June 2022 – Market Commentary
The Fund delivered +0.55% in June, 6.15% over 12 months and 6.23% annualised since inception.
As we welcome a new financial year and reflect on the past, we are reminded of how quickly financial markets can change. In July last year, interest rates were at unprecedented lows of 0.1%, and RBA Governor Lowe was shaping expectations of no interest rate rises before 2024. As we have seen, the cash rate has risen three times since May this year, by a total of 1.25%. Numerous other developed countries have experienced substantial interest rate increases due to central bank intervention and face, in some cases, another 50 or even 75 basis point increases in the coming weeks. While the rate rises are headline grabbing, it’s worth remembering that they are being imposed because of unexpectedly high inflation, partially due to very strong economic activity as the world has emerged from COVID restrictions.
While we cannot predict the future, we can plan for possible future scenarios, and one is preparing for rising interest rates as outlined in our January 2022 client note. With this scenario now a reality, the portfolio is experiencing the benefits of this planning, with floating interest rate exposures rising by 0.98% and short-dated fixed-rate exposures being offered at rates 0.50% to 1% higher over the quarter. As a result, Fund level returns have lifted, as seen below.
The current environment is a sage reminder of the importance of considering both risk and returns when investing. We believe specific sectors have borne considerable risk to generate a high return which the prior period of ample economic stimulus and artificially low-interest rates hasn’t tested. Those same tailwinds do not apply going forward and further reinforce our view the tide may be turning on specific sectors, e.g. construction finance (which the Fund does not invest in).
More lately, we have seen the fallacy of pricing assets (such as bank stocks, utilities and infrastructure) as a bond proxy by simply discounting expected future cash flows at current rates without adequate consideration of the risks to both earnings and interest rates. One only needs to observe the price movement of the Big 4 banks, which are 15% lower than the prior quarter. Rather, a more detailed assessment of the risk profile is being once again valued.
The Fund is designed to be a defensive holding in an investor’s portfolio and therefore constructed by assessing how an asset might perform through the economic cycle and, therefore, whether it is eligible for inclusion within the Fund. This naturally constrains what we can invest in and creates an aversion to assets with an elevated or speculative risk profile. We believe the market will reward funds that generate good returns with a conservative risk profile instead of products offering high returns and associated high risk.
We remain vigilant of economic conditions and are closely watching key indicators which drive the fundamentals on which we invest. The performance of the underlying holdings remains strong. We continue to reassess the portfolio and outlook to act accordingly and take advantage of attractive opportunities.
Please note that we have changed our Fund Registry provider to Boardroom in response to increasing investor numbers and enhanced functionality that Boardroom offers, such as an investor portal.
Please reach out should you have any questions or want to discuss our thoughts on the current outlook in more detail.