The one factor Metrics is focusing on, particularly as the economy slows

Please note, this interview was filmed on 26 February 2024

Fund profile

• Name of fund: Metrics Master Income Trust (ASX: MXT) and Metrics Income Opportunities Trust (ASX: MOT)
• Asset Class: Australian fixed income
• Investment objectives:
• MXT - The trust is to provide monthly cash income, low risk of capital loss, and portfolio diversification by actively managing diversified loan portfolios and participating in Australia’s bank-dominated corporate loan market. The manager seeks to implement active strategies designed to balance the delivery of the target return* while seeking to preserve investor capital. *The Trust targets a return of the RBA cash rate plus 3.25% per annum net of fees (currently 7.60% p.a.)
• MOT - Metrics Income Opportunities Trust seeks to provide investors with exposure to a portfolio of private credit investments. The Investment objective of the trust is to provide monthly cash income, preserve investor capital and manage investment risks while seeking to provide the potential for upside gains through investments in private credit and other assets such as Warrants, Options, Preference Shares and Equity.
• Link to fund pages: MXT and MOT

Cash flow is king

Andrew Lockhart, managing partner at Metrics Partners, notes that while demand for credit remains fairly constant over the cycle, the space is not immune from a slowing economy.

"You do see a slowdown in activity, and that will obviously impact borrowers' demand for financing as they slow down their CapEx or projects take longer, or are delayed or postponed, because of business or economic conditions. That's a reality of a slowing economy", notes Lockhart. 

In such instances, what becomes increasingly important is a borrower's ability to generate free cash flow. As Lockhart puts it;

"You're always looking at what is the stability and predictability around cash flows".

It’s one of the reasons Metrics particularly likes property development transactions in the current environment, given the “source of repayment of our debt facility is the eventual sale of the property on completion”.

“You’ve got a known source of repayment, and it's more predictable," adds Lockhart.

He also compares such businesses and their more consistent and predictable cashflows to those that are exposed to commodity prices, production volumes, or foreign currency risk, whereby the “variability of their cash flows can be quite material”.

Understanding the borrower

Metrics leans on its discovery process to understand a company’s strategy and how it will drive earnings growth and free cash flow. 

“A lot of this comes down to an assessment of management’s capability to implement their strategy and the appropriate capital structure that can support any deterioration in business or economic conditions," says Lockhart. 

To provide the best opportunities to investors, Metrics does not limit itself to a particular segment of the market, like some other managers. Rather, it wants to offer investors wide diversification across both corporate and real-estate-related transactions.

“There is a whole range of areas where we are active in seeking to originate good quality transactions," Lockhart explains. Key examples include project and infrastructure funding, leverage and acquisition finance, and commercial real estate structured credit. 

"We do that because what we're looking to do is to find the best risk-adjusted returns regardless of an industry specification."

In the interview above, Lockhart provides more detail about Metrics' process, how he and his team view the opportunity set currently, and the two vehicles through which investors can access the opportunity.

About Metrics Credit Partners

Metrics Credit Partners is a leading alternative asset manager with in excess of $17bn in AUM and a track record of more than 10-years of performance and capital preservation.*

LIT

Metrics Master Income Trust (MXT)

Australian Fixed Income

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LIT

Metrics Income Opportunities Trust (MOT)

Australian Fixed Income

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*Past performance is not a reliable indicator of future performance.