August 2022 – Market Commentary

The Fund delivered +0.63% in August, 6.39% over 12 months and 6.29% annualised since inception.

We are frequently asked about our views on the RBA cash rate and its likely trajectory, given its impact on asset values across almost every asset class. In recent months some market participants have taken the view that after an initial sharp rise in interest rates this trajectory will partially reverse as the RBA realises the impact has been more contractionary on the economy than expected. However, the current market view is clearly that rates will continue to rise into next year, peaking around 3.5% where they will stay in the medium term. The implications of this are clear. Assets that have suffered steep declines in their value due to recent and continuing rate hikes (e.g. equities, long dated or duration bonds) are not expected to recover quickly. While the higher expected cash rate is bad news for market speculators hoping for a sharp reversal in asset prices, its good news for those investors seeking income (particularly those that maintained their capital base) who now enjoy a higher expected income stream from their investments.

From a Fund context, the higher RBA cash rate continues to push our returns higher, in many cases, on the same underlying holding; we do not need to sell and buy a higher expected return asset. Instead, the rate of income we are paid is related to the RBA cash rate rises. As outlined in prior performance updates, we are mindful of the impact that higher interest rates are having on the investment environment more widely and the risk profile of different assets we consider. A dominant theme over the prior year has been a shift to more secured investments where our capital benefits from being secured by a physical asset (in addition to a variety of other structural protections embedded in the asset purchase) that can be recovered to repay capital. Today, well over 90% of the Fund is secured in this way.

We welcome the higher RBA cash rate lifting the Fund’s target return to 7.35% net of fees, delivering an attractive rate of return to our investors.

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