- Performance was negatively impacted by wider credit spreads, however coupon income as well as positive contributions from overlay and hedging strategies resulted in a positive return for the month.
- Fund duration has been reduced and we note that when market conditions normalise, this period will give rise to a portfolio with a much higher yield that will benefit investors over time.
|Month (%)||Quarter (%)||1 Year (%)||Since Inception* (% p.a.)|
|RBA Cash Rate||0.01||0.02||0.10||0.15|
^ Inception date for DHOF was 1 March 2020. Excess return is measured with reference to net performance. Returns for periods longer than one year are annualised. Past performance is not a reliable indicator of future performance.
DHOF Fund and Investment Objective
DHOF targets an absolute return over time by investing in a diversified portfolio of hybrid securities which offer the best risk adjusted returns available from a global universe of securities.
The aim of DHOF is to provide a steady stream of income over the medium term, by investing in a diversified portfolio fo Australian and global hybrid securities and cash, and to provide a total return (after fees) that exceeds the Benchmark by 3.5%-4.5% measured throughout a market cycle.
- Modified duration: 0.72 years
- Spread duration: 2.57 years
- Running Yield: 3.68%
- Average Credit Quality: BBB
- Portfolio ESG Score: A
- Management Cost: 0.65% + 0.10% pa expense recovery (incl. of GST and RITC)
- Inception Date: 1 March 2020
The Fund generated a return of -1.44% for the month, with credit spreads and duration detracting from performance. Positive contributions from both overlay positions and hedges helped to reduce volatility, as did holding excess cash.
The primary conversation taking place in hybrid markets last month, in our view, was the likelihood of expected call dates being honoured in the context of the outlook for interest rates. This particularly affected fixed-rate securities with long periods between reset dates. Across DHOF’s diverse portfolio we hold a range of security types, and thus the response to higher interest rates and the assessment of call dates is security specific.
Given this degree of subjectivity, we continue to focus our efforts on those factors that we can control. Therefore, we have: a) increased cash holdings to take advantage of opportunities that may come once we see stabilisation in CPI and rates markets, b) reduced duration exposure, and c) maintained hedges to dull credit spread impacts, which we believe may still widen in the coming months as the current market cycle progresses.
From an underlying issuer perspective, our confidence remains high that banks can draw on their financial strength to remain profitable and manage risks in a fast-evolving economic environment.
After a consolidation in late March, April saw a resumption of the trends apparent since late 2021. Rates markets globally saw yield curves flatten, with the focus on how much and how quickly central banks will act to normalise interest rates. Meanwhile, credit markets are working through the impacts of inflation and spreads moved modestly wider again during the month. In addition, outsized moves in major currencies such as the yen created an additional dynamic that kept investors on edge.
With the decision of the RBA to increase interest rates for the first time in 10 years, and offering a strong signal that further increases are imminent, Australia has joined much of the world in a concerted push to bring interest rates back to a neutral setting as swiftly as possible. Subject to the evolution of the inflation picture in coming months, we should expect rates to rise at most meetings of the RBA this year, toward an estimated neutral rate around 2.5%. With up to 40% of local borrowers having at least some part of their borrowings fixed, the flow through to the real economy will be gradual.
In the US, we expect quantitative tightening (ie: the reduction in the Fed’s holdings of Treasuries) to begin in coming weeks in addition to rate increases, which we have held for some time to be the “x-factor”, particularly for financial markets. This will have the effect of removing excess liquidity from the system which given the prominence of the US dollar in global trade and commerce, could have unintended consequences well beyond America’s shores.
COVID-related disruptions in China and the conflict in Ukraine show us that ongoing supply chain concerns will linger for the foreseeable future. Part of the inflation story can be attributed to these factors, on which tighter monetary policy can have limited impact. In the real economy, employment indicators have positively exceeded expectations, creating upward pressure on wages. This is creating challenges for businesses that are seeing raw material input costs and wage costs rise more quickly than they have for some time, risking margin contraction if these cannot be passed through to consumers.
Thus, overall we expect volatility to continue and maintain a defensive posture as a result.
To read more about Daintree Hybrid Opportunities Fund (Managed Fund) ASX: DHOF, click here.
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Past performance is not a reliable indicator of future performance. Please read the PDS prior to investing. This information is general in nature and is subject to the terms and conditions outlined here.