Mitigating risks for steady market returns


by Clive Tompkins

  • Email Alerts for:

Transcription of Finance News Network Interview with Antares Income Fund Portfolio Manager, Mark Kiely

Clive Tompkins: Hello Clive Tompkins reporting for the Finance News Network. Joining me from the Antares Income Fund is Portfolio Manager, Mark Kiely. Mark welcome back.

Mark Kiely: Thank you, good to be back.

Clive Tompkins: The Fund launched in November last year, what’s been the response?

Mark Kiely: The response has been really positive; we’ve had good inflows into the Fund. We’ve had investors and advisors seeking the Fund for the more defensive allocation. What we’ve actually had feedback from investors and advisors has been that their current defensive allocations, such as maybe term deposit investments or hybrid investments, just haven’t been working. In the case of term deposits, they’re finding that there is a falling margin and falling rates have been offered.

Also what they’re finding is that the liquidity, particularly going into next year, is going to be dramatically reduced. As regulatory changes come into the banking sector, meaning that they’ll start to impose break costs on TDs and also term structures as you get your money out; so maybe lockup periods of 30 days etc. So people are very concerned about liquidity in the term deposit market.
In the hybrid market, what we’re finding both advisors and investors have experienced recently, is basically price volatility. So they’re very concerned about the way that they’ve behaved, and they’re certainly not behaving as a defensive asset class investment.

Clive Tompkins: What are the benefits of the Fund?

Mark Kiely: The key benefits of the Antares Income Fund is I guess, if you look at three core objectives or what we call are pillars, which is liquidity, capital preservation and returns. So firstly, we look to basically maximise liquidity and ensure capital preservation, and then we seek to maximise returns. So that’s been a lot of interest from people who want a defensive type income, type solution.

Clive Tompkins: Where’s the Fund been investing its money over the last three to six months?

Mark Kiely: The bulk of the funds have been invested into Australian dollar investment grade corporate and credit securities. The way the Fund’s been accessing those securities has been primarily through two other Antares credit funds, the Antares Enhanced Cash Trust and the Antares Credit Fund. The other way it’s been accessing those securities, by direct investments into very attractively priced fixed income credit securities, when they’ve been available in the marketplace.

Clive Tompkins: Is there any non-investment grade or hybrid exposure within the Fund?

Mark Kiely: At the moment there’s no non-investment grade or high yield exposure in the Fund. That said, we did actually enter a high yield exposure in the Fund back in August, taking advantage of what was then some volatility in credit spreads. They widened out quite substantially. So we actually took exposure to two credit indices, the US credit indices CDX and the European crossover. So a very diversified high yield segment, we took that exposure in August. We then maintained that till early October and exited for quite a good profit for the Fund. So we can take advantage of market opportunities in the high yield space, but currently we don’t because the market haveactually repriced to lower spreads.

In the hybrid space we have zero exposure to the Fund and to be honest with you, we’re probably highly unlikely to have any exposure to hybrids. Simply because of the risks that are imbedded in those investments, as we’ve seen the equity beta. But there’re other risks in those Funds, it might be non-accumulative interest payments etc. So given the pricing structure of those instruments, we’re unlikely to actually enter into that market.

Clive Tompkins: What do you perceive as some of the biggest risks for investors in the current environment?

Mark Kiely: I think one of the biggest risks we’re facing on a forward looking basis, is the eventual withdrawal of what is called, a cheap global funding. The Fed has flooded the world with cheap global money and that’s meant a lot of asset prices and a lot of traded securities, have got quite imbalanced in their pricing structures. Their equity valuations, be it emerging markets, be it credit spreads, be it bond yields and bond yield structures. Only last week we saw heightened volatility in the US bond market, where US Treasuries has actually had their biggest one day emerges since the Lehman crisis.

So looking forward we’re concerned about at some stage, that cheap money is going to be need to be withdrawn from the market and how that may play out. It may be delayed for some time because of the European growth deterioration, particularly in the German data, but eventually it will happen. And when that does happen, we are uncertain how credit spreads may evolve and may track during that period of let’s call it, withdrawal of cheap funding.

Clive Tompkins: Last question Mark. What is the Antares Income Fund been doing to mitigate these risks?

Mark Kiely: I guess with the risk being increased volatility in traded markets, for the Antares Income Fund what’ll we do? One of the key things we’re doing is actually maintaining the overall liquidity in the Fund, to ensure that we’re there to enable the liquidity to be accessed from our investor base. Another key thing we’re doing is actually reducing some of the credit spread volatility that we have in the Fund, by taking some of that risk off the table.

And then thirdly interest rate duration. Given recent volatility in interest rate structures, we’re carrying very little interest rate risk in the Fund, at basically 45 days on average. So low interest rate duration, lower credit spread risk in the Fund and basically high liquidity. All targeting, let’s call it capital preservation,should markets becoming more volatile.

Clive Tompkins: Mark Kiely thanks for the update.

Mark Kiely: Thank you, thanks for your time.