- Credit spread tightening was a key contributor to performance in August, with a strong contribution in particular from RMBS/ABS
- Duration and curve positioning were negative contributors to our overlay for the month, though positive contributions from credit-oriented quantitative strategies were a partial offset
|Month (%)||Quarter (%)||1 Year (%)||Since Inception* (% p.a.)|
|eInvest Income Maximiser Fund (EMAX)||0.42||0.69||5.38||1.43|
|Daintree High Income Trust||0.43||0.69||5.37||3.19|
|RBA Cash Rate||0.01||0.03||0.13||0.27|
^Inception date for EMAX was 22 November 2019 and inception date for the underlying Daintree High Income Trust was 1 November 2018. Excess Return since inception is measured on the Daintree High Income 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 High 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
EMAX Fund and Investment Objective
EMAX is an absolute return bond strategy. The Fund 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.
EMAX aims to provide investors with a monthly income stream over the medium term by investing in a diversified portfolio of credit fixed income securities and cash that exceeds the RBA Cash Rate (after fees) by 3-4% over a market cycle.
- Modified duration: 0.82 years
- Portfolio Yield: 3.64%
- Average Credit Quality: BBB-
- Portfolio ESG Score: A
- Management Cost: 0.65% (incl of GST and RITC)
- Inception Date: 22 November 2019
- EMAX paid a distribution of $0.092 dollars per unit in August 2021
EMAX had a good month returning 0.42% bringing the rolling twelve-month performance to 5.38% net of fees. Coupon income and credit spread contraction were the main drivers of returns, however those were offset by negative contributions from duration and small losses in overlay trading. Australian market credit spreads were a little mixed during the month with mid tenor financials a touch wider, similar tenor corporates and RMBS a little tighter. US High Yield credit spreads saw higher quality BB names generally outperforming riskier B and CCC credits. The fund continues to have a modest interest rate duration positioning at 0.82 years.
NAB issued their first domestic benchmark issue since 2020 raising $2.75b of funding. In the RMBS/ABS sector, we saw another very strong month of issuance. We participated in a handful of deals including Harvey 2021-1, Mortgage House 2021-2, Resimac 2021-2, and Think Tank 2021-1. Total primary securitisation issuance this year is well on pace to surpass 2020 totals. Several companies reported earnings during the month but overall, these reports did not have a material impact on spreads.
August saw somewhat less volatility in government bond yields than July, with the Australian 10yr trading in a 19.5bp range compared to a 43bp range last month. Nonetheless, the Australian 10yr hit its lowest yield since February (1.08 on August 20) before ending the month higher at 1.155. Some investment grade credit spreads widened (though financials and structured credit broadly performed well). In high yield, by contrast, credit spreads narrowed across the board and this supported performance in our funds. Fed Chair Powell’s speech at Jackson Hole was the main driver of this risk asset performance, with equity markets also rallying as the Fed once again presented a more dovish outlook for policy than what markets had been expecting.
In Australia, speculation continued as to the RBA’s reaction function: Will tapering of QE be delayed in September as the RBA aligns itself with ‘Team Australia’, or will tapering proceed regardless? The Australian dollar has already depreciated by 5.6% since mid-May (despite the 2% rally in the last week and a half of August). At current levels the currency is providing more outright support to the external sector of the Australian economy than has been the case for some time.
That said, we believe the more important consideration is the future profile for Australian domestic demand, which has clearly taken a hit due to lockdowns. The RBA is of the view that the rebound from lockdowns will be significant in 2022, but it remains to be seen whether this is in fact the case. In particular, the strong linkage between workers and employers that was a feature of the 2020 Job-Keeper support package is not replicated in current government support measures. Sharply weaker labour markets may therefore manifest in New South Wales and Victoria in the coming months.
In New Zealand, both the New Zealand dollar and New Zealand bond yields fell (as we foreshadowed last month) as the RBNZ held off on raising rates. We believe that on balance, the RBA should take the RBNZ’s lead and hold off on tapering as well. On August 6, Phil Lowe said that “…we are expecting a return to strong growth next year. Any additional bond purchases would have their maximum effect at that time and only a very small effect right now when the extra support is needed most.” Since then, however, lockdowns have been widened and extended and case numbers are yet to peak. The economy has likely therefore realized the RBA’s downside scenario as outlined in the August Statement on Monetary Policy, which is characterized by extended lockdowns, weaker consumption and labour market outcomes, and a delayed opening of state and international borders. An adjustment to the policy trajectory is a sensible expectation based on these changed circumstances.
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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.