Summer New Zealand Fixed Interest

Summer New Zealand Fixed Interest fund performance summary as at 30 April 2022.

Fund at a glance

Unit price (as at 30 April 2022): $1.0751

Date the fund started: 19 September 2016

For information on fees, see our Fees page.

For more information on the Summer New Zealand Fixed Interest fund read the latest quarterly fund update and the product disclosure statement

Fund objective and strategy

See the New Zealand Fixed Interest page for the Summary of investment objective and strategy.

Fund returns 

PIR Total since inception (annualised) 1 Month 3 Month 1 Year 3 Years^
28% 0.95% -1.12% -2.85% -5.29% -0.38%
17.50% 1.08% -1.27% -3.25% -6.04% -0.44%
10.50% 1.17% -1.38% -3.52% -6.53% -0.48%

  ^ Annualised

Fund returns are calculated net of fund charges, trading expenses and accrued tax for a New Zealand resident individual paying tax at the Prescribed Investor Rate identified above. 

Top 10 investments 

  Asset name % of fund net assets
1 ANZ transactional bank account 8.68%
2 Housing New Zealand 3.36% 12/06/2025 6.12%
3 NZ Govt Inflation Ind Bond 20/09/25 5.84%
4 New Zealand Local Government Funding Agency Ltd 14/04/2033 3.50% 5.33%
5 New Zealand Local Government Funding Agency Ltd 15/04/2027 4.50% 4.00%
6 Westpac New Zealand 1.439% 24/02/2026 3.83%
7 New Zealand Local Government Funding Agency Ltd 15/04/2024 2.25% 3.16%
8 New Zealand Local Government Funding Agency Ltd 15/04/2025 2.75% 3.11%
9 Housing New Zealand 3.42% 18/10/2028 2.27%
10 Vector Ltd 14/03/2024 4.996% 1.97%

The top 10 investments make up 44.31% of the fund.

Manager's Commentary

Market Commentary

April was yet an another negative month for New Zealand fixed interest investors, in general.

Summer New Zealand Fixed Interest delivered a return of -1.12 % for the month of April and a return of -5.29% for the 12 months to the end of April 2022.

Portfolio Positioning

Our focus has been to build and maintain a compelling yield-to-maturity1, which we estimated to be around 4.25% at the end April.

Furthermore, we calculated the fund’s duration2 at close to 3.85 years and a weighted-average portfolio credit rating of “A+”3; the fund’s investment profile ranged from on-call cash to a bond maturity in 2050.

We’ve also ensured ample liquidity, complementing cash holdings with short-dated New Zealand Government bond proxies (Housing New Zealand and New Zealand Local Government Funding Agency securities) and a number of bond maturities spread over the remainder of this year. 

Trading activity has been focused on continuing to accumulate New Zealand Government 2025 inflation-linked bonds; this is the fund’s second largest position and our strategy is to quietly lift the fund’s exposure to between 10%-15%, if / when the implied break-even inflation rate for these bonds dips meaningfully below 3%. 

Outlook

Unfortunately, we didn’t expect the aggressive move higher in New Zealand bond yields that we got over the month, or over the calendar year to-date.

Indeed, we thought that our Reserve Bank of New Zealand had done a good job in managing the market’s expectations around monetary policy settings and the potential movement – direction and trajectory – of the Official Cash Rate (OCR), at its February monetary policy statement and again over this month when it increased the OCR by 0.50% to 1.50%.

What we didn’t foresee was the contagion of rising bonds yields and interest rates from elsewhere around the world, as a whole raft of central banks started talking and acting tough on inflation, shunting our bond yields materially higher over the beginning of 2022.

While we’re sticking to our view that the OCR will move up to what we consider to be just above the neutral cash rate, at around 2.50%, we’re not going to double- down on our view, which we acknowledge as well outside of consensus.

Rather, with the market pricing in a terminal OCR of somewhere around 4.25%4 towards the end of 2023, we’re going to opportunistically and methodically increase duration up to and then beyond four years: slowly and cautiously, to be sure.

This is because there has been no change in our thinking; we continue to doubt that the widely anticipated wage and salary increases will match price hikes associated with current supply disruptions, exacerbated by what we see as short term and unlikely to be sustained consumer demand.

To reiterate, by definition a decline in real purchasing power lowers the amount of money available for discretionary spending, a  theme which we expect to gain more “air time” as we move into the middle of this year, if our pick for faltering consumer confidence and falling household discretionary spending is correct. We think momentum is building around our thesis and points to the most recent ANZ-Roy Morgan NZ Consumer Confidence survey released on 29 April 2022, where New Zealand consumer confidence, according to those surveyed, is extremely pessimistic and is consistent with economic recession. It’s a similar story for the Westpac McDermott Miller Conference survey for the March 2022 quarter, which now records consumer confidence from respondents to be at the lowest level since the Global Financial Crisis of 2008.

Finally, it is impossible to understand the full implications of the tragedy in Ukraine; price increases associated with energy and food are unlikely to be offset by commensurate increases in salary and wages, in our view, and again, we see this as a tax, ultimately stretching domestic household budgets so that discretionary spending falls. Nonetheless, inflation could be more acute than we originally expected over the shorter term, hence our healthy exposure to short-dated inflation linked bonds 

 

1 Yield to maturity is calculated as the weighted-average yield of all securities in the portfolio as at 30 April 2022, assuming that all amounts owed by the issuer will be received by the Fund.

2 Duration measures the sensitivity of a security’s yield or price to a change in interest rates

3 Credit ratings are an indication of a security’s or issuer’s credit quality. Where possible we use external credit ratings and will apply our own credit rating if a security is unrated by an external agency. Weighted-average portfolio credit quality is calculated by us, using a linear scale

4 Westpac Institutional Bank, “What’s Priced In?”, 29 April 2022

 

 

 

 

This is not a recommendation to buy or sell any financial product and does not take your personal circumstances into account. All opinions reflect our judgement on the date of communication and may change without notice. Past performance is not a reliable guide to future performance. We recommend you take financial advice before making investment decisions. We have prepared this web page in good faith based on information obtained from other sources, but we do not guarantee the accuracy of that information. We do not make any representation or warranty (express or implied) that this web page is accurate, complete, or current and to the maximum extent permitted by law disclaim any liability for loss which may be incurred by any person relying on this web page.