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.

Risk Indicator (volatility)

Target Asset Allocation

Equities 30.00%
Bonds 62.50%
Cash 7.50%

Commentary

As of 31 December 2021

Market Highlights

  • Third quarter GDP came in at -3.7% versus expectations of -4.1%, the fall reflecting impact of the recent Auckland lockdown. Pre-pandemic this would a been considered a monster of a GDP fall, but lessons from past lockdowns suggest that economic activity will pick up where it left off as lockdown restrictions are lifted.  
  • Continued Official Cash Rate (OCR) increases expected, however with a risk being the OCR peaks at a lower level than many assume and possibly take longer than expected to get there.

 

The Reserve Bank will likely consider GDP as interesting in that it is better than their November MPS forecast of -7.0%, however given it’s impacted by a lockdown and that prior lockdowns have seen consumption bouncing back once restrictions are lifted it provides little new insight into appropriate monetary policy settings. This leaves us with much the same view regarding the economy and investment markets in 2022. In summary:

  • Monetary conditions will continue to tighten at a measured pace.
  • The labour market is strong with low unemployment and capacity constraints, this is likely to continue until boarder restrictions are reduced or demand abates.
  • Supply chains are challenged but unlikely to further deteriorate.
  • Inflation will remain well above the Reserve Bank’s 1-3% band in the first half of 2022, however, should ease thereafter as both the base effect of prior high inflation numbers roll out and the impact of increased interest rates dampens consumption.
  • The world is awash with debt, smaller interest rate increases will be required than in the past to slow demand.
  • Vaccinations rates continue to rise, and the risk of severe lockdowns is diminishing as we move to a COVID endemic world with the introduction of the Governments traffic light system.

This sees us expecting continued Official Cash Rate (OCR) increases with risks surrounding the OCR peaking at a lower level than many assume and possibly take longer than expected to get there. This should be a positive outcome for all interest sensitive investment sectors. Even though we believe longer term bond rates are near their peak, over the past few months the fund has held higher levels of cash than it would normally do so to help mitigate the impact of rising interest rates.

The fund’s exposure to the alternative investment sector via the Option Fund has also provided a source of returns and diversity as investment outcomes and characteristics from this sector are not highly correlated with traditional equity and bond assets. The fund is also holding close to the upper permitted limit of shares as we continue to believe shares have a good chance of outperforming bonds over the next three years. As noted in previous commentaries, the market is pricing in around a further 2% of OCR rises by the Reserve Bank. With this in mind we think we need to see further unexpected rises in inflation or economic growth rates for interest rates to push much higher as current pricing already reflects increased inflation uncertainty and Central Banks’ removal of economic stimulus. With interest rates likely to remain low relative to historical levels we continue to believe it is appropriate for investors to seek income from more diverse sources than the interest rate market alone. Even though some equity prices have fallen we believe the environment remains attractive for equities, even though catalysts for new growth remain elusive. This means the Income Fund will remain invested in a range of NZ companies listed on the NZX that pay an acceptable level of dividends or who have the likelihood of doing so in the future. In addition to the fund receiving a steady stream of dividend income, we expect that over time the industry sectors and business models adopted by these companies should be rewarded by a steady or rising share price. The bond sector of the fund is invested primarily in medium to longer duration assets balanced out with a higher than usual allocation to cash. We are happy to have exposure to longer term assets as even though the OCR will rise, much of the anticipated increases are already reflected in market pricing and the OCR peak is likely to be low compared to previous tightening cycles. Once again, the month of December demonstrated that investing in a diversified portfolio of income focused assets provides some protection from the downturn in individual holdings or asset classes.

Performance

Nikko AM Investment Scheme
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Performance

at 31 December 2021
One month Three months One year Three years (p.a) Five years (p.a)
Fund performance1 2.00% -0.45% 1.28% 2.31% 3.63%
Appropriate Market Index (AMI)2 1.07% -1.41% -2.17%
  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
BNZ 1.884% 08/06/2026 4.44%
Kiwibank Ltd 111230 2.36 Cb 3.62%
Heartland Group Hlnpv 3.54%
NZ Local Govt Funding Agency 3.50% 14/04/2033 3.32%
Skellerup Holdings Limited 3.19%
Stride Stapled Grp Npv Units 2.88%
Infratil Ltd 151222 5.65 Cb 2.87%
Liberty Finance 090223 3.70 Cb 2.84%
Spark New Zealand Ltd 2.62%
TR Group 4.533% 07/03/2024 2.61%

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