Perpetual Ethical SRI Credit (PER1744AU) Report & Performance

Income return was a substantial contributor to outperformance during the month, led by RMBS, banks and non-financial corporates. The portfolio’s running yield was 5.8% at month end, with the spread measured at 2.1%.

Credit spread tightening was the most significant contributing factor to return during the month. Domestic spreads narrowed over the month on supportive supply dynamics and increasing investor risk appetites Subordinated bank exposures performed well as tier 2 and hybrid paper tightened reflecting elevated secondary market demand and a paucity of new issues. Tightening RMBS spreads also contributed to outperformance Lastly, the Fund benefitted from exposure to foreign denominated credit across multiple sectors USD spreads outperformed AUD counterparts and the Fund’s exposure to USD denominated corporates, domestic and offshore banks were constructive. The Manager elected to lock in recent profits on an EUR denominated bond from Ausnet following an extended rally

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 tall risks. The Fund maintains a small (0.6 years) duration exposure as a result of the government bond allocation

Primary market activity was subdued and the Manager was selective in purchases made during the month. The Fund increased its exposure to CMBS via a new $500M Think Tank deal Early in July, the Manager elected to add exposure to a recently issued EUR denominated Morgan Stanley senior bond which tightened throughout the remainder of the month, contributing to outperformance.

While the outlook for credit has improved, the Manager remains conscious of the implications of slowing growth and tightening financial conditions for credit valuations and liquidity. The Fund remains defensively positioned while retaining the capacity to take advantage of relative opportunities presented as the outlook improves

The Fund invests in quality issuers that meet Perpetual’s ESG and Values based criteria relating to what the company is in the business of and the way business operations are conducted respectively Upon application of the ESG and Values based criteria, several bond issuers have been screened out These include for example, companies involved in the extraction of fossil fuels or companies whose revenues are significantly associated with socially questionable products or services.

The Fund’s June relative return was notable, accounting for almost zox 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 5.1% at month end. with the spread measured at 11%

Credit spread tightening was the most substantial contributor to return during June. Domestic crest spread dynamics were ret atively subdued. narrowing slightly on aggregate while remaining in range of recent levels. The Fund’s exposure foreign denominated hybrid securities was the key contributing recta to the robust credit spread return. After reducing hybrid exposures early in the year. the Manager selectively added exposure to USD denominated Macquarie hybrid debt at attractive levels following the sharp selloff in March in the wake of 1183’s purchase of Credit Suisse. In June. the spread on this position narrowed substantially. contrituting to return. Elsewhere. a Euro denominated hybrid in the utilities sector was a significant contributor.

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 tag risks. Allocation to government bonds contribute to the fund’s running income and allow the m anger 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 Fund invested in the new fixed rate issue from ACI finance which the manager believes offers attractive carry for the level of risk.

The Fund also bought some recently issued E UR 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. The Fund invests in quality issuers that met Perpetual’s ESG and Values based criteria relating to what the company is in the business of and the way business operations are conducted respectively. Upon appl ication of the ESG and Values based criteria several band issuers have been screened out. These include. for example. companies involved in the extraction of fossil fuels or companies whose revenues are significantly associated with socially questionable products or services.

The Perpetual ESG Credit Income Fund in the month of May delivered a return of 0.6%. outperforming its benchmark by 0,3%

Income retLen was the most significant determinant of outperformance during May. The Fund continues to wiled a healthy rum ing inane in excess of the benchmark and rising interest rates continue to increase the coupons paid on the Fund’s floating rate assets. The portfolio% running yield was 53% at month end. with the spread measured al 2.1%.

Credit spread tightening also contributed strongly to performance. During a month of benign spread dynamics, the Fund’s expos ure to nonfinancial corporates. utili ties and securitised seders was constructive. Subordinate trenches of a number of RMBS issues performed wet I. contributing to relative return.

In recognition of lightening 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 ending the month with a slightly reduced allocation Allocation to government bonds supported the Fund’s running income and during the month the Fund’scurve positioning contribu tea to outperfamance The Fund was active in primary and secondary markets cluing May. The Manager was able to monetise new issue concessions on de als from NAB. Credit Agricole and Bendigo Adelaide Bank.

The Fund added allocation to a number of RMBS and ABS issues. taking the opportunity to rotate into higher yielding trenches and longer dated issues 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 cre dit outlook has improved while remaining slightly negative. Accordingly. the Fund remainsdefensively positioned ythile retaining the capacity to take aevant age of relative opportunities. The Fund invests in quality issuers that meet Perpetual’s ESG and Values based criteria relating to what the company is in the business of and the way business operations are conducted respectively. Upon application of the ESG and Values based criteria. several bond issuers h aye beenscreened out. These include. for example, companies involved in the extract ion of fossil fuelsor companiesW.1os° revenues are significantly associated with socially questionable products or services

Income return contributed to outperformance during the month. The portfolio’s running yield was 4.6% at month end, with the s pread measured at 1.7%.

Credit spread dynamics were constructive for performance during the month as spreads tightened on aggregate. The Fund’s alloc ation to financials — most notably domestic and offshore banks — were the key contributors to spread return during February. The Manager elected to reduce credit risk in the portfolio, moving up the quality spectrum, trimming BBB exposures while increasing allocation to AAA rated credit. As a resul t, the Fund’s exposure to financials was reduced while allocation to RMBS — a sector which offers access to AAA floating rate credit — increased. Additionally, in the rotation away from riskier segments of credit, the manager has added to the short position on high yield credit (initially established in J anuary), through a credit default swap (CDS) hedge. While the credit outlook remains neutral, it is worth noting that while technical indicators are supportive , credit fundamentals are more challenged, and the Manager elected to de-risk the portfolio and lock in recent gains.

Credit spread tightening was the most significant contributor to outperformance over the month. In a strong month for credit, spreads narrowed as the outlook for global growth improved while investors also priced in a slower pace of monetary tightening from central banks. Th e key contributing sectors to credit spread outperformance were domestic and offshore banks, with a more modest contribution from non -financial corporates, utilities and securtised bonds. The Fund’s exposure to USD and EUR denominated debt performed well across the aforementioned non -securitised sectors. While the Fund retains the capability to invest in offshore credit markets, all foreign denominated exposures are hedged back to AUD. Following the robust rally in credit spreads and cognisant of the impact successive interest rate increases will have on the debt servicing metrics for more highly levera ged issuers, the Manager elected to add a short position on the European crossover CDS index (which tracks European issuers on the cusp of investment grade and high yield).
Over recent months, in recognition of tightening financial conditions and liquidity risks, the Fund has held approximately 15 -17% in cash and highly liquid government and semi-government bonds. During January, this high liquidity sleeve of the portfolio was converted to cash from semi-government securities following the sharp fall in bond yields, contributing to portfolio performance. The Fund ended the month with a sm all, short (negative) duration position which is expected to perform if bond yields rise following their strong January rally.

Sector allocation was actively managed during the month. The Manager elected to increase exposure to securitised sectors, buy ing RMBS in secondary markets. The Manager believes that the sector offers attractive value relative to the major bank curve which it is typically correlated with. The Fund’s regional bank exposure was increased via new deals from Bendigo Adelaide Bank and Bank of Queensland which offered attractive value relative to the majors. Elsewhere, the manager elected to trim exposures to subordinated financials.

The Fund’s defensive positioning continues to mitigate the impact of tightening financial conditions and the potential elevat ed market volatility that may result as central banks continue to withdraw liquidity from financial markets (quantitative tightening) at an unprecedented p ace. This positioning provides a degree of risk mitigation, whilst preserving the capacity to take advantage of relative value opportunities should market volatility increase.
The fund applies both ethical and socially responsible investment (SRI) screens relating to what the company is in the business of and the way business operations are conducted respectively. Upon application of the ethical and SRI screens, several bond issuers have been screen ed out. These include, for example, companies involved in the extraction of fossil fuels or companies whose revenues are significantly associated with socially questionable products or services.

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 cre dit premix have contributed to the increase in portfolio income over the past year. The portfolio’s running yield was 5.0% at month end, withthe spread measured at 2.3%.

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 inthe E UR 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.

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).
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 8.1% at month end. Semi-government securities offer a slight premium to government bonds while remaining highly liquid and relatively low risk. Semi spreads widened slightly over the month, marginally detracting from outperformance.

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. The Fund’s defensive positioning continues to mitigate the impact of tightening financial conditions and disruptions to credit market liquidity. As the outlook for credit spreads improves, the Fund retains capacity to take advantage of relative value opportunities.

The fund applies both ethical and socially responsible investment (SRI) screens relating to what the company is in the business of and the way business operations are conducted respectively. Upon application of the ethical and SRI screens, several bond issuers have been screened out. These include, for example, companies involved in the extraction of fossil fuels or companies whose revenues are significantly associated with socially questionable products or services.