September, 2023
Income return was the most significant contributing factor to outperformance during the month. The portfolio's running yield was 5.9% at month end, with the spread measured at 2.0%.
Credit spread dynamics contributed to outperformance during the month. Spreads were subdued during September before widening towards the end of the month as rising bond yields and oil prices saw investors move to reduce risk. The Fund's security selection was rewarded, with exposure to subordinated bank spreads and foreign denominated credit contributing to credit spread return.
The Manager continues to actively manage liquidity tall risks by maintaining an elevated exposure to highly liquid government bonds and cash. Allocation to government bonds contribute to the fund's running income and allow the manager to inexpensively express duration positions. During the month the Fund's exposure to government bonds was increased. The Manager elected to lengthen the Portfolio's duration during September, adding exposure to the longer dated (7-8yrs) end of the curve via government bonds. The Manager chose to utilise the long end, recognising the possibility of persistent elevated inflation and uncertainty of the path of monetary policy tightening. During September, rising bond yields detracted from outperformance as a result of the Fund's 0.6 years of duration.
The Portfolio was very active in primary and secondary markets during September. Major banks and financial credit exposures were selectively lengthened and the Manger took the opportunity to rotate into fixed rate bonds, locking in attractive coupons as the peak of the monetary tightening cycle nears. Note the fund typically hedges the interest rate risks of fixed rate bonds in the portfolio. The Fund also invested in the floating rate tranche of the new $2.4B senior unsecured deal from Westpac.
The outlook for credit is challenging and the Fund remains defensively positioned while retaining the capacity to take advantage of relative value opportunities as they arise
The Fund invests in quality issuers that meet Perpetual's ESG and Values based criteria relating to what the company is in the business of and the way business operations are conducted respectively. Upon application of the ESG and Values based criteria, several bond issuers have been screened out These include, for example, companies involved in the extraction of fossil fuels or companies whose revenues are significantly associated with socially questionable products or services.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/828_pfp-2-1.pdfAugust, 2023
Income return was the most substantial contributor to outperformance during the month, led by RMBS, banks and non-financial corporates. The income generated by the Fund's exposure to floating rate notes and allocation to cash have benefitted from the aggressive increase in base rates over the past 16 months. The portfolio's running yield was 5.5% st month end, with the spread measured at 2.0%.
Credit spread contraction contributed to outperformance during August as domestic spreads continued to grind tighter. The Fund's exposure to securitised sectors was the most significant contributor to credit spread return. This was partially offset by widening spreads among a number of Euro denominated bonds across diversified financials, real estate and non-financial corporate sectors.
In recognition of tightening financial conditions, the Fund continues to maintain a highly liquid sleeve (-15-18%) of cash and government securities which protects against liquidity tail risks. The Fund maintains a small (0.4 years) duration exposure as a result of the government bond allocation which the Manager elected to shorten during the month. The Fund's duration exposure was rewarded during the month as yields ended the month slightly lower contributing to return.
Issuance volumes were resurgent during August and the Fund was active in primary and secondary markets. The Manager elected to add exposure to domestic and offshore banks. The Fund took part in the $5.0B senior unsecured deal from CBA before monetising the new issue concession taking profit shortly after issue The Manager elected to take part in the new 10-year $750M fixed rate deal from Lloyds Banking Group which performed well over the of the month contributing to outperformance.
The outlook for credit remains delicately poised, the Manager remains conscious of the implications of slowing growth and tightening financial conditions for credit valuations and liquidity The Fund remains defensively positioned while retaining the capacity to take advantage of relative value opportunities presented as the outlook improves
The Fund invests in quality issuers that meet Perpetual's ESG and Values based criteria relating to what the company is in the business of and the way business operations are conducted respectively Upon application of the ESG and Values based criteria, several bond issuers have been screened out These include for example, companies involved in the extraction of fossil fuels or companies whose revenues are significantly associated with socially questionable products or services.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/828_pfp-1-1.pdfJuly, 2023
Income return was a substantial contributor to outperformance during the month, led by RMBS, banks and non-financial corporates. The portfolio's running yield was 5.8% at month end, with the spread measured at 2.1%.
Credit spread tightening was the most significant contributing factor to return during the month. Domestic spreads narrowed over the month on supportive supply dynamics and increasing investor risk appetites Subordinated bank exposures performed well as tier 2 and hybrid paper tightened reflecting elevated secondary market demand and a paucity of new issues. Tightening RMBS spreads also contributed to outperformance Lastly, the Fund benefitted from exposure to foreign denominated credit across multiple sectors USD spreads outperformed AUD counterparts and the Fund's exposure to USD denominated corporates, domestic and offshore banks were constructive. The Manager elected to lock in recent profits on an EUR denominated bond from Ausnet following an extended rally
In recognition of tightening financial conditions, the Fund continues to maintain a highly liquid sleeve (15-18%) of cash and government securities which protects against liquidity tall risks. The Fund maintains a small (0.6 years) duration exposure as a result of the government bond allocation
Primary market activity was subdued and the Manager was selective in purchases made during the month. The Fund increased its exposure to CMBS via a new $500M Think Tank deal Early in July, the Manager elected to add exposure to a recently issued EUR denominated Morgan Stanley senior bond which tightened throughout the remainder of the month, contributing to outperformance.
While the outlook for credit has improved, the Manager remains conscious of the implications of slowing growth and tightening financial conditions for credit valuations and liquidity. The Fund remains defensively positioned while retaining the capacity to take advantage of relative opportunities presented as the outlook improves
The Fund invests in quality issuers that meet Perpetual's ESG and Values based criteria relating to what the company is in the business of and the way business operations are conducted respectively Upon application of the ESG and Values based criteria, several bond issuers have been screened out These include for example, companies involved in the extraction of fossil fuels or companies whose revenues are significantly associated with socially questionable products or services.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/828_pfp-9.pdfJune, 2023
The Fund's June relative return was notable, accounting for almost zox of the Fund's annual outperformance target in a single month. Income return was a significant contributor to outperformance during the month, led by RMBS, domestic and offshore banks. The portfolio's running yield was 5.1% at month end. with the spread measured at 11%
Credit spread tightening was the most substantial contributor to return during June. Domestic crest spread dynamics were ret atively subdued. narrowing slightly on aggregate while remaining in range of recent levels. The Fund's exposure foreign denominated hybrid securities was the key contributing recta to the robust credit spread return. After reducing hybrid exposures early in the year. the Manager selectively added exposure to USD denominated Macquarie hybrid debt at attractive levels following the sharp selloff in March in the wake of 1183's purchase of Credit Suisse. In June. the spread on this position narrowed substantially. contrituting to return. Elsewhere. a Euro denominated hybrid in the utilities sector was a significant contributor.
In recognition of tightening financial conditions, the Fund continues to maintain a highly liquid sleeve (-15.18%) of cash and government securities which protects against liquidity tag risks. Allocation to government bonds contribute to the fund's running income and allow the m anger to inexpensively express duration positions. During the month the Manager added exposure to government bonds. increasing the Fund's duration to 0.6 years by month end. The Fund was relatively active In primary and secondary markets during the month The Fund invested in the new fixed rate issue from ACI finance which the manager believes offers attractive carry for the level of risk.
The Fund also bought some recently issued E UR denominated Sydney Airport senior bonds in secondary which were priced cheaply relative to the AUD BBB curve. The Fund remains defensively positioned while retaining the capacity to take advantage of relative opportunities. The Fund invests in quality issuers that met Perpetual's ESG and Values based criteria relating to what the company is in the business of and the way business operations are conducted respectively. Upon appl ication of the ESG and Values based criteria several band issuers have been screened out. These include. for example. companies involved in the extraction of fossil fuels or companies whose revenues are significantly associated with socially questionable products or services.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/828_pfp-8.pdfMay, 2023
The Perpetual ESG Credit Income Fund in the month of May delivered a return of 0.6%. outperforming its benchmark by 0,3%
Income retLen was the most significant determinant of outperformance during May. The Fund continues to wiled a healthy rum ing inane in excess of the benchmark and rising interest rates continue to increase the coupons paid on the Fund's floating rate assets. The portfolio% running yield was 53% at month end. with the spread measured al 2.1%.
Credit spread tightening also contributed strongly to performance. During a month of benign spread dynamics, the Fund's expos ure to nonfinancial corporates. utili ties and securitised seders was constructive. Subordinate trenches of a number of RMBS issues performed wet I. contributing to relative return.
In recognition of lightening financial conditions. the Fund continues to maintain a highly liquid sleeve (14 -15%) of cash and government securities which protects against liquidity tail risks. During the month the Manager actively traded government bonds ending the month with a slightly reduced allocation Allocation to government bonds supported the Fund's running income and during the month the Fund'scurve positioning contribu tea to outperfamance The Fund was active in primary and secondary markets cluing May. The Manager was able to monetise new issue concessions on de als from NAB. Credit Agricole and Bendigo Adelaide Bank.
The Fund added allocation to a number of RMBS and ABS issues. taking the opportunity to rotate into higher yielding trenches and longer dated issues Non-financial corporate exposures were selectively trimmed with the Manager taking profits on a number of positions. This included a USD denominated NBN co fixed rate bond which performed well as a result of Moody's upgrading Its credit rating during the month.
Throughout the first half of 2023. the Manager has reduced credit risk in the Fund in line with the negative outlook. The cre dit outlook has improved while remaining slightly negative. Accordingly. the Fund remainsdefensively positioned ythile retaining the capacity to take aevant age of relative opportunities. The Fund invests in quality issuers that meet Perpetual's ESG and Values based criteria relating to what the company is in the business of and the way business operations are conducted respectively. Upon application of the ESG and Values based criteria. several bond issuers h aye beenscreened out. These include. for example, companies involved in the extract ion of fossil fuelsor companiesW.1os° revenues are significantly associated with socially questionable products or services
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/828_pfp-7.pdfFebruary, 2023
Income return contributed to outperformance during the month. The portfolio's running yield was 4.6% at month end, with the s pread measured at 1.7%.
Credit spread dynamics were constructive for performance during the month as spreads tightened on aggregate. The Fund's alloc ation to financials — most notably domestic and offshore banks — were the key contributors to spread return during February. The Manager elected to reduce credit risk in the portfolio, moving up the quality spectrum, trimming BBB exposures while increasing allocation to AAA rated credit. As a resul t, the Fund's exposure to financials was reduced while allocation to RMBS — a sector which offers access to AAA floating rate credit — increased. Additionally, in the rotation away from riskier segments of credit, the manager has added to the short position on high yield credit (initially established in J anuary), through a credit default swap (CDS) hedge. While the credit outlook remains neutral, it is worth noting that while technical indicators are supportive , credit fundamentals are more challenged, and the Manager elected to de-risk the portfolio and lock in recent gains.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/828_pfp-6.pdfJanuary, 2023
Credit spread tightening was the most significant contributor to outperformance over the month. In a strong month for credit, spreads narrowed as the outlook for global growth improved while investors also priced in a slower pace of monetary tightening from central banks. Th e key contributing sectors to credit spread outperformance were domestic and offshore banks, with a more modest contribution from non -financial corporates, utilities and securtised bonds. The Fund's exposure to USD and EUR denominated debt performed well across the aforementioned non -securitised sectors. While the Fund retains the capability to invest in offshore credit markets, all foreign denominated exposures are hedged back to AUD. Following the robust rally in credit spreads and cognisant of the impact successive interest rate increases will have on the debt servicing metrics for more highly levera ged issuers, the Manager elected to add a short position on the European crossover CDS index (which tracks European issuers on the cusp of investment grade and high yield).
Over recent months, in recognition of tightening financial conditions and liquidity risks, the Fund has held approximately 15 -17% in cash and highly liquid government and semi-government bonds. During January, this high liquidity sleeve of the portfolio was converted to cash from semi-government securities following the sharp fall in bond yields, contributing to portfolio performance. The Fund ended the month with a sm all, short (negative) duration position which is expected to perform if bond yields rise following their strong January rally.
Sector allocation was actively managed during the month. The Manager elected to increase exposure to securitised sectors, buy ing RMBS in secondary markets. The Manager believes that the sector offers attractive value relative to the major bank curve which it is typically correlated with. The Fund's regional bank exposure was increased via new deals from Bendigo Adelaide Bank and Bank of Queensland which offered attractive value relative to the majors. Elsewhere, the manager elected to trim exposures to subordinated financials.
The Fund's defensive positioning continues to mitigate the impact of tightening financial conditions and the potential elevat ed market volatility that may result as central banks continue to withdraw liquidity from financial markets (quantitative tightening) at an unprecedented p ace. This positioning provides a degree of risk mitigation, whilst preserving the capacity to take advantage of relative value opportunities should market volatility increase.
The fund applies both ethical and socially responsible investment (SRI) screens relating to what the company is in the business of and the way business operations are conducted respectively. Upon application of the ethical and SRI screens, several bond issuers have been screen ed out. These include, for example, companies involved in the extraction of fossil fuels or companies whose revenues are significantly associated with socially questionable products or services.
December, 2022
Income return was the most significant contributor to relative return during the month. Financials and securitised sectors were the most substantial drivers of income return with non-financial corporate exposures also contributing. Ongoing increases in interest rates and expanding cre dit premix have contributed to the increase in portfolio income over the past year. The portfolio's running yield was 5.0% at month end, withthe spread measured at 2.3%.
Credit spread dynamics contributed to outperformance during December. Credit spreads traded in a tight range, narrowing over the course of the month. Credit spread performance was led by domestic and offshore banks with corporates and utilities also contributing. The Portfolio's exposure to USD denominated domestic bank debt performed well, led by Macquarie and Westpac USD hybrids. The Fund's small, short position inthe E UR Xover CDS index performed well during December as Euro corporate spreads surged in the middle of the month. The Manager exited the position at the peak in the wake of the surprise announcement on monetary policy by the Bank of Japan (BoJ), which loosened the yield on its ten year government bonds from 0.25% to 0.5%, wreaking havoc on equity, bond and currency markets.
The contribution of duration exposure was constructive. The portfolio began the month with near 0 duration. The Manager elected to add duration exposure as long term yields rose following the surprise BoJ policy change. As yields retraced lower by month end, portfolio performance benefited from the modest positive duration exposure (less than six months).
In recognition of tightening financial conditions, reduced liquidity (as a result of quantitative tightening by central banks) and the challenging outlook for credit, the Fund maintains approximately 10-15% weighting across cash and highly liquid government and government adjacent sectors. After selectively adding during December, the Fund's semi-government exposure was 8.1% at month end. Semi-government securities offer a slight premium to government bonds while remaining highly liquid and relatively low risk. Semi spreads widened slightly over the month, marginally detracting from outperformance.
Sector allocation was actively managed during the month. Allocation to domestic bank and semi government sectors was increased. RMBS exposures were rotated with the manager electing to take part in the December Resimac deal and trimming a number of existing RMBS positions. Elsewhere, the Fund took part in the new benchmark deal from Suncorp Metway. The Fund's defensive positioning continues to mitigate the impact of tightening financial conditions and disruptions to credit market liquidity. As the outlook for credit spreads improves, the Fund retains capacity to take advantage of relative value opportunities.
The fund applies both ethical and socially responsible investment (SRI) screens relating to what the company is in the business of and the way business operations are conducted respectively. Upon application of the ethical and SRI screens, several bond issuers have been screened out. These include, for example, companies involved in the extraction of fossil fuels or companies whose revenues are significantly associated with socially questionable products or services.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/828_pfp-4.pdfNovember, 2022
Income return was the most significant contributor during the month. Financials and securitised sectors were the most substantial drivers of income return with utilities and corporate exposures also contributing. As interest rates continue to rise and credit premia widen, the Fund's running yield continues to increase, mitigating the impact of ongoing credit spread volatility. The portfolio's running yield was 4.9% at month end, with the spread measured at 2.3%.
Credit spread dynamics were constructive for performance during the month. Credit spreads tightened on aggregate while performance was mixed by sector. The Fund's allocation to offshore financials performed well, most notably a number of Euro denominated hybrid exposures. Domestic bank subordinated spreads were impacted during the month as APRA issued a statement reiterating prudential requirements for callable instruments.
Over recent months, in recognition of tightening financial conditions, reduced liquidity and the challenging outlook for credit, the Fund has held approximately 20%-25% in cash and highly liquid government bonds. During November, this defensive allocation was reduced in line with the improving outlook to 10-15%. The Manager elected to invest in semi-government securities which offer a slight premium to government bonds while remaining highly liquid and relatively low risk. The Fund's semi-government exposure's duration was hedged via short government bond futures whic h gave the fund exposure to swap spread tightening. During the month, the small semi-government allocation performed well, contributing to outperformance.
Sector allocation was actively managed during the month. Exposure to securitised sectors was selectively increased over the month. The Manager believes that securitised assets currently offer relative value following recent tightening of the spread between the 1-and-3 month swap rates, with most securitised bond coupons benchmarked against 1 month bank bill swap rates. Elsewhere, the Manager elected to take part in new deals from NAB and I NG bank, both of which priced at attractive levels and performed well in secondary.
The Fund's defensive positioning continues to mitigate the impact of tightening financial conditions and disruptions to credit market liquidity. As the outlook for credit spreads improves, the Fund retains capacity to take advantage of relative value opportunities.
The fund applies both ethical and socially responsible investment (SRI) screens relating to what the company is in the business of and the way business operations are conducted respectively. Upon application of the ethical and SRI screens, several bond issuers have been screened out. These include, for example, companies involved in the extraction of fossil fuels or companies whose revenues are significantly associated with socially questionable products or services.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/828_pfp-3.pdfOctober, 2022
Income return was the most substantial contributing factor to performance during the month. The fund's running yield continues to increase as interest rates rise and credit premiums widen remaining a crucial buffer mitigating ongoing volatility in credit and fixed income markets. The portfolio's running yield was 4.1% at month end, with the spread measured at 2.1%.
Credit spread dynamics were slightly negative for performance during October. Credit spreads moved slightly wider over the month while swap spreads expanded sharply. Credit spreads remain impacted by reduced secondary market liquidity. The Fund's exposure to USD corporates and financials were the most significant detractors as USD credit widened. The Fund's long position in the EURO crossover CDS index (which tracks European non-investment grade corporate issuers) performed well during the month. Euro denominated spreads have recovered over recent months following a sharp widening in June 2022. The Manager elected to take profits on the position, reducing credit risk within the portfolio.
In recognition of tightening financial conditions, reduced liquidity and the challenging outlook for credit, the Fund continues to actively trade Australian government bonds. Over recent months, the Fund has held approximately 20%-25% in cash and highly liquid government bonds. During October, the Fund's government bond exposure performed well as yields rallied and by month end, the Manager had reduced the position.
The Manager was active in primary and secondary markets during the month. The Fund took part in new deals from ANZ and Commonwealth Bank which offered attractive spreads and are indicative of the potential opportunities presented by recent spread widening. Elsewhere, the Manager was opportunistic in purchasing a number of competitively priced RMBS lines in secondary that were liquidated as part of the response of UK pension funds to the GILTs crisis. Securitised assets performed well during the month, with credit spreads contracting and contributing positively to portfolio returns.
Overall, the fund remains defensively positioned in recognition of the challenging outlook for credit spreads and increasingly tight financial conditions, while retaining the flexibility to take advantage of relative value opportunities presented by recent volatility.
The fund applies both ethical and socially responsible investment (SRI) screens relating to what the company is in the business of and the way business operations are conducted respectively. Upon application of the ethical and SRI screens, several bond issuers have been screened out. These include, for example, companies involved in the extraction of fossil fuels or companies whose revenues are significantly associated with socially questionable products or services.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/828_pfp-2.pdfSeptember, 2022
Income return was the most substantial contributing factor to performance during the month offsetting a portion of the negati ve credit spread return. The Fund's running yield continues to offer a robust buffer against ongoing volatility in credit and fixed income markets. As a result of rising interest rates and widening credit spreads, the Fund has continued to increase its running yield while at the same time reducing credit risk. Th e portfolio's running yield was 3.9% at month end, with the spread measured at 2.2%.
Credit spread widening detracted from performance during the month. Domestic spreads widened on aggregate as hawkish central bank rhetoric, slowing economic growth and tightening financial conditions weighed on credit markets. Domestic spreads were more resilient than offs hore spreads during September. The most significant detractors from credit spread return were foreign denominated, long dated, subordinated debt and hybrids. Elsewhere, spread dynamics were mixed, with the Fund's utilities allocation performing well.
In recognition of tightening financial conditions and the challenging outlook for credit, the Fund continues to hold and acti vely trade Australian government bonds. At month end, just under 25% of the fund's assets were held across highly liquid government bonds and cash. During the month the Manager elected to increase the allocation to government bonds while rotating into shorter dated bonds in order to keep the fund's duration steady. The Fund's duration exposure detracted from performance during September, as bond yields rose throughout the month.
Sector and issuer allocations were actively managed throughout the month. The Manger elected to opportunistically trim subord inated bank debt exposures. The Fund took part in the new deal from NBN co which represented an attractive relative value opportunity from a h igh-quality government owned issuer with an established monopoly. Overall, the fund remains defensively positioned in recognition of the challenging outlook for credit spreads, while retaining the flexibility to take advantage of relative value opportunities presented by recent volatility.
The fund applies both ethical and socially responsible investment (SRI) screens relating to what the company is in the business of and the way business operations are conducted respectively. Upon application of the ethical and SRI screens, several bond issuers have been screen ed out. These include, for example, companies involved in the extraction of fossil fuels or companies whose revenues are significantly associated with s ocially questionable products or services.
The fund applies both ethical and socially responsible investment (SRI) screens relating to what the company is in the business of and the way business operations are conducted respectively. Upon application of the ethical and SRI screens, several bond issuers have been screen ed out. These include, for example, companies involved in the extraction of fossil fuels or companies whose revenues are significantly associated with s ocially questionable products or services.
August, 2022
Income return was the most significant contributing factor to outperformance during the month. The Fund's allocation to RMBS,domestic and offshore banks as well as non-financial corporates were the key contributing sectors to income return. The Fund's running yield continues to offer a robust buffer against ongoing volatility in credit and fixed income markets. The portfolio's running yield was 3.8% at month end with the opread measured at 2.2%.
Credit spread tightening was a large contributing factor to outperformance during the month. Domestic spreads were rangebound on aggregate, however the fund's exposure to offshore credit was rewarded. USD denominated hybrid and subordinated domestic bank positions performEd well. The Fund's exposure to Euro denominated non-financial corporates continued to recover following the indiscriminate spread widening observed in June.
The Fund's duration exposure detracted from performance during August, as bond yields rose throughout the month. The Fund continues to hold and actively trade Australian government bonds, contributing to portfolio liquidity and running income, whilst further strengthening the portfolios credit quality. In recognition of tightening financial conditions and the challenging outlook for credit the Manager has allocated approximately 25% of the fund to highly liquid exposures across cash and government bonds. At month end, this defensive allocation was predominantly held in Government bonds.
The Manager was active in secondary markets during the month, rotating issuer exposures across domestic and offshore banks and non-financials. One of the instruments the Manager continues to utilise in actively managing credit risk is exposure to the EURO crossover CDS index (which tracks European non-investment grade corporate issuers). Allocation to this position was increased towards month end. Overall, the fund remains defensively positioned in recognition of the challenging outlook for credit spreads and increasingly tight financial conditions, while retaining the flexibility to take advantage of relative value opportunities presented by recent volatility.
The fund applies both ethical and socially responsible investment (SRI) screens relating to what the company is in the business of and the way business operations are conducted respectively. Upon application of the ethical and SRI screens, several bond issuers have been screened out. These include, for example, companies involved in the extraction of fossil fuels or companies whose revenues are significantly associated with socially questionable products or services.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/828_pfp-1.pdfJuly, 2022
The rise in credit yield premiums and official cash rates over the first half of 2022 has improved the Fund's running yield as a result of its predominantly floating rate structure. The portfolio's running yield was 3.3% at month end with the spread measured at 2.2%.
The expansion of credit spreads observed over recent months slowed in July. While AUD spreads ended the month slightly wider, USD and especially EUR spreads tightened, the latter recovering a portion of the dramatic selloff observed in June. During June, following the drama tic selloff in EUR credit in June, The Manager elected to add a long position in the EURO crossover CDS index (which tracks European non -investment grade corporate issuers). As EUR spread recovered, the position contributed substantially to performance. The Fund's exposure to financial spreads - most notably offshore banks - also performed well, contributing to outperformance.
The Fund continues to hold and actively trade Australian government bonds, contributing to portfolio liquidity and running in come, whilst further strengthening the portfolios credit quality. In recognition of tightening financial conditions and the challenging outlook fo r credit the Manager has allocated approximately 25% of the fund to highly liquid exposures across cash and government bonds. The funds duration expos ure performed well during July, with bond yields rallying on rising recession concerns and moderating monetary policy tightening expectations.
With a challenging outlook for credit spreads and reduced liquidity in secondary markets, risk management remains paramount. The Fund maintains its defensive positioning while retaining the flexibility to take advantage of relative value opportunities presented by recent volatility. The contribution of duration and synthetic credit positions during the month demonstrate the potential benefit offered by the flexibility of the Fund's elevated cash and government bond allocation.
The fund applies both ethical and socially responsible investment (SRI) screens relating to what the company is in the business of and the way business operations are conducted respectively. Upon application of the ethical and SRI screens, several bond issuers have been screen ed out. These include, for example, companies involved in the extraction of fossil fuels or companies whose revenues are significantly associated with socially questionable products or services.
June, 2022
Financial markets weaken on inflation and recession concerns; AUD spreads widen; EUR spreads underperform dramatically; Yields rise early before rallying; RBA increases 50bps; Corporate primary issuance subdued; securitisation robust; The outlook for credit has improved while remaining negative
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/189403419.pdfMay, 2022
Income return contributed to relative performance over the month. Contributions to income return were broad based, led by RMBS, non-financial
itrunning yield was 1.84% at month end with the spread measured at 1.34%. Credit spread expansion was the most significant detractor from return over the month. Spreads continued to widen, impacted by growth and inflation and offshore banks werethe most significant detracting sectors. Alongside the broader move wider in spreads and tightening financial conditions, domestic bank spreads were
#impacted by elevated issuance volumes during the month. The Funds allocation to government bonds continued to build, adding to portfolio liquidity in the form of highly liquid, AAA rated government issued securities with low transaction costs (bid/offer spreads) relative to credit securities which remain impacted by subdued secondary market liquidity. During ed 25 bps increase to thecash rate.porates in order take
advantage of the steepness of the BBSW curve. Interest rates for securitised assets are predominantly benchmarked against the 1-month BBSW, while corporates are benchmarked to the 3 month BBSW which is currently notably higher, reflecting market pricing of increases to the RBA official cash rate over this time horizon. The Manager also took the opportunity to add a number of Euro denominated bonds which were offering attractive relative value in the utility and telecommunications sectors.
With a challenging outlook for credit spreads and reduced liquidity in secondary markets, risk management remains paramount. The Fund maintains its defensive positioning while retaining the flexibility to take advantage of relative value opportunities presented by recent volatility. The fund applies both ethical and socially responsible investment (SRI) screens relating to what the company is in the business of and the way business operations are conducted respectively. Upon application of the ethical and SRI screens, several bond issuers have been screened out - including for example, companies involved in the extraction of fossil fuels or companies whose revenues are significantly associated with socially questionable products or services.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/188422449.pdfApril, 2022
Income return was the key contributor to relative performance over the month. The portfolio collected running income in excess of the benchmark across all corporate and collateralised sectors. Contributions to income return were broad based, led by RMBS, non-financial corporate, domestic and offshore banks. The portfolio running yield at month end was 2.02% with the spread measured at 1.87%
The outlook for credit remains marginally positive, supported by robust credit quality. The funds elevated cash holdings are reflective of seasonal positioning over the holiday period and a defensive posture given historically low credit premiums.
Valuation indicators are benign. Concerns surrounding the Omicron variant and a more hawkish stance from the Fed have contributed to widening spreads across US investment grade, high yield and AU investment grade. The basis swap has normalised and is no longer detracting from the overall credit outlook.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/187432211.pdfJanuary, 2022
Income return was the key contributor to relative performance over the month. The portfolio collected running income in exces s of the benchmark across all corporate and collateralised sectors. Contributions to income return were broad based, led by RMBS, non -financial corporate, domestic and offshore banks. The portfolio running yield at month end was 1.6% with the spread measured at 1.4%. Widening credit spreads detracted from performance during January. Credit spread dynamics were mixed with financials widening somewhat while corporates traded in a tight range. Financials led by regional and offshore banks were the most significant detractors from credit spreads return during non-financial corporate
detracted marginally. While widening credit spreads in some sectors contributed to the negative return, month to month volati lity continues to be Sector and risk allocations were broadly maintained over the month The Manager was selective in purchases made despite strong primary issuance as increased via a regional
bank senior bond purchased in primary. The outlook for credit remains marginally positive, supported by robust credit quality. The funds elevated cash holdings are reflective of seasonal positioning over the holiday period and a defensive posture given historically low credit premiums. The fund applies both ethical and socially responsible investment (SRI) screens relating to what the company is in the busine ss of and the way business operations are conducted respectively. Upon application of the ethical and SRI screens, several bond issuers have been screen ed out - including for example, companies involved in the extraction of fossil fuels or companies whose revenues are significantly associated with s ocially questionable products or services.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/183927534.pdfDecember, 2021
Income return was the key contributor to relative performance over the month. The portfolio collected running income in exces s of the benchmark across all corporate and collateralised sectors. Contributions to income return were broad based, led by RMBS, non -financial corporate, domestic and offshore banks. The portfolio running yield at month end was 1.5% with the spread measured at 1.3%. Credit spread dynamics were mixed for performance. Domestic credit spread performance was mixed by sector with financials out performing corporates and securitised sectors. Tightening major bank spreads contributed to performance. The Fund maintains a significant allocatio n to subordinated bank debt
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/182702763.pdfNovember, 2021
Income return was the key contributor to relative performance over the month. Contributions to income return were broad based , led by RMBS, nonfinancial corporate, domestic and offshore banks. The portfolio running yield at month end was 1.6% with the spread measured at 1.4%. Credit spread dynamics detracted from relative performance. Spread performance was mixed by sector with financial sectors inc luding domestic and offshore banks as well as RMBS detracting from performance. Australian Dollar spreads led by major banks widened on aggregate on Omicron concerns and increasing expectations of central bank tightening. Portfolio allocation to non-financial corporates and utilities positively contributed to relative performance, offsetting a portion of the widening in financials. A tail risk hedge covering almost four percent of the portfo lio was implemented during July and provided the portfolio with significant downside protection during November. The hedge was implemented using the European crossover credit default swap (CDS) index. As volatility increased and spreads crucially European BBB and high yield widened, the CDS hedge contributed strongly to performance. Following the late month selloff as result of the spread of the Omicron variant, the manager elected to take pro fit on the position and closed out the hedge
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/182424977.pdfOctober, 2021
Income return was the key contributor to relative performance over the month. The portfolio collected running income in exces s of the benchmark across all corporate and collateralised sectors. Contributions to income return were broad based, led by RMBS, non -financial corporate, domestic and offshore banks. The portfolio running yield at month end was 1.3% with the spread measured at 1.0%.Credit spread dynamics marginally detracted from relative performance. Domestic spreads were rangebound on aggregate over the month.
The credit outlook has moderated slightly but remains positive. Valuation indicators have turned slightly negative. Spreads extremely tight relative to historical averages. The 5y Basis swa p moved materially wider during the month which dragged on the valuation outlook. The widening basis swap makes the AUD credit market more attractive for issuers and less attractive for offshore investors, and is expected to weigh on spreads. The growth outlook remains strongly positive. Supply chain disruption continues to impact economic growth expectations as see n in a number of falling global PMIs (albeit from high bases). While growth expectations remain robust, they have cooled over the month. The accessibi lity of equity capital as seen in the strong IPO pipeline remains supportive for spreads. The ratio of credit upgrades to downgrades remains positive for spreads but is expected to moderate slightly while increased M&A activity may provide a headwind for credit quality
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/180944631.pdfAugust, 2021
Income return was the key contributing factor to outperformance over the month. The portfolio collected running income in exc ess of the benchmark across all corporate and collateralised sectors. Contributions to income return were broad based, led by RMBS, non -financial corporate, domestic and offshore banks. The portfolio running yield at month end was 1.4% with the spread measured at 1.2%
The credit outlook has remains strongly positive. Valuation indicators are neutral. Spreads have contracted significantly over the past year reaching below their pre COVID lev els. The growth outlook remains strongly positive. Global PMIs softened during the month as a result of COVID concerns and continu ed supply chain disruption. Growth expectations continued to be revised down during the month and are now neutral. The ratio of credit rating upgrades to downgrades remains very supportive.
Demand and supply indicators continue to positively contribute to the overall credit outlook. Issuance volume in the primary credit market is below trend relative to long term averages. Reduced primary market activity over the recent months continue to support credit spreads. Technical indicators remain neutral to the overall credit outlook. US credit spreads continue to marginally detract from the overall credit score while, robust equity valuation and volatility continue to be supportive for domestic spreads.
The credit outlook remains strongly positive, supported by supply and demand factors as well as robust corporate earnings and improved credit ratings. The portfolios remain well positioned to take advantage of relative value opportunities presented by the current market condi tions
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/179138519.pdfJuly, 2021
Income return was the key contributing factor to outperformance over the month. The portfolio collected running income in exc ess of the benchmark across all corporate and collateralised sectors. Contributions to income return were broad based, led by non -financial corporates, banks and RMBS. The portfolio running yield at month end was 1.7% with the spread measured at 1.4%
Credit spread dynamics were mixed for performance. Domestic spreads were rangebound on aggregate, remaining resilient despite increasing COVID-19 -financial corporates, banks and utilities were the main detractors from credit spread retur n. Securitised sectors including RMBS contributed positively to credit spread return. While the credit outlook remains positive, valuations are look ing full and upside in credit spreads is increasingly limited following the extended rally. As such risk management is paramount. During July, the Manager elected to hedge tail risks bytaking a position in a credit default swap index which performed well during the month.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/176089002.pdfJune, 2021
The portfolio continued to collect running income in excess of the benchmark. This contribution from positive carry primarily came from non-financial corporates, RMBS, and domestic banks. The portfolio running yield at month end was 1.58% with the spread measured at 1.44% above the benchmark. Credit spread dynamics were the key contributing factor in outperformance over the month.
Credit spreads continued their steady grind tighter during June. Financial spreads outperformed corporates on aggregate. Portfolio allocation to domestic banks, non -financial corporates, and offshore banks were a strong contributors. The manager elected to increase the allocation to Macquarie via their June subordinated AUD deal which tightened on the issue after meeting robust demand. the manager also elected to increase allocation to a Macquarie US dollar hybrid offering attractive relative value. Both issues performed well and were substantial contributors to outperformance.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/174988371.pdfApril, 2021
The portfolio collected running income in excess of the benchmark across all corporate and collateralised sectors. The key co ntributing sectors to income return were non-financial corporates and RMBS. The portfolio running yield at month end was 1.6% with the spread measured at 1.5% above the benchmark. Credit spread tightening was the key contributing factor to outperformance over the month. Credit spreads tightened on aggreg ate, reflecting strengthening global growth expectations and robust corporate earnings results. Contribution to credit spread return was broa d based, headlined by nonfinancial corporates, offshore banks, non-bank- debt raising was the top performing position in the fund over the month. The bonds were purchased outright (unhedged) to establish a long duration pos ition and were sold for a profit as bond yields trended lower during April.
Sector allocation was actively managed over the month. The manager elected to increase allocation to RMBS and offshore banks while trimming exposure to non-financial corporates. The Fund increased exposure to the utilities sector, taking part in the new deals from Australian G as Networks and NSW Electrical Network Finance (the financing arm of Transgrid). Elsewhere, the Fund also took part in new deals from Transurban Queensland and Bank of Queensland. Portfolio risk was actively managed throughout the month. Capital structure risk allocations were maintained, whilerating exposure was selectively reduced following a period of strong performance.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/172126867.pdfDecember, 2020
Income return was a significant contributor to outperformance during December. The portfolio continued to collect running inc ome in excess of the benchmark. The contribution from positive carry was broad based, coming from non-financial corporates, RMBS and property sectors, alongside Domestic and offshore banks. The portfolio running yield at month end was 1.86% with the spread measured at 1.80% above the benchmark. Credit Spread tightening was the key contributing factor in outperformance. Credit spreads continued to tighten although less dramatically than during the November rally.
Credit spreads benefitted from improving macro expectations and investor confidence following the US presidential election and COVID vaccine news. Domestic spreads were resilient in late December as travel restrictions were reintroduced to combat the spread of COVID-19 in New South Wales. On aggregate, corporate credit outperformed financial spreads. Portfolio allocations to non -financial corporates and property alongside domestic and offshore banks were the main contributors to outperformance. Portfolio risk was actively managed throughout the month. Portfolio positioning was consolidated following the strong November rally. The manager took the opportunity to de-risk the portfolio in a number of ways. Allocation to AAA credit and cash was increased. The manager moved up the capital structure, increasing allocation to senior debt.
Portfolio weighted average life was also selectively shortened. Primary issuance was subdued in line with seasonal expectations. The manager took part in a new automotive ABS deal from Metro Finance and industrial property trust issuance from Goodman Australian Industrial Fund. Sector allocation was actively managed with exposure to ABS, Utilities and Non-bank Financials increased while Domestic Banks and non-financial corporate exposures were trimmed. The portfolio remains well positioned with strong defensive attributes while maintaining the capacity to take advantage of relative value opportunities in 2021.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/164029033.pdfasset_class: Fixed Income
asset_category: Diversified Credit
peer_benchmark: Fixed Income - Diversified Credit Index
broad_market_index: Global Aggregate Hdg Index
manager_contact_details: Array
ticker: PER1744AU
release_schedule: Monthly
commentary_block: Array
factsheet_url:
https://www.perpetual.com.au/funds/perpetual-esg-credit-income-fund/?product=piesca
Fund Profile
fund_features:
The Perpetual Ethical SRI Credit Fund aims to provide regular income and consistent returns by investing in a diverse range of income generating, ethical and socially responsible assets. It provides investors with an active, diversified portfolio of high quality, floating rate, predominantly investment grade securities that have passed through a screening process based on ethical and socially responsible factors. Sovereign issuers (governments) will be analyzed on environmental, social and governance (ESG) factors, based on a scoring system utilizing research from external specialists. This may include, but is not limited to, considering any unethical practices such as corruption, rule of law and political instability of the sovereign.
structure: Managed Fund