Financial Year in Review

“Two halves, two different worlds" 

July 2026 | For public consumption

Twelve months ago, the consensus view was that FY26 would be the year duration finally rewarded the faithful, as the RBA worked its way through a steady easing cycle. For six months, that thesis held. Then it broke — comprehensively. The financial year split neatly in two. Through the December half, the RBA continued cutting, inflation appeared to be behaving, and the market priced a terminal rate materially below where we sit today. From January onwards, that narrative unravelled. Seventy-five basis points of tightening in six months is not a fine-tuning exercise. It is a central bank conceding that the disinflation it had declared was, at best, incomplete.

For anyone holding fixed rate paper into that turn, it was a painful outcome. The AusBond Credit Fixed Index returned 2.75% for the year — less than cash, and less than the rate of inflation for much of the period. The ASX 200 managed 2.77%, similarly beaten by the bank bill index at 3.86%. Meanwhile the floating rate note (FRN) index returned 4.88%, and the gap between floating and fixed credit — 213 basis points — tells you almost everything about which risks were rewarded and which were punished.

Against that backdrop, our funds delivered:

Fund (net of fees)	FY26	Vs B’mark	Excess	Target	Excess
Mutual Cash & Term Deposit Fund	4.09%	3.86%	+0.23%	+0.50%	-0.27%
Mutual Income Fund	5.51%	3.86%	+1.65%	+1.20%	+0.45%
Mutual Credit Fund	6.63%	3.86%	+2.77%	+2.20%	+0.57%
Mutual High Yield Fund	8.25%	3.86%	+4.36%	+4.50%	-0.11%

Benchmark is the Bloomberg AusBond Bank Bill Index, target is spread above the benchmark. Figures as at 30 June 2026

Every fund beat its benchmark. Two exceeded target, and two fell marginally short — the Cash and Term Deposit Fund by 27 basis points, and the High Yield Fund by 11 basis points. We'll come to why.

The macro backdrop: the disinflation that wasn't

The first half of the financial year proceeded roughly to script. The RBA eased, the market cheered, and commentators began drafting obituaries for the inflation problem. Bond investors extended duration. Equity investors extended multiples.

The turn came from two directions at once, and neither was a surprise to anyone who had been paying attention.

Oil

Energy prices moved sharply higher through the first quarter of 2026 and have kept moving. Supply-side disruption met a demand picture that was more resilient than expected, and the flow-through to headline inflation was rapid — fuel prices first, then freight, then the broader goods complex. Central banks like to describe energy shocks as transitory and look through them. That is a defensible strategy when inflation expectations are anchored. It is a dangerous one when they are not, and by early 2026 the anchoring was looking a good deal less secure than the RBA would have liked.

Housing

The more troubling contributor, because it is the one monetary policy cannot fix. Rents and the housing component of the CPI have remained persistently elevated, driven not by excess demand for credit but by a structural shortfall in supply. Construction completions continue to run below household formation. Approvals have not recovered to the levels needed to close the gap. Labour and materials constraints in the building sector persist. This is a supply problem being addressed with a demand-side instrument, and the RBA has been explicit that it has limited tools available. Raising the cash rate does not build houses; if anything, higher financing costs make marginal projects less viable. The Reserve Bank is tightening into a shortage it cannot resolve, because the alternative — allowing the shelter component to keep pushing headline inflation higher — is worse.

The combination pushed trimmed mean inflation back up through the first half of calendar 2026, and the RBA Board responded with three consecutive moves. Offshore, the picture rhymed: the US Federal Reserve confronted the same energy pass-through layered on top of tariff-driven goods inflation, and the easing cycle that markets had priced for the US evaporated in similar fashion. European growth stayed weak while its inflation problem reasserted itself — the worst of both worlds. China's property overhang continued to weigh on commodity demand, which helps explain why the ASX 200 went nowhere despite the energy complex performing well: the resources sector's exposure is bulk commodities, not oil.

What worked

Floating rate exposure

Worked decisively. This is the point of the whole exercise. A portfolio built on floating rate notes does not care which way the cash rate moves, because the coupon resets. When the RBA turned in January, our funds' income increased. Fixed rate holders took a capital hit and then sat on below-market coupons for the balance of the year. The 213 basis point spread between the FRN and fixed credit indices is the price of a directional rate call that went wrong.

We want to be clear that this is not a victory lap for a market call. We did not forecast a 75 basis point tightening cycle. We positioned so that we would not need to. That distinction matters, and it is the single most important thing we can tell investors about how these portfolios are constructed.

Primary market discipline

Issuance was heavy through the year, particularly among banks and financials, and heavy supply means genuine new issue concessions. Volatility around the policy turn widened those concessions further. We were selective rather than enthusiastic, and the second half, in particular, offered better entry points than the first.

Subordinated and Tier 2 positioning

The regulatory transition in the hybrid space continued to reshape domestic bank capital structures, and the Tier 2 market absorbed modest supply. Spreads held up well even through the rate turn — a reminder that credit risk and interest rate risk are distinct, and that a hawkish central bank is not, in itself, bad news for credit quality. The Credit Fund's 277 basis point excess return owes a good deal to that positioning.

Not reaching

There were pockets of the market where spreads compressed to levels that did not compensate for the underlying risk. We didn't own them. In a year where credit fundamentals held together, that discipline cost a little. Over a cycle, it is the whole game.

Where we fell short

The Cash and Term Deposit Fund's 4.09% represents a 23 basis point premium to bank bills — a respectable outcome for a portfolio whose first obligation is capital stability and same-day liquidity. It fell 27 basis points shy of target largely because of the shape of the year rather than its endpoint. Term deposit rates compressed through the first half as banks anticipated further easing, and while pricing improved sharply once the RBA turned, the fund carried those lower rates through maturities set in the December half. We deliberately kept terms short through the second half rather than locking in rates ahead of a tightening cycle we could see building. That decision cost basis points in FY26 and will earn them back in FY27.

The High Yield Fund's 8.25% missed its 8.36% target by 11 basis points — a rounding error against a 439 basis point excess return over benchmark, but worth explaining. The fund held more liquidity than the target implies through parts of the first half, having judged that spread compensation at the tights was inadequate given rising policy uncertainty. That judgement cost 11 basis points. Given what we now see building in the inflation picture, we would make the same call again.

Looking forward: the risk is not behind us

We enter FY27 with a cash rate higher than it was six months ago and, on the evidence in front of us, a meaningful probability that it goes higher still.

Oil is the immediate concern. Prices have continued to firm into the new financial year, and the pass-through to headline inflation operates with a lag measured in months, not quarters. If current levels hold — let alone extend — the CPI prints through the December half will be uncomfortable reading, and the RBA has already demonstrated its willingness to act.

Housing is the slower burn, and the more intractable. The supply shortfall is a decade in the making and will not be resolved in a year. Until completions materially exceed household formation, the shelter component of the CPI will keep exerting upward pressure regardless of what the cash rate does. Investors should be sceptical of any forecast that assumes this component normalises quickly.

Three implications for positioning

First, duration risk is not cheap enough. Fixed rate credit has repriced, but not to levels that adequately compensate for the possibility of further tightening. We are not extending, although we don’t buy fixed rate bonds anyway, so not a large part of our daily pondering.

Second, higher-for-longer is good for income. The uncomfortable truth for borrowers is the welcome one for our investors: a higher cash rate means higher coupons on floating rate paper, immediately and mechanically. The absolute yields available across our funds are better today than they were 12 months ago.

Third, credit fundamentals will be closely monitored. Seventy-five basis points of tightening into an economy already carrying elevated household debt will eventually show up somewhere. It hasn’t not yet, and we aren’t not forecasting a credit event. But the margin for error in security selection is narrower than it was, and we are underwriting accordingly. For these reasons we specialise in APRA regulated banks and structured credit with hard first ranked security over underlying assets.

The case for floating rate credit has never depended on a directional call on rates.That is precisely why we like it, and why FY26 unfolded the way it did for our investors while it unfolded rather differently for others.

To our investors: thank you for your continued confidence. Beating a benchmark in a year when equities returned less than cash — and doing so through a policy reversal that caught most of the market leaning the wrong way — is the outcome these portfolios are built to produce.