Perpetual Wholesale Diversified Income (PER0260AU) Report & Performance

The Fund’s June relative return was notable, accounting for more than 25% of the Fund’s annual outperformance target in a single month. Income return was a significant contributor to outperformance during the month, led by RMBS, domestic and offshore banks. The portfolio’s running yield was 5.7% at month end, with the spread measured at 2.0%.

Credit spread tightening was the most substantial contributor to return during June. Domestic credit spread dynamics were relatively subdued, narrowing slightly on aggregate while remaining in range of recent levels. The Fund’s exposure foreign denominated hybrid securities was the key contributing factor to the robust credit spread return. After reducing hybrid exposures early in the year, the Manager selectively added exposure to Macquarie and Westpac USD denominated hybrids at attractive levels following the sharp selloff in March in the wake of UBS’s purchase of Credit Suisse. In June, the spreads on these positions narrowed substantially and the Manager elected to take profit on the Fund’s USD Westpac hybrid exposures. Elsewhere, Euro denominated hybrids in the utilities and telecommunications sectors were significant contributors.

In recognition of tightening financial conditions, the Fund continues to maintain a highly liquid sleeve (~15-18%) of cash and government securities which protects against liquidity tail risks. Allocation to government bonds contribute to the fund’s running income and allow the manager to inexpensively express duration positions. During the month the Manager added exposure to government bonds, increasing the Fund’s duration to 0.6 years by month end.

The Fund was relatively active in primary and secondary markets during the month. The Manager elected to take part in the record-breaking subordinated deal from Westpac before monetising the new issue concession, trimming the exposure as spreads tightened. The Fund invested in the new fixed rate issue from AGI finance which the manager believes offers attractive carry for the level of risk. The Fund also bought some recently issued EUR denominated Sydney Airport senior bonds in secondary which were priced cheaply relative to the AUD BBB curve. The Fund remains defensively positioned while retaining the capacity to take advantage of relative opportunities.

Income return was the most significant determinant of outperformance during May. The Fund continues to collect a healthy running income in excess of the benchmark and rising interest rates continue to increase the coupons paid on the Fund’s floating rate assets. The portfolio’s running yield was 5.6% at month end, with the spread measured at 2.0%.

Credit spread tightening added modestly to performance. During a month of benign spread dynamics, non-financial corporate exposures detracted slightly due to limited spread widening across a small number of issuers with a modest positive contribution from utilities.

In recognition of tightening financial conditions, the Fund continues to maintain a highly liquid sleeve (14-15%) of cash and government securities which protects against liquidity tail risks. During the month the Manager actively traded government bonds electing to add to and later liquidate the position.

Allocation to government bonds supported the Fund’s running income during the month, the Fund’s curve positioning contributed to outperformance. The Fund was active in primary and secondary markets during May. The Manager was able to monetise new issue concessions on deals from NAB and Credit Agricole. The Fund added allocation to a number of RMBS and ABS issues, taking the opportunity to rotate into higher yielding tranches and longer dated issues. Domestic regional and offshore bank exposures were added to in primary. Non-financial corporate exposures were selectively trimmed with the Manager taking profits on a number of positions. This included a USD denominated NBN co fixed rate bond which performed well as a result of Moody’s upgrading its credit rating during the month.

Throughout the first half of 2023, the Manager has reduced credit risk in the Fund in line with the negative outlook. The credit outlook has improved recently while remaining slightly negative. Accordingly, the Fund remains defensively positioned while retaining the capacity to take advantage of relative opportunities.

Income return was the most significant contributor to relative return during the month. Financials and securitised sectors were the most substantial drivers of income return with non-financial corporate exposures also contributing. Ongoing increases in interest rates and expanding credit premia have contributed to the increase in portfolio income over the past year. The portfolio’s running yield was 4.8% at month end, with the spread measured at 2.1%. Credit spread dynamics contributed to outperformance during December. Credit spreads traded in a tight range, narrowing over the course of the month. Credit spread performance was led by domestic and offshore banks with corporates and utilities also contributing.

The Portfolio’s exposure to USD denominated domestic bank debt performed well, led by Macquarie and Westpac USD hybrids. The Fund’s small, short position in the EUR Xover CDS index performed well during December as Euro corporate spreads surged in the middle of the month. The Manager exited the position at the peak in the wake of the surprise announcement on monetary policy by the Bank of Japan (BoJ), which loosened the yield on its ten year government bonds from 0.25% to 0.5%, wreaking havoc on equity, bond and currency markets. In recognition of tightening financial conditions, reduced liquidity (as a result of quantitative tightening by central banks) and the challenging outlook for credit, the Fund maintains approximately 10-15% weighting across cash and highly liquid government and government adjacent sectors. After selectively adding during December, the Fund‘s semi-government exposure was 8.3% at month end. The contribution of duration exposure was constructive. The portfolio began the month with near 0 duration. The Manager elected to add duration exposure as long term yields rose following the surprise BoJ policy change. As yields retraced lower by month end, portfolio performance benefited from the modest positive duration exposure (less than six months). Sector allocation was actively managed during the month.

Allocation to domestic bank and semi government sectors was increased. RMBS exposures were rotated with the manager electing to take part in the December Resimac deal and trimming a number of existing RMBS positions. Elsewhere, the Fund took part in the new benchmark deal from Suncorp Metway. As the outlook for credit spreads improves, the Fund retains capacity to take advantage of relative value opportunities.

Income return was the most significant contributor during the month. Financials and securitised sectors were the most substantial drivers of income return with utilities and corporate exposures also contributing. As interest rates continue to rise and credit premia widen, the Fund’s running yield continues to increase, mitigating the impact of ongoing credit spread volatility. The portfolio’s running yield was 4.5% at month end, with the spread measured at 2.0%. Credit spread dynamics were constructive for performance during the month. Credit spreads tightened on aggregate while performance was mixed by sector.

The Fund’s allocation to offshore financials performed well, most notably a number of Euro denominated hybrid exposures. Domestic bank subordinated spreads were impacted during the month as APRA issued a statement reiterating prudential requirements for callable instruments. Over recent months, in recognition of tightening financial conditions, reduced liquidity and the challenging outlook for credit, the Fund has held approximately 20%-25% in cash and highly liquid government bonds. During November, this defensive allocation was reduced in line with the improving outlook to 10-15%. The Manager elected to invest in semi-government securities which offer a slight premium to government bonds while remaining highly liquid and relatively low risk.

The Fund’s semi-government exposure’s duration was hedged via short government bond futures which gave the fund exposure to swap spread tightening. During the month, the small semi-government allocation performed well, contributing to outperformance. Sector allocation was actively managed during the month. Exposure to securitised sectors was selectively increased over the month.

The Manager believes that securitised assets currently offer relative value following recent tightening of the spread between the 1-and-3 month swap rates, with most securitised bond coupons benchmarked against 1 month bank bill swap rates. Elsewhere, the Manager elected to take part in new deals from NAB and ING bank, both of which priced at attractive levels and performed well in secondary

Income return was the most substantial contributing factor to performance during the month. The fund’s running yield continues to increase as interest rates rise and credit premiums widen remaining a crucial buffer mitigating ongoing volatility in credit and fixed income markets. The portfolio’s running yield was 3.9% at month end, with the spread measured at 1.9%. Credit spread dynamics were slightly negative for performance during October. Credit spreads moved slightly wider over the month while swap spreads expanded sharply. Credit spreads remain impacted by reduced secondary market liquidity. The Fund’s exposure to USD corporates and financials were the most significant detractors as USD credit widened.

The Fund’s long position in the EURO crossover CDS index (which tracks European non-investment grade corporate issuers) performed well during the month. Euro denominated spreads have recovered over recent months following a sharp widening in June 2022. The Manager elected to take profits on the position, reducing credit risk within the portfolio. In recognition of tightening financial conditions, reduced liquidity and the challenging outlook for credit, the Fund continues to actively trade Australian government bonds. Over recent months, the Fund has held approximately 20%-25% in cash and highly liquid government bonds. During October, the Fund’s government bond exposure performed well as yields rallied and by month end, the Manager had reduced the position. The Manager was active in primary and secondary markets during the month.

The Fund took part in new deals from ANZ and Commonwealth Bank which offered attractive spreads and are indicative of the potential opportunities presented by recent spread widening. Elsewhere, the Manager was opportunistic in purchasing a number of competitively priced RMBS lines in secondary that were liquidated as part of the response of UK pension funds to the GILTs crisis. Securitised assets performed well during the month, with credit spreads contracting and contributing positively to portfolio returns. Overall, the fund remains defensively positioned in recognition of the challenging outlook for credit spreads and increasingly tight financial conditions, while retaining the flexibility to take advantage of relative value opportunities presented by recent volatility.

The rise in credit yield premiums and official cash rates over the first half of 2022 has improved the Fund’s running yield as a result of its predominantly floating rate structure. The portfolio’s running yield was 3.1% at month end with the spread measured at 2.0%.

The expansion of credit spreads observed over recent months slowed in July. While AUD spreads ended the month slightly wider, USD and especially EUR spreads tightened, the latter recovering a portion of the dramatic selloff observed in June. During June, following the dramatic selloff in EUR credit in June, The Manager elected to add a long position in the EURO crossover CDS index (which tracks European non-investment grade corporate issuers). As EUR spread recovered, the position contributed substantially to performance. The Fund’s exposure to financial spreads – most notably offshore banks – also performed well, contributing to outperformance.

The Fund continues to hold and actively trade Australian government bonds, contributing to portfolio liquidity and running income, whilst further strengthening the portfolios credit quality. In recognition of tightening financial conditions and the challenging outlook for credit the Manager has allocated approximately 25% of the fund to highly liquid exposures across cash and government bonds. The funds duration exposure performed well during July, with bond yields rallying on rising recession concerns and moderating monetary policy tightening expectations.

With a challenging outlook for credit spreads and reduced liquidity in secondary markets, risk management remains paramount. The Fund maintains its defensive positioning while retaining the flexibility to take advantage of relative value opportunities presented by recent volatility. The contribution of duration and synthetic credit positions during the month demonstrate the potential benefit offered by the flexibility of the Fund’s elevated cash and government bond allocation.