Welcome to the November 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 November 2022, the Fund delivered a return of 0.96% net of fees, compared with 0.36% for the benchmark RBA Overnight Cash Rate + 1.5%. Since inception, the Fund has returned 4.12% 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 4.09% and a yield-to-maturity of 5.01% compared with the actual RBA Cash Rate as at 30 November 2022 of 2.85%. 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 0.10 years.
Market Commentary and Outlook
After credit spreads jumped in October, there was a strong mean-reversion in November. This generated stronger returns for investors in the Fund. After peaking at 115 basis points (bps) over the quarterly Bank Bill Swap Rate (BBSW), 5-year major bank senior bond spreads finished November at 103bps, which is still wide of their post-2013 average level of 79bps. Along similar lines, 5-year Tier 2 bond spreads hit an intra-month peak of circa 280bps over the BBSW yet finished the month much tighter at 245bps. This compares with the average 5-year Tier 2 spread for the majors at around 189bps. In the State government bond market, 10-year NSW spreads over Commonwealth bonds contracted from 86bps at their highs in late October to 69bps by the end of November, which is still well above their long-term average of 33bps.
In summary, credit spreads still look very wide (or cheap) in the bank senior, bank Tier 2 and State government bond markets. Additionally, all these bonds are being boosted by an increase in the 3-month BBSW, which has leapt from around 0% last year to 3.1% pa at time of writing. For example, in 2021 the running yield of a 5-year CBA Tier 2 bond would have been approximately 1.3% pa and this year the same bond has paid 5.9% pa.
Another interesting development in November was the sharp reduction in government bond yields and how the markets paired-back previous forecasts for the RBA’s Cash Rate. Bond markets were pricing the RBA lifting its Cash Rate to as high as 4.6%. In November, this projection was pulled-back to 3.7% and this flowed through to long-term government bond yields. The yields on 10-year Australian Government bonds peaked around 4.3% in June and were still trading at 4.2% in October. These yields fell sharply in November to ~3.5% and this trend that continued in early December. The catalyst for this rally in risk-free bonds has been the pivot by global central banks to slow-down the pace of their record hiking cycles. This was in response to a clear deterioration in global macro data from interest rate hikes and evidence that core inflation in the US was rolling over.
This overall reduction in spreads has delivered strong performance by the Fund. We are optimistic that through December, spreads will continue to mean-revert and the pull-to-par effect mentioned last month should continue to drive strong returns.
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.