- Credit spreads narrowed on the month, aiding performance
- Overlay positioning was a small positive for performance, but this was offset by our core duration and positioning which detracted modestly
|Month (%)||Quarter (%)||1 Year (%)||Since Inception* (% p.a.)|
|eInvest Income Maximiser Fund (EMAX)||0.50||-0.27||2.81||1.07|
|Daintree High Income Trust||0.51||-0.26||0.96||2.82|
|RBA Cash Rate||0.01||0.03||0.10||0.25|
^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: 0.60 years
- Portfolio Yield: 3.05%
- Average Credit Quality: BBB
- Portfolio ESG Score: AA
- 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 December 2021
EMAX returned 0.50% for the month bringing the rolling two-year performance to 0.83% (0.62% above cash). The fund’s performance was driven by primarily by spread contraction and coupon income with a modest contribution from overlay strategies. Interest rate positioning had minimal impact. Sector spread performance was driven primarily by strong performance in bank capital securities and modest tightening in corporates. The fund continues to have a modest interest rate duration positioning of 0.60 years.
No surprise that new issuance slowed down during the month. There were no new RMBS transactions for the fund, however we did participate in Computershare 2027 transaction. Given the illiquidity going into year-end, we have left cash levels modestly elevated.
Covid continued to cast a long shadow over most activity in 2021, as it did in 2020, with long-lived lockdowns in many parts of Australia and New Zealand. Moving into 2022, however, there has been a change in sentiment. The reality of living with the virus has been accepted by most in antipodean politics and the shadow of Covid is therefore receding.
For markets, however, the virus continues to cast a shadow because the dislocated global supply chain continues to put upward pressure on prices. China’s zero-tolerance approach to the virus will ensure this remains the case in 2022. Investors will therefore remain highly uncertain as to the severity of US inflation, likely policy responses, the extent of the subsequent slowdown and the severity of global spillovers.
Just how much will monetary policy in the US and elsewhere be tightened? We live in a world where leverage is elevated and demand for new credit is therefore low. Credit impulse data remain weak across several jurisdictions. Conceptually, this means the contribution of new credit growth to GDP is weak. If the main channel by which tighter monetary policy works is to restrain demand for credit, it follows that all else being equal, a weakening credit impulse reduces the need for tighter monetary policy. Bond markets realise this, refusing to price a prolonged tightening cycle against this backdrop. A faster than expected pace of near-term rate hikes in developed market economies (most notably the US) may be required to fight inflationary impulses, but even the hikes currently priced are expected to result in a long tail of slower growth.
Australia will not be immune from tighter global financial conditions. For example, AUD weakness amid broad USD strength may contribute to higher imported inflation which brings forward RBA hikes. High household savings rates in Australia have also driven expectations among some market participants that household spending will drive above-trend local growth in 2022. We do not subscribe to these views. The consumer caution that has been a feature of the post-GFC landscape will not suddenly disappear, regardless of household balance sheet strength. Views that Australian inflation may surprise to the upside in 2022 are therefore likely misplaced. The crucial element that drives our core view is low wages growth. For several years, labour force underutilisation has been too elevated to sustain higher wages. We believe the opening of the international border will in fact cause a supply shock that drives this underutilisation higher. Of course, such a shock will dissipate over time. Nonetheless, we believe it will elongate an already long path to sustained higher wages in Australia. We therefore maintain our view that the RBA hiking cycle will start later than markets expect. It should also be remembered that low fixed home loan rates will start reverting to standard variable rate pricing or higher fixed rates in 2023, while the delivery of stage 3 tax cuts that might be expected to act as an offset to this will mostly benefit higher income households with a higher propensity to save. We therefore retain our view that rate hikes in Australia are more likely in 2023 or 2024 than in 2022.
Even as the RBA tightening cycle lags those of other global central banks, 2022 will still be a year where monetary accommodation is wound back globally. Investors will increasingly focus less on the near-term trajectory for rate hikes in the US and more on the terminal cash rate for the cycle. Asset market volatility typically increases at this point in the cycle, a change that may be exacerbated by the withdrawal of unconventional stimulus in various jurisdictions (including Australia). Near-term tightening in the US is fully priced and in Australia, we would argue 2022 tightening is excessively priced. It follows that we see yields in the short end of the Australian curve as excessive, but at the same time we do not see a catalyst for a re-price lower. In fact, we would concede that if our core RBA view is incorrect, the risks are indeed skewed towards earlier hikes as opposed to later hikes. As markets continue to grapple with what a future that is not dominated by Covid means for the global growth/inflation trade-off, we may also see a re-rating of growth expectations in Australia and elsewhere. Against this backdrop we see duration risks as evenly balanced for the first time in quite a while.
So, as 2021 draws to a close, we thank all our investors for their trust over the last year. We wish everyone a safe and prosperous 2022 as we look forward to a better year health-wise. Markets will remain challenging though, with elevated volatility a likely feature. Against this backdrop, at Daintree we continue to emphasise the importance of a defensive investment capability that focuses on capital preservation.
To read more about eInvest Income Maximiser Fund (Managed Fund) Code: EMAX, 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.