Managing Bonds for Income -

Trust Management leads the way

September 2015


Trust Management continually evaluates the way in which we manage our clients' assets and we are always striving to deliver investment products and services focused on the needs of charities.


To this end, we have been conducting extensive research and modelling on an alternative management style for New Zealand Bonds, a management style that focuses on the generation of income.


Most managers of New Zealand Bond Funds devote their attention to making duration calls and managing credit risk.  The focus on total return can, in some circumstances, result in the income of the Fund reducing as the manager changes the portfolio duration.

From 1 October 2015, Trust Management will be changing the management style of its New Zealand Bond Fund to have an explicit income focus.  We will trade more frequently during periods of rising interest rates, trading capital returns for income returns, with the total return largely unchanged.  When interest rates are falling, we wil revert to a more traditional "hold-to-maturity" strategy, so that the income of the Fund is maintained until the Bonds progressively mature.


We are making this change because the majority of our investors rely on income from the Fund to achieve their charitable purposes.  We therefore believe it is more important to place a greater level of emphasis on the income return of the Fund rather than just the total return.


We are very conscious that for most investors, an investment into our Bond Fund is part of a wider balanced portfolio of assets.  As such, we have conducted extensive analysis to establish whether managing the Fund with an explicit income focus would impact any of the other key characteristics of the asset class, specifically its expected total return, the volatility of the return and the correlation with other asset classes.


Our research concludes that an "income focused" strategy is likely to result in significant income enhancement for investors in the Fund relative to the current market approach while not having a material impact on the total return or correlation with other asset classes.  While this change of management style will result in a slight increase in the volatility of the Fund's total return, our research suggests the higher levels of income generated will be more stable and consistent from year to year.


In summary, we believe the change will better achieve investors' investment objectives by generating a higher and more stable level of distributable income.  We will continue to carefully manage other portfolio risk factors, particularly interest rate risk, credit ratings and counterparty risk.


If you have any questions, or would like to know more about our New Zealand Bond Fund, please do not hesitate to contact John Williams, Investment Manager on 09 550 4046.


Grant Hope

Chief Executive Officer

09 550 4044





Shane Coward

General Manager

09 550 4045





John Williams

Investment Manager

09 550 4046






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