This fundie returned 9.33% in 12 months without holding a single equity

Please note: this interview was recorded on Thursday, 20 June, 2024. *The performance number quoted in the headline is to the 12 months ending 31 May 2024. Past performance is not a reliable indicator of future return. 

Depending on which period you look at, the average long-term return for the ASX 200 hovers sits somewhere in the 9-10% range. And while all asset classes carry risk, it is widely accepted that equities carry more risk than fixed income.

Over the past 12 months, fixed income has enjoyed a halcyon period. But things are changing, and now is the time to avoid potholes, according to Roy Keenan, co-head of fixed income and portfolio manager of the Yarra Enhanced Income Fund.

For Keenan, the last quarter of 2023 was a “fantastic period” in which there were higher rates, expectations the RBA would cut aggressively, and credit spreads were quite wide.

As we all know, interest rate expectations have changed, and Yarra’s house view is that we will see one rate cut this year, in November, followed by another rate cut in 2025, “but it’s going to be a shallow rate cut cycle”, says Keenan.

So, how is he seeing the opportunity set right now?

“We think IG credit is offering good returns at the moment, but it also feels like a market where you want to be avoiding potholes", says Keenan.

The last 12 months to two years have been a really good investing period, but we are conscious of not making mistakes in the current market”, says Keenan.

Those potholes include any company that is leveraged up and has significant exposure to higher interest rates, add Keenan.

The current landscape

While potholes are to be avoided, Keenan still sees a conducive environment for credit.

Leaning on the view of Yarra Capital Management Head of Macro and Strategy, Tim Toohey, he notes that with growth starting to slow, “we’re approaching a period where the good time for the market is starting to evaporate a little”.

He adds that inflation, from the RBA's point of view, has been a lot slower to come down – although the Yarra view is that it will be reined in.

From a credit point of view, “slow growth rates and inflation being a bit stickier is a pretty good credit environment for us”, says Keenan.

“So our expectations for the macro environment is positive [for] credit”, says Keenan. 

Locking in returns

With Keenan expecting his investing landscape to still be solid, despite not rising to prior heights, I asked him if he has been locking in returns.

His response? “We do that a lot now”.

“We're trying to combine the macro and credit and pick whether it is time to be buying floating or fixed rate. We do a mix of both. When we're buying a fixed-rate security, we ask ‘Does it sit amongst our portfolio and our expectation for where cash rates and longer-term bond rates are going to be over the next 12 to 24 months?’

At the moment, we're running our interest rate duration at about one and a half years and we've set that given the environment we're expecting”, says Keenan.

How Yarra is investing

Tier 2 bank paper remains Keenan’s preference in the stack. For those unfamiliar, Tier 2 securities sit about halfway down the bank capital structure and generate higher returns for higher risk than senior secured debts.

The Yarra Enhanced Income Fund is currently running around 52-53% in Tier 2, notes Keenan, which is “probably the highest it’s ever been”.

Keenan adds that in March, rating agencies Standard and Poor’s and Moody’s both lifted the credit rating of hybrid capital, meaning major Tier 2 bank paper is A-rated, “which is a really high credit quality”, says Keenan.

“I continue to believe that Tier 2 credit spreads will grind in tighter and hence why we’re positioned that way”

Watch the video

In the video above, Keenan also talks about why credit investors love new issuance, and how floating-rate securities have been driving performance.

He also shares his outlook for the next 12-24 months, and why he wouldn’t mind adding a bit more risk to the portfolio. 

Access to regular, stable income

The Yarra Enhanced Income Fund seeks to deliver higher returns to investors than traditional cash management and fixed income investments. Learn more via the Fund profile below, or by visiting Yarra Capital's website.

Managed Fund

Yarra Enhanced Income Fund

Australian Fixed Income

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