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    DHOF June Monthly Report & Update

    Overview
    • Fund performance was impacted by wider credit spreads, which overwhelmed coupon income and a positive contribution from overlay strategies
    • The fund remains defensively positioned amid volatile market conditions
    Performance
    Month (%)Quarter (%)1 Year (%)Since Inception* (% p.a.)
    DHOF Return-0.80-1.51-5.355.52
    RBA Cash Rate0.060.100.170.18
    Excess Return-0.86-1.60-5.525.34

    ^ 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.

    Key Statistics  
    • Modified duration: -0.04 years
    • Spread duration: 2.43 years
    • Running Yield: 3.01%
    • Average Credit Quality: A-
    • Portfolio ESG Score: A
    • Management Cost: 0.65% + 0.10% pa expense recovery (incl. of GST and RITC)
    • Inception Date: 1 March 2020

     

     

    Fund Review

    The Fund reported a return of -0.8% for the month, outperforming on a relative basis compared to local and global hybrid indices. The Solactive Australian Hybrid Index (Gross) fell by 1.3%, while the Bloomberg Barclays Global CoCo Index fell by 6.9%. Returns were supported by underweight positions in European issuers, high levels of cash, and hedges that worked well to offset weakness in the underlying assets.

    There were several new hybrid securities offered to the market by Australian banks, which contributed to the intra-month weakness. Major banks offered spreads of 3.15-3.4% above the reference rate, while Macquarie is offering in the range of 3.7-3.9%. We did not participate in these offerings as we believe that Australian hybrid spreads need to widen by 50-60 basis points relative to subordinated Tier 2 capital to represent fair value.

    The Fund regrettably chose not to pay a distribution for the June quarter. Ongoing and sustained volatility in currency and interest rate markets required active hedging to manage the impact on NAV. The volatility subsequently led to losses on some of these hedging transactions, exceeding the amount of coupon income received from the underlying assets over the same period, leading to a lack of distributable income.

    Outlook

    The near-term outlook remains considerably uncertain, with intra-week volatility being exacerbated by lower trading volumes brought on by the northern hemisphere summer.

    Central banks are quickly gaining ground in their bid to collar inflation, but their actions still feel more about catching pace with prices rather than having any real influence on their moderation. The more pressing issue, voiced recently by Federal Reserve Chairman Jerome Powell, is ensuring that inflation expectations remain anchored. He went so far as to say that “The Fed would restore price stability even at the risk of rising interest rates too high”. Breakeven rates and inflation forwards peaked in late April and have subsequently fallen by an average of half a percentage point, suggesting that the financial markets believe the Fed can return inflation to desired levels. Similar trends are evident in Europe, the UK and Australia, with local breakeven rates back to levels prior to Russia’s invasion of Ukraine.

    While anchored inflation expectations would help to keep Chair Powell from following through on his “too high” threat, we believe a deteriorating growth outlook is also influencing their recent march lower. Economic data has been mixed, particularly in the United States, with several indicators printing below consensus estimates in recent months. However, monetary policy transmission channels are typically lagged by several months, thus it is difficult to attribute this weakness to central bank actions alone. Another possible sign of economic fragility is weakness in commodities, including base metals such as copper. Long watched as a barometer of economic health, the price of copper has fallen by more than 15% in June alone.

    Despite these signals of caution, demand for labour remains strong. Business sentiment has proven resilient when compared with consumer sentiment, leading to record low unemployment rates across the developed world. Despite central banks’ inflation problem, we believe the employment market will be of as great interest to policymakers as midterm elections loom for the United States in November. Surging prices for essentials such as gasoline and food, coupled with tenuous housing markets stalled by sharply rising mortgage rates make for a politically volatile combination.

    The lure of strong nominal yields in the United States has seen the US dollar appreciate materially this year. Against an uncertain geopolitical backdrop, this poses risks to emerging markets that are already struggling to secure stable food and energy supplies as the sanctions noose is tightened on Russia. However, despite sustained global pressure, Russia’s currency has been one of the strongest in the world this year after forcing certain customers to purchase their energy products with rubles. Meanwhile, the Bank of Japan’s steadfast maintenance of yield curve control has driven sustained weakness in the yen, a currency that has traditionally acted as a safe haven of sorts in risk-off environments.

    Concerns are growing about the durability of the current expansion, which we believe will contribute to ongoing credit market volatility. Local estimates for the terminal cash rate are too high, in our view. We are sceptical that the Australian economy could sustain a restrictive 3%+ cash rate when most market forecasts of the neutral rate are currently around 2.5%. We expect AUD cash rates to approach neutral by the end of 2022 before becoming more sensitive to incoming data. Credit spreads have been repricing since late 2021, reflecting a very tight starting point and macro/geopolitical concerns. Corporate balance sheets are strong, with plentiful liquidity and sensible term structures that will limit the widening impulse of the current cycle. Nevertheless, we believe it is premature to consider removing hedges or adding spread duration for now.

    To read more about Daintree Hybrid Opportunities Fund (Managed Fund) ASX: DHOF, click here.

    Interested in purchasing units in the fund? Contact your financial adviser or simply purchase via your online broker, and as always read the PDS for more information. This can be found here. 

    Keen to learn more? Read why Active managers tend to outperform passive fixed income managers.

    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.