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Boosting your portfolio’s cash component in a high inflation environment

Boosting your portfolio’s cash component in a high inflation environment

On the day of the Melbourne Cup, the Reserve Bank of Australia (RBA) announced an increase of the official cash rate to 4.35 per cent. Interestingly, the term deposit rates offered by my friendly bank remained the same as the previous week. This suggested an unwillingness of the bank to increase interest rates on deposits, despite the 13th RBA official cash rate hike in the past 18 months.

Bank Bill rates offered by a major Australian bank with a 4.35 per cent official cash rate:

90 days: 4.70 per cent p.a.
6 months: 4.90 per cent p.a.
9 months: 4.95 per cent p.a.
12 months: 5.05 per cent p.a.  (interest paid at maturity)

With Australia’s annual inflation rate running at 5.4 per cent in the September 2023 Quarter, we are receiving inquiries about increasing the yield on investments.

Aura Credit Holdings our partner in private credit

As many readers know, Montgomery’s business partner in private credit is Aura Credit Holdings. I’ve been impressed with Brett Craig, Aura Credit Holdings’ founder and portfolio manager, and his team and the track record of the Aura Funds.

Performance comparison

In the 75 months from inception in August 2017 to October 2023, the Aura High Yield SME Fund – designed for wholesale investors – has seen significant growth. An original investment of $100,000 has appreciated to $177,475. This is equal to a compound annual return of 9.61 per cent, after expenses and assuming reinvestment of the monthly distributions. 

In comparison, over the same 75-month period, the S&P/ASX 300 Accumulation Index, which assumes reinvestment of dividends, turned $100,000 into $152,343, a 6.97 per cent compound annual return. 

In summary, the Aura High Yield SME Fund outperformed, and investors were $25,132 per $100,000 better off (on a pre-tax basis).

Exploring different investment options   

 I have created a matrix comparing returns of different allocations between investing in the Aura High Yield SME Fund and term deposits. Please note we are not comparing the risk profile of term deposits against the Aura High Yield SME Fund, and accept the risk profile of this fund is significantly higher than term-deposits.   

Matrix on Yields (being conservative, and assuming interest income is not reinvested)*

Matrix Term Deposit
at Bank (p.a.)
Aura High Yield
SME Fund (p.a.)
Annual
Yield (p.a.)

Return

5.00% 9.24%  
Weights 1 80 20 5.85%
Weights 2 70 30 6.27%
Weights 3 60 40 6.70%

*Assumes Term Deposit at a Big 4 Australian Bank at 5.00% p.a.- paid at the end of 12 months. Assumes the Aura High Yield SME Fund pays 9.24 per cent per annum based on the historical 75-month average of 0.77 per cent per month.

Assuming 12 months returns of 5.0 per cent for Bank Bills and 9.24 per cent for the Aura High Yield SME Fund could offer I explored various portfolio weightings returns.

For example, a portfolio weighting of 70 per cent in Bank Bills and 30 per cent in the Aura High Yield SME Fund took my return to 6.27 per cent. This is a 25.4 per cent increase on the 5.0 per cent rate earnt on Bank Bills. 

Other benefits include the consistent monthly income and monthly redemptions from the Aura High yield SME Fund, as opposed to being paid at the end of twelve months from my friendly bank.

Disclaimer

Find out more about the Aura Private Credit Funds

You should read the relevant Information Memorandum (IM) before deciding to acquire any investment products.

Past performance is not an indicator of future performance. Returns are not guaranteed and so the value of an investment may rise or fall.

This information is provided by Montgomery Investment Management Pty Ltd (ACN 139 161 701 | AFSL 354564) (Montgomery) as authorised distributor of the Aura High Yield SME Fund (Fund). As authorised distributor, Montgomery is entitled to earn distribution fees paid by the investment manager and, subject to certain conditions being met, may be issued equity in the investment manager or entities associated with the investment manager.

Aura Credit Holdings Pty Ltd (ACN 656 261 200) (ACH) is the investment manager of the Fund and operates as a Corporate Authorised Representative (CAR 1297296) of Aura Capital Pty Ltd (ACN 143 700 887 | AFSL 366230). 

The Aura High Yield SME Fund is an unregistered managed investment scheme for wholesale clients only and is issued under an Information Memorandum by Aura Funds Management Pty Ltd (ABN 96 607 158 814, Authorised Representative No. 1233893 of Aura Capital Pty Ltd AFSL No. 366 230, ABN 48 143 700 887).

Any financial product advice given is of a general nature only. The information has been provided without taking into account the investment objectives, financial situation or needs of any particular investor. Therefore, before acting on the information contained in this report you should seek professional advice and consider whether the information is appropriate in light of your objectives, financial situation and needs.  

Montgomery and Aura Group  do not guarantee the performance of the Fund, the repayment of any capital or any rate of return. Investing in any financial product is subject to investment risk including possible loss. Past performance is not a reliable indicator of future performance. Information in this report may be based on information provided by third parties that may not have been verified.

INVEST WITH MONTGOMERY

Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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