Single Sector Fund

Nikko AM Income Fund

About the fund

This fund aims to provide a higher return than cash and provide regular income through distributions while maintaining capital value. The fund does this by investing in a combination of bonds and income-generating shares.

The fund holds bonds and shares across companies that have been carefully selected based on their ability to provide reliable, sustainable income. Unlike a term deposit, the value of your investment can fall, so the amount you receive when you redeem could be less than the amount you invested. However, if the value increases, the amount you redeem could be higher than the initial amount you invested. Our Income Fund offers a range of new benefits, including a 3.5% p.a defined distribution rate, paid out quarterly.

Find out more about the Nikko AM Income Fund

Risk Indicator (volatility)

1
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4 Medium to High
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7

Target Asset Allocation

Growth 35.00%
Income 65.00%

Commentary

As of 31 December 2023

Market Highlights

  • The S&P/NZX 50 Gross (with imputation credits) Index returned 4.2% over the quarter and 3.89% in December alone, making up for negative returns in October.
  • The bond sector as measured by the Bloomberg NZ Bond Composite Index also had a strong quarter and month, up 4.64% and 2.04% respectively as interest rates continued to move lower.



The Income Fund performed strongly over the final quarter of 2023 with November and December returns being elevated by strong equity and bond market performance.

The S&P/NZX 50 Gross (with imputation credits) Index returned 4.2% over the quarter and 3.89% in December alone, making up for negative returns in October. The bond sector as measured by the Bloomberg NZ Bond Composite Index also had a strong quarter and month, up 4.64% and 2.04% respectively as interest rates continued to move lower. Interest rates fell as inflation continued to trend lower in most international markets. Investor attention turned from anticipating more central bank rate rises to speculating on when and by how much interest rates may fall. This change of sentiment in the fixed interest market increased the buying interest in bonds of all maturities resulting in rate falls and increased bond prices. Lower interest rates and the possibility of more to come as 2024 progresses also encouraged a strong year-end rally in equity markets.

Longer maturity bonds were the best performers as they have a higher price sensitivity to falls in rates and the shift lower in rates was relativity consistent along the yield curve. The December quarter gains in the bond market was enough to push bond returns above cash returns over 2023 but cash returns still outperformed the equity market as the NZX 50 did not significantly participate in the strong performance of the ‘tech sector’ that is more highly represented in some offshore markets such as the US.

The fund benefited from a long duration position as interest rates declined. Although we believe interest rates will be lower than present by the end of 2024 it is possible that markets have got too optimistic about the positive interest rate outlook. A short term upward bounce in interest rates is likely early in 2024. However, we believe a move higher in rates represents a buying opportunity as the general trend in rates is down, however the timing of this occurring is uncertain and we remain patient for investment opportunities. Ultimately economic developments and the data will dictate the way forward and markets may remain volatile for some time.

With interest rates falling for two months in a row it was not surprising to see interest rate sensitive stocks perform well. The property names in the fund’s equity portfolio performed strongly after being under pressure for most of the year. The electricity sector also performed well with Meridian, Mercury and Genesis all increasing by over 5% over December. Heartland Group share price fell after they announced a lower 2024 earnings outlook after a slow start to the year.

We continue to believe investors should seek income from a diverse range of sources. Looking ahead over the medium term a lower rate environment should be supportive for both bond and equity returns. The Income Fund remains invested in a range of NZ companies listed on the NZX that pay a consistent level of dividends or who have the likelihood of doing so in the future. In addition to dividend income, we expect over time the industry sectors and business models adopted by these companies should be rewarded by a steady or rising share price.

Performance

Nikko AM Investment Scheme
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Performance

at 31 December 2023
One month Three months One year Three years (p.a) Five years (p.a)
Fund performance1 2.56% 4.21% 6.44% -0.10% 1.06%
Appropriate Market Index (AMI)2 2.71% 4.57% 6.23% -0.77%
  1. Returns are before tax and after the deduction of fees and expenses and including tax credits (if any).
  2. AMI: Composite - refer to Nikko AM NZ Investment Scheme OMI 

5 year cumulative performance $10,000 invested

Top 10 Holdings

Security Name Percentage
Kiwibank Ltd 191027 5.737 Gb 5.13%
Powerco Ltd 070330 6.397 Cb 4.92%
Westpac New Zealand Ltd 160932 6.19 Cb 4.72%
TR Group 4.533% 07/03/2024 4.21%
Bank Of New Zealand 010928 0.00 Cb 3.27%
Westpac New Zealand Ltd 140234 6.73 Cb 3.20%
Bank Of New Zealand 3.20%
Works Finance Nz Ltd Pref Share 3.15%
Spark New Zealand Ltd 3.11%
Chorus Limited 3.05%
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