News and Insights

The Fund delivered +0.74% in January, 7.45% over 12 months and 6.43% annualised since inception.

A key feature of the Manning Monthly Income Fund is its flexibility to move in and out of Australian credit sectors such as mortgages, consumer and business loans as fundamentals deteriorate or as superior opportunities present. Therefore, we are constantly assessing if the Fund should participate in each sector given the economic outlook and fundamentals within each. By contrast, single asset class funds (e.g. mortgage funds) are far more limited in their ability to reduce exposure to a sector in times of stress.

Manning’s recent quarterly macroeconomic outlook forum showed that the Australian property market and its impact on the economy is an important factor to consider. Our research found that while some parts of the property and mortgage market displayed poor fundamentals, attractive opportunities still exist when taking a conservative and diversified approach.

This approach focuses on targeting lower, loan-to-value ratio, more resilient assets, and lending only on a short-term basis. We deliberately avoid areas that we believe shall not perform through the cycle such as construction finance, rather favouring assets which would be attractive to a wide variety of potential buyers in the unlikely event of the asset not performing. With the property market changing in response to higher interest rates, it further highlights the need to make shorter-term investments where we are not locked into longer-dated assets. We are constantly evolving our approach in this sector although the overarching principles remain unchanged and, over 7 years, has resulted in no loss of capital, interest, or fees.

We are pleased to report strong client growth from new financial advisers seeking to diversify and reduce equity market risk and capture the value of the higher RBA Cash Rate, which continues to lift our expected return target to the current level of 8.35% net of fees.

The Fund delivered +0.72% in December, 7.15% over 12 months and 6.40% annualised since inception.

There are several Fund features that investors like to discuss, namely the significant number of underlying loans within the portfolio (circa 9,500+) and diversification that this achieves, the short-dated or shorter-term nature of those loans and the contractual nature of loan repayments, which has delivered consistent investor returns. Further to this, investors have recently shown increased interest in the Funds’ Sharpe Ratio.

A Sharpe Ratio is a quantitative measure of a Fund’s risk-adjusted returns. It calculates this by determining the average monthly return an investment has achieved over a period, in our case the prior 3 years. It then deducts the so-called ‘risk free rate’ being the RBA cash rate recognising that for a rate of return to be attractive, it must exceed what an investor can achieve in near zero risk investment. The Sharpe ratio then assesses how stable or volatile those monthly returns are and finally divides the average monthly returns less the risk free rate by this number. In summary, for a Fund to achieve a high Sharpe ratio it must firstly, deliver an average rate of return well above the risk free rate, and ensure that it consistently does so. The Sharpe ratio penalises a Fund that can only deliver one and not the other making it a very useful data point for investors seeking an attractive rate of return that is consistently delivered.

The Manning Monthly Income Fund’s Sharpe ratio is 23.36.

The Fund delivered +0.71% in November, 6.91% over 12 months and 6.37% annualised since inception.
Fund investors shall welcome the higher RBA cash rate increasing the Funds targeted return to 8.10% (p.a. as at December 2022) net of fees, comparing very favourably to what many predict will be a soft year ahead for equity markets.

In January, we outlined the key areas to watch in 2022: inflation, the removal of stimulus, Australian property, and the more hawkish global central banks. While these dominated investor concerns through 2022 and, at times, created intense market volatility, none have caused the widespread dislocation that some suggested. For example, despite the most prolific increase in the RBA cash rate in living history, unemployment which we see as a crucial barometer of economic health, remains at record lows, with households having substantial savings to buffer them against a more challenging 2023. Australian property has fallen in value, although its path suggests an orderly market dynamic without signs of distress, such as forced sales.

Looking ahead to 2023, the negative wealth effect of falling house prices, the slowing of excess household savings spending, the projected increase in unemployment, and higher mortgage repayments for many mortgage holders may drag economic growth lower. Fading employer optimism around future growth could reduce business investment and potentially lead to greater restraint in wage negotiations, further restricting growth. However, it is unlikely that the economy will slip into a deep recession. Australia benefits from low government debt compared to other developed economies and interest rates have risen, which provides scope for stimulus, although the government and RBA are likely to be cautious in their approach.

We see little change needed to the Funds construct, which has focused on:

• prioritising opportunities that are secured by a hard asset that could be sold to repay our investment (for example, low loan to value first mortgage loans)
• focusing on ‘through the economic cycle’ sectors being sensible consumer, business and mortgage-related transactions
• retaining the short maturity nature of assets to ensure we can continue to pivot as the facts change (the average maturity of our portfolio is 7 months)
• and most importantly, taking a risk-first approach to assessing every opportunity rather than being attracted to higher-yielding opportunities.

These factors have added considerable value to Fund investors in 2022 and we believe they shall continue to do so in 2023.

As our final note for the year, the Manning Asset Management Team wishes to thank our clients, their financial advisers, asset consultants, wealth groups and institutions who use or recommend our Fund. We wish you an enjoyable and safe festive season and look forward to delivering an industry-leading return on your capital in 2023.

The Fund delivered +0.69% in October, 6.64% over 12 months and 6.33% annualised since inception.

We are pleased to report the Fund’s portfolio of assets continues to perform strongly, and we believe, well positioned to continue delivering strong income returns with capital stability. Returns were particularly strong in October due to high levels of deployment.

Inflation remains at the forefront of investors’ minds as the previous positive indicators of economic health, such as strong employment, high savings rate and solid retail spending, are now seen as key inhibitors to stabilizing our economy. The strength of these indicators has resulted in more liberal use of monetary policy, seeing one of the sharpest rises in interest rates in modern history, increasing the volatility of asset prices and making forecasting future states more problematic. It is therefore worth outlining how we approach the issue when making investment decisions on behalf of the Fund.

Within a fixed income or credit portfolio, investors can determine how long they invest before their capital amount is repaid (assuming the asset performs), a feature that other asset classes, like equities, typically do not share. This is typically referred to as ‘short dated’, an investment term of up to 12 months or ‘long dated’ where investment terms can reach 5 or 7 years until scheduled repayment. Manning has long favoured a short-dated investment approach that enables the Fund to be more actively positioned to suit the economic environment, with the Fund’s investments being regularly repaid. For example, the Fund currently has a weighted average life of 10 months or in other words, invested capital shall be on average returned in 10 months’ time. Compared to peers within the Diversified Credit universe, the average is 44 months or 4.5 times longer. We believe this has been particularly beneficial/added considerable value in, firstly, enabling us to be far more active in pivoting the portfolio towards areas which display strong fundamentals and secondly, preserving the value of the Funds holdings given the more imminent return of that capital. See peer relative performance below, where the Manning Monthly Income Fund has been the top-performing Fund over 1, 3 and 5 years.

(Investment Centre, Money Management, Nov 2022)

In summary, we have been actively managing the Fund to favour more short dated assets where we are less reliant on predicting the future. By reducing the reliance on longer term forecasting of economic conditions, we believe a superior return which is importantly, more stable, can be delivered.

A short-dated portfolio is appropriate given the uncertain economic times. While that view is unlikely to change in the short term, the need to add longer dated assets will likely re-emerge in the medium to long term. For example, locking in higher interest rate loans when global interest rates are falling is an attractive way to generate an additional return, providing the portfolio retains its flexibility to change and adapt to the market environment. We do however, feel this is some time away.

Josh Manning, Portfolio Manager at Manning Asset Management, and Charlie Viola, Partner & Managing Director – Wealth at Pitcher Partners, discuss interest rates, property prices and implications for portfolios, and the role of fixed income and credit in today’s investment environment.

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 +0.61% in September, 6.53% over 12 months, as Fund returns continue to lift alongside a higher RBA cash rate as anticipated. At the same time, key risk measures across the Fund are at or below longer-term averages.

The Fund invests across multiple sectors, including strictly first ranking Australian mortgages, which have performed without loss since inception of the Fund seven years ago. Across that seven year period the property market has risen, fallen, risen and now falling once again, with the latest price reductions drawing some media attention and, therefore investor interest. We have summarized our views on this dynamic below and the implications for the Fund.

While we are now seeing property prices decline from their peaks (driven by increasing interest rates), we still expect this portion of the portfolio to perform well and indeed expect to see significant opportunities for further investment as prices settle at a reduced level. The factors that support this view and opportunity are outlined below:

• Our exposure to the sector is via a first mortgage at an average loan to value ratio of 59.12% providing a significant buffer against any current or further reduction in property prices
• We focus on short term exposures (typically around 1 year) so have regular opportunities to reprice and reassess risk as markets change
• Unemployment is the biggest driver historically of mortgage defaults and it is currently at historic lows
• We avoid the highest risk parts of the market such as construction lending
• We diversify our portfolio across different borrowers and geographies to minimise the impact of any particular loan on the performance of the book
• The macro economic environment and outlook (including inflation levels) in Australia is better than most other regions of the world and the RBA and government has considerable capacity to use monetary and fiscal policy to stimulate the economy again if required

In summary, Australian mortgages remain an attractive sector for the Fund today, provided we take the necessary precautions as outlined above. In some regards, less attractive fundamentals can also skew the market in our favour as other lenders, namely banks, pull back, leaving an even larger addressable market with only so much demand to meet it, helping to lift expected returns as we have experienced.

The Fund delivered +0.63% in August, 6.39% over 12 months and 6.29% annualised since inception.

We are frequently asked about our views on the RBA cash rate and its likely trajectory, given its impact on asset values across almost every asset class. In recent months some market participants have taken the view that after an initial sharp rise in interest rates this trajectory will partially reverse as the RBA realises the impact has been more contractionary on the economy than expected. However, the current market view is clearly that rates will continue to rise into next year, peaking around 3.5% where they will stay in the medium term. The implications of this are clear. Assets that have suffered steep declines in their value due to recent and continuing rate hikes (e.g. equities, long dated or duration bonds) are not expected to recover quickly. While the higher expected cash rate is bad news for market speculators hoping for a sharp reversal in asset prices, its good news for those investors seeking income (particularly those that maintained their capital base) who now enjoy a higher expected income stream from their investments.

From a Fund context, the higher RBA cash rate continues to push our returns higher, in many cases, on the same underlying holding; we do not need to sell and buy a higher expected return asset. Instead, the rate of income we are paid is related to the RBA cash rate rises. As outlined in prior performance updates, we are mindful of the impact that higher interest rates are having on the investment environment more widely and the risk profile of different assets we consider. A dominant theme over the prior year has been a shift to more secured investments where our capital benefits from being secured by a physical asset (in addition to a variety of other structural protections embedded in the asset purchase) that can be recovered to repay capital. Today, well over 90% of the Fund is secured in this way.

We welcome the higher RBA cash rate lifting the Fund’s target return to 7.35% net of fees, delivering an attractive rate of return to our investors.

The Fund delivered +0.70% in July, 6.29% over 12 months and 6.27% annualised since inception.

The particularly strong return was attributable the higher RBA cash rate and associated interest rates paid on our investments, strong deployment levels and the higher than normal fees we were able to charge on transactions. We pass these upfront and establishment fees onto investors (unlike many of our peers) which is another way we differentiate our fund and deliver higher returns.

Central bank policy continues to attract widespread attention with markets fixated on inflation and, importantly, how effective monetary policy is in calming inflationary pressures. With the US being further advanced in its inflation correction process, it is now showing early signs of easing inflation. Investors may begin to feel the monetary policy effectiveness question is being answered and therefore a more optimistic outlook. While one could argue this, it’s important to remember that we remain in a transition stage where economies globally are finding new equilibrium levels, both in terms of their respective cash rates but also currency levels, fiscal policy and terms of trade. Finding new equilibriums is not unusual, although the range of these changes in many cases are.

As credit investors, we are not trying to pre-empt markets. Instead, we invest in high quality assets, which we believe, given a range of outcomes, will perform through the cycle and have ample defensive characteristics to deliver a smooth and consistent return. This means we are investing in shorter-dated investments where capital is being regularly returned on a 6 -18 month basis allowing us to continually reassess the risk profile of the economy and underlying investment.

As noted in prior communications, returns continue to lift alongside a higher RBA cash rate (as the fund is designed to do) and strong deployment levels.

Looking across different Australian loan markets, we are starting to see a greater divergence in fundamentals from the prior environment in which all sectors benefitted from government stimulus, rising property prices and robust employment. We are attentive to the need to manage the portfolio appropriately given higher interest rates and the pressure that may be placed on borrower serviceability and in finding suitable transactions. With our mandate allowing us to move away from sectors with weakening fundamentals towards those with strong fundamentals, this represents an opportunity when compared to peers who typically only focus on one market sector.

Thank you to our new investors, with the firm experiencing positive net inflows in each month this year.

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.