Welcome to the July 2021 Investment Update for the Switzer Higher Yield Fund (SHYF or the Fund). Click here to download the report.

Performance Summary

For the month of July, the Fund delivered a return of 0.11% net of fees, compared to 0.13% for the benchmark RBA Cash Rate + 1.5%. Since inception the Fund has delivered a return of 4.83% p/a net of fees, outperforming the 3.87% p/a return for the benchmark RBA Cash Rate + 1.5%.

At the end of the month, the Fund had a weighted average interest rate of 1.75% compared with the actual RBA Cash Rate of sub-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 0.05 years. The Fund has exposure to 50 different bonds/hybrids across the capital stack, including a 43.1% weight to highly rated Australian State government bonds, and has a 5.2% weight to cash.

Market Commentary and Outlook

July was yet another month of cross-currents in fixed-income markets that furnished some attractive opportunities. The stand-out was the big rally in interest rate duration as long-term bond yields declined further. The fixed-rate (rather than floating-rate) benchmark AusBond Composite Bond Index appreciated by a strong 1.76% in July, outperforming even the Aussie share market’s 1.06% return.

This rally was fuelled by a fall in the Australian 10-year government bond yield, which slumped from 1.53% to 1.18% over the month on the back of markets pricing-out the hysteria earlier in the year about the threat of a spike in inflation (or “reflation”).

In Australia, the June inflation data remained incredibly benign notwithstanding the spike in the headline inflation numbers due simply to the payback from previous deflation during the COVID-19 shock last year. Over the year to June, core inflation in Australia remains at about 1.5% while on a six-month annualised basis core inflation has been running at 1.75%, both well-below the mid-point of the RBA’s target 2%-3% band.

Across the rest of the local fixed-income markets, performance was more subdued in July. Our indices that track credit spreads (note that when bond spreads compress, their prices increase and they can then be sold to generate a capital gain) on a constant-maturity basis had 5-year major bank senior bond spreads tightening from 49 basis points (bps) to 46bps over the month, partly explained by banks looking for paper to put into their Committed Liquidity Facility books.

One step down the capital stack, 5-year major bank Tier 2 bond spreads also tightened slightly from 129bps to 127bps over the quarterly bank bill swap rate (BBSW). After a robust return in June, the ASX hybrid market was much more subdued in July with 5-year major bank AT1 hybrid spreads effectively moving sideways from 248bps to 249bps (although 3-year spreads tightened from 217bps to 212bps). After the end of the month, Macquarie Bank also announced a new $500 million hybrid issue, which should be well-received.

In the State government bond sector, there was greater consolidation in June after an increase in the States’ cost of capital above the Commonwealth government bond curve. In July, for example, 10-year Victorian government bond spreads above the cost of Commonwealth government bonds were basically unchanged at 30.8bps. In contrast, NSW government bonds continued to be sold down as the market moved spreads wider on the back of the large debt funding surprise revealed by the NSW government following its otherwise impressive Budget in June.

One surprise after the end of the month was the RBA’s decision at its August board meeting to stick to its previous plan of tapering its bond purchase program from $5 billion/week to $4 billion/week in September. The strong consensus was that the RBA would reverse this decision, which the RBA said had been a line-ball call made at its June meeting on the heroic assumption the Sydney lockdown would be short and sharp. In August, the RBA maintained the taper, although it did caution that it would carefully revisit this plan at its September (and subsequent) Board meetings, considering the impact of the pandemic on the economy. The RBA has also stressed that the $4 billion/week is flexible, open-ended, and can be dialled-up or dialled-down depending on the data.

Investment Objective

The Switzer Higher Yield 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.