Welcome to the February 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 February, the Fund delivered a return of -0.21% net of fees, compared with 0.13% for the benchmark RBA Cash Rate + 1.5%. Over the past three years the Fund has returned 2.45% p.a. net of fees, compared with 1.91% p.a. for the benchmark.

At the end of the month, the Fund had a weighted average interest rate of 1.08% compared with the actual RBA Cash Rate of less than 0.10%. 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 0.20 years.

Market Commentary and Outlook

February was a fascinating month with the global conflict risks from the outbreak of war between Russia and the Ukraine. There was an international rush to dump all Russian exposures, which had been widely held as part of institutional investors’ emerging market equities/debt portfolios.

The S&P500 Index in the US fell 3.00%, while the AusBond Composite Bond Index fell 1.21% after declining by 1.02% in January. The AusBond Floating-Rate Note Index also lost 0.01% in February with the one stand-out being the ASX hybrids market, which managed to return 0.20% in the month.

There was aggressive widening in global credit spreads, with US and EUR cash investment-grade spreads increasing by 19 basis points (bps) and 23bps respectively over February. Aussie credit spreads lagged with 5-year major bank senior and Tier 2 spreads only climbing by 8bps and 16bps, respectively.

There were two islands of relative security, ironically at opposite ends of the risk spectrum. The AAA and AA rated State government bond (or ‘semis’) market outperformed, with NSW’s 10-year spread over Commonwealth government bonds tightening by 2bps in February. The relatively high-yielding ASX hybrid market also provided positive total returns, with 5-year major bank hybrid spreads tightening slightly from 231bps to 228bps.

We had two new major bank hybrid deals from ANZ and CBA, printing at 270bps and 275bps respectively over the quarterly bank bill swap rate. The ASX hybrid market absorbed this circa $3 billion of new supply extremely well, aided by the implementation of ASIC’s new Design & Distribution Obligation laws which make new hybrid issues only available to wholesale investors, or retail investors who have received personal advice from their financial planner.

State governments issued substantial amounts of new debt in response to very strong demand from Japanese investors and Australian banks. State and Federal budget deficits are also improving rapidly, helped by soaring commodity prices which has been amplified by the Russia/Ukrainian war.

Investment Objective

In the State government bond market, 10-year spreads to the Commonwealth government bond yield curve compressed from 37 bps to 33 bps over the month. All the States save Victoria reported much better budget outcomes than the market had forecast with material downgrades to future debt issuance consistent with Coolabah’s priors. The stand-out in this respect was NSW with a stunning $20 billion downgrade to debt issuance in FY2022 vis-à-vis bank estimates only a few months prior.

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.