March 2024 – Market Commentary
The Fund delivered +0.74% in March, 9.49% over 12 months and 6.87% annualised since inception (April 2016), continuing to deliver over 5% net return above the RBA cash rate.
Past performance is not necessarily indicative of future performance. Returns are net of fees, excluding tax, and assume reinvestment of all distributions. Returns greater than one year are annualised. Inception: April 2016.
As we conclude Q1, Founder and Portfolio Manager Josh Manning summarises key themes discussed with clients throughout the quarter as below.
Portfolio Performance Review
Over the past 12 months, the fund has delivered a return of over 9.49% net of fees, with approximately 9% of that being delivered as an income-based return to our investors on a monthly basis. This performance is consistent with the return objective and philosophy of the fund. On a monthly basis, these returns have been in a very tight range from 70 to 80 basis points. We have stayed true to our label in delivering consistently over an 8-year period on our RBA cash rate, plus 5% net of fees return objective. Taking a longer-term perspective, we have exceeded that return objective by approximately 50 basis points across all time periods. This performance demonstrates our commitment to managing the risk profile in a range of economic scenarios.
Our investment model is centered around asset-backed securities or asset-backed financing. Manning provide finance to non-bank lenders in the Australian market, which is secured by a range of underlying assets that support our capital. In the event of a downturn, these assets can be used to repay our capital and interest. Over the past few years, we have focused on increasing asset security at the underlying level. This means we are seeing particularly attractive risk adjusted returns and are predominantly focused on mortgages, typically residential and in some cases, commercial. If the wholesale pool of many underlying loans fails to perform, those underlying loans are supported by a relatively low LVR property that can be sold to repay our capital. Through these security measures, we have consistently delivered on our return objective and, over the Fund’s 8 year track record, never had a negative return from credit losses.
Market Update
From a market update perspective, the Australian economy has surpassed its peak and is now in contraction territory, characterised by rising unemployment, a loosening bias by central banks, and weak business conditions. This is similar to what we are seeing in the US, UK, Europe, and China. In this environment, our focus is specifically on credit risk. We are less concerned about interest rate risk but are firmly focused on asset backing and the security of those underlying loans.
A key macroeconomic metric we have been watching and continue to watch closely is the household balance sheet. We believe this is an area where stress will be felt throughout 2024, as evidenced by the household savings ratio, which historically peaked at around 20% and is now approaching zero.
Risk Management
The DNA of our firm is firmly centered around risk management. If there was one attribute investors need to demand from their investment manager, it’s very good skills in this regard. When we talk about risk management, we’re talking about it in many ways. It’s both how we look at transactions that come across the desk, how we assess them, how we engage with different counterparties to really understand deeply their business and the assets we are financing. We endeavourer to develop a deep personal relationship with our counterparties which gives us priority access to the underlying information and allows us the ability to intimately understand the risks within each individual transaction.
Investment Outlook
The investment outlook will continue to have a number of known and unknown risks. As a fund manager, it’s our role to identify and manage those within the asset class. We continue to have a bias towards proven sectors of the Australian credit markets which have long track records. We note the emergence of a range of new credit funds in the Australian market that typically have a shorter track record and less experienced investment teams that may not have a track record in managing credit portfolios through varying market conditions.
We continue to ask for non-negotiable, proven risk management protections. For example, investing in sectors that do perform through the economic cycle and really avoiding those where we do think there is significant embedded risk. Examples of those could include corporate loans where there isn’t a secure underlying asset that’s protecting that loan or construction finance where there is significant project risk and the ‘as is’ and ‘completed’ valuations of those properties can be extremely high. Our focus remains also on diversifying broadly and seeking suitable protections in our legally documented financing warehouses that provides us certain rights should the portfolio or broader market deteriorate. Manning has a range of very seasoned investment professionals that have over a hundred collective years of experience in this asset class. We believe this is a key market advantage not just in delivering investors market leading risk adjusted returns, but also in protecting investor capital on the downside.
