Investment Objective and Investment Strategy
To actively manage a portfolio of credit instruments and deliver returns that are uncorrelated to equity markets. Targeted portfolio construction is to hold assets with a short credit duration and high running yield to ameliorate periods when risky assets sell-off. Mutual manages interest rate risk by predominately investing in assets that reset their reference rate every 30 or 90 days.
The Mutual High Yield Fund (the “Fund”) delivered another strong monthly return, recording 1.03% net for July. The six-monthly net return was 3.88%, relative to the benchmark of 0.91%. The Fund benefits income orientated investors as the majority of the returns are delivered via quarterly unfranked distributions (or running yield).
Continuing the theme from prior months, Investors are still “hunting for yield” with little consideration of risks. An example is the listed interest rate security, Ramsay health Care (ticker: RHCPA). This bond trades at around $109.00, but may be called at the next payment date in October 2019 at $100 plus accrued of ~$2.30. Accordingly, Investors currently buying this security are risking $7.00 of capital.
Notwithstanding the recent rally in risky assets, on balance it is likely to continue, which owes to low yield on offer from term deposits and government bonds. Recently the Australian government issued a 10-year government bond at 1.09% setting a new record low. The sharp fall in bond yields over 2019 has increasingly resulted in the phenomenon of negative yielding debt (mainly in Europe), meaning Investors are paying an institution to hold their bonds.
According to Bloomberg, around $13 trillion of global bonds trade with a negative yield. Europe are witnessing highly rated corporate debt trading with negative yields, including Nestle, McDonalds, Apple and AT&T. Amazingly, as the negative yields in Europe push investors into riskier assets, the 2.05% yield on Greece 10-year government bonds is only 16bps higher than the 10-year US government bond rate.
The Fund employs a relative value strategy to identify undervalued assets. Since the inception of the Fund we continue to view great relative value in Residential Mortgage Backed Securities (“RMBS”). This proved correct in July with most of the outperformance attributable to the tightening credit spreads of the Fund’s holdings of RMBS. While RMBS credit spreads may have tightened in July, they still represent great relative value with BBB rated RMBS bonds trading at BBSW + 390bps while 5- year major bank subordinated bonds, also rated BBB trade at around BBSW + 185 bps.
Looking forward, the Fund continues to review a number of attractive investment opportunities with the objective to meet the Fund’s benchmark over a rolling 12-month period.