Welcome to the January 2022 Investment Update for the Switzer Higher Yield Fund (Managed Fund) (SHYF or the Fund). Click here to download the report.
For the month of January, the Fund delivered a return of -0.26% net of fees, compared with 0.13% for the benchmark RBA Cash Rate + 1.5%. Over the past three years the Fund has returned 2.61% p.a. net of fees, compared with 1.95% p.a. for the benchmark.
At the end of the month, the Fund had a weighted average interest rate of 1.10% compared with the actual RBA Cash Rate of less than 0.10%. The average credit rating of the Fund is A+; it has an average A ESG bond rating from MSCI; and the modified duration of the Fund is 0.19 years.
Market Commentary and Outlook
In late December, the market was only pricing in the expectation of three Fed hikes in 2022. The S&P500 Index was sitting at 4,793 points. Following strong inflation, employment and wages data in January, US Federal Reserve Chair Jerome Powell strongly signalled that the Fed would increase the number of hikes implied by its ‘dot plots’ to at least four, and possibly higher. The market shifted to pricing in around five hikes with economists upgrading their forecasts in lockstep.
The impact on equities and other risk asset-classes in January was predictable. The S&P500 slumped by 9.2% to a low of 4,327 points and the Nasdaq fell 13.5%.
Over recent months the Fund had materially reduced its exposure to credit, increased cash weights and introduced hedges to protect residual credit risk holdings. The Fund also continued to hedge-out all interest rate risk, keeping its interest rate duration around zero years. Credit spreads behaved as expected given the equities rout, although Aussie credit was characteristically low beta and “head-in-the-sand”.
The major banks’ 5-year hybrid curve on the ASX pushed out from its recent tights in December of 209 basis points (bps) to 229bps by the end of January. One step up the capital structure, 5-year major bank Tier 2 bond spreads likewise climbed from 143bps to 144bps over the month. At the top of the capital stack, 5-year major bank senior spreads moved from 66bps to 64bps. At the same time, long-term interest rates climbed with the 10-year Australian government bond yield lifting from 167bps on 31 December 2021 to an intra-month high in January of 202bps, finishing at 190bps.
Although all banks reported net client buying of State government bonds (or ‘semis’) in January, one or two short-sellers managed progressively to push spreads more than 10bps higher in the month, with NSW and Victorian 10-year bonds finishing at 42bps and 44bps respectively over the 10-year Commonwealth bond curve. Their thesis was that State government bond spreads would move wider after the RBA had completed its bond purchase program (or ‘quantitative easing’) in February.
Since the RBA’s December meeting and Governor Lowe’s subsequent speech, there was clear consensus that quantitative easing would end in February. Whatever doubt remained was completely removed by the strong inflation number in January.
In the State government bond market, 10-year spreads to the Commonwealth government bond yield curve compressed from 37 bps to 33 bps over the month. All the States save Victoria reported much better budget outcomes than the market had forecast with material downgrades to future debt issuance consistent with Coolabah’s priors. The stand-out in this respect was NSW with a stunning $20 billion downgrade to debt issuance in FY2022 vis-à-vis bank estimates only a few months prior.
The Switzer Higher Yield Fund (Managed Fund) is a zero-duration bond fund which aims to provide investors an attractive cash yield with low capital volatility by investing in a portfolio of high quality and liquid fixed income securities. The portfolio is managed by Coolabah Capital Institutional Investments. The Fund aims to achieve total returns which are between 1.5% to 3.0% greater than the RBA Cash Rate after fees and expenses on a rolling 12-month basis.
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DISCLAIMER: Switzer Asset Management Limited (SAML)(ABN 26 123 611 978, AFSL 312247) is a wholly-owned subsidiary of Contango Asset Management Limited, a financial services business listed on the ASX (CGA). SAML and CGA are authorised representatives of ST Funds Management Limited (AFSL 416778) to provide general advice. SAML is the Responsible Entity and Coolabah Capital Institutional Investments Pty Limited is the investment manager of Switzer Higher Yield Fund (Managed Fund)(ARSN 093 248 232) (the Fund).
This material has been prepared for general information purposes only. It does not contain investment recommendations nor provide investment advice. It does not take into account the objectives, financial situation or needs of any particular individual. Investors should, before acting on this material, consider the appropriateness of the material.
Neither SAML, CGA, their related bodies corporate, entities, directors or officers guarantees the performance of, or the timing or amount of repayment of capital or income invested in the Fund or that the Fund will achieve its investment objectives. Past performance is not indicative of future performance.
Any economic or market forecasts are not guaranteed. Any references to particular securities or sectors are for illustrative purposes only and are as at the date of publication of this material. This is not a recommendation in relation to any named securities or sectors and no warranty or guarantee is provided that the positions will remain within the portfolio of the Fund.
Investors should seek professional investment, financial or other advice to assist the investor determine the individual tolerance to risk and needs to attain a particular return on investment. In no way should the investor rely on information contained in this material.
Investors should read the Fund’s Product Disclosure Statement (PDS) and consider any relevant offer document in full before making a decision to invest in the Fund. Relevant information relating to the Fund can be obtained by visiting www.switzerassetmanagement.com.au. All numbers included in this document are sourced from Coolabah Capital Institutional Investments unless otherwise stated.