BlackRock Enhanced Australian Bond Fund

Transcription

1 2017 FUND UPDATE BlackRock Enhanced Australian Bond Fund Investment Performance (%) Fund Inception 1 M th 3 M ths CYTD 1 Yr 3 Yrs 5 Yrs Inc BlackRock Enhanced Australian Bond Fund (Gross of Fees) 26-Mar Bloomberg AusBond Composite Index SM (Gross of Fees) Outperformance (Gross of Fees) Past performance is not a reliable indicator of future performance. Performance for periods greater than one year is annualised. Performance is calculated in Australian dollars and assumes reinvestment of distributions. Gross performance is calculated gross of ongoing fees and expenses. Market Review Australian bond markets rallied on the back of waning RBA expectations with the 2-year falling 12bps to 1.82% and the 10-year bond falling 17bps to 2.67%. The Bloomberg AusBond Composite Index (the Index ) returned +1.09% in October. Treasuries (+1.24%) were the best performing component of the Index, followed by Semis (+1.01%), Supra-Sovereigns (+0.79%) and finally Credit (+0.98%). While the rally was positive for duration, returns were further aided by credit spreads and carry. Digging into credit market performance, the Australian itraxx Index continues to break to new post financial crisis tights, tightening 7bps over the month to close at 65bps. Corporates (+1.12%) outperformed Financials (+0.99%) this month, led by Telcos (+1.38%), Staples (+1.27%) and Infrastructure (+1.21%). Conversely, Autos (+0.65%), Materials (+0.66%) and Energy (+0.70%) were among the bottom performing corporate sub-sectors. Within Financials, performance was driven by offshore banks (which benefited from longer duration), while nonmajors lagged at (+0.73%). A lack of credit events are keeping downward pressure on spreads, and though spreads do not seem to be reacting to the global macro themes at play, investors are cautious around the edges, and we maintain the view that credit spreads will likely range trade over the medium-term. At present, the technical and fundamental backdrop for spreads remains stable. Semis outperformed in October, tightening to both ACGB and swap. Our view that swap spreads will tighten argues for holding long semi positions against bonds. Demand for semis certainly persists and we saw this met with an uptick in supply last month, notably at the long-end (e.g. 30yr) of the curve. The market estimates that semis are, overall, roughly 37% through FY funding plans; however, there is certainly a dispersion in issuance rate among states. Turning to supply, the Index added A$19.8bn of new-issues and taps in October, up 36.2% m/o/m and A$5.0bn greater than the 12-month average (A$14.8bn). Treasury issuance of A$9.5bn was the largest contributor followed by Non-Government (A$5.4bn) and Semi- Government (A$4.8bn). Taking into account buybacks and maturities, net new supply was positive this month, amounting to A$7.4bn. Nineteen new issues were added to the Index at month-end, amounting to A$10.4bn. The RBA has again kept rates on hold, and the October statement was largely neutral with a tone of improving economic outlook. Market tone, however, was quick to change on the back of weaker than anticipated CPI data. Specifically, headline CPI came in at 0.6% q/o/q (vs. 0.8% q/o/q expected) and just 1.8% y/o/y (vs. 2.0% y/o/y expected); the core measures also came in below expectations as the trimmed mean fell to 0.4% q/o/q and the weighted median dropped to 0.3% q/o/q. The core measure remains below the RBA s target band (e.g. 2-3%) for a seventh consecutive quarter. Meanwhile, we continue to see strong employment prints with the unemployment rate down to 5.5% (from 5.6%) and an unchanged participation rate (65.2%). Labour force data (Sept) revealed 19.8k in jobs created (6.1k full-time, 13.7k part-time) bringing YTD job creation to 371.7k (315.9k full-time, 55.8k part-time), the strongest on record. The NAB business survey (Sept) showed that confidence lifted from an index level of 5pts to 7pts. The business conditions index eased from 15pts to 14pts but remains around recent its recent quite high average. In the US, the September non-farm payrolls report showed mixed results as the impact of multiple hurricanes hitting the US was present throughout the report. On the headline, non-farm payroll employment fell 33k (vs. 80k expected). The unemployment rate declined to a cycle low 4.2% (vs. 4.4% expected) as the participation rate continued to rise coming in at 63.1% (vs. 62.9%). The September ISM manufacturing index rose to 60.8 (vs expected) while the September ISM non-manufacturing composite rose sharply to 59.8 (vs expected). Both headline and core CPI missed expectations in September with headline coming in at 0.5% and core rising just 0.1%. On a positive note, advance Q3 GDP came in at 3.0% q/o/q (vs. 2.6% expected), driven by a strong build in inventories over the period The Bloomberg AusBond Composite 0+ Yr Index returned 1.09% in October for a 12 month return of 1.64%

2 BlackRock Enhanced Australian Bond Fund October 2017 Portfolio Commentary The fund returned +1.15% in October, outperforming the benchmark by 0.05%. Sector selection added roughly 4bps of active return, largely driven by our overweight to corporate bonds. Security selection was flat during the period, while securities lending added 0.6bps of active return. The portfolio s duration remained in line with the benchmark over the month. The benchmark s duration-times-spread (DTS*) rose 0.01% m/o/m to 1.00%, while the portfolio s active credit spread beta (DTS) fell from 0.62% to 0.55%. The fund s long inflation breakeven position was a detractor for the month. *DTS: Credit Duration Times Credit Spread. DTS measures the sensitivity of the price of a bond to relative changes in spread. Example: if a spread is 100 bps and duration is 2, DTS amounts to 200 bps or 2.0%. Market and Outlook Commentary Key macro risks to the domestic economic outlook remain; rising unemployment, fragility in the housing market, China s ability to rein in leverage and slow bank asset growth. The RBA s core view is that economic growth will gradually pick up to a little over 3%, however, wages growth remains sluggish, household debt remains at historic highs and housing-related data continues to suggest that the market has peaked. We continue to expect the RBA to keep the cash rate unchanged throughout 2017 and even into mid From a global perspective, market sentiment continues to be driven by the political landscape. The Australian dollar remains underpinned by positive risk sentiment, global growth momentum, rising commodity prices (i.e. iron ore) and a neutral RBA policy stance.

3 BlackRock Enhanced Australian Bond Fund October 2017 About the Fund Investment Objective The Fund aims to outperform the Bloomberg AusBond Composite Index SM before fees over rolling three-year periods, while maintaining a similar level of risk as its benchmark. Fund Strategy The strategy takes active positions on the yield curve, sector allocation and stock selection. The main contributor to performance is expected to be through yield curve positioning followed by sector and stock selection. Fundamental and market investment insights are systematically used to determine our yield-curve positions. We strategically tilt the portfolio towards short-maturity credit due to the excess return premium per unit of risk incurred compared with traditional government and semigovernment debt securities. The credit portion of the portfolio is weighted towards those sectors (industries) and stocks that are expected to outperform over the economic cycle. Fund Strategy (cont.) Should be considered by investors who Seek a broad exposure to Australian bonds. Have a long term investment horizon. Fund Details BlackRock Enhanced Australian Bond Fund APIR Fund Size BGL0060AU 380 mil Buy/Sell Spread 0.05% / 0.08% Tracking Error (3 Years p.a.) 0.15%

4 FUND UPDATE BlackRock Enhanced Australian Bond Fund October 2017 Risk Characteristics Portfolio % Benchmark % Difference % Modified Duration (Years) Duration x Spread Yield Average Coupon Average Maturity (Years)

5 FUND UPDATE BlackRock Enhanced Australian Bond Fund October 2017 Issued by BlackRock Investment Management (Australia) Limited (AFS License No , ABN ) ( BlackRock ). BlackRock is the responsible entity of the Fund(s) referred to in this document. An Offer Document for the Fund(s) is available from BlackRock. Potential investors should consider the Offer Document in deciding whether to acquire, or to continue to hold, units in the Fund(s). BlackRock, its officers, employees and agents believe that the information in this document is correct at the time of compilation, but no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors or omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This document contains general information only and is not intended to represent general or specific investment or professional advice. The information does not take into account an individual s financial circumstances. An assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial or other professional adviser before making an investment decision. No guarantee as to the capital value of investments in the Fund(s) nor future returns is made by BlackRock. If you have any queries relating to any of this information or to obtain a copy of the Offer Document for the Fund(s), please contact your relationship manager. Alternatively, if you have a query relating to the wholesale funds, please contact Institutional Client Services on ICS-Australia@blackrock.com, or please call Adviser Services on if you have a query relating to our retail fund range.