March 2023 – Market Commentary
The Fund delivered +0.75% in March, 8.09% over 12 months and 6.49% annualised since inception.
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.
Over the past month, news headlines have reported on the challenges faced by US and European banks. While the media has focused on corporate missteps, we are interested in how loans have performed individually and when compared to broader markets. As a fixed-income investor, our main focus is on investments secured by underlying loans. Therefore, our first line of defence that protects our capital and investment return isn’t the institution as it is with equity, equity-like and corporate loan investments, but rather the performance of the underlying loans which continue in many of these cases to perform strongly.
We haven’t seen the same missteps locally given the very different construct of our banking/financial system and regulatory oversight. However, we are starting to see some key risk measures increase. Risk metrics such as personal insolvencies, loan arrears and defaults have fallen sharply below long-term averages since 2020 when consumer spending slowed and stimulus measures increased. This wasn’t a new norm but rather a point-in-time dynamic that we are now seeing fade with these measures moving towards longer-term averages. While such an increase can be sensationalised, it has been our long-held view that this would occur, and thus investment decisions have been assessed on higher stress rates. For instance, personal insolvencies in Australia are projected to increase, but even the Australian Governments upper bound projection of 35,000 in FY 30 June 2024 is not particularly elevated compared to longer-term averages, with an expected forecast of 25,000.
The observation that key risk measures are increasing is leading some to believe that interest rates have peaked locally, suggesting now is the time to add duration (buy longer-term bonds) to your portfolio. The basis being a recent downbeat consumption, inflation reading, and issues abroad reduce central banks’ ability to lift rates further. One could also argue interest rates might trend higher by examining longer-term data and that inflation remains above the RBA’s target. Selecting the right one will see positive fixed-income returns. Selecting the wrong shall likely see negative returns. Our preferred approach is to remain short-duration or select shorter investments focusing on finding assets that generate an attractive return with capital protections rather than trying to correctly forecast an inherently unknown interest rate path to deliver a positive return.