Switzer Higher Yield Fund October 2021 Portfolio Update

Welcome to the October 2021 Investment Update for the Switzer Higher Yield Fund (SHYF or the Fund). Click here to download the report.

Performance Summary

For the month of October, 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 2.84% p.a. net of fees, compared with 2.08% p.a. for the benchmark.

At the end of the month, the Fund had a weighted average interest rate of 1.10% compared with the actual RBA Cash Rate of less than 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 40 different bonds/hybrids across the capital stack, including a 42.2% weight to highly rated Australian state government bonds, and has a 16.4% weight to cash.

Market Commentary and Outlook

October was an extraordinary month with the main bond benchmarks registering some of their largest losses in history. The Fund outperformed for several reasons, including hedging out interest rate risk and hedging bank credit risk in anticipation of wider credit spreads on these securities.

In Australia, both short and long-term interest rates surged due to an upside inflation surprise. Core inflation was 0.7% for the September quarter and 2.1% for the 12 months (versus consensus forecasts of 0.5% and 1.8%, respectively). This led to a dramatic shift in market pricing for the cash rate, with more than 130 basis points (bps) of RBA hikes predicted for 2022 at one point. This was juxtaposed against the RBA’s claim that it would not touch its target cash rate until 2024.

The sharp increase in short-term interest rates in October was echoed by a striking rise in the 10-year Australian government bond yield, which lifted from 1.49% at 30 September to 2.09% by 29 October. This smashed fixed-rate bonds, as proxied by the Australian Prudential Regulation Authority’s benchmark for the superannuation industry – the AusBond Composite Bond Index, which declined a stunning 3.55% over the month of October. This was its second-worst month in over 30 years.

One outperformer in October was the State government bond (’semis’) market, where 10-year spreads declined from 34.8bps to 30.9bps, generating attractive capital gains.

Another sector we are positive about coming into year-end is the ASX hybrid market. In October, the large repayment of the CBAPE hybrid injected about $1.45bn of cash into investors’ hands looking for a high-yielding home. This played out across the month with the ASX Hybrids Index delivering a robust 0.63% fully franked return, as the 5-year major bank hybrid spread compressed from 241bps to 231bps. We believe it is possible these spreads could test 200bps before year-end.

Investment Objective

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.

Copyright © 2021 Switzer Asset Management Limited

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.