Monthly Investor Update from La Trobe Financial – May ’24

Chris Paton – Chief Investment Officer

Welcome to our monthly business and portfolio update. There’s plenty of good news and plenty of exciting things happening here at Latrobe Financial. I’ll start with what you already know. And we kicked off 2024 celebrating an entire generation. That’s right, 15 consecutive years of our 12 month term account being recognised as the best of the best by Money Magazine. These awards are not the reason why we exist as a business. However, we always appreciate the external recognition, as it must mean we’re doing something right for you. Our investors, the hallmarks of our business are consistency, quality, and reliability. And private credit done right should provide investors with a low volatility income experience at All points along the economic cycle. Now that’s a performance profile. We are incredibly proud to have delivered across almost 35 years of our retail investors since inception of each of our portfolio accounts.

When it comes to Australian real estate private credit, our foundational asset class, we are the market leader. And on the back of our performance, we’re pleased to announce that our 12 month term account has also been named as a finalist for the Australian Fixed Income Fund of the Year of the EC Annual Fund Manager of the Year Awards in June, currently returning 6.75% per annum for investors. The performance profile of the 12 month term account since inception shows the power of its performance. This is headlined by no loss of investor capital ever liquidity being paid to investors on time and in full and all income paid at the advertised rate each month since inception. It’s an incredibly strong track record across a range of economic market and interest rate cycles, and it’s something as a business we remain laser focused on repeating for our investors across the decades to come.

Now turning to some incredibly exciting news in what is a real milestone moment for the business, and that is the launch of our Latrobe Global Asset Management strategy. A strategy designed to bring the best of the investment world to Australian investors. Through Latrobe Global Asset Management, we will lean into our international networks and private market expertise to develop a suite of high quality unique investment strategies, asset classes, which have historically been very difficult for Australian retail investors to access. And the launch of our global asset management strategy is headlined by our newest product offering Latrobe US Private credit, a product which we have developed in partnership with Morgan Stanley. And in some incredibly exciting news, we are launching this product to retail investors this month, a product delivering monthly income for investors with a target return of 8.5% per annum net of fees. Now, we’ve designed this product very deliberately, aiming to give Australian investors the opportunity to participate in a generational investment thematic, and that’s supporting the rebuild of the US middle market, which is currently by itself the third largest economy in the world.

And we’re doing that through a defensive portfolio of directly originated senior secured loans to US middle market companies. And these are companies owned by some of the largest private equity firms in the world, the who’s who of Wall Street. We are incredibly excited about this product and are delighted to be giving retail investors the opportunity to access this asset class in this way for the very, very first time. Now, we’ll shortly be bringing this product to our retail investors, which captures that incredible tailwind via new retail unit offering. The product which is moving throughout launch in June and into July will have monthly subscriptions and monthly income distributions. It will provide quarterly liquidity access. It offers a yield target of about 8.5% per annum net of fees and before FX adjustments and will be hedged against foreign exchange risk. Now, it’s not just uniqueness that we’re pursuing in this new product, it’s also quality, quality in the asset class, quality of manager and quality of strategy. We’re incredibly excited about this news and we’re delighted to be giving retail investors the opportunity to access this asset class for the very first time. And of course, we welcome any and all queries you might have by contacting our dedicated electrode Global Asset Management desk on 1 808 1 8 8 1 8. Thank you for watching.

Michael Watson – Head of Distribution

In our last update, we mentioned how Australia was semi navigating the narrow path that Nirvana scenario of falling inflation. No more rate hikes, full employment, continued economic growth, and with no fallout in house prices. And for the most part, that continues with the resilience of our economy against a range of pressures and a cooling global economy on display. More recently, we saw the federal government deliver its may budget. That fiscal lever used to either grow or cool an economy. The government is attempting to assist with cost of living relief while cooling inflation. It’s attempting to support economic growth with increased net migration while simultaneously addressing house price affordability. But these are paradoxical issues serving a lot of different masters, and in the end, it arguably doesn’t get anywhere at all. Of course, governments like to get reelected and with a federal election on the horizon, the government will argue this budget does enough.

It has its headline with a surplus of $9.3 billion. Now that sounds contractionary, however, it’s thanks to revenue windfalls rather than savings. Also, it has an outcome. Inflation is set to fall below 3% in 20 24, 25 and beyond. And it has deliverables around the country. Lots of different groups get something. There is the usual consensus about the long-term challenges of defence investment, NDIS, sustainability health, and our raging population and energy transition. And it does give a nod to inflation and housing affordability, but without doing anything really materially to move the needle. Noting that we’re looking into a wall of deficits, it’s easy to argue it does nowhere near enough to address inflation. But there’s more. We have a low growth forecast, but across the economy we have minimal surplus capacity. So if we do stimulate growth, we’ll almost immediately see an uplift in inflation. And for all of these reasons and more, this needed to be a productivity budget.

If we are to address this in any meaningful way, we will need continued net elevated migration, allay immediate capacity constraints, continued skill development to build a higher skilled economy, improve technology investment to improve manufacturing processes, workplace efficiencies and the like. Tax reform to simplify tax, which really had its last big reform with the GSD. It also needs infrastructure spending to meet the challenges of increased population and labour market reform, ensuring that workplace laws match modern employee requirements. To the extent that we can see it, there are only one of these elements being addressed, being skill development. We can address these matters now when their background issues or wait until they’re urgent, but they’re not going away with headwinds of structural inefficiency and ageing population, reducing the pool of taxpayers, the growth of the services sector, which is more labour intensive and less productive. And the trend towards onshoring is a shift away from the competitive advantage.

Policies we’ve pursued over the last generation and are not a driver of productivity. So the budget that tries to give something to everyone does deliver everyone one thing, a higher neutral interest rate setting and a more inflationary prone and environment going forward. Investors will rightfully ask, what does this mean for Australian real estate private credit investment strategies? In a nutshell, nothing. And that’s because we carefully construct our investment portfolios to perform through all market, all economic cycles. Our 12 month term account, which is now towards 22nd year, has therefore lived through 22 separate budgets from both labour and liberal governments. It has remained a beacon of consistency, delivering impeccable performance with no investor ever lost a cent of capital, flawless liquidity, and our declared distribution rate matching our advertised rate throughout, and that’s something that our almost 100,000 investors can budget for. Thank you for watching.

Lilian Chin – Head of Client Partnerships

Welcome to our monthly property update. 12 months ago, the worm had just turned on property prices, which had recently hit a floor down 9.1% from peak then, and even now, some within the market are forecasting falls of up to 30% from peak. Not only has this not happened, but prices across 2023 recovered their lost ground and continue to appreciate this calendar year. Residential house prices are expected to appreciate by about 5%. What’s driving that? It’s the structural issues which are so embedded within the residential property market that will take a long time to tilt population growth. While this will mean revert to over a fairly short period, given government intervention last financial year, saw our population grow by around 650,000. That’s about the entire population of Tasmania. More Australians than ever before needing a place to live. Residential vacancies are at near record lows, which is driving rental inflation.

It is very tough for renters trying to find affordable housing, indeed, any housing. Add to that, the deep rooted structural under supply of new houses being built. These micro trends, Aren going to change overnight and will keep a floor under the Australian residential property market. What has driven the performance of the Australian property market over the last circa 18 months has been simple economics. The tension between demand versus supply, let’s unpick the supply of Australian property on the market. The headline residential listing volumes are well below their long run average. One of the key contributors to this is the structural undersupply of new houses being built with building approvals nationally linear decal lows. If we look over our history of dwelling approvals and at the start of last decade, rolling approvals and completion, numbers jumped, and yes, these numbers can be volatile. Following the end of the last cyclical peak, completions then fell hard.

The supply constraints on materials were particularly pronounced with the onset of covid lockdowns and have never really recovered. The number has tracked low at a moment when it needs to track higher. The end goal of all this activity is completions. We’re just not getting the properties built. With this in mind, the federal government announced a 6.2 billion in specific housing initiatives. In its recent may budget some of the key spending initiatives address supply, providing states and territories with additional funding for connecting essential services such as water, power, sewage, and roads, thereby hoping to stimulate top-down supply of stock providing 20,000 new fee-free TAFE places in courses relevant to the construction sector. These are in addition to the housing Australian Future Fund, which was announced last September with the goal of building 30,000 new and affordable social homes in the fund’s first five years. There is no silver bullet to fix the housing shortfalls, particularly with the forecasted supply shortfall of a hundred thousand dwellings to the end of 2028.

That’s years more of the same, and it waits to be seen if these plans will even move the needle at all. All of this means one thing. Australia is looking into structurally higher property prices. Now and into the future there will be some cyclicality, but without the cyclical busts we have seen at different points in time for investors, Australian property is likely to remain an attractive asset class, whether through a direct holding, such as an investment property or through a portfolio of property backed security, such as our almost 20 billion Australian real estate private credit investment strategies. We look forward to bringing you further updates on the Australian property market. Until then, thank you for watching.