The Point

FAST PODCAST: Not all income funds are well positioned for rising bond yields

Bond yields have been rising and fixed income investing is gaining advocates.

But not all income funds are in the right position to take advantage says Pendal’s head of income strategies Amy Xie Patrick.

“One year ago, to invest in risk-free bonds in Australia, you were getting paid virtually nothing,” says Amy in her latest podcast. “Now you’re getting paid nearly 2.5%.

“But if you don’t have the flexibility within your portfolios to take advantage of this higher-yield environment, then this is a really large prize you are being forced to forego.

“Investors need to look at what kind of income fund they’re getting into. Is it a buy-and-hold, steady as she goes, let’s-not-do-much-about-it kind of income fund?

“Or has your income fund actually been incredibly active to insulate you against the rising interest rate risks, the rising macro risks, that have occurred over the last 6-to-12 months?

“The latter is positioned with more flexibility – and more dry powder – to take advantage of the higher yields we have today.”

Chris Lees: Why Ukraine tragedy is a geopolitical and financial inflection point

It’s now clear the humanitarian tragedy in Ukraine is a major inflection point for geopolitics as well as financial markets, says Pendal Global Select Fund co-manager Chris Lees.

There are three points to understand, says Chris in Pendal’s latest fast podcast.

“Number one, obviously it’s a tragic humanitarian disaster, but it’s interesting watching how the West is rallying around to help where it can.

“Two, it is a genuine geopolitical inflection point. We must recognise that it will affect our children and our grandchildren. Germany has basically ripped up its pacifist constitution. Swiss banks have for the first time enforced US sanctions.

“Third, this is a genuine financial market regime shift. Like when water turns to ice, you’ve got to stop swimming. Then when ice turns back to water, you have to stop ice-skating.

“We’re seeing things like the rotation from growth to value seeming to stop since the Ukraine invasion. Now there’s a rotation from value to defensive, low beta, quality growth stocks for example.

“Those are the type of medium-to-long-term things we think people should be looking for.”

FAST PODCAST: What rates expectations mean for bond-buying

Investors should be looking to upweight bonds in their portfolios on a medium-to-long term outlook, argues Pendal’s TIM HEXT in this fast podcast.

Bonds are starting to get towards levels where you could argue in the medium-to-longer term they make a lot more sense.

It’s been very difficult for me as a bond fund manager over the last couple years to recommend that bonds were a good investment down at 1%. The risks were much more to the upside.

FAST PODCAST: Speedy shoppers are buying more but not hanging around for long

“If you look at the performance of the REITs sector during the month of February, retail was actually the strongest sector.

Even though there was a lot of disruption during the period because of Covid – and there was rental relief granted and earnings were a bit softer – the actual operating metrics themselves were improving.

So you’ve seen improving occupancy levels, leasing spreads are improving, interest in pre-leasing is improving.

Interestingly, we’re still seeing foot traffic down 20 per cent on 2019 levels, but it’s been more than compensated by the average spend which is up about 30%.

So people know what they’re going to buy when they go to shopping centres. They’re not there for particularly long. They don’t go as often as they used to, but they spend more.

FAST PODCAST: What makes this cycle different – and which data investors should be watching

Every cycle is slightly different, says Pendal global equities PM Chris Lees in our latest Pendal Fast Podcast.

What’s different this time?

“The Fed is starting to raise interest rates as the global economy’s already slowing,” says Chris. “In the past, the Fed was raising interest rates as the global economy was still accelerating – but because of Covid it got delayed.

“This time is slightly different in that the Fed hasn’t even started raising rates – it’s talking about it.

“Actually, if you look at GDP growth rates, they’re beginning to slow and inflation rates are probably peaking. So it’ll be a very volatile time for financial assets. It always is when interest rates go up.

“It’ll be slightly different from previous playbooks because the timing and the sequencing is different.”

Where will we land? “The bullish potential is that actually this is a normal mid-cycle correction. [But] it’s too early to tell at the moment.

“There is potential for a bear market, says Chris. “It’s a low probability potential at the moment, but every day the probabilities of that are drifting up.”