The Income Fund was down -0.3% in April, versus the benchmark which was down -0.2%, driven by interest rate movements as global markets continue to grapple with the push and pull of inflation and economic growth.

Locally, the Reserve Bank of New Zealand held the Official Cash Rate steady at 5.5%. This was followed by an inflation release which showed a small decrease, but less than most forecasts. This dynamic is playing out in most developed markets as inflation continues to come down, but slowly, as some parts of the economy have a significant lag. This has caused expectations for rate cuts from central banks to be delayed from mid-2024 to late 2024. Meanwhile, economic activity during the month showed signs that a slowdown looks increasingly likely. This should ease inflationary pressures, providing a supportive environment for interest rates to fall in the medium term.

Grifols was an early contributor to returns in April as the company surprised us and the market by calling (buying back from us) the bonds at par, leading to a healthy return. The company has faced questions around its upcoming debt maturities and was keen to address this earlier than we had anticipated.

Contributors to fund returns were also those with low or no interest rate exposure such as positions in bank floating rate bonds from National Australia Bank, Westpac and ANZ. These bonds benefitted as their coupons change with interest rates, allowing their yield to fluctuate with less volatility than fixed-rate bonds. The Australian banks have also benefitted from solid profitability in the higher interest rate environment, helping to support bond trading levels.

On the contrary, Sherwin Williams and Charter Communications were detractors to returns in April. Their bonds, issued in USD have maturity dates of 2029 and 2032 (respectively) and are some of the longest in the fund. This led to bond prices falling as interest rates in the US rose about 0.5%, the most of any developed market. Positively, both companies released Q1 results in April, with fundamental credit metrics remaining solid in both cases. Notably, Charter Communications said they would decrease financial leverage towards the lower end of their guidance range - an update which we view positively.