New Zealand Fixed Interest Fund

(Formerly Forsyth Barr New Zealand Fixed Interest Fund)

Overview

The fund aims to achieve positive long-term returns by investing in selected New Zealand fixed interest assets which will typically have low to moderate levels of movement up and down in value.

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Unit Price

Month End Unit Price

As at 30 Apr 2022

1.8118 NZD

The unit prices shown do not take into account any adjustment for any accrued PIE tax that individual investors may need to pay on withdrawal. Buy/sell spreads may apply when transacting - there are currently none.

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Manager's Comment

Market Commentary

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

The New Zealand Fixed Interest Fund delivered a gross return of -1.53 % for April, slightly out-performing the fund’s market index return of -1.60%

For the 12months to the end of April 2022 the fund delivered a gross return of -3.83% approximating the fund’s market index return of -3.84%.

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…

Market Commentary

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

The New Zealand Fixed Interest Fund delivered a gross return of -1.53 % for April, slightly out-performing the fund’s market index return of -1.60%

For the 12months to the end of April 2022 the fund delivered a gross return of -3.83% approximating the fund’s market index return of -3.84%.

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 shorter-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 bond 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 point 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

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Major Investments

As at 30 Apr 2022
Company name % of fund
Housing New Zealand 3.36% 12/06/2025 6.30%
NZ Govt Inflation Ind Bond 20/09/25 6.01%
ANZ transactional bank account 5.99%
New Zealand Local Government Funding Agency Ltd 14/04/2033 3.50% 5.49%
New Zealand Local Government Funding Agency Ltd 15/04/2027 4.50% 4.11%
Westpac New Zealand 1.439% 24/02/2026 3.94%
New Zealand Local Government Funding Agency Ltd 15/04/2024 2.25% 3.25%
New Zealand Local Government Funding Agency Ltd 15/04/2025 2.75% 3.20%
Housing New Zealand 3.42% 18/10/2028 2.33%
Vector Ltd 14/03/2024 4.996% 2.02%
Major holdings as % of total portfolio 42.65%
Total portfolio holdings 79

Performance over time

Return Comparison

As at 30 Apr 2022
1 Month 3 Months 1 Year *3 Years *Since commenced operation
Net Fund Return 1 Month -1.16% 3 Months -2.92% 1 Year -5.41% *3 Years -0.39% *Since commenced operation 3.13%
Gross Fund Return 1 Month -1.53% 3 Months -3.83% 1 Year -6.73% *3 Years 0.24% *Since commenced operation 5.34%
S&P/NZX Investment Grade Corporate Bond Index 1 Month -1.60% 3 Months -3.84% 1 Year -7.08% *3 Years -0.19% *Since commenced operation 5.06%

*Annualised
Net Fund Returns are calculated after deduction of fund charges, trading expenses and accrued tax for a New Zealand resident paying individual tax at the highest Prescribed Investor Rate (28%). Gross Fund Returns are calculated before deduction of taxes and fund charges but after deduction of trading expenses and including imputation credits where applicable. Market index returns do not have any deductions for fund charges, trading expenses or tax.

The S&P/NZX Investment Grade Corporate Bond Index (“Index”) is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Forsyth Barr Limited. Copyright © 2015 S&P Dow Jones Indices LLC, a subsidiary of McGraw Hill Financial Inc., and/or its affiliates. All rights reserved. Redistribution, reproduction and/or photocopying in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spdji.com. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.

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Morningstar Performance

Morningstar is a leading global provider of independent investment research that ranks and reports on Funds within New Zealand and Australia. View the latest Fund Report for the New Zealand Fixed Interest Fund.

Fund update

As at 31 March 2022

This document tells you how the New Zealand Fixed Interest Fund has performed and what fees were charged. The document will help you to compare the fund with other funds. (Please note that this fund was previously known as the Forsyth Barr New Zealand Fixed Interest Fund, and that Fund Updates may refer to the fund by that name.)
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General Fund Information

Risk indicator

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The risk indicator is rated from 1 (low) to 7 (high). The rating reflects how much the value of the relevant fund’s assets goes up and down (volatility). A higher risk generally means higher potential returns over time, but more ups and downs along the way. The risk indicator is based on the returns data for the five years to 31 March 2022. See more information about the risks of investing in the Product Disclosure Statement.

Target investment mix

Cash and cash equivalents 5%
New Zealand fixed interest 95%
International fixed interest 0%
Australasian equities 0%
International equities 0%
Listed property 0%

Things to note

  • Manager: Forsyth Barr Investment Management Limited
  • Investment manager: Octagon Asset Management Limited
  • Date the fund started: 26 June 2008
  • Tax status: Portfolio Investment Fund (PIE)
  • Minimum suggested investment time frame: At least three years
  • Benchmark: None
  • Currency: New Zealand dollars

View the Product Disclosure Statement for detailed information about this Fund and Octagon Investment Funds Scheme.

Fees

  • Annual fund charges are currently 0.75% p.a. of the value of your investment. We pay management and administration charges along with the Supervisor fee out of this. All fees and charges are quoted exclusive of GST.
Forsyth Barr Investment Management Limited is the issuer and Octagon Asset Management Limited the investment manager of the Octagon Investment Funds. The comments on this webpage do not take your personal circumstances into account. Before acting on any information on this webpage, we recommend you seek financial advice. Forsyth Barr Investment Management Limited, Octagon Asset Management Limited and their affiliates do not make any representation or warranty (express or implied) that this webpage 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 webpage. This webpage is not intended to be distributed or made available to any person in any jurisdiction where doing so would constitute a breach of any applicable laws or regulations.
 
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