FIIG Monthly Income Fund – February 2025 Monthly Commentary

We are pleased to bring you February 2025’s performance, market commentary and portfolio positioning information for the FIIG Monthly Income Fund.

Performance

Since inception in October 2024, the fund has outperformed its benchmark by 1.57% after fees.

Market Commentary

The Trump trade fell flat in February, with heightened uncertainty about Elon Musk’s DOGE squad reach, (with respect to the US labor market) as well as flip-flopping on tariff / geopolitical policies impacting the medium-term growth outlook. We recently opined that it would be rather difficult for any CEO to commit to long-term capital investments with constantly shifting goalposts, and this sentiment finally showed up in survey data. The US Treasury market repriced swiftly, with the 10-year yield falling from 4.54% to 4.20% at month end. The Australian 10-year government bond yield fall was just one-third of that magnitude as the market heeded the warning from RBA Governor Bullock that too many cash rate cuts had been priced into our bond market (despite the RBA moving ahead with a 0.25% easing at its February meeting, taking the official cash rate to 4.1%).

US equities fell slightly while the ASX 200 endured a 4.2% decline. In a relative sense, credit spreads were resilient with US Investment Grade spreads widening by just 6 basis points (0.06%) versus equivalent maturity US Treasuries. US High Yield spreads widened by 20 basis points (0.2%). Australian credit spreads outperformed offshore indices with spreads tightening by 4 basis points (0.04%). That was despite a big pick-up in local issuance after the end of the ASX reporting season. We still note large oversubscription levels in recent new deals although anecdotal evidence from brokers suggests more churning/funding of new deals with existing bonds rather than fresh allocations from inflows.

Positioning

During the month, we extended duration to around 1 year at the portfolio level. We took profits on this position by halving the exposure by month-end. The holdings utilised in this strategy included long-dated Aussie government bonds, Woolworths 2034’s and QUBE Logistics 2034’s.

We used the surge in new issuance to diversify exposures with the fund now holding close to 60 individual holdings. New lines include Mizuho 28’s (senior unsecured), Liberty 2030’s (senior unsecured), IAG 39’s (subordinated), Westpac 35’s (subordinated) and AusNet hybrids. We also allocated to two new RMBS deals originated by AFG and Apollo (Suncorp, now ultimately owned by ANZ).

In terms of rating splits, around one-quarter of the fund is in cash + AA (or better) rated bonds. A further quarter is in the ‘A’ bucket (i.e. c50% in A- to AAA-rated bonds). Around 40% is in the BBB band with just 9% in sub-investment grade, so overall we have a fairly high skew to quality in the portfolio.

The portfolio yielded c5.8% at the end of February, compared with the index yielding c4.1%. 

Outlook

The outlook is very fluid due to ongoing uncertainty surrounding the Trump administration and its ultimate balance between posturing (for the sake of a ‘deal’) vs. pursuing its trade and geopolitical agendas. It does feel like second-term Trump is more focused on his enduring legacy and redrawing the geopolitical map vs. Trump 1.0, that was focused on tax cuts and the performance of the S&P 500. Europe is currently scrambling to find money for increased defence spending, which is impacting forecast budget deficits and bond yields.

Scott Bessent, US Treasury Secretary, has specifically called out lowering the US 10-year yield as a key focus – key drivers here include lower oil prices (leading to lower inflation), lower government deficits (via higher national income and/or lower expenses – see DOGE) or maybe this government will be content to suffer through lower economic growth in the short-term in order to pursue its medium-to-long-term goals of bringing manufacturing capacity back to the USA. 

Closer to home, we have our own election in a few months and a consumer that seems to be picking up again. RBA Governor Bullock pushed back against market pricing on further rate cuts and it seems like the RBA is content to be ‘slow’ (in a relative sense) on the way up - and down. This arguably plays into the Monthly Income Fund asset class as if we take the RBA at face value, the bank bill (benchmark) yield should remain elevated for the foreseeable future.

Given this fluidity, please make sure you dial into our next webinar in early April for updated thoughts and portfolio positioning. Please click here to register. 

I look forward to updating you once again next month. 

For more information about the FIIG Monthly Income Fund, please click here