For the year ending 30 September 2019, the Income Fund produced a total return of 8.8%. This good outcome was achieved through an approximate 20% exposure to 3 – 5 year fixed term instruments and an increased exposure to high quality floating corporate debt.

The third quarter of 2019 was characterised by continued market volatility and further declines in global bond yields. Negative interest rates in Japan and the Eurozone, and mounting expectations that the US Federal Reserve will cut interest rates several more times in the months ahead, have expanded the pool of bonds with sub-zero yields to more than $15 trillion – or around 25% of the global bond market. In Germany, yields are negative all the way from cash deposits to 30 year bonds. In Switzerland, negative yields extend all the way out to 50 year bonds. Unsurprisingly, this backdrop has resulted in further declines in the yields (rising prices) of medium term fixed interest bonds and bank deposits.

Looking ahead, the risk of a ratings downgrade by Moody’s remains high as GDP growth is likely to disappoint relative to budget expectations, whilst the funding requirements of SOEs have increased. As such, we remain cautious of long dated fixed interest bonds due to the capital sensitive nature of the fund’s investors. Should a downgrade occur fixed-interest bond yields could rise due to forced selling by passive funds as a result of our exclusion from important investment grade bond indices. The fund is well positioned for this with a low modified duration (interest rate price sensitivity) and a reasonably high short dated cash balance to take advantage of opportunities that may present themselves.