The outlook is still positive for fixed-income investors hoping for lower yields (and therefore higher prices on their bond investments), argues Pendal’s AMY XIE PATRICK

You can also listen to this podcast on Apple or Spotify

An excerpt from this podcast

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Amy Xie Patrick, Pendal’s head of income strategies:

Fixed-income investors looking for lower yields – and therefore higher prices on their bond investments – may be disappointed with the recent cycle.

“When I’ve been speaking to clients over the past few weeks, many have been worried that the cutting cycle is not translating to lower bond yields in the same way we’ve seen previously,” notes Pendal’s Amy Xie Patrick in her latest fast podcast.

But investors need not be concerned, since conditions still favour a rate-cutting environment, says Amy, who leads Pendal’s fixed-income strategies.

Underlying inflation is under control – supported by a looser US labour market which has not yet been impacted by President Trump’s mooted immigration crack-down. n Australia a tighter labour market has not led to significant wage increases.

“The market’s priced in two more US cuts this year, maybe another two in Australia.

“The RBA has enough room to get back to neutral fairly quickly… And the Federal Reserve probably has the ability to move a little bit more than the market’s priced in.

“It’s still a choppy year ahead – but this is where a proven active process for duration and rates really does count for fixed-income portfolios.”

Founder-led companies have created enormous wealth for shareholders but they also come with challenging risks. Regnan analysts GRACE ZHANG and OSHADEE SIYAGUNA explain

• Risk in founder-led firms
• Robust governance required
• Read Regnan’s full report: Masters of Control
• Find out more about Regnan

STEVE Jobs, Mark Zuckerberg, Rupert Murdoch, Elon Musk – there is a seemingly endless rollcall of visionary founders that have generated extraordinary wealth for shareholders.

But for all the attractions of founder-led companies, concentration of control in a powerful shareholder also carries inherent risk – founders may limit board independence, prioritise their own interests over those of shareholders, or act in a way that damages a company’s culture and reputation.

Recent governance dramas at several ASX-listed companies illustrate how founder influence can pose a challenge for investors.

So, how should investors to think about founder-led companies?

A new study from responsible investing leader Regnan sets out some principles to help manage the delicate balance between harnessing the strength of founders and mitigating their inherent risks.

Fundamentally, Regnan finds success comes down to robust governance frameworks – ensuring independent boards, sunset clauses for dual-class shares, and transparent conflict-of-interest policies.

“Founder-led [companies] are engines of innovation, resilience, and long-term growth, yet their concentrated power structures can pose significant governance risks,” say the report’s authors, Regnan analysts Grace Zhang and Oshadee Siyaguna.

“By striking the right balance between entrepreneurial freedom and accountability, founder-led, controlled companies can unlock their full potential while fostering trust among all stakeholders.”

Governance risk

Founder-led companies can outperform due to their long-term focus, stable leadership, and commitment to innovation.

A deep alignment between the company’s success and the interests of controlling shareholders allows for strategic consistency and a resilience to help weather economic downturns.

But founder-led companies also come with unique risks.

Regnan’s research finds that chief among these are the potential for boards to be compromised by close ties to founders, a tendency for founders to act as CEO and chair, dual-class voting structures that disadvantage minority shareholders, excessive remuneration, nepotism, and the risk of related-party transactions.

“While controlling shareholding may constitute a factor of influence to stock performance in general, it certainly amplifies governance risks of controlled companies,” say the authors.

Regnan found multiple case studies illustrating governance risks.

Companies with Australian connections came in for particular criticism.

Rupert Murdoch’s News Corporation spent US$674 million buying the Shine Group production company that was 53 per cent-owned by the founder’s daughter, Elisabeth Murdoch, despite misgivings among minority shareholders.

Retailer Kogan.com granted its founders retention-focused options valued at A$70 million and A$46.7 million respectively, despite 42 per cent of shareholders voting against the grant. When ultimately cash-settled, the payout represented 51 per cent of the company’s total cash on hand.

Poker machine maker Aristocrat Leisure agreed to provide its founder, Len Ainsworth, with a new car every three years for the rest of life – and cover all running costs. The long-retired Ainsworth has been quoted suggesting he wants a “Rolls Royce as a final gift”.

Advice for investors

Regnan suggests a series of steps investors can use to protect their interests while still getting access to the potential upside of founder-led companies by proactively addressing governance risk and fostering accountability.

Key recommendations from the report include ensuring board committees retain independence, seeking separate chair and CEO roles, seeking transparent conflict-of-interest policies, and pursuing sunset clauses for dual class share structures.

 

How should investors interpret Donald Trump’s whipsaw approach to tariffs? What does it all mean for inflation and markets? Pendal’s head of bonds TIM HEXT explains in our latest fast podcast

You can also listen to this podcast on Apple or Spotify

An excerpt from this interview with Pendal’s head of government bond strategies Tim Hext:

Investors could not be blamed for feeling a bit queasy at Donald Trump’s whipsaw approach to tariffs.

Trump has imposed and suspended tariffs on Canada and Mexico this week — and remains in a tit-for-tat  tussle with China at the time of writing. 

What does it all mean for inflation and markets?

“The tariff threat does add to this argument that inflation isn’t about to come down anytime soon,” says Pendal’s head of bond strategies Tim Hext.

“The market is right to be a little bit concerned. Obviously free trade — or some version of free trade — is generally to the benefit of both parties.

“The law of comparative advantage says you end up focusing on what you are a cheap producer of.

“If you start throwing sand into the gears of free trade that’s not a good thing.

“Ultimately, I think it is bad for growth and will mean slightly higher inflation, but not enough to suddenly cause rate hikes in the near future.

“It creates a lot of short-term noise, but fortunately investors with a medium-to-long-term time-frame can leave it to people like me to worry about that.”

Tim says investors should hold course for now.

In the podcast Tim lays out his latest thinking on fixed interest investing.

Listen to the full podcast above

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About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

Find out more about Pendal’s fixed interest strategies here

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About Pendal

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

Contact a Pendal key account manager

One of the surprises of 2024 was the absence of rate cuts in Australia. What happened and how long will the Reserve Bank sit on its hands? Pendal’s head of income strategies AMY XIE PATRICK explains in this review of 2024

You can also listen to this podcast on Apple or Spotify

An excerpt from this podcast

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Amy Xie Patrick, Pendal’s head of income strategies:

The RBA has stood pat all year long, and even the market’s expectations about what they’ll do in 2025 continues to get pushed out.

I think that surprised almost everyone in 2024.

What was the reason for that? Where was the surprise in 2024 that meant we didn’t see the rate cuts we expected in Australia, and even the US Fed was a bit less ambitious than expected?

At the end of 2023, a year ago, it was very much a narrative of inflation is now coming down into central bank’s target ranges.

We can see that happening and it’s no longer a massive inflationary shock problem that we had in 2022.

Since we can see this trend, and since we know that at 4.35% cash rate in Australia or 5.5% Fed funds rate in the US are pretty restrictive levels of monetary policy.

The market was betting that the inflation trends would be enough to get both of these major central banks into a steady cutting cycle that would result in an anticipated seven or eight cuts from the US over 2024 and four or five cuts from the RBA over 2024.

The surprise this year has been not so much a lack of progress on inflation because that’s happened and is still happening.

But the surprise has been the resilience of economic activity.

This is especially so in the US. Whether it’s because of leftover stimulus cheques in consumer pockets or whether it’s because asset prices have done extremely well since the pandemic stimulus was delivered, the US consumer is just not crumbling.

And the US consumer still drives 70% of GDP growth over there.

That economic resilience has shown up time and time again over the course of 2024.

And the Fed is, I think, understandably reluctant to engage in a preset path of interest-rate easings given that the economic backdrop isn’t as soft as they thought it would be.

Investors soon need to find alternatives for hybrids after regulators announced plans to phase them out. But not all substitutes may be suitable, argues Pendal’s head of income strategies AMY XIE PATRICK in a new fast podcast

You can also listen to this podcast on Apple or Spotify

An excerpt from this podcast

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Amy Xie Patrick, Pendal’s head of income strategies:

For years, Australian investors flocked to bank hybrid securities as a cornerstone of income-generating portfolios.

Hybrids — debt instruments issued by banks that can convert to equity in times of trouble — have been popular with everyday investors due to their accessibility.

But investors will soon need to find alternatives, after regulators announced plans to phase them out from 2027.

In her latest podcast, Pendal’s head of income strategies Amy Xie Partick explains the options for investors.

Retail investors are likely to look for substitutes in term deposits and equities – though neither are a like-for-like solution, says Amy.

TDs reduce liquidity and may not be a long-term solution as rates come down.

Equities with a dividend and franking credits can replace income – but they come with increased portfolio volatility compared to hybrids

Amy argues that an actively-managed fixed-income portfolio can be a better solution.

As an investor, Amy blends high-quality investment grade bonds for income, equities to help capital grow and government bonds to manage the portfolio through the rates cycle.

“We try to bridge that gap between what the investor wants and what is currently available.”

In its latest impact report, sustainable investor Regnan reviews the key drivers influencing its decisions and outlines its portfolio, engagement and voting activity

• Generative AI a “critical enabler and accelerator” of change
• Increased exposure to Circular Economy and Education sectors
• Find out about Regnan Global Equity Impact Solutions Fund
• Download Regnan’s 2023 Annual Impact Report

GENERATIVE AI technology has heavily influenced markets over the past year — especially in the US tech sector.

But the technology — made famous by OpenAI’s ChatGPT — is also driving innovation among companies focused on solving problems in the ESG space, says Regnan’s senior fund manager Tim Crockford.

“We are already using it to become more efficient and it has been encouraging to see how quickly some of the portfolio companies have been to integrate this powerful tool, says Tim, who oversees Regnan Global Equity Impact Solutions Fund.

Regnan Global Equity Impact Solutions fund invests in mission-driven businesses that provide solutions to the environmental and social challenges of our time.

The fund aims to deliver market-beating, long-term returns, by identifying “system changers” that innovate, disrupt and ultimately produce positive environmental, social and financial outcomes.

“It is fair to say that generative AI will be a critical enabler and accelerator for some of the system change that the transition to a more sustainable world has already embarked on,” says Crockford.

The team’s latest impact report – which covers the calendar 2023 year – lists a range of AI-related innovations that have been rolled-out by companies in the portfolio.

Some examples include:

• Qiagen, one of the leading molecular diagnostics innovators, is using gen AI in its bioinformatics platform to help accelerate drug discovery, by identifying molecular targets
• Sartorius, a global leader in bioprocess solutions, is partnering with NVIDIA, to create organoids – 3D structures created from stem cells – that could replace traditional animal models in drug discovery
• Agilent, the life science tools maker helping customers increase the efficiency of their research labs, has used generative AI to improve quality control and reduce production defects by 49%
• Ansys, one of the world’s leading software simulation innovator, has released SimAI, which can boost the efficiency of generative AI models by 10 to 100 times during the design phase
• Xylem, the water treatment and technology innovator, has partnered with software company Esri, to build a model that predicts pipe leakage, which has reduced pipe failures four-fold.

Find more examples and greater detail in the report:

While there’s little chance of a rate cut before February, Pendal’s head of government bond strategies TIM HEXT sees some value in bonds today. He explains in our latest fast podcast

You can also listen to this podcast on Apple or Spotify

An excerpt from this interview with Pendal’s head of government bond strategies Tim Hext:

This week’s Aussie inflation data was a mixed bag. While the headline number dropped into the RBA’s target range at 2.8%, the trimmed measure remained above target at 3.5%.

It will take a few more quarters until the more important trimmed measure heads down towards 3%, says Pendal’s head of government bonds Tim Hext in a new fast podcast.

“The news which will make the RBA less than enthusiastic about cutting rates in the very near term is that services inflation remains quite elevated at around 4.5%,”Tim says.

“Services make up around two thirds of the CPI basket, and that’s where things like tight labour markets, housing shortages, all those domestic issues are keeping inflation more elevated than the RBA would like.”

Tim doesn’t expect a rates move before the RBA’s February meeting. “There won’t be enough information by December. The market is 50-50 on whether they’ll cut rates in February.”

For bond investors Tim sees value in some areas after the recent sell-off.

In the podcast, Tim also covers the impact of next week’s US election and war in the Middle East.

Listen to the full podcast above

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About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

Find out more about Pendal’s fixed interest strategies here

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About Pendal

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

Contact a Pendal key account manager

Asset managers who engage with investee companies achieve better outcomes for investors and the community, argues Regnan’s Laura Sheehan

• Engagement with management is crucial to impact investing
• No one-size-fits-all approach when consulting with a company
• Find out about Regnan Global Equity Impact Solutions Fund

IT’S NO surprise that corporate engagement and shareholder action have become one of the most common responsible investment approaches in Australia.

Engagement generally refers to the process of asset managers “engaging” directly with investee companies and bond issuers to influence corporate behaviour and achieve better outcomes for investors and the community.

It comes under the umbrella of “stewardship” which also includes active ownership (voting), collaboration and policy and advocacy, according to the Responsible Investment Association of Australasia.

More than half (51%) of investment managers and asset owners surveyed in Australia and New Zealand had a adopted a stewardship code by 2021, RIAA reports.

Engagement is a critical component of the investment process for sustainable investor Regnan – and senir analyst Laura Sheehan sees it as an essential tool for driving positive change.

“There’s many ways to invest, and the right or wrong of that isn’t binary,” Sheehan says.

“But you can’t be something you’re not. So for me, it’s important to understand and agree with an investment approach.”

“We need to be able to identify companies that are willing to engage with us,” she says.

“Typically, companies are happy to engage when you bring something, rather than a spoiler plate, to the table.”

Sheehan cautions against a one-size-fits-all approach when it comes to engagement.

“Some high-growth companies may need more breathing room to execute their plans,” she says.

Engagement is a two-way relationship, and the key is to have a deep understanding of the business and the in which a company operates in. That ensures better engagement between investor and management.

“If you’re asking for things that are just not even realistic, or things that show you don’t understand the business, I think that’s going to impact your influence and the willingness of management to engage more broadly.”

Engagement in the resources sector

Sheehan’s experience in the energy sector has given her a unique perspective on the value of informed engagement.

“One frustration for me covering oil and gas was when people have a superficial understanding of energy systems and energy infrastructure and the lifecycle of investments, even the difference between energy and electricity.

“They start engaging but not in a very impactful way, because they might be asking for actions that don’t make sense or could never be achieved.”

At Regnan, Sheehan and her colleagues take a more nuanced approach, seeking to understand the company’s position within the broader system and how that system is evolving.

“It’s about understanding where the company sits within the context of the value chain and the system that it’s in. And it’s about understanding how the system itself is changing and how it needs to change,” she says.

As the newest member of the Regnan Global Equity Impact Solutions team, Sheehan says Regnan’s investment philosophy aligns with her own, with a focus on long-term investment horizons and searching for mission-driven companies delivering impactful solutions  to address social and environmental challenges.

“I think that’s an incredibly motivating universe to go fishing in,” she says, adding that working with people you like is also critical to success.

“I met with each person individually, and I think it was very clear for me that it would be a team of people I would be able to get along with and enjoy working with,” she says.

As Sheehan embarks on her journey with Regnan, her commitment to impact investing and meaningful engagement is clear.

She highlights the significance of the proprietary Regnan Taxonomy, explaining “It gives you the guard rails you’re looking for and the mission you’re trying to achieve, which ultimately is what you need to be doing when you’re investing for the long term.

Exclusion of fossil fuels presents minimal challenges for sustainable bonds compared to other asset classes, writes Pendal head of credit and sustainable strategies, GEORGE BISHAY  

• Sustainable portfolios across asset classes have generally excluded exposure to fossil fuels. This means some asset classes may face additional benchmark-relative risk by adopting sustainable strategies.
• There is a perception that all asset classes face these potential performance risks when prioritising sustainability. But Pendal demonstrates there is minimal impact on the performance of sustainable, active, fixed income in Australia compared to other asset classes when fossil fuel prices rise and fall.  
• Unlike some other asset classes, a sustainable approach to Australian fixed income adds minimal, if any tracking error when screening out fossil fuel exposure
• Find out more about Pendal Sustainable Australian Fixed Interest Fund

SUSTAINABLE funds typically screen out industries such as fossil fuels, tobacco, weapons, alcohol, gaming, pornography and uranium mining.

This is generally with a revenue threshold, where companies with a certain level of revenue linked to a particular activity are screened out.  

Different asset classes have different potential exposures to fossil fuels.

Fossil fuel companies typically make up a large part of equities indices (about 15 per cent of the ASX 300 in July 2024).

By contrast, issuers involved in fossil fuel extraction, exploration or refining are a small component of the Australian fixed-income benchmark.

Chart 1 below shows these issuers make up only about 0.1 per cent of the Australian fixed income benchmark, according to the rules applied to Pendal Sustainable Australian Fixed Interest Fund (see Chart 1 footnote below).

However, there can be variations in the exclusions of different funds.

For example, in Australian equities a fund’s revenue threshold can dictate whether a company such as BHP (at about 9% weight in the ASX300 index) is included or not.

BHP’s revenue includes coal mining. Other iron ore miners such as Fortescue Metals and Rio Tinto are not typically excluded.

Notwithstanding these variations in exclusions, active performance in the average sustainable equity fund is influenced by changes in oil prices.  

As a result of these differing levels of benchmark exposure, sustainable fixed-income portfolios in Australia are less sensitive to the movements in oil prices than equity counterparts.  

What drives the active performance of Pendal Sustainable Fixed Interest Fund?

Active credit management is the main driver of excess returns in Pendal Sustainable Australian Fixed Interest Fund.

The green circles in the chart below highlight periods when the manager’s active de-risking and re-risking of its credit exposures process led to strong outperformance.  

These returns are driven by active management and are delivered despite rising oil markets.

The black circle highlights a period of rising inflation concerns due to Covid supply chain issues driving goods inflation and central bank hiking fears.

This led to a risk-off event in credit markets which saw most active fixed-income funds underperform the benchmark. 

 

Given the volatility of oil markets, Pendal Sustainable Australian Fixed Interest Fund has delivered consistent returns, outperforming its benchmark in 75%¹ of months since inception to July 2024.   

The chart below illustrates the number of excess return months under different buckets of excess returns.

Social and environmental benefit + portfolio diversification benefit

Many sustainable fixed-income investors are attracted to ESG-labelled bonds which aim to address green, social and sustainability issues.

The proceeds of these bonds are usually ring-fenced for specific environmental or social projects to support climate stability and/or the underserved in society.

The Australian ESG labelled fixed-income market was valued at some $A124 billion in August 2024, constituting 7.6% of the total Australian fixed-income benchmark.

The ESG-labelled bond market offers sustainable Australian fixed interest managers exposure to an additional opportunity set beyond traditional fixed income – environmental and social projects across varying sectors, credit qualities and tenors.

These labelled bonds can complement an overall fixed-income portfolio, bringing added diversification benefits.

The credit spread on these bonds may not directly follow the credit spread on an equivalent vanilla bond issued by the same issuer. This arises from the different technical supply and demand factors affecting these types of bonds.

These bonds are desirable and often in greater demand than vanilla counterpart bonds.

The Australian fixed interest market has ESG labelled bonds in 13 of its 14 sub-sectors (transport is the only missing sector), providing investors with the ability to diversify across numerous sectors.

In August 2024, the Pendal Sustainable Australian Fixed Interest fund held more than 66% in ESG-labelled securities.

Sustainable fixed income as part of your core fixed income allocation

Unlike sustainable equities, which may underperform during periods of rising oil prices, Australian sustainable fixed-income exhibits minimal sensitivity to oil markets or any other screened activities.

This differentiation allows investors to integrate sustainable fixed income into their overall core fixed interest allocation with minimal additional benchmark risk.   

By incorporating Australian sustainable fixed income alongside other traditional assets, investors can achieve a robust portfolio while also supporting climate stability and/or the underserved in society.

¹ Pendal Sustainable Australian Fixed Interest outperformed the Bloomberg AusBond Composite 0+yr in 72 of 96 months from inception (Aug-16) to July 2024, gross of fees.    

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Find out more

Pendal Sustainable Australian Fixed Interest Fund is an Australian bond fund that aims to outperform its benchmark while also seeking investments in securities that target environmental and social outcomes.

The Fund is designed for investors who want income, diversification across a broad range of fixed income securities and are prepared to accept some variability of returns.

It is one of the few sustainable fixed-income offerings in the Australian market.

The fund is managed by Pendal’s head of credit and sustainable strategies, George Bishay. George holds a wealth of experience in portfolio management and credit analysis.

With over three decades working in financial markets, he has worked across numerous fixed income, credit and money market portfolios in portfolio management, credit analysis and dealing roles. He has managed dedicated sustainable fixed-interest portfolios for more than 15 years.

 

What does a potential August RBA rate hike mean for Australian fixed-income investors? Pendal’s head of government bond strategies TIM HEXT explains in this fast podcast

You can also listen to this podcast on Apple or Spotify

An excerpt from this interview with Pendal’s head of government bond strategies Tim Hext:

Australia appears to be at different stage of the rate cycle compared to international peers – a “lagging cycle compared to the rest of the world”, as Pendal’s Tim Hext puts it.

“Globally, people are looking at very high interest rates and going: ‘We just don’t need them anymore.’

“In Australia though, inflation’s proven to be quite sticky around 4% in the last couple of quarters. The RBA’s patience is being tested.”

August is a live meeting in terms of potential rate changes – and next week’s CPI figures will be key to the decision, Tim says in a new fast podcast.

A higher-than-expected number could prompt a hike. A lower-than-expected number would mean rates stay where they are.

However, if an August rate hike eventuates, investors should largely ignore it, Tim says.

“I think they will be cutting rates early next year. Whether they hike in early August or not, I think the environment will be far friendly for inflation. “

Tim explains why in the podcast.

Listen to the full podcast above

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About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

Find out more about Pendal’s fixed interest strategies here

---

About Pendal

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

Contact a Pendal key account manager