FIIG Monthly Income Fund – December 2024 Monthly Commentary

Performance

The FIIG Monthly Income Fund returned 0.77% net of fees in December, outperforming the AusBond Bank Bill Benchmark by 0.39%.

December’s returns were solid despite a sell-off in global interest rates as well as a risk-off tone permeating equity markets. The S&P/ASX 200 total return for December was -3.2%, while the Aussie government yield curve steepened after the Fed’s ‘hawkish’ interest rate cut. Despite the volatility, the FIIG Monthly Income Fund has now delivered outperformance of 1.02% (after fees) over its first quarter, a very pleasing start for our new fund. Around half of this outperformance has been generated via income returns and the remainder has been generated by price gains – credit spread compression on portfolio holdings as well as profiting from duration trading opportunities offered up by the volatile backdrop.

Market Commentary

Remarkably, the US 10-year bond yield has now risen more than 100 basis points since the Fed cut rates by 0.5% back in September. Generally, economic data has held up better than the market’s (and the Fed’s) expectations, with labour market indicators remaining robust (3Q24’s main concern) whilst inflation measures have started picking up again (perhaps the most frightening contributor is Arabica coffee beans, which have increased by 35% since November, and a whopping 80% over 2024 as a whole. The days of a humble $5 coffee appear numbered!).

Survey data such as the Institute for Supply Management (ISM)surveys have been uniformly positive when it comes to items such as new orders, but we discount this to some degree due to the companies looking to front-run potential tariffs come late January 2025.

Positioning 
In early December, we took profit on fixed-rate corporate bonds (Woolworths + Flinders Port 2034’s), which lowered the portfolio duration. We reversed course later in the month after yields had climbed via buying Qube Logistics 5.9% Dec 2034’s. These were issued earlier in December and we were able to purchase them at a small discount to new issue pricing. We increased our holdings in AA-rated senior unsecured Svenska Handelsbanken 2028’s and AAA-rated ING 5-year covered bonds, whilst introducing Pacific National and Ampol subordinated floating rate notes to the mix.

The fund yielded around 6% on interest rate duration of 0.8yrs by month-end while the fund had grown to cAUD32m. All portfolio holdings are currently AUD-denominated.
Overall, we are once again interested in tactical interest rate trading at current levels, notwithstanding the negative momentum and potential volatility in the lead-up to Trump’s inauguration and his first few weeks in office. This stance, if anything, is emboldened by the ongoing softness in Chinese economic data. January will likely provide a decent smattering of financial new issuance, with February’s reporting season the next hurdle for meaningful non-financial corporate supply.

Outlook
The market is currently focused on US growth ‘exceptionalism’ driven by the consumer; however, we see growing evidence of a slowdown in the labour market and falling personal savings buffers that could otherwise sustain the positive trajectory. We can now add the potential for negative growth shocks from tariffs and trade friction and potential cuts to government funding that currently supports growth. The expected productivity gains on account of the Artificial Intelligence revolution have a clear offset in the labour market as evidenced by Google parent Alphabet, which revealed that one-quarter of its coding is already being completed by this technology (as opposed to traditional, highly-paid ‘human’ coders).

Globally, the ECB, Bank of Canada and the RBNZ have commenced rate cuts as inflation continues to move towards target zones. China has pushed through large monetary policy easing measures that support liquidity (and even some outright stock market boosting measures), but outright fiscal easing has been lacking as the economic model has shifted towards quality of growth rather than growth at all costs. In the 12 months to October 2024, industrial profits fell by around 4% in China, underscoring the economic challenge facing the country. Chinese 10-year bond yields are flirting with 1.6% at the time of writing versus the high 4’s in the US and Australia – the latter obviously being more heavily influenced by the Chinese slowdown.

Still, as of right now, Australian economic growth and the employment market are holding up but are being increasingly driven by government (both Federal and State) spending. Stage-3 tax cuts have given a small boost to retail sales but hardly appear to be setting off a new wave of spending; rather, the initial evidence is that consumers are at least partially saving the windfall.

The RBA does not see inflation falling to the mid-point of its target until 2026 – this arguably plays into the Monthly Income Fund asset class if we take the RBA at face value, as the bank bill (benchmark) yield should remain high for the foreseeable future.

Disclaimer
The Fund is benchmarked against the Bloomberg AusBond Bank Bill Index which is engineered to measure the Australian money market by representing a passively managed short term money market portfolio. This index is comprised of 13 synthetic instruments defined by rates interpolated from the RBA 24-hour cash rate, 1M BBSW, and 3M BBSW. The yield target indicated for the fund is provided as an indicator based on the portfolio composition and does not guarantee actual yield. Buy/sell spreads are based on percentage of transaction value and are subject to change.

Equity Trustees Limited (“Equity Trustees”) (ABN 46 004 031 298), AFSL 240975, is the Responsible Entity for the FIIG Monthly Income Fund ("the Fund").  Equity Trustees is a subsidiary of EQT Holdings Limited (ABN 22 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX: EQT).

This notice has been prepared by FIIG Securities Limited to provide you with general information only. In preparing this notice, we did not take into account the investment objectives, financial situation or particular needs of any particular person. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. Neither FIIG, Equity Trustees nor any of its related parties, their employees or directors, provide and warranty of accuracy or reliability in relation to such information or accepts any liability to any person who relies on it. Past performance should not be taken as an indicator of future performance. You should obtain a copy of the Product Disclosure Statement before making a decision about whether to invest in this product.

ailable at fiig.com.au/tmd. A Target Market Determination is a document which is required to be made available from 5 October 2021. It describes who this financial product is likely to be appropriate for (i.e. the target market), and any conditions around how the product can be distributed to investors. It also describes the events or circumstances where the Target Market Determination for this financial product may need to be reviewed.