Monthly Investor Update from La Trobe Financial – June ’24

Chris Paton – Chief Investment Officer

Welcome to our monthly Business & Portfolio Update.  And we start with some very exciting news, a milestone moment for the business:  the successful launch of our La Trobe US Private Credit Fund which is now available for retail investors.

We’re delighted to have launched the PDS to market, giving Australian investors access to this asset class for the very first time through a strategy carefully curated with our product partners, Morgan Stanley.

Our US Private Credit Fund is the inaugural product in La Trobe Global Asset Management.  A strategy launched to market as we bring the best of the world’s investment offerings to Australian investors.  It will provide Australian investors the opportunity to invest into asset classes which are traditionally hard to access, and strategies traditionally held exclusively for institutional investors.  And it is through this lens that we have brought our La Trobe US Private Credit Fund to market.

Before we dive into that product further, I’m pleased to report that our $11bn La Trobe Australian Credit Fund continues to go from strength to strength, currently providing investors with investment returns which sit at their highest point in a decade.  In the month of May, we passed a milestone: 100,000 investors in the Credit Fund^.  A big thank you to each and every one of our investors and partners who have helped the business grow to almost $20bn in assets under management.

Pleasingly, our portfolio accounts remain in terrific shape with borrowers continuing to perform very well notwithstanding that we are two years into a rate-hiking cycle and two and a half years into a cost of living event.  In fact, arrears have decreased over the last few months, and now sit at just 3.1% within the Credit Fund.

That is ultimately a reflection of the high quality borrowers we look to target and our deliberately conservative approach to the construction and management of our portfolios.  Portfolios which are incredibly diverse. Over 11k individual loan assets across the Fund as we look to insulate and protect investors and their investment outcomes.  It is these portfolios which facilitate the delivery of a premium, low-volatility income across all market and economic cycles.

If you are familiar with La Trobe Financial’s existing portfolios, then you will immediately recognise similar characteristics within the La Trobe US Private Credit Fund portfolio.   And it all starts with the disciplined approach to portfolio construction and management, all of which is undertaken by our product partners, Morgan Stanley.

Firstly, it’s the quality of the asset, and we are targeting direct loans to high quality corporate borrowers who operate in the US middle market.  These are companies with market leading positions, high barriers to entry, with strong & stable free cash-flows.  Companies which don’t operate in cyclical industries, ensuring stability in earnings and performance across the market and economic cycles.  Morgan Stanley are highly selective in the assets that find their way into our portfolios, rejecting 95% of the 1000+ loans they are rejecting each year.

And rather than taking big bets on a small number of high-quality assets, it’s all about diversification.  With the wholesale class having launched in December 2023, our underlying portfolio has been living, breathing and performing for six months now and, at over $160m in size, is already diverse.

Diverse from a borrower perspective, with 49 individuals borrowers across our portfolio with an average loan investment size of US$2.9m.  Diverse from an industry perspective, with those borrowers operating in 22 individual industries.  You can see that while we avoid the cyclical sectors, we do have a bias towards service industries.  Companies which are providing essential or non-discretionary services, such as veterinarian or H/VAC services.

Having a diversified portfolio of high quality loan assets – just like in our La Trobe Australian Credit Fund – provides a higher yield and similarly low-volatility income profile for our investors.

Of course, all investments carry risk, so you should carefully consider the PDS before making any investment decision.

So that’s the portfolio which will ultimately be driving the performance of the product which, at a headline level, seeks to provide monthly income with a target distribution return of 8.50%* per annum, and this is net of fees and expenses, but before adjustments for FX rate fluctuations.

It has a minimum investment amount of $10,000, and provides quarterly liquidity access**, with withdrawals of up to 5% of the total investment class units available each quarter.  We are also hedging the AUD investments exposed to USD.

But the good news doesn’t stop  there.  What better way to launch our La Trobe US Private Credit Fund than with a competition.

Eligible investors in the La Trobe US Private Credit Fund will have the chance to win an incredibly unique opportunity to Meet the Manager, the Morgan Stanley Private Credit team, in New York.  One lucky investor and their guest will enjoy an all-expenses paid trip to New York, which includes business class flights, five nights’ accommodation and spending money.**

For a chance to access this once-in-a-lifetime opportunity, make a minimum investment of $50,000 by 20 August. Each $50,000 invested will earn one entry into the prize draw, and you can visit our website to learn more and view the competition terms and conditions.

It is with these strongest of foundations that we are able to offer investors even greater investment opportunities with the launch of the La Trobe US Private Credit Fund. If you have any queries or would like to learn more, simply call our friendly Asset Management team on 1800 818 818.

Michael Watson – Head of Distribution

Welcome to our monthly economic update.  This month, we’ll take a closer look at inflation, which is a critical part of our ‘narrow path’ journey to ongoing economic stability.

Through the period that was COVID, an enormous supply-side shock hit markets.  You will recall costs of shipping going through the roof, as did the cost of items like semi-conductors, energy, food, and a range of other items that depend on operational logistics chains.

Coming out of the COVID period, Governments and regulators globally had thrown the proverbial kitchen sink into stimulatory measures aimed at kick-starting growth.  Supply chains were normalising.  Consumers were spending, businesses were hiring, and a V-Shaped economic recovery was underway.  Inflation was beginning to pick itself off the canvas from its decade-long low observations.  Everything was looking, well, pretty good.

Then, in February 2022 Russia invaded Ukraine, and yet another supply-shock hit markets, particularly around food and energy.  Inflation took off globally, ahead of growth in consumption and productivity.  So governments and central banks stepped in, tightening fiscal spending, and increasing market interest rates.

Now back to Australia.  After a long period below the RBA’s target inflation range  of 2-3%, Inflation peaked at 7.8% in December 2022.  Of course, interest rate hiking was well underway, and was working.  Consumers were tightening their belts, and inflation began falling as fast as it rose.

But where to from here?

We are regularly asked for our forecast on interest rates.  So far in 2024, serious commentators and market forecasts have ranged from 2-3 more hikes, to 2-3 cuts.  No one really knows, and each new data release to market sees views oscillating back and forth.  March CPI figures show items like clothes and footwear falling by 1.1% in the quarter, as discretionary spending is being cut from household budgets.  On the other hand, the ABS monitors 13 different business segments, and found that 12 of these have improved their turnover year on year.

The Reserve Bank is particularly circumspect.  You would think that with the direction of inflation since its peak that it could relax.  But it continually points to uncertainty: to the persistence in services inflation numbers; the lack of productivity improvements;  the weakness in economic data, and also its variability.   In short, it doesn’t know either.

What it does know, is the history of inflation.  In the early 1970s, oil producing nations cut production, which saw the cost of oil essentially quadruple over a few short months.  This had an enormous impact on inflation.  We had high inflation, and low economic growth.  Or as it was described, stagflation.

Why does this matter?

It matters because inflation, which had been broadly stable through the 1960s, took off.  The oil embargos were announced in October 1973.  Inflation was running at about 4.7%.  It did not get back below that level sustainably until 1991 -nearly 20 years later.

But how was it brought under control?  Well, largely using the same levers available to governments and regulators now.  In September 1973 you could get your home loan at a rate of 7% per annum.  This steadily increased for the next decade.  You will note that borrower rates continued to be lifted, even as inflation was seemingly falling.  Our national accounts may have looked like a ‘beautiful set of numbers’ in 1989, but with average borrower rates peaking at a whopping 17% in 1990, this was shortly followed by ‘the recession we had to have’.  Unemployment hit a massive 11%, and home loan borrower rates weren’t sustainably back below 7% – where they had been back in the early 1970s -until 1997.

So while a lot was going in through that time with deregulation -the dollar float, globalisation and the like -we had a supply shock which was the genesis of a 20-year inflation cycle and a 25 year rate hiking cycle, culminating in a deep recession.

But there is a lot going on now, too, and to quote Mark Twain, ‘History doesn’t repeat itself, but if often rhymes.’  Inflation has spiked, and interest rates have followed.  With that in mind, the resolve of the RBA must not be broken, to successfully wrest inflation under control.  Governments, too, must also share the burden.  Avoiding a recession today might be electorally palatable, but falling real incomes and standards of living for a generation or more?  11% unemployment and a deep recession?  That’s far worse, and we’re not there yet.

Thank you for watching.

Lilian Chin – Head of Client Partnerships

Welcome to our monthly property and credit market update.

If you have watched our recent updates, we have talked about the cyclical floor on house prices driven by strong population growth and low unemployment.  You will also have heard us speaking about diverging outcomes starting to appear across markets, as the impact of higher interest rates is felt.

These attributes are continuing, which we’ll explore through this update.

But firstly, let’s take a moment to unpick the current state of the market.

At the end of May, the total stock of residential housing in Australia was valued at $10.7 trillion.  With around $452 billion in gross sales per annum, this sees about one-fifth of our 11 million dwellings turn over each year.  We have a market which represents a large portion of Australia’s overall wealth.  At the most macro of levels, it is not overly geared.  And it is an open market with ample opportunities to buy and sell.

Since the COVID lockdown period, property values have multiplied.  Smaller capital cities of Perth, Adelaide and Brisbane have increased by around 60%; an astounding amount.  Canberra, Hobart, Sydney & Darwin have increased in the 25%-30% range.  Followed by Melbourne, with a relatively weaker result – still having grown by 11% since COVID.

It might be easy to blame lockdowns and a weaker economy in Victoria for its lower growth, but that is unfair.  Victoria has been adding around 10,000 more new completed dwellings annually to its market than NSW over the past few years, and has consistently been growing its stock by far more than the other states.

Unfortunately, it’s not enough.   Existing stock coming onto market, plus new stock being introduced, continues to fall well short of demand.  Last year, we grew our population base by over 650,000 against new stock coming onto the market of 300,000.  In the coming years, dwelling completions will likely stay subdued, but population growth is expected to stay elevated, even if it does tilt back towards what is historically more normal.

So the trend of increasing prices is continuing.  House prices are up, nationally, 8.3% per annum in the 12 months to June.  Capital cities are growing, regional prices are growing.

Lets now turn to my opening remarks.  Diverging outcomes are starting to appear across markets, as the impact of higher interest rates is felt.  But it’s not divergence across different locations; it’s divergence across different price points within markets.

Housing is expensive.  The cost of servicing debt has increased as interest rates have risen.  Therefore, it’s no surprise that expensive houses are not growing at anywhere near the rate of lower priced homes.

Across Melbourne, Brisbane, Adelaide, and Perth, it is the lowest 25% of dwellings that are growing the fastest.  In these markets, the more expensive properties are only growing at around half the rate.  In Sydney, the highest 25% of values are barely growing in price, and in Melbourne, that same cohort is now starting to go backwards.

But what does this tell us?

It tells us that core stock of lower priced property continues to show its cross-cyclical resilience.  It tells us there is a broad and wide market of people wanting to enter the market, or enter it at a lower price-point since the cost of carrying debt has increased.  And it tells us that while property will continue to be cyclical, the underlying market has a  floor to protect against any immediate and significant fall in prices.

Thank you for watching.