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Reserve Bank decision solidifies role of floating-rate fixed income assets
Investment manager Daintree Capital, together with distribution partners Perennial and eInvest, held an investor webinar on its recently listed Hybrid Opportunities Fund (ASX:DHOF), which was quoted on the ASX earlier last month.
With interest rates at all-time lows and the RBA giving “a very low probability” to the current surge in inflation triggering an early increase in the official rate, interest rates aren’t going anywhere soon.
This is where Daintree Capital has been able to shine, by investing in a diversified portfolio of 25-125 hybrid bank securities targeting a return of 3.5-4.5% pa above the cash rate net of fees, with quarterly income distributions. The fund is able to provide investors with a steady stream of income over the medium term via a detailed and active investment process.
What is the investment process?
Portfolio manager Brad Dunn explains, “We first take a very large universe of securities and from there we do a number of screens, both fundamental, quantitative and relative-value, until we get down to a much more manageable number of securities to which we can do credit work.”
“Several hundred securities is distilled down to perhaps 50-75 or 100 securities or so, to which we can generate a portfolio that will achieve our investment objective of 3.5%-4.5% above the RBA cash rate. The majority of that income will come from coupon income together with overlay strategies and alpha strategies,” says Dunn.
The combination of active management and global diversification are the two factors that give the portfolio manager confidence in outperforming. DHOF produced a total return of 0.6% in October, driven by coupon income and a tightening of credit spreads. Daintree says, “Credit market conditions remain strong, including in the banking sector, driven by demand for high-quality income opportunities. Also helping sentiment was a robust quarterly reporting season from the American banks, where profitability surprised to the upside.”
Against a backdrop of low interest rates, hybrids offer compelling value in the fixed-income space with a high investment-grade credit rating especially at a time when there has been a lack of new hybrid issuances.
To add to it, Dunn says “Over the past decade banks have strengthened their balance sheets as a result of tougher capital rules and they have a high average credit rating. We believe banks are also well-positioned to benefit from rebounding economies as the world emerges from the COVID-19 pandemic.”
The fund is now available in a single unit structure or can be bought on the ASX under ticker code DHOF through a stockbroker or share broking account.
The great part about investing in this fund is that eInvest has committed to plant one tree for each client invested in the fund, working with the OneTreePlanted initiative.
