News and Insights

Josh Manning, Portfolio Manager and Founder presents the Q1 2024 market update for Manning Asset Management.

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.

With Australia’s population forecasted to reach over 29 million by 2030, driven by net migration of around 500,000 per year, the demand for new housing is at record highs. The Australian Government announced in August 2023 a target of 60,000 new dwellings per quarter for the next 5 years, well above the long run average of 39,000 per quarter. It is unsurprising that we are seeing an increase in demand for construction finance and an increasing concentration of construction loans within private credit fund portfolios. What is less understood, is how much risk is this adding to an investor’s portfolio? And what amount of additional return justifies this risk? To answer this, we need to understand the nature of construction finance and consider the risks of this type of lending in the context of the Australian market.

Understanding Construction Loan Dynamics

Put simply, a construction loan is a type of financing used for the purpose of building new residential / commercial structures or extensive renovations. These loans cover various costs associated with construction, including land purchase, materials, labour costs and other project-related expenses. The terms of construction loans can vary but terms are typically less than 24 months. The amount advanced by the lender is typically based on the expected completed valuation of the project. For example, a residential property may be purchased for $1,000,000 in its current state by a developer who has plans to knock down and replace the existing property with townhouses with a total completed valuation of $2,000,000. If a lender advances 70% against the final valuation, i.e. $1,400,000, there may be a period through the construction phase where the value of the loan is greater than the value of the property it its current form. Should a borrower default occur in this stage, the lender, and hence the credit investor, may experience a loss of capital.

The Risk of Uncontrolled Variables

We see several key risks that contribute to the possibility of a loss investor capital:

1. Uncertainty of Economic Conditions: The economic environment at the start of the project is different from the environment in which the completed project may be sold. This increases the likelihood that the true completed value deviates from the original valuation.

2. Material and Labour Costs: We have seen rising interest rates, increasing labour and raw material costs, all of which can significantly reduce the profitability of a project, eroding the borrower’s equity and increasing the potential loss of investor capital. Additionally, there is the risk of defects either during or after the construction period that result in costly remediation before an Occupancy Certificate can be issued.

3. Delays: Construction delays can occur for several reasons, including material availability, skilled staff shortages, builder solvency, weather and disputes between the developer and builder or the builder and sub-contractor. Delays can materially increase the cost (e.g. labour and interest on the construction loan) and reduce the economic viability of the project.

4. Financing Risk: If the construction project is not finished within the loan term or fails to achieve the specified milestones, there is a possibility that financing expenses will rise or lines of credit may be revoked, affecting the project’s completion.

5. Regulatory Change: Projects may be modified or cancelled because of changes to building requirements or zoning rules. This can significantly impact the final project valuation and expose credit investors to capital losses.

Whilst the lender has the protection of the loan to value ratio and progressively drawdown funds as the construction project moves through the various stages, there is no getting around the fact that these risks exist and are beyond the control of the lender and credit investors.

This poses the questions, ‘if construction lending is riskier, why aren’t we seeing more issues in Australian credit portfolios?’ For the better part of the last decade (with the exclusion of COVID, where banks provided mortgage payment holidays and the Government released unprecedented stimulus into the economy), the Australian property market has largely experienced what would be considered “good times”. Borrowers have experienced extended periods of record low interest rates; we have seen arrears rates at all-time lows and a surge in asset values. When times are good and assets are performing well, it is easy to lose sight of the risk-adjusted return of a fixed income portfolio, with the primary focus turning towards the headline return figure.

A Historical Perspective

With the last financial crisis over a decade in the rear-view mirror, and the ‘fading affect bias’ enabling us to forget the “bad times”, it is important to remind ourselves where pockets of pain were felt in recent Australian history, reflect on the risk within our credit portfolios, and evaluate if we are being compensated for this risk. In the wake of the GFC, whilst Australia got through better than most developed nations, Suncorp Metway provides a great insight into a credit ‘pain pocket’. In June 2012, 53.9% of the loans within Suncorp Metway’s $2.35bn Construction & Development Loan Advances book were impaired, i.e. assets that are no longer worth what they are listed at on the balance sheet and expected to incur some loss of capital. This increased from 2.3% 5 years prior. In 2012 the Construction & Development Loan Advances book comprised only 4.7% of the total Gross Credit Risk exposure but accounted for 60.5% of total impaired assets. For context, the Real Estate Mortgage Loan Advances book impaired assets peaked at 0.1% in 2009 and Total Gross Assets saw an impaired asset peak of 4.8% in June 2011.

More recently, an eye watering 2,400+ construction companies in Australia entered administration between since July 2021. To put this in perspective, this means that construction company defaults comprise nearly 27% of all company defaults in Australia since July 2021. This data, sourced from ASIC in March 2024, paints a vivid picture of the challenges faced by the construction industry.

What Risk Premium is Fair?

All of this is not to suggest there is no place for construction finance in the Australian market. In fact, government policy and population forecasts dictate that it is necessary. The question we need to ask ourselves is, what extra rate of return should we be expecting in a credit portfolio for taking on construction risk? Based on history in the Australian market and the current headwinds in the construction industry, we would argue an extra 1-2% (versus returns of diversified credit funds, such as the Manning Monthly Income Fund) does not hit the mark on a risk adjusted basis.

Co-authored by Samuel Evans – Senior Investment Analyst at Manning Asset Management

The proliferation of fixed income and credit options within Australia over the last 2-3 years has been immense. With higher cash rates and volatility of other asset classes, this has been a welcome development. But can their remarkably strong returns continue, particularly as arrears rise within the major bank portfolios and the employment market alongside the broader economy softens? This article attempts to translate this broad question into something more specific and actionable for those who invest in Australian credit.

Three primary ways credit investors can lose money:

(Other risks, such as reinvestment risk and liquidity risk are prevalent, although less salient, in today’s environment.)

• Default risk: this is the risk that the borrower will be unable to make the required payments on their debt, leading to a default. When a borrower defaults on a loan or bond, the investor may not receive the interest payments or principal repayment they were expecting, leading to a loss.
• Interest rate risk: this occurs when the interest rates in the market rise after an investor has purchased a fixed-rate debt security. The value/price of fixed-rate securities falls when interest rates rise and the longer the maturity date, the greater the volatility.
• Credit rating risk: an unforeseen event occurs, decreasing the creditworthiness of the counterparty and causing the value of the bond to fall.

When thinking about each, it is crucial to consider both the probability and the potential severity of a particular risk or outcome. In the most extreme scenarios, where the investment result is binary—either success or failure—I crudely refer to these as “red or black” transactions. Red investors get their return and, in some cases, believe it was a wise investment. Black, the investor loses their money. If your potential upside is the espoused interest rate or yield to maturity (call it 5 – 15%) and the downside is 100% loss of capital, red/black investment propositions are an easy no. Providing an investor can understand how bad it could get and then what the upside and downide is considering the likelihood of each with little cause for concern, prima facie, it’s worth a deeper look.

Default risk: An influential factor on investment terms

Default risk plays an influential role in determining the terms on offer for a proposed investment. Some fund managers solely trade the changes in such perception, given its influence on the asset’s price. In my view, everything has a risk of default, so investors need to understand what that risk is and how that could change on a relative basis, thereby impacting the asset’s price. One could ask, what would need to go wrong before this counterparty is at risk of default? Mapping such scenarios out, assessing probability and then asking how bad each scenario could get provides a good sense of default risk. As a word of caution, I don’t subscribe to the view that ‘we have never had a problem with such borrowers’ or ‘we have never lost money’ as the gold standard in this space. I say this as some offerings in Australia have short track records (under five years). Over that time, asset prices have primarily risen, meaning assets used as security are often sold at a very healthy price, and broader economic conditions have been far more accommodating than investors should assume going forward. A more rigorous assessment, as suggested above, is that standard.

Interest rate risk: The two way bet

I recently wrote about interest rate risk (sometimes referred to as duration risk) and the careful use of it given how it is used within one’s portfolio. (See 4 potholes fixed income investors need to avoid in 2024). While many believe interest rates locally shall fall, it’s important to note that inflation, for the prior two years, has remained uncomfortably above the RBA’S 2-3% Consumer Price Index target, risking a high inflation psychology being embedded. Unit Labour Costs Growth sits at circa 7% with low and on some measures, negative labour productivity, which creates a two-way risk for Australia’s significant service-based economy (chance rates could rise or fall), particularly with the RBA having very little appetite for a surprise in inflation readings. Additionally, Australia’s peak cash rate has been lower than other advanced economies reducing any urgency in moving lower. In short, taking interest rate risk is not a free lunch with two-way risk (of duration adding or subtracting from returns) and must be carefully considered.

Credit risk: Often overlooked and unpredictable

Credit rating risk is an area most investors overlook. Ask any experienced stockbroker in Australia for examples of strong-performing companies that one day misstep and come under significant financial stress. You can expect a long list to follow. We also see transactions in the market that arise due to a ‘market opportunity’ that requires debt finance. Given the difficult-to-predict nature of events (M&A activity, regulatory or legal change, economic downturn, natural disaster, cyber-attack, key personnel etc) that lead to a reduction in a bonds credit rating, assessing how bad it could get is equally difficult. Having said that, certain counterparties are more susceptible to such event, such as those with less consistent access to capital (low internal capital reserves, volatile earnings with high fixed costs, lack of stable bank credit lines or, at worst, unprofitable) or parties who undertake project-based endeavours which are far more susceptible to negative developments. As an investor, you can either actively avoid such event-natured counterparties and/or diversify your portfolio to minimise the impact that any event risk would have on it.

Arrears: How bad are they?

Arrears locally have risen of late off what have been astonishing low levels. For example, in late 2022, after the RBA started hiking interest rates, 90+ day Prime mortgage arrears (borrower three months or more behind in mortgage repayments) fell to circa 0.3%, approximately half their decade average. At December 2023 end, they finished at 0.4%, which is a significant circa 25% increase yet below long-term averages. If we consider arrears for both Prime (high-quality borrowers) and Non-conforming (often less high quality), arrears are above medium-term averages yet below prior highs. With Rating Agencies expecting arrears to peak in 2024, expect to hear more commentators jump at the chance to show the significant relative increases in arrears, which should only be considered taking a longer-term perspective (not month-to-month).

So, are arrears good or bad for a credit investor? Intuitively, rising arrears can increase the above risks for investors, increasing default risk, interest rate/duration risk, credit spreads, and events that lead to credit rating downgrades. Counterintuitively, the perceptions of this will drive better investment terms in new deals to attract investors and, therefore, can be the most attractive assets. In our experience, the superior terms offered on new transactions with a less rosy outlook, and assuming one is sensible in the areas they invest and risk is taken on, often more than compensate for the feared risk. In essence, we relish the current environment with far less room for downside surprises.

The Fund delivered +0.70% in February, 9.51% over 12 months and 6.84% annualised since inception (April 2016), continuing to deliver over 5% net return above the RBA cash rate.

The Fund carried a higher than normal cash holding last month as we declined to participate in a transaction towards the end of the due diligence process. We spent many months structuring this transaction only to find out late stage that one of the risk mitigants we sought was not granted, therefore we made the difficult decision to withdraw. However, we believe this is in investors long term best interests and consistent with our investment philosophy: capital preservation is the first priority of the Fund.

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 interest in fixed income investments and private credit continues to surge, the market is witnessing a parallel growth in the number of new fund managers looking to ‘make hay while the sun is shining’. This development has led to a common question from both potential and existing investors: what distinguishes Manning Asset Management in this increasingly competitive landscape?‍

This month we wanted to touch on three of these key differentiators.

1. 8 year track record of delivering a strong and consistent income stream to investors

For the past eight years, the Manning Monthly Income Fund has consistently achieved its target return of RBA cash rate +5%, net of fees. Year after year, this performance demonstrates the Fund’s ability to deliver strong and consistent returns in the form of a monthly cash income stream, while maintaining an acute focus on capital preservation. We are pleased to be entering our ninth year of the strategy and endeavour to continue the Fund’s track record of never having a negative monthly return from credit losses.

2. Skin in the game and alignment of incentives

The Manning team is not just a Fund manager but also a substantial investor in the Fund, investing alongside our clients on the same terms. This shared risk aligns our commitment to capital stability and our careful selection of investment opportunities that we believe will perform throughout the economic cycle. We also ensure that all fees, interest, and other related benefits are passed directly to investors. We reject the practice of retaining establishment or upfront fees or other such payments made when investing in a new transaction. This approach removes any potential conflict of interest, allowing us to focus solely on safeguarding investor interests and investing in transactions that best fit the fund’s risk-return profile.

3. Diversification

A key component of our investment strategy is diversification. We ensure that investor capital is not overly concentrated in any one sector or individual loan. The Fund invests in a significant number of underlying loans (19,323 as at 29 February 2024), thereby reducing the risk of unforeseen economic events having a material impact on the Fund. The Fund’s largest single asset currently accounts for 1.72% of the Fund. This approach mitigates concentration risk and ensures that issues with individual loans do not negatively impact investor outcomes.

As a testament to delivering on our stated investment objective, 90% of our investors from 5 years ago remain in the Funds today, and circa 93% of all investors remain invested today.

As we move through Q1 of 2024, many of our clients are eager to understand our views on what this year may hold for the Fund and how we are positioning the portfolio. Foundationally, one needs to understand how we invest capital being bedded within an appreciation for why investors have invested with us over the prior 8 years. That being a desire for strong and consistent returns delivered as a monthly income stream and an acute focus on capital preservation. While the asset class freely delivers income via regular coupons, our primary efforts focus on capital preservation.

Long-time investors will observe our active management (see the below chart) by moving in and out of Australian credit sectors such as mortgages and consumer and business loans, navigating the portfolio away from areas where the risk profile is building or as significant opportunities present elsewhere. We deliberately avoid areas that we believe shall not perform through the cycle, such as construction finance, rather favouring assets that would be attractive to a wide variety of potential buyers in the unlikely event of the asset not performing. We are constantly evolving our approach, although the overarching principles remain unchanged and, over 8 years, have resulted in no negative months from credit/loss of capital.

Continuing our ethos of being a ‘through-the-cycle’ manager and Fund, we have little doubt that 2024 will contain isolated pockets of weakness within sectors and industries, which, in many cases, have been building for some time, and these are areas the Fund looks to avoid. Examining the Fund’s holdings, the portfolio is offering our investors historically elevated returns, and we are pleased to say the Fund isn’t currently displaying any areas of weakness.

We look forward to working on behalf of our clients in 2024 and delivering another year of strong and consistent income-based returns.

Successful investing is as much about avoiding losers as picking winners, which means dodging the following pitfalls is a good start.

The secret to successful investing in the fixed income and credit markets is simply avoiding the issues or potholes. While we freely admit that 90% of the time, we are jumping at shadows (perceived risks) that turn out to be risks offset by other factors, we believe this approach remains prudent given how costly that 10% can be to our investors, particularly those looking to the asset class for income and capital stability.

In the following wire, I identify some of the key things fixed-income investors should watch out for. The first of these revolves around some mistakes I made early in my investment career, which have since sharpened my focus.

Pothole 1: No skin in the game

Alignment of incentives is crucial – put another way, be wary of those offering investment deals if they don’t have skin in the game. This is my top investment consideration, at least partly because this Principal-Agent problem was core to some of my investment blunders in my earlier years.

In short, if a firm that offers me an opportunity has a strong reputation in the market, is incentivised primarily by how the investment performs (i.e. fees), and the person pitching it to me is personally invested in equivalent or more subordinated terms, I’m more inclined to listen.

On the other hand, I avoid those who don’t have much at stake by way of reputation, economics, or “hurt money”. A simple question, ‘Why is that person pitching me this investment?’ can lead to the most profound and informative insights.

Pothole 2: Large loans

We’ve spent decades managing multi-billion dollar loan books on behalf of Australian and international banks, having seen both the good and not-so-good times. But a common theme throughout is the avoidance of large loans, with loan size considered relative to the borrower’s size, credit rating, financial position and other factors. However, it ranges anywhere from a consumer loan that exceeds $100,000 to a property-backed loan exceeding $10 million.

Large loans are riskier because they typically require a refinancing event, unlike smaller loans, which can often fully amortise down to $0.

They also fit the credit appetite of an increasingly small group of lenders as they get larger (minimising the parties who will refinance them). In our experience, avoiding large loans and investing in a diversified portfolio can materially de-risk one’s portfolio, maximising return potential.

Pothole 3: Highly leveraged counterparties/borrowers

Thanks to a higher RBA cash rate and credit spreads, the borrowing cost has almost doubled compared to two years ago. Despite this, we haven’t seen a material reduction in the use of debt funding. This begs the question – why?

Understanding why and, importantly, what forms of debt those counterparties and borrowers have becomes crucial to avoid adverse selection. That is, capital going to those with the most acute borrowing needs who are in the most acute predicament (aka, poor quality credits). For example, certain borrowers have high borrowing requirements given their sector, business model or funding (cheap) access that justifies higher leverage.

Others with a lower capital base, who can only access more expensive debt, are less justified and symbolic of the borrower’s financial position.

Alternatively, investors could avoid highly indebted counterparties and borrowers who use expensive unsecured or short-term borrowings to maximise the chance of positive selection/financing of the best credits.

Pothole 4: Duration isn’t a free lunch

Over the prior 18 months, investors commonly ask us whether we believe Australia’s cash rate has peaked. This is commonly used as a gauge of whether or not to add duration to a portfolio.

I believe actively managing duration can add alpha to portfolios, so it’s a worthy pursuit. But the additional risk this can add is often overlooked. Depending on the investor, this additional risk may be acceptable. But we commonly find that risk is being taken by a sleeve of one’s portfolio that is viewed as low risk, anchoring absolute returns, and offering diversification.

Adding duration over the prior three years has seen investors lose around 10% of their portfolio’s balance, a significant loss of capital. When adjusted for the opportunity cost, that money could have been invested in a short-duration portfolio (which has for the most part printed very healthy returns). Duration is no free lunch.

An important role to play

Using the above guide and asking salient questions can provide a rich sense of whether your holdings are well-positioned for 2024. Should investors avoid the issues, it’s hard to argue that credit/fixed income that can offer expected returns of up to 10% per annum doesn’t have an important role to play in 2024.

The Fund delivered +0.80% in December, 9.43% over 12 months and 6.79% annualised since inception (April 2016), continuing to deliver over 5% net return above the RBA cash rate.

There are several Fund features that are important to investors, two key elements include the significant number of underlying loans within the portfolio (circa 15,000+ as at 31 December 2023) and diversification that this achieves, plus how we pick the right assets to perform through the economic cycle and structure them correctly. Both these foundational pillars have delivered consistent investor returns since the inception of the Fund in April 2016.

Structuring refers to the contractual obligations we put in place to control risk, and if those risk limits exceed our tolerance, they give rise to certain rights. By way of a simplified example, Manning will determine what level of arrears we are willing to tolerate when investing in a pool of underlying assets. The counterparty seeking finance must ensure those arrears levels are not exceeded. If these set levels are breached due to counterparty-specific or industry-wide issues, Manning would typically have a right to require that counterparty to repurchase some or all of those assets in arrears, or the facility would need to be closed and paid down. As closing the facility would be detrimental to that counterparty, they are highly incentivised to ensure those limits are not breached initially and, if they are, are quickly resolved before we exercise such contractual rights.

Given this approach, when structuring transactions upfront, we consider how that facility would be paid down should that counterparty not adhere to our pre-agreed risk limits. Importantly, we focus on ‘asset-backed’ transactions in that our financing is secured against assets that are of value and can be recovered to repay some or all of our capital. Therefore, a request to have our facility repaid can either occur through being refinanced or allowing those underlying assets, which are being regularly repaid, to repay our financed amount. This approach has ensured the Fund has never had a negative month from credit losses in its close to 8 year track record while investing through a variety of market cycles and economic conditions.

As 2024 commences, we remain vigilant of the outlook and are pleased to say all counterparts are operating within risk limits, and we do not see an elevated risk profile in our book.

We look forward to engaging with you throughout the year and wish all our investors a prosperous 2024.

The Fund delivered +0.72% in November, 9.35% over 12 months and 6.75% annualised since inception (April 2016), continuing to deliver over 5% net return above the RBA cash rate.

In December 2022, as we combed through the economic forecast of the major banks and research houses, we saw considerable consensus around the RBA cash rate peaking at 3.1% to 3.85% by March or April 2023, inflation falling to circa 3% by December 2023 and Australian residential property falling some 15%-20% peak to trough. With the benefit of time, we now know rates didn’t peak in early 2023, property didn’t fall as expected, and inflation didn’t subside despite the prolific use of monetary policy. Looking at 2024, reading these same reports, and undertaking our analysis, what actionable insights can we draw from these prior forecasts that haven’t proven to be particularly reliable?

Firstly, maintaining our focus on investing in shorter-dated opportunities, that is, positions where we can either renew or where capital is returned every 12-24 months. The Fund today (as at 30 November 2023) has a weighted average life of 0.57 years, which means 50% of the capital could, based on contractual terms, be returned within 6.80 months, enabling us to change how we invest as the outlook changes. Secondly, diversification or, more importantly, the lack of any large concentration in any sector or individual loan will reduce the risk of certain unforeseen economic events having a material impact on the Fund. Currently, the Fund’s largest single asset is 0.99% of the Fund. We believe further our focus on such elements can provide a strong foundation to navigate 2024 and continue delivering strong returns to our investors.

As investors may have observed, monthly returns will vary month to month, largely due to activity levels (recycling money from one maturing investment into a new investment), which results in the Fund holding higher than targeted cash levels throughout the month, detracting from returns in the short term. While we acknowledge this short-term impact, the imperatives around following our investment process and staying true to label in targeting assets that will perform through the economic cycle is of far greater significance. This rigour in our approach will mean we may say no to transactions in the late stages of due diligence, which causes higher levels of cash held for such investments to be deployed later. We believe making the right investment decisions rather than minimising cash held is of far greater significance in maximising returns over the long term

On behalf of the Manning Team, we thank all our clients for their ongoing support and wish everyone an enjoyable break over the festive season.