Q2 2026 Fund Commentary

Commentary and opinions are provided by Keyridge Asset Management Limited.

Market commentary

Credit markets experienced a volatile quarter as developments in the Middle East remained the principal driver of market performance. During the first half of the quarter, the tensions pushed oil prices above USD$110 per barrel, which prompted renewed stagflationary fears. Higher energy prices increased inflationary pressures and raised concerns that global economic growth could slow, creating a challenging backdrop for fixed income markets.

As inflation expectations strengthened, investors reassessed the outlook for monetary policy. The prospect of further interest rate cuts diminished, while markets increasingly priced in the potential for additional policy tightening. Government bond yields rose sharply during the first half of the quarter before retracing as geopolitical tensions showed signs of easing. European government bond yields finished the quarter lower overall, while U.S. Treasury yields ended modestly higher.

Market sentiment improved during June, following indications of a more durable ceasefire and broader diplomatic engagement in the Middle East. Corporate credit markets remained resilient throughout the quarter, supported by healthy demand for new issuance and generally solid economic data.

Performance

SCOR SE (5.25%, perpetual, callable 2029) contributed to performance as the company bought back some subordinated debt during the quarter and delivered good operating performance. Allianz SE (3.20%, perpetual, callable 2027) also contributed because the group reported strong operating profits and benefited from investors' appetite for subordinated bonds with shorter duration. EnBW Energie Baden-Württemberg AG (3.625%, callable 2031) added to relative performance because of a good set of operating earnings.

Currency movements contributed to performance over the quarter. The Canadian dollar weakened against several major currencies, benefiting holdings denominated in Australian dollars, U.S. dollars, sterling and euros. The Australian dollar strengthened following further policy tightening by the Reserve Bank of Australia, and the U.S. dollar benefited from the U.S. Federal Reserve Board's (the Fed) continued emphasis on controlling inflation.

A U.S. Treasury bond (0.50% due 2027) detracted from performance. A U.S. Treasury bond (2.625% due 2029) also detracted because expectations around U.S. Federal Reserve Board rate hikes grew over the quarter on the back of rising inflationary pressures and strong employment data.

Japanese yen exposures detracted from performance because the currency weakened to multi-decade lows despite a modest interest rate increase by the Bank of Japan.

Portfolio activity

The sub-advisor added Space Exploration Technologies Corp. (5.65% due 2033) as the company issued debt in public markets for the first time, offering an attractive entry point. Other new purchases included Legal & General Group PLC (7.125%, perpetual, callable 2033) and Oncor Electric Delivery Co. LLC (4.55%, callable 2031), because subordinated bonds in the financials and utilities sectors were assessed as attractively placed in the current market environment.

SCOR SE (5.25%, perpetual, callable 2029) was sold against the Legal & General purchase. Profits were also taken on Engie SA (6.125%, perpetual, callable 2032), Siemens AG (2.35%, 2026) and Vattenfall AB (2.50%, 2083, callable 2033) hybrid bond because these bonds had fulfilled valuation targets and were replaced by higher-yielding assets.

Positions in U.S. Treasuries and Canadian, Australian and Japanese government bonds were increased and reduced throughout the quarter to manage the Fund's overall duration and lock in attractive rates at the long end of the yield curve.

Outlook

In the sub-advisor's view, if tensions in the Middle East continue to ease, there may be less need for substantial additional monetary tightening, which could provide continued support for government and corporate bond markets.

Investment-grade credit continues to benefit from attractive all-in yields, which support investor demand despite relatively rich valuations in some areas of the market. Economic fundamentals also remain reasonably supportive, with resilient labour markets helping to underpin corporate balance sheets and overall credit quality.

The sub-advisor is monitoring the artificial intelligence (AI) space, particularly the ability of companies to generate sustainable returns from significant infrastructure investment. Market attention has shifted towards the future monetization of capital expenditure programs and the potential for greater competition within this sector.

Consumer-facing industries are beginning to experience more pressure from higher household energy costs and weaker disposable incomes. Meanwhile, companies in the infrastructure, defence and financials sectors continue to display comparatively resilient fundamentals. While valuations in some parts of the market are elevated, attractive all-in yields still provide support for credit markets, and the sub-advisor remains broadly constructive on the outlook for fixed income.