Successful investment in SEEK bond typifies Enhanced Yield Fund’s approach.
Key points
- The Fund built a SEEK bond position in 2019 and 2020.
- As an unrated bond from a new issuer, fewer institutions could invest in SEEK’s bond. That created an opportunity for the Fund to earn a higher return.
- Through the Fund’s research processes, we determined that SEEK had an attractive business model, market position and balance sheet.
- The bond’s floating-rate return was another attraction. The Fund anticipated that interest rates would rise and positioned for that through floating-rate bonds.
- The well-timed investment occurred when rates were near zero, and before interest rates climbed. The bond’s coupon increased as rates rose, and capital was protected.
- After redemption in June 2023, the bond delivered an attractive return of the 3-month bank bill plus around 5% per annum.
Introduction
The Enhanced Yield Fund looks for anomalies: mispriced investments with the potential for outsized returns. The best anomalies are market-leading companies with simple business models. Our detailed credit work then determines the investment opportunity.
SEEK’s market-leading job platform in Australia provides most of its revenue and profit. The company also holds leading positions in Malaysia, Singapore and other countries across Asia and South America, as Figure 1 below shows.
Figure 1: SEEK’s international operations
Source: Seek, 3 April 2023
In Australia, SEEK is regarded as the go-to site for job advertising – a valuable position built over years and hard to dislodge. Success builds network effects: more employers post ads on SEEK, leading to more interest from prospective job seekers, leading to more employers posting on the site.
The business is well-managed financially, benefiting from economies of scale and earning high profit margins because the marginal cost to host another ad on its platform is minimal.
Unlike its largest competitors, SEEK uses a subscription model where the employer pays, receiving larger discounts the more jobs posted. This creates sticky, recurring revenue, and is one of the key features that attracted our attention.
SEEK further benefits from the quality of its management. Andrew Bassat, who co-founded the company in 1997 and built it into the powerhouse it is today, served as CEO until 2021 and remains actively involved. His replacement, Ian Narev, formerly CEO of Commonwealth Bank of Australia, is highly experienced.
Market dynamics
At its core, SEEK benefits when employment is strong and companies need more workers. Jobs activity in recent years has played to that strength.
Market position and balance sheet are always important, and particularly so during unforeseen events like COVID-19 where work habits, face-to-face meetings and all kinds of business-as-usual practices were turned upside down. SEEK’s sticky revenue, strong balance sheet and valuable market position held it in good stead. Typical of best-in-class companies, SEEK emerged strongly from COVID-19.
Bond dynamics
There were two features that played to the Enhanced Yield Fund’s strength:
- SEEK was a new issuer to the bond markets. The market often takes time to warm to a name and bond yields can be particularly attractive early on.
- The SEEK bond was unrated. Most bonds carry a credit rating from S&P or Moody’s and Australian benchmark bond funds often require a rating to invest. There is a smaller potential investor pool for unrated bonds. As a ground-up credit investor, the Enhanced Yield Fund never relies on third parties to do the important work and views these unrated deals as an opportunity.
Outsized returns
The Fund’s position, initially built in 2019 and 2020 (to 3% of the Fund) earned about 5% above bank bills.
Earning floating-rate (rather than fixed-rate) returns added a double benefit. Coupons increased each quarter during 2022 and 2023 in line with the Reserve Bank cash rate, and capital was protected. The power of floating rates during a rising rate environment is hard to overstate.
Conclusion
The Enhanced Yield Fund constantly looks for new anomalies. It currently holds a broad range of investments at the early, middle, and late stages of their investment theses. We believe each one offers outsized return potential for its risk.
About the Author
David Murray is a Senior Credit Analyst at PM Capital, a leading asset manager of global and Australian equities, and fixed income.
More information on the PM Capital Enhanced Yield Fund is available here. Alternatively, see more insights related to the Enhanced Yield Fund here.
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.
