Welcome to the August 2021 Investment Update for the Switzer Higher Yield Fund (SHYF or the Fund). Click here to download the report.
For the month of August, the Fund delivered a return of -0.16% net of fees, compared with 0.13% for the benchmark RBA Cash Rate + 1.5%. Over the past three years the Fund has returned 2.81% p.a. net of fees, compared with 2.20% p.a. for the benchmark.
At the end of the month, the Fund had a weighted average interest rate of 1.73% 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 0.06 years. The Fund has exposure to 43 different bonds/hybrids across the capital stack, including a 47.1% weight to highly rated Australian state government bonds and a 7.6% weight to cash.
Market Commentary and Outlook
State government bonds (also known as “semis”) tend to be amongst the safest and most liquid holdings in the portfolio. While almost all our bond yields increased in August, the interest rate spread paid by these bonds above the yield on Commonwealth government bonds jumped by 30 basis points (bps). This is on par with the near-record 30-40 bps increase in semi-spreads observed during the initial pandemic shock in March 2020.
At around 45 bps above 10-year Commonwealth government bond yields, NSW’s 10-year bonds are trading on spreads well above the average ~30 bps that prevailed between 2014 and 2018. In a world where most asset-classes are very expensive, this is one sector that offers a compelling opportunity, which we have been eager to exploit.
As we look ahead, there will be several key drivers that we believe will help drive semis spreads tighter:
- NSW has $28bn of cash ready for debt clearance in its Debt Retirement Fund.
- The lockdowns in NSW and Victoria are costing the economy around 50% less than what was initially expected.
- We are forecasting the NSW lockdown to end in October.
- GST revenue, which is the single biggest source of State government tax revenue, remains strong.
- Other states not in lockdown will revise down their debt issuance requirements.
Turning to the hybrids sector, spreads on 5-year major bank hybrids increased by 5-6 bps in August as banks front-ran new ASIC marketing rules. These new marketing regulations will make it much harder for banks to sell hybrids to retail investors from 5 October 2021. This triggered a sudden spike of supply in August from issuers including Westpac, Suncorp and Macquarie. The net result of this new supply was that it pushed 5-year major bank hybrid spreads up from 248 bps to ~253-254 bps.
The new ASIC regulations, known as “design and distribution obligations”, require hybrid issuers to take responsibility for the types of investors to whom they sell hybrids Most banks are therefore switching to selling hybrids to wholesale investors rather than retail investors. This in turn will likely mean smaller ASX hybrid deals and more securities issued into the unlisted institutional market. We expect this to be a positive for listed hybrids as supply will be less than it has been in the past.
Finally, in the bank Tier 2 bond market, we had been materially de-risking our exposures in anticipation of new supply and August delivered, with the first local major bank Tier 2 bond issue since January 2020. Commonwealth Bank issued a large $1.5 billion, Tier 2 issue at 132 bps over the Bank Bill Swap Rate and it has since tightened slightly to around 127 bps on the bid side.
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.
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DISCLAIMER: Switzer Asset Management Limited (SAML)(ABN 26 123 611 978, AFSL 312247) is a wholly-owned subsidiary of Contango Asset Management Limited, a financial services business listed on the ASX (CGA). SAML and CGA are authorised representatives of ST Funds Management Limited (AFSL 416778) to provide general advice. SAML is the Responsible Entity and Coolabah Capital Institutional Investments Pty Limited 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 purposes 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 should, before acting on this material, consider the appropriateness of the material.
Neither SAML, CGA, their related bodies corporate, entities, directors or officers guarantees the performance of, or the timing or amount of 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.
Investors should seek professional investment, financial or other advice to assist the investor determine the individual tolerance to risk and needs 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. Relevant information relating to the Fund can be obtained by visiting www.switzerassetmanagement.com.au. All numbers included in this document are sourced from Coolabah Capital Institutional Investments unless otherwise stated.