Welcome to the September 2021 Investment Update for the Switzer Higher Yield Fund (SHYF or the Fund). Click here to download the report.
For the month of September, the Fund delivered a return of 0.21% net of fees, compared with 0.13% for the benchmark RBA Cash Rate + 1.5%. Over the past 3 years the Fund has returned 2.83% p.a. net of fees, compared with 2.12% p.a. for the benchmark.
At the end of the month, the Fund had a weighted average interest rate of 1.45% 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 0.02 years. The Fund has exposure to 40 different bonds/hybrids across the capital stack, including a 46.9% weight to highly rated Australian state government bonds, and a 15.1% weight to cash at present.
Market Commentary and Outlook
September was an interesting month. While the Fund pleasingly generated robust outperformance, both the fixed-income and equities markets struggled for several reasons.
Global equities slumped in September, falling 3.04% on the back of rising bond yields with the US 10-year government bond yield increasing from 1.31% to 1.49%. This environment hurt fixed-rate bonds (fixed-rate bond prices decline as yields rise).
As 10-year Australian government bond yields leapt from 1.16% to 1.49%, Australia’s main bond proxy, the fixed-rate AusBond Composite Bond Index declined by a chunky 1.51% in September (placing it in the worst 3% of months on record).
This decline reinforced a positive correlation between interest rate risk (AKA ‘duration’ risk) and equity returns. Since the Global Financial Crisis this correlation has often been negative, but we have repeatedly argued that investors should expect a positive correlation between duration and stocks in inflationary periods.
A triple-header of sorts was capped off by the near-zero duration AusBond Floating-Rate Note Index recording a relatively rare 0.06% loss in September (placing it in the worst 3% of months since 1999) for a completely different reason: the increase in senior-ranking bank bond credit spreads. We have been positioning to capitalise on this for some time.
In contrast to the weakness seen in the above markets, the Fund’s returns were powered by spread compression in our main positions: semi-government bonds, bank tier 2 subordinated bonds, and hybrids – all of which tightened over September.
Looking more broadly at markets, the topic of the month was China’s Evergrande Group (Evergrande), and the news that China’s Ministry of Housing and Urban-Rural Development had informed lenders that Evergrande – the second largest property developer in China – will not be making its principal and interest payments on outstanding debt from 21 September 2021. Evergrande has been perceived to be implicitly government-guaranteed (i.e. ‘too-big-to-fail’) and has issued higher-yielding debt in global markets that has been gobbled up by many brand-name fund managers.
Thankfully, the Fund was protected from the Evergrande saga by one of Coolabah’s fundamental yet far-reaching Environmental, Social & Governance screens: we do not invest in securities issued by companies based in non-democratic countries. This prevents us from allocating to bonds issued by any Chinese entities even though they often pay attractive interest rates, seem to be ostensibly low risk, and frequently have appealing growth prospects.
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.