Market Commentary

April saw a continuation of themes from the March quarter. Inflation repeatedly surprised to the upside and saw central banks rapidly move towards raising short term interest rates. The Ukrainian crisis has yet to be resolved, creating further risks to economic growth and supply chains globally. Whilst many markets began removing restrictions related to the Covid-19 pandemic, China has begun to impose tighter restrictions as Omicron takes hold there, creating further disruption.

These continued headwinds to economic growth saw investment markets generally deliver negative returns over April. Our cash holdings were helpful to total returns but all the other asset classes delivered negative returns over the month. Higher interest rates do flow through to the future potential return for the fixed interest portion of the fund however.

Most of the Balanced Fund individual asset class portfolios continue to do well against their respective market indices, with the exception of the global equity portfolio. As announced last month, we are in the process of funding two new portfolio managers with the aim of improving the expected risk adjusted return characteristics of the global equity portfolio.

The New Zealand dollar, relevant for our portfolios with unhedged foreign currency exposures, fell against the US dollar but rose against the Australian dollar.

For further commentary on each of the asset classes within the Balanced Fund, please refer to the commentaries for each of the relevant single-asset class funds.

Portfolio Performance

The Balanced Fund delivered a gross return of -2.00% during April, approximating the fund’s market index return of -1.98%.

For the 12 months to the end of April the Balanced Fund delivered a gross return of -1.96%, underperforming the fund’s market index return of -1.32%.

Outlook

As the Ukrainian crisis has persisted, we are tempering our generally positive view of the global economy, and therefore the outlook for company profits. It appears likely that this new disruption to commodity supply – particularly energy and agriculture - along with further pandemic related lockdowns in China, will cause inflation to stay higher for longer than we previously expected.

Europe and Asia appear to be the worst effected from an economic growth perspective. Some economists debate the usefulness of higher interest rates when it is supply, rather than demand, that is the root of rising prices. It is clear however that rising prices are everywhere, wages are beginning to respond, and surveys of expected future inflation are drifting higher, forcing the central banks to respond.

The continued move higher in fixed interest rates sees both domestic and global fixed interest markets reflecting a more realistic view of the future outlook in our opinion. Fixed interest market valuations are therefore more attractive. Equity markets have fallen in tandem with higher interest rates, as fixed interest assets offer lower risk than equities and now offer more attractive returns relative to equity markets.

In early May our Asset Allocation committee met to discuss the recent moves in asset prices. At that meeting we chose to remain with a modest overweight to growth assets relative to income assets. Within the fixed interest investment class, we sold down some of our New Zealand fixed interest assets and invested that money into the global fixed interest assets. We continue to think investment markets will remain volatile in the near term.

Foreign currency exposures associated with international fixed interest are hedged to the New Zealand dollar. We actively manage the fund’s currency exposures associated with international and Australian equities, and listed property. As at 30 April 2022, these exposures represented 39.74% of the value of the fund. After allowing for foreign currency hedges in place, approximately 22.86% of the value of the fund was unhedged and exposed to foreign currency risk.