The real returns – yields shrink as inflation grows

By Trilogy Funds Management

Sponsored Content

Investors trying to keep tabs on inflation have been subjected to a head-spinning barrage of conflicting information and predictions in recent times.

By some measures, prices are increasing at the fastest rate in over a decade, while other indicators suggest inflation is relatively subdued.

Our Chief Risk Officer, Henry Elgood, says these current market conditions can be challenging for investors to navigate.

“Inflation expectations are constantly changing, based on market movements and statistical economic data. It remains a primary discussion topic in the market, centred on whether these changes are permanent or transitory in nature, as well as the implications of each possible outcome.

“It’s not just where inflation is going to get to but also how quickly we get there,” he said.

Yet no matter what the statistics say, the lived experience of consumers is that the cost of daily necessities is soaring, eroding the value of their cash which is earning almost nothing in savings accounts and term deposits.

In this environment, it’s no surprise that investors are increasingly seeking out more competitive income returns for their portfolios, sparking growing interest in fixed interest and asset-based income funds.

Headline inflation as reported by the Australian Bureau of Statistics (ABS) surged to 3.8% in the quarter to June[1], the fastest pace of increase since 2008, while wages rose at less than half that rate[2] over the same period.

Some economists say this should be no cause for concern. All we are seeing, they argue, is the reversing of an artificially weak Consumer Price Index (CPI) reading for the June 2020 period, caused by the collapse of fuel prices and waiving of childcare fees 12 months earlier[3].

They point to more modest increases in other measures of inflation such as the trimmed mean and weighted median. These adjusted measures, also known as ‘core’ inflation, are intended to provide a better indication of the medium-term trajectory of prices than the raw data. Both were comfortably below 2% per annum for the latest quarter.

The real returns - yields shrink as inflation grows. Current market conditions can be challenging for investors to navigate.Inflation expectations are constantly changing, based on market movements and statistical economic data. It remains a primary discussion topic in the market, centred on whether these changes are permanent or transitory in nature, as well as the implications of each possible outcome.

The Reserve Bank of Australia has also reassured investors concerned by inflation that it does not expect CPI to exceed 2% per annum before the second half of 2023.

Yet as any grocery shopper can attest, the cost of a basket of necessities has been climbing for some time and shows no sign of slowing down. The data confirms that this has indeed been the case.

In a report released in May, the ABS revealed that the things we need to buy to survive became a lot more expensive -by 61.4% – between 2005 and 2020[4].

These so-called ‘non-discretionary’ goods or services include those which meet our basic needs (food, shelter, healthcare), are required to maintain current living arrangements (car maintenance, school fees), or are a legal obligation (compulsory insurance, stamp duty).

By comparison, prices of discretionary items such as takeaway meals, alcohol and holidays increased by a much lower 38.6 %.

The Association of Superannuation Funds of Australia (ASFA) notes that retirees in particular have been hard hit by spiraling bills for essential items.

In the past 12 months petrol prices have jumped 27.3% while medical and hospital services rose 6.7%, fruit was up by 4.7% and vegetables by 5.5%, ASFA found. [1]

ASFA CEO Martin Fahy said retirees were particularly exposed to the basics such as food, fuel and health insurance.

“They tend not to benefit from areas where we see low inflation or price decreases such as childcare, education, whitegoods and clothing,” Dr Fahy said.

A particular threat to the discretionary incomes of Australians of all ages is rent. While soaring property prices may have been a boon for property owners, this asset inflation is now feeding through into consumers’ hip pockets.

Property market analysts SQM Research says the national average weekly rent of $508 a week rose by 1.3% for the 30 days to August 12 and by a concerning 13.7% for the previous 12 months[2].

SQM says rents for houses in some cities have recorded stunning increases over the past year, with Brisbane up by 11.2%, Perth up by 12.9% and Darwin up by 25.3%.

This trend seems unlikely to reverse any time soon, given that building costs are growing much faster than headline inflation as supply chains struggle to deal with the pandemic and construction demand outstrips supply of both labour and materials.

In Sydney, over the previous 12 months the cost of steel has risen 10%, rebar is up 20% and timber prices have soared 25%, according to a July 2021 report by global real estate consultancy Turner & Townsend[3].

Yet the full extent of these price increases is not yet being passed on to clients, says Turner & Townsend Australian real estate lead Matt Billingham.

“We’re anticipating further price increases with global supply chain issues expected to continue through 2022,” Mr Billingham said.

With prices on the rise all around us but the Reserve Bank of Australia pledging to keep interest rates at historical lows for years to come, the challenge for investors is finding liquid investments that can provide competitive income. These include certain fixed-interest funds as well as other income-producing funds and diversified income funds.

One such diversified income option is the Trilogy Enhanced Income Fund (Fund), which has delivered competitive returns to investors since inception in 2017*.

The Fund invests mainly in a range of cash, fixed-interest investments and other financial assets. It also enhances returns by investing approximately 35% of its holdings in the property market via the Trilogy Monthly Income Trust. This is a pooled mortgage trust that issues loans secured by registered first mortgages over Australian property.

“Our investment team tracks and monitors the ever-evolving inflation expectations across different markets and have been modelling multiple scenarios to ensure we’re prepared for whatever happens from here,” Henry Elgood said.

“For example, if there was a significant shift in inflation expectations, how would each part of our portfolio be impacted? To what degree on a theoretical basis, according to our models, would that look like? How would our return exposure shift and what we can do to mitigate that?

“What we can do to prevent that as best as we can is always front of mind through assessing and regularly reviewing those models and assumptions,” he said.

While past performance is not a reliable indicator of future performance, it’s worth noting that as at 31 August 2021, the Trilogy Enhanced Income Fund has provided a historical average net annualised return of 3.74% per annum* since launch and 3.21% per annum* over the past year.

The Fund aims to pay distributions monthly, requires a minimum investment of $5,000 and provides access to funds in 30 days while the fund is liquid.To download a brochure or request a call-back from a member of our Investor Relations Team, visit the Trilogy Funds website

*Past performance is not a reliable indicator of future performance.

This article is issued by Trilogy Funds Management Limited ABN 59 080 383 679 AFSL 261425 (Trilogy) as responsible entity for the Trilogy Enhanced Income Fund (Fund) ARSN 614 682 469 and Trilogy Monthly Income Trust (Trust) ARSN 121 846 722. Application for investment can only be made on the application form accompanying the Product Disclosure Statement (PDS) dated 28 July 2020 for the Trilogy Enhanced Income Fund ARSN 614 682 469 and 17 December 2018 for the Trilogy Monthly Income Trust ARSN 121 846 722 available at www.trilogyfunds.com.au. The PDS contains full details of the terms and conditions of investment and should be read in full, particularly the risk section, prior to lodging any application or making a further investment. All investments, including those with Trilogy, involve risk which can lead to loss of part or all of your capital or diminished returns. Trilogy is licensed to provide only general financial product advice about its products and therefore recommends you seek personal advice on the suitability of this investment to your objectives, financial situation and needs from a licensed financial adviser. Investments with Trilogy are not bank deposits and are not government guaranteed. 


Are you a 708 sophisticated investor?

A sophisticated investor is defined under Section 708 of the Corporations Act (net assets of $2.5 million or annual incomes in excess of $250,000).

They are eligible to receive information regarding wholesale investment opportunities that are not available to regular or retail investors.

Please subscribe if you would like to be alerted to these types of opportunities.