March saw the Income Fund up 0.88%, ahead of the benchmark which returned 0.67%. This strong performance was driven by a rally in interest rates both domestically and offshore. The largest moves were in short term New Zealand interest rates as expectations for OCR cuts increased. This was driven by weak economic indicators as well as confirmation that New Zealand officially fell into recession in December of last year.

Contributors to returns in March were from positions in offshore bank bonds such as those issued by Permanent TSB, Natwest Group and Barclays. These bonds continued their roughly year-long rally as bank earnings and fundamentals continue to be robust. This helped credit spreads to rally during March, which are now closing in on previous high-water marks. Given our macroeconomic outlook, which we expect will likely flow into future bank earnings negatively, we will likely continue trimming these ‘winners’ over the coming months.

On the downside, our position in Synlait was again a detractor in March. The company continues to struggle with overcapacity in their manufacturing footprint which has led to earnings downgrades. March underperformance was driven by concerns that Synlait’s bank syndicate may force repayment of bank debt in the near term. In early April the company announced a short-term repayment extension to July. We continue to believe Synlait’s significant asset base is worth considerably more than its debt burden and therefore will be able to repay bondholders when it matures in December this year.