October 2023 – Market Commentary

The Fund delivered +0.77% in October, 9.34% over 12 months and 6.73% annualised since inception (April 2016), continuing to deliver over 5% net return above the RBA cash rate.


We are pleased to report the Fund’s portfolio of assets continues to perform strongly, and we believe, is well-positioned to continue delivering strong income returns with capital stability. Despite the Fund’s higher expected returns, our approach to risk management remains unchanged. Manning has recently completed our quarterly Macroeconomic Assessment, aimed at gauging the influence of present and forecasted economic trends on our portfolio for both the immediate future and the long term. This thorough analysis is part of our commitment to understand the broader economic landscape and its potential effect on portfolio performance, particularly with regard to credit risk.

As we observe the macroeconomic backdrop, including issues around inflation, geopolitical conflict, productivity headwinds, and structural labour force changes, we are assessing what the implications are for Australia’s economy and our investment strategies. As readers will be aware, the bedrock of our investment strategy has always been to find and invest in investments that we believe will perform through the cycle, so moving through the various phases in the economic cycle shouldn’t necessarily require significant changes to our portfolio positioning. Given the RBA’s continued determination to tame inflation and slow the economy, it is key to consider how that contraction might impact the various components of the portfolio, and in turn how that might inform our investment decisions in the immediate future as well as medium term.

In determining credit quality, we assess a transaction via a bottom-up approach rather than top-down via a credit rating. While the assessment is an extensive process, two simplified examples of distinct elements that we consider illustrate how we aim to protect investor capital in times of stress.

Having made a detailed assessment of each of the Lenders we work with, we examine individual assets originated by a Lender by reviewing source information (loan application forms, credit files, and alike) that provides a rich insight into borrower quality. A testament to the value of this approach is looking back at the Global Financial Crisis, which was at least in part caused by loans to poor quality borrowers being bundled up into an often complex and opaque structure, and sold as relatively low risk, until eventually and unsurprisingly, many of those borrowers couldn’t make repayments.

We consider not only if borrowers can make their ongoing payments but also, if their circumstances change, what is the quality and extent of asset security is available to us to protect the portfolio from any credit loss. We believe this approach provides a vital sense of portfolio quality, which, in turn, informs our assessment of overall credit quality.

Another example would be understanding the alignment of incentives. Manning assesses the extent to which a Lender (and the principles behind it) has ‘skin in the game’. Which means what is the risk capital that the Lender itself is prepared to offer to support the performance of the assets they are generating? This is known as the amount of ‘risk retention’ that Manning and other market participants require from the sellers.

Given Australia’s position in the economic cycle and the clear intent of the RBA, management of credit quality remains a key focus. We advocate for investors to either do their own granular due diligence to assess the credit quality of their investments, or alternatively invest with those who have a proven track record in being able to do so.

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