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

Equities 30.00%
Bonds 62.50%
Cash 7.50%

Commentary

As of 31 May 2022

Market Highlights

  • The bond market fared better rising 0.2% as measured by the Bloomberg Composite Bond Index over May however it is down 5.3% on a year-to-date basis. The NZX 50 Index decreased by 4.85% over the month and 13.2% lower since the start of 2022.





 

The fund declined over May as equity markets fell. The bond market fared better rising 0.2% as measured by the Bloomberg Composite Bond Index over May however it is down 5.3% on a year-to-date basis. The NZX 50 Index decreased by 4.85% over the month and 13.2% lower since the start of 2022. The fund holds around 29% of its assets in NZ equities with an additional 2% in preference shares. Approximately 61% of the fund is invested in bonds and cash with the remainder invested in the Nikko Option Fund. The Option Fund returns were negative over the month as bond yields spiked to 3.2% before retreating again. These sharp movements saw yields move through option strike levels creating losses for the fund. Meridian Energy, Spark, Chorus and Skellerup were the better performing equity holdings. They all outperformed the return of the NZX50 however all posted negative returns. Stride Property Group, Mercury and Contact Energy were this month’s laggards being buffeted by changing investor sentiment. Mid-term bonds with 4 to 7-year maturity dates performed best, being long enough to be somewhat insulated from rising cash rates but not long enough to be significantly impacted by inflation concerns that tend to show up most in 10-year bonds.

 

As we know interest rates have been rising quickly as the RBNZ and other Central Banks around the global battle high inflation however we are mindful that the cash rate could peak below the level of RBNZ projections should the economy faulter as stimulus is reduced. Governor Orr is reported as saying that it is a very plausible outcome were inflation to return back to the 1% to 3% target range. Likewise, it is possible there is more work for the bank to do should inflation expectations remain elevated. The RBNZ’s central projection is one where inflation falls back into the range with interest rates being modestly above neutral and rates holding at that level before falling back again. It is hard to put a precise number on what level of interest rates constitutes neutral as often the level changes over time however at present neutral is probably in the 2% to 2.5% range. Uncertainty surrounding how far and how fast the RBNZ will increase the cash rate has led the market to price in a cash rate as high as 4% to 4.25%. Only time will tell if this expectation is too high and bond yields have increased too much.

 

We continue to believe investors should seek income from diverse sources. Even though some equity prices have fallen we believe the environment remains acceptable 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 a consistent 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 Official Cash Rate will rise further however much of the anticipated increases are already reflected in market pricing. The OCR peak is likely to be around 3.5% which is low compared to previous tightening cycles and lower than levels priced into bond markets. Most of the recent corporate and bank bond issues have been sold with yields between 4% and 5%, we feel investing at these levels is looking attractive compared to the likely peak in the OCR, even if there is the risk markets overshoot for a while.

 

 

Performance

Nikko AM Investment Scheme
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Performance

at 31 May 2022
One month Three months One year Three years (p.a) Five years (p.a)
Fund performance1 -1.65% -4.22% -4.25% -0.93% 1.35%
Appropriate Market Index (AMI)2 -1.36% -3.31% -6.01%
  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 4.60%
Westpac New Zealand Ltd 160227 3.696 Cb 3.96%
NZ Local Govt Funding Agency 3.50% 14/04/2033 3.22%
Spark New Zealand Ltd 3.19%
Infratil Ltd 151222 5.65 Cb 3.14%
Liberty Finance 090223 3.70 Cb 3.10%
Skellerup Holdings Limited 3.05%
Genesis Energy Ltd 140328 4.17 Gb 3.05%
SBS Bank 280328 7.16 CB 2.82%
Infratil Limited 2.78%

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