Offering equity-like returns, the income opportunity has rarely been better

He was never explosive like Chris Judd, nor freakishly athletic like Buddy Franklin. Pendlebury’s superpower is something much rarer - consistency. Week after week, season after season, through injury, through good times and bad, and for more than two decades, he has simply delivered.

What does this have to do with investing? Well, when it comes to income investing, explosive is not usually what you want. You want consistency. Certainty. Reliability. A decent yield helps too.

Across those metrics, the Yarra Enhanced Income Fund, run for nearly 25 years by Roy Keenan, shares some parallels with Pendlebury. The fund has never missed a distribution and has consistently outperformed its benchmark - through all market cycles, good and bad. More importantly, Keenan believes the backdrop for income investors remains highly attractive.

“Australia is in a really good situation at the moment where we have some of the highest base rates and government yields in the whole G10,” Keenan says.

“That gives you a great starting point from a total real yield perspective. Yes, spreads are tight, but the total yield to maturity on a lot of securities at the moment is looking pretty attractive.”

Keenan also points to the outright level of income currently available in the market.

“Today in the Enhanced Income Fund, we're talking about a 6.5% running yield, which is in some ways going to get better on a 12-month booking basis. So that’s pretty attractive.”

In the interview above, Keenan explains why he believes fixed income remains in a 'sweet spot' for investors, why Yarra is rotating toward fixed-rate securities, how the proposed CGT changes could reshape the relative appeal of income assets, where the fund is finding value across bank credit and AT1 issuance, and how the team navigated the volatility sparked by geopolitical tensions and widening credit spreads.

Interview summary

Fixed income’s moment is far from over

When Livewire last spoke to Keenan, he described fixed income and credit markets as being in the best shape he had seen in his career. Despite more RBA tightening, geopolitical volatility and market jitters, he has not changed his view.

“In some ways, it’s got better,” Keenan says.

His reasoning is straightforward. Yields remain elevated, investor demand for income is growing, and Australia still offers some of the most attractive base rates in developed markets.

Keenan also believes the Federal Government’s proposed capital gains tax changes could materially alter the competitive landscape between growth assets and income investments.

“For a long time now, equities or investing in growth capital has been tax advantaged by that discount,” he says.

“The gap, which was quite wide between fixed income and whether it be equities, property, or even in providing seed capital or venture capital, that gap’s closing after tax.”

For Keenan, that increasingly favours fixed income on a risk-adjusted basis.

Why Yarra is leaning into fixed rates

One of the more notable shifts inside the Yarra Enhanced Income Fund has been a growing preference for fixed-rate securities over floating-rate exposure.

Keenan believes the market has become too focused on the RBA and the possibility of additional rate hikes.

“What they forget is that the market always prices the expectation for the RBA,” he says.

While much of the market continues to favour floating-rate instruments, Yarra has been moving the other way.

“Maybe the time now is to actually lock that in and buy some really exciting fixed-rate opportunities,” Keenan says.

That contrarian positioning reflects Yarra’s broader macro view that the tightening cycle is likely near its peak and that the bigger issue over the next 12 to 18 months may not be inflation, but slowing growth.

“If our belief is that the cash rate is stopping at 4.35%, then you should be rotating into that fixed rate out of the floating rate,” he says.

The attraction is not simply headline yield, but duration of income certainty. By locking in higher rates today, Keenan says investors can secure sustainable income streams for longer.

Credit spreads, volatility and finding value

Like many fixed income managers, Yarra faced a more volatile backdrop earlier this year as geopolitical tensions triggered a risk-off move in markets and concerns emerged around private credit liquidity. Rather than panic, however, Keenan says the volatility created opportunity.

“If the market overreacts to something, in our view, we should adjust and start adding to that because you’re getting paid for the risk all of a sudden,” he says.

Keenan says the team has become more defensive where necessary, while selectively increasing exposure where spreads have widened enough to compensate investors appropriately.

Importantly, he believes investors should focus on total yield rather than spreads in isolation.

“You also have to think about the total yield and you cannot deny that Australia is in a really good situation at the moment where we have some of the highest base rates - government yields - in the whole G10 at the moment,” he says.

Staying investment grade as growth slows

Despite attractive headline yields in parts of the market, Yarra remains focused on maintaining investment-grade quality across the portfolio.

Keenan warns that investors can become overly focused on headline-running yields without properly understanding the sustainability of those returns.

“Running yield is only a really quick snapshot and things can change very, very quickly,” he says.

Instead, he encourages investors to focus on yield to maturity, duration and overall credit quality. If economic growth slows as expected, he believes maintaining discipline around credit risk will become increasingly important.

“We are not avoiding high yield, but we want to get paid for that risk,” Keenan says.

“I think that’s where, in a slowing economic environment, we need to be very careful where we’re investing.”

Where fresh money is going today

So where is Yarra deploying capital right now? For Keenan, the answer is relatively clear: fixed-rate Additional Tier 1 bank securities. Often referred to as hybrid bonds or capital notes, AT1 is a type of deeply subordinated, loss-absorbing bank capital. Sitting just above common equity, it helps banks maintain stability during financial stress, primarily by absorbing losses through cancelled coupons or conversion into equity.

“If I had one thing to invest in, I’d be buying fixed-rate AT1,” he says.

He points to yields approaching 7.5% for investment-grade securities as particularly compelling in the current market.

“That looks like close to equity-like returns for an investment-grade security,” he says.

While he stresses investors should not concentrate an entire portfolio in one area, he believes the current opportunity set in fixed income remains highly attractive for income-focused investors prepared to look beyond cash.

Managed Fund

Yarra Enhanced Income Fund

Australian Fixed Income

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