Launched on the Australian Stock Exchange today, DIFF is an actively-managed diversified portfolio of liquid, mainly investment-grade securities, giving investors the opportunity to access assets such as senior debt and subordinated bank debt, which are generally more difficult to access directly.

DIFF is a unit class of the Perpetual Diversified Income Fund (DIF), a managed fund with $2.5 billion in funds under management^[1]. Over a 20-year history, DIF has delivered a net return above core inflation in 16 financial years to June 30, 2025. Further, the Fund’s gross total return has exceeded the Bloomberg AusBond Bank Bill index over rolling 3-year periods throughout every month since 2011. The Fund is managed by Perpetual’s Head of Credit and Fixed Income Vivek Prabhu, who has more than 20 years of investing experience. Perpetual’s credit and fixed income team comprises eight investment professionals managing more than $8 billion in funds under management.

Chief Executive, Perpetual Asset Management Australia, Amanda Gillespie said: “It’s important we continue to evolve our product suite, and this is another great example of how we can find opportunities that meet the changing needs of investors.”

Perpetual Head of Credit and Fixed Income, Vivek Prabhu, added: “Fixed income assets such as cash, bonds and credit offer defensive, lower-risk properties than equities and can help investors generate income, diversify their portfolios, preserve capital and hedge against economic conditions, which in today’s uncertain macroeconomic environment is a crucial element of an investment portfolio.

“With elevated equity valuations, uncertain growth outlooks and rising volatility reflecting challenging risk outlook for equities, together with interest rates trending downwards, credit and fixed income investments can offer a safer alternative with reduced volatility and better capital preservation than equities, while at the same time generating strong returns through different market cycles.”

The Fund aims to provide regular income and consistent returns above the Bloomberg AusBond Bank Bill Index (before fees and taxes) over rolling three-year periods by investing in a diverse range of income generating assets and will make distribution payments quarterly.

———-

[1] As at 30 June 2025

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Bernard Reilly

Perpetual has announced it has entered into a Letter of Intent with Partners Group to explore innovative product development and investment strategy opportunities combining both public and private assets.

The LOI agreement will see Perpetual’s Asset Management business and the Australian arm of Partners Group, one of the largest firms in the global private markets industry with USD$152 billion^[1] in assets under management, collaborate to identify, evaluate, and pursue strategic opportunities, including the potential launch of investment vehicles or products such as Listed Investment Trusts, co-investment, and/or fund structuring.

Perpetual CEO and Managing Director, Bernard Reilly, said: “Perpetual has been at the forefront of Australian investing for decades and this new relationship with Partners Group aligns with our strategic intent of bringing innovative solutions to our clients and continuing to evolve our product suite to provide contemporary, high quality and in-demand investment solutions for our client base.

“Combining Perpetual’s expertise, knowledge and connections as an Australian equities investor, together with Partners Group’s significant local and global reach in private markets including private equity, infrastructure, real estate, royalties and credit, provides the opportunity to explore products that give investors access to asset classes across both public and private markets within a single product, which is a strategic relationship among the first of its kind in the Australian investment industry.”

The agreement also allows for the sharing of market insights, research and investment perspectives, as well as expanded networking collaboration and cross-border opportunities.

Partners Group Head of Australia Martin Scott said: “Since 1996, our business has invested more than USD$234 billion in a range of private markets opportunities across the globe with the sole intent of building long term value for our clients and stakeholders.

“Partnering with Perpetual, one of the flagship brands in Australian equities investing, to explore new investment strategies that combine public-private assets for Australian investors is an exciting step for our business in the region and one that reflects the increasing role played by private markets in the real economy.”

Perpetual Head of Equities, Vince Pezzullo, said: “This agreement with Partners Group provides the foundations for public-private strategies that will allow us to invest in a company’s full lifecycle through various markets and also for investors to benefit from exposure to different parts of the capital structure in the future.

“Potential solutions could also allow for dynamic re-allocation between the investment sleeves over time and make use of liquidity and market events to add additional value to client portfolios.”

With the signing of the LOI, the parties will now work together on market testing to evaluate the demand for the solutions and any proposed structures.

———-

Notes:
[1] As at 31 December 2024

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The announcement reflects the planned retirement of Michael Korber, who will step down from this leadership position after more than 40 years in the industry and more than 20 years at Perpetual.

Vivek, who is currently Perpetual’s Head of Fixed Income, will commence in the leadership role from 1 July 2025. He has more than 30 years industry experience and has been with Perpetual for over 20 years, working closely with Michael and the broader team. He has a deep understanding of the team’s investment philosophy, process and approach, and has a proven track record as Portfolio Manager for the team’s income strategies, which collectively have more than $3.8 billion in funds under management. Vivek will continue in his role as Portfolio Manager for the Perpetual Diversified Income Fund, Perpetual Credit Income Fund and Perpetual ESG Credit Income Fund.

While Vivek will assume the Head of Credit & Fixed Income leadership role from 1 July, Michael will continue in his current Portfolio Manager role for a period of up to 12 months. Greg Stock, Perpetual’s current Head of Credit Research and Senior Portfolio Manager who has also been with the business for over 20 years, has been appointed Deputy Portfolio Manager for the Perpetual Credit Income Trust and Perpetual Pure Credit Alpha Fund and will work closely with Michael during the transition period.

Chief Executive, Perpetual Asset Management Australia, Amanda Gillespie said: “Michael’s contribution, not only as a leader in our business but as one Australia’s most respected credit and fixed income investors, has been enormous. We are incredibly thankful for the commitment and dedication he has shown to providing quality client outcomes and building such a strong and talented team throughout his tenure at Perpetual.

“Importantly, Perpetual has a long and proud history of developing and promoting talent from within, and our focus on succession planning ensures we have the strength and depth for this transition.

“Vivek is a highly respected Portfolio Manager and his natural leadership skills, commitment to fostering strong and collaborative teams, coupled with his dedication to providing quality investment outcomes, ensures we will continue to deliver for our clients.”

Perpetual’s Credit & Fixed Income team comprises of eight investment professionals managing more than $8 billion in funds under management.

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Michael Innes and Antony Pupovac will join the Private Clients team in Queensland as Partners in May, while Sandra Kent and Laura Bosman will join the Private Clients team in Western Australia as Senior Financial Advisers later this month.

Patrick Malone has recently joined as a Partner leading Priority Life, a specialist risk advisory business that is part of Perpetual Wealth Management.

Perpetual Wealth Management Chief Executive Mark Smith said: “As one of Australia’s premier providers of multi-disciplinary wealth management services for high net worth clients, we’re thrilled to have such great talent joining our business and welcome this group of advice professionals to Perpetual.

“The depth and breadth of their experience and skillset, coupled with our strong and dedicated existing teams will play an important role in the continued growth and success of our business.”

Managing Partner Private Clients, Andrew Baker said: “Our business is focused on the comprehensive needs of clients including individuals, families, business owners, professionals and community organisations across a range of areas including strategic and investment advice, trustee services, accounting, business advisory and philanthropic solutions.”

“Michael, Antony, Sandra, Laura, and Patrick bring a wealth of experience to our teams. Their diverse backgrounds and skillsets, together with their clear focus on quality client outcomes will seamlessly complement our existing teams serving clients across the country.”

Sandra and Laura will further strengthen Perpetual’s ‘Advice for Women, by Women’ program. Launched in October 2024, the program focuses on the comprehensive and unique financial needs and goals of women by building a supportive and inclusive advice program. Close to 60% of Wealth Management’s advice team are women, and women represent approximately 40% of the business’ client groups.

As at 31 March 2025, Perpetual Wealth Management had more than $21 billion in Funds Under Advice. This included net inflows of $0.9 billion during the March quarter.

“Our business has grown year-on-year for the past decade and the industry is well-placed to grow, which will make high-quality advice more important than ever. We are always looking for exceptional people to join the firm,” said Mr Smith.

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Alan Logan

Perpetual Wealth Management’s Direct Australian Equities Responsible Investment portfolio has recently been added to the HUB24 Managed Portfolio platform, giving financial advisers and their clients greater access to the portfolio purpose-built for managed accounts.

The Responsible Investment portfolio, managed by portfolio manager Daniel Nelson, has $155 million in funds under management[1] and was certified by the Responsible Investment Association Australasia (RIAA) in June 2024.

Head of Partnerships, Investments Research Alan Logan said: “We know through our high net worth and not-for-profit business that responsible and ethical investment solutions are at the forefront of many adviser-client conversations. The addition of the Responsible Investment portfolio on the HUB24 platform gives more advisers and clients potential access to these types of investments.”

As at 30 June 2024, the Perpetual Wealth Management Direct Equities team managed approximately $4.43 billion in funds under advice. The Direct Equities team comprises six investment professionals with an average tenure of 15 years’ experience.

Portfolio Manager Daniel Nelson said: “We have a tried and tested philosophy that focuses on quality and value, and we implement this approach with a constant lens on first protecting and then growing our clients’ wealth.

“With an investment universe of approximately 300 stocks, our robust screening and stock analysis create a high conviction portfolio of 20 – 30 stocks, while paying close attention to portfolio parameters, risk measures and liquidity.”

Teams within Perpetual Wealth Management are now also using EthosESG, a platform that evaluates more than 1.5 million impact metrics from both public and private companies, allowing comparability and analysis across portfolios, strategies and asset classes through a prism of 45 ESG causes such as climate, equality, education, mental health, justice and more. Earlier this year Perpetual entered into a partnership with ACA Group, a leading global financial advisory and technology firm headquartered in New York, to utilise the platform.

“The platform is a real game-changer for our business and lifts our client offering to a new level, providing another reference point for our teams to more closely scrutinise stocks within the investment universe,” said Mr Logan

———-

Notes:
[1] As at 31 July 2024

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Amy Xie Patrick

In a world without bank hybrids, investors should re-consider their income plan, says Pendal’s head of income strategies Amy Xie Patrick.

• Hybrid securities can suffer meaningful shortfalls
• It’s “unwise” to rely solely on hybrid income through all market environments
• Find out more about the Pendal Monthly Income Plus Fund

FOR years, Australian investors have flocked to bank hybrid securities as a cornerstone of income-generating portfolios.

Hybrids — debt instruments issued by banks that can convert to equity in times of trouble — have been popular with everyday investors due to their accessibility.

But investors will soon need to find alternatives, after the Australian Prudential Regulation Authority announced plans to phase them out^[1] from 2027 (see more in our recent quarterly update)^[2].

ARPA wants to “simplify and improve the effectiveness of bank capital in a crisis” and replace hybrids with “cheaper and more reliable forms of capital that would absorb losses more effectively in times of stress”.

Below we examine whether hybrids truly delivered on their promise to investors — and we discuss an alternative that could help fill the gap.

The myth of defensiveness

Hybrid securities, as their name suggests, sit somewhere between the asset classes of fixed income and equities.

They serve as one of the first lines of defence in a bank’s capital structures in times of turmoil, and outside of those times pay regular coupons, like bonds.

Though the coupon feature means they are often classed as “defensive”, their purpose as a capital instrument makes them inherently ill-suited to serving a defensive role in portfolios.

Through multiple market cycles, bank hybrid securities globally have exhibited a positive correlation with equity markets.

When things are fine, these securities pay their coupons and may even deliver some mark-to-market capital gains should their credit spreads tighten.

In times of severe market stress, hybrids can behave more like equities than bonds. During the collapse of Credit Suisse in April 2023, the bank’s hybrid securities were written down to zero – a worse outcome than Credit Suisse shares.

As the figure 1 graph below highlights, using the example of CBA, the long-term performance of hybrids has lagged even more senior bonds.

These securities tend to behave like high-quality bonds when all is fine, and like equities when all is not.

The capped potential for capital growth in hybrid securities means they are not capable of generating levels of reward commensurate with the likely volatility investors will experience along the way.

Figure 1: All the risk without the reward
Long-term returns of CBA equity, CBA hybrids (“Perls”) and major bank senior bonds

Exchange-traded ≠ liquidity

Another selling point of hybrids has been their exchange-traded status.

Many investors assume this means that hybrids can be easily bought and sold.

In reality, market liquidity for hybrids has always been contingent upon the ability of brokers to match buyers and sellers in the market. In such a retail-dominated asset class, costly buy-sell spreads can also be a feature.

The fallacy that “listed equals liquid” has been exposed in times of crisis, when the exit doors for hybrids can become very narrow.

Repeatable income? Not so fast

Since hybrids come with a higher risk of capital loss than senior bonds, these securities compensate investors with a higher credit spread, translating ultimately into higher coupons than more senior bonds.

Unlike senior bonds, hybrid coupons can be reduced, delayed or completely switched off. This feature of hybrid securities is a benefit to the issuers as it offers a lifeline in times of need.

For investors, it’s a reminder that the higher income potential in hybrids is far from guaranteed.

Figure 2: More risk should command more reward
Risk and reliability of income through the bank capital structure

While Australian bank hybrids have not experienced any volatility in coupon payments in recent history, both the events of the Credit Suisse crisis in 2023 and that of many other European banks during the European Sovereign Crisis in 2012 have shown that it has been unwise to rely solely on income from hybrids through all market environments – particularly considering that the majority of income-seeking investors tend to be conservative in their risk tolerance.

A smarter way to use the capital structure

We’ve uncovered that hybrid securities suffer meaningful shortfalls.

Their contractual terms allow issuers to skip coupon payments. Investors’ ability to access their capital is likely to be variable and limited when they most need it. Their potential for capital growth does not compensate for the meaningful volatility that investors can experience along the way.

But what if there has always been a smarter way to use the capital structure?

Figure 3 expands on the bank capital structure to a broader set of asset types. More importantly, the diagram looks at what jobs these assets are good at doing that could be important to any investor.

Figure 3: Asset utility through the eyes of the investor

The key revelations from Figure 3 are as follows:

• Different assets are good at doing different things
• No single asset class can satisfy all investment objectives
• Hybrids satisfy none of the basic requirements

The idea that different asset types need to be employed may seem daunting, but Figure 4 illustrates that the idea is simple.

In the graph below, we compare the long-term return outcomes of holding CBA hybrids, versus holding most of your capital in cash and putting only 10% into CBA shares.

Nothing beats equities for generating capital growth. And a cash-heavy portfolio has significantly diluted adverse volatility events along the way.

Figure 4: A little bit of equities goes a long way
Comparing long-term returns of CBA hybrids versus a portfolio of 90% cash and 10% CBA shares

Pendal Monthly Income Plus Fund – a solution for defensive income

As Australian bank hybrids face extinction, our Pendal Monthly Income Plus Fund provides a compelling alternative for investors.

We start from investment objectives and map them to the assets that have a proven track record of delivering against those objectives.

That means we don’t have to accept market narratives about hybrids (or any other asset types) that have not been entirely accurate.

We don’t have to run for narrowing exits when others stampede. And we don’t have to face a mismatch between the liquidity we offer our investors versus the liquidity we are able to access in the market.

The components of the strategy are simple.

We use high-quality investment grade bonds to generate income. We actively allocate to equities to help our investors’ capital grow, with a track record of avoiding market chaos.

And we use government bonds or interest rate exposure more broadly to manage the portfolio through the rates cycle.

Since the portfolio is 100% Australian, investors also get a healthy franking credit benefit through the portfolio’s equities exposure. And since the portfolio is 100% liquid, investors are also able to access daily liquidity.

The fund’s strategy recognises the broad aims of all income-seeking investors: a regular, stable and repeatable income stream, and capital growth to help offset the effects of inflation over the medium term.

These aims help ensure that the Fund’s investment objectives align with its investors. These objectives and how we’ve measured against them are illustrated in Figure 5.

Figure 5: Monthly Income Plus Fund: our three investment objectives

The fund pays distributions monthly and, since inception 15 years ago, has never missed a payment.

While equity and bond markets the world over suffered double-digit losses in 2022, this strategy’s drawdown was limited to 5%.

And alongside regular income with limited drawdowns, the portfolio’s capital has grown every year bar one since inception.

The longer-term track record of the Pendal Monthly Income Plus Fundcan be seen in Figure 6.

Here, we’ve illustrated performance against a hurdle of RBA Cash + 2% (consistent with the risk tolerance of conservative income investors), and against an index of Australian bank preference shares as a generous proxy for hybrid instruments (since shares have greater potential for capital growth than bonds).

The Monthly Income Plus portfolio could have been a replacement for hybrids all along.

Figure 6: Long-term track record

In early September, prior to the APRA announcement, the average gap between bank hybrid and subordinated bond credit spreads tracked around 60 basis points.

This gap was at the tighter end of the historical range of this relationship. Today, this gap stands at less than 10 basis points.

Scarcity has been the main factor behind this compression.

Since banks will no longer be issuing these higher-yielding securities, but investors still like higher yields, the demand has far outstripped supply in recent weeks.

Scarcity, however, does not change the nature of hybrid instruments.

They remain on the frontlines to take losses and cease paying coupons in times of stress.

They will still mature at par (100 cents on the dollar), so cannot offer capital growth to hold-to-maturity investors.

And they will likely be hard to sell (at least at the price investors would like) in times of market turmoil.

It is time to look for better opportunities elsewhere.

——–

Notes:
[1] https://www.apra.gov.au/news-and-publications/apra-proposes-update-to-bank-capital-framework-to-strengthen-crisis
[2] https://www.pendalgroup.com/wp-content/uploads/2024/09/Pendal-IFI-Australian-Quarterly-Update-2024-Q3_FINAL2.pdf

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The US and China rate cuts mark a profound shift in global investment patterns with deep implications for investors.

Fed rate cuts are not just a story for US investors – one of the biggest beneficiaries is China. Perpetual’s James Holt explains:

• Rate cuts see swing to emerging markets and resources
• Undervalued China shares soar
• Find out about Barrow Hanley’s global equities investment solutions

Rate cuts in the US are driving a rotation towards emerging markets as investors search for stronger returns, says Perpetual’s James Holt.

The US Federal Reserve cut interest rates by a larger-than-expected half a percentage point in September after a year of holding rates at their highest level in more than two decades.

This easing of monetary policy signals the end of a strong US dollar cycle that has dominated markets in recent years and should set the stage for renewed performance in undervalued emerging markets such as China.

“The big story in markets last month is the US Fed cutting rates – but what has really surprised investors is that the US cut also enabled China to follow suit with its own rate cuts,” says James Holt, head investment specialist at asset manager Perpetual.

Holt represents US-based Barrow Hanley, a global leader in value investing which is distributed in Australia via Perpetual Group.

The US and China rate cuts mark a profound shift in global investment patterns with deep implications for investors, Holt says

“We live in a US dollar world and the strong US dollar of the past few years has pulled money from other parts of the world, pushing US stocks higher.

“But now we’re starting to see a reversal.

“The first big rate cut might signal more cuts ahead and suddenly investors are thinking the fastest-growing, best-return place in the world might no longer be the US.

“It could be time to start taking money out of the US to find better returns elsewhere in the world.

“When markets do that, they’ll also reflect on the fact that emerging markets are really, really cheap.”

China shares undervalued

China’s economy has struggled to recover post-COVID, leaving the Chinese stock market trading at generational lows and single digit P/E ratios.

“This isn’t just the cheapest in 10 or 15 years – it’s the cheapest in our careers, and we’ve been in this market for 25 years,” says Holt.

Beijing’s September stimulus package^[1] cut rates, lowered reserve ratio requirements, reduced down-payment minimums, and injected liquidity into the market.

More importantly, the government reiterated its commitment to taking the necessary policy measures to achieve its 5 per cent growth goal.

This commitment sent Chinese shares sharply higher, resulting in a 23 per cent jump in September and driving the MSCI Emerging Markets Index to a 6.7 per cent gain for the month.

Beneficiaries of the change have been leading Chinese equities like retailer JD.com, car maker Great Wall Motor Co, and insurer Ping An Insurance.

Holt argues there is more to go in Chinese policy measures to help sustain the rally. Investors should stay focussed on undervalued stocks that are great businesses and are unaffected by headwinds from government policy.

“In the Barrow Hanley Global Global share Fund, we’ve gone out of our way to make sure we pick Chinese stocks that are fundamentally sound but are also are in industries that Beijing wants to succeed – or at least, not in industries that the government is seeking to curtail.

“You want to curate your stocks very carefully and not hold businesses too exposed to property or other sectors that are coming under the microscope of regulatory authorities.”

Potential for attractive returns

More broadly, the market is starting to broaden away from the narrow, tech-focus that has dominated recently, argues Holt.

Last month, seven of the 11 sectors outperformed the broader index as utilities and real estate benefitted from falling rates in the US and consumer, materials and industrials outperformed.

“We have been in the investment industry long enough to understand that one or two months does not make a trend.

“But the recent shifts in the market may set a longer-term trend given what we believe were clear excesses in the market not fully supported by underlying fundamentals,” he says.

“Regardless, we continue to adhere to our bottom up, fundamentally driven value process, as we know over the longer term this will provide strong relative returns for our clients.”

———–

Notes:
[1] https://www.reuters.com/markets/asia/chinas-central-bank-cuts-banks-reserve-requirement-ratio-by-50-bps-2024-09-27/

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US fixed income is looking expensive and investors should shift their focus to finding better value in Australian and European credit, says Perpetual portfolio manager Vivek Prabhu.

Credit spreads – the additional return over government bonds that compensate investors for taking on risk – have reached historic lows in the US as a strong economy and the prospect of falling interest rates drive demand for higher yields.

But despite the benign economic conditions, Prabhu says the market is overlooking important risks, led by uncertainty about the upcoming US election and the potential for inflationary policies from both candidates.

“I haven’t held any US banks in the portfolio for about 18 months now,” says Prabhu, who manages the Perpetual Diversified Income Fund, an actively-managed, diversified portfolio of floating-rate debt investments.

“That is not driven by any concerns around credit fundamentals – it’s just that I’m finding better risk-return propositions elsewhere.”

US election key to outlook

Prabhu says the US election outcome will likely dictate the path of both credit and equity markets over the coming months.

“A Trump clean sweep of the House and the Senate will likely be inflationary with tax cuts and tariffs. That means interest rates stay higher for longer, which is a headwind for risk assets.

“Having said that, if the Democrats get in, they also have some big spending policies.

“Deadlock might be the best outcome for markets – with neither side having a clean sweep of the Senate and the House.”

Opportunities in Australian mortgages

US uncertainty and tight valuations mean there are better options available in other markets, led by Australian residential mortgage-backed securities and European banks, says Prabhu.

Australian residential mortgage-backed securities (or RMBS) meet his definition of a high-quality asset.

By pooling together thousands of home loans, RMBS offer a way to capture returns from Australians’ love of housing without lending directly to individual borrowers.

“I’m rotating into the high-quality end of the spectrum at this part of the credit and economic cycle. That’s where you’re currently being paid for risk.

“You’re not being paid enough for taking risk at the riskier end of the spectrum.

“RMBS have a very good track record in terms of performing. Even during the GFC and the pandemic, there weren’t any losses on Aussie-rated RMBS.

“It’s got a very good performance history, and the current conditions are supportive – people are able to service their mortgages because unemployment is very low, and interest rates are close to the peak of the cycle and likely to fall next year.”

Unusually strong property prices on the back of high immigration are also bolstering the investment case, says Prabhu.

“That means the collateral backing for these bonds, in terms of homeowners’ equity, is supportive as well.”

European banks attractive

Another attractive credit market at the moment is European banks, which are well regulated and look in much stronger shape than in the past, Prabhu says.

Regulators increasing bank capital and liquidity requirements in the wake of the GFC and a normalisation of interest rates over the last couple of years have contributed to improved bank profitability.

“I’ve got close to 30 per cent of my portfolio in foreign bonds, largely allocated to European credits which are still offering good value compared to the expensive US market.”

Bond market rollercoaster

Prabhu says fixed income investors should stay the course and not read too much into this year’s bond market gyrations.

“The whole year has been a bit of a rollercoaster in bond yields,” he says.

“At the start of the year, markets were pricing seven Fed rate cuts. By February it was four, and by March only one or two.

“Following the initial rate cut of 50 basis points by the Fed in mid-September, another 25-50bps of easing seems likely by the end of 2024.

“Australian and US bond yields have risen by about 70 basis points since then, returning to levels last seen six months ago in Australia and three months ago in the US.”

The upshot for investors? Don’t get too caught up in short term moves driven by hedge funds and traders, Prabhu argues.

“It feels like the market likes catching on to and then overreacting to whatever the current narrative is.

“It reads into every little nuance and has these wild swings which get traction for about a month until we find the next new theme, and then we go the other way.

“These gyrations are typical during inflexion points in the interest rate cycle.

“They provide opportunity for active managers like us to generate return as yields move from one extreme to the other while markets try to price the ultimate speed and magnitude of the rate-cutting cycle.”

By Vivek Prabhu, head of fixed income.

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Michael Korber

A combination of diversification across issuers, industries, asset type, credit quality, maturities and countries remains crucial given credit markets will continue to face a challenging environment with tightening financial conditions, according to Perpetual’s Managing Director, Credit & Fixed Income, Michael Korber.

“The recent events involving the US regional banking sector was just a further headwind in a market environment already facing up to a spike in inflation and lower economic growth.

“All of these headwinds lead to liquidity pressures in financial markets, making it harder to borrow money in the short term, but also raising refinancing risks for even good borrowers over the next couple of years.

“I think we are going to have a tighter, more challenging environment going forward, but it’s also an environment that creates real opportunities for quality investors.

“At the same time, the rising interest rate environment provides the potential for rising income and distributions in a floating rate portfolio which can contribute significantly to returns.”

Mr Korber manages the Perpetual Credit Income Trust (ASX: PCI) which aims to provide monthly income by investing in a diversified pool of credit and fixed income assets. Perpetual has a long history in investing in credit and fixed income and specialises in Australian corporate credit given its local presence, ability to meet borrowers and manage credit risk for the portfolio.

Focus on diversification

“Diversification is not just about having a large number of issuers or different types of credit quality. It’s also important to spread the risk in portfolios across a variety of sectors, industries and asset types such as bonds, RMBS/ABS and corporate loans.

“In challenging environments it’s important to be unconstrained and maintain the ability to invest broadly across the fixed income universe,” said Mr Korber.

As at 31 March 2023, PCI holds 130 assets across 91 issuers with 40.0% investment grade, 54.8% high yield (sub investment grade and unrated) and 5.2% cash.

Michael Murphy, Perpetual Senior High Yield Analyst and Portfolio Manager of the Perpetual Loan Fund, highlighted the importance of fundamental research when identifying quality issuers.

“In terms of what we look for in the portfolio, the borrowers are typically large corporates with a strong market position, significant economic moats and high recurring revenues that are resilient to economic downturns.

“We have very little exposure to consumer discretionary companies, and we also seek to avoid  exposure to property development, which is more dependent on economic cycles, and we’re mindful that many investors are already heavily weighted to the property sector with their own direct investments.”

Corporate loans and other high yield assets can also offer higher yields than other fixed income assets. Due to Perpetual’s size and market position, PCI can offer access to these credit and fixed income assets not typically available to individual investors.

“Our continued focus on maintaining a healthy running income and diversification positions us well looking ahead and the market volatility will continue to provide some attractively priced fixed income opportunities to generate returns for the portfolio,” said Mr Murphy.

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Alex and James will manage Perpetual’s Small Cap and Microcap strategies. The announcement follows the upcoming departure of Jack Collopy, who will leave the business at the end of June following almost 22 years with Perpetual.

Perpetual Chief Executive, Australia, Amanda Gillespie said: “Jack has made an outstanding contribution to the business throughout his time at Perpetual. His investment performance has been strong and he leaves the team in a very good position to continue providing quality outcomes for our clients. We wish him all the best in the future.”

Alex and James will be supported by two dedicated small cap analysts who are already part of the Australian equities team, as well as research coverage from the wider analyst team.

“Perpetual has a long and proud history of succession planning and promoting from within. Both Alex and James had been promoted in recent years in anticipation of leadership roles within the business, and we are extremely confident that they will move seamlessly into their roles as Co-PMs,” Ms Gillespie said.

Alex has been Deputy Portfolio Manager of the Smaller Companies strategy for more than two years and has been a member of the investment team for eight years. He has covered the Telecommunications, Media and Retail sectors in that time and worked very closely with Jack in portfolio management.

James has more than 16 years’ industry experience and has spent time in various roles covering building materials, steel, paper and packaging sectors. He has been working on the Pure Value Share Fund in various portfolio management roles for almost four years. As at 31 March 2023, the Pure Value Share Fund has returned 24.96% p.a. over three years (net performance) compared to 16.59% for the ASX300 Accumulation Index^[1].

Perpetual’s Australian Equities team is one of the largest and most experienced in the industry and includes 7 portfolio managers and 9 analysts. Collectively, the team has an average of 19 years industry experience and more than 8 years at Perpetual.

As at 31 March 2023, 100% of Perpetual’s Australian equities strategies are outperforming their benchmarks over three years^[2].

“Over the past few years there has been a deliberate focus on ensuring a profile of experience and tenure across the team. Most recently we appointed an experienced large cap analyst – Jakov Males – who joined the team as a senior analyst in mid-April.

“Momentum is strong and the team is fully focused on continuing to providing quality investment outcomes for our clients.”

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[1] Past performance is not indicative of future performance. The Perpetual Pure Value Fund is constructed without reference to any benchmark and doesn’t form part of the fund’s investment objective. The S&P/ASX 300 Accumulation Index is used for comparison purposes only. The disclosure document or product disclosure statement (PDS) of any of the investment strategies should be considered before deciding whether to acquire or hold units in any strategy. Target Market Determinations for the PAMA funds are available on www.perpetual.com.au or calling 1800 022 033. Perpetual Limited ABN 86 000 431 827 Angel Place, Level 18, 123 Pitt Street Sydney NSW 2000, Australia Phone +61 9229 9000 www.perpetual.com.au
[2] Outperformance based on strategies with over A$100 million in AUM and provided on a gross of fees basis. Investment performance of the strategies may differ once fees and costs are taken into account. Past performance is not indicative of future performance. The disclosure document or product disclosure statement (PDS) of any of the investment strategies should be considered before deciding whether to acquire or hold units in any strategy. Target Market Determinations for the Perpetual funds are available on www.perpetual.com.au or calling 1800 022 033.

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