September, 2023
• 1 year Fund performance now above 6%
• Global interest rate investors back away from premature rate cut cycle
• Increases in key infrastructure and fuel distribution investments
Credit markets were relatively stable over the month, after the corporate earnings season presented few surprises – particularly relating to our key investments.
Despite weaker consumer data and increasing pressure on employment markets, global investors started to get a little ahead of themselves – particularly in the US – in terms of pricing in the beginning of a cycle of lower interest rates. Markets have now broadly removed the likelihood of lower interest rates near term, which seems reasonable to us. All things being equal, we suspect the next move in rates may still be up.
Fund performance in September was predominately influenced by the significant number of new investments that the Fund has made over the past six to twelve months, as we took advantage of points in time where markets were pricing in what we believed was an unrealistic number of interest rate increases.
During the month we topped up several key holdings, with increases to our investments in Brisbane Airport, Melbourne Airport, fuel and convenience store distribution business Ampol, and dominant freight infrastructure business Aurizon at yields of 5% and above.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/EYF-Fund-September-2023.pdfAugust, 2023
• Fund realises profit on fixed rate bonds as markets lean towards rate cuts in 2024
• New investment in UK retail banking powerhouse at a yield too good to pass up
Markets continued to embrace the idea that central banks around the world – including the Reserve Bank of Australia and the US Federal Reserve – may be at the end of their respective tightening cycles in August. Indeed, markets are now suggesting that the next move in interest rates might well be down - with both Australian and US bond markets pricing in multiple rate cuts in 2024.
The Fund’s meaningful investment in short dated fixed rate bonds built up over the past year or so, contributed positively to performance as bond yields fell over the month. The Fund initiated a new position in the subordinated bonds of UK retail banking giant Lloyds Bank during the month, at a floating rate yield of 3-month cash + 2.9% - providing an initial floating rate yield of over 7%.
The Fund divested its position in Australian 3-year government bonds at a yield of ~3.7% during the month, after benefitting meaningfully from the recent fall in government bond rates. This capital was rotated into Australian bank bonds at yields of 4.5% to 4.6% - locking in the gains on the government bonds and in addition, increasing the portfolio’s yield to maturity.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/EYF-Fund-August-2023.pdfJuly, 2023
•Fixed rate bond investments drive returns for July
•Aurizon and Micron were key contributors to performance
•Current -5.5% gross yield to maturity" gives us plenty to smile about
The Fund began the new financial year well, primarily as a result of our fixed interest rate bond exposures.
Interest rate markets rallied strongly in July, reflecting a material shift in expectations, as softer inflation and weaker consumer data prompted investors to consider that many of the world’s major central banks are towards, or even at the end of their tightening cycles.
This was reflected in rhetoric from the US Federal Reserve, the European Central Bank and the Reserve Bank of Australia, who all flagged that from here on, any future rate rises will only occur if warranted by economic data.
From a credit perspective, our holding in Australian energy infrastructure business Aurizon performed well as the market started to recognise its strong position in the resources value chain and improving earnings.
Additionally, our holding in the bonds of global memory technology powerhouse Micron performed well on strong earnings, driven by increasing demand from the surging artificial intelligence sector.
Our significant recent investing at what we consider attractive yields has delivered pleasing performance and we believe we have a good platform to work from for the next couple of years.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/EYF-Fund-July-2023.pdfJune, 2023
• Pleasing performance for the month and the year despite substantial rises in market interest rates
• Major bank and Spanish property bonds deliver outsized returns in June despite the volatility
• Yield to maturity of portfolio close to 12 month high at ~5.50%^
June was a solid month for performance, despite 3-year bond yields rising by ~0.70% and 10-year yields rising by ~0.40%. Performance for the year to June was also solid at 5.4% after fees.
Performance was buoyed by a number of positive developments for some of our existing holdings.
Our holding in long dated US dollar (hedged back to Australian dollar) floating rate bonds issued by ANZ and Westpac rallied significantly after CBA announced it was redeeming a similar bond. In light of the step change in valuation, we were happy to sell our holding, having generated a return of ~8% p.a. from this investment.
Additionally, our holding in the senior secured bonds of Spanish property company Aedas rallied strongly as speculation mounts regarding a potential takeover by existing major shareholder Castlelake. In order to access the cashflow from the secured properties, Castlelake would currently need to redeem the bonds at a premium.
We are content to wait and see what transpires here. Despite the rally, the bonds currently generate a yield of ~7.50% which we still see as an attractive return for the level of risk, and thus we are happy to hold the investment for the time being.
We are pleased with the performance of the Fund over the past year. Interestingly though, due to the considerable amount of investing we have done, the gross yield to maturity of the portfolio is actually closer to its 12 month high at ~5.50%^
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/EYF-Fund-June-2023.pdfMay, 2023
Interest rate hedges help protect investor capital amid sharp rises in bond yields
Higher bond yields subsequently provide opportunities to lock in further returns.
Bond yields rose notably over the month as investors turned their attention from bank balance sheets, back to inflationary pressures and the potential for higher official interest rates near term.
The Fund absorbed the rate increases well, as it had a significant amount of its interest rate exposure hedged during the move. We have now lifted the hedge, with expectations that any future increase in rates will be somewhat more modest.
We invested just under 10% of the Fund’s capital during the month in the senior bonds of a number of new and existing issuer names such as Woolworths, Apple and US memory and storage giant Micron, at yields of up to ~6%.
While there is no doubt that there is still upward pressure on inflation evident in some sections of the economy, there are also signs that activity is starting to moderate. With markets now factoring in an RBA cash rate comfortably above 4% near term, we are happy to lock in bond yields to maturity along the lines of those above.
The Fund still has a substantial amount of spare capital on hand, and thus we are in an excellent position to take advantage of further compelling yield opportunities as they become available.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/EYF-Fund-May-2023.pdfApril, 2023
Bond market valuations fluctuated over the month, as investors tried to get a handle on where global central banks were at with their respective tightening cycles. The consensus seems to be that most are near the end. In response to the banking sector issues that ensued in March/April, bond market investors began to price in substantial interest rate cuts – in some cases this year. With a heavy inflation backdrop and a strong labour market we felt this was premature.
At one point Australian 3 year bonds were pricing in a ~2% RBA cash rate over the next couple of years which we felt was far too aggressive. Hence, we closed out the majority of the Fund’s exposure to fixed interest rates, locking in substantial gains. Bank subordinated bonds performed well during the month.
In particular the Fund’s holding in US dollar (hedged into Australian dollar) floating rate bonds issued by ANZ and Westpac performed well, after global banking giant HSBC redeemed a similarly natured bond, prompting market speculation that ANZ and Westpac may do the same. The ongoing benefits accumulating from the considerable increase in the Fund’s yield to maturity was the other main driver of performance in April. With the large amount of investing that we have done over the past year, the underlying yield from these bonds is now creating a good starting point month to month.
File:March, 2023
The March quarter was eventful to say the least – with central banks around the world battling to get inflation under control – and then more recently, several lower tier offshore banks succumbing to a mix of large reductions in their asset values, coinciding with material deposit outflows from their customers – ultimately requiring them to rely on central bank or government funding support – and in the case of Credit Suisse – requiring a complete transfer of ownership to Swiss banking giant UBS. (The Fund had no direct exposure to any of these banks)
We are pleased to report that the Fund not only preserved investor capital over the quarter, but generated a positive return of 1.9%.
File:February, 2023
• Major bank bonds get a lift from increasing interest rate expectations
• European property and industrial services companies provide healthy returns on capital restructuring
• Tesco bonds outperform as the business delivers strong earnings growth
February was a month of contrasts, with different sectors moving in different directions as global central banks surprised investors with somewhat hawkish tones, suggesting that there may be more interest rate rises on the horizon than first thought.
The Fund’s holding in major bank subordinated bonds performed well, as the potential for higher interest rates in the near to medium term suggests better earnings outcomes for the banks.
Our holdings in the senior secured bonds of Spanish property companies Aedas and Neinor Homes also performed well, after Neinor announced an on-market buyback of its bonds at well above market price. While we didn’t sell into the buyback, we made significant mark-to-market gains. Aedas’s bonds rallied on the expectation that it might do the same.
French industrial services company SPIE redeemed its 2024 maturity bonds – also at a significant premium to market - which added meaningfully to recent performance.
The Fund’s holding in Tesco’s senior secured bonds rallied significantly as it reported strong quarterly earnings, driven by several categories including fresh food sales and strong growth in online sales.
We made new and additional investments during the month, including increases to our positions in the senior bonds of fuel distribution company Ampol, and US banking giant Wells Fargo at yields of ~5%.
With the considerable amount of investing that the Fund has done recently, the gross yield to maturity of the Fund now sits at greater than 5%^.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/EYF-Fund-February-2023.pdfJanuary, 2023
Performance in January was strong, driven mainly by our exposure to fixed rate bonds – a position we spent most of 2022 building. Consistent with our long-held views, markets are now expecting many central banks (including the Reserve Bank of Australia) to stop raising interest rates by mid year – and with official cash rates in some cases well below the lofty levels that were being priced in at various points last year, our investments have benefitted considerably.
The Fund also benefitted significantly from its exposures to corporate bonds. In particular, Australian major bank subordinated bonds performed well as APRA allowed numerous banks and insurers to redeem their bonds. APRA had previously made confusing remarks to the market suggesting that this might not necessarily be permitted. Our holding in UK supermarket giant Tesco performed well, as it continues to grow earnings via both pricing and volume increases, while to a good extent keeping costs under control.
Netflix has been a strong performer recently, having successfully broadened its customer offering well ahead of investor expectations, and reporting far better subscriber growth than expected. Finally, our holdings in Irish home builders Cairn Homes and Glenveagh Properties performed well, after they provided solid trading updates. The housing market is being well supported by the Government’s promise that increasing the stock of housing is their number one priority for 2023. With a yield to maturity^ of over 5% as a starting point, we very much look forward to seeing how the rest of 2023 plays out.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/EYF-Fund-January-2023.pdfDecember, 2022
The Fund performed strongly in the December quarter, returning 1.35%. Performance was largely driven by the significant increase in the yield to maturity^ of the portfolio as a result of the substantial number of new yield investments that were made at what we believe were very attractive levels, over the course of 2022. The opportunity to take advantage of these investments was created by the Fund’s large cash and short dated security position going into early 2022 – where we were mindful (and thus conservatively invested) of the potential impact that substantially higher interest rates could have on market valuations. This shift in market pricing materialised over 2022, supporting our views, and putting us in a position to make these investments. In terms of individual investment performance, the two standouts in the December quarter were French industrial services company SPIE – market leader in improving the energy efficiency of commercial properties, and on demand video streaming pioneer Netflix, who has successfully broadened out its customer offering well ahead of investor expectations, as well as retaining far more of its existing clients than markets expected post the lift in numbers that they achieved as a result of the COVID-19 pandemic.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/Quarterly-Report-31-December-2022-Managed-Funds.pdfNovember, 2022
The considerable amount of the Fund’s capital that we have invested in fixed rate bonds at very attractive yields over the past six months or so contributed meaningfully to performance in November. As market interest rates fell notably on softer global data and recent central bank rhetoric suggests a reduction in both the speed and magnitude of interest rate increases into 2023, the prices of many of these bonds increased notably. Additionally, the large increase in the overall invested position of the Fund of late has materially increased the Fund’s yield to maturity – which currently sits comfortably above 5%^.
The coupons that we are receiving on the bonds held by the Fund are continually flowing through to performance. Given the extraordinary degree to which official interest rates have increased around the world this year – including in Australia – we expect levels of global economic activity to continue to moderate in 2023, and thus we think markets will be disappointed by the future magnitude of interest rate increases. Assuming that this plays out as we expect, prices of the Fund’s fixed rate bonds potentially have further to rise.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/EYF-Fund-November-2022.pdfOctober, 2022
The Fund’s return was strong in October, as the substantial investments we have made this year - and the resulting significant increase in the Fund’s yield to maturity - contributed meaningfully to performance. Our holding in Netflix bonds performed particularly well during the month. Netflix announced the launch of its new low-cost subscription service, and that it gained greater than expected additional subscribers to its existing higher margin offerings. It also had several successful content launches during the quarter – some of which are now among its most watched shows of all time. Our investment in European firm SPIE – whose business largely focusses on improving energy efficiency in commercial buildings - also performed well in October after it announced the sale of its UK operations to London based services firm, Imtech. The bulk of the proceeds are expected to be used to reduce balance sheet debt, strengthening SPIE’s credit profile. Irish residential property firms Cairn Homes and Glenveagh Properties both performed well after the Irish central bank announced that home buyers are now able to borrow up to 4 times their income to buy a home (compared to the previous 3.5 times). This should lead to higher sales volumes for both businesses, and at higher absolute prices. Having broadly preserved capital through a very turbulent year for bond markets, and with its attractive running yield now well above 5%^, the Fund is in a strong position to capitalise on the current high interest rate environment.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/EYF-Fund-October-2022.pdfSeptember, 2022
September was a turbulent month for bond markets, seeing much investor speculation around the speed and magnitude of official interest rate increases, particularly by the US Federal Reserve. The yield on the benchmark US 10 year government bond rose by ~0.65% during the month, implying a further capital loss of over 5%, and the Australian 10 year government bond yield was up by ~0.30%, implying additional losses of over 2.5%. With our exposures concentrated in much shorter dated bonds than those above, the Fund was largely insulated from the big interest rate moves, however the volatility in interest rate markets spilled over into credit markets somewhat. Thus, Fund performance was slightly negative over the month. We sold most of our position in the longer dated bonds of Brisbane Airport in September, having realised a return of ~15% from this investment. We increased our position in the ~2 year bonds of businesses such as Woolworths, Qantas, Westpac and Bunnings, and made a new investment in prolific toll road owner Transurban Queensland – all at yields of well over 4%, which is attractive for such short dated bonds. Given the substantial amount of investing that we have done over the past 6 months or so, at yields that we genuinely believe to be anomalies, the running yield* of the Fund now sits just under 5%, well above the current RBA cash rate of 2.6%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/EYF-Fund-September-2022.pdfAugust, 2022
Interest rates rose meaningfully over the month as markets increasingly expect inflation to be sustained at higher levels, and for a longer period. During August, bond investors priced in an additional ~0.50% of interest rate increases in 2023, with the peak in the RBA cash rate now expected to be up around 4% next year. We have noted previously that we think this is too high, and implies corresponding residential mortgage rates of around 6-7% which, given the significant level of household indebtedness in Australia, we believe would be unsustainable and lead to some level of economic weakness. Despite mixed performance from corporate bond markets during the month, the Fund performed well, as our holdings in both domestic airports and major bank bonds outperformed. Airports are seeing an extraordinary lift in revenue, as demand for both domestic and overseas travel is booming. Over the past six months we have been taking significant advantage of the substantial increase in short dated bond yields, to the extent that the running yield^ of the Fund is now well over 4%. The Fund’s running yield has the potential to increase even further as we identify additional anomalies in global bond markets.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/EYF-Fund-August-2022.pdfJuly, 2022
The month of July saw investors back away from the almost 4% RBA cash rate that had been priced into the bond market by the end of 2022, despite the RBA raising the official cash rate to 1.35% in July and then 1.85% in early August. We remarked in our June quarterly report that we regarded a 4% cash rate by December as “highly unlikely”. In recent months, we invested a significant portion of the Fund into fixed rate corporate bonds at an average yield of around 4% to take advantage of this dynamic. Last month, as investors focussed on the impact of higher inflation and rates on the economy longer term, interest rate expectations fell meaningfully, down to almost 3% by the end of the year. This is still lofty in our opinion, but nonetheless closer to what we expect the likely outcome to be. As expectations fell, fixed rate bonds rallied hard, and credit spreads tightened notably as markets took the view that the strain on the corporate world would be lessened. The Fund benefitted considerably from this re-pricing. In addition to its fixed rate exposure, the Fund still has over 50% of its investments in floating rate corporate bonds, and with 90 day bank bill yields having increased from almost 0% in March, to over 2% in July, this has added considerably to the running yield on all of these investments.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/EYF-Fund-July-2022.pdfJune, 2022
A challenging June quarter saw the Fund finish the Financial Year down -0.9% compared to the MSCI World (AUD) which was down -6.5% over the same period.
Growing recession fears triggered a sharp selloff over the quarter, with the correction accelerating noticeably in the latter stages of June. Inflation data continues to come in above expectations, leading to a more aggressive policy response from central banks around the world. During the month of June alone, the Bank of England increased interest rates by 25bps, the Reserve Bank of Australia by 50bps, and the Federal Reserve by 75bps. With central bankers doubling down in their fight against inflation, interest rate increases are occurring at the same time that economic data and commentary from corporates suggest a broader slowdown is afoot.
Commodity positions were mixed, metals miners detracted from performance while oil and gas holdings outperformed the broader commodities universe and provided a positive contribution after dividends
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/Quarterly-Report-30-June-2022-Managed-Funds.pdfMay, 2022
Significant volatility dominated investment markets in May – particularly in interest rates and credit. Benchmark government bond yields rose further as inflation – particularly wage inflation – became anchored in the economy. Considering this, we were again happy to broadly preserve investor capital. Markets are now pricing in an RBA cash rate of ~3% by the end of 2022, which we feel is too aggressive given the impact that higher rates are already having on the Australian housing market, and the resulting wider contraction in spending that typically follows. Credit spreads also increased notably during the month, as nearer sighted investors became nervous about what higher inflation and interest rates might mean for company bottom lines. Given the large portion of the portfolio that we were holding in cash and short dated yield investments, we were in a great position to take advantage of the above market dynamics. The Fund purchased the ~2 year bonds of some of the world’s most iconic businesses, such as McDonalds, Coca Cola, Wells Fargo and Woolworths – at yields of around 4% which is attractive for such short dated investments. The significant investments we have made over the past couple of months have materially increased the Fund’s running yield, as has the ~1% increase in the 90 day bank bill yield, which gets added to the Fund’s predominately floating rate portfolio.
Given the significant volume of investments we have recently made, we believe that the portfolio is well placed to deliver on the Fund’s longer term performance objectives.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/EYF-Fund-May-2022.pdfApril, 2022
April brought with it a continuation of two main themes. Firstly, persistent global inflation pressures fueling higher market interest rates and further increases in central bank cash rates (including the first increase by the Reserve Bank of Australia on May 3rd from 0.1% to 0.35%). Secondly the continuation of the devastating war in Ukraine. The yield on the 10 year Australian Government bond rose another ~0.30% to ~3.15%, implying a further capital loss of almost 3% on the benchmark bond. Additionally, credit spreads were weaker across most sectors as markets speculated over the longer term impacts of the above themes on the global economy - particularly in Europe. Weaker credit spreads and sharply higher interest rates created significant investment opportunities. The Fund made investments in the 1 to 2 year senior bonds of Queensland Investment Corporation’s coveted shopping centre business, and fast food giant McDonalds - at yields of ~3%. These are attractive returns for such short dated investments.
Given the material increase in yields (a result of both higher interest rates and credit spreads) we expect to make further investments near term. Also, we believe interest rate markets have gone too far in pricing in an official cash rate in Australia of almost 4% by the end of 2023, and so we are looking at ways of positioning the Fund to take maximum advantage of this anomaly.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/EYF-Fund-April-2022.pdfMarch, 2022
The Fund preserved investor capital in March, despite further sharp rises in global interest rates. Markets are becoming increasingly concerned with the prospect of higher inflation. The yield on the Australian 10 year government bond rose a further ~0.70% in March to ~2.85%, equating to a loss of over 6% for the month and over 15% since August last year. As Russian aggression in Ukraine held centre stage, volatility in corporate bond markets provided numerous opportunities to invest capital at attractive yields. The Fund purchased the senior bonds of video streaming pioneer Netflix at over 2% above cash, and renewable energy powerhouse NextEra Energy at over 1.5% above cash. These companies had been trading below 1% over cash prior to the crisis in Ukraine. Longer term we believe they can return to these valuations, implying 5%+ returns over the next 12 months. We added to our Australian bank subordinated bonds during the month, with new positions in ANZ and Westpac at ~2% above cash. We expect these investments can generate a return of 3% to 4% over the next 12 months. We also topped up our holdings in Ampol, Ausnet and Seek at yields of over 3% above cash.
Near term, we intend to maintain our almost zero interest rate exposure to help insulate the portfolio from rising interest rates. We also expect to make further corporate bond investments to take advantage of current market volatility, which we believe will help deliver on the Fund’s performance objectives longer term.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/EYF-Fund-March-2022.pdfFebruary, 2022
Volatility in risk markets continued in February and fixed income markets were not immune. Increasing evidence of rising global inflation put further upward pressure on bond yields during the month. The benchmark Australian 10 year bond rose by another 0.25% to ~2.15% in February, representing a fall of over 2% in its capital value. This marks a fall of ~10% in its value over the past 6 months!
In addition to inflationary concerns, Russia’s aggressions in the Ukraine also put markets on edge as higher commodity prices and potentially slower European growth (Europe is a close trading partner of Russia) saw markets weaken notably.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/EYF-Fund-February-2022.pdfJanuary, 2022
January was another month where volatility in interest rate markets took centre stage, as concerns mounted regarding whether central banks have been too slow to react to notably higher inflation and economic growth. This has prompted speculation about sharper increases in official interest rates. Australian and US 10-year bonds ended the month ~0.25% higher at ~2% and ~1.75% respectively. In light of the move higher in interest rates, and the resulting volatility in credit and equity markets, we are pleased to have preserved the funds capital in January. The Fund increased its position in fuel distribution and convenience store business, Ampol, during the month. As people resume their normal travel habits, and higher levels of saving encourage greater discretionary spending, we think a yield of well over 3% above cash warranted a larger position in the portfolio. We believe that market interest rates are likely to continue to rise, and thus we intend to maintain our almost zero direct exposure to interest rate duration, to help protect the portfolio. Additionally, given the backdrop of sound credit market fundamentals, we think it is a good time to be invested in credit markets, and expect to use the Fund’s cash reserves to take further advantage of any short term market volatility.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/EYF-Fund-January-2022.pdfDecember, 2021
The portfolio returned 4.1% over the quarter. The main positive contributors were our positions in the copper companies Freeport McMoRan and First Quantum Minerals in addition to our position in alternative asset manager Apollo Global Management
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/Quarterly-Report-31-December-2021-Managed-Funds_0.pdfNovember, 2021
Credit markets weakened towards the end of November as a new variant of the Covid-19 virus – Omicron – was recognised by the World Health Organisation as a variant of concern. Despite the volatility across markets, the Fund’s capital was well preserved. The Fund made a number of attractive investments during the month, with new positions being initiated in Australian energy infrastructure company, Ausnet, at a margin of ~3% above cash, as well as fuel distribution and convenience store business, Ampol, at a margin of ~3.4% above cash. We also added to our holding in the senior secured bonds of Melbourne Airport at a margin of ~1.7% above cash. These new investments highlight that although markets have performed well over the past year, there are still attractive yields to be found if you look in the right places. With over 40% of its assets invested in cash and short dated bonds, the Fund is well positioned to take further advantage of any genuine investment anomalies that present themselves if this current period of market volatility persists
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/EYF-Fund-November-2021-1.pdfNovember, 2021
Credit markets weakened towards the end of November as a new variant of the Covid-19 virus – Omicron – was recognised by the World Health Organisation as a variant of concern. Despite the volatility across markets, the Fund’s capital was well preserved. The Fund made a number of attractive investments during the month, with new positions being initiated in Australian energy infrastructure company, Ausnet, at a margin of ~3% above cash, as well as fuel distribution and convenience store business, Ampol, at a margin of ~3.4% above cash. We also added to our holding in the senior secured bonds of Melbourne Airport at a margin of ~1.7% above cash. These new investments highlight that although markets have performed well over the past year, there are still attractive yields to be found if you look in the right places. With over 40% of its assets invested in cash and short dated bonds, the Fund is well positioned to take further advantage of any genuine investment anomalies that present themselves if this current period of market volatility persists.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/EYF-Fund-November-2021.pdfOctober, 2021
Market interest rates rose sharply in October as more investors adopted our view that the recent rise in inflation may not be so transitory. Australian 10-year bond yields rose by ~0.50% during the month to over 2% - representing a ~5% fall in value in just one month! Our effectively zero exposure to fixed term interest rates meant we were well protected. Performance was slightly negative during the month on broad credit market weakness, as investors became fearful of how global central banks may respond to inflation. The Fund’s holding in bank subordinated bonds was softer on weaker credit markets and investor concerns regarding supply. We believe supply will be easily absorbed, and that attractive valuation anomalies relative to senior debt should see the investment add meaningfully to performance over time. Our holding in Spanish property bonds detracted from performance in October on market weakness and changes to regulations relating to social housing. We spoke to both companies and are of the view that the new regulations will have little impact on their revenues, and thus markets have over-reacted somewhat.
The Fund currently has a considerable portion of its assets in cash and low volatility short dated bonds. Thus, we are well positioned to take advantage of new valuation anomalies that present themselves. We will be maintaining effectively zero interest rate exposure, to insulate the portfolio from the rising interest rate environment.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/EYF-Fund-October-2021.pdfSeptember, 2021
September was a volatile month for markets as inflation, the potential reversal of central bank liquidity injections, excessive Chinese property debt, and the inability of the US Government to resolve its budget issues all took centre stage. Our holdings in Spanish Property companies Aedas and Neinor gave up some of their recent strong gains over the month, as some investors appeared content to take profits. The Fund’s almost zero exposure to interest rates meant that it was well insulated from the notable rise in bond market yields over the month. Australian government 10-year yields rose ~0.35% representing a capital loss of ~3%. The Enhanced Yield Fund however was largely unaffected. One thing that is becoming increasingly clear to us is that inflation is looking less transitory and more sustained. As demand grows in line with the strengthening global economy, wage levels recover, and supply chains continue to be disrupted, we suspect inflation pressures will keep building. In light of this, we intend to maintain little to no exposure to longer term interest rates in the portfolio. We think higher long term interest rates may well be one of the biggest impediments to fixed income returns over the medium to longer term
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/EYF-Fund-September-2021.pdfAugust, 2021
Credit markets remained relatively quiet in August, as investors looked for further direction from global central banks regarding the timing of both the winding back of their huge liquidity programs, and future interest rate rises.The portfolio’s Air Services theme performed well during the month, as markets start to look through the lockdowns and position themselves for a re-opening of domestic travel towards the end of the year.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/EYF-Fund-August-2021.pdfJuly, 2021
Credit markets weakened during the month, as the world continues to grapple with the new “Delta” variant of the Covid-19 virus. The Fund however performed soundly and comfortably preserved investor capital.
Portfolio returns were largely dominated by our Spanish holdings. Major shopping centre owner Lar Espana announced a tender offer for its senior secured bonds in July. While we decided against participating, the tender offer valued the bonds at a significant premium to where they were previously trading.
Additionally, our holdings in Spanish residential property companies Aedas and Neinor also performed well. With demand for housing in Spain’s major cities now higher than where it was prior to the Covid-19 pandemic, house prices are rising significantly. These two businesses are in a strong position to capitalise on this favourable market dynamic.
Keen observers of the Fund will notice that we have increased our holdings in cash and short dated bond investments in recent months. This has been done primarily with the objective of being in a position to take advantage of any near-term market volatility that comes along. In the meantime, we believe there is still significant value to be realised from the Fund’s current investments.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/EYF-Fund-July-2021.pdfJune, 2021
The market was strong over the quarter and the portfolio was up 6.1%.
We exited our position in Visa during the quarter. Visa has been one of the portfolio’s core positions and strongest performers, buying at bottom quartile valuation in 2010 and selling at top quarter for >1,000% return. We still view Visa as an exceptional business, but with interest rates inflecting higher and Visa’s valuation in the mid-30s price-to-earnings, we see better opportunities elsewhere. We increased the portfolio’s holding in Royal Dutch Shell during the quarter. Oil prices globally have moved higher as reopening activity globally drives higher demand while outpacing returning supply. Despite this, equity valuations are still discounting very conservative oil price forecasts. RDS shares have lagged as a legacy of the 2020 dividend cut, however we see room to grow the dividend and use surplus cashflow for share buybacks, debt reduction and additional capex to fund the energy transition.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/Quarterly-Report-30-June-2021-Managed-Funds-1.pdfJanuary, 2021
NAB announced the formal redemption of its income securities (ASX code: NABHA) during the month, seeing the notes rally a final +3% to their par value of $100. This investment has been extremely profitable for the Fund. We have generated over a 30% cumulative return on our holding. Our holding in long dated major bank subordinated debt rallied a further 3% post NAB’s announcement. These securities lose their ability to be counted as subordinated debt on bank balance sheets at the end of this year, and markets are continuing to speculate that they too may be redeemed at par.
Our holding in the secured debt of UK supermarket giant Tesco also rallied strongly in January, as it reported strong Christmas trading results, and importantly a significant uplift in its online sales, which has been a key focus over the past couple of years. Going forward there is still considerable value to be realised from the portfolio’s holdings, in particular from our air services and bank subordinated debt themes that we have outlined in previous reports.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/EYF-Fund-January-2021.pdfDecember, 2020
Markets took a breather in December, as virus cases in the US and Europe continued to surge. Even the east coast of Australia found itself under a continuing outbreak cloud. The Fund performed well over the month. In particular, the travel services theme that we initiated post the worst of the COVID-19 pandemic continued to add material value to the portfolio. Our investments in Brisbane and Melbourne Airports performed especially well, particularly Brisbane Airport as it is more exposed to the domestic passenger market, and thus is likely to benefit more as state borders continue to open back up.
Also during the month, NAB shareholders voted to redeem the NAB Income Securities (ASX code: NABHA) in 2021. Given their $100 redemption value, there is still more value to be realised from this investment. We are pleased with how the portfolio has handled the COVID-19 crisis. The Fund’s return of 2.4% in the second half of 2020 is testament to our process of identifying genuine anomalies in global markets that have been unpredictable to say the least. Furthermore, we think there is considerable value still to be realised from the Fund’s investments in the months to come.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/EYF-Fund-December-2020.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: PMC4700AU
release_schedule: Monthly
commentary_block: Array
factsheet_url:
https://www.pmcapital.com.au/enhanced-yield-fund/reports
->Report & Commentary
->Reports
->Monthly
fund_features:
PM Capital Enhanced Yield B aims to provide investors a return in excess of the RBA3 cash rate. The Fund aims to outperform the RBA cash rate with a low degree of volatility and minimal risk of capital loss. To invest in a combination of cash, yield securities and to a much lesser extent (less than 5% net asset allocation) equity strategies. The Fund invests the majority of its Assets in cash and interest-bearing securities.
structure: Managed Fund