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Investment Management
Macquarie Income Opportunities Fund
Monthly Report – March 2017
STRICTLY CONFIDENTIAL
Investment objective
The Fund aims to outperform the Bloomberg AusBond Bank Bill Index over the medium
term (before fees). It aims to provide higher income returns than traditional cash
investments at all stages of interest rate and economic cycles.
Fund performance to 31 March 2017
Fund highlights
The Fund outperformed the benchmark in March, despite performance in global credit
markets slightly diverging during the month. Excess returns were driven by the Fund’s
holdings in the Australian credit market, as spreads for Australian bank debt and
mortgaged-backed securities both outperformed. However, volatility in the US credit
market increased which driven by a midmonth fall in oil prices and the failure of President
Trump to pass the healthcare bill. The Fund reduced its high yield position during the
month, as valuations for the sector have become less attractive.
US issuance volumes increased, with Verizon Communications the largest issuer at $11bn
and Siemen AG issued $7.5bn of debt. In financials, both HSBC Holdings and UBS Group
issued. The Fund participated in the new issues by HSBC Holdings and Siemen AG.
Issuance volumes in Australia were moderate in March, and the Fund participated in a new
bond issue from AMP and a credit card ABS issued by Latitude Financial Services.
Markets finished March on a mixed note overall. Risk markets that had rallied strongly for
the last 12 months took a small backward step. The volatility proved to be modest and
short-lived, and by the end of the month, much of the spread widening had been reversed.
There were a number of drivers of the initial weakness, including weakness in oil prices, an
earlier than expected US Federal Reserve (Fed) hike, and a setback to Trump’s reform
agenda in the US. By the end of March, though, a ‘chase for yield’ mentality began to
return to markets, and both credit and government bond markets attracted buyers.
The Fed hiked the federal funds rate in March for the third time since the financial crisis.
The move was exceptional, as only three weeks earlier markets had priced only a 30%
chance of a rate move. While the move may have unsettled markets, the Federal Open
Market Committee statement and Fed Chairperson Yellen’s post-meeting press conference
underlined a gradual approach to raising rates, calming market uncertainty.
Oil prices weakened over the month, breaking back down through $US50/barrel as US
supply continued to grow and OPEC’s production cuts looked less rigidly applied than had
been hoped. The price moves were only moderate however, it was enough to be a strong
contributor to a widening of 50bps in global high yield credit spreads. With valuations in
high yield credit generally unattractive, any reason to not hold the asset class has
understandably been met with significant outflows from the sector, and this was reflected in
investor withdrawals from high yield credit picking up in March.
The Trump administration stumbled at its first significant legislative hurdle during March,
with the Republican Party’s amendments to the Affordable Care Act failing to find enough
1 month (%)
0.47 0.43 0.15 0.28
3 months (%)
1.53 1.41 0.44 0.97
1 year (%)
5.94 5.42 1.94 3.48
2 years (% pa)
3.48 2.97 2.09 0.88
3 years (% pa)
3.63 3.13 2.30 0.83
5 years (% pa)
4.83 4.32 2.65 1.67
Since inception (% pa)***
5.79 5.27 4.47 0.80
Total gross
fund returns
Total net excess
returns
Total net fund
returns*
Benchmark
returns **
Past performance is no indication of future performance.
** The benchmark is the Bloomberg AusBond Bank Bill Index.
*Total net returns are quoted after the deduction of all fees and expenses. Total returns are calculated based on changes in net
asset values and assumes the reinvestment of distributions. Due to individual investor circumstances, your net returns may differ
*** Inception date is 19/09/2003
Sector breakdown
4.3%
Credit
opportunities
Emerging
market debt
High
yield
Hybrid
securities
0.3%
Investment
grade
94.4%
1.0%
0.0%
Sector limits (%) (min/max)
Investment grade
20/100
Hybrid securities
0/10
High yield
0/15
Emerging market debt
0/15
Credit opportunities
0/20
Region breakdown
Australia - 56.7%
United States - 19.7%
Others - 11.7%
Europe (ex UK) - 8.9%
UK - 3.0%
Credit profile breakdown
* Cash consists of physical cash and cash exposure through credit hedges
Average credit rating: A-
'Less than BBB' includes 1.2% of residual exposure to issuers held via our global
Investment Grade allocation
0
10
20
30
40
Cash* AAA AA A BBB Less than
BBB
Unrated
%