July 2022 – Market Commentary
The Fund delivered +0.70% in July, 6.29% over 12 months and 6.27% annualised since inception.
The particularly strong return was attributable the higher RBA cash rate and associated interest rates paid on our investments, strong deployment levels and the higher than normal fees we were able to charge on transactions. We pass these upfront and establishment fees onto investors (unlike many of our peers) which is another way we differentiate our fund and deliver higher returns.
Central bank policy continues to attract widespread attention with markets fixated on inflation and, importantly, how effective monetary policy is in calming inflationary pressures. With the US being further advanced in its inflation correction process, it is now showing early signs of easing inflation. Investors may begin to feel the monetary policy effectiveness question is being answered and therefore a more optimistic outlook. While one could argue this, it’s important to remember that we remain in a transition stage where economies globally are finding new equilibrium levels, both in terms of their respective cash rates but also currency levels, fiscal policy and terms of trade. Finding new equilibriums is not unusual, although the range of these changes in many cases are.
As credit investors, we are not trying to pre-empt markets. Instead, we invest in high quality assets, which we believe, given a range of outcomes, will perform through the cycle and have ample defensive characteristics to deliver a smooth and consistent return. This means we are investing in shorter-dated investments where capital is being regularly returned on a 6 -18 month basis allowing us to continually reassess the risk profile of the economy and underlying investment.
As noted in prior communications, returns continue to lift alongside a higher RBA cash rate (as the fund is designed to do) and strong deployment levels.
Looking across different Australian loan markets, we are starting to see a greater divergence in fundamentals from the prior environment in which all sectors benefitted from government stimulus, rising property prices and robust employment. We are attentive to the need to manage the portfolio appropriately given higher interest rates and the pressure that may be placed on borrower serviceability and in finding suitable transactions. With our mandate allowing us to move away from sectors with weakening fundamentals towards those with strong fundamentals, this represents an opportunity when compared to peers who typically only focus on one market sector.
Thank you to our new investors, with the firm experiencing positive net inflows in each month this year.