June 2023 – Market Commentary
The Fund delivered +0.72% in June, 8.88% over 12 months and 6.60% annualised since inception, continuing to deliver over 5% net return above the RBA cash rate.
The Fund delivered 0.72% in June being in line with its monthly return target. Investors will note that returns move monthly as investment maturities occur and new investments come online, impacting cash held by the Fund. During the period, we have identified several opportunities in the late stages of due diligence, although settlement has been delayed seeing the Fund hold additional cash. We are comfortable holding this cash given the attractiveness of the transactions underway.
Throughout the month, we have engaged with multiple advisory and institutional clients who share a common interest in our views on the economic outlook and how we manage risk accordingly. A key pillar of our investment process is picking the right assets to perform through the economic cycle and structuring them correctly.
Structuring refers to the contractual obligations we put in place to control risk, and if those risk limits exceed our tolerance, they give rise to certain rights. By way of a simplified example, Manning will determine what level of arrears we are willing to tolerate when investing in a pool of underlying assets. The counterparty seeking finance must ensure those arrears levels are not exceeded. If these set levels are breached due to counterparty-specific or industry-wide issues, Manning would typically have a right to require that counterparty to repurchase some or all of those assets in arrears, or the facility would need to be closed and paid down. As closing the facility would be detrimental to that counterparty, they are highly incentivised to ensure those limits are not breached initially and, if they are, are quickly resolved before we exercise such contractual rights.
Given this approach, when structuring transactions upfront, we consider how that facility would be paid down should that counterparty not adhere to our pre-agreed risk limits. Importantly, we focus on ‘asset-backed’ transactions in that our financing is secured against assets that are of value and can be recovered to repay some or all of our capital. Therefore, a request to have our facility repaid can either occur through being refinanced or allowing those underlying assets, which are being regularly repaid, to repay our financed amount.
We have had counterparties who have breached our risk limits, and we have had to exercise our rights which has always led to 100% of capital being returned due to the sensible, legally enforceable contractual obligations within our agreement. This approach has ensured the Fund has never had a negative month from credit losses in its 7+ year track record while investing through a variety of market cycles and economic conditions.
We remain vigilant of the outlook and are pleased to say all counterparties are operating within risk limits, and we do not see an elevated risk profile in the portfolio.
