The FIIG Monthly Income Fund has officially launched, and we caught up with the Portfolio Manager, Garreth Innes, to see how things were progressing and answer some unanswered questions from the investor webinar in September.
On the 1st of October, FIIG’s Monthly Income Fund (‘MIF’) officially launched with over 300 seed investors. With less than a fortnight of investing underway, we caught up with Portfolio Manager Garreth Innes to try to answer as many questions as possible from the webinar
held on the 19th of September, which we’ve included in the article.
But first, a little bit about Garreth…
Garreth is a seasoned fixed income professional, having spent the bulk of his career at Aberdeen Asset Management managing domestic and global fixed income portfolios. As Head of Australian Fixed Income, he managed a team of five analysts and portfolio managers, and he sat on the Tactical Asset Allocation committee for an external global insurance client. Most recently, he was a multi-asset portfolio manager at Drummond Capital Partners, contributing to fixed income allocations as well as managing the firm’s
internal hedge fund. Garreth has more than 15 years of professional experience in addition to holding a Master’s Degree in Finance (UNSW) and being a CFA Charterholder.
Garreth, can you tell us about the investment strategy when managing a bond portfolio like the FIIG Monthly Income Fund?
The primary focus and bulk of the portfolio will be on income alongside capital preservation. The Fund will invest in a portfolio of predominantly Investment Grade rated floating rates notes and Asset-Backed Securities to provide investors with a consistent income source. It is expected that income generated from these assets will provide the majority of the returns for the Fund.
Investors can also expect tactical exposures to High Yield and Unrated Bonds, Emerging Market Debt and Secured Loans when opportunities present themselves.
How will you position the portfolio ahead of what looks like a rate-cutting cycle against an incredibly intense geopolitical backdrop where things could change quite quickly?
When it comes to positioning a fund for the medium-to-long-term, it is dangerous to get too attached to short-term market narratives. In the last few months, the policy-sensitive US 2-year government bond yield has traded in a 1.5% range as the focus shifts from inflation to the labour market, while US oil prices have plumbed multi-year lows and subsequently bounced aggressively as the market has digested Chinese monetary stimulus and a very worrying situation in the Middle East. If that wasn’t enough, we have a US election in
November that, depending on the outcome, could have dramatically disparate outcomes for risk-assets and bond yields (due to large differences in taxation and trade policies of the two parties).
There is no portfolio management team on Earth that will call each of these
events/outcomes accurately, so the sensible approach at a time like this is to position the portfolio for a variety of outcomes and diversify risks whilst maintaining a firm view on the key deliverables of the mandate. This means avoiding concentrations in certain industries, geographies, interest rate risk, etc. Once the outcomes become apparent, we have the capacity to pivot relatively quickly as an actively managed fund. We can also look to dampen the volatility of the credit bucket by using cash, duration and FX as hedges.
In terms of the rate-cutting cycle, the RBA cash rate is currently priced to fall to 3.5% by the end of 2025 (based on current market pricing). This may or may not occur, but if the market is correct, this will be a fairly shallow rate-cutting cycle, which would still deliver a yield in excess of 5% in MIF (based on longer-term credit spread levels).
Importantly, for MIF, the Bank Bill Index is still around 4.3% as the RBA is attempting to hold off on meeting the market until there is concrete evidence that inflation is under control, outside of government subsidies and rebates on power bills. This keeps the running yield of our benchmark (and the bulk of the funds’ holdings) at an elevated level compared with recent years.
How does the FIIG Monthly Income Fund differ from the existing FIIG Australian Bond Fund?
The Funds are intentionally different yet complementary. The FAB Fund is benchmarked to an index that contains around five years’ worth of interest rate risk, or duration. Whilst the team has the capacity to increase/decrease duration around this benchmark, there will always be some level of duration embedded in the portfolio, meaning the capital value of the fund will rise when interest rates are falling (and vice versa).
The Monthly Income Fund is benchmarked to an index that has negligible duration. So if interest rates are rising/falling aggressively, this should have limited impact on the capital value of the Fund. We can take on interest rate risk up to a maximum of 2.5 years if we expect yields to fall aggressively, but in that instance, our maximum position will only be half of the benchmark duration of the FAB Fund.
Other differences include a pure Australian Dollar, investment grade-rated universe for the FAB Fund, which is heavily allocated to highly-rated Federal and State government bonds, whereas the MIF can invest in a wider variety of global bonds across the credit rating spectrum up to specified limits.
Depending on a client’s view of the world, they can blend a combination of FAB and MIF to achieve a fixed income exposure with which they are comfortable.
Is the targeted return over the entire three years, or are you expecting this from day one?
Great question, and one that is important for clients to understand from the get-go. The Fund is aiming to outperform the Bloomberg AusBond Bank Bill benchmark by 2% (net of fees) over the cycle, which we deem to be 3 to 5 years. This does not mean that the Fund will yield 2% more than the index at all times. There will be times where the Fund yields more or less than the benchmark, based on our assessment of optimal risk-adjusted holdings at that point in time.
What is the level of risk? If I invest today and want to liquidate in several months’ time,
would I get all my money back?
The Fund has been ascribed a low to medium risk level which means that there is a low to medium risk of loss of capital over 6-12 months. The Fund’s holdings are marked to market daily, which introduces an element of price volatility (as distinct from permanent capital loss), but this is constrained by the maximum duration of 2.5 years and limitations on sub-investment grade bonds, for example. The Fund will be invested in corporate bonds and notes throughout time, so investors will be exposed to movements in general credit spreads, however we can also utilise duration and FX strategies to attempt to minimise the volatility generated by movements in credit spreads.
How will the Fund ensure liquidity?
The majority of the underlying holdings skew toward relatively liquid investments. We monitor the underlying liquidity of the Fund on a daily basis and invest in a ‘laddered’ approach whereby we are comfortable with the proportion of cash + highly liquid assets.
What is the percentage allocation of assets to investment grade and various seniorities of debt?
Please refer to the below table which outlines the investment universe for the Fund:
Thanks Garreth, now to address some of the remaining logistical/operational questions from our recently held webinar.
The FIIG Monthly Income Fund has an initial investment requirement of 10K minimum, however, investors can top up with $1K after that. The management fee is competitive compared to other Monthly Income Funds at 0.50% p.a., and we have an application spread of 0.05% and a sell spread of 0.10%.
If I want to redeem some or all of my investment, how does that work?
Withdrawals will generally be paid to your nominated Bank Account within 5 Business Days. You can withdraw some or all of your investment by completing the withdrawal form or completing it online.
Can I open an account now and invest in due course when I am ready?
If you want to invest a larger amount later on, it is recommended that you Fund your
account with a minimum of $10,000 initially, and then you can make additional applications when you are ready. Additional applications can be made online as well.
How frequently will you be communicating with investors and what can I expect to receive?
There will be a monthly fund factsheet that details the month's positioning, market
commentary, fund commentary, and fund sector allocation. A monthly distribution update will also be provided.
An annual holdings and tax statement is issued, which details the components of the distribution needed to complete an investor's annual tax return.
How do you manage monthly distribution payments without compromising bond selection - stagger maturity/bond payment dates? Is there a chance you may have to sell bonds to meet payments?
Each bond needs to be worthy of inclusion on its own merits – thankfully there is a large universe with plenty of options when it comes spreading coupon dates. We have developed an income distribution process to ensure we are distributing income during the financial year and the year-end distribution will include any realised capital gains with income distributions. This process ensures we will not need to incur a capital gain to distribute during the financial year.
Can I reinvest my Monthly distributions?
Yes you have the option to reinvest your distributions or have them paid to your nominated bank account. This can be done online through the online for or via the InvestorServe portal.
Why is the fund better than an ETF?
The Fund is actively managed to target outperformance of the index and generate monthly income rather than being managed to meeting the index. Active management involves a dedicated, experienced team making strategic decisions to outperform the market.
Most ETF’s will target an index (no outperformance) or will hold anything that is eligible for inclusion (no discretion). A common drawback of bond ETF’s is therefore the largest issuers (and potentially companies with the most debt outstanding) become the largest proportion of the index, which might not be optimal.
We hope that we’ve answered most of your questions, please feel free to email
funds@fiig.com.au if you have any more.
And, if you didn’t get to watch the Investor Webinar, you can now watch it on demand by
clicking here.
For more information on the FIIG Monthly Income Fund, please visit the microsite, by clicking here.