The Pacific Coolabah Global Active Credit Fund was launched on 10 October and outperformed its benchmark for the month in the AUD class. As at 31 October, the Fund’s weighted average yield to expected maturity is 6.98%, which compares favourably with the benchmark yield of 5.86%.
The Fund benefited from very active credit trading in primary and secondary markets and defensive positioning to lower beta geographic exposures during October. Risk assets were impacted by a sharp increase in long-term government bond yields in the US and the outbreak of military conflict in the Middle East. US and European synthetic investment grade credit spreads were 6 basis points (bps) wider, respectively. Equity markets in the US and Europe also lost 2.2% and 2.7% over the month.
US 10-year government bond yields jumped by 36bps from 4.57% to 4.93%, notably underperforming Germany and UK yields, which moved by -3bps and +7bps, respectively. The appreciable increase in long-term US risk-free rates was fuelled by the higher-for-longer narrative gripping markets following the Federal Reserve slashing its projected rate cuts in 2024 in half combined with a rise in the quantum of US government bond issuance, which surprised some participants.
Overall, the Bloomberg Global Aggregate Corporate Index lost -1.04% in October, which was primarily a function of the large sell-off in US government bond yields. The Fund aims to closely match the interest rate duration of the benchmark, generating outperformance (or alpha) through its active credit trading strategies in primary and secondary markets.
While the extreme volatility in bond and equity markets stifled the volume of new credit issuance, the Fund was able to capitalise on a rich array of mispricings in USD, EUR and Asian bonds. The portfolio managers sought to insulate the Fund from the escalating turbulence by actively reducing beta and pivoting exposures to lower risk and higher liquidity jurisdictions.
As US 10-year government bond yields approached 5% in October, long-dated interest rate duration exposures are becoming particularly attractive from an asset-allocation perspective. The portfolio managers believe it makes sense for investors to consider averaging into duration given the elevated level of outright yields and some partial evidence that tight monetary policy in the US is compelling mean-reversion in consumer price pressures.