Sector Spotlight: Mineral Resources

Airlie Funds Management

July 2022

Join Vinay as he discusses what makes Mineral Resources a unique business and how it's positioned for future growth.

Speaker: Vinay Ranjan, Equities Analyst

Funds operated by this manager:

Airlie Australian Share Fund

Important Information: Units in the fund(s) referred to herein are issued by Magellan Asset Management Limited (ABN 31 120 593 946, AFS Licence No. 304 301) trading as Airlie Funds Management ('Airlie') 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 to acquire, or continue to hold, the relevant financial product. A copy of the relevant PDS and TMD relating to an Airlie financial product or service may be obtained by calling +61 2 9235 4760 or by visiting www.airliefundsmanagement.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 an Airlie 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. Airlie 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 Airlie. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon.

Any third party trademarks contained herein are the property of their respective owners and Airlie 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 Airlie.

Cracking the code on digital advice

abrdn

August 2022

Funds operated by this manager:

Aberdeen Standard Actively Hedged International Equities Fund, Aberdeen Standard Asian Opportunities Fund, Aberdeen Standard Australian Small Companies Fund, Aberdeen Standard Emerging Opportunities Fund, Aberdeen Standard Ex-20 Australian Equities Fund (Class A), Aberdeen Standard Focused Sustainable Australian Equity Fund, Aberdeen Standard Fully Hedged International Equities Fund, Aberdeen Standard Global Absolute Return Strategies Fund, Aberdeen Standard Global Corporate Bond Fund, Aberdeen Standard International Equity Fund , Aberdeen Standard Life Absolute Return Global Bond Strategies Fund, Aberdeen Standard Multi Asset Real Return Fund, Aberdeen Standard Multi-Asset Income Fund

¹ https://www.ardata.com.au/wp-content/uploads/2022/05/AFALandscape2022-AB_R2.pdf

² https://www.ardata.com.au/wp-content/uploads/2022/05/AFALandscape2022-AB_R2.pdf

Australian Secure Capital Fund - Market Update August

Australian Secure Capital Fund

August 2022

Funds operated by this manager:

ASCF High Yield Fund, ASCF Premium Capital Fund, ASCF Select Income Fund

Macro is still in the driver's seat

Novaport Capital

September 2022

Funds operated by this manager:

NovaPort Microcap Fund, NovaPort Wholesale Smaller Companies Fund

Chris Gosselin, CEO of FundMonitors.com, speaks with Rob Hay, Head of Distribution & Investor Relations at Collins St Asset Management.

The Collins St Value Fund has a track record of 6 years and 6 months and has outperformed the ASX 200 Total Return Index since inception in February 2016, providing investors with an annualised return of 16.78% compared with the index's return of 9.42% over the same period.

Funds operated by this manager: Collins Street Value Fund

The Investment Case for Private Credit

Altor Capital

August 2022

Private credit thought piece - FundMonitors.com:

The Altor AltFi Income Fund (Fund), which specialises in SME and mid-market corporate private credit, is one of a number of Australian fund managers which invests in private credit via listed and unlisted managed funds.

The Fund invests in private credit instruments and has a target distribution rate of 10% p.a. payable quarterly. It has a track record of over 4 years and has achieved 11.62% p.a. to 30 July 2022.

The Manager undertakes a robust investment process, which involves a deep understanding of each investment it makes, including the borrower's key drivers, asset position and funding requirements, and looks at credit opportunities through a private equity lens prior to moving to credit assessment.

The Fund works with management to design a loan structure that meets the objectives of both parties. These debt instruments could vary from senior secured facilities, equipment financing, acquisition financing, management buyouts or research and development lending.

Altor's value-add and active management strategy seeks to mitigate risk and focus on maximising returns by being actively engaged with the business post-transaction, whether at the board level, or in a strategic role.

The Opportunity

Australian Small and Medium Enterprises (SMEs) are starved of capital primarily due to the continued reduction in banks' lending appetite for lending coupled with a domestic debt capital market that lacks the scale and depth compared to overseas counterparts. This funding gap in the market provides private credit investors with opportunities to deploy capital into the sector through structures that protect capital while exhibiting excellent risk return profiles.

The 2021 SME Banking Insights Report, commissioned by Judo Bank and conducted by East and Partners showed that one in four SMEs is unsuccessful in obtaining finance. The third edition of the report which includes SMEs with a turnover of up to $50m found that the funding gap for this segment was $119.2 billion.

This is a result of changes to regulatory and prudential regimes which have seen banks reduce and withdraw offering credit particularly to the mid-market corporates and SMEs.

The gap also provides an opportunity for private credit managers to find high quality loans within the SME segment.

An Emerging Asset Class

"Private credit managers, including many boutiques, have experienced staggering growth rates over the past three to four years as banks have restricted lending or failed to provide borrowers with the flexibility needed during the pandemic."

Australian Financial Review, 2022

The Asset Class

Private credit refers to a range of debt investments that are available to companies or those requiring capital to fund specific projects. A borrower has obligations to make predetermined principal payments in addition to interest and fees which generate a return for the lender. The borrower has a contractual obligation to repay the capital at a pre-determined future date.

Private credit investments can deliver higher returns from a higher interest rate, upfront fees and in some cases attaching equity instruments over the underlying business that is borrowing the money. The investments are illiquid, in that they cannot be freely traded in a secondary market. This compares to other credit investment such as investment grade bonds and high yield bonds which can be traded in a secondary market but typically trade OTC, experiencing large bouts of volatility.

Investments are privately negotiated with the borrower and there are various features such as loan structures and controls to provide protection to the lender, as well as interest rates and the potential for complementary equity and options to generate additional returns.

The Investment Case

Private credit portfolios, if structured properly, have the potential to generate superior risk-adjusted returns relative to other asset classes. Australian investment portfolios are generally underweight fixed income at both institutional and individual investor levels compared to global investors. Australian portfolios have a 14% allocation to fixed income which decreases further when analysing Australian Self-Managed Super Funds' 2% allocation to fixed income. This compares to 36% in the United Kingdom, 22% in the United States and 28% across the world.

There are numerous benefits associated with investing in private credit which include:

1. Generating Sufficient Yield in a Low Interest Rate Environment
2. Greater Protection from Rising Interest Rates
3. Higher Seniority and Security
4. Greater Lender Protections and More Control
5. Lower Potential Losses in a Default
6. Historically Low Allocation to Fixed Income in Australian Portfolios
7. Asymmetric Return Profiles Through More Upside Potential
8. Higher Illiquidity Premium
9. Low Volatility

Private Credit in a Rising Interest Rate Environment

As interest rates rise, driven primarily by inflation, private credit provides several resilient characteristics that benefit investors. Firstly, pricing of private credit loans is a key feature, with variable loans benefiting from a rising interest rate environment. Interest rates based on a base rate plus a margin mean that investor income rises alongside interest rate increases. For loans priced with fixed interest rates, short duration loans is a mitigating factor, allowing the lender to reprice debt at higher interest rates as loans mature.

Another defensive characteristic is the underlying business model of the borrowers in the loan book. In high inflationary environments, a portfolio of companies that can pass on cost increases to customers and maintain margins, safeguarding investors against rising input costs such as wages and raw materials.

Loan origination is typically done via private negotiation, offering investors protection as lenders negotiate better terms, including a senior secured structure, covenants, and attaching equity exposure, each of which can make investments more defensive.

Private loans have also historically offered relatively low volatility as private credit managers are not forced to mark to market its assets daily due to constant re-pricing experience in tradable public markets. This provides more stable returns during periods of market volatility.

Finally, credit quality and fundamentals of issuers generally improve with economic recoveries, meaning private credit managers are generally well positioned for a rebound in economic activity once the new business cycle begins.

Author: Benjamin Harrison, CIO | Portfolio Manager

Funds operated by this manager:

Altor Alpha Fund, Altor AltFi Income Fund

Hedge Clippings | Friday, 09 September 2022

This week Dr. Philip Lowe copped a fair amount of flak following the RBA's fully anticipated decision to raise rates by a further 0.50% taking the rate to 2.35%. He also signalled further upward movements by stating he was "committed to doing what is necessary" to knock inflation on the head.

That's now five rate rises in five months. There's likely to be a further 2 or 3 increases at least, so even if they're not all 0.5%, or don't come at monthly intervals, the official cash rate is likely to be over 3% by early 2023, if not by Christmas this year. Therein lies the source of the flak: It wasn't so long ago that his "advice" was that rates wouldn't start rising until 2024.

It is probably fair to say it will be a while before Lowe looks that far over the horizon again, as the inevitable political opportunists - whinger in chief of everything, Greens leader Adam Bandt leading the charge - called for his resignation. The problem is (or was) that global central banks also underestimated the threat of inflation because much of the cause behind it wasn't there.

When Dr Lowe made his "steady as she goes until 2024" prediction, Putin hadn't indicated he was going to invade Ukraine and create an energy crisis. China hadn't gone into lockdown and created a supply chain crisis. Wages hadn't spiked upwards (and still haven't) to the same degree as inflation.

So Australia is in the same boat as the US, as well as the UK, or Europe, where interest rates were increased by 0.75% overnight, once again with the message that taming inflation (where it is significantly higher than in Australia) is a greater priority than the risk of a recession.

It is well understood that monetary policy and raising or lowering interest rates is a blunt instrument - and the only one - that the RBA has to counter the multiple inputs that create inflation, and affect the economy. As a result, it is not surprising that the RBA governor rejected calls for his resignation, and pointed to both the difficulties of forecasting in the time of Covid, the strength of the economy, and full employment.

That won't stop Adam Bandt whinging, but following the Queen's death overnight he's wasted no time in changing his angle of attack to target the monarchy. There'll be plenty of time for that debate in due course, but a little bit of respect might have been the order of the day.

Changing tack - Hedge Clippings used to feature a weekly section under the title of "Now For Something Completely Different" to finish the week on a positive note. Given there is now so much content on both the internet and social media, we have let that slide, but every so often an item comes along which we find either amusing or in this case uplifting.

This video of a street singer performing outside London's Covent Garden fits the bill, when he's joined by an actual stage star of Phantom of the Opera, Dutch Soprano Celinde Schoenmaker, for an impromptu duet. Enjoy!

News & Insights

Managers Insights | Collins St Asset Management

The cost of war | 4D Infrastructure

Are the businesses enjoying stock price rises today also the winners of tomorrow? | Insync Fund Managers

August 2022 Performance News

Bennelong Australian Equities Fund

4D Global Infrastructure Fund (Unhedged)

Insync Global Capital Aware Fund

Quay Global Real Estate Fund (Unhedged) 

L1 Capital Long Short Fund (Monthly Class)

Argonaut Natural Resources Fund

Bennelong Concentrated Australian Equities Fund

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