Perpetual Ethical SRI Credit (PER1744AU) Report & Performance

What is the Perpetual Ethical SRI Credit fund?

The Perpetual Ethical SRI Credit Fund aims to provide regular income and consistent returns by investing in a diverse range of income generating, ethical and socially responsible assets. It provides investors with an active, diversified portfolio of high quality, floating rate, predominantly investment grade securities that have passed through a screening process based on ethical and socially responsible factors. Sovereign issuers (governments) will be analyzed on environmental, social and governance (ESG) factors, based on a scoring system utilizing research from external specialists. This may include, but is not limited to, considering any unethical practices such as corruption, rule of law and political instability of the sovereign.

Growth of $1000 Investment Over Time

Performance Report

Peer Comparison Report

Peer Comparison Report

Latest News & Updates For Perpetual Ethical SRI Credit

Perpetual Ethical SRI Credit Fund Commentary September 30, 2023

Income return was the most significant contributing factor to outperformance during the month. The portfolio’s running yield was 5.9% at month end, with the spread measured at 2.0%.

Credit spread dynamics contributed to outperformance during the month. Spreads were subdued during September before widening towards the end of the month as rising bond yields and oil prices saw investors move to reduce risk. The Fund’s security selection was rewarded, with exposure to subordinated bank spreads and foreign denominated credit contributing to credit spread return.

The Manager continues to actively manage liquidity tall risks by maintaining an elevated exposure to highly liquid government bonds and cash. Allocation to government bonds contribute to the fund’s running income and allow the manager to inexpensively express duration positions. During the month the Fund’s exposure to government bonds was increased. The Manager elected to lengthen the Portfolio’s duration during September, adding exposure to the longer dated (7-8yrs) end of the curve via government bonds. The Manager chose to utilise the long end, recognising the possibility of persistent elevated inflation and uncertainty of the path of monetary policy tightening. During September, rising bond yields detracted from outperformance as a result of the Fund’s 0.6 years of duration.

The Portfolio was very active in primary and secondary markets during September. Major banks and financial credit exposures were selectively lengthened and the Manger took the opportunity to rotate into fixed rate bonds, locking in attractive coupons as the peak of the monetary tightening cycle nears. Note the fund typically hedges the interest rate risks of fixed rate bonds in the portfolio. The Fund also invested in the floating rate tranche of the new $2.4B senior unsecured deal from Westpac.

The outlook for credit is challenging and the Fund remains defensively positioned while retaining the capacity to take advantage of relative value opportunities as they arise

The Fund invests in quality issuers that meet Perpetual’s ESG and Values based criteria relating to what the company is in the business of and the way business operations are conducted respectively. Upon application of the ESG and Values based criteria, several bond issuers have been screened out These include, for example, companies involved in the extraction of fossil fuels or companies whose revenues are significantly associated with socially questionable products or services.

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Product Snapshot

  • Product Overview
  • Performance Review
  • Peer Comparison
  • Product Details

Product Overview

Fund Name APIR Code
? A Product Code is unique a identifier code issued by a group or governing body, to reference products in a large group. For an example, APIR codes are commonly used for Funds and Ticker codes are commonly used for Securities such as ETFs and Stocks.
Structure
?
Asset Class
? An Asset Class breakdown provides the percentages of core asset classes found within a mutual fund, exchange-traded fund, or another portfolio. Asset classes (in microeconomics and beyond) generally refer to broad categories such as equities, fixed income, and commodities.
Asset Category
? An Asset Category is a grouping of investments that exhibit similar characteristics and are subject to the same laws and regulations. Asset categories (or a sub-asset class) are made up of instruments which often behave similarly to one another in the marketplace, looking down to the Asset Category level is important if looking to build a diversified portfolio.
Peer Benchmark Name
? A Peer Index (benchmark) refers to a peer group of investment managers who have the same investment style or category. It is used to compare the performance of one manager to their peer group, which makes it simpler for investors to choose between the vast number of investment managers.
Broad Market Index
? A Market Index (benchmark) refers to a hypothetical portfolio of investments that represents a segment, asset or category of an investable market. Market Indices are used to benchmark managers performance, to assist their style reliability and ability to provide excess returns.
FUM
? Funds/Assets under management (AUM) is the total market value of the investments that a person or entity manages on behalf of clients. Assets under management definitions and formulas vary by company.
Management Fee
? A management fee is a charge levied by an investment manager for managing an investment fund. The management fee is intended to compensate the managers for their time and expertise for selecting finanical products and managing the portfolio.
Performance Fee
? A performance fee is a payment made to an investment manager for generating positive returns. This is as opposed to a management fee, which is charged without regard to returns. A performance fee can be calculated many ways. Most common is as a percentage of investment profits, often both realized and unrealized. It is largely a feature of the hedge fund industry, where performance fees have made many hedge fund managers among the wealthiest people in the world.
Spread
? A spread can have several meanings in finance. Basically, however, they all refer to the difference between two prices, rates or yields. In one of the most common definitions, the spread is the gap between the bid and the ask prices of a security or asset, like a stock, bond or commodity. This is known as a bid-ask spread.
Perpetual Ethical SRI CreditPER1744AUManaged FundsFixed IncomeDiversified CreditFixed Income - Diversified Credit IndexGlobal Aggregate Hdg Index46.47 M0.7%0.00%0.2%

Performance Review

Fund Name Last Month
? Returns after fees in the most recent (last) month).
3 Months Return
? Returns after fees in the most recent 3 months.
1 Year Return
? Trailing 12 month returns.
3 Years Average Return
? Average Annual returns from the last 3 years.
Since Inc. Average Return
? Average (annualised) returns since inception
1 Year Std. Dev. (Annual)
? The standard deviation (or annual volatility) of the last 12 months.
3 Years Std. Dev. (Annual)
? The average standard deviation (or annual volatility) from the last 3 years.
Since Inc. Std. Dev. (Annual)
? The average standard deviation (or annual volatility) since the fund inception.
1 Year Max Drawdown
? The maximum drawdown in the last 12 months - a drawdown is a peak-to-trough decline during a specific period for an investment, trading account, or fund.
3 Year Max Drawdown
? The maximum drawdown in the last 36 months - a drawdown is a peak-to-trough decline during a specific period for an investment, trading account, or fund.
Since Inc. Max Drawdown
? The maximum drawdown since inception - a drawdown is a peak-to-trough decline during a specific period for an investment, trading account, or fund.
Perpetual Ethical SRI Credit0.73%1.78%9.02%4.87%3.76%1%1.77%2.59%0%-2.5%-5.24%

Peer Comparison

Fund Name Peer Index Name
? A group of individuals who share similar characteristics and interests are called peer groups. Peer group analysis is an essential part of assessing a price for a particular stock in investment research. The emphasis here is on making a comparison, meaning that the peer group constituents should be more or less identical to the company being examined, especially in terms of their main business and market capitalization areas.
12 Months Excess Return
? Excess returns are an important metric that helps an investor to gauge performance in comparison to other investment alternatives. In general, all investors hope for positive excess return because it provides an investor with more money than they could have achieved by investing elsewhere.
Excess Return Annualised Since Inception
? Excess returns are an important metric that helps an investor to gauge performance in comparison to other investment alternatives. In general, all investors hope for positive excess return because it provides an investor with more money than they could have achieved by investing elsewhere.
12 Months Alpha
? Alpha is used in finance as a measure of performance, indicating when a strategy, trader, or portfolio manager has managed to beat the market return over 12 months. Alpha, often considered the active return on an investment, gauges the performance of an investment against a market index or benchmark that is considered to represent the market’s movement as a whole.
Alpha Annualised Since Inception
? Alpha is used in finance as a measure of performance, indicating when a strategy, trader, or portfolio manager has managed to beat the market annualized since inception. Alpha, often considered the active return on an investment, gauges the performance of an investment against a market index or benchmark that is considered to represent the market’s movement as a whole.
12 Months Beta
? Rolling 12Month Beta is a measure of the volatility—or systematic risk—of a security or portfolio compared to the market as a whole. Beta is used in the capital asset pricing model (CAPM), which describes the relationship between systematic risk and expected return for assets (usually stocks).
Beta Annualised Since Inception
? Beta is a measure of the volatility—or systematic risk—of a security or portfolio compared to the market as a whole. Beta is used in the capital asset pricing model (CAPM), which describes the relationship between systematic risk and expected return for assets (usually stocks).
12 Months Tracking Error
? 12Month Tracking error is the difference in actual performance between a position (usually an entire portfolio) and its corresponding benchmark over the last 12 months. The tracking error can be viewed as an indicator of how actively a fund is managed and its corresponding risk level. Evaluating a past tracking error of a portfolio manager may provide insight into the level of benchmark risk control the manager may demonstrate in the future.
Tracking Error Since Inception
? Since Inception tracking error is the difference in actual performance between a position (usually an entire portfolio) and its corresponding benchmark since inception. The tracking error can be viewed as an indicator of how actively a fund is managed and its corresponding risk level. Evaluating a past tracking error of a portfolio manager may provide insight into the level of benchmark risk control the manager may demonstrate in the future.
12 Months Correlation
? Correlation, in the finance and investment industries, is a statistic that measures the degree to which two securities move in relation to each other. Correlations are used in advanced portfolio management, computed as the correlation coefficient, which has a value that must fall between -1.0 and +1.0.
Correlation Since Inception
? Correlation, in the finance and investment industries, is a statistic that measures the degree to which two securities move in relation to each other. Correlations are used in advanced portfolio management, computed as the correlation coefficient, which has a value that must fall between -1.0 and +1.0.
Perpetual Ethical SRI CreditFixed Income - Diversified Credit Index0.56%0.75%NA%NA%NA%0.31.72%1.36%0.620.86

Product Details

Fund Name Verifed by SMSF Mates Manager Address Phone Website Email
Perpetual Ethical SRI CreditYes-https://www.perpetual.com.au/-

Product Due Diligence

What is Perpetual Ethical SRI Credit

Perpetual Ethical SRI Credit is an Managed Funds investment product that is benchmarked against Global Aggregate Hdg Index and sits inside the Fixed Income - Diversified Credit Index. Think of a benchmark as a standard where investment performance can be measured. Typically, market indices like the ASX200 and market-segment stock indexes are used for this purpose. The Perpetual Ethical SRI Credit has Assets Under Management of 46.47 M with a management fee of 0.7%, a performance fee of 0.00% and a buy/sell spread fee of 0.2%.

How has the investment product performed recently?

The recent investment performance of the investment product shows that the Perpetual Ethical SRI Credit has returned 0.73% in the last month. The previous three years have returned 4.87% annualised and 2.59% each year since inception, which is when the Perpetual Ethical SRI Credit first started.

How is risk measured in this investment product?

There are many ways that the risk of an investment product can be measured, and each measurement provides a different insight into the risk present. They can be used on their own or together to perform a risk assessment before investing, but when comparing investments, it is common to compare like for like risk measurements to determine which investment holds the most risk. Since Perpetual Ethical SRI Credit first started, the Sharpe ratio is NA with an annualised volatility of 2.59%. The maximum drawdown of the investment product in the last 12 months is 0% and -5.24% since inception. The maximum drawdown is defined as the high-to-low decline of an investment during a particular time period.

What is the relative performance of the investment product?

Relative performance is what an asset achieves over a period of time compared to similar investments or its peers. Relative return is a measure of the asset's performance compared to the return to the other investment. The Perpetual Ethical SRI Credit has a 12-month excess return when compared to the Fixed Income - Diversified Credit Index of 0.56% and 0.75% since inception.

Does the investment product produce Alpha over its Peers?

Alpha is an investing term used to measure an investment's outperformance relative to a market benchmark or peer investment. Alpha describes the excess return generated when compared to peer investment. Perpetual Ethical SRI Credit has produced Alpha over the Fixed Income - Diversified Credit Index of NA% in the last 12 months and NA% since inception.

What are similar investment products?

For a full list of investment products in the Fixed Income - Diversified Credit Index category, you can click here for the Peer Investment Report.

What level of diversification will Perpetual Ethical SRI Credit provide?

Perpetual Ethical SRI Credit has a correlation coefficient of 0.86 and a beta of 0.3 when compared to the Fixed Income - Diversified Credit Index. Correlation measures how similarly two investments move in relation to one another. This establishes a 'correlation coefficient', which has a value between -1.0 and +1.0. A 100% correlation between two investments means that the correlation coefficient is +1. Beta in investments measures how much the price moves relative to the broader market over a period of time. If the investment moves more than the broader market, it has a beta above 1.0. If it moves less than the broader market, then the beta is less than 1.0. Investments with a high beta tend to carry more risk but have the potential to deliver higher returns.

How do I compare the investment product with its peers?

For a full quantitative report on Perpetual Ethical SRI Credit and its peer investments, you can click here for the Peer Investment Report.

How do I compare the Perpetual Ethical SRI Credit with the Global Aggregate Hdg Index?

For a full quantitative report on Perpetual Ethical SRI Credit compared to the Global Aggregate Hdg Index, you can click here.

Can I sort and compare the Perpetual Ethical SRI Credit to do my own analysis?

To sort and compare the Perpetual Ethical SRI Credit financial metrics, please refer to the table above.

Has the Perpetual Ethical SRI Credit been independently verified by SMSF Mate?

This investment product is in the process of being independently verified by SMSF Mate. Once we have verified the investment product, you will be able to find more information here.

How can I invest in Perpetual Ethical SRI Credit?

If you or your self managed super fund would like to invest in the Perpetual Ethical SRI Credit please contact via phone or via email .

How do I get in contact with the Perpetual Ethical SRI Credit?

If you would like to get in contact with the Perpetual Ethical SRI Credit manager, please call .

Comments from SMSF Mates

SMSF Mate does not receive commissions or kickbacks from the Perpetual Ethical SRI Credit. All data and commentary for this fund is provided free of charge for our readers general information.

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Historical Performance Commentary

Performance Commentary - August 31, 2023

Income return was the most substantial contributor to outperformance during the month, led by RMBS, banks and non-financial corporates. The income generated by the Fund’s exposure to floating rate notes and allocation to cash have benefitted from the aggressive increase in base rates over the past 16 months. The portfolio’s running yield was 5.5% st month end, with the spread measured at 2.0%.

Credit spread contraction contributed to outperformance during August as domestic spreads continued to grind tighter. The Fund’s exposure to securitised sectors was the most significant contributor to credit spread return. This was partially offset by widening spreads among a number of Euro denominated bonds across diversified financials, real estate and non-financial corporate sectors.

In recognition of tightening financial conditions, the Fund continues to maintain a highly liquid sleeve (-15-18%) of cash and government securities which protects against liquidity tail risks. The Fund maintains a small (0.4 years) duration exposure as a result of the government bond allocation which the Manager elected to shorten during the month. The Fund’s duration exposure was rewarded during the month as yields ended the month slightly lower contributing to return.

Issuance volumes were resurgent during August and the Fund was active in primary and secondary markets. The Manager elected to add exposure to domestic and offshore banks. The Fund took part in the $5.0B senior unsecured deal from CBA before monetising the new issue concession taking profit shortly after issue The Manager elected to take part in the new 10-year $750M fixed rate deal from Lloyds Banking Group which performed well over the of the month contributing to outperformance.

The outlook for credit remains delicately poised, the Manager remains conscious of the implications of slowing growth and tightening financial conditions for credit valuations and liquidity The Fund remains defensively positioned while retaining the capacity to take advantage of relative value opportunities presented as the outlook improves

The Fund invests in quality issuers that meet Perpetual’s ESG and Values based criteria relating to what the company is in the business of and the way business operations are conducted respectively Upon application of the ESG and Values based criteria, several bond issuers have been screened out These include for example, companies involved in the extraction of fossil fuels or companies whose revenues are significantly associated with socially questionable products or services.

Performance Commentary - July 31, 2023

Income return was a substantial contributor to outperformance during the month, led by RMBS, banks and non-financial corporates. The portfolio’s running yield was 5.8% at month end, with the spread measured at 2.1%.

Credit spread tightening was the most significant contributing factor to return during the month. Domestic spreads narrowed over the month on supportive supply dynamics and increasing investor risk appetites Subordinated bank exposures performed well as tier 2 and hybrid paper tightened reflecting elevated secondary market demand and a paucity of new issues. Tightening RMBS spreads also contributed to outperformance Lastly, the Fund benefitted from exposure to foreign denominated credit across multiple sectors USD spreads outperformed AUD counterparts and the Fund’s exposure to USD denominated corporates, domestic and offshore banks were constructive. The Manager elected to lock in recent profits on an EUR denominated bond from Ausnet following an extended rally

In recognition of tightening financial conditions, the Fund continues to maintain a highly liquid sleeve (15-18%) of cash and government securities which protects against liquidity tall risks. The Fund maintains a small (0.6 years) duration exposure as a result of the government bond allocation

Primary market activity was subdued and the Manager was selective in purchases made during the month. The Fund increased its exposure to CMBS via a new $500M Think Tank deal Early in July, the Manager elected to add exposure to a recently issued EUR denominated Morgan Stanley senior bond which tightened throughout the remainder of the month, contributing to outperformance.

While the outlook for credit has improved, the Manager remains conscious of the implications of slowing growth and tightening financial conditions for credit valuations and liquidity. The Fund remains defensively positioned while retaining the capacity to take advantage of relative opportunities presented as the outlook improves

The Fund invests in quality issuers that meet Perpetual’s ESG and Values based criteria relating to what the company is in the business of and the way business operations are conducted respectively Upon application of the ESG and Values based criteria, several bond issuers have been screened out These include for example, companies involved in the extraction of fossil fuels or companies whose revenues are significantly associated with socially questionable products or services.

Performance Commentary - June 30, 2023

The Fund’s June relative return was notable, accounting for almost zox of the Fund’s annual outperformance target in a single month. Income return was a significant contributor to outperformance during the month, led by RMBS, domestic and offshore banks. The portfolio’s running yield was 5.1% at month end. with the spread measured at 11%

Credit spread tightening was the most substantial contributor to return during June. Domestic crest spread dynamics were ret atively subdued. narrowing slightly on aggregate while remaining in range of recent levels. The Fund’s exposure foreign denominated hybrid securities was the key contributing recta to the robust credit spread return. After reducing hybrid exposures early in the year. the Manager selectively added exposure to USD denominated Macquarie hybrid debt at attractive levels following the sharp selloff in March in the wake of 1183’s purchase of Credit Suisse. In June. the spread on this position narrowed substantially. contrituting to return. Elsewhere. a Euro denominated hybrid in the utilities sector was a significant contributor.

In recognition of tightening financial conditions, the Fund continues to maintain a highly liquid sleeve (-15.18%) of cash and government securities which protects against liquidity tag risks. Allocation to government bonds contribute to the fund’s running income and allow the m anger to inexpensively express duration positions. During the month the Manager added exposure to government bonds. increasing the Fund’s duration to 0.6 years by month end. The Fund was relatively active In primary and secondary markets during the month The Fund invested in the new fixed rate issue from ACI finance which the manager believes offers attractive carry for the level of risk.

The Fund also bought some recently issued E UR denominated Sydney Airport senior bonds in secondary which were priced cheaply relative to the AUD BBB curve. The Fund remains defensively positioned while retaining the capacity to take advantage of relative opportunities. The Fund invests in quality issuers that met Perpetual’s ESG and Values based criteria relating to what the company is in the business of and the way business operations are conducted respectively. Upon appl ication of the ESG and Values based criteria several band issuers have been screened out. These include. for example. companies involved in the extraction of fossil fuels or companies whose revenues are significantly associated with socially questionable products or services.

Performance Commentary - May 31, 2023

The Perpetual ESG Credit Income Fund in the month of May delivered a return of 0.6%. outperforming its benchmark by 0,3%

Income retLen was the most significant determinant of outperformance during May. The Fund continues to wiled a healthy rum ing inane in excess of the benchmark and rising interest rates continue to increase the coupons paid on the Fund’s floating rate assets. The portfolio% running yield was 53% at month end. with the spread measured al 2.1%.

Credit spread tightening also contributed strongly to performance. During a month of benign spread dynamics, the Fund’s expos ure to nonfinancial corporates. utili ties and securitised seders was constructive. Subordinate trenches of a number of RMBS issues performed wet I. contributing to relative return.

In recognition of lightening financial conditions. the Fund continues to maintain a highly liquid sleeve (14 -15%) of cash and government securities which protects against liquidity tail risks. During the month the Manager actively traded government bonds ending the month with a slightly reduced allocation Allocation to government bonds supported the Fund’s running income and during the month the Fund’scurve positioning contribu tea to outperfamance The Fund was active in primary and secondary markets cluing May. The Manager was able to monetise new issue concessions on de als from NAB. Credit Agricole and Bendigo Adelaide Bank.

The Fund added allocation to a number of RMBS and ABS issues. taking the opportunity to rotate into higher yielding trenches and longer dated issues Non-financial corporate exposures were selectively trimmed with the Manager taking profits on a number of positions. This included a USD denominated NBN co fixed rate bond which performed well as a result of Moody’s upgrading Its credit rating during the month.

Throughout the first half of 2023. the Manager has reduced credit risk in the Fund in line with the negative outlook. The cre dit outlook has improved while remaining slightly negative. Accordingly. the Fund remainsdefensively positioned ythile retaining the capacity to take aevant age of relative opportunities. The Fund invests in quality issuers that meet Perpetual’s ESG and Values based criteria relating to what the company is in the business of and the way business operations are conducted respectively. Upon application of the ESG and Values based criteria. several bond issuers h aye beenscreened out. These include. for example, companies involved in the extract ion of fossil fuelsor companiesW.1os° revenues are significantly associated with socially questionable products or services

Performance Commentary - February 28, 2023

Income return contributed to outperformance during the month. The portfolio’s running yield was 4.6% at month end, with the s pread measured at 1.7%.

Credit spread dynamics were constructive for performance during the month as spreads tightened on aggregate. The Fund’s alloc ation to financials — most notably domestic and offshore banks — were the key contributors to spread return during February. The Manager elected to reduce credit risk in the portfolio, moving up the quality spectrum, trimming BBB exposures while increasing allocation to AAA rated credit. As a resul t, the Fund’s exposure to financials was reduced while allocation to RMBS — a sector which offers access to AAA floating rate credit — increased. Additionally, in the rotation away from riskier segments of credit, the manager has added to the short position on high yield credit (initially established in J anuary), through a credit default swap (CDS) hedge. While the credit outlook remains neutral, it is worth noting that while technical indicators are supportive , credit fundamentals are more challenged, and the Manager elected to de-risk the portfolio and lock in recent gains.

Performance Commentary - January 31, 2023

Credit spread tightening was the most significant contributor to outperformance over the month. In a strong month for credit, spreads narrowed as the outlook for global growth improved while investors also priced in a slower pace of monetary tightening from central banks. Th e key contributing sectors to credit spread outperformance were domestic and offshore banks, with a more modest contribution from non -financial corporates, utilities and securtised bonds. The Fund’s exposure to USD and EUR denominated debt performed well across the aforementioned non -securitised sectors. While the Fund retains the capability to invest in offshore credit markets, all foreign denominated exposures are hedged back to AUD. Following the robust rally in credit spreads and cognisant of the impact successive interest rate increases will have on the debt servicing metrics for more highly levera ged issuers, the Manager elected to add a short position on the European crossover CDS index (which tracks European issuers on the cusp of investment grade and high yield).
Over recent months, in recognition of tightening financial conditions and liquidity risks, the Fund has held approximately 15 -17% in cash and highly liquid government and semi-government bonds. During January, this high liquidity sleeve of the portfolio was converted to cash from semi-government securities following the sharp fall in bond yields, contributing to portfolio performance. The Fund ended the month with a sm all, short (negative) duration position which is expected to perform if bond yields rise following their strong January rally.

Sector allocation was actively managed during the month. The Manager elected to increase exposure to securitised sectors, buy ing RMBS in secondary markets. The Manager believes that the sector offers attractive value relative to the major bank curve which it is typically correlated with. The Fund’s regional bank exposure was increased via new deals from Bendigo Adelaide Bank and Bank of Queensland which offered attractive value relative to the majors. Elsewhere, the manager elected to trim exposures to subordinated financials.

The Fund’s defensive positioning continues to mitigate the impact of tightening financial conditions and the potential elevat ed market volatility that may result as central banks continue to withdraw liquidity from financial markets (quantitative tightening) at an unprecedented p ace. This positioning provides a degree of risk mitigation, whilst preserving the capacity to take advantage of relative value opportunities should market volatility increase.
The fund applies both ethical and socially responsible investment (SRI) screens relating to what the company is in the business of and the way business operations are conducted respectively. Upon application of the ethical and SRI screens, several bond issuers have been screen ed out. These include, for example, companies involved in the extraction of fossil fuels or companies whose revenues are significantly associated with socially questionable products or services.

Performance Commentary - December 31, 2022

Income return was the most significant contributor to relative return during the month. Financials and securitised sectors were the most substantial drivers of income return with non-financial corporate exposures also contributing. Ongoing increases in interest rates and expanding cre dit premix have contributed to the increase in portfolio income over the past year. The portfolio’s running yield was 5.0% at month end, withthe spread measured at 2.3%.

Credit spread dynamics contributed to outperformance during December. Credit spreads traded in a tight range, narrowing over the course of the month. Credit spread performance was led by domestic and offshore banks with corporates and utilities also contributing. The Portfolio’s exposure to USD denominated domestic bank debt performed well, led by Macquarie and Westpac USD hybrids. The Fund’s small, short position inthe E UR Xover CDS index performed well during December as Euro corporate spreads surged in the middle of the month. The Manager exited the position at the peak in the wake of the surprise announcement on monetary policy by the Bank of Japan (BoJ), which loosened the yield on its ten year government bonds from 0.25% to 0.5%, wreaking havoc on equity, bond and currency markets.

The contribution of duration exposure was constructive. The portfolio began the month with near 0 duration. The Manager elected to add duration exposure as long term yields rose following the surprise BoJ policy change. As yields retraced lower by month end, portfolio performance benefited from the modest positive duration exposure (less than six months).
In recognition of tightening financial conditions, reduced liquidity (as a result of quantitative tightening by central banks) and the challenging outlook for credit, the Fund maintains approximately 10-15% weighting across cash and highly liquid government and government adjacent sectors. After selectively adding during December, the Fund’s semi-government exposure was 8.1% at month end. Semi-government securities offer a slight premium to government bonds while remaining highly liquid and relatively low risk. Semi spreads widened slightly over the month, marginally detracting from outperformance.

Sector allocation was actively managed during the month. Allocation to domestic bank and semi government sectors was increased. RMBS exposures were rotated with the manager electing to take part in the December Resimac deal and trimming a number of existing RMBS positions. Elsewhere, the Fund took part in the new benchmark deal from Suncorp Metway. The Fund’s defensive positioning continues to mitigate the impact of tightening financial conditions and disruptions to credit market liquidity. As the outlook for credit spreads improves, the Fund retains capacity to take advantage of relative value opportunities.

The fund applies both ethical and socially responsible investment (SRI) screens relating to what the company is in the business of and the way business operations are conducted respectively. Upon application of the ethical and SRI screens, several bond issuers have been screened out. These include, for example, companies involved in the extraction of fossil fuels or companies whose revenues are significantly associated with socially questionable products or services.

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