Only fund to achieve all green lights in research on absolute return bond funds.
The PM Capital Enhanced Yield Fund was the only fund in its cohort to meet its return objective, preserve capital and target income distribution, a recent survey of absolute return bond funds by Morningstar has found.1
Absolute return bond funds aim to deliver consistent returns, regardless of market direction. Unlike traditional fixed-income strategies, absolute return bond funds are less constrained by benchmark indices and have greater investment flexibility.
Morningstar, a global investment research firm, surveyed absolute return bond funds in Australia. It assessed each against three criteria: Annual Alpha Objective (return), Risk/Capital Preservation and Income Distribution Targeted.
The results formed a “heatmap” assessment of absolute return bond funds, each receiving a green, red or amber light for the criteria.2 All but one of the funds surveyed failed parts of the heatmap assessment (they had red or amber lights for some criteria).
The PM Capital Enhanced Yield Fund was the only fund to achieve all three green lights in Morningstar’s heatmap. Other surveyed funds mostly underperformed on their return objective or did not preserve capital.
Morningstar wrote3: “…many investors would rightfully expect absolute return bond managers to generate consistent returns across all market environments, including negative markets like we saw in 2022. … However, recent active returns for these fixed-income managers have been challenged in this environment.”
Morningstar highlighted the PM Capital Enhanced Yield Fund. “Only one manager - PM Capital Enhanced Yield - is showing as green for meeting its cash-plus return objective. PM Capital is an opportunistic credit-oriented manager that had good preparedness to take advantage of valuation opportunities arising from the Coronavirus pandemic.”
Market-leading income solution
Jarod Dawson, Portfolio Manager of the PM Capital Enhanced Yield Fund and a PM Capital Director, welcomed Morningstar’s assessment of the award-winning fund.4
“It’s always pleasing when our Fund receives industry recognition,” he says. “But the main goal is for the PM Capital Enhanced Yield Fund to continue delivering for its investors over long periods, in terms of returns and capital preservation.”
Established in March 2002, the PM Capital Enhanced Yield Fund aims to achieve an excess return above the Reserve Bank of Australia’s cash rate, with low volatility and minimal risk of capital loss.
The Fund seeks to identify and profit from market anomalies predominantly in corporate bonds, hybrids and other debt-market opportunities worldwide.
The PM Capital Enhanced Yield Fund is one of three PM Capital funds. As a defensive income fund, the PM Capital Enhanced Yield Fund complements the growth-focused PM Capital Global Companies Fund and PM Capital Australian Companies Fund.
“For more than two decades, the PM Capital Enhanced Yield Fund has played an important role in our clients’ portfolios,” says Dawson. “From an income perspective, the Fund has consistently delivered the best of both worlds for investors: an annual return above the cash rate and capital preservation over long periods.”
Enhanced Yield Fund Performance - 30 June 2023
^Returns are calculated from exit price to exit price assuming the reinvestment of distributions for the period as stated and represent the combined income and capital return. The index is RBA Cash Rate. See www.rba.gov.au for further details.
*Performance Fee Option: Management fee: 0.55%. Performance fee: 25% of net excess above RBA Cash Rate (subject to a high watermark). **Management Fee Option - Class B units: Management Fee: 0.79%.
Well positioned
Dawson says the Fund was positioned for effectively no interest-rate duration during the past 12 months – a successful position as rates raced higher.
The Fund used a similar strategy over the past two decades during the Global Financial Crisis, European Sovereign Debt Crisis and other market shocks. The Fund anticipated higher inflation and interest rates and positioned accordingly.
“That was ‘common sense’ positioning,” says Dawson. “A year ago, it was obvious that near-zero rates in Australia and overseas had to rise to bring inflation down. The Fund’s flexible mandate enabled it to position quickly for that change.”
This positioning has done three things. The Fund has preserved capital in volatile market conditions; achieved its return objective for income investors; and redeployed capital into bond issuance from quality companies in the past 6-12 months.
“The Fund had the firepower to take advantage of opportunities and make material investments at attractive yields,” says Dawson. “The Fund still has a substantial amount of spare capital on hand, so is in an excellent position to take advantage of further compelling yield opportunities as they emerge.”
In July, Dawson will update investors on the PM Capital Enhanced Yield Fund’s latest positioning and performance for June quarter 2023.
More information on the PM Capital Enhanced Yield Fund is available here. Alternatively, see more insights related to the Enhanced Yield Fund here.
Notes
1Little, D., “The Ambitious World of Absolute Return Bond Funds,” Morningstar Manager Research. 10 May 2023.
2A green shading means objectives were met; amber means they were partially met; red means they were not met.
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4PM Capital's Enhanced Yield Fund (EYF) was awarded the Money magazine Best of the Best Awards 2020: Best Income Fund – High Yield and Credit.
This insight is issued by PM Capital Limited ABN 69 083 644 731 AFSL 230222 as responsible entity for the PM Capital Enhanced Yield Fund (ARSN 099 581 558, the ‘Fund’). It contains summary information only to provide an insight into how we make our investment decisions. This information does not constitute advice or a recommendation, and is subject to change without notice. It does not take into account the objectives, financial situation or needs of any investor which should be considered before investing. Investors should consider the Target Market Determinations and the current Product Disclosure Statement (which are available from us), and obtain their own financial advice, prior to making an investment. The PDS explains how the Fund’s Net Asset Value is calculated. Past performance is not a reliable guide to future performance and the capital and income of any investment may go down as well as up.
