7% Returns, Falling Rates & Portfolio Positioning for 2025

Stratton Bell, Portfolio Manager, SGH Enhanced Income Trust

December 2024 Quarter Update: Adapting to Changing Rates: Fixed Income and Stable Returns in Volatile Markets

 

Performance Overview

Last quarter, we saw the SGH Enhanced Income Trust return 1.4% after all fees and before franking credits, outperforming the benchmark by 4 basis points over the period.

Market Movements and Portfolio Impact

Floating and Fixed Rate Investments

We did see the floating rate investments perform in line with expectations, with very little movement across cash rates here in Australia. On the fixed interest side, we did see a little bit of volatility.

When we turn our minds back to November, when President Trump won the US election, he announced his intention to introduce a number of tariffs. That was seen as slightly negative by the market, and the expectation was that tariffs would increase inflation, which would lead to higher interest rates.

Interest Rate Movements

What we saw in the back of that was the 10-year US government bond increasing by 0.7% to 4.5% over the quarter, while the Australian 10-year government bond increased by 0.4% to slightly below 4.5% over the same period. This was a minor negative for the fund, but we did see the rest of the investments perform in line with expectations.

If we cast our minds over the next 12 months, we do expect the RBA to reduce interest rates by about 0.5% to 1%. In Australia, we expect the RBA to decrease interest rates by about 0.5% to 1% over the next 12 months.

That will continue to support our narrative of increasing our fixed rate exposure and decreasing our floating rate exposure when opportunities present themselves.

Outlook and Portfolio Positioning

Resilience in High-Stress Environments

The portfolio is positioned to perform well in high-stress environments.

We did see some significant movements in the bond market over the last quarter, yet the portfolio still performed exceptionally well despite the volatility that was experienced. We continue to see opportunities within the fixed income space and will continue to reduce our floating rate exposure, as we have done over the past 12 months.

Expected Rate Cuts by the RBA

The reason we believe interest rates will continue to decline in Australia is twofold. First, there is a continuation of weakness in the private sector. Second, inflation is slowing. Both of these indicators will likely translate into lower interest rates over the next 12 months.

Credit Markets and Portfolio Adjustments

Over the last quarter, we haven’t made any material changes to the SGH Enhanced Income Trust. We still expect that interest rates will continue to drift downward, warranting an increase in our exposure to fixed rate bonds over floating rate bonds over the period.

When it comes to credit events, the most important factor is the health of US and Australian companies. And the balance sheets at this stage seem very strong, which suggests there will be strong demand for credit over the next 12 months.

Why Invest in the SGH Enhanced Income Trust?

There are three main reasons why I think, investors should consider investing in the SGH Enhanced Income Trust:

With interest rates at current levels and the portfolio returning just over 7% over the past 12 months after fees and before any franking credit benefits, it is a great return and a strong diversifier for any portfolio.

Second. many people still have money in term deposits, and this trust is expected to continue outperforming bank term deposits by about 2% over the medium term.

The last one is, the US market has been very strong, hitting constant record highs. This is a very good way to diversify away from equity markets and into more stable credit investments.

 

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*The text has been edited for clarity.

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The document contains general information only. Reference to either individual securities or other investments should not be considered as investment advice. We strongly encourage you to obtain professional advice before making an investment in securities that have been mentioned. Documents you should consider prior to making an investment could include the relevant Product Disclosure Statement and the accompanying Target Market Determination. If you would like further information on financial products that SG Hiscock & Company Ltd (AFSL 240679) is the investment manager for, contact the Client Services team on 1300 133 451, visit the website www.sghiscock.com.au or contact your financial adviser.  Any investment is subject to risk, including possible loss of income or capital invested.