Monthly Investor Update from La Trobe Financial – July ’24

Chris Paton – Chief Investment Officer

This month, we start with incredibly exciting news, and that’s celebrating the recent passing of yet another significant milestone for La Trobe Financial.  From our humble beginnings 72 years ago, we now manage over $20 billion in assets across institutional, wholesale, and retail investors.

We now have over 130,000 customers across our business.  And to each of our wonderful customers, we exist for a single reason: Serving you with simple, easy to understand financial solutions which in some meaningful way contribute towards your wealth creation journey.  For our La Trobe Australian Credit Fund and US Private Credit Fund investors, all 100,000 of you^, thank you for placing your trust in us to manage your hard-earned wealth.

Back to matters closer to home, and earlier this month, we witnessed a critical shutdown of global IT infrastructure.

The catalyst: a single IT service within much of the globe’s IT infrastructure which caused the world to grind to a halt.  People were stuck in airports.  Shopping centres unable to process transactions.  Healthcare services were unable to treat patients.  And a whole range of other flow on affects took time, money, and a lot of frustration, to overcome.  Thankfully, the world is largely back to normal, however there are a range of lessons to be drawn from this shutdown which can be applied to principles very close to our own hearts here at La Trobe Financial: managing your investment portfolio.

Let’s start with the simplest aspects.  Diversification, and knowing what’s under the hood.  Again, and again, we have preached the importance of diversification in investing.  Not putting all your eggs in one basket.  Another way to think about diversification, is by not committing yourself to a single point of dependency for any part of your business or investment.  In business, there is key person risk.  In investing, there is concentration risk.  This IT outage saw a whole range of global systems stutter due to a reliance on a single service provider.  History shows, certainly from an investment perspective, that the larger the scale of the dependency, the more amplified the outcomes, including of course in the event something goes wrong.

Consider your own investments.  Are you overexposed to a particular asset or asset class?  Or indeed, are you overexposed to a particular sector – meaning that your wealth might be overly aligned to the performance of one particular sector or industry?  And crucially, do you really know what you are investing in: what the underlying assets are and where the key risks lie?  What drives their performance and outcomes? Holding your investments across a range of assets and sectors, puts you in a much better position for success.  And so does only investing into assets when you understand what’s really under the hood.

At La Trobe Financial, our portfolio accounts have always maintained a key focus on diversification and transparency.  We hold very granular asset profiles, diversified by borrower, location and sector, to give the best possible resilience against the movement of one particular sector driving performance.  Consider our 12 Month Term Account.  With a weighting of 54% to residential assets, the balance of assets comprise of targeted holdings across commercial, industrial, construction, vacant land, rural, and cash assets.  Each can contribute to the yield profile of the strategy, but none hold an overweight position to adversely impact overall portfolio performance.

And we put our money where our mouth is.  Each month, we publish detailed information onto our website with hundreds of data points, so any interested investor can get right down into the nitty-gritty to understand exactly how our portfolios are comprised.  And we encourage investors to really get under the hood of La Trobe Financial as ultimately, it is what is under the hood which has delivered impeccable performance for our investors.

The 12 Month Term Account, it sits among the most diversified strategies in the Australian Real Estate Private Credit sector.  We’d say we’re the most diversified, but no other manager in our space that we can find actually publishes the depth of data we do on a regular basis to allow comparison.  So, make of that what you will.

Looking forward often involves looking back, and there is nothing new under the sun.  History has a litany of instances where concentrated sectors have come unstuck, with positive and negative outcomes felt for years to come.

Consider the GFC.  Which, at its most macro sense, had a range of institutions which had grown too big, and overly concentrated to a single asset class.  The outcome, after the initial shocks, were smaller banks, with higher capital provisioning, and regulators working to disentangle and de-risk complex global financial networks.

But what does that mean for us, over 15 years on?

Well, plenty.  In a recent webinar, you will have heard us talking about key, macro drivers of investment into the next generation.  One of these was de-banking: the rise of private credit.  Yes, an outcome of the GFC is banks being forced to focus on remaining ‘smaller’, better capitalised, and limiting concentration across the types of loans they will offer.

With banks stepping out of a sector, non-banks have stepped in; writing loans to high quality borrowers who once upon a time would have been serviced by a bank but for whom the private market now provides a more timely, nimble and appropriate funding source.

In America, private credit has slowly picked up momentum, long supported by institutional and wholesale investors.  It has now reached critical mass, sufficient for managers to build diversified portfolios of quality assets to suit a range of risk and return profiles for retail investors.  Indeed, La Trobe Financial has recognised this tailwind, delivering a strategy in U.S private lending with the launch of our La Trobe US Private Credit Fund.

This strategy considered the de-banking tailwind, encouraged by the regulatory response to the GFC.  And it delivers a diversified portfolio of directly originated loans, made to companies in the U.S middle market, operating in  non-cyclical industries, to deliver a premium risk-adjusted and stable income.  .  And we have developed this product with the highest-quality counterpart, Morgan Stanley and its global leading U.S. private credit team.

For retail investors, the La Trobe US Private Credit Fund offers a return target of 8.5% per annum, with monthly income and quarterly withdrawal windows.*  And of course, our friendly Asset Management team can be contacted on 1800 818 818 if you’d like to learn more.

History doesn’t repeat itself, but it often rhymes, as Mark Twain once wrote.  The recent IT outage, teaches another lesson we can apply here:  Stay diversified.  Ensure you know how an investment works.  Ensure you know what is under the hood, and ensure you understand where the risks are.

Thank you for watching.

Michael Watson – Head of Distribution

Welcome to our monthly economic update.

Are we in a recession, or aren’t we?  This month, we take a look at economic growth, what’s driving it, and what lies ahead.

In recent decades, Australia was the envy of the economic world.  From the early 1990s recession, we had a 30 year window of positive economic growth.  No recessions, subdued inflation, low unemployment, cash rates that still encouraged investment, and Governments running budget surpluses.

After the tough economic periods through the late 1970s and 1980s, it was – economically speaking – a great time to be alive.  Of course, nothing lasts forever.  The supply shock that was COVID saw our 30 year run end, and the subsequent supply shock from the invasion of  Ukraine, saw re-emerging inflation spike.

The tools to cut inflation are fairly blunt..  At its simplest, Governments use  fiscal policy by cutting their spending, and central banks use monetary policy by hiking interest rates.

Both levers have been pulled, and, et voila.  Inflation, which spiked to x% in [date] is seemingly returning towards target.

If only it were that simple.

These fiscal and monetary tools don’t directly reduce inflation.  They are a second-order effect.  The first order effect is to take the steam out of an economy: people and governments spending and investing less cuts demand, slows economic growth, lowers wage growth, increases unemployment.  These factors are what causes inflation to fall.  Which is why the narrow path of controlling inflation, without blowing up the rest of the economy, is such a difficult path to tread.

Let’s talk about GDP, or, economic growth.  In Australia, our long history of performance was the envy of the world.  Consider the U.S.  In the early 2000s with the tech wreck & Asian Financial Crisis, it was hit much harder than Australia.  Just as it was also hit much harder through the GFC.  Australia has tracked a smoother path of economic growth.

Looking ahead, however, and both economies have benign growth forecasts.  With the steam being taken out of each economy, according to the IMF, neither is really likely to set the world on fire for the rest of this decade.

But it’s how the growth is being produced which is the most important, and what separates the U.S. and Australia.  And the U.S. is doing a much better job of it than we are.  We have used these updates previously to talk about productivity, and how in Australia, our productivity growth is weak.  Consider the GDP per capita.  This means,  the amount of output each individual is contributing to economic growth.

In America, output has lifted.  There is a very clear increase in GDP per capita post COVID.  That is an economy genuinely ‘back to work’.  Here in Australia, we can’t say the same.  GDP per capita was barely positive in the years prior to COVID, and for the past five quarterly readings has either been neutral or negative.  So, we are in a recession in all but name.

But how is this possible, when the IMF forecasts had both of our economies set to grow by similar amounts to the end of this decade?  Consider population growth.  In Australia, the RBA confirms our annual population growth was 2.5% in 2023.  More people, buying more, spending more, employed and paying taxes.  Overall, contributing to our economic growth, and keeping it positive.  In the U.S. we saw population growth of just 0.5% in 2023.

So, we have two countries, one sustainably increasing productivity to grow its economic output, the other with outcome derived from policies which ultimately are not sustainable in the long-run.  The discussion for productivity in Australia isn’t going away anytime soon, and the sooner we have it, the better.

Thank you for watching.

Lilian Chin – Head of Client Partnerships

Welcome to our monthly property and credit update.

Just like the property market itself, market commentary moves in cycles.  For some reason, like no other asset class, property can only seem to be spoken of in terms of either boom, or bust.  It’s not particularly helpful!

So where are we, here in July 2024?

Commonly, the winter period spells a gentle slowdown in market activity.  Fewer listings, and few auctions are common to the cooler months.  And that tends to cool the market itself, prior to things picking up again in springtime.

This year it’s no different, with total listings down, and the market through July cooling ever so slightly to 0.5% growth in the month to 18 July, down from 0.7% growth in the month prior.  This is not a market bust, and it is nothing to worry about.  As markets go up and down, it’s important not to be frightened when they do fall when fundamentals are otherwise in your favour.

Consider the past 12 months.  In the year to 30 June we saw national prices rise by 8% and regional areas grow by 7%.  So, fairly uniform results overall.  You may recall in our recent update we mentioned that divergence was starting to appear between markets.  This trend has continued.  Overall the 8% national growth was driven by strong performance across our smaller capital cities, in particular Perth, Adelaide and Brisbane, against lower growth across the larger markets of Sydney and Melbourne.  And while Sydney’s prices remain at peak, Melbourne’s most recent cyclical peak was March 2022, with prices having retraced by a very modest 3.9% since.

So there is divergence, with some areas are growing faster than others.  Total stock on market is continuing to be thin, meaning supply  remains modest.  And clearance rates remain firm, so whatever stock is on the market, continues to be snapped up.

There will be some cyclicality, at an individual city level.  The larger markets of Melbourne and Sydney are seeing an increase in distressed listings, so you can expect some choppiness with these bigger, expensive cities.  Those smaller cities experiencing growth in prices, like Brisbane and Perth, are seeing big decreases in their distressed listings.  And across the nation as a whole, total distressed listings remain down year on year by 4.2%.

So, if you witness downwards movements in the coming months, these are not pointing to deep cyclical bust.  These are pointing to conditions you expect to see in any market across the fullness of a cycle.

Moving to credit, and strong performance continues to reinforce the underlying resilience of property.  Overall, Australian borrowers continue to perform really well.  Demand for new lending is running within longer-run trend levels, and performance remains strong.

Across the market, consider that pre-Covid, Australian mortgage arrears we running at 1.8%.  The market was universally comfortable with those settings.  In the March quarter of 2024,  following a pandemic, following two years of cost of living pressures, and following nearly two years of interest rate hikes, sector arrears remained lower, at just 1.6%.  And while there is a likelihood that these numbers could increase, these, again, are part of normal market movements, and are in no way pointing towards a bust.

Overall, property and credit in Australia are characterised by stability in prices, with borrowers in the market continuing to demonstrate capacity to meet their loan obligations.  A good position to report.

Thank you for watching.