Switzer Higher Yield Fund December 2022 Portfolio Update

Welcome to the December 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 December 2022, the Fund delivered a return of 0.36% net of fees, compared with 0.38% for the benchmark RBA Overnight Cash Rate + 1.5%. Since inception, the Fund has returned 4.12% p.a. net of fees, compared with 3.71% p.a. for the benchmark.

At the end of the month, the Fund had a running yield of 4.17% and a yield-to-maturity of 5.29% compared with the actual RBA Cash Rate as at 31 December 2022 of 3.10%. 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 0.19 years.

Market Commentary and Outlook

In December, the Fund generated robust returns as a function of ongoing mean-reversion in historically elevated credit spreads across a spectrum of core assets. This has been a common theme in recent months as investors have come to recognise these material mispricings.

Returns have also been driven by a dramatic increase in the Fund’s yield, or the weighted-average internal rate of return on the bank and government bonds it holds. The yield of the Fund has leapt from circa 1% last year to 5.29% as of 31 December 2022. The Fund’s strong return in December was encouraging given the significant challenges experienced by the equities and fixed-rate bonds sectors. In December, the S&P500 Index slumped 5.9%, while the NASDAQ Composite Index lost 8.7%. Even the comparatively resilient Australian All-Ordinaries Index fell 3.5%.

In 2022, the single-best performing liquid asset-classes were arguably cash and highly rated floating-rate bonds. They both outperformed other asset classes that were accurately “marked-to-market”. The fixed-rate Composite Bond Index lost 9.71% in 2022 (including 2.06% in December) and the AusBond FRN Index gained 1.28% (including 0.34% in December), just pipping the return on the RBA’s Cash Rate of 1.32%. The catalyst was the unprecedented increase in both overnight cash rates and the long-term expectations of central bank rates as reflected by government bond yields. In December 2021, the Australian and US 10-year government bond yields sat at 1.67% and 1.51% respectively. However, those yields had shot up to 4.05% and 3.87% respectively by December 2022.

Having been very negative on bank bonds for much of 2021 and 2022, the Fund started re-acquiring this asset class which had become historically very cheap in both spread and outright yield terms. Indeed, all-in yields as high as 6-7% p.a. have become available on some major bank bonds. This is the most attractive fixed-income return offered by government-guaranteed banks in over a decade. Looking forward, we believe the underlying themes of yield and mean reversion will continue to drive performance of the Fund.

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.

DISCLAIMER: AGP Investment Management Limited (AGP IM) (ABN 26 123 611 978, AFSL 312247) is a wholly owned subsidiary of Associate Global Partners Limited (AGP) (ABN 56 080 277 998), a financial institution listed on the ASX (APL). AGP IM is the Responsible Entity and Coolabah Capital Institutional Investments Pty Limited (CCI) is the investment manager of Switzer Higher Yield Fund (Managed Fund)(ARSN 093 248 232) (the Fund).

This material has been prepared for general information only. It does not contain investment recommendations nor provide investment advice. It does not take into account the objectives, financial situation or needs of any particular individual. Investors must, before acting on this material, consider the appropriateness of the material.

Any references to ‘We’, ‘Our’, ‘Us’, or the ‘Team’ used in the context of the portfolio commentary, is in reference to CCI, as investment manager for the Fund.

Neither AGP IM, AGP, their respective related bodies corporate, directors, officers, employees, agents or advisers guarantees the performance of, or the timing or amount of any repayment of capital or income invested in the Fund or that the Fund will achieve its investment objectives. Past performance is not indicative of future performance.

Any economic or market forecasts are not guaranteed. Any references to particular securities or sectors are for illustrative purposes only and are as at the date of publication of this material. This is not a recommendation in relation to any named securities or sectors and no warranty or guarantee is provided that the positions will remain within the portfolio of the Fund.

It is recommended that investors seek professional investment or financial or other advice to assist the investor determine the individual tolerance to risk and the investor’s need to attain a particular return on investment. In no way should the investor rely on information contained in this material.

Investors should read the Fund’s Product Disclosure Statement (PDS) and consider any relevant offer document in full before making a decision to invest in the Fund. The Fund’s Target Market Determination and other relevant information can be obtained by visiting www.associateglobal.com. All numbers included in this document are sourced from CCI unless otherwise stated.