September 2024
Investment Objective Investment Strategy Target Return Investment Highlights
Fund Rating
APIR ETL0072AU
Entry / Exit Price $1.0794/1.0784
Fund Size $52m
Liquidity Daily
Distributions Quarterly
Inception Date 31 May 2009
Income Distributions
FY25
JUN
SEP
Distribution (CPU)
1.01
1.27
FY24
JUN
SEP
DEC
MAR
Distribution (CPU)
1.01
1.06
1.68
1.19
FUND METRICS
Runnning Yield 6.09%
Average Yield to Maturity/Call 5.70%
Duration 0.80 years
Credit spread duration 2.81 years
Average credit spread 148 bp
Number of positions 55
Percentage floating rate assets 83.6%
Largest drawdown since inception 1.86%
Best monthly return 4.49%
Negative Total return in a calendar year 0/18
PERFORMANCE
1 MTH
1 YR
2 YRS
5YRS
SI
Distribution Return
1.27
5.15
3..24
3.05
4.16
Growth return
- 0.79
1.44
0.37
-0.21
2.08
Total net return
0.48
6.59
3.61
2.84
6.24
Benchmark
0.36
4.42
2.86
1.83
2.42
Active Return
0.12
2.17
0.75
1.01
3.82
Top 10 Securities
ANZ 34’29
4.89%
IAG 45'25
3.62%
4.66%
ANew York Life Funding
3.62%
Paccar 27
3.70%
Victoria Power Network
3.61%
Suncorp Metway 29
3.70%
Victoria Power Network
3.07%
Ausgrid
3.63%
ANZ Prep'30
2.76%
Platforms
AMG Super
Bell Direct
HUB24
netwealth
Ausmaq
CMC Stockbroking
mFund
Powerwrap
Australian Money Market
Freedom of Choice
Nabtrade
uXchange
Market Commentary
September marked the month when the US Federal Reserve eased cash rates by 50bp. September was a month where a number of central banks eased policy reflecting the work of the Federal Reserve.
Was the easing unexpected? No, the market had been calling for an easing in response to falling employment numbers. The inflation genie has not been fully tamed, however concerns over job creation and maintaining employment was the Fed’s imperative.
Was the easing necessary or was 50bp too much, only time will tell. The U.S. bond market has built in a number of rate cuts over 2025 but that view can rapidly change.
It appears as though the Fed is normalising rates as economic conditions are reasonably robust. A rate cut now will spur along growth and we will probably see the U.S. GDP grow somewhere in the high 2%’s./p>
As the reader can see from the graph below courtesy Torsten Slok Apollo Management, economic conditions are far from dire.
*Courtesy Apollo Management Torsten Slok The Daily Spark “ Goldilocks has arrived , but the story does not end here” September 28 2024.
Portfolio Management
Market volatility continued throughout September. Markets sought guidance from the Federal Reserve to determine just how far the Federal Reserve was gong to ease rates.
One could be persuaded that the Fed was bullied into the rate cut of 50bp. The vote on the rate cut was unusual in that there was dissent when in most instances the vote is unanimous. There was a dissenter with that person voting for a cut of 25bp. That person's view was such that they were concerned that a rate cut of 50bp could over-stimulate the economy leading to inflation returning.
The bottom line is that perhaps a cut of 50bp was not required. The other way to view the cut and one can have some sympathy in the view is that the cut was a nomalisation of rates.
The context of normalisation is unusual. In most circumstances a cut occurs when the economy needs some assistance. When the Federal Reserve cuts to normalise when economic conditions are robust and that is state of the current U.S. economy. Whilst concerns over jobs remain, it may be that with technology the pareto level for employment may be transitioning.
The net result has been initially a rally in bond yields, however that rally has slowed and looks to have overreached. Equities look sound, corporate reporting is solid, so what is there to fear? Equities for the moment look set for a reasonable growth period and credit should follow suit. This view appears to hold for many developed economies.
Australia is in a slightly different position. Our economy is skewed towards the prevailing economic undercurrent in China and our building industry. Inflation has become a bugbear for the RBA so unlike many of its counterparts it is unwilling to ease. The RBA wants to see inflation fall before easing and this is becoming more unlikely with the turmoil in the Middle East. An easing now seems more likely in the first quarter 2025.
Over the month credit saw spreads widen until recently. In aggregate spreads moved about 4-10 bp wider over the month. This provided opportunities.
During the month, fixed rate securities had a very strong rally which seemed consistent with the rally in the U.S. The fixed rate holdings were cut by half (7% in total), whilst the Manager looked to introduce some more beta into the portfolio. The current portfolio credit weighting is now A- versus single A in the previous month.
The decrease in fixed rate holdings allowed the investments in several interesting issues, which have since performed strongly.
Investments were made in the new ANZ perpetual’30. This issue which is not AT1 nor can it be classified explicitly as T2 appeared to be issued as result of APRA’s recent changes to capital.
APRA’s changes mean that AT1 securities or the listed bank hybrids will be phased over the next few years. As bank hybrids call dates occur, these securities will be called and will not be replaced. The majors s will need to replace AT1 with more CET1 capital and Bank Tier2. The extra issuance is roughly another $6b or so for the majors including Macquarie Bank and both domestic and international markets will be able to handle the extra issuance.
The Fund invested in the new QBE Tier 2, which is taking advantage of the new capital requirements that S&P require. Scentre Group issued a hybrid in the public market, this is to the authors knowledge the first hybrid issue in the public markets as opposed to listing on the ASX.
Credit is expected to perform and especially if indeed rates are being normalised. Demand for credit remains strong. Looking to international markets, one canary is the high yield has seen some strong market contraction over the past month and this bodes well for equity markets and in turn is positive for credit.
Over the month we saw the ratio of senior to sub widen back to 2.06 before settling around 2-1.98 times the spread.
In general spreads widened before compressing later in the month. The portfolio captured some of this movement.
Cash remains around 2%, the weighting in fixed rate securities has been halved. Duration has increased marginally as we have extended duration through some purchases. The average coupon has increased 30bp and running yield has also increased similarly. The yield to maturity is 5.7% which is best explained as the Fund has some reasonable capital gains across a number of securities.
The portfolio over the month returned 0.5% and the rolling year on year was 6.6%. The average credit spread is 148bp and with time this spread should increase further.
Liquidity as always remains important. The portfolio remains very liquid with all securities marked to market daily and with over 90% of the portfolio actively traded via the screens.
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