Welcome to the July 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 July, the Fund delivered a return of 0.27% net of fees, compared with 0.23% for the benchmark RBA Cash Overnight Rate + 1.5%. Since inception the Fund has returned 4.15% p.a. net of fees, compared with 3.70% 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 1.35%. 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 0.06 years.

Market Commentary and Outlook

There have been significant shifts in global asset pricing in 2022 through to July, with the Bloomberg Global Aggregate Index falling over 12% in this period. These shifts are associated with the advent of strong returns from fixed income after a challenging period since late 2021. With the yield of the Fund being the highest it has for several years (i.e., the current running yield is 3.15%, versus a year ago 1.75%); future returns are likely to be more promising. Inflation has forced the US Federal Reserve to hike the target cash rate to the 2.5-3.0% range, which we were expecting (and likely now beyond that range), however many of the supply drivers of the recent inflation shock are now dissipating, while demand is being crushed by record increases in interest rates.

In the State government bond market, 10-year NSW and Victorian spreads above the Commonwealth government bond yield curve contracted from 60bps and 62bps, respectively, to circa 57bps over the course of July. One rating band lower in the AA-rated 5-year major bank senior bond market, credit spreads compressed modestly in July from 97bps to 95bps over Bank Bill Swap Rate (BBSW). There has been foreign bank demand to buy 5-year major bank bonds despite these bonds trading at lower yields and being more expensive.

A different story has been playing out in the major banks’ BBB+ rated Tier 2 bond market, where spreads increased sharply in July from 243bps to 263bps over BBSW on the back of outflows from credit funds (at an opportune time for investors to buy, as other credit funds have had to sell these bonds to fund redemptions, despite these bonds trading at very wide spreads) and a large new $1.25 billion issue from NAB.

The ASX hybrid market’s robust returns in July were driven by material spread compression with the 5-year major bank curve contracting from 334bps to 309bps, inside post-2013 average spreads of around 346bps. While we had forecast superior performance out of the ASX hybrid market because of risk premium compression, current spread levels are now tight relative to higher-ranking (and rated) major bank Tier 2 bond spreads sitting at 263bps.

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.