Australian Fixed Interest: Unveiling the road ahead in 2024

Janus Henderson Investors

December 2023

Funds operated by this manager:

Janus Henderson Australian Fixed Interest Fund, Janus Henderson Australian Fixed Interest Fund - Institutional, Janus Henderson Cash Fund - Institutional, Janus Henderson Conservative Fixed Interest Fund, Janus Henderson Conservative Fixed Interest Fund - Institutional, Janus Henderson Diversified Credit Fund, Janus Henderson Global Equity Income Fund, Janus Henderson Global Multi-Strategy Fund, Janus Henderson Global Natural Resources Fund, Janus Henderson Tactical Income Fund

This information is issued by Janus Henderson Investors (Australia) Institutional Funds Management Limited ABN 16 165 119 531, AFSL 444266 (Janus Henderson). The funds referred to within are issued by Janus Henderson Investors (Australia) Funds Management Limited ABN 43 164 177 244, AFSL 444268. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Past performance is not indicative of future performance. Prospective investors should not rely on this information and should make their own enquiries and evaluations they consider to be appropriate to determine the suitability of any investment (including regarding their investment objectives, financial situation, and particular needs) and should seek all necessary financial, legal, tax and investment advice. This information is not intended to be nor should it be construed as advice. This information is not a recommendation to sell or purchase any investment. This information does not purport to be a comprehensive statement or description of any markets or securities referred to within. Any references to individual securities do not constitute a securities recommendation. This information does not form part of any contract for the sale or purchase of any investment. Any investment application will be made solely on the basis of the information contained in the relevant fund's PDS (including all relevant covering documents), which may contain investment restrictions. This information is intended as a summary only and (if applicable) potential investors must read the relevant fund's PDS before investing available at www.janushenderson.com/australia. Target Market Determinations for funds issued by Janus Henderson Investors (Australia) Funds Management Limited are available here: www.janushenderson.com/TMD. Whilst Janus Henderson believe that the information is correct at the date of this document, no warranty or representation is given to this effect and no responsibility can be accepted by Janus Henderson to any end users for any action taken on the basis of this information. All opinions and estimates in this information are subject to change without notice and are the views of the author at the time of publication. Janus Henderson is not under any obligation to update this information to the extent that it is or becomes out of date or incorrect.

Why self storage could be a good place to stash some cash

Pendal

December 2023

Self storage is an under-appreciated part of the real estate industry that could be a big winner from Australia's growing population. Julia Forrest explains the investment opportunity. 

SELF-STORAGE is not the first place many investors would think of as a place to stash some cash.

But Aussie equities investors looking for opportunities should take a closer look at the industry, says Pendal PM Julia Forrest.

"The world of self-storage is not something you often hear about, but it's an asset class we like," says Forrest, who co-manages property investing in Pendal's Aussie equities team.

Record high immigration and a downsizing trend towards apartment-living will fuel ongoing strength in the self storage industry, says Pendal's Julia Forrest.

ASX-listed National Storage REIT (ASX: NSR) -- which operates 230 centres across Australia and New Zealand -- offers exposure to the sector.

NSR is the biggest active position in Pendal's property strategy, Forrest says.

The opportunity explained

High inflation and rising interest rates have seen a somewhat muted investor appetite for real estate over the past twelve months.

Office assets are trading as much as 30 per cent below book value and the retail and logistics sectors are both under some pressure.

But self-storage assets are defying that trend, underpinned by strong demographics, low maintenance costs and inbuilt inflation protection, says Forrest.

"Occupancy was supercharged during COVID -- and is now returning to normal -- but the underlying metrics remain very strong, linked largely to Australia's strong population growth."

Self-storage assets were in strong demand during the COVID lockdowns period as young people returned to the family home, expats were forced to return at short notice, and many households had to clear space for working from home.

Now immigration and an ageing population are underpinning the industry's growth.

Forrest says 70 per cent of self storage clients are individuals looking for somewhere to store their possessions, often prompted by a life event.

The remaining 30 per cent are businesses needing somewhere to store their inventory, building materials, and tools.

Low costs, strong prices

One of self storage's key attractions is very low maintenance costs compared to other types of real estate.

"It costs very little to maintain -- you're replacing lighting, there's a minor amount of depreciation. That means you get strong, resilient cash flows."

As a result, valuations are holding up well as other real estate sectors come under pressure.

Retail real estate faces structural headwinds from the move to online shopping and infinite supply of virtual alternatives to physical store space, says Forrest.

Office is also facing structural change in the way people work and has risks ahead as the economy slows.

"But self storage is not a discretionary purchase -- a lot of it is needs based because of those life events, which makes it a little more resilient than the other sectors.

"Self storage is still transacting at book value. Office is 20 to 30 per cent below book value. Retail and even industrial are beginning to see a bit of pressure on book values, but self storage continues to transact at book values."

Self-storage sites also have the potential for transformation into high value industrial and logistics space, she says.

"Industrial vacancy is incredibly low. For self storage, one of the higher and better uses is as industrial. You don't get that with office because of zoning."

Inflation protection

Forrest says self storage offers a level of inflation protection in a portfolio because of the short duration of leases.

"Because you're leasing month to month, if there is a big inflationary spike you can just lift your rate. You are not locked into a long-term lease. This provides quite a lot of inflationary resilience."

She says the Australian market is quite immature relative to other markets.

"Self storage space in Australia represents 2.1 square feet per capita. In the US, it's closer to 6.1 square feet per capita. So, in terms of available space, Australia is relatively under serviced, although the US is a much more mobile market."

Real estate sentiment shifts

Sentiment towards real estate has shifted markedly in the last few weeks after a tough year amid signs that inflation is coming under control, Forrest says.

"Until very recently, people were very concerned about interest rates and inflation.

"But with a couple of lower CPI readings here and in the US, the market's pricing of future rate hikes has come way back and that has led to a real estate rally."

Author: Julia Forrest & Pete Davidson

Funds operated by this manager:

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at December 8, 2021. PFSL is the responsible entity and issuer of units in the Pendal Multi-Asset Target Return Fund (Fund) ARSN: 623 987 968. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient's personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

Investing in toll roads

Magellan Asset Management

November 2023

While we tend to think of toll roads as a recent phenomenon, they have been around for thousands of years. Toll roads today are a popular way for cash-strapped governments to raise money and improve the quality of, and reduce the congestion on road networks. Given the huge capital costs (toll roads often cost billions of dollars to build), for most investors the listed market is the only way to gain access to these assets. 

Types of toll roads

There are two main types of toll roads; inter-urban toll roads (those between cities); and intra-urban toll roads (those within cities), which can be further be divided into radial, orbital and high-occupancy toll (HOT) lanes.

Each road varies in terms of its dynamics but, in general, this difference stems from the types of users and the trips undertaken. 

Intra-urban toll roads typically host a higher proportion of cars - with a significant part of this related to people traveling to and from work and going about their daily lives. Consequently, in an economic downturn, while some traffic will divert to the alternative free route, as long as people have jobs to go to or errands to run, the diversion is likely to be minimal. By contrast, roads between cities tend to have higher proportions of commercial traffic and discretionary trips, which are more economically sensitive.

Key Earnings Drivers

As is generally the case for transport infrastructure, the revenue for a toll road is a function of volume and price. In the case of toll roads, this can be put simply as: Toll road revenue = Traffic volume x toll price

Pricing Mechanism for toll roads?

The typical business model for a toll road is that a government agency enters into a concession agreement (contract) that entitles a toll-road operator to collect tolls for a defined period and increase those tolls on a regular basis in a defined way. 

The basis on which tolls are increased is controlled by the terms of the concession agreement and the level of tolls is generally linked to inflation. Table 2 shows how contracts differ. In Canada, the owner of the 407 ETR tollway can raise tolls with minimal constraints, while in Australia toll increases are linked to the consumer price index, the rate of inflation or 1 per cent per quarter. 

The pricing mechanism for these toll roads generally tracks increases in inflation with minimal lag. Consequently, most toll-road owners have the ability to respond quickly to any rise in inflation.

The impact of price demand

As tolls increase, there is generally a temporary switching effect where some users shift to the toll-free alternative. This causes competing routes to get more congested, which boosts the attractiveness of the tolled route. This results in an increase in total revenue, all things being equal, as the toll increase more than offsets the temporary decline in traffic. This can be seen from the below case study 1, that shows traffic on Sydney's Eastern Distributor, which grew 118% over 18 years despite tolls increasing 151% over the same period.

The volume of traffic

Three main factors affect the volume of traffic on toll roads.
1. Trip-time certainty
A critical point in the decision-making process for drivers is how predictable travel times are. Drivers will pay a premium for a predictable trip and overestimate average driving times on trips with highly variable conditions. 
2. Demand for toll roads is tied to economic development
Experience shows that the demand for transport is related to economic development. Increases in populations and wealth lead to more demand for transport; in a growing economy, we can expect the number of vehicles on roads to rise over time. 

Case Study 2 below, shows the number of cars per thousand people in different countries around the world. It shows that as countries become wealthier, the demand for transport and mobility leads to increases in car ownership. The direct relationship between the demand for transport and economic development underpins the need for transport infrastructure.

3. Capacity constraints on the existing network 
A new toll road is typically supported by governments to add capacity to a network that is at, or approaching, capacity. If alternative routes to the toll road are congested, traffic growth on toll roads is likely to be higher than that of the corridor for long periods of time. This is displayed below in case study 3, which shows the traffic along a key corridor in Sydney, Australia. It shows that, despite the addition of the M5 toll road in 1992, the average daily traffic on the existing network remained unchanged and all traffic growth in the corridor was via the toll road. 

What are the risks?

1. Misalignment of incentives
A misalignment of incentives of management and advisers is the most fundamental risk to the financial success of a toll road. Recent history is littered with high-profile bankruptcies in toll roads located across the globe. Examples include the Cross City Tunnel, the Lane Cove Tunnel, the RiverCity Motorway and BrisConnections in Australia; the ITR, the SR125, the SR130, the Pocahontas Parkway and the Chicago Skyway in the US; and the M6toll in the UK. What these failures have in common is they were a result of misalignment of incentives, with (mostly) investment banks using highly aggressive traffic numbers and/or capital structures to generate investment banking fees or increase assets under management on which they could charge management fees. The other instances were largely where companies' bonus structures rewarded growth in assets rather than long-term investment metrics.

This is one of the reasons Magellan places so much emphasis on the governance or agency risk of these businesses. Incentives drive behaviour. A management team with incentives that align with the needs of long-term asset owners is less prone to such errors. 

2. Congestion charges
Eight cities including Milan, London, Singapore and Stockholm have congestion charges, aimed at reducing traffic in parts of the central business district, that largely have proved effective. Other cities, including Sydney, Australia and Washington DC, have considered such measures. 

A congestion charge increases the cost of a trip into the charged area, which would be expected to shift people to other modes of transport; in particular, public transport. Other solutions such as Washington DC's dynamic pricing on parking meters may also reduce traffic at the margins.

3. Technological disruption
As we have noted in our paper, 'Self-driving cars - implications for toll roads', we expect autonomous vehicles and driverless cars to prove positive for the earnings of toll roads over the next 10 to 20 years, particularly for urban toll roads. 

Toll roads today typically can handle about 2,200 vehicles per lane per hour. A study by the University of California1 concluded that full penetration of self-driving cars could double this capacity. This is because computer-driven vehicles will be able to travel much closer together, at much higher speeds and in much thinner lanes. 

The long-term impact on toll roads will depend on the balance between additional trips created by driverless cars minus the additional capacity that is created on the free roads 

4. Working from Home
Working from home has been a more common working approach post-pandemic. However, we note that for most roads, commuter traffic only represents a minority of trips, with school-runs and other local trips representing the majority. 

5. Declining licence uptake among younger adults
Much has been made about the decline in teenagers and people in their early 20s getting a driver's licence. 
In the University of Michigan study, the most common reason given for not getting a licence was that people said they were too busy (37%), followed by the cost of owning and maintaining a vehicle (32%). Interestingly, 31% said it was because people said it was so easy to get a lift from a friend. Ultimately, though, these people are more likely to get a car once they leave university and enter the workforce, and especially once they have children. This is supported by the NSW Household Travel Survey, which found weekday car trips by households with children were 3.9 times that of single-person households. Their main reason for using the car (22.7% of trips) was to ferry children around. 

An Australian study into the same phenomenon2 suggested a range of explanations. Potential causes included increasingly restrictive access to learners and full licensing requirements along with lifestyle factors - increased tertiary education, staying at home longer and delaying working and having children, and the reduced status symbol of a car. The study found that young people who maintain frequent contact with friends through technology are more, not less, likely to see their friends in person. 

Toll roads can generate growing and inflation-protected income streams for long-term investors. While the risks are low compared with most equities, the risks of these assets are nonetheless real - particularly when they pertain to agency risk. In-depth research and a good understanding of the drivers of the business and incentives of management teams should allow investors to reap the benefits of these largely misunderstood assets.

Funds operated by this manager:

Magellan Global Fund (Hedged), Magellan Global Fund (Open Class Units) ASX:MGOC, Magellan High Conviction Fund, Magellan Infrastructure Fund, Magellan Infrastructure Fund (Unhedged), MFG Core Infrastructure Fund

Important Information: 

This material has been delivered to you by Magellan Asset Management Limited ABN 31 120 593 946 AFS Licence No. 304 301 ('Magellan') and has been prepared for general information purposes only and must not be construed as investment advice or as an investment recommendation.  This material does not take into account your investment objectives, financial situation or particular needs. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer documentation, offer or invitation to purchase, sell or subscribe for interests in any type of investment product or service. You should obtain and consider the relevant Product Disclosure Statement ('PDS') and Target Market Determination ('TMD') and consider obtaining professional investment advice tailored to your specific circumstances before making a decision about whether to acquire, or continue to hold, the relevant financial product. A copy of the relevant PDS and TMD relating to a Magellan financial product may be obtained by calling +61 2 9235 4888 or by visiting www.magellangroup.com.au.

Past performance is not necessarily indicative of future results and no person guarantees the future performance of any financial product or service, the amount or timing of any return from it, that asset allocations will be met, that it will be able to implement its investment strategy or that its investment objectives will be achieved. This material may contain 'forward-looking statements'. Actual events or results or the actual performance of a Magellan financial product or service may differ materially from those reflected or contemplated in such forward-looking statements.

This material may include data, research and other information from third party sources. Magellan makes no guarantee that such information is accurate, complete or timely and does not provide any warranties regarding results obtained from its use. This information is subject to change at any time and no person has any responsibility to update any of the information provided in this material.  Statements contained in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of Magellan. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. No representation or warranty is made with respect to the accuracy or completeness of any of the information contained in this material. Magellan will not be responsible or liable for any losses arising from your use or reliance upon any part of the information contained in this material.

Any third party trademarks contained herein are the property of their respective owners and Magellan claims no ownership in, nor any affiliation with, such trademarks.   Any third party trademarks that appear in this material are used for information purposes and only to identify the company names or brands of their respective owners. No affiliation, sponsorship or endorsement should be inferred from the use of these trademarks. This material and the information contained within it may not be reproduced, or disclosed, in whole or in part, without the prior written consent of Magellan.

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What is the Fed's Senior Loan Officer

Survey and what is it telling us? 

Challenger Investment Management

November 2023

Funds operated by this manager:

Challenger IM Credit Income Fund, Challenger IM Multi-Sector Private Lending Fund

For Adviser & Investors Only

[1] All the data in this report is sourced from the SLOOS which is produced by the Federal Reserve. https://www.federalreserve.gov/data/sloos.htm

The 'low emissions' megatrend:

Is it too early to invest in green hydrogen?

Insync Fund Managers

December 2023

The 'low emissions' megatrend is decarbonising business models, driving long term value for investors and helping corporates and countries attain climate related goals.

Insync Funds Management CIO, Monik Kotecha said, 'The main levers of the low emissions megatrend are cost competitive renewables that have experienced massive drops in their establishment, then production costs, compared to their fossil fuel and nuclear peers.'

This, he said, is what is driving the 'electrification of everything' including transportation, heating, industrial operations, etc. 'More than just clean energy generation, it also encompasses digitally optimised energy efficiency systems, decentralised energy generation and overhauling entire electricity grids.'

Half of the world's demand for energy is projected to be served by 'clean molecule' sources by 2050 and hydrogen, the first, lightest and most abundant element in the universe, is set to play a vital role.

'Electrification alone won't get us to net zero,' Mr Kotecha said. 'Hydrogen as part of an energy mix could supply sectors not suited to electricity, such as heavy machinery and heavy industries, in lieu of fossil fuels.'

Seen as a potentially environment-friendly transformative force Mr Kotecha said hydrogen is an enticing prospect for investors, green hydrogen in particular. 'However, it is vital to temper enthusiasm with a dose of realism, given the hurdles on the path to profitability.'

At the heart of the challenge, he said, lies competition with fossil fuels. 'Currently, they are more cost-effective and often heavily subsidised by governments, which means green hydrogen is dependent on external private financial support. Subsidised carbon economics continues to dominate over environmental concerns, and this will remain a challenge until subsidies, scale, infrastructure, and technology advances for green hydrogen level up the current 'unlevel' playing field.'

Most hydrogen today is produced by extracting it from oil, coal or natural gas. In order to justify substantial capital investment for an environment-friendly production source, high-capacity utilisation is essential.

'Green hydrogen is made by splitting the water molecule via electrolysis to create hydrogen. This demands a stable green power source, which is no small feat - although this complex issue is rapidly being overcome.'

A variation to green hydrogen is pink hydrogen (electrolysis powered from nuclear energy). New salt based nuclear reactors already under construction could proffer a cost effective and far safer and environmentally friendly power source than today's typical fission reactors, thus meeting the need for stability of supply.

However, it is likely that the green hydrogen sector will require a more extended investment horizon to realise its full potential or until new technology breakthroughs like those encountered in solar impact the economics.

'In other words, unfortunately, we don't think green hydrogen has yet reached an essential economic tipping point to be a profitable component of the low emissions megatrend, nor produce companies that meet our high profitability criteria, but we will continue to watch and see.'

Funds operated by this manager:

Insync Global Capital Aware Fund, Insync Global Quality Equity Fund

Disclaimer
Equity Trustees Limited ("EQT") (ABN 46 004 031 298), AFSL 240975, is the Responsible Entity for the Insync Global Quality Fund and the Insync Global Capital Aware Fund. EQT is a subsidiary of EQT Holdings Limited (ABN 22 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX: EQT). This information has been prepared by Insync Funds Management Pty Ltd (ABN 29 125 092 677, AFSL 322891) ("Insync"), to provide you with general information only. In preparing this information, we did not take into account the investment objectives, financial situation or particular needs of any particular person. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. Neither Insync, EQT nor any of its related parties, their employees or directors, provide and warranty of accuracy or reliability in relation to such information or accepts any liability to any person who relies on it. Past performance should not be taken as an indicator of future performance. You should obtain a copy of the Product Disclosure Statement before making a decision about whether to invest in this product.

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Market Commentary - November

Glenmore Asset Management

December 2023

Funds operated by this manager:

Glenmore Australian Equities Fund

China Property: Has the "Grey Rhino" been tamed?

Ox Capital (Fidante Partners)

December 2022

Stabilization of property market in sight = Time to buy quality growth stocks in China.

Relative to most governments in the world, the Chinese authorities proactively controlled and deflated the property
market bubble to sustain a stable economy in the long run. Policy measures, including tighter lending standards and
house price restrictions, were put in place to dampen real estate speculation while containing escalating home and
land prices. Notably, latest statistics from China indicate signs of stabilization in the property market.

1. Policy measures have been effective: Measures put in place over two years ago have been effective and
authorities have started relaxing some policy measures given :

1) Property sales are down ~50% from 2021 levels (near 2015 levels).

2) Housing starts have declined over 60% from peaks to 2023 YTD. Urbanization rate in China is only ~60%,
much lower than that of developed countries, and the lack of new starts in the system will ultimately reduce
overall supply (less completions) in the next few years. As such, supply and demand dynamics will increasingly
tighten.

2. Affordable housing vs. other counties: China property prices are affordable relative to other EM/DM counties
while affordability will improve further as mortgages rates decline.

3. Stimulating growth: The Chinese authorities have started to stimulate the economy, showing an intention to boost growth, increase consumer sentiment and investor confidence. We believe further reforms are likely to mitigate risks to the broader economic recovery. Notably, our base case for China is that of continual policy easing and continued government stimulus, an environment ripe for improving economic activity.

Equity market correction provides entry point. Although we do not believe it is the time to buy China developer stocks given structural headwinds facing the sector (i.e. Lower household formation), and we believe the property sector is set to stabilize rather than a robust recovery.

However, we do believe this set-up of "stimulating growth" is a similar playbook to the GFC in USA and Europe in 2009 when it was a great time to own quality growth companies at deeply discounted valuations. As such, we view a similar set up for many quality growth stocks in China at inexpensive valuations now.

Funds operated by this manager:

Ox Capital Dynamic Emerging Markets Fund