Firstmac’s expertise in Residential Mortgage Backed Securities has seen over $14 billion in RMBS issued since 2003. High Livez gives everyday investors access to this market, which is usually restricted to institutional investors.
Fund performance to 31 January 2017
The High Livez fund continued its recent trend of improving monthly distributions at a time of record low interest rates.
For the month of January 2017, the distribution was 4.44% per annum, representing a margin of 2.94% above the Reserve Bank of Australia’s official cash rate.
This follows an annualised 4.27% in December 2016, 4.29% in November, 4.15% in October and 4.21% in September.
The unit price declined slightly from 1.0487 to 1.0481.
The fund’s underlying asset performance remains strong and above our fund objective.
As you know, the assets held by the fund are a diversified portfolio of investment-grade Residential Mortgage Backed Securities (RMBS) which are comprised of loans secured against people’s homes, as well as some bank deposits.
The fund holds RMBS from some of Australia’s most highly-rated financial institutions including Westpac, AMP, National Australia Bank, the Commonwealth Bank, and Suncorp.
The annualised Total Return for the 5 years to 31 January 2017 was 6.40%, comprising of 5.58% distribution return and 0.82% of capital growth.
The High Livez Investment Committee targets consistent earnings with the primary objective of providing regular monthly distributions. A number of new investment opportunities were under consideration at the end of the month.
Australian Credit Markets
So far this year financial markets have been characterised by low volatility, unlike the same period of 2016. Equity markets were modestly softer in January, down 1.2%, while credit markets have been markedly tighter with a lack of new deals and no material movement in interest rates. ASX-listed retail debt securities have tightened significantly with a rash of redemptions being reinvested in secondary market stock. In 2017, around $9bn of ASX- listed securities are callable. This may cause an increased supply of deals pushing spreads wider. In the institutional market, the risk premium of credit has also moved tighter. CBA senior credit default swap spreads have moved from trading close to 70 basis points at the start of the year to a low of 60 basis points at the end of January.
Australian Economic Update
Since the RBA last met in early December, it has received evidence in the fourth quarter CPI report that annual inflation is still tracking low at 1.5% year on year. There has also been evidence that GDP growth is likely to rebound strongly in the approaching fourth quarter report following the surprisingly weak showing in the third quarter of 2016 of -0.5% quarter-on-quarter.
Indications of the likely rebound in growth in the fourth quarter are already available in fourth quarter real retail trade and the cumulative monthly international trade position showing a surplus of $A4.8 billion in three months ending December compared with a deficit of $A3.8 billion in the three months ending September.
The turnaround in trade position alone is sufficient to contribute two percentage points to fourth quarter nominal GDP growth and a percentage point to real GDP.
Signs also showed in late 2016 of a stronger turn in employment growth as well as a lift in housing activity, albeit increasingly concentrated in Melbourne and Sydney. The improvement in housing has also come with another burst of upward price pressure in Melbourne and Sydney. While the RBA is likely to stay on hold over the next few months, signs of rebounding growth and increasing concerns about excessive house price inflation are increasing the likelihood that the next cash rate move, probably late 2017 or early 2018 will be a 25bps cash rate hike to 1.75%.
Historical performance assumptions
*Total return for the 5 years to 31 January and 6.71% p.a. since inception on 29 March 2011. The total return is the trust’s consolidated performance over the period referenced. Past performance is not indicative of future performance and should not be the only factor considered when selecting an investment. Performance is calculated on an initial investment for $10,000 with distributions reinvested. Ongoing fees and expended have been applied however individual taxes are excluded. This information is general information only and does not take into account your individual objectives, financial situation or needs. You should assess whether the information is appropriate for you and consider obtaining financial advice prior to making an investment decision.