Nikko AM NZ Cash Fund

The strategy performed well in quarter four returning 0.26% outperforming the 90-day bank bill index which returned 0.16%. The OCR increased from 0.25% to 0.75% over the quarter increasing in 0.25% steps at each of the October and November meetings. These rate rises were widely expected however there was a divergence in expectations around the Reserve Bank’s November meeting with bets finely balanced between two camps, those expecting a 0.25% OCR rise and those that viewed a 0.50% rise as more appropriate (given the strength of inflation and employment). From a portfolio positioning perspective Nikko has consistently been in the 0.25% camp implementing a barbel strategy to exploit pricing above 0.25% increments at each meeting date. This turned out to be a solid decision as the Reserve Bank’s November MPS provided clarity around their expected OCR path factoring in the impacts of COVID effectively raising the hurdle for 0.50% OCR rises to occur, damping more aggressive OCR paths priced in prior to this meeting. This reduction of OCR paths notwithstanding a 0.25% OCR increase remains more than fully priced in for the Reserve Bank’s next meeting in February. The fund continues to pursue a barbel strategy to exploit this pricing as an OCR increase of more than 0.25% at the next meeting requires increased economic impetus along with less COVID driven uncertainty to eventuate. At the same time as taking these short positions around the Reserve Bank’s upcoming meetings we continue to see merit in opportunistically adding longer positions reflecting a view that risks are the OCR will peak at a lower level than many assume and possibly take longer than expected to get there.