Realm High Income – Wholesale (OMF0009AU) Report & Performance

Cash and Short-Term Liquidity Weighting: ↑ The allocation to highly liquid assets (cash, commercial paper and government bonds) increased from 12.15% to 13.84%. This reflected lower allocations to corporate bonds, bank T1 and ABS public; which was partly offset by higher allocations to bank T2 and ABS private.

Corporate & Subordinated Debt Allocation: ↓ Weighting to corporate bonds and subordinated debt (corporate hybrids and bank T2) decreased from 37.00% to 36.59%. July was a solid month for global credit as the risk sentiment continued to strengthen. This was partly attributed by the improved macroeconomic outlook in the US and positive developments in the US regional banking sector. As such, Financial sector credit spreads outperformed as they continue to recover post the March banking crisis, with ongoing strong outperformance from bank capital instruments (T2 and AT1). Noteworthy global issuance included a senior deal from Fifth Third Bancorp — the first issuance from a pure US regional bank since the collapse of Silicon Valley Bank — which has performed very strongly in secondary markets. Domestically, improved risk sentiment and muted new issuance saw credit spreads firm over the month, with notable outperformance from bank T2.

Interest Rate Duration Position: ↑ IRD positioning increased from 0.70 to 0.82 years. Volatility was divergent between Australian and US government bonds, with the trading range in the Australian 10 year remaining meaningfully higher than the US. During the month, the respective 10-year government bonds reached decade highs before contracting. Drivers of government bond volatility included a hawkish fed and a surprisingly strong ADP employment report. A weaker than expected inflation print and a cash rate increase of 0.25% as expected, led to the retracement of US bonds. Australian inflation was slightly lower than expected but printed a strong unemployment rate of 3.5%. However, the biggest driver of Australian bond volatility was the Bank of Japan’s decision to increase the Yield Curve Control band of the 10-year bond to maximum of 1%. IRD positioning was influenced by these events.

Residential Mortgage-Backed Securities (RMBS): ↓ Weighting to RMBS securities decreased from 18.38% to 18.02% over the month. Public structured credit market yields began to tighten over the month of July, with reports of a strong offshore bid returning to the market. This was especially prevalent in the senior portions of the capital structure in prime transactions, with the bid tightening credit margins across the sector. Tighter yields continue to make transaction more economic for issuers, leading to a substantial amount of primary deal flow looking to price in markets over the next month, including several regional bank trades, along with both prime and non-conforming RMBS.

With respect to market performance, Prime arrears as reported by S&P’s SPIN index improved 3bps over the month of June to 0.97%. Nonconforming arrears also improved, tightening 16bps to 3.47%. Both results remain very strong in comparison to both market expectations and historic index levels.

Cash and Short-Term Liquidity Weighting: ↑ The allocation to highly liquid assets (cash, commercial paper and government bonds) increased from 9.77% to 12.15%. This largely reflected lower allocations to ABS, RMBS and bank T1; partly offset by higher allocations to bank T2.

Corporate & Subordinated Debt Allocation: ↑ Weighting to corporate bonds and subordinated debt (corporate hybrids and bank T2) increased from 35.15% to 37.00%. The improved risk sentiment saw global credit spreads firm over the month, with bank capital instruments (T2 and AT1) continuing to outperform. The exception was GBP assets which underperformed due to macroeconomic concerns from high inflation. The silver lining was Lendlease buying back £125 million of their senior unsecured Sterling bond maturing in 2033 – a high conviction line in the portfolio – at a premium of more than 10% to market value. Domestically, risk sentiment and credit spreads were also firmer which resulted in solid outperformance from new issuance. Notable new deals include T2 issuance from Westpac and QBE and corporate issuance from Endeavour Energy and Australian Gas Infrastructure Group. New deal participation resulted in increased allocations to T2’s.

Interest Rate Duration Position: ↑ IRD positioning increased from 0.32 to 0.70 years. Economic data releases highlighted the strength of global economies. Most notable was the accelerating UK inflation figure in addition to a strong employment report. Australian unemployment decreased unexpectedly to 3.6%, while the fair work commission increased the minimum award wages by 5.75%. The 3rd estimate of the US GDP came in higher than expected, revealing the resilient economy. The FOMC paused rate hikes, but with a hawkish stance. Remaining global central banks hiked rates with the RBA, BoC and BoE surprising the market to varying degrees. Consequently, Australian government bond rates underperformed US and ended the month breaching 4%. In line with market movements, IRD positioning of the fund was increased accordingly.

Residential Mortgage-Backed Securities (RMBS): ↓ Weighting to RMBS securities decreased from 19.32% to 18.38% over the month. Public structured credit market yields remained in line over the month of June, after having tightened at the end of May as foreign investor interest started to return. The tightening in yields makes issuing transactions more economic for issuers. This has bought more primary deal flow to public markets including two new bank transactions, and several nonconforming and CMBS transactions.

Secondary markets remain moderately active, with good transaction volume reported from each of the broking desks. With respect to market performance, Prime arrears as reported by S&P’s SPIN index weakened 6bps over the month of April to 1.01%. Nonconforming arrears also weakened slightly, increasing 3bps to 3.73% as reported by S&P for the March period. Both results remain very strong in comparison to both market expectations and historic index levels.

Cash and Short-Term Liquidity Weighting: ↓ The allocation to highly liquid assets (cash, commercial paper and government bonds) decreased from 11.67% to 9.77%. This largely reflected increased allocations to corporate bonds, bank T1 and corporate hybrids; partly offset by lower allocations to bank T2 and RMBS.

Corporate & Subordinated Debt Allocation: ↑ Weighting to corporate bonds and subordinated debt (corporate hybrids and bank T2) increased from 31.35% to 35.15%. The cautious market sentiment from April improved over the month of May as concerns over US regional banks subsided and the optimism of a US debt ceiling deal grew. This paved way for the continued recovery in bank capital instruments (T2 and AT1) which strongly outperformed corporate bonds. It also provided us the opportunity to take profits in bank T2 and increase allocations to corporate bonds. Domestically, credit spreads firmed over the month in sympathy with global risk sentiment. The return of Australian corporate issuance continued in May with deals from Ausnet, Transgrid and QIC Town Centre Fund in AUD and Melbourne Airport in EUR.

Interest Rate Duration Position: ↓ IRD positioning decreased from 0.39 to 0.32 years. Economic data over the month of May was mixed. Labour data in Australia and in the US alluded to softening conditions while the headline inflation numbers surprised to the upside. The silver lining in the US was the weakening ‘core services ex housing’ figure, a sign of weakening demand. RBA, FED, RBNZ, ECB and BOE raised interest rates by 25 basis points – with the RBA’s action somewhat surprising the market and consequentially increasing the expected terminal rate from 3.7% to 4.1%. Global Risk sentiment improved as the month progressed, with US regional bank sector concerns easing and the US debt ceiling negotiations being resolved in principle. Portfolio positioning reflected the market conditions with only minor adjustments.

Residential Mortgage-Backed Securities (RMBS): ↓ Weighting to RMBS securities decreased from 22.32% to 19.32% over the month. Public structured credit market yields began to tighten into month end, in line with other credit markets. Primary market issuance was less active in May than April, but include both a new bank transaction and regional bank transaction amongst other non-conforming programs. Secondary markets were more active over the month as investors looked away from the limited primary market supply to increase allocation to the sector. With respect to market performance, Prime arrears as reported by S&P’s SPIN index weakened 2bps over the month of March to 0.95%, with Bloomberg reporting prime arrears for April remaining inline with the prior month at 0.93%.. Nonconforming arrears improved 29bps to 3.70% as reported by S&P for the March period, with Bloomberg’s arrears index for nonconforming loans also improving 26bps for the month of April to 3.01%. Both results remain very strong in comparison to both market expectations and historic index levels.

Cash and Short-Term Liquidity Weighting: ↑ The allocation to highly liquid assets (cash, commercial paper and government bonds) increased from 7.12% to 11.67%. This largely reflected lower allocations to bank T2, corporate bonds & RMBS which was partly offset by higher allocations to bank T1 and ABS.

Corporate & Subordinated Debt Allocation: ↓ Weighting to corporate bonds and subordinated debt (corporate hybrids and bank T2) decreased from 37.35% to 31.35%. Following the March banking crisis which saw the collapse of a couple of US regional banks and Credit Suisse, April felt like a relatively quiet month. Reduced volatility and solid first quarter earnings from the US major banks supported the continued recovery in global credit spreads over the first half of the month. This allowed us to take profits on bank T2’s and crystalise the strong capital gain on our CS senior debt positions. Sentiment turned around in the second half of April, as concerns over US regional banking deposit flows reemerged. Ultimately, this led the collapse of yet another US regional bank, First Republic Bank, on the 1st of May. While credit spreads have underperformed into the start of May, the sell-off has been modest compared to the moves witnessed in March. In terms of new issue supply, there was a pickup of new deals from Australian corporates including Worley and Stockland in AUD and Transurban, Sydney Airport and Telstra in EUR. This continued into the start of May with new deals from Australian Financials in AUD, including NAB, BEN and Suncorp issuing senior paper and ANZ issuing a T2.

Cash and Short-Term Liquidity Weighting: ↓ The allocation to highly liquid assets (cash, commercial paper and government bonds) decreased from 10.91% to 7.12%. This largely reflected increased allocations to bank T1, bank T2 and RMBS and lower allocations to corporate bonds and ABS.

Corporate & Subordinated Debt Allocation: ↓ Weighting to corporate bonds and subordinated debt (corporate hybrids and bank T2) decreased from 38.62% to 37.35%. After a relatively quiet start to the month, global credit spreads sold-off sharply toward mid-March, as concerns over a potential “banking crisis” riled financial markets. The forced merger between Credit Suisse and UBS saw the write-down of around US$16 billion worth of CS AT1’s but resulted in a very handsome capital gain to our high conviction CS senior debt position. Note: we did not have exposure to CS AT1’s. Unsurprisingly, bank capital securities (i.e., T2 and T1) underperformed during this period, which provided us an opportunity to pivot back into global assets – this was largely expressed through adding to USD T2/T1’s issued by strong Australian financial institutions while reducing allocations to AUD corporate bonds. While the outlook remains uncertain, the markets consider the impacts of the March “banking crisis” to be largely contained, which has led to a modest recovery in global credit spreads at month-end. New issuance activity was relatively quiet over the month as volatility remained high.

Interest Rate Duration Position: ↓ IRD positioning decreased from 0.58 to 0.38 years. Financial stability concerns were the major drivers to volatility over the month – the collapse of Silicon Valley bank in the United States and the forced merger between Credit Suisse and UBS being the main culprits. Concerns around contagion, in the US, were quickly thwarted by guaranteeing the noninsured deposits of SVB, however, global confidence suffered in the aftermath. As a result, the volatility of global government bonds was unsurprisingly high for the month of March – with absolute levels ending the month sharply lower than where they began. Most notably, market’s view on AUS terminal cash rate decreased from 4.2% to 3.5%, with the expectation of a rate cut by the end of 2023. In line with market movements, portfolio interest rate duration was decreased.

Cash and Short-Term Liquidity Weighting: ↓ The allocation to highly liquid assets (cash, commercial paper and government bonds) decreased from 14.93% to 10.91%. This reflected increased allocations to corporate bonds, ABS and RMBS and lower allocations to bank T2 and bank T1.

Corporate & Subordinated Debt Allocation: ↓ Weighting to corporate bonds and subordinated debt (corporate hybrids and bank T2) decreased from 40.42% to 38.62%. The tremendous credit spread rally since November 2022 took a breather in February as the market focus shifted back to higher terminal interest rates and sticky inflation. Global credit spreads closed mixed month-on-month with USD slightly wider while EUR was slightly firmer as European recession probability forecasts declined. Domestic credit was a relative outperformer having lagged the recent global rally. This supported our tilt back towards into AUD credit (notably corporate bonds and bank T2) as we continued to take profits in global T2’s. Domestically, we saw the return of T2 issuance with ANZ issuing an inaugural 15-year (callable after 10 years) bond with a fixed coupon of 6.736%. This was followed up by T2 issuance from Suncorp and NAB, with all three deals performing well in secondaries. In early March, CBA issued a 15-year (callable after 10 year) T2 with a fixed coupon of 6.704% which is also performing well.

Interest Rate Duration Position: ↑ IRD positioning increased from 0.52 to 0.58 years. Both the volatility and the end of month government bond yields were higher for February. Much to the market’s dismay, global economic data had continued to surprise to the upside. Most notable of these surprises were the US unemployment number, which unexpectedly fell to 3.4%, along with upside surprises to US inflation data. Consequently, central bank commentary was hawkish due to the risk of persistent inflation on the back of a resilient consumption economy. As a result, terminal cash rates increased which flowed through to higher government bond yields. Australian rate movements were correlated to global government yields for the most part and as a result, our positioning was increased slightly.

Residential Mortgage-Backed Securities (RMBS): ↑ Weighting to RMBS securities increased from 20.75% to 23.04% over the month. Public structured credit market yields tightened significantly over the course of the month, after having lagged the tightening experienced by other credit markets in January. Senior AAA markets tightened by as much as 40 basis points, with middle mezzanine (A/BBB rated) and junior mezzanine markets (subinvestment grade rated) tightening as much as 80 basis points. Dealer inventory levels remain very low as market participants continue to seek out good quality paper. Lenders saw these significantly tightened yields as an opportunity to issue into the market, with a significant amount of dealflow within the current primary market pipeline across several different asset classes expected over the next month.

With respect to market performance, Prime arrears as reported by S&P’s SPIN index weakened 11bps over the month of December to 0.76%, with nonconforming arrears weakening to 3.20%. Both results remain very strong in comparison to both market expectations and historic index levels.