News and Insights

The Fund delivered +0.72% in June, 8.88% over 12 months and 6.60% annualised since inception, continuing to deliver over 5% net return above the RBA cash rate.

The Fund delivered 0.72% in June being in line with its monthly return target. Investors will note that returns move monthly as investment maturities occur and new investments come online, impacting cash held by the Fund. During the period, we have identified several opportunities in the late stages of due diligence, although settlement has been delayed seeing the Fund hold additional cash. We are comfortable holding this cash given the attractiveness of the transactions underway.

Throughout the month, we have engaged with multiple advisory and institutional clients who share a common interest in our views on the economic outlook and how we manage risk accordingly. A key pillar of our investment process is picking the right assets to perform through the economic cycle and structuring them correctly.

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.

We have had counterparties who have breached our risk limits, and we have had to exercise our rights which has always led to 100% of capital being returned due to the sensible, legally enforceable contractual obligations within our agreement. This approach has ensured the Fund has never had a negative month from credit losses in its 7+ year track record while investing through a variety of market cycles and economic conditions.

We remain vigilant of the outlook and are pleased to say all counterparties are operating within risk limits, and we do not see an elevated risk profile in the portfolio.

The secret to this fund manager’s seven-year track record is to just keep it simple. Written by Hans Lee, Livewire Markets

If there’s one common trait among fund managers that consistently outperform their benchmarks or their competition, it’s that they do one thing and do it well. No distractions, no differences between fund strategies, and little to no divergence from their core mission.

One of those outperforming funds is the Manning Monthly Income Fund. The fund has never had a negative return month from credit in its seven-year existence. When I asked Josh Manning, CEO of Manning Asset Management, how the fund has so consistently outperformed, he points to one thing.

“We’re not doing anything new or different,” Manning said. “Our investment process has been designed to work through all market conditions. We’re simply just repeating that and continuing to deliver the results we have.”

What do you attribute your outperformance to?

Manning: The thing is we’re not doing anything new or different. Our investment process has been designed to work through all market conditions and really what we think we’ve got a very strong investment process and we’re simply repeating that and continuing to deliver the results that we have.

I think in terms of what’s made the strategy so successful, it’s just really about right-sizing our risk limits.

We’ve lost deals because we’ve said we’re not going to take that risk or that’s too big a position but having that discipline to stick to our investment process to have the right risk limits. A lot of managers had a lot of duration on their book and they’ve torn up capital over the last 12 months because of that.

We were very deliberate in terms of how we managed the book around keeping it shorter-dated, particularly through 2020 where there was a lot of market uncertainty.

What investments have detracted from your performance over the past year (if any) and what have you done with them?

Manning: We haven’t had any detractors really over our whole history. We buy assets and some we know will be above investment hurdles, some are below investment hurdle and we just recognise there’s a variety of different reasons why you buy assets.

Firstly, they need to stack up on a risk-adjusted basis. So if something is super low risk then it makes sense to buy it.

The other reason why assets might be slightly below the target is that they have a lot of liquidity in the portfolio. We recognise that’s good from not only an investor perspective but from a flexibility and portfolio perspective.

Have you had to do anything differently this year to deal with the heightened volatility and uncertainty in markets?

Manning: Each quarter, the investment process incorporates a macroeconomic outlook session from the investment committee where we think about what’s happening in the external environment. What’s the context in which we’re making those investments and what are the implications for portfolios.

So there’s already a very robust way in which we think about that external environment and build that into the portfolio construction. Ultimately, the assets that we pick up in the portfolio and how we manage them. It’s a continuing theme, but I think the investment process picks that up and is very well-placed to help navigate that uncertainty.

What are the biggest macro concerns you are monitoring in the portfolio going forward?

Manning: The way I think about it is there are known and unknown risks. So a known risk is the prolific interest rate hiking cycle that we’re going through globally at the moment.

That has implications for unemployment, business investment, business confidence and ultimately, that has implications for the fundamentals of Australian credit markets.

It’s around buying the right assets. So it’s around thinking about these concerns about the macroeconomic environment (and we will always have concerns). We’ll never say we’re not concerned at all. We’ll never go all-in. So we’re about spreading our bets.

But when we make those bets, it’s around stress testing those assets on a very severe basis. So say for an example, an investment had a potential credit loss underneath it of 2%. We knew in a very bad economic environment that could go up three to four times, there will be stress testing at an 8% loss rate.

What kinds of yields are you targeting in the coming year?

Manning: Our main fund is targeting loans that are delivering 9% or higher. While most of our assets deliver yields higher than this, we believe it isn’t a time to be investing based on headline yields. It is the time for being fussy about what deals we participate in, ensuring they fit our risk appetite.

People need to remember, markets are cyclical and when money is flowing into an asset class, it’s easy to get carried along and slowly accept greater and greater risk. We believe in sticking to your risk appetite and looking at investing on a longer term basis that will deliver the best investor outcome.

Is there an area of your market that has huge potential but no one is paying attention to?

Manning: We’ve been quite active in coming in and out of sectors as the fundamentals of those sectors change around. Early on, we had a lot of consumer loans. The fundamentals of those in terms of the risk-adjusted returns came down and we moved our book more into mortgages where we saw a huge opportunity.

More recently, we’ve seen some really strong assets in the business loan space. So we’ve been able to on a relative basis say, well, that’s a better risk-adjusted return, typically a lower risk investment for the return profile.

Speaking of business loans, what kinds of businesses are you wanting to target in this environment of heightened interest rates and risks?

Manning: Business loans is an interesting space, being extremely diverse. Investing in areas such as unsecured lending particularly to plug business cash flow issues is deeply unattractive and not an area we invest in.

Targeting some of the least risky aspects can provide some attractive opportunities. When we invest in this space, we focus on spreading our bets as widely as possible to ensure we do not have large fund concentrations.

We like lending that is naturally suited to businesses when they are growing (e.g. a business buying something to take on an increasing number of orders) and seek opportunities where there are mismatches in business cash flows i.e. they have money due and payable although require funds now for an asset purchase.

Ultimately the cornerstone to our investing is having security over the asset we are lending on. While we are finding good opportunities in this space, we are favouring more traditional non-construction 1st ranking mortgages, given the uncertain outlook placing a limit on our appetite for business loans at present.

This chart appears in the most recent RBA Statement on Monetary Policy and is one way of reflecting the changes in credit conditions in the Australian economy.

How does this chart affect the way you invest?

Manning: I really like macro big picture things. I think they’re really interesting and they tell you a lot about the tide – which way the tide is running and whether you’re swimming with it or against it. Obviously, growth in this multi-trillion dollar credit market, which we’re participating in here in Australia means we are swimming with the tide.

I get excited about capturing that growth in attractive risk-adjusted assets that have the right risk measures around it. But it’s obviously good that the markets are growing and there’s an increasing number of opportunities out there.

Finally – just for fun – who makes a good investor in your fund?

Manning: We actually quite enjoyed thinking about this question because I think my favourite investors are critical thinkers. So people who read widely, make their own opinions on topics using multiple different sources and they don’t just pick up the front page of an article and take that as gospel.

https://www.livewiremarkets.com/wires/how-investors-can-access-9-yields-in-this-asset-class

Fixed income has matured as an asset class, driven by the global rise in cash rates, resulting in increased yields. Heightened market volatility has also emphasised the need for diversification away from equities and property. Additionally, Australia’s fixed income market has witnessed ongoing development, leading to widening credit spreads or expected returns over the cash rate. Initially, large institutional investors and their asset consultants sought fixed income investments, but now the demand is extending to financial advisers and both wholesale and retail investors seeking stability in their portfolios. While there is widespread demand for this asset class, the underlying reasons for such demand vary. This article seeks to explore the main reasons for this demand and how that may shape what form of fixed income could be better suited to achieving the desired outcome within one’s portfolio.

Reason 1: A Source of Portfolio Return

Investors are primarily attracted to fixed income due to its historically elevated expected returns, which typically range from 5-10% per annum. This return compares favourably to other asset classes on a risk-adjusted basis. Investors seeking these returns can decide how sensitive they want their expected returns to be in response to changes in interest rates and demand for such investments. For instance, an investor who believes the RBA cash rate will decrease and the demand for a particular fixed income asset will rise may be better suited to a long duration strategy. Such a strategy offers the potential for additional returns if these events occur, albeit with added risk. However, if an investor predicts interest rate movements incorrectly, they may experience softer or even negative returns. Alternatively, investing in shorter duration or shorter-term assets provides less sensitivity to interest rate changes and therefore, is considered an inflation fighting or ‘real return profile’ strategy as returns should move up and down with the cash rate.

Reason 2: Regular Income

Typically, investor returns are derived from interest payments, which benefit from being contractual obligations. This differs from equities or hybrids, where such payments are discretionary or less certain. Furthermore, generating income from fixed income investments can be a cost-effective investment, unlike property investments that involve expenses such as upkeep or vacancies. For investors with income generation as a priority, it is important to examine the investment’s running yield, net of expected management or other costs, as it serves as the best indicator of likely income streams.

Reason 3: Capital Stability and Portfolio Diversification

However, the extent to which fixed income provides these benefits can vary. Investors prioritising capital stability should consider engaging a fund manager with dedicated resources and specialised skills to understand the nuances of the market and promptly act if a fixed income asset deteriorates. Investing through a fund also allows access to a more diversified portfolio compared to individual investments. For example, it is not uncommon to invest in a Fund and gain access to many hundreds if not thousands of underlying assets. When evaluating such funds, investors should carefully consider the fees involved and, most importantly, examine the track record of the fund managers. Questions such as the fund’s duration of operation, whether it delivers on its objectives (such as low volatility), and the managers’ previous track record with other organisations are crucial. In fixed income, experience counts, and we too often see firms renamed and ills obfuscated.

Reason 4: Immunization

Immunization is a strategy commonly utilized in institutional portfolios but can also be relevant for individual investors with specific return requirements. Fixed income investments, given their capital stability and income generating nature, are often employed in this strategy. For example, an investor may aim to achieve a return of the RBA cash rate +4% to meet a predetermined projection of ongoing expenses that need to be funded. In other words, seeking to match investment income with outgoings helps to ‘immunize’ the risk of a shortfall assuming those projections. Alternatively, the investor may seek to preserve the inflation-adjusted value of their portfolio while receiving a consistent 4% annual income stream. By investing in fixed income assets that offer more predictable income payments, investors can aim to align their monthly needs with the projected payments from the investment. While the concept may appear complex, it demonstrates how the reliability of returns or income payments can provide investors with greater certainty about their future financial situation.

Alignment of Objectives

Investors should approach their fixed income allocation as a means to adjust their portfolio’s risk profile, rather than solely focusing on driving returns. By recognising this subtle distinction, investors can effectively prioritise their needs and align them with the appropriate fixed income investment objectives, such as income generation, diversification, immunisation, inflation-fighting return profile, or capital stability. Placing greater emphasis on the desired outcome enables the selection of investments that are best suited to achieving those goals.

How we’re answering one of the most pressing questions from investors

One adviser said that it’s hard to find income these days without taking big risks. Now, there’s a fund that solves that problem.

Between October 2019 and July 2022, the RBA’s cash rate never climbed above 1%. Since July 2022, Australia’s central bank has hiked its benchmark interest rate 12 times in 13 months. It has also often done it at multiples of the regular 25 basis point increments, making the search for stable and growing income that much more challenging.

Now, more than ever, we believe investors are more discerning and selective about where they invest their capital. That’s where we believe we have a ready and available solution.

Launched seven years ago, the Manning Monthly Income Fund is designed to grow income without taking on outsized risk. The fund has never had a negative return month from credit losses in the seven years it has been in operation.

How is this possible given all the headwinds that have plagued the financial markets over that time?

The secret has been sticking to a five-point investment philosophy that prioritises capital preservation and asset diversification above all.

In this Fund in Focus, I’ll share some details about the Manning Monthly Income Fund and introduce you to the experienced team who manages it.

Timestamps

• 0:00 – Introduction
• 1:45 – Introducing the Manning Monthly Income Fund
• 3:21 – The Manning Monthly Income Fund’s performance
• 4:02 – Investment Philosophy
• 5:26 – The Manning AM Team
• 6:55 – Asset Allocation In-Depth
• 7:26 – Investment Process

Disclaimer:

This video may not be copied without the prior consent of the issuer Manning Asset Management Pty Ltd AFSL 509 561, ACN 608 352 576. This podcast is intended for use only by persons who are ‘wholesale clients’ within the meaning of the Corporations Act. It is intended to provide general information only and has been prepared without taking into account any particular person’s or entity’s objectives or needs. Investors should, before acting on this information, consider the appropriateness of this information having regard to their own situation. While due care has been taken in the preparation of this podcast, no warranty is given as to the accuracy of the information. Except where statutory liability cannot be excluded, no liability will be accepted by Manning Asset Management for any error or omission or for any loss caused to any person or entity acting on the information contained in this podcast. We do not guarantee the performance or success of an investment and you may lose some or all of the capital invested. Past performance is not a reliable indicator of future performance.

The Fund delivered +0.79% in May, 8.70% over 12 months and 6.57% annualised since inception, continuing to deliver over 5% net return above the RBA cash rate.

As the RBA continues to move the cash rate higher, we increasingly believe that the performance of the different Australian credit sectors will diverge following a long period characterised as having low arrears and relatively consistent performance. For example, the performance of prime vs near prime mortgage borrowers will differ alongside unsecured business lending vs secured. The driver shall be the uneven nature in which the economic slowdown and higher mortgage repayments shall impact each.

Given this outlook, we anticipate more active management of the portfolio into sectors and structures best able to perform through this period. An opposing set and forget strategy based on a historical perspective shall see investors inherit additional risk, which we see as unwise.

Many Funds in the market limit access only to loans that they have originated. In this scenario, investors capital is confined to one lender and, most notably one sector. Investors, therefore, need to assess if that lender is the best in the market and, crucially, given the outlook, if that sector is the right place to be. Manning rather looks across the 200+ Australian lenders and uses its domain expertise and dedicated resources to find the most attractive lenders, invest with the right ones in the right sectors given the outlook and most importantly, use our scale to negotiate preferential terms, which typically have enhanced risk mitigants to further protect investor capital.

This multi-sector, multi-issuer approach, where we have considerable bargaining power given our scale, alongside our specialist resources with their domain expertise, is a powerful way to navigate what we see as a more challenging economic period ahead.

Evergreen Ratings

The Manning Monthly Income Fund was recently reviewed by Evergreen’s Rating, a specialist Australian Ratings House and was awarded their top rating, Highly Commended. An award they have never given to Fixed-Income/Credit Fund. Evergreen notes, “The Fund offers a way for wholesale investors to invest in a portfolio of mortgages, business and consumer debt, structured in such a way that credit risk is significantly reduced but still targets returns well in excess of the RBA cash rate” and “Evergreen Ratings believe the Fund is well-managed and will continue to generate returns and manage risk to the levels expected of the Fund” and finally, “Evergreen Ratings believe the Fund has a very high probability of meeting its objectives”. Thank you to our clients for making this possible and please reach out if you wish to receive this updated report.

For years, conventional fixed income struggled to pay rates. But Manning Asset Management continues to beat the crowd – Written by Hans Lee, Livewire Markets.

The story of fixed-income underperformance has been well-telegraphed. But look beneath the surface of the government bond market and you’ll find that alternative sources of fixed income have fared much better. Some of these outperforming assets include consumer loans, business loans, and in particular, the mortgage-backed asset market.

Mortgage-backed assets are, and we hasten to point this out, are not the same things as the kind of mortgage-backed securities that brought down Lehman Brothers and the like in 2008.

The Manning Monthly Income Fund could have invested in traditional, publicly traded RMBSs but they chose not to because they knew there was a better way to access the market. This presented a quandary for Josh Manning, founder of Manning Asset Management and his team.

How can you capture reliable income in the wider property space without (literally) betting the house?

To get around this problem, the Fund has taken a big interest in carefully chosen, high-quality mortgage-backed assets. Today, mortgage-backed assets actually make up more than 50% of the Manning Monthly Income Fund and are a big source for its long-term outperformance.

In this wire, I’ll share some insights into how the team invests in this traditionally opaque and challenging part of the market.

Outperforming the benchmark (and the plan to stay ahead)

According to the Livewire funds database, the Manning Monthly Income Fund has been the top performer over the last three years in the fixed income category. Since its inception, it’s returned 6.53% per annum to shareholders. So how did it do it?

“It’s really about finding the right strategy which can perform through different market conditions,” Manning said. “We’re not really looking to outperform.”

But the statistics don’t lie – and the fund really has outperformed its competition. Manning attributes the fund’s stability to three things:

1. Finding a strategy that is designed to stand the test of time.
2. The right people in the right seats at the decision-making table – including finding people with vast amounts of market experience.
3. Get the incentives right – and this extends from business structure to the general investment philosophy

“For seven years, through all sorts of geopolitical issues, through all sorts of RBA cash rate profiles, through all sorts of macro backdrops, we have just consistently hit our RBA + 5 objective. It’s not about trying to go over, it’s just about consistency,” he added.

The fund has a target return of the RBA cash rate plus 5%. With the cash rate now over 4%, how does Manning plan to stay ahead?

“I think you have to be really careful about where you’re playing,” he said. “We really like that shorter-dated, shorter-weighted average lifetime fixed income investments which don’t have that long duration aspect.”

The shorter-dated end of the market, Manning explains, doesn’t expose investors to as much credit spread risk. Note that “shorter-dated” in this context means anything that matures in under 24 months (and in a lot of cases, under 12 months).

“We also like stuff where we think the asset class, its structures, and its counterparties can perform through the economic cycle. If you can get that right balance, the asset class provides strong returns, asset diversification, strong and consistent income, low volatility, and capital stability,” he emphasised. “But you have to be very deliberate.”

The assets in the fund

The old adage argues that “diversification is the only free lunch in investing”. But Manning and his team take that to a whole new level. The Manning Monthly Income Fund has over 10,000 individual asset exposures. But who is backing these assets?

“We’re looking across the market – literally hundreds of lenders – and trying to find lenders that we believe are the best in their field and can offer very attractive pools of loans that we can purchase,” he said.

To explain this point further, he referenced a recent deal the team were involved in.

“We negotiated for 135 basis points more yield. We’re also saying we want more capital protections and not only that, we want to enhance liquidity. We want better terms than those being offered to the market,” he noted. “Because this is all we do, we can be very active and we do pull back.”

All of which, Manning says, is backed by what they call “proven counterparties”. But what makes a proven counterparty?

“Essentially, we don’t rely on credit ratings and third-party research. We have deep relationships and a long track record of working in this sector,” he said.

He added that the team may receive five to six deals on average per week, but the investment management team may only execute one or two of them per month.

“We have a proprietary process where there is a formal, invasive process to go under the hood of lenders. It includes things like on-site visits and meeting with key and junior management. I call it a contact sport,” he quipped. “There is a very clear alignment of interests.”

The property aspect

As has already been noted, more than half of the fund’s composition is dedicated to residential and commercial MBSs. Those positions have only continued to rise, especially in the residential space where allocations to that part of the market are near all-time highs.

So what does Manning think about the future trajectory of the property market? He says that property needs to be evaluated in a much more granular way. Each segment, area, and asset need to be assessed individually to understand the fundamental and risk profile of each potential investment.

“The Australian property market is quite an academic principle,” he said. “You don’t have to be a property market forecaster. We’re not trying to say property will be up or down a certain amount. Our focus is on the risk profile,” he added.

“The question is not whether property will be up or down by a certain percent in 12 months’ time. The question is, how safe is our capital and do we strongly believe we will receive 100% of our principal back at loan maturity. To answer that, you need a fundamental understanding of each segment of the market to gauge risks and pockets of value,” he added.

As a result of his views, Manning points out that the fund does not play in conventional methods – or indeed, the kinds of securities that were so much the subject of the 2008 Financial Crisis.

“We’re not in traditional RMBS or CMBS-type securities. Those are public deals that are highly structured and to get a good yield, you have to be heavily subordinated. To do that, you take on more credit risk and more mark-to-market risk,” he said.

“What we prefer to do is to go directly to these issuers and structure deals directly with them. We’re purchasing actual loans themselves. We’re not buying off an exchange,” he added.

Australian Fixed-Income Markets Unveiled – Investor Implications Amid the RBA’s Economic Transition

As the RBA moves from pumping to decelerating Australia’s economy, what are the implications for investors and how is Manning monitoring and thinking about these developments? In light of these changing domestic dynamics, you are invited to this webinar with Portfolio Manager & Founder, Josh Manning and Chief Investment Officer, Adrian Bentley, as we discuss the most important themes emerging this year. The webinar will cover:

– What are we seeing in the fixed-income markets: the considerations and outlook for income investors

– Public Vs Private Markets – what does an investor need to consider right now

– The eternal question – what might happen in the Aussie housing market and how is Manning positioned?

The webinar will be presented by:

Josh Manning – Portfolio Manager & Founder

Adrian Bentley – Chief Investment Officer

Juliet Shirbin – Head of Investor Relations

Disclaimer:

This video may not be copied without the prior consent of the issuer Manning Asset Management Pty Ltd AFSL 509 561, ACN 608 352 576. This podcast is intended for use only by persons who are ‘wholesale clients’ within the meaning of the Corporations Act. It is intended to provide general information only and has been prepared without taking into account any particular person’s or entity’s objectives or needs. Investors should, before acting on this information, consider the appropriateness of this information having regard to their own situation. While due care has been taken in the preparation of this podcast, no warranty is given as to the accuracy of the information. Except where statutory liability cannot be excluded, no liability will be accepted by Manning Asset Management for any error or omission or for any loss caused to any person or entity acting on the information contained in this podcast. We do not guarantee the performance or success of an investment and you may lose some or all of the capital invested. Past performance is not a reliable indicator of future performance.

Drawn by appealing yields and the perpetual necessity for portfolio diversification and resilience, investors are gravitating towards this asset class. However, understanding the dichotomy of public versus private fixed-income assets is pivotal. This article unravels the benefits of each, outlining their significance in contemporary portfolios.

Navigating The Public Bond Market

Australia is home to many higher-quality fixed-income managers and, as the fourth largest savings pool globally, there are numerous global funds with an Australian presence. Public fixed-income assets include Government Bonds (Commonwealth, State or Quasi Government), Corporate Bonds (issued by better known companies) and Asset-Backed Securities (typically issued by bank and non-bank financial institutions). Being public in nature provides investors with an element of liquidity in that there typically is a market to buy and sell such assets however the amount of liquidity is primarily determined by how large that bond issue is, how well known the issuer is and the complexity of the security. For example, an Australian Commonwealth Government Bond has substantial liquidity. In this regard, investors can, to varying degrees, buy and sell those bonds directly or via a broker. They can also access such assets via a Fund that can provide liquidity by allowing them to apply and redeem in accordance with the Fund terms. Public bonds benefit from relatively standard upfront disclosure when they are first issued so investors can more readily compare one issuance/bond to another.

In most cases, the issuer or the individual bond will have a credit rating so investors can have greater confidence that bonds attracting this credit rating fit their risk appetite (e.g. an investor may have risk appetite only for bonds rated AA or higher). Large and more commonly used Credit Rating Agencies (e.g. S&P, Moody’s) are global, so one can also more readily compare an Australian bond to a UK-issued bond. The public bond market in Australia is large at over $2 trillion and plays an essential role in institutional and individual portfolios.

Private Assets: Unlocking Liquidity & Assessing Risk

Private fixed income assets are primarily Corporate and Asset-Backed Securities and can be issued by the same entities that issue public bonds. Unlike public equivalents, private fixed income assets can vary significantly in nature and do not commonly have a credit rating attached to them. They often arise through direct engagement with the issuer where bespoke terms are negotiated between one or just a few parties rather than being more widely held by many investors in the market. Those investors value the direct relationship with the issuer and, importantly, the enhanced terms that can be achieved. For example, private equivalents can include security over assets in addition to a corporate guarantee where any non-payment could enable the investor to pursue the company directly. Any enforcement actions required could also occur via direct engagement with the issuer, whereas public equivalents often require many parties to engage, determine the best approach, vote and then act via a representative thus, it can be more drawn out, costly and less predictable.

Private fixed income assets however are not, by themselves, particularly liquid. They typically have a maturity where capital is scheduled to be returned however, before then, there can be limited ways to sell them. While this is true if you hold just one bond, buying a second bond that matures between now and the maturity of the first bond, doubles the liquidity frequency. Buying a further bond at a different maturity adds further liquidity, and so on. If you have a $100m+ portfolio, strategically planning scheduled maturities can add significant liquidity. If you don’t have that quantum, a fund specialising in such investments can provide added liquidity.

Another consideration with private fixed-income assets is that a rating agency may not rate them. If you buy one of these assets directly, you must assess the asset’s risk profile and suitability for one’s portfolio. Please read my prior article here for thoughts on this. Assessing suitability involves considerable domain expertise in that sector gathered over market cycles, access and time to evaluate the opportunity through direct engagement with the issuer and both qualitative and quantitative approaches to understand the risks and assess the appropriateness of the mitigants in place. While there are no official numbers, our estimates of private fixed-income assets exceeds $200 billion in Australia alone.

Accessing Opportunities: The Dual Role in Investor Portfolios

Investing in private fixed-income assets is more complex, time-consuming and requires additional scale to achieve a degree of liquidity. In our experience, investors can typically receive 2-3% more per annum (than equivalent public assets) to compensate them for that impost. For example, we recently purchased an asset for the Fund, which, notably, met our threshold question: will this asset perform through the economic cycle and delivers a running yield of 11.50% per annum.

We see both sectors playing an essential role in investor portfolios, although we are drawn to the higher risk-adjusted returns that private fixed-income markets offer where we have the scale, domain expertise and time to extract them for our clients.

The Fund delivered +0.79% in April, 8.41% over 12 months and 6.53% annualised since inception.

Across our three Funds, we participate in numerous transactions where the underlying borrowers pledge property as security either directly (via a mortgage) or indirectly (via broader loan terms). We therefore, track and contemplate how the Australian property market is performing and what this means for the Funds.

Firstly, our clear bias is towards residential property for the following reasons. Compared to office, retail or industrial, there tends to be a deeper pool of potential purchasers of residential property and, thus, greater liquidity should the property need to be sold. Loan sizes are smaller and, combined with the fact that there are many more residential loans than commercial loans, enables a more granular and diversified portfolio. Lastly, residential property tends to be more homogenous I.e. a 3-bedroom house in a particular postcode will largely perform like others in that area, thus, making longitudinal studies more predictive and less influenced by one-off property-specific factors. We do in limited circumstances, finance commercial properties when they share some of the characteristics above.

When stress testing the Fund’s portfolio, we consider recent increases in property prices in addition to the possibility of a sharp decrease in property prices.

Borrowers faced with rapidly rising interest rates either via their current variable rate mortgages or rolling off of cheaper fixed rates will struggle to afford new and higher mortgage repayments, particularly when faced with the higher cost of living pressures, lower household savings and the possibility of a weakening job market. In this scenario, all borrowers are at risk, particularly those who recently upsized and took on a large mortgage with any potential government stimulus or relief measures likely to be less targeted towards meaningfully helping those borrowers vs lower loan balance/lower-income households.

Assessing this scenario, one needs to consider both the length of the loan, the current property valuation and how that valuation was derived. While on average the Fund lends just circa $62 against every $100 of equity, meaning technically prices would need to fall substantially over our 12 – 24 month term to adversely impact the fund, the analysis doesn’t stop there. For example, the valuation may consider ‘like’ properties sold in the prior 12 months and factor in an assumed growth since those sales. But has that property appreciated in that period? To answer that, we consider the qualifications and experience of the valuer, the valuer’s incentives influenced by who appoints/pays them (the lender, homeowner or real estate agent who wants to sell the property) and how ‘comparable’ are comparable properties which are used to substantiate a valuation, to name just a few. In short, the protection of capital in a market where property prices fall further is centred around conservative loan amounts against targeted property as detailed; however, such an approach without a critical assessment of how one determines it to be ‘conservative’ shouldn’t be overlooked.

We should also note that Manning has a relatively consistent purchasing pattern to avoid having significant exposure to loans originated at any particular point when valuations may be elevated. In this regard, investors can also diversify away some of this risk.

Many associate price increases with reducing the risk of property backed lending, however the opposite applies. Most simply, rapidly appreciating prices are more susceptible to mean reversion, or a significant increase in prices could cause a significant decrease. In this regard, the prior 12 months have been a healthy period in lowering this risk.

As we face a softening economy, some of these above considerations can materially and favourably influence the risk profile of the Fund. The Fund has never had a negative monthly return from credit which we are focussed on retaining.