Brad Dunn

Daintree Capital (Daintree), a specialist in building global hybrid and fixed income portfolios and part of the Perennial Group, has announced the launch of a new global bank hybrid fund – the first single unit fund of its kind in Australia, distributed by Perennial and eInvest.

The Daintree Hybrid Opportunities Fund invests in a diversified global portfolio of 25-125 hybrid bank securities, targeting a return of 3.5-4.5% per annum above the cash rate, net of fees, with quarterly income distributions.

Commenting on the launch, Brad Dunn, Portfolio Manager for the Fund said: “Against a backdrop of ultra-low interest rates, we are seeing increased demand from investors for sources of reliable, consistent income.

“Hybrids offer some of the best yield in the fixed income market for a near-investment grade credit rating, with lower risk than investing in equities markets.”

Mr Dunn said despite strong demand for hybrid securities from investors, there had been a lack of new issuance in the Australian market in recent years.

“In order to meet this demand, we believe taking a global approach opens up more opportunities to invest in the hybrid securities of large, quality issuers,” he said.

Opportunity to benefit from a stronger banking sector

Mr Dunn said the global banking sector offered a broad opportunity set and an attractive return profile.

“Over the past decade banks have strengthened their balance sheets as a result of tougher capital rules and they have a high average credit rating. We believe banks are also well positioned to benefit from rebounding economies as the world emerges from the COVID-19 pandemic,” he said.

The Daintree Hybrid Opportunities Fund invests in the hybrid securities of global banks including Bank of America, Credit Suisse, Lloyd’s Bank and ING Group.

As hybrids can exhibit periods of volatility, the investment team uses cost-effective hedges to reduce volatility for investors throughout the market cycle.

Mr Dunn said active management and global diversification provided the potential for outperformance above the Australian bank hybrid index.  As at 31 August 2021 the Fund has delivered performance of 12.58% p.a. (after fees) since its inception* on 1 March 2020 and 6.49% (net of fees) over the past 12 months.

Choice and flexibility

The Fund will be available in an innovative single unit structure, which allows investors to apply for units directly, via a platform or on the ASX via a stockbroker or share trading account.

“Our goal was to allow investors to choose their preferred method of access, with the option of having the real-time liquidity that comes with investing on an exchange.

“On-market funds are particularly popular with retail investors as they typically do not have a minimum investment amount, with the exception of the minimums that are imposed by brokers,” Mr Dunn said.

Daintree was established in 2017 by Mark Mitchell and Justin Tyler and actively manages approximately $700 million for investors.

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Mark Mitchell

Investors who rely on fixed income investments to reduce portfolio volatility when risk assets are underperforming may need to revise their investment approach, according to recent analysis from Daintree Capital (Daintree).

Daintree’s analysis shows that in a ‘lower for longer’ interest rate environment short duration, active fixed income strategies are necessary to manage risk in a volatile market.

Director at Daintree Capital, Mark Mitchell, said investors can no longer afford to ‘set and forget’ and ‘safe haven’ assets, such as government bonds, are now a much less attractive proposition.

“The world has changed for fixed income investors and they are facing a tough decision: continue to invest as usual or accept the new normal and learn to navigate a changed landscape,” Mr Mitchell said.

“We have moved into an environment of exceptionally low government bond yields and in many cases negative real interest rates. Unfortunately, that new reality is likely to be with us for some time to come.

“We believe, globally, government bond yields have reached, or are very close to reaching, a lower bound and it is going to be difficult to generate the returns they have in the past.

“For investors in funds that mirror long duration indices, future expected returns will be much lower and there is a lot less protection against an equity correction at a much greater cost.”

Hedging out equity risk

Mr Mitchell said while the simple ‘set and forget’ 60/40 portfolio was facing extinction, there were other options investors could consider.

“One compelling approach is to significantly reduce allocations to long duration government bond fund strategies and reallocate a portion of those funds into a lower duration, investment grade credit fund.

“A basic, actively managed short duration Australian credit fund can easily generate 1-1.5% more than the Ausbond Composite Index, without relying on yields moving lower to generate additional returns.

“A portion of the additional income earned by that switch could then be spent on a much more targeted hedging strategy to help protect equity exposure,” he said.

Passive investing can increase risk

With an increasing array of passive fixed income options now available on the market, investors are also facing the choice between lower cost passive investments and active strategies.

Justin Tyler, Director, Daintree Capital, said while a passive approach may work for other asset classes, fixed income investing required a hands-on approach and investors need to be risk aware.

“Passive investing means investing in the largest debt issuers, which may expose investors to unnecessary risks,” Mr Tyler said.

“There is no single index that does a reasonable job of representing the very large investable universe, both locally and offshore, which means passive investors stand to miss out on potential sources of downside protection and return.”

Mr Tyler said many fixed income indices are also biased towards (and often exclusively focused on) fixed rate bonds, increasing the potential for loss if interest rates rise.

“We believe success in fixed income investing can be best achieved through an absolute return, benchmark agnostic approach which is focused on delivering a risk and return that is tailored to the needs of bond investors, rather than the rules of index providers,” he said.

Mr Tyler said the key take-out for investors is that fixed income markets are unlikely to return to normal for many years to come.

“With interest rates as they are, there is little room for them to fall further and boost bond prices,” he said.

“While it is possible to create a defensive bond portfolio in these challenging markets, we believe this requires using smart strategies which may not have been necessary before.”

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The Fund employs an absolute return investment approach, aiming to outperform the RBA cash rate by a net margin of 1.5% p.a. to 2% p.a. over rolling three-year investment terms, while delivering investors a steady income stream and focusing on capital preservation.

Daintree was established in 2017 and actively manages approximately $380 million for investors.

The investment philosophy centres on the belief that markets are not fully efficient, with asset values, at times, driven by irrational influences. To navigate this, Daintree employs both a top-down and bottom up approach, focusing on absolute return orientation, mandate flexibility, and emphasis on coupon income.

Commenting on the Fund’s performance and track record, Lonsec said: “Over the three-year period to August 2020, the Trust’s return of 2.8% p.a. exceeded the outperformance target of 1.5%-2% and outperformed the Lonsec peer group. Pleasingly the returns were also generated at significantly lower volatility as measured by the standard deviation of returns than the Lonsec peer group.

“Lonsec believes the Trust, having recently achieved a three-year track record, has been true to label, acting in accordance with its investment philosophy which focuses on capital preservation.”

Daintree is co-founded and managed by Mark Mitchell, responsible for credit investments, and Justin Tyler, who specialises in interest rates and currency. Mitchell and Tyler are supported by a team of fixed income experts.

Commenting on the team, Lonsec said, “Mitchell and Tyler are well experienced with their respective specialist areas and complimentary in holistically managing the portfolio.  The investment team’s alignment of interest with investors is strong, driven by the 50% equity ownership by Mitchell and Tyler and co-investments by all the investment team members. Furthermore, the team is backed by Perennial Partners, an established entity in the domestic equities market, mitigating risk and driving business growth and opportunity.”

Daintree Co-Founder and Director, Mark Mitchell, said: “Fixed income markets have changed dramatically in recent times and investors can no longer afford to ‘set and forget’. The RBA has announced a record low interest rate of 0.10%, mirrored by central banks around the world, resulting in limited genuinely defensive income generation options available for fixed income investors. The multi-decade rally in government bond yields has likely come to an end so investors need other options for this portion of their portfolio. The days of owning simple long duration fixed income assets have likely come to an end.”

Justin Tyler, Daintree Co-Founder and Director, added: “Quality investment analysis, risk management, and diversification are crucial in fixed income, which is why we believe in an active approach aligned to investors goals and risk appetite. We also view ESG integration as integral to quality investment analysis and managing risk, which is why the team employs thorough research, screening out ten harmful, negative sectors.

“The Daintree team is excited to receive an upgrade to Recommended for our Core Fund, a testament to our true-to-label, specialist approach,” Mr Tyler said.

Daintree’s Core Income Fund also received a “Recommended” rating through Zenith Investment Partners, while its High Income Trust received an “Approved” rating by Zenith. Daintree was also named a Finalist in Zenith’s Rising Star Awards last month.

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The Fund employs an absolute return investment approach, aiming to outperform the RBA cash rate by a net margin of 1.5% p.a. to 2% p.a. over rolling three-year investment terms, while delivering investors a steady income stream and focusing on capital preservation.

Daintree was established in 2017 and actively manages approximately $300 million for investors.

The investment philosophy is centred on the belief that markets are not fully efficient, with asset values, at times, driven by irrational influences. To navigate this, Daintree employs both a top-down and bottom up approach, focusing on absolute return orientation, mandate flexibility, and emphasis on coupon income.

In its report Zenith commented, “Daintree has significantly improved its security selection process, combining a range of propriety quantitative models and technology that aids in the systematic aggregation of market-based data and third-party information.

“Daintree’s fair value approach provides a solid foundation upon which an issuer’s credit policy and spread margins can be assessed. Ultimately, Zenith considers this an efficient mechanism for narrowing the Fund’s investible universe and identifying mispriced opportunities,” Zenith said.

Daintree is co-founded and managed by Mark Mitchell, responsible for credit investments, and Justin Tyler, who specialises in interest rates and currency. Mitchell and Tyler are supported by a team of fixed income experts.

Commenting on the team, Zenith said, “Mitchell and Tyler have complimentary skills and contribute unique perspectives to the investment process. Furthermore, we believe the combination share a similar set of investment beliefs, which is evident in their collaborative approach to portfolio management.”

Daintree Co-Founder and Director, Mark Mitchell, said: “Fixed income markets have changed dramatically in recent times. Interest rates are at historic lows resulting in limited genuinely defensive income generation options available for fixed income investors. The multi-decade rally in government bond yields has likely come to an end so investors need other options for this portion of their portfolio. The days of just “set and forget” by owning simple long duration fixed income assets have likely come to an end.”

Justin Tyler, Daintree Co-Founder and Director, added: “Quality investment analysis, risk management, and diversification are crucial in fixed income, which is why we believe in an active approach aligned to investors goals and risk appetite. The Daintree team are excited to receive an upgrade to ‘Recommended’ for our Core Fund, a testament to the true-to-label, specialist approach of our team.”

Daintree’s High Income Trust also received an “Approved” rating in May this year through Zenith Investment Partners.

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Mark Mitchell

Daintree Capital’s Core Income Trust has been added to the Mason Stevens and Netwealth platforms, giving more advisers and their clients access to the investment manager’s fixed income strategy which delivers a steady income stream and high level of capital security.

The news follows the Trust’s recent addition to the HUB24 platform, as advisers increasingly demand more innovative portfolio solutions for their income-focused clients.

Daintree Capital Director and Portfolio Manager of Credit Mark Mitchell said having the Core Income Trust included on the platforms’ investment menus would provide adviser clients with more opportunities to access Daintree’s fixed income strategy.

Daintree Capital’s core investment philosophy is based on a robust credit culture, a pragmatic investment process and a focus on the core reason why fixed interest is a key part of client investment portfolios: the preservation of capital and protection against downside risk.

“There has been strong demand for income producing strategies in a low interest rate environment, particularly among retirees and other conservative investors who rely on term deposits for their fixed income allocations,” Mitchell said.

“We are pleased that a growing number of advisers will now be able to access our Trust and provide clients with a higher income than is generally available through term deposit and banking products, with similar credit risk and higher liquidity”.

The Daintree Capital Core Income Trust seeks to produce a return (net of fees) that exceeds the RBA Cash Rate by 1.50%-2.00% p.a. over a rolling three-year period.

The fund also recently achieved an “Investment Grade” rating from Lonsec.

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Justin Tyler

Despite the nation having one of the highest savings rates in the world thanks to its compulsory superannuation system, a closer look at Australian retirement funds revealed they contained on average an almost 50% allocation to equities^[1], significantly higher than other developed nations such as the UK and Canada.

Daintree Capital Director Justin Tyler said the heavy weighting to growth assets was driven by Australians’ lack of familiarity with the bond market and their eagerness to take advantage of the nation’s generous franking credit regime, but raised additional volatility and sequencing risks for retirees in particular.

“Equities may be better understood by most investors as an asset class, but fixed income plays an equally important role in a portfolio – one of insurance. The fixed interest component of a portfolio smooths out negative returns to limit falls in a portfolio’s value when equity markets go south,” Tyler said.

Tyler pointed to research compiled by Daintree Capital that indicated a portfolio compiled of 50% ASX100 shares and 50% an index fund tracking the AusBond Credit FRN Index would have generated around half the volatility of a pure equities portfolio from 2005 to the present day.

“Australian retirement funds on average have just a 14% allocation to bonds, compared to a 22% average in the US and 36% in the UK^[2], so it would seem that those approaching retirement are taking excessive risks with their savings in exposing themselves to the twists and turns of the equity market,” he said.

“This is particularly the case given that Australian retirement savings are made up almost entirely of ‘defined contribution’ style schemes – meaning income in retirement is dependent upon the investment returns generated by the fund, rather than linked to an individual’s working salary as it is in many other markets.”

——–

[1] Source: Willis Towers Watson
[2] Source: Willis Towers Watson

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Mark Mitchell

The income challenge is one of the biggest issues facing Australian retirees. With our official cash rate looking like remaining at 1.5% for quite some time, the numbers become staggering; A retiree with a $1 million portfolio investing at the cash rate will produce only $15,000 p.a.

Whilst the temptation is to go up the risk curve to obtain higher yields, investors still need a high quality base portfolio.

New investment boutique, Daintree Capital lead by two industry heavyweights, Mark Mitchell, ex Portfolio Manager and Head of Credit at Kapstream and Justin Tyler, former Senior Investment Manager at Aberdeen together with a hand-picked investment team have today launched the Daintree Core Income Trust.

“This diversified, absolute return focussed portfolio, takes the best ideas from our collective experience. Its aim is to provide a monthly income stream with a return of around 2% higher than the cash rate and with greater liquidity than term deposits”, commented Mark Mitchell.

“An income exposure should be liquid, giving investors the opportunity to quickly gain access to their funds should personal circumstances change. Daintree’s Core Income Trust provides daily liquidity” added Justin Tyler.

To ensure they can focus on investing, Daintree have contracted with Perennial which provides Responsible Entity, back-office, marketing and distribution services to Daintree Capital.

Daintree Capital’s core investment philosophy is based on a robust credit culture, a pragmatic investment process and a focus on the absolute return at the portfolio including the preservation of capital.

“We believe that our clients should achieve good results from the Core Income Trust in most market environments. We build our portfolios with this as the cornerstone of our investment philosophy,” said Mark Mitchell.

“At the heart of our investment process is a strong risk management framework. We believe that this approach ensures a consistency of performance over time and strong risk-adjusted returns” he said.

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Mitchell is the former Portfolio Manager and Head of Credit at Kapstream. Justin Tyler, a former Senior Investment Manager with Aberdeen, responsible for interest rate decisions, has also joined Mitchell in this new boutique.

Together, they are forming a five-person, fixed interest team under the Daintree Capital brand.

Daintree Capital’s core investment philosophy is based on a robust credit culture, a pragmatic investment process and a focus on the core reason why fixed interest is a key part of client investment portfolios; the preservation of capital and, importantly, protection against downside risk.

“We believe that our clients should achieve good results from their fixed interest portfolio in most market environments. We build our portfolios with this as the cornerstone of our investment philosophy,” said Daintree Capital Managing Director and Portfolio Manager, Mark Mitchell.

“At the heart of our investment process is a strong risk management framework. We believe that this approach ensures a consistency of performance over time and strong risk-adjusted returns” Mitchell said.

Anthony Patterson, Chairman of Perennial Investment Management Limited, said lower interest rates are likely to persist for longer, and investors need a flexible, total-return focus within strict risk limits to meet their income needs.

“In Daintree, we will be delivering income products that will reliably deliver superior returns than those available through many traditional banking products.

“Perennial will be running the back-office and distribution functions of Daintree allowing it to stay wholly focused on gaining the best risk adjusted returns for investors,” he said.

“We look forward to supporting Mark, Justin and the Daintree Capital team in building their business and running a successful portfolio for our investors “They are successful credit and income specialists and we believe they have a very bright future.”

Mr Mitchell said: “We look forward to building a successful partnership with the team at Perennial.”

Daintree Capital’s inaugural portfolio is an absolute return fixed income portfolio and will be available from 30 April 2017.
Chase Corporate Advisory’s Nelson Lam was the adviser to Daintree Capital.

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