aggressive rate rises; and on the other side, a flight to safer assets like government bonds and gold would cause a rally in bonds. So in the end the two rational responses have resulted in interest rates markets trading in a tight range since the invasion began. The war has given everyone a reason to pause, including central banks.
Perhaps now there will be a reticence to raise interest rates too aggressively in such uncertain times. Caution is required when faced with a Russian leader who could react in an even more irrational way if cornered. As managers, we have also been cautious in trading and positioning of the Fund. We have been shortening our exposure to longer-dated corporate bonds and concentrating on the less volatile 5yr part of the curve. This has served us well in this environment. We are well-positioned to invest in new issues when the primary market reopens. New issues will come cheaper and with a greater new issue premium than before; this will be a positive for the fund going forward.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Artesian-Corporate-Bond-Fund-February-2022-Update.pdfJanuary, 2022
The new year risk on trade ended rather abruptly mid-month, as equities around the globe face continued headwinds from hawkish central banks (excluding the RBA), Omnicron, geopolitical risks and inflationary pressures. However, credit markets were comparatively sanguine and traded in an orderly fashion throughout January. The AUD corporate bond market had significant new supply and demand in equal measure, as domestic and offshore financials issued AUD 11.4b. This is the 5th largest ever monthly volume according to our records, which is quite impressive considering the softer market backdrop. Considering the improving fundamentals and technicals, we are still quite constructive on investment grade credit spreads. We especially like fixed rate bonds (interest rate hedged) because of the significant pick up in running yield due to steeper yield curves.
It was a very active month for the Fund, trading much more volume than usual for this time of year. Whilst that active management led to profits for the Fund, there were mixed results for the credit spreads of the existing portfolio. With that said, considering the monthly net return of -0.08%, the moves in spreads were mild. Outperformance was dominated by new issuance, namely CBA’s and Westpac’s 5yr fixed rate bonds, yielding an impressive 2.4% for a AA- rated senior bond. The main under performers in January were the Fund’s positions in the Bank of Queensland and Banco Santander.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Artesian-Corporate-Bond-Fund-January-2022-Update.pdfDecember, 2021
The major talking point for markets in December, was the US Federal Reserve’s (the Fed) December meeting and their median projections for interest rates. To combat runaway inflation caused by significant stimulus and then supply bottlenecks, the Fed has signalled they expect to raise interest rates three times in 2022 and three times in 2023. This was more hawkish than what was priced into the market, which sent interest rates higher as expected. After a short-lived wobble in US equities, the S&P now sits at an all-time high. We believe the biggest focus for markets in 2022 will be; how successfully or unsuccessfully central banks are able to manage their (transitory?) inflation pressures.
Whilst yields ended the month higher, the Fund’s short interest rate duration position moderated the losses and enabled a positive return for the month. The Fund’s shorter dated fixed rate bonds and subordinated debt were the main contributors to underperformance in December. This was offset by the Fund’s running yield and longer dated fixed rate bonds which outperformed. As we highlighted last month, we are seeing some great opportunities in longer dated bonds which have started the year on a positive note
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Artesian-Corporate-Bond-Fund-December-2021-Update.pdfNovember, 2021
On the first day of trading in November, interest rate markets began to reverse some of the extraordinary rises that occurred in October. On November 1st, 3yr yields rallied almost 20bps to finish the day at 1.19%. The remainder of the month was a lot less volatile and 3yr yields traded in a 17bp range. Global inflation expectations took a backseat to Omicron towards the end of the month, although we expect inflation to pose a greater risk to markets than the latest COVID variant. In saying that, some countries in Western Europe are now going back into lockdown due to rampant cases of Delta; assumed to be due to low vaccination rates. Fortunately, in Australia most internal borders excluding Western Australia should be open for the holiday period, which will bode well for the economy considering the recent increase in the level of household savings. With 5-6% growth predicted for Australia in 2022, corporate balance sheets are well positioned to prosper. The Fund’s interest rate duration positioning contributed positively to the month’s returns. However, credit spreads were wider across the board in November which dragged returns into slightly negative territory. Considering the extreme volatility we have seen in interest rates this year, combined with the widening in credit spreads over the back half of the year, we are pleased to have produced a positive return for 2021. Looking forward to 2022, we are in a good position given; the level of outright yields, the recent widening in credit spreads, the positive tail wins to the Australian economy and the ever-expanding depth and breadth of the AUD corporate bond market.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/b81742_5616916af044490cb624301d855a790a-1.pdfOctober, 2021
Mind the gap! It felt like that was the motto for October 2021, as 3yr yields gapped from 0.50% to 1.40%. Extreme volatility in the front end of the yield curve severely tested the liquidity of the government bond market. To give that some context, as we closed out October, interest rates futures were predicting 6 (!) RBA 0.25% rate increases by the end of 2022. The RBA stood back and didn’t intervene through their yield curve control, as the market took the view that interest rates will rise materially before 2024 (the date the RBA had signalled they would start raising interest rates). At the November 2nd RBA Board Meeting, the RBA confirmed they have now formally discontinued their yield curve control. They have also softened their language, from “no rate hikes until 2024”, to “it’s possible that an earlier move will be appropriate”.
October produced another month of positive correlation between equities and long interest rate duration bonds, the ASX slid -0.11% and the Bloomberg AusBond Composite 0+ Yr Index was down a whopping -3.55%. Whilst the Fund did produce a negative return of -0.60%, the Fund’s running yield rose by 0.62%. Even though the Fund’s interest rate duration is below the mandate target of 1 year, interest rate volatility was the main cause of underperformance in October. The Fund’s interest rate hedged fixed rate bond positions offset some of the drag, significant outperformance came from the Fund’s Volkswagen, Coles and Transurban positions.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/b81742_fba6a80d85dc4c6daac01b3264366558.pdfSeptember, 2021
Like what we experienced in February this year before the Delta outbreak, investors are now looking through Covid to a more optimistic future. Interest rates marched higher in September, which took the froth out of the equity markets. Not a great month for investors who hedge their equity portfolios with long duration bond funds. The ASX finished the month down -2.69% along with the Bloomberg AusBond Composite 0+ Yr Index also in negative territory at -1.51%. Whilst not a great month for the Fund in terms of absolute performance, it was quite a good month in terms of relative performance due to the Fund’s comparatively low exposure to interest rates.
The Fund was active throughout the month, capturing alpha in the primary and secondary markets which offset the negative drag from the Fund’s interest rate exposure. Underperformance in September came from the Fund’s positions in Coles, Volkswagen and Barclays. Outperformance was from the Fund’s positions in Transurban, Toyota and Lendlease. New issue volumes were robust, as all non-financial bonds issued in September finished the month tighter. It was very encouraging to see more labelled bond issuance with Woolworths issuing a two-tranche sustainability linked bond, which received AUD +3b of orders for an AUD 700m deal.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/b81742_53a5ef073a1b409589afd90182d13e03.pdfDecember, 2020
The Fund closed out 2020 with another solid month; active management drove the majority of the returns earlier in the month and we witnessed a mild contraction in credit spreads as the month progressed. The annual net return for 2020 of 3.16% (RBA cash rate +2.83% for Class B Units), outperforms the Fund’s target return of the RBA cash rate +2.75%. Considering the COVID-19 induced market volatility we experienced in late Q1 and into Q2, we are satisfied with the Fund’s returns for 2020.
With 2020 now behind us, our focus shifts to 2021 and how best to position the Fund. It is hard to find an economic commentator who hasn’t predicted higher house prices, low interest rates, higher equities and tighter credit spreads in 2021. This alone makes us pause, as the herd buy together they also sell together. The positive technicals and turning fundamentals of the market have been written about ad nauseam.
So our focus as we set the investment strategy for 2021 tends to be more focused on what can upset the consensus, and identifying the best early signalling of these potential events. Events such as: Australia’s deteriorating relationship with China, vaccine issues, central banks unwinding stimulus packages, steepening yield curves (and how heavily indebted corporates navigate this), reckless risk taking in the search for yield, and lastly, the unwinding of crowded trades are all areas to watch. In saying that, the outlook for investment grade credit is positive and taking an active approach to interest rate duration will be paramount. From a credit spread perspective, unlike equities, credit spread valuations look reasonable although we do expect them to become rich throughout 2021. We expect robust new issuance volumes as corporates take advantage of low outright yields. Like 2020, the Fund will be focused on adding alpha through active management as opposed to chasing outright yields with lower credit quality
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/b81742_7d223bd4fdeb46e19593b087f33e76f8.pdfticker: ETL8268AU
release_schedule: Monthly
commentary_block: Array
factsheet_url:
https://www.artesianinvest.com/australian-corporate-bond-fund
PERFORMANCE REPORT.
manager_contact_details: Array
asset_class: Fixed Income
asset_category: Bonds - Australia
peer_benchmark: Fixed Income - Bonds - Australia Index
broad_market_index: Australian Bond Composite 0-10Y Index
structure: Managed Fund
fund_features:
Artesian Corporate Bond Fund A invests in a diversified portfolio of liquid, investment grade fixed and floating rate AUD corporate bonds. It is an actively managed absolute return fund that aims to achieve consistent returns above the daily RBA cash rate throughout fluctuating interest rate and economic cycles.
- Investment grade fund with an emphasis on liquidity and credit quality, and has no listed bank hybrids.
- Strict ESG overlay (negative screen on fossil fuels, tobacco, gaming, alcohol, pornography and munitions) with a positive ESG filter and a bias towards green bonds.
- Short interest rate duration fund with a floating rate note bias.
- Daily liquidity and quarterly distributions.
- No currency risk (all corporate bonds are AUD only).
- Capped fund size to maximize returns for investors.
- Manager Address : Level 4/66 Hunter St, Sydney NSW 2000, Australia
- Phone : +61 2 9037 4144
- Website : https://www.artesianinvest.com/
- Contact Page : https://www.artesianinvest.com/admin