Higher for longer
It was a difficult month for both share and bond markets with sharp falls across both. Despite this, Milford’s diversified funds had more modest losses, outperforming underlying markets and passive peers. Expectations that interest rates will stay elevated for longer periods drove global bonds* to lose 1.7% in September. The move in interest rates also weighed on shares, with broad losses across global, Australian and NZ shares (down 3.7%, 2.8% and 2.2% respectively)**.
The falls in bond prices in the month were predominantly in longer maturity bonds, reflecting changing expectations of how long interest rates would have to remain around current levels. Milford’s bond holdings are concentrated in shorter maturities, and we have maintained a reduced exposure to longer-dated interest rates. This cushioned our funds from falling bond prices and we reiterate our conviction that our bond holdings offer attractive risk-reward at this juncture.
Share market losses were broad, and there were few companies that delivered positive performance last month. Nonetheless, there are a number of areas we are invested in that performed well. Higher energy prices have benefitted a number of our holdings in September, including Shell (+8.1%) and Santos (+3%). European banks have depressed valuations, and higher interest rates should boost earnings. In September, Bank of Ireland and NatWest Group bucked the global slide in shares to end up 1% and 2.3% respectively. Of course, many of our holdings lost value last month as they were buffeted by macro headwinds. In many cases, this offered opportunity to add to these holdings at cheaper prices where we retain conviction in the company outlook.
When broad asset prices fall, increased cash holdings that deliver positive returns (around 0.5% per month) provide a solid anchor for funds, in addition to being able to deploy that cash at lower asset prices. We continue to be optimistic on the outlook for returns, but caution that the road will be windy. Lower asset prices today across bonds, and the companies we own, bode well for future returns. Furthermore, a complex macro-economic environment will continue to provide a fertile ground for an active manager such as ourselves to invest and outperform.
*Bloomberg Global Aggregate Index
**MSCI world, ASX200, NZX50 indices