Welcome to the June 2022 Investment Update for the Switzer Higher Yield Fund (Managed Fund) (SHYF or the Fund). Click here to download the report.
For the month of June, the Fund delivered a return of -0.72% net of fees, compared with 0.19% for the benchmark RBA Cash Rate + 1.5%. Over the past three years the Fund has returned 1.49% p.a. net of fees, compared with 1.78% p.a. for the benchmark.
At the end of the month, the Fund had a running yield of 2.87% and yield to maturity of 4.22% compared with the actual RBA Cash Rate of less than 0.85%. The average credit rating of the Fund is AA-; it has an average A ESG bond rating from MSCI; and the modified duration of the Fund is 0.05 years.
Market Commentary and Outlook
The financial year ended with an acceleration of the asset pricing thematics that we have experienced since December 2021. That is, higher long-term interest rates resulting in lower current asset valuations. However, there is now evidence to suggest that the strong US core inflation (a key driver for higher interest rates) may be rolling-over. In this context, one important dynamic that we are watching closely is US corporate margins, which have been highly elevated and are likely to mean-revert as supply-chain blockages disappear and inventory levels build. This is crucial to US core inflation outlook and hence monetary policy. Naturally, expectations for the future path of interest rates will determine asset pricing levels.
Financial market performance in the month of June was exceptionally weak. The ASX All Ordinaries Index lost 9.51%, one of its worst month’s since March 2020. Australia’s benchmark bond index, the AusBond Composite Bond Index, lost another 1.48%, bringing its cumulative losses since August 2021 to a record 12.5%.
Bond yields continued their relentless march higher in June, though they did end the month much lower than their intra-month peaks. In Australia, the 10-year Commonwealth bond yield jumped from 3.35% at the end of May to 3.66% by 30 June. This was, however, significantly below the intra-month high of 4.20%. US 10-year government bond yields rose from 2.84% to 3.00% in June but were well down on the 3.47% peak touched in the middle of the month. The catalyst for the move lower in yields in the second half of June was softer activity and inflation data with mounting speculation that the US economy could experience a technical recession.
In June there was generally a drift wider in credit spreads, or the risk premium above the cash rate that companies pay to borrow money. The one exception was the major bank senior bond market, where 5-year major bank senior bonds tightened 4 basis points (bps) from 101bps to 97bps in June. 5-year Tier 2 bonds climbed by a material 18bps from 226bps to 245bps in June. Another notch down the capital structure, 5-year major bank Tier 1 hybrid spreads fared worse increasing sharply by 67bps from 279bps to 346bps. This has reduced the capital value of assets in the Fund and driven the negative performance in the month of June. However, a positive is that wider credit spreads and elevated BBSW interest rates means that the running yield and yield-to-maturity the Fund receives going forward has materially increased.
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.