Sandhurst Strategic Income B (STL0044AU) Report & Performance

The Sandhurst Strategic Income Fund (Class A units) has achieved an annualised quarterly return of 3.52% (after fees) for the March quarter. The Fund saw an increase in returns throughout the March quarter which was reflected in a distribution per unit that was ≈43% greater than the December distribution. Global financial markets at the start of 2023 were characterised by a strong rally across equity and credit markets as an expectation for the Federal Reserve (Fed) to cut rates later in the year gained traction.

Elevated inflationary data and the tight labour markets that were recurring themes in 2022 then returned in February which increased recessionary fears and saw equities retrace some of their January gains. Concerns about a potential banking crisis emerged in early March with the collapse of Silicon Valley Bank (SVB) following deposit outflows after a failed capital raise. The demise of SVB saw depositor confidence plummet and the resulting outflows of Signature Bank deposits saw it become the third largest bank failure in US history. The broader contagion was not just limited to the US as the already beleaguered Credit Suisse became the third casualty in the span of less than a fortnight.

Regulators moved quickly in response by providing guarantees on certain deposits while the Fed supported the liquidity and stability of the banking system by providing access to cheap funding. The Sandhurst Strategic Income Fund did not hold any investments with SVB, Signature Bank or Credit Suisse.

The Strategic Income Fund (Class B) achieved an annualised return of 3.28% (after fees) for the quarter ending 31 December and an average annual return of 2.97% (after fees) since inception. The Fund continues to outperform its benchmark and saw an increase in returns throughout the December quarter which was reflected in a distribution per unit that was 30% greater than the prior distribution at the end of September. Global markets experienced a tumultuous 2022 with persistent volatility creating challenging conditions. However, the final quarter of 2022 saw gains on risk assets globally as investors became optimistic on an improving outlook for 2023. A defining moment was the relaxation of China’s zerocovid policy bolstering emerging markets, and other developed regions. The market reacted favourably to a meeting between US President, Joe Biden, and Chinese leader Xi Jinping in November, which signalled the possibility of improving US-China relations.

The UK emerged from its September crisis ending in positive territory. The latter stages of 2022 saw the Eurozone show signs of slowing inflation, mirroring similar trends in the US. Following the softer inflation prints, investors had become hopeful of an easing in monetary policy. Government bond yields were slightly higher at the end of the quarter, reflecting the continued commitment from major central banks to tighten monetary policy to bring inflation back to the ranges of the respective region. Australian equities posted strong performance returning 6.5% outperforming many international markets. Benefitting from China’s pivot on its zero COVID policy, softening inflation and a broad stabilisation in global bonds.

The Strategic Income Fund (Class B units) has achieved an average annual return for the past two years of 0.78% (after fees) and has generated an average annual return of 2.96% (after fees) since inception. The Fund continues to outperform its benchmark and saw an increase in returns throughout the September quarter which was reflected in a distribution that was 2.8 times greater than the distribution at the end of June. Geopolitical tensions and hawkish central bank actions to combat inflationary pressures saw elevated volatility in credit persist. Rate markets continue to drive directionality in equities as well as credit and the quarter ended with the Bank of England attempting to calm domestic markets to prevent pension funds from collapsing. The start of the quarter had several economic data prints indicating a slowdown in the global economy causing markets to rise briefly over the possibility of an earlier Fed pivot. News from the Jackson Hole Summit in August dashed hopes of a near term pivot from the US Central Bank as Fed Chair Jerome Powell highlighted the Federal Reserve’s commitment to quell inflation. This set the hawkish tone which was later reaffirmed by a worse than expected US CPI report in September. As the quarter progressed, offshore markets were challenged as the ongoing energy crisis in Europe coupled with rising inflation and tightening monetary policy weighed. The UK mini budget announced the biggest of package tax cuts in the region since the early 1970s increasing volatility and resulting in cable falling to an all time low. The fallout required the Bank of England to revert to Quantitative Easing to prevent pension funds from collapsing and has weakened market sentiment.

The Strategic Income Fund has achieved an average annual return for the past two years of 0.39% (after fees) and has generated an average annual return of 2.68% (after fees) since inception. Over the past quarter, the Fund paid a distribution of 0.0955 cents per unit, equating to 0.382% p.a. but lost some capital value due to market movements to produce a negative return of 0.08% for the quarter. The second quarter of 2022 saw the global growth narrative continue to soften as inflation pressures grew, the war in Ukraine continued, energy crisis expanded, and central banks withdrew accommodative monetary policy. Sustained weakness in equity and bond markets saw the US equity market experience its worst return for the first half in 60 years as a circa 20% decline put the market into bear territory. Other global markets also saw heavy losses on a growing lack of confidence amongst investors.

Inflationary pressures have been a main driver of the negative performance in markets. Consumer price index readings across the globe have registered much higher than anticipated and central banks have struggled to combat the increase in prices. The US Federal Reserve (Fed) became more aggressive in their rate hikes and reset expectations of how high rates could go. The pace and extent of rate hikes built fears of a recession late in the quarter spurring further volatility across markets. The dynamics of the geopolitical.

The Strategic Income Fund has achieved an average annual return for the past two years of 1.33% (after fees) and has generated an average annual return of 3.06% (after fees) since inception.

The elevated volatility seen in late February in credit markets persisted in March and liquidity was constrained as Russia’s invasion of Ukraine further fuelled existing inflationary pressures. These developments drove the risk-off theme and widened spreads which resulted in capital losses across credit markets.

Revised expectations for more aggressive monetary tightening in the U.S. to combat inflation (CPI report showed a 12-month rise of 7.9%) and a 25bp increase in the fed funds rate at the FOMC meeting did not weigh on equities as the S&P 500 rose by 5.2% through March. Despite the increase in equities, slower earnings growth, reduced fiscal stimulus from the government, stagflation risks and geopolitical tensions have created uncertainty for global equities moving forward and suggest that the bounce in March could represent a bear-market rally. Comparatively, Australian equity markets outperformed global benchmarks as the ASX 200 rose by 5.7%

In late February markets saw heightened volatility as geopolitical tensions spiked in relation to Russia’s invasion of Ukraine, prompting a risk-off move in markets. Bond yields also rose as the likelihood of monetary tightening from central banks increased due to elevated inflation. The combination of geopolitical and monetary policy risks pushed credit spreads (the difference between the yield on credit assets and risk-free assets) wider translating to capital losses across credit markets. Commodities prices also soared as the war in Ukraine threatened to push shortages further.

Due to the late-month volatility, the Strategic Income Fund achieved a -0.08% return (after fees) for the month. The return was impacted by capital volatility across credit markets. The Fund has produced a positive return of 0.28% over the 12 months to 28 February 2022. Since inception the Fund has produced an average return of 2.80% p.a.