April 2024 – Market Commentary
The Fund delivered +0.86% in April, 9.57% over 12 months and 6.91% annualised since inception (April 2016), continuing to deliver over 5% net return above the RBA cash rate.
We are pleased to report the Fund’s portfolio of assets continues to perform strongly, and we believe, is well-positioned to continue delivering strong income returns with capital stability. Despite the Fund’s higher expected returns, our approach to risk management remains unchanged.
Monetary Policy and global cash rates once again dominate mainstream media, with no shortage of market commentators voicing their perspective. As discussed in our article ‘Arrears rising, should credit investors be concerned?’ published mid-March, we outlined the ‘two-way’ risk within the RBA cash rate setting: the chance that the RBA cash rate could rise further. More commentators now subscribe to this view, moving away from the near-unanimous belief that rates will be imminently cut, citing a material possibility that interest rates could rise further.
Investors are keen observers of interest rate settings and likely changes, given their impact on asset prices such as shares and bonds. As short-duration investors, we are not relying on correctly picking interest rate movements to drive our returns, instead, we focus on what these changes mean for the health of the Australian economy, i.e., what they say about the bigger macroeconomic picture and its implications for the Fund.
In the previously mentioned article, we explained that factors like low unemployment, low productivity growth, and high wage growth contribute to inflation over time. These slow-moving drivers of inflation take time to appear in inflation data and eventually subside. As a result, we believe the RBA cash rate will remain elevated for some time and financial challenges to continue. In other words, households and businesses experiencing financial stress now have a long road ahead before economic conditions improve.
From a credit investor perspective, given this outlook, higher quality loans and counterparties in non-cyclical areas must be favoured over assets that offer marginally higher yields. We acknowledge that further incremental yield may be left on the table by not taking such risks, although, on a risk-adjusted basis, such decisions are prudent and consistent with our strong focus on capital preservation and unblemished 8-year credit history. As readers will be aware, the bedrock of the Fund’s investment strategy has always been to find and invest in assets that we believe will perform through the cycle. By maintaining portfolio discipline and quality, should conditions deteriorate further, an investor in the Fund is better placed to maximise the ‘through the cycle’ return potential of the asset class.
We are pleased to report a strong pipeline of new assets being considered for the Fund, with mortgages and, to a lesser extent, business loans being our preferred areas, given their powerful capital protection features. Consumer loans are less favoured.
