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    sea under the bridge

    ECOR March 2022 Monthly Report & Update

    Overview
    • Credit spreads widened across sectors and geographies, led by offshore names, and this was the main driver of a negative performance outcome for the month
    • The fund is running a very modest long duration position which was also a small detractor, while hedges gave back the performance of prior months. When the market settles, however, this period will give rise to a portfolio with a much higher yield that will benefit investors over time.
    Performance
    Month (%)Quarter (%)1 Year (%)2 Years (%)Since Inception* (% p.a.)
    eInvest Core Income Fund (ECOR)-1.01-1.35-0.981.450.71
    Daintree Core Income Trust-0.96-1.35-0.981.402.10
    RBA Cash Rate0.010.020.100.140.23
    Excess Return-1.02-1.38-1.081.300.48

    ^ Inception date for ECOR was 22 November 2019 and inception date for the underlying Daintree Core Income Trust was 1 July 2017. Excess Return since inception is measured on the Daintree Trust. Performance shown above are net of fees. To give a long-term view of the fund performance in the asset class, we have shown the returns of the Daintree Core Income Trust. The Trust has identical investments. Fund returns are calculated using net asset value per unit of the underlying fund at the start and end of the specified period and do not reflect the brokerage or the bid/ask spread that investors incur when buying and selling units on the exchange. Past performance is not a reliable indicator of future performance

    ECOR Fund and Investment Objective 

    ECOR is an absolute return, cash plus, investment-grade bond strategy. ECOR is not constrained by any traditional fixed income index, which provides us the flexibility to seek out the best risk-adjusted returns available across regions, sectors and securities.

    The aim of ECOR is to provide a steady stream of income and capital stability over the medium term by investing in a diversified portfolio of fixed income securities and cash. ECOR seeks to produce a return (net of fees) that exceeds the RBA Cash Rate by 1.50-2.00% p.a. within a cycle.

    Key Statistics  
    • Modified duration: 0.31 years
    • Portfolio Yield: 1.92%
    • Average Credit Quality: A
    • Portfolio ESG Score: A
    • Management Cost: 0.45% (incl. of GST and RITC)
    • Inception Date: 22 November 2019
    • ECOR paid a distribution of $0.035 dollars per unit in March 2022

    Fund Review

    ECOR returned -1.01% for the month net of fees. The fund’s performance was negatively impacted by wider credit spreads and higher bond yields which more than offset coupon income. On average credit spreads were approximately 11 basis points wider on the month with weakness seen across corporates, financials and structured credit. While we have significantly reduced duration in the portfolio, the larger sell off in government bond yields also contributed to the negative performance for the month. The fund continues to have a very modest neutral interest rate duration positioning of 0.31 years.

    New issuance picked up during the month with the market taking the view that the world is not coming to an end because of the Russian invasion of Ukraine. While US credit spreads rallied in the second half of the month, Australia credit spreads largely held steady. We participated in numerous deals during the month including AFG and Plenti in the ABS space and Suncorp, Liberty, BNP and BNS in financials.

    Outlook

    The range of possible outcomes and their attendant probabilities remain numerous and fluid, respectively. With that healthy dose of caution recorded up front, we expect three key, interconnected trends to permeate and influence economic and financial markets in the coming months – inflation, commodity prices, and geopolitics.

    Central banks worldwide have been responding to inflationary pressures for months, and with the US Federal Reserve joining the chorus in March, we expect the trajectory to accelerate through 2022. Even Australia, who just six months ago was still forecasting “lift-off” in late 2023/early 2024, could now increase rates as early as June 2022. We do not subscribe to this view, based on the RBA’s insistence on observing sustainable wage increases above three percent before moving. As at time of writing, the earliest we could see multiple quarters with the required growth rate would be September/October of 2022.

    In one sense, the normalisation of rates is a positive signal because employment globally has held up far better than expected. Nevertheless, the whole raison d’etre of higher interest rates is to encourage saving and moderate economic activity to manage inflationary impulses. One of the challenges the globe faces is that households already have elevated savings as a response to pandemic-era support measures, elevated uncertainty, and truncated consumption patterns. Rising interest rates will also have a more direct impact on property markets, such as in the United States where the cost of the popular 30-year fixed mortgage rate has jumped quickly in 2022. Rising funding costs for Australian banks will create an additional driver of rising mortgage rates, although after heady gains during 2021 some moderation in housing markets would not be a bad thing, in our view.

    Arguably the most prominent driver of rising inflation expectations is commodity prices. This moniker covers a broad range of materials ranging from energy to fertiliser to wheat. The immediate focus of attention is the energy complex, where demand remains strong, but supply concerns persist. An already tight market is being pressured by harsh sanctions on Russian production, exacerbated by voluntary withdrawal of trade by private entities wary of violating the broad range of restrictions. As a result, prices are biased strongly to the upside and show no sign of receding as the world scrambles to secure alternate sources of supply. Reliable energy exporters such as Australia are beneficiaries, including the local currency, but ultimately cost increases will filter into transport and electricity costs and will ripple through entire economies.

    Markets attempt to discount all known information into current prices but assessing the implications of war is especially difficult. With Russia being a large energy exporter, the first order impacts are clear. But with Ukraine (and to a lesser extent Russia) being a significant exporter of foodstuffs including wheat and corn, major disruptions to agricultural production could have direct, real-world effects on products that everyone consumes. For those with a longer memory, persistent food inflation is acknowledged as one of the triggers for the Arab Spring of 2011. As a result, we remain wary of exogenous shocks arising from the fog of war.

    Financial markets have been expressing their views on key thematics via yield curves, credit spreads and equity prices, with some curious disparities. The short end of yield curves have been pricing in more aggressive hiking cycles despite geopolitical uncertainties, with the belief that central banks must respond to inflationary pressures or risk the even more dire outcome of a stagflationary spiral. This is not our base case but would be the worst case for both economies and markets. However, the long end has not responded in the same way, leading to a raft of yield curve inversions the likes of which we last observed in 2018. We believe this can be explained partly by a flight-to-safety trade based on the risk of a prolonged conflict in Ukraine, but also by the market hedging against the risk that a swift hiking cycle creates an economic downturn that forces central banks to pause or reverse course either next year or in 2024. The big unknown remains the outlook for quantitative tightening (QT), a likely long and drawn-out process that has little to no historical precedent but could just as easily derail even the most well telegraphed interest rate normalisation cycle.

    Risk assets have had a rocky start to 2022, but credit markets have generally been more sanguine than equities. Credit spreads have widened modestly but persistently since late 2021, while equities have fluctuated wildly. We have noted a clear fall in market volumes in both equity and fixed income, with this reduced liquidity contributing to wider daily movements. This may simply reflect some anticipation of the impending commencement of QT, creating the potential for further volatility as the actual process begins.

    Therefore, against a backdrop of uncertainty, we remain positioned for flexibility. Yield curves have begun to invert, but they are by no means a perfect predictor of recession. Commodity prices will be supporting an inflationary impulse for the foreseeable future, especially while hostilities continue in Ukraine. Without clear positive catalysts, our base case is for yields and credit spreads to continue moving wider in the months ahead.

    Investment Manager

    Daintree Capital, the investment manager of ECOR, is a boutique investment manager specialising in the construction of absolute return, income generating portfolios. The firm was nominated as a Finalist for the Money Management Fund Manager of the Year Award in the Emerging Manager category for 2019, and ECOR has a ‘Recommended’ rating from Lonsec and Zenith. Daintree Capital is also a signatory to the United Nations Principles for Responsible Investment.

    To read more about eInvest Core Income Fund (Managed Fund) Code: ECOR, 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.

    The rating issued 02/2022 published by Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec).  Ratings are general advice only and have been prepared without taking account of your objectives, financial situation or needs. Consider your personal circumstances, read the product disclosure statement and seek independent financial advice before investing. The rating is not a recommendation to purchase, sell or hold any product. Past performance information is not indicative of future performance.  Ratings are subject to change without notice and Lonsec assumes no obligation to update.  Lonsec uses objective criteria and receives a fee from the Fund Manager. Visit lonsec.com.au for ratings information and to access the full report. ©2022 Lonsec. All rights reserved.

    The Zenith Investment Partners (ABN 27 103 132 672, AFS Licence 226872) (“Zenith”) rating (assigned 09/2020) referred to in this document is limited to “General Advice” (s766B Corporations Act 2001) for Wholesale clients only.  This advice has been prepared without taking into account the objectives, financial situation or needs of any individual and is subject to change at any time without prior notice.  It is not a specific recommendation to purchase, sell or hold the relevant product(s).  Investors should seek independent financial advice before making an investment decision and should consider the appropriateness of this advice in light of their own objectives, financial situation and needs. Investors should obtain a copy of, and consider the PDS or offer document before making any decision and refer to the full Zenith Product Assessment available on the Zenith website. Past performance is not an indication of future performance. Zenith usually charges the product issuer, fund manager or related party to conduct Product Assessments.  Full details regarding Zenith’s methodology, ratings definitions and regulatory compliance are available on our Product Assessments and at https://www.zenithpartners.com.au/RegulatoryGuidelines