- Credit spreads were wider on the month, driven by greater volatility in offshore markets, and bond yields were also higher. These factors detracted from performance
- Global securities underperformed local names; a trend we expect will reverse in due course
|Month (%)||Quarter (%)||1 Year (%)||Since Inception* (% p.a.)|
|RBA Cash Rate||0.01||0.02||0.10||0.16|
^ 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: 0.67 years
- Spread duration: 2.39 years
- Running Yield: 3.76%
- 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
DHOF recorded a fall of 0.91% in February, heavily skewed to credit spread widening in offshore markets. Australian securities were the standout with many logging a positive month against an uncertain backdrop. The performance was all the more impressive as ANZ and CB announced plans to issue new securities with floating rate margins of 2.7 and 2.75% respectively. Australian banks also reported half-yearly results or quarterly updates, with the main takeaway being sustained margin compression from low interest rates and intense competition. European-focused issuers experienced a rapid increase in volatility across all instruments. In North America, valuation discrepancies are as wide as we can remember. We continue to assess the impact of severe sanctions on short-term funding markets, where banks globally play a pivotal role. While impacting short-term performance, yields-to-next-call in 2026 for the investment-grade rated J.P. Morgan and Bank of America are now above 7% in AUD terms. We believe this more than prices in a steep rate hike cycle, and therefore if the outlook for interest rates moderates later this year, we could see this valuation gulf begin to close.
February saw a continuation of the deterioration in sentiment that started in January. This is not surprising given the developing situation in Ukraine. Volatility in markets has naturally increased because of the associated uncertainty, a backdrop that is likely to remain in place for the foreseeable future.
Bond yields rose for most of the month, as the US printed a 7.5% annual CPI print for January and the market once again marked higher the likely trajectory of Fed rate hikes. In the last week of February, however, bond yields staged a sharp reversal lower as safe haven buying offset continuing inflation fears. The net result is that bond yields are higher for the month but not dramatically so; by way of example the Australian 10-year government bond yield has risen from 1.90% to 2.14% with the Australian bond market underperforming the US. Amidst continuing bond market volatility, it was interesting that expectations for the RBA Cash Rate have not changed meaningfully with money markets continuing to envisage four RBA rate hikes by the end of 2022.
Perhaps the main market move in February has been in US real yields, which after peaking in February have quickly fallen back to levels last seen in December. This move has been driven by a spike in the level of inflation expectations, with bond markets now pricing a stagflationary environment for the US over the next 2-3 years. Although risky assets (including credit) have suffered a fall in value because of the combination of geopolitical fears and heightened cash rate expectations across geographies, there is surprise in some quarters that the move has not been more severe given the enormous geopolitical uncertainty at this juncture. Lower real yields are likely part of the explanation, providing a support for equity markets in particular that would perhaps otherwise have experienced a more disorderly selloff.
Amid the challenging investment environment we remain particularly wary of declining market liquidity and the possibility that risk-off moves in markets are sharply exacerbated as a result. This is a time for defensive portfolio positioning and despite weakness in credit markets, the portfolio is positioned with a range of offsetting positions that aim to limit the drawdowns that will be experienced during these challenging times.
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.