Welcome to the August 2022 Investment Update for the Switzer Higher Yield Fund (Managed Fund) (SHYF or the Fund). Click here to download the report.

Performance Summary

For the month of August, the Fund delivered a return of 0.39% net of fees, compared with 0.28% for the benchmark RBA Overnight Cash Rate + 1.5%. Since inception, the Fund has returned 4.15% p.a. net of fees, compared with 3.69% p.a. for the benchmark.

At the end of the month, the Fund had a running yield of 3.15% and yield-to-maturity of 4.36% compared with the actual RBA Cash Rate of less than 1.85%. The average credit rating of the Fund is A+; it has an average A ESG bond rating from MSCI; and the modified duration of the Fund is 0.01 years.

Market Commentary and Outlook

Performance in August was driven by ongoing mean-reversion in the credit spreads of key portfolio positions, including both bank bonds and government bonds. The month was nonetheless a tale of two halves. Over the first 16 days, US equities soared 4.5% before accounting for dividends. However, in the second half of the month, the S&P500 slumped a stunning 8.1%, closing below 4,000 index points.

This was primarily driven by the market successfully anticipating a hawkish pivot by the US Federal Reserve. On 26 August, the Federal Reserve’s Chairman, Jay Powell, signalled that the Fed could lift interest rates by another super-sized 75 basis points (bps) at its next meeting in September, subject to future data flows, and reiterated that its central case was a terminal cash rate just shy of 4%. Powell further reinforced the perspective that crushing both elevated core consumer price pressures and inflation expectations was the Fed’s paramount priority even if that came at cost of a recession (without explicitly articulating this trade-off).

Long-term interest rates jumped before and after the Fed’s hawkish pivot with Australia’s 10-year government bond yield climbing sharply from 3.06% to 3.60% over August (this is still significantly below the 4.20% peak that Aussie 10-year yields touched in June). This meant that floating-rate bond strategies, such as the Fund, outperformed their fixed-rate counterparts.

Locally, senior-ranking bank paper performed well, with 5-year major bank senior spreads compressing from 95bps above the quarterly bank bill swap rate to 84bps. Tier 2, to which the Fund has a meaningful exposure, performed even more strongly with 5-year major bank spreads plunging sharply from 263bps to 235bps. One notch further down the capital structure, the ASX listed hybrid market also experienced reasonable spread compression with 5-year major bank spreads contracting from 308bps to 296bps over the month.

Looking forward, we expect bank credit spreads to continue to compress as they continue to offer attractive yields and be a significant driver of returns.

Investment Objective

The Switzer Higher Yield Fund (Managed Fund) is a zero-duration bond fund which aims to provide investors an attractive cash yield with low capital volatility by investing in a portfolio of high quality and liquid fixed income securities. The portfolio is managed by Coolabah Capital Institutional Investments. The Fund aims to achieve total returns which are between 1.5% to 3.0% greater than the RBA Cash Rate after fees and expenses on a rolling 12-month basis.