Portfolio Review FY25

As we move into the second half of 2025, diversification remains key. Our portfolio strategy favours a balanced mix of investment-grade securities and high-yield corporate bonds, with a moderate long duration stance.

Market Outlook

Global equity and bond markets have experienced a turbulent start to 2025, primarily on concerns that a potential tariff-driven trade war could heighten inflation and recession risks. Financial markets have since staged a rally over the last month, with the tariff imposition paused to allow for trade negotiations. There is now greater conviction that tariff levels will settle well below the original headline levels that scared markets.

Global long-term government bond yields have resumed their climb, driven by improved risk sentiment, a paring back of rate cut pricing and growing deficit and supply concerns. With US deficit concerns at the forefront, inflation risks lingering, and Moody’s now joining S&P and Fitch in downgrading the US’s AAA rating, the pressure at the long end continues to build. The Australian bond yield curve remains impacted by global factors despite the RBA tailwind. The RBA already had the green light to move towards a neutral policy rate of around 3%.

AUD corporate and bank credit spreads have broadly tracked USD investment grade (IG), albeit with lower beta. Within the major bank complex, spreads moved sharply wider across the capital structure, but while senior and Tier 2 debt have almost fully retraced to pre-Liberation Day levels, hybrid discount margins appear to have stabilised at somewhat wider levels.

Portfolio Construction

As we enter the second half of 2025, we continue to see the importance of diversification across assets and sectors and remaining alert for opportunities to add to risk assets during volatile periods.

Our preferred portfolio construction is:

• Duration: Moderate long position
• Yield Curve: We look to maintain an even allocation to fixed-rate and floating-rate bonds on expectations that the rate cut cycle may be more drawn-out than the market has suggested, even as the RBA has begun to cut rates.
• Sector/Credit Mix: We will maintain a broadly diversified portfolio consisting of 60% short-dated investment grade and longer-dated semi-government and government securities (IG) alongside 40% high-yield (HY) corporate bonds & loans. A barbell strategy is used to capture higher spread securities whilst managing risk between IG and HY. Longer-dated (10-year plus) semi-government and government securities are not as strongly linked to the RBA cash rate as are 3-year government bond yield movements, and we believe there could be potential outperformance in this bucket.

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