Hedge Clippings | Friday, 02 December 2022
For the first time this year market analysts - or at least the media - are hinting that the interest rate medicine we've collectively been taking to curb inflation might be working, and as a result, the US Fed and Australia's RBA might take a breather on the size of future rate increases. Jerome Powell indicated as such this week, saying they might start as soon as December, while also cautioning that there was "still a long way to go in restoring price stability."
Meanwhile, in Australia the ABS released monthly inflation figures this week, for the first time providing a monthly rather than a quarterly report, which showed annual inflation at 6.9% to the end of October, down from September's number of 7.3%. In his last statement on November 1, RBA Governor Philip Lowe expected inflation to peak around 8% by the end of the year, so there's some cause for optimism, even though his past (admittedly longer term) forecasting hasn't always been spot on. There's also a slight caveat on the make up of the ABS' monthly inflation numbers, which only measures 63% of the CPI basket, excluding for instance electricity and gas prices, which - unless you're living "off the grid" or under a rock - you might have noticed have been on the rise recently.
With their board meeting next Tuesday, we won't have long to wait to see if the RBA holds off on their next rate increase, but most economists think not, having "only" increased them by 0.25% in October and November, and with a 2 month gap to the next meeting in February 2023. Meanwhile, it's worth remembering that in the US there's room to "ease off" as rates there rose by 0.75% in each of June, July, September, and November.
Meanwhile, equity markets, renowned for pricing in future conditions and earnings, are pretty confident that the worst is over, with the ASX 200 in November posting its second successive monthly rise of over 6%, to take its 12 month return into positive territory, up (just) 0.39%. Adding in dividends, the total 12 month return was a not so shabby 5%, or just over 2% YTD since January. That doesn't mean everything has recovered, with the ASX Small Industrials down 21% over 12 months and the same YTD. For comparison purposes, the S&P 500's Total Return was down 9.21% over 12 months to the end of November, and -13.1% YTD, while for some really eye watering gyrations, the S&P Cryptocurrency Broad Digital Market Index has toppled -71% over 12 months, having been UP 296% over 12 months to November 2021.
All this goes to show that markets move in different ways at different times. There is no "one" market, hence the need for analysis and asset allocation. Investors and fund managers understand the cycles, even if they are frustrated by them at times when their preferred strategy or sector is facing headwinds, while other sectors are benefiting from tailwinds. This was shown best by the growth/value divergence (and subsequent reversal) of the past five years and is also reflected in the popularity and performance of specific investment strategies and sectors we see in the FundMonitors.com database.
One such sector has been the significant, but often overlooked, fixed income sector, encompassing debt and credit funds which lack popular media appeal while equities (and the tech/growth sector in particular) often dominate investor and media interest. In falling markets the attraction of regular income and capital protection come into their own, potentially with a yield of 6-10%. Out of this has emerged a Peer Group of hybrid funds, blending credit and equity, or equity like elements, designed to provide the regular income needs of investors, coupled with either equity upside and/or downside protection.
While no two funds are the same, the Hybrid Credit Peer Group comprises a variety of funds with varying investment processes and performances, and their returns and risk profiles have shown the benefits of the approach. For example, FundMonitors has recently completed a FACTORS Research Report on the *Altor AltFi Income Fund, which "invests via a portfolio of private credit instruments (loans) across a selected group of small to medium enterprises. Investors receive quarterly cash distributions, and gain further upside through free attaching equity exposure on selected debt investments the Fund makes" and has returned over 11% p.a. over 4 years since inception, with a Sharpe Ratio of 3.93%.
Along similar lines is a new fund from *Collins St. Asset Management, which invests in convertible notes, targeting distributions of 2% per quarter [8% per annum], with the potential for equity upside on conversion of the loan at the end of the term. This week we caught up with Rob Hay from Collins St. to discuss the strategy, and you can watch the video below.
These funds also seek to fill a gap in the funding market for smaller and medium sized companies, both listed and private, which was created post the Hayne Royal Commission as Banks and traditional lenders left the market, or restricted lending to the sector.
*Both these funds are only open to wholesale or sophisticated investors. Past performance is no guarantee, and investors should seek appropriate advice.
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