News and Insights

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.

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 or Pitcher Partners 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

Recent domestic bond market volatility has reverberated through many asset classes causing investors to question their portfolio allocations. While some aspects are often sensationalised, significant shifts are occurring within the Australian bond markets that investors need to understand and consider when managing their portfolios. Manning Asset Management, a specialist Fixed Income and Credit manager, is hosting a webinar to discuss:

• What are these shifts occurring within the Australian Fixed Income market;

• What are the implications for investors with an allocation to Fixed Income;

• What are the key economic factors they are watching to assess this changing landscape;

• How are they positioning the Fund given these changes and economic outlook

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.

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 webinar. 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.