August 2023 – Market Commentary

The Fund delivered +0.75% in August, 9.10% over 12 months and 6.67% annualised since inception, continuing to deliver over 5% net return above the RBA cash rate.


Since May 2022 when the RBA started increasing Australia’s cash rate to slow the economy and its uncomfortably high inflation, there has been little evidence of that higher cash rate’s impact. For example, retail sales remained robust, growing each month throughout 2022. We are now witnessing the lagged impact of that policy, which is reassuring as it indicates the RBA cash rate may be high enough and no more pressure needs to be added to household or corporate balance sheets by way of further cash rate increases. While reassuring, it’s also important to note from a relative perspective, a 4% increase since May 2022 in the RBA cash rate is substantial, and it could even be argued, more impactful given its prior low 0.1% base that it came off.

From a fixed income investor perspective, we are watching for signs of stress both in the economy (i.e. changes in the unemployment rate, corporate insolvencies, house prices and alike) and in fixed income assets. Currently, the most vulnerable assets where we believe stress will be seen first are those with meagre protections, such as business loans not secured by a hard asset such as a property or vehicle or, large loans compared to the size of the borrower. Large loans for a variety of reasons have proven to be more problematic and it is why, bankers globally watch loans size carefully.  Large loans can be even more problematic when they are not supported by a borrower that has regular annuity style income streams to meet regular repayments. For example, a large loan that capitalises interest throughout the term and relies upon a future intended event to pay the loan off. These transactions contain significant ‘event risk’ and make it difficult to detect a deterioration in credit quality before the final repayment is due.

As we assess the outlook for Australian fixed income and credit markets, we are keenly watching lenders who allow large loans, particularly where borrowers have limited regular business revenues to make regular repayments. Such a dynamic is commonplace within construction finance, where you are lending to a developer who often has large net cash outgoings during the construction phase and primarily relies upon the project going according to plan, the apartments or properties selling in a short period and selling at a high enough price to recover the full loan amount. Such an asset has material inherit risk, which is why the Manning Monthly Income Fund has no construction finance assets. It should also be noted, that large loans are also more impactful to an investor. For example, a loan defaulting in a portfolio of 20 loans can have a 10 times larger impact than a portfolio of 200, and so on.

Therefore, assessing the number of loans and the largest loan of one’s portfolio is a good barometer of risk and why Manning Asset Management prioritises avoiding large loans and investing in a diversified fashion.

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