Switzer Higher Yield Fund May 2022 Portfolio Update

Welcome to the May 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 May, the Fund delivered a return of 0.46% net of fees, compared with 0.15% for the benchmark RBA Cash Rate + 1.5%. Over the past three years the Fund has returned 1.92% p.a. net of fees, compared with 1.80% p.a. for the benchmark.

At the end of the month, the Fund had a weighted average interest rate of 2.52% compared with the actual RBA Cash Rate of less than 0.35%. 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 0.03 years.

Market Commentary and Outlook

One of the most important developments in the month of May was the dramatic increase in the average interest rate of the portfolio, also known as the ‘running yield’, which is now the highest it has been in many years. We tend to talk more about the portfolio yield when assets become very cheap: as credit spreads (or the extra interest rate a bond earns) increase, the portfolio yields also improve. More recently, the jump in our portfolio yields has been driven by three key factors:

  1. the RBA lifting its cash rate from 0.10% to 0.35% for the first time in May,
  2. expectations of more RBA hikes that are priced into the quarterly bank bill swap rate (this has leapt from 0.01% last year to 1.5% at the time of writing), and
  3. a sharp spike in credit spreads in Australia and overseas.

Floating-rate strategies, such as our portfolio, will continue to benefit from the RBA delivering ongoing cash rate hikes, which are priced by the market to peak at a staggering 3.7%. Long-duration fixed-rate bond strategies will profit if there are fears of a growth slow-down (or a recession) and potential future rate cuts, which will push long-term interest rates down and fixed-rate bond prices higher.

We believe that the RBA will struggle to lift its cash rate above 1.50% in the near-term because of the constraint posed by a fall in house prices. The national dwelling value index published by CoreLogic declined by 0.1% in May, which is the first time it has fallen since the pandemic-induced correction that ended in September 2020. The real devil is in the detail, however, with much larger losses being recorded by Sydney and Melbourne, where home values declined by 1.0% and 0.7%, respectively, in the month of May alone.

Looking ahead, if the RBA Cash Rate continues to rise, then we believe the portfolio could start to see the benefits of increased running yields over the next 12 months.

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.