September, 2023
The Fund underperformed the benchmark over September. The key driver was duration positioning as the Fund maintained a position of approximately 3-years of duration, and this detracted from returns as yields rose significantly across the globe. Within the interest rate position, curve and country selection was a positive contributor, offsetting some of the losses. The Fund maintained a strong bias to shorter ends of the yield curve, which performed relatively well amid significant curve steepening, and a weighting toward Australian duration, which likewise performed relatively better. Credit performance was a modest positive, reflecting slightly wider spreads over the month, but defensive positioning and positive security selection in investment grade (IG). Within credit, positive contributors included credit hedges (as volatility began to increase late in the month), and issuers such as Australian banks, US corporates such as Oracle, and selected mortgage-backed securities. This was somewhat offset by renewed weakness in major US bank holdings, which slightly detracted.
The Fund made small changes to credit exposure over the month, reducing some remaining higher beta credits after very strong performance. This included trimming transport-related exposures in Europe, such as Heathrow airport and Abertis, a toll road operator – with spreads fully reflecting the more positive outlook and not compensating for the risk of volatility, in our view. The Fund added shorter dated credit and lower beta sectors such as utilities and healthcare in place of the sales, reflecting our view on credit beta. Within interest rate positioning, the Fund switched further from US duration to Australian duration, without changing the overall level of interest rate exposure, given the ongoing volatility and the fact that the US treasury market recently broke through key technical levels. We continue to expect opportunities to add to credit positions over time – particularly as we see spreads as relatively tight, against a backdrop of high economic uncertainty and increasing volatility in the underlying bond market.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Income-Opportunities-Fund-Performance-Report-PRRP-MIOF-ANZ-28.pdfAugust, 2023
The Fund outperformed the benchmark modestly over August, on a gross of fee basis. Duration positioning was a positive contributor, despite significant volatility and weakness in rates markets, with curve and country positioning the key benefit. Credit positioning was a flat contributor, with positive contributions from investment grade offset by emerging markets. Within credit sectors, investment grade credit was a positive contributor, with Australian banks, insurance issuers and selected offshore names (such as Amgen) key positive contributors. Australian mortgage-backed securities were also a positive contributor, with very stable running yield the driver in this sector. Emerging markets detracted, reflecting underperformance of small holdings of African sovereign issuers. Within duration positioning, the Fund’s exposure to Australian duration was a positive contributor, bucking the broader volatility in rates, and in the US, modest overall underperformance was offset by curve positioning.
The Fund made small changes to credit exposure over the month, favouring additions to Agency mortgage securities as historically wide spreads due to volatile rates markets, remain attractive. The Fund trimmed exposure to selected higher beta issuers that had performed strongly (such as International Consolidated Airlines) and added to mid-curve Australian corporates and selected new issuance, where we see specific opportunities. The Fund also participated in new Australian Residential Mortgage-Backed Securities (RMBS) issuance during the month, viewing spreads there as an attractive long-term source of carry. We continue to expect opportunities to add to credit positions over time - but at higher spread levels, given the likelihood of economic weakness in the medium term. In duration, the Fund trimmed approximately half of its Japan government bond short position, after the Bank of Japan relaxed their yield curve control policy somewhat and yields rose.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Income-Opportunities-Fund-Performance-Report-PRRP-MIOF-ANZ-27.pdfJuly, 2023
The Fund outperformed the benchmark over July, with credit positioning continuing its recent positive performance contributions. The Fund’s duration positioning also added value, with the Fund’s short positioning in Japan, as well as shorter end curve positioning globally (particularly short end AUD bonds), performing well despite overall benchmark global yields finishing the month higher. Amongst credit sectors, investment grade was a key contributor, as were emerging markets holdings, due to tighter spreads in all risk markets. Amongst individual issuers, Australian and global financials were amongst the largest contributors (Morgan Stanley, Westpac and NAB, amongst others), as the global banking sector rebounded strongly after lagging for several months. Amongst underperformers, AT&T modestly detracted, as reports of lead sheathing on some of the company’s legacy wireline network added uncertainty to the picture – we remain very comfortable with the long-term fundamentals of the issuer.
The Fund made small changes to credit exposure over the month, trimming emerging markets exposure and some specific credits as spreads approached 1-year tights. Additionally, the Fund added to shorter-dated global financials amidst new issuance and specific opportunities to maintain yield in an ongoing uncertain environment. The Fund also added credit downside protection via options, which we believe provides low-cost and positive-asymmetric protection for the portfolio, in the case of a meaningful sell-off in the coming months. The Fund also added to Agency MBS securities, with spreads on these sectors remaining at the upper end of historical ranges, which continue to offer attractive yields with very strong fundamental credit quality. We continue to expect opportunities to add to credit positions over time - but at higher spread levels, given the likelihood of economic weakness in the medium term.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Income-Opportunities-Fund-Performance-Report-PRRP-MIOF-ANZ-26.pdfMay, 2023
The Fund underperformed the benchmark in May, driven by duration positioning. Credit positioning added value, even as credit spreads widened modestly. The Fund maintained an approximately 3-year duration position over the month, weighted to US denominated rates.
Bond yields globally sold off with lingering inflation, continued healing in financial markets after the turbulence in March, and some specific concerns around the US debt ceiling. Overall, 10-year Treasury yields rose by over 20bps for the month, and Australian 10-year bonds performed worse, rising by over 25bps. Credit positioning added value chiefly through protective option positions – these were removed mid-month amidst a weak market backdrop, locking in gains. Security selection within investment grade (IG) corporates and Emerging Markets also contributed positively.
The Fund made small changes to credit exposures during the month, adding exposure in European and Australian new issuance, with elevated overall spreads and some deals offering attractive concessions. The Fund added Australian utility Ausnet Services, and European insurer Allianz – all high-quality issuers with new bonds sold during the month. The Fund removed some high yield (HY) credit hedges in the first weeks of the month, with spreads at year-to-date wides (excluding the brief spell of volatility during March), banking profits as those positions were put in place at much tighter spreads in February. The Fund also further added to the US Agency Residential Mortgage-Backed Securities (which had begun from an initially zero base in late April): an asset class that had performed very poorly through 2022 and early 2023, and that now offers historically wide spreads. We continue to expect opportunities to add to credit positions over time - but at higher spread levels, given the likelihood of economic weakness or recession later this year. The Fund added modestly to duration mid-month, reflecting higher yields and our ongoing belief that bond yields at these levels reflect strong long-term value.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Income-Opportunities-Fund-Performance-Report-PRRP-MIOF-ANZ-25.pdfApril, 2023
The Fund outperformed the benchmark in April, with both duration and credit positioning modestly contributing. This was reflective of smaller moves in both credit and bond markets month-on-month, despite still overall elevated volatility. USD duration positioning was a positive contributor, offset by Australian duration positioning, as the relative spread widened between these two markets. Amongst credit sectors, investment grade (IG) was the largest positive contributor, reflecting continued excess running yield. Most other credit segments provided very small impacts either way. Financials were the strongest sector performer this month, reflecting some rebound in overall sentiment, especially amongst larger US and Australian exposures, while higher beta emerging markets allocations (such as Egypt) were small detractors.
The Fund made modest adjustments to credit exposures during the month, slightly reducing exposure to European and US IG credit. Spreads in this sector, particularly outside financials, recovered much of their March weakness. As such, re-assessing credits such as Honeywell (a high-quality US industrial, but trading at one-year tights) and Celanese (a BBB- US chemical producer, also near one-year tights) was appropriate. The Fund also added downside protection in credit derivatives, to offer some offset if broad market weakness were to resume. The cost of option hedging, in particular, has fallen sharply as implied volatilities have reduced after the March volatility. The outlook continues to be uncertain and likely to be volatile. We continue to expect opportunities to add to credit positions over time, but at higher spread levels, given the likelihood of economic weakness or recession later this year. The Fund remains positioned with significant liquidity to take advantage of opportunities as they arise. We believe markets will continue to be volatile as we navigate the challenges of bringing inflation down, while trying to avoid overtightening policy. The Fund’s credit exposures overall are heavily weighted to IG, with small emerging markets and very modest high yield holdings. We think that best reflects the environment ahead and look forward to opportunities to add to higher beta sectors.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Income-Opportunities-Fund-Performance-Report-PRRP-MIOF-ANZ-24.pdfFebruary, 2023
The Fund underperformed the benchmark over the month, with renewed pressure on global interest rates the key driver of the underperformance. The Fund’s credit positioning added value, with global investment grade credit and Australian Residential MortgageBacked Securities the key drivers of that contribution. Strong data releases in the US and Europe (as well as evidence of a deceleration in inflation improvement) impacted bond markets: in the US, for example, the peak rate Federal Reserve (Fed) rate priced by the market rose from 4.90%, to 5.41%, and long duration bonds followed suit. The Fund’s duration is weighted to Australia, and Australian duration materially outperformed global moves (yields rose less), though still rose overall. Credit markets overall were mixed, but the Fund’s positioning in higher quality credit added value: positioning in financials was key, which again outperformed the broader market.
Amongst individual credits, Australian and bank exposures were key positive contributors, as subordinated debt in the local market continued to perform well. US investment grade (IG) credit exposures were a detractor, with holdings of JP Morgan and Valero, a US refiner, giving up a portion of their recent impressive gains.
The Fund trimmed some higher beta European credits during the month (including a real estate investment trust (REIT) and a crossover rated industrial issuer) after strong performance. European credit still offers a spread pickup versus other global markets, but the rebound has been significant – with structural energy and inflation problems still lingering. The Fund also trimmed exposures to longer dated Australian corporates after significant spread tightening. Offsetting this, the Fund added short dated exposures in Australian banks and mortgage-backed securities, to maintain income in a lower volatility sector of the market.
The Fund added to duration positions over the month as yields renewed their sell-off: the Fund added short dated Australian duration, underscoring our view that short rates in Australia are attractive, and that the impact of the Reserve Bank of Australia rate hikes is beginning to have a slowing impact on the economy.
We continue to view the moves in bond markets as offering opportunities to add to both credit and duration positions over time - but at higher yield levels, particularly in credit, where spreads are now inside long-term averages and are not realistically discounting the possibility of economic weakness or recession later this year. The Fund remains positioned with significant liquidity to take advantage of opportunities – we believe markets will continue to be volatile as we navigate the challenges of bringing inflation down, while trying to avoid overtightening policy. The Fund’s credit exposures overall are heavily weighted to investment grade, with small emerging markets and very modest high yield holdings. We think that best reflects the environment looking ahead and look forward to opportunities to add to higher beta sectors.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Income-Opportunities-Fund-Performance-Report-PRRP-MIOF-ANZ-23.pdfDecember, 2022
The Fund underperformed the benchmark over the month, with detraction from duration positioning offsetting positive credit contributions. Fixed income markets finished the year mixed: high quality credit spreads were modestly tighter, but government bond yields were higher in the final weeks of the year after the Bank of Japan (BoJ) adjusted their yield curve control settings, against an illiquid market backdrop. The Fund’s overweight position in AUD duration detracted, though this was offset by a short position in Japanese bonds, intended to offset the impact of this kind of unexpected adjustment from the BoJ. Credit positioning added value: investment grade credit benefitted from tighter spreads and increases in allocations made over the last several months, and emerging markets were also positive. The largest industry sector contributions were from financials, transportation, and capital goods.
Key individual names contributing to the credit result again included major financial issuers, such as bonds issued by US banks Morgan Stanley, as well as subordinated debt from Australian major banks. Fundamentally strong issuers (such as Holcim and Honeywell) denominated in EUR also added to the result, as that market continued to move back from the extreme wides reached in mid-October. Underperformers included Aroundtown, a European REIT, and Warner Bros Discovery: hit by continued elevated integration costs as the issuer moves to get the costs of its streaming content down to an appropriate level.
The Fund generally maintained its credit positioning over the month, adding small exposures in shorter dated bonds offering attractive yields, but less exposed to credit spread and bond market volatility. The Fund’s duration position was trimmed during the month after a rally in yields, mostly in the US. We continue to view the moves in bond markets as offering opportunities to add to both credit and duration positions over time - but at higher yield levels, particularly in credit, where spreads are now only at long term averages despite the more difficult economic outlook. The Fund remains positioned with significant liquidity to take advantage of opportunities – we believe markets will continue to be volatile as we navigate the challenges of bringing inflation down, while trying to avoid a material growth slowdown. The Fund’s credit exposures overall are heavily weighted to investment grade, with small emerging markets and very modest high yield holdings. We think that best reflects the environment looking ahead and look forward to opportunities to add to higher beta sectors.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Income-Opportunities-Fund-Performance-Report-PRRP-MIOF-ANZ-22.pdfNovember, 2022
The Fund outperformed the benchmark over the month, with positive contributions from both duration and credit positioning. A better than expected US consumer price index print was a trigger for significant repricing across markets, which benefited positioning. Amongst credit sectors, emerging markets and investment grade credit were the strongest contributors: investment grade credit spreads were the best (volatility-adjusted) sector across global markets, and are the largest weight in the Fund – a position that has been added to over previous quarters. Duration positioning also added value, with global developed market bond markets rallying sharply. Holdings of AUD and USD interest rate duration strongly contributed to the month’s result.
Key individual names contributing to the credit result included senior bonds issued by US banks Morgan Stanley, Bank of America, and JP Morgan, which had widened consistently all year and had been gradually added to the Fund, reflecting our view that fundamentals in this sector were very strong, and the spread widening was more technical in nature. Recent additions in Euro also strongly contributed: the focus had been adding names less impacted by Europe’s slowing economy, but that had been dragged wider by the broader market. Additions in Euro-denominated bonds issued by PPG (US-based industrial coatings) and Allianz (insurance), are two examples. Underperformers included a small number of high yield holdings, such as Occidental Petroleum – the high yield market rebounded early, but had a much more mixed November. The high yield sector is only a small allocation, given our view that spreads here do not compensate for the uncertain environment.
The Fund made small further additions to investment grade credit in the first half of the month but paused buying and moved to small position trims into the end of the month, reflecting tighter spreads and lower new issuance concessions. No material changes were made to duration positions over the month. The Fund remains positioned with significant liquidity to take advantage of opportunities – we believe markets will continue to be volatile as we navigate the challenges of bringing inflation down, while trying to avoid a material growth slowdown. The Fund’s credit exposures overall are heavily weighted to investment grade, with small emerging markets and very modest high yield holdings. This positioning reflects our outlook for the environment ahead.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Income-Opportunities-Fund-Performance-Report-PRRP-MIOF-ANZ-21.pdfOctober, 2022
The Fund outperformed the benchmark for October, with positive contribution from credit allocations being the key driver. Duration positioning was a modest positive contributor to the result, despite overall higher global yields. All credit sectors contributed to the result, including the Fund’s small allocation to high yield, which outperformed broader credit markets. On interest rate positioning, allocations to Australian rates contributed positively to performance, significantly outperforming global yields (which overall ended the month weaker). Amongst individual issuers, holdings of US banks, European tollroads (including a holding receiving an upgrade from high yield to investment grade), and oil refiner Valero were contributors.
The Fund’s positioning remains with significant liquidity (with cash and short-dated investment grade totalling over 40% of holdings), offering meaningful opportunities to begin to look at opportunities in a sharply higher yield environment. During the month, the Fund added to European credit, particularly in new issuance, taking advantage of attractive spreads in non-European or companies less exposed to the European economic cycle in that market: for example, adding Morgan Stanley and US industrial conglomerate Honeywell. The Fund also added modestly to Australian duration positioning at attractive levels, viewing the expectations for Reserve Bank of Australia (RBA) pricing as too optimistic, and viewing duration as an effective offset to credit risk now that yields are materially higher.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Income-Opportunities-Fund-Performance-Report-PRRP-MIOF-ANZ-20.pdfSeptember, 2022
The Fund underperformed the benchmark for September, with a broad acceleration of previous themes: inflation, aggressive tightening from central banks, and geopolitics; now joined by financial stability concerns as UK government bond markets suffered significant losses and illiquidity, and global currencies fell sharply. Duration exposures were the largest single driver of the performance for the month, with developed market bonds continuing their recent sharp sell-off: USD and AUD-denominated bond positions were the largest detractors. Credit exposures also detracted, particularly in the final days of the month as market sentiment deteriorated. The largest single sector detractor was investment grade credit, reflecting the size in the portfolio and additions though the year to this sector, given increasingly attractive spreads. High yield was also a detractor, though to a smaller degree. Among individual performers, US banks were a detractor (such as Bank of America, Morgan Stanley and JP Morgan), with spreads reaching levels not seen in the last 10 years (outside of the brief COVID window): we see these names as offering value given the strong fundamentals and are comfortable with the position.
The Fund’s positioning remains with significant liquidity (with cash and short-dated investment grade totalling over 40% of holdings), offering meaningful opportunities to begin to look at opportunities in a sharply higher yield environment. During the month, the Fund trimmed a small number of more cyclically exposed sectors, such as auto parts and travel – we view the outlook for markets as remaining volatile and have previously added higher quality investment grade credit during periods of spread weakness. The Fund also further trimmed its recent addition of Australian bank subordinated bonds, after strong performance in these recent new issues.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Income-Opportunities-Fund-Performance-Report-PRRP-MIOF-ANZ-19.pdfAugust, 2022
The Fund underperformed the benchmark for August, with positive contributions from credit offset by weakness in interest rate duration. Amongst credit sectors, emerging markets staged a meaningful recovery after lagging the rebound in July and were joined by global investment grade credit as key positive contributors to the overall result. On the duration side, the detractors were in Australian and US denominated interest rate positions, as bond yields again accelerated into the end of the month. Among individual performers, the recent NAB and ANZ subordinated bonds were strong contributors, as well as rebounds in small allocations to corporate hybrids, such as US utility Southern Co. This was offset by spread widening in US banks such as Bank of America and JP Morgan as new issuance and general volatility in that market put some pressure on these names, despite the fundamental credit quality remaining high.
The Fund’s positioning remains with significant liquidity, with cash and short-dated investment grade totalling over 40% of holdings, offering meaningful possibilities to begin to look at opportunities in a sharply higher yield environment. During the month, the Fund trimmed a small number of higher beta credit exposures, after strong recovery into the middle of August – we view the outlook for markets as remaining volatile and have previously added higher quality investment grade credit during periods of spread weakness.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Income-Opportunities-Fund-Performance-Report-PRRP-MIOF-ANZ-18.pdfJuly, 2022
The Fund outperformed the benchmark over July, with approximately equal contributions from both interest rate duration and credit positioning. Most developed credit markets regained a portion of their losses from June during the month, and wider spreads offered more attractive entry points to add to exposures. Amongst credit sectors, investment grade credit was the largest positive contributor, closely followed by high yield. Emerging markets was also a positive contributor, though smaller, given the rebound in these markets lagged developed market credit. Duration positioning added value, led by Australian rates positioning, with CAD and USD duration also contributing. Among individual performers, a newly added National Australia Bank subordinated bond was a strong contributor, as were European infrastructure issuers such as toll roads.
The Fund remains positioned with significant liquidity, with cash and short-dated investment grade credit totaling over 40% of holdings, offering meaningful possibilities to begin to look at opportunities in a sharply higher yield environment. During the month, the Fund added exposures to investment grade credit in the US and Australia, reflecting attractive spread levels even given the volatile and difficult market backdrop. Additions included a new National Australia Bank subordinated bond, which priced at the widest spread level for a new AUD issue since 2016, as well as US financials and US industrials, such as refiner Valero. The Fund also added approximately 0.5 years of interest rate duration during the first half of the month, similarly viewing bond yields as attractive and offering a hedge against growing global growth fears. Both of these additions helped add to returns over the period.
‘Stagflation’ is increasingly being used to describe the current macroeconomic environment. We have been warning of stagflation all year, and the market narrative is now evolving towards recession. We have stated that recession is indeed a risk but was not a certainty, the key lies with how central banks conduct monetary policy. The US Federal Reserve believes at a 2.5% rate that policy is neutral, however, they are signalling that policy rates need to go higher in order to bring inflation back to the target of 2% on average. Although this is a challenge, as the Federal Reserve’s own forecasts show rates rising to 3.75% during 2023 before falling modestly in 2024. In contrast, the market’s discount for the Federal Reserve policy has rates peaking at around 3.30% in 2022 and falling to around 2.75% in 2023. This reveals a significant mismatch, which is likely to result in further asset volatility.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Income-Opportunities-Fund-Performance-Report-PRRP-MIOF-ANZ-17.pdfJune, 2022
The Fund underperformed the benchmark during the month, as the investing environment for fixed income markets continued to be highly volatile. This theme was further extended in June, as government bonds had their second widest monthly trading range and credit markets had their worst month for the already weak year so far. Weakness in both credit markets and government bonds contributed to the result with both interest rate duration and credit positioning detracting. Amongst sectors and individual issuers, there was similar contributions from investment grade, high yield and emerging markets holdings, and some European holdings (which are modest overall) were the worst individual performers, given the weaker growth outlook in that market and very sharp credit market moves. Among individual underperformers, EUR-denominated bonds from Bank of America, Southern Company (a US utility) and airline IAG were a few of the largest detractors – we remain fundamentally comfortable with the issuers, but market pricing has moved aggressively wider in anything denominated in EUR, even where the business operates outside that region.
The Fund’s positioning remains with significant liquidity, with cash and short-dated investment grade totalling over 40% of holdings, offering attractive possibilities to consider new opportunities in a sharply higher yield environment. Overall, credit risk is near the low end of historical allocations for the strategy, with reductions over the last 18 months in global investment grade and more recently in high yield, building significant cash exposures. The Fund reduced exposure to high yield issuers early in the month before the material spread widening, judging that the higher beta exposures offered more downside risk in this environment. Offsetting this, small additions to investment grade were made late in the month, with spreads much wider and in issuers (such as Morgan Stanley) where we have strong fundamental conviction and see more balanced risk-reward outlooks.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Income-Opportunities-Fund-Performance-Report-PRRP-MIOF-ANZ-16.pdfMay, 2022
The Fund underperformed the benchmark during the month, with moves in both government bond markets and credit markets detracting. Government bond yields were wider over the month, despite a mid-month rally, as renewed hawkish rhetoric from central banks such as the Reserve Bank of New Zealand weighed on the Fund’s positions in shorter maturity AUD bond holdings. Credit markets were volatile and ultimately finished mixed, with higher quality US denominated credit tighter, whilst other regions and lower credit quality securities were materially weaker. This reflects a continued lack of liquidity as well as uncertainty over the direction of global growth. Within the Fund’s credit exposure, positions in a small number of European and higher beta US credit holdings were the main individual detractors, such as European toll roads and a hybrid security issued by US utility NextEra. Positive contributors included higher quality investment grade credit, and specific higher rated high yield issuers, such as Charter, a US cable operator.
The Fund remains positioned with significant liquidity, with cash and short-dated investment grade totalling over 40% of holdings, offering attractive possibilities to consider new opportunities in a sharply higher yield environment. For example, the Fund added holdings in A3/BBB+ rated coatings company PPG, and A3/A- Swiss bank UBS, both in new issue offshore. We consider these types of higher quality issuers offer attractive value (particularly with new issue concessions) and are well set up to perform despite the difficult market backdrop. Offsetting this, the Fund reduced exposure to some high yield issuers during the month, including Air Canada (which rebounded strongly after airlines sold off in March, post the invasion of Ukraine), and hybrids issued by Vodafone. We remained fundamentally comfortable with the issuers, but higher beta exposures are clearly more impacted by the market volatility and we view as appropriate to trim in periods of strength.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Income-Opportunities-Fund-Performance-Report-PRRP-MIOF-ANZ-15.pdfApril, 2022
The Fund underperformed the benchmark for the month, with moves again heavily influenced by significant government bond market weakness. That continued the trend from the first quarter of 2022, where inflation and increasingly hawkish central banks globally combined to drive very significant rises in bond yields (causing lower bond prices), particularly at the shorter maturity part of the yield curve. Holdings of short-dated Australian government bond exposures were the largest contributor, with hawkish messaging from the Reserve Bank of Australia driving a sharp repricing of rate hike expectations over the month – moving from an already elevated 6 hikes, to almost 10 hikes by year end. Credit markets were also weaker during the month, with US investment credit (IG) credit recording its worst month for spread widening since March 2020 – which was also a contributor to underperformance this month. Within the credit market, exposures in IG and high yield credit led the weakness, with the Fund’s positions in global BBB-rated IG the largest single sector grouping. Issuers that we have strong fundamental comfort with, such as toll-road operator Transurban Queensland and US bank JP Morgan, were amongst the largest single name detractors, reflecting the broad market re-pricing of credit risk.
The Fund’s positioning remains positioned with significant liquidity (with cash and short-dated IG credit totalling over 40% of holdings), enabling us to begin looking at meaningful opportunities for the Fund to participate in a sharply higher yield environment. For example, US banks are now issuing at spreads near, or wider than levels at the peak of the 2018 market stress – which we think begins to offer an attractive entry point in a sector that has made significant progress in improving capital levels and simplifying operations. The Fund added Bank of America in April, which issued in EUR with a spread of almost 2% over government bonds, or an AUD-equivalent yield of approximately 5%, which we believe offers value for an issuer that should be relatively resilient in a volatile market and economic backdrop. In contrast, spread tightening from the post-Russian invasion wides offered an opportunity to trim higher-beta exposures, removing selected more cyclical industrial names, such as Ford Motor Credit. On interest rate duration positioning, the Fund added modestly to its AUD yield curve exposure, judging yields on offer to be increasingly attractive – though with expectations that this is likely to continue to be volatile.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Income-Opportunities-Fund-Performance-Report-PRRP-MIOF-ANZ-14.pdfMarch, 2022
The Fund underperformed the benchmark for the month. The moves were principally driven by interest rate duration positioning as government bond markets continued to reprice sharply, with the start of 2022 being the worst first-quarter performance for global government bonds in decades. The Fund’s credit positioning added value, with an appropriate overall credit risk stance and significant liquid holdings allowing the Fund to add to holdings at attractive levels during the significant mid-month volatility. Holdings of high yield and emerging markets credits were the key contributors to performance, as these sectors bounced back the strongest in the latter half of the month. There were several key drivers of market moves – most significantly the continued war in Ukraine and its impact (beyond the direct humanitarian implications) on growth and inflation, alongside renewed hawkish tones from most key global central banks; offset by relatively healthy underlying economic data and expectations for corporate earnings.
By the end of the month, government bond yields had increased by 70bps across the curve (for example, the Australian 2- and 10-year yields). The US 2-year 10-year Treasury yield spread inverted for the first time since 2019 – the spread has historically been a reliable indicator of recessionary risk if the inversion persists, though the timing is highly variable. Credit spreads widened sharply into mid-March, with US investment-grade credit spread at one point nearing levels from the late 2018 Federal Reserve tightening-induced stress, though spreads rapidly repriced tighter in the second half of the month to remarkably finishing overall lower in the spread.
We maintain a ‘barbell’ approach to positioning the Fund: we continue to hold significant liquidity (with cash and short-dated investment-grade credit totalling over 40% of the holdings), paired with allocations to higher-beta sectors including high yield credit and emerging markets debt. This remains appropriate, as evidenced by the ability in March to add to positions amongst market weakness. The Fund started accumulating exposure selectively in a couple of areas. These include BB-rated issuers in the US that are fundamentally solid, including cable operator Charter and business services firm Iron Mountain with bonds from both issuers around 10bps off their 2021 highs; and investment-grade issuers where bonds have sharply repriced, including Boston Scientific, a US medical devices issuer that issued in EUR; and Discovery, a US media company with long bonds that were over 15bps lower.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Income-Opportunities-Fund-Performance-Report-PRRP-MIOF-ANZ-13.pdfFebruary, 2022
The Fund underperformed the benchmark for the month, with repricing in both government bond and credit markets contributing to the result. There were two key drivers to the market moves: sharply more hawkish central bank rhetoric, mostly early in the month, and Russia’s invasion of Ukraine in the second half. Apart from the clear humanitarian costs, the invasion increases both short and medium term economic uncertainty, including the impact on inflation, global growth, and even the plumbing of the financial system. Credit markets overall were sharply weaker, and the negative credit contribution was driven by the Fund’s holdings of European investment grade (IG) and emerging markets (EM) credit – both of these sectors are clearly more impacted by closer linkages to Russia/Ukraine. EM were initially less impacted, but clearly underperformed after geopolitical tensions flared.
Bond markets were generally torn between higher inflation and more aggressive central bank activity, and a flight to safe haven assets as geopolitical tensions flared. Overall, bond yields were higher over the month, and the Fund’s modest duration positioning detracted. Over the last year, the Fund has meaningfully reduced IG credit exposures, and has been holding significant liquidity levels (with cash and short-dated IG credit totalling over 40% of assets), which reduced the impact of market weakness and offers opportunities to take advantage of spread volatility over time. During the month, the Fund added some credit exposures on weakness, focusing in sectors that had underperformed – such as EUR-denominated IG, where even names such as Bank of America, not linked to Russia, had repriced sharply – while reduced some Australian credit exposure, which had held in very well amid the volatility and moved only modestly. We also took the opportunity to add to the Fund’s duration exposure in Australia, judging market expectations of rate hikes as likely too aggressive given the economic uncertainty and recent messaging from the Reserve Bank of Australia.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Income-Opportunities-Fund-Performance-Report-PRRP-MIOF-ANZ-12.pdfJanuary, 2022
The Fund underperformed the benchmark for the first month of 2022 amid the volatility in both government bond and credit markets. The move in credit spreads was the sharpest widening since March 2020, and the performance of government bonds (using US Treasuries) was the worst since 2016, as investors digested changes in the tone from several central banks. The performance of the Fund’s duration and credit positionings were impacted by the widespread volatility in markets, though our risk positions had been trimmed back meaningfully over the past several months in anticipation of market volatility, and our duration exposure has remained well below levels held pre-pandemic. The Fund’s remaining high yield and emerging markets holdings detracted from performance, for example, BB-rated credit such as Air Canada and high yield cable issuers traded wider in spreads, though with no changes to fundamentals but more uncertainty on the pace of central bank rate hikes. In contrast, UK travel exposures such as International Airlines Group contributed positively to performance, as the UK announced that they would ease cross-border travel restrictions.
During the month, the Fund continued to add short-dated credit, which provides some yield on offer but limited interest rate risk exposure – this remains our preferred use of cash when there is limited new issuance or higher yielding options, and this portion of the credit market has performed well during the recent volatility. The Fund opportunistically added some longer-dated European credit, including REITs and packaging companies, with recent volatility offering more attractive entry points. Markets had already begun to rebound into the end of the month, which had some degree of positive impact on performance. Overall, the Fund maintains a healthy liquidity allocation and lower overall risk exposures, and we remain open to using market volatility as an opportunity to add to preferred positions. With central banks pivoting to a message of rate hikes and stimulus withdrawal in recent months, we expect bouts of volatility to be much more prevalent versus 2021.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Income-Opportunities-Fund-Performance-Report-PRRP-MIOF-ANZ-11.pdfDecember, 2021
The Fund outperformed the benchmark in December, with a year-end rally in credit spreads the largest contributor to the positive result. The improvement in credit markets had several drivers, including much lower issuance volumes into year end, lower liquidity, reduced concern about the new Omicron variant, and apparent comfort from broad markets with the US Federal Reserve’s approach of accelerating the tapering of their asset purchase. The key drivers of performance were allocations to high yield and higher-beta investment grade credit, which benefited from the improved economic outlook and have been somewhat more shielded from government bond market volatility. The Fund’s duration positioning had a neutral impact on performance, with bond yields volatile but overall mostly unchanged, while the FX positioning was a small negative after several months of strong positive performance contributions. Within the Fund’s credit holdings, some of the top performers included travel-sensitive sectors such as airlines – including International Airlines Group and Air Canada – reflecting the reduced fears around Omicron. Commodity-linked high yield holdings in metals and paper and packaging were also additive, given the rebound in energy and industrial commodity prices.
The Fund continued to add short-dated credit during the month, with some yield on offer and limited interest rate duration exposure – this remains our preferred use of cash when there is limited new issuance or higher yielding options. After a rebound in investment grade spreads, some longer-dated new bonds that were added in November were trimmed back. Given the lower new issue volumes, most activities in the Fund were in the secondary market this month
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Income-Opportunities-Fund-Performance-Report-PRRP-MIOF-ANZ-10.pdfOctober, 2021
The Fund underperformed the benchmark in October. Whilst credit holdings continued to contribute positively to performance the portfolio’s small duration positioning used as a natural hedge to potential risk market volatility detracted from performance amid the significant and acute moves in short dated bond yields.
Bonds were the key focus during the month, with markets testing central bank commitment to maintaining low rates by pushing yields of shorter maturity bonds significantly higher. The dramatic moves were exacerbated by apparent unwinding of positions in markets such as Australia, seeing bond yield curves pricing in central bank rate hikes over the next 2 years, which we believe is fundamentally unjustified and extreme. The Fund held a lower strategic level of duration position compared to previous years, given lower overall global yields and the ongoing fear of inflation. Much of the portfolio duration exposure was held in Australia, which was amongst the most heavily affected by the market moves. Notably, while month-end marked the peak of the volatility, some rebound has already been evident in the early days of November. The Fund’s credit positioning contributed positively to performance, with excess running yield earned on higher beta sectors (emerging markets and high yield, principally) helping as a counterbalance in a month of otherwise very minimal moves in credit markets. The Fund reduced its holdings of investment grade credit over the month, further reflecting the tight spreads in the sector. We continue to maintain a ‘barbell’ approach in our credit allocations, with reduced investment grade exposure (particularly the higher quality, fully valued sectors), higher liquidity, and higher emerging markets and high yield exposure. This approach maintains some yield in an environment where yield is hard to come by, but also keeps liquidity available in case of market volatility. The Fund participated in a new deal from aircraft lessor AerCap, which brought a $US21bn multi-tranche deal to fund its purchase of General Electric’s leasing business – we had reduced some air transport exposure in previous months in anticipation of the deal. In duration positioning, the Fund added to positions in short maturity Australian rates over the month as the rates sell-off intensified, including some additions near the peak of the market stress and at levels we viewed as extreme.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Income-Opportunities-Fund-Performance-Report-PRRP-MIOF-ANZ-9.pdfSeptember, 2021
The Fund underperformed the benchmark in September, mostly influenced by interest rate performance. Global bond yields rose materially over the month, with the US benchmark 10 year yield rising 18bps to just under 1.50%. The Fund maintained a low interest rate exposure of just over 1 year, below the 2019-220 levels and below neutral levels for the strategy. The Fund’s developed market credit positioning contributed offsetting positive performance on the other hand – both investment grade (IG) and high yield credit were strong, reflecting good relative performance in BB and BBB-related credits. Amongst the strongest individual positions, holdings of airlines such as Air Canada and International Airlines Group (parent of British Airways) performed well as the US moved to open up transatlantic travel. Weaker performers included some portions of emerging markets debt, which has relatively underperformed with developments in the Chinese market. Overall, emerging markets exposures contributed a flat result for the month.
The Fund added new credit holdings during the month, mostly in IG credit, though spreads continued to be generally tight with limited new issue concession. The portfolio added a new bond from Qantas in AUD in new issue, as well as new issuance from global issuers such as Southern Company (US utility company), which issued in Europe. In addition, some volatility in interest rates and equity markets offered some opportunities to build on existing holdings, such as adding to a hybrid exposure to Silicon Valley Bank, one of our favoured US regional banks. The Fund overall maintains its barbell of higher beta credit and high liquidity allocations. We began adding back some duration in the Fund late in the month, again reflecting the late month sell-off in rates. So far, the additions of duration position have been via options, hence with minimal immediate impact on the Fund’s duration exposures
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Income-Opportunities-Fund-Performance-Report-PRRP-MIOF-ANZ-1-1.pdfAugust, 2021
The Fund outperformed the benchmark in August while markets mostly traded in tight ranges. Performance was chiefly driven by running yield on credit holdings and currency option positions, which were implemented as an alternative to interest rate duration to provide downside protection for the Fund. All credit sectors contributed to performance, including the investment grade, high yield and emerging markets holdings which rebounded from last month’s flat result. Spread moves were minimal from the end of July, masking some intra-month volatility, so most of the performance driver was excess running yield. Top individual performers in credit were holdings of recovery trades such as cruise lines, which rebounded, and Latin American sovereign credits in emerging markets, which also regained ground on political developments after a weak July. AUD currency options were also a key contributor to returns, with an option structure implemented to provide protection to the Fund if the AUD falls. This was put in place as an alternative downside protection structure to interest rate duration, which currently offers less upside and more potential volatility. The currency position added value even as risk markets were steady and with growing pessimism over the pace of the Australian economic growth given the extended lockdowns, and the position was partly covered before the currency began rebounding into month-end.
Portfolio changes in global credit focused on a continued barbel of higher beta and recovery trades, with additions to BBB-rated credit and travel-related exposures in Europe. The changes were also focused on individual opportunities rather than wholesale sector moves given lower new issuance volumes and limited spread volatility, meaning that overall sector opportunities were limited. The Fund’s modest interest duration positioning was maintained and continued to be weighted towards AUD duration. This was supplemented by an AUD option structure, which generated significant performance and was partially hedged by month-end.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Income-Opportunities-Fund-Performance-Report-PRRP-MIOF-ANZ-8.pdfJuly, 2021
The Fund outperformed the benchmark in July, driven by interest rate positioning. A rally in bond yields globally benefited the Fund’s duration positioning, with Australian bond yields in particular (where the Fund has a greater interest rate exposure held) outperforming amongst developed markets. Credit risk sectors were mixed during the month, with a small positive contribution from investment grade (IG) credit and Australian residential mortgage-backed securities, while somewhat offset by the emerging markets exposure. Overall, credit sectors delivered a generally flat result.
The strongest individual credit contributors included mortgage-backed securities, reflecting the continued strong housing market and the continued chase for yield. Despite the extended lockdown in Australia, AUD corporate credit generally held in well, reflecting strong overall demand and some expectations for further policy support, though there was some modest weakness in directly COVID-impacted sectors. USD credit was weaker in general, driven by strong new issuance and some growth concerns. Emerging markets were the weakest amongst global credit sectors, reflecting the same global growth concerns and continued spread of the Delta variant. Accordingly, amongst the larger detractors for the month were small holdings of Latin American sovereign issuers, where yields could not keep pace with the significant rally in US Treasury yields.
Portfolio changes at an overall level were modest over the month, focused mainly on the continuation of sourcing lower volatility carry in short-dated EUR and USD securities. These offer an attractive alternative to cash and longer-dated credit, providing ongoing running yield but much less exposure to spread or bond yield volatility. The Fund reduced its holdings of USD air leasing companies, a space that still has a strong fundamental trajectory but has spreads tightened significantly – we expect opportunities to potentially re-enter this space later in the year with upcoming M&A deals due to be funded. Given lower spreads and yields globally, and lower issuance volumes given Australia’s lockdowns and the northern hemisphere summer, there were limited attractive new issuance over the month. The Fund’s duration positioning has been maintained, and continues to be weighted towards AUD duration.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Income-Opportunities-Fund-Performance-Report-PRRP-MIOF-ANZ-7.pdfJune, 2021
The Fund outperformed the benchmark in June. The Fund’s credit exposures and interest rate duration both contributed evenly to performance, with investors’ desire for yield continuing to support a small rally in credit spreads and government bond yields during the month. Spread compression (higher-beta/lower-rated credit outperforming higher-rated) continued to be the key theme in June, which benefited the Fund’s positions in BBB-rated credit in particular. Amongst the strongest contributors in the credit allocation were corporate hybrids (for example, holdings of Ampol and European toll road operator Abertis), higher-beta US utilities names, and some travel exposures. These allocations held in well overall despite some late month weakness, as concerns built around the ‘delta’ variant of the virus and the pick-up in cases in a number of regions.
The Fund reduced some holdings in longer-dated AUD-denominated credit during the month, continuing with the theme of reducing longerdated exposures that either offer low spreads or have performed very strongly, reflecting our view that these allocations offer reduced upside and higher downside in the case of credit market weakness. For example, we reduced exposures to selected longer-dated industrial REITs and other industrial names that had performed strongly. Excess cash continues to be re-deployed in short-maturity credit where some spread can be found, including subordinated banks globally and BBB non-financial corporates.
Overall, the risk setting of the Fund remain in place, favouring a ‘barbell’ of higher-beta credit (BBB, and selected high yield and emerging markets credit), while maintaining short-dated holdings and significant liquidity to take advantage of any opportunities. The interest rate duration exposures were maintained, which provided some additional carry in the most attractive parts of the AUD and USD curves and should offer some modest offset to the risk holdings
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Income-Opportunities-Fund-Performance-Report-PRRP-MIOF-ANZ-6.pdfMay, 2021
While society is discussing the evolving pandemic, vaccination rollouts and the re-opening of economies (or occasional lockdowns), fixed income investors are obsessing about inflation. During May, the data for April revealed that inflation was indeed rising, yet bond markets barely reacted. This was because the reasons behind the rise of inflation have been telegraphed. There are base effects, including the big declines in inflation at this time of 2020 now being reversed, logistical challenges as a result of supply chain disruption, and the impact of economic re-openings with a resultant surge in demand. It is also expected that these same forces will persist for the next few months. Over the past decade, fixed income markets have moved to fully embraced the theme of ‘lower for longer’, that is, persistently low interest rates. Therefore, inflation is a material threat to the current environment. We therefore expect the debate about inflation to rage for some time, which means that we are in a period of heightened sensitivity to inflation risk for fixed income markets.
US credit markets finished May mixed. IG spreads tightened 4bps to 84bps, while US high yield (HY) spreads widened 5bps to 296bps. The tightening in IG spreads was driven by strong ongoing demand for high quality yield from both domestic and non-US issuers, and somewhat limited supply. Corporate earnings wrapped up in May, with the tail end of the season continuing to produce very strong results. Overall, over 70% of issuers in the S&P 500 positively surprised on revenues, and around 75% beat on earnings. In European IG and HY credit, the moves were also relatively benign over the month.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Income-Opportunities-Fund-Performance-Report-PRRP-MIOF-ANZ-5.pdfApril, 2021
Some challenges continue to present in fixed income markets. Starting with the facts, during April US President Biden unveiled two infrastructure packages targeted at an additional $US4tn of stimulus, following hot on the heels of the third fiscal support package since the pandemic hit. In the US, as vaccine administration accelerates, new cases fall and pressure on hospitals eases, the process of re-opening the economy continues to be supported. Sentiment surveys rose, employment grew, and inflation jumped to 2.6%. Equities also surged to another new high and credit spreads tightened to pre-pandemic levels. Yet, bond yields were lower on the month.
Risk markets have been running on the growth recovery and the strength so far coming through in Q1 earnings. While bond yields marched higher through 4Q20 and 1Q21, reflecting the lifting of deflationary fears, price actions have suggested that inflation may not be as big a risk as many economists are suggesting. Central banks have dismissed the current and expected rise of inflation as transitory, citing deeps scars from the pandemic that are at work to add to the pre-existing structural downward pressures on inflation. Calming words echoed by most central banks have quelled, but not eliminated, the fears in bond markets that monetary stimulus can be tapered.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Income-Opportunities-Fund-Performance-Report-PRRP-MIOF-ANZ-4.pdfMarch, 2021
The theme of ‘divergence’ has been observed over the past months, with uneven impacts of the pandemic across countries and sectors as well as varied fiscal responses by different governments. Adding to the divergence has been the vaccination rollouts. Amongst developed countries, the UK and US have led the way on vaccine administration, which are enabling the gradual re-opening of their economies. In contrast, Europe has laboured and is now dealing with a third wave of coronavirus and a re-tightening of restrictions. The combined result has caused US rates to shoot higher, led by the 10-year bond yields, and yield curves to steepen sharply. European yields, on the other hand, actually fell by a few basis points. So, for fixed income investors, country selection and positioning were key drivers of performance in the month of March. That said, there should be no allusions to the challenges facing fixed income in 2021, as the volatility across interest rate markets experienced during the first quarter is likely to continue as investors cope with the uncertainties still surrounding the virus, the challenges of the vaccination process and the expected volatility in the month-to-month economic data. Still, supportive policies and a gradual re-opening of economies are combining to underpin risk markets, where credit spreads have remained resilient and close to historic tights.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Income-Opportunities-Fund-Performance-Report-PRRP-MIOF-ANZ-3.pdfJanuary, 2021
The new year did not start off quietly. Surging virus cases, new variants and pressure on hospitals have caused governments to re-tighten restrictions. In parallel, the vaccination process has begun but there is significant divergence taking place between countries in terms of supply and administration. The very long US election process came to a head with the Georgia Senate run-off early in the month. The Democratic party obtained both seats and, with the casting vote of the Vice-President, have won control of Congress. That said, the margin is wafer-thin, and is not the blue-wave sweep that pollsters had suggested. This reality was overlooked by the markets as expectations are for further near-term fiscal stimulus.
All of these events did not stop equity markets from surging to new highs in the US and credit spreads from tightening back towards prepandemic levels. Bond yields rose and yield curves steepened as the longer-maturity bonds underperformed, but rate markets are nowhere near their pre-pandemic levels. This has put bond markets in the cross-hairs of debate in terms of the outlook for 2021, where optimists are forecasting an inflation surge and higher interest rates. Others, like ourselves, are sceptical particularly as bond markets have a long history of accurately reflecting the reality.
The Fund outperformed the benchmark in January, while credit markets were mixed and bond yields grinded higher over the month. The Fund’s credit exposures contributed positively to performance. Running yields and security selection in investment grade (IG) corporate credit were a key contributor as laggard BBB-rated issuers continued to perform well, even as the broader IG market was slightly weaker. Examples include holdings of Brisbane Airport, which had been added in the second half of 2020 and has benefited from the gradual reopenings; and Australian corporate hybrids, which continue to be well supported in the current environment. Tactical hedging positions against high yield (HY) exposures that were put in place early in the month also added to credit performance in during the sell-off in the latter half of the month. Emerging markets debt and HY exposures in the Fund were overall small positive contributors. The duration positioning detracted from performance as yields rose higher, though the higher yields are beginning to offer opportunities to extend duration again – after we significantly reduced duration exposure in September last year with yields trading at historic lows.
The Fund mostly maintained its overall risk exposure levels, trimming further some of the IG credit where there is limited upside. There were also reductions in some recovery trades that have performed very well, such as holdings of Southwest Airlines and Sydney Airport – both of which have traded back near or through their pre-pandemic levels. The higher beta sectors continue to offer better relative value, though given their increased volatility, exposures to those sectors are offset by owning less volatile shorter-dated securities with some yield (European bank subordinated debt, for example), as opposed to owning longer-dated IG credit with only modest spreads.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Income-Opportunities-Fund-Performance-Report-PRRP-MIOF-ANZ-2.pdfDecember, 2020
Financial markets ended a tumultuous 2020 with the expectation that the new year will be a pathway to returning to normality. Risk assets continued to rally into year end, buoyed by the news that mass vaccination has begun. But at its core, the rally has been underpinned by the unprecedented monetary and fiscal responses across the globe.
Global sovereign yields, in contrast, only edged cautiously higher while embracing the fundamental reality that the global economy has experienced a massive deflationary shock as a result of the pandemic, and that the road to recovery is likely to be long and rocky. The combination of very low sovereign bond yields and direct central bank support has been driving a search for yield by investors. This was illustrated by the fact that high yield and emerging markets USD-denominated sovereign spreads were back to their February (pre-pandemic) levels despite the significant deterioration in macroeconomic fundamentals. While global sovereign yields are now higher than their mid-year historic lows, the overall level of yields has remained well below their prepandemic levels. The Fund outperformed the benchmark in December, with continued vaccine positivity boosting the recovery and compression trades globally. Investment grade (IG) credit was again the largest contributor to performance. High yield (HY) and emerging markets (EM) debt were also strong contributors despite the smaller allocations, as these markets outperformed in the spread compression environment. Amongst individual issuers, infrastructure names such as airports and European toll roads issuers, as well as hybrids from utility provider AusNet, were top performers during the month. The duration exposure in the Fund was a modest negative contributor to performance in the month, as duration positions have been pared back significantly since earlier in 2020.
The Fund mostly maintained its overall risk exposure levels, with an allocation to global IG, some holdings of EM debt and HY, and significant levels of liquidity to take advantage of any market volatility. The allocation to global IG was trimmed early in the month, with much less spread tightening potential going forward from ‘generic’ IG credit (that is, not heavily virus-impacted) meaning that there are better riskadjusted opportunities. Overall, the Fund maintained its barbell approach of maintaining strong portfolio liquidity and holding allocations to higher beta sectors and selected ‘recovery’ trades. We believe this has bee
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Macquarie-Income-Opportunities-Fund-Performance-Report-PRRP-MIOF-ANZ-1.pdfNovember, 2020
November was a solid month for financial markets, driven by positive news on vaccines and more clarity on the outcome of the US election. Two potential disruptive concerns, however, could likely be overlooked at present, namely the logistics of distribution and vaccination for the global population, and a split US Congress. The pattern of markets performance in November was led by risk assets across multiple asset classes. In fixed income, high yield credit led the way, while in currencies it was emerging markets. There was a rotation out of safe havens, with gold (-5.4%) and silver (-4.3%) giving back some of their strong gains of recent months. Notably though, global bond yields were resilient, with both US and European yields ending the month lower and spreads in peripheral Europe becoming tighter. However, New Zealand and Australia were the underperformers as their yields rose over the month.
The Fund outperformed the benchmark in November, as positivity around the vaccine progress strongly boosted ‘recovery’ trades in credit markets. The Fund’s global investment grade (IG) sector allocation was the largest contributor to performance, reflecting broad market performance. But importantly, also added value were the additions of selected issuers over the last several months that would benefit from a recovery in some of the most COVID-impacted sectors. Holdings of selected airlines (such as Qantas and Delta Air Lines), air leasing companies, and airports were all strong contributors to returns. In addition, holdings of emerging markets (EM) debt and high yield (HY) credit also performed strongly. Duration exposures in the Fund were neutral contributors to performance through the month.
The Fund maintained its overall risk exposure levels, while adding further to selected recovery trades during the month. This included additions of toll road hybrid bonds, and franchise bonds from a quick service restaurant operator in the US. Most of the ‘recovery’ trades in the Fund were accumulated in the past several months at attractive spread levels, and performed well in November. Most of the new additions were made in secondary purchases, as primary markets have been offering somewhat less attractive pricing. The Fund continues to build a ‘barbell’ strategy overall, owning selective higher beta sector and IG holdings with material spread tightening potential, as well as strong liquidity levels, to allow the Fund to take advantage of further opportunities and potential volatility. Issuance volumes were higher in November, but net issuance remained low – a key support for credit markets. The demand for credit remained strong in a world of low yields, and was reflected in the low volatility in credit markets despite news around COVID-19 and the withdrawal of the US Federal Reserve’s (Fed) support programs.
ticker: MAQ0277AU
commentary_block: Array
factsheet_url:
https://www.macquarieim.com/investments/fixed-income/macquarie-income-opportunities-fund
Performance -> Download Full Report
release_schedule: Monthly
fund_features:
Macquarie Income Opportunities Fund launched in 2003 with aims to outperform the Bloomberg AusBond Bank Bill Index over the medium term (before fees). It seeks to provide higher income returns rather than traditional cash investments at all stages of interest rate and economic cycles. This portfolio invests predominantly in a high-quality core of liquid, investment-grade credit and cash, keeping its interest-rate duration fairly low.
- It provides exposure to a wide range of domestic and global investment grade floating and fixed rate instruments, asset-backed securities, and cash.
- Interest rate risk will generally be hedged through the use of derivatives such as swaps and futures.
- A disciplined framework is used to analyse each sector and proposed investment to assess its risk. The Fund may be exposed to derivatives to implement its investment strategy.
- The portfolio is generally hedged to Australian dollars. However, any exposure to emerging markets debt issued in the local currency of the debt will generally be unhedged.
manager_contact_details: Array
asset_class: Fixed Income
asset_category: Diversified Credit
peer_benchmark: Fixed Income - Diversified Credit Index
broad_market_index: Global Aggregate Hdg Index
structure: Managed Fund