Daintree Core Income Trust (WPC1963AU) Report & Performance

The Core Income Trust returned 0.70% for the month, net of fees. The fund’s performance was supported by coupon income and credit spreads.

Credit markets continued their positive year, with economic conditions exceeding expectations and pushing credit spreads tighter.

Credit investors, based on recent spread performance, remain sanguine about the short-to-medium term outlook.

Interest rates were volatile, with the shorter end of the curve rallying as the market debates whether the RBA tightening cycle has now concluded. We believe it is too early to make this determination and keep our duration positioning close to zero.

The Fund did not participate in any new primary issuance in July, having taken significant steps during the first half of the year to reposition toward optimal coupon income generation.

The Core Income Trust returned 0.56% for the month net of fees. The fund’s performance was supported by coupon income and credit spreads. Duration created a modest drag as did overlay and hedging.

Credit markets continued their positive year, with volatility in March quickly absorbed by the larger tightening trend. Spread performance suggests credit investors are sanguine about the short-to-medium term outlook.

Interest rates rose over the month, as rate hikes continue and expectations for further tightening remain priced for the remainder of this year. Having reduced duration toward the beginning of May, the impact on fund performance was minimal.

The Fund continues to prudently add risk, which includes selective participation in primary issuance across corporate and securitised transactions.

The Core Income Trust returned 0.34% for the month, net of fees. The fund’s performance was supported by coupon income and credit spreads. Duration created a modest drag as did overlay and hedging. Credit markets were resilient with spreads holding firm or modestly tightening. A paucity of significant data allowed recent trends to continue, with higher yields enticing a broader investor base.

Interest rates rose over the month, but having reduced duration toward the beginning of May, the impact on performance was minimal. The Fund continues to prudently add risk, which includes selective participation in primary issuance across financial, corporate and securitised transactions.

The Core Income Trust returned 0.39% for the month net of fees. The fund’s performance was supported by coupon income and credit spreads. Duration created a modest drag while overlay and hedging contributions were positive. Volatility in rates markets subsided in April but remained higher than in recent years.

Incoming economic data remains mixed, but at the margin results are underwhelming market expectations. Yield curves remain inverted but there is growing dispersion between 2yr/10yr and 3m/10yr curves, implying the market is expecting interest rates to be cut as early as this year. We are sceptical that such a scenario will play out during 2023, but we cannot rule out the possibility that short-term interest rate markets are handicapping the possibility of a severe stress event that requires substantial rate cuts.

Difficulties remain among US regional banks, one of the possible sources of a severe stress event. However, even as issues with First Republic Bank play out, recent results have revealed a decidedly mixed picture that, nonetheless, is a little better than feared. We expect the situation to remain fluid in the months ahead. Following our change in risk appetite in January, we continued in April to prudently shift portfolios away from cash and short-dated assets, selectively participating in primary issuance, predominantly in securitised assets where relative value remains attractive.

The Core Income Trust returned 0.32% for the month net of fees. The fund’s performance was driven by coupon income and narrower credit spreads. Continued stronger than expected economic data has encouraged investors to contemplate a scenario where growth remains resilient in the face of higher interest rates, scuttling any possibility of a pivot later this year, described as a “no landing”. This was supportive of risk assets that have also benefitted from a short-term liquidity injection on a global basis even as the US Federal Reserve quantitative tightening programme continues.

Sovereign yields at the short- and long-ends rose in response, while yield curves generally inverted further, in some cases to record levels. The improvement in the growth backdrop is supported by various drivers such as the re-opening of China, strength in US consumption that is likely to continue for longer than expected, and the absence of the fiscal drag in the US that featured in 2022.

In Australia too, the reopening of China should support growth. We acknowledge that the RBA may remain hawkish for longer as a result. Following our change in risk appetite in January, we continued to prudently shift portfolios away from cash and short-dated assets, selectively participating in primary issuance in the senior unsecured banking sector where the market technical was supportive, and in securitised assets where relative value remains attractive.

The Core Income Trust returned 0.75% for the month net of fees. The fund’s performance was positively impacted by coupon income, narrower credit spreads and overlay strategies. The weaker-than-expected US CPI report supported markets, although this was offset by the ECB and Bank of England raising rates and indicating further hikes to come. The Bank of Japan adjustment to its yield curve control program was also a shock to markets amidst illiquid end-of year trading conditions, but the net result was a strong performance for financial issuers, particularly in subordinated paper.

The Australian 10-year bond yield rose by more than 50bp in December, with early January price action moving to reverse this sell off. Our core duration position is zero, and our view remains that inflation momentum will be more difficult to lower than what the markets currently assumes. Given our defensive positioning and continuing modestly bearish outlook for spreads over the medium term, we avoided new issues during the month. We continue to carry larger than normal cash and short-term securities weightings in the fund.