Antares Capital’s Fixed Income fund finds stability in uncertainty


by Clive Tompkins

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Transcription of Finance News Network Interview with Antares Fixed Income Fund portfolio manager Mark Kiely

Dallas Baird:
Hi I’m Dallas Baird for the Finance News Network and joining me for an update on the Antares Fixed Income Fund is portfolio manager Mark Kiely. Mark, welcome back.

Mark Kiely: Happy to be here.

Dallas Baird: The Antares Fixed Income Fund has been running for over four months now, can you just give us an introduction to the fund and who it is targeted at?

Mark Kiely: The Antares Income Fund is a fund that is designed to provide a stable income stream by using a diversified series of fixed income strategies. It uses a core and satellite approach. At the core is the Antares Enhanced Cash Trust. That’s a cash trust we have been managing at Antares since January 2007, so pre-GFC, and throughout every single month since inception it has always had a positive absolute return. So, a very strong track record. Then around that core we have a series of other strategies to dial up and dial down the risk within the Antares Income Fund. Those other strategies include the short duration credit fund managed by Antares, The Antares Credit Relief Value Fund, as well as global investment grade credit in global high yield. It’s a lower risk  yield offering with very stable yield offering and its key focus being on capital preservation and liquidity we think probably lends itself to being attractive to those approaching retirement or maybe in the early post-retirement phase.

Dallas Baird: What are the most common questions investors ask you about the fund and your processes?

Mark Kiely: Sure. One of the most common questions I have been asked has been ‘why now, why are launching the Antares Income Fund now?’ The answer to that is that Antares has a long, successful track record in excess of twenty years in managing to wholesale and institutional client bases. We manage around twenty two billion in that space but we have never had a retail offering to the market. In the, let’s call it the safe yield offering, term deposits have been a very attractive proposition for a lot of investors over the last several years but we’re finding that the market now with the term deposit margins compressing and also with, maybe, issues around breakability going forward as banks charge for the ability to break TDs may mean the liquidity in those product is going to be less. So we’ve thought about what could we offer the market as an alternative. And hence, the Antares Income fund is what we’re coming up with which is a fund that is focusing very much on capital preservation and achieving a good return.

Dallas Baird: So, what’s the current positioning of the Antares Fixed Income Fund?

Mark Kiely: The Antares Income Fund positioning is what we would classify as defensive. Credit spreads have had a good run, they’re approaching historical lows in the post-GFC period. Equity markets are reaching all time highs. So the markets are very much factored for a lot of good news. We think that maybe there are some risks on the horizon that will maybe upset that scenario. China growth is slowing down. The European Union still has some unresolved issues. So, in that environment we’ve actually pushed the portfolio into a defensive positioning to preserve capital, which is one of the key objectives of the Antares Income Fund.

Dallas Baird: Now, the RBA appears to have put further rate cuts on hold.  What’s your view on interest rates going forward, and how will this impact the Antares Fixed Income Fund?

Mark Kiely:    The Reserve Bank has been quite explicit in removing the easing bias. The question is are they going to move to a tightening bias. At this stage, there’s no real signs of this happening at the moment but there are risks out there.  Only last week we had the governor of the reserve bank commenting on house price appreciation which is referring essentially to the risk of asset bubbles, you might say. If, as we move out into the later part of 2014, early part of 2015, the world economy continues to improve and maybe the Australian economy transitions from the resource sector driven growth dynamic into a more broader based growth, you may find that interest rate tightening’s come back onto the agenda. In that scenario, how would that impact the Antares Income Fund? Well, it will actually be quite a positive because you’ll find the Antares Income Fund will actually rise up in yield in line with rising rates because on average its securities, or its investments, reset every forty five days, so very quickly it will actually rise in line with rising cash rates.

Dallas Baird: The Federal Reserve has started to taper its quantitative easing program. What impact will that have on yields and risk assets like equities?

Mark Kiely: We saw what was referred to as many market participants back in May last year, let’s call it the ‘taper tantrum’ where by risky assets got sold off, particularly emerging market assets, as people started to think about tapering. We’ve now actually had a situation where tapering has actually started and is going to continue. The biggest thing in my mind is not so much about tapering, it’s more about monetary policy expectations. At the moment, people have disassociated tapering from monetary policy changes. I think as we move into the later part of 2014 I think people will start to focus on monetary policy changes in the US and as that front end cash rate is either going to rise or be perceived to be rising, a lot of those cheap carry trays that have funded risky assets may start to unwind which means that risky assets such as emerging markets, high yield and even equities may find themselves delivered on the off or basically being repriced downwards.

Dallas Baird: How does the Antares Fixed Income Fund differ from traditional fixed income and other income funds?

Mark Kiely: With respect to traditional fixed income funds, they traditionally carry a lot of durational risk which means that they tend to underperform in rising rate environments, capital losses from rising rates. The Antares Income Fund, as I mentioned, actually benefits from rising rates. Other income products out there such as, let’s say, equities based or equity income funds have an equity market beta embedded within the product so they tend to obviously be exposed to down equity markets. The income fund we’ve presented is a fixed income fund and doesn’t have that equity market beta but has very much a key focus on capital preservation. 

Dallas Baird: Your fund targets a return of 1 per cent to 2.5 per cent, after fees, over bank bills. Why such a large range of targeted excess returns?

Mark Kiely: The reason we’ve got a large range of targeting excess returns is because where we’re starting from and the starting point for us and the Antares Income Fund is about the first two key objectives being capital preservation and liquidity. It’s only after we’ve actually made those two key objectives in the way we have structured the portfolio that we actually focus on return. So, in various environments we may find ourselves not being able to actually get a three per cent return simply because to do so we’d have to put too much risk on the portfolio and therefore threaten that capital preservation focus, so hence the larger range. There will be parts of the cycle when we will be at the lower end of that range and there will be parts of the cycle when we will be at the top end of that range, being able to capture returns when assets are priced accordingly.

Dallas Baird: Mark Kiely, thanks for the update and good luck with the next quarter.

Mark Kiely: Thank You.