The impact of rising rates and inflation

The impact of rising rates and inflation

In this video, Brett Craig explains the likely impact of rising interest rates, inflation and the possibility of a recession on small to medium enterprise businesses. He also reveals how these factors influence potential opportunities in the credit market. Brett then discusses why the Aura Core Income Fund has a preference for SMEs that have strong balance sheets, strong cash flows and a strong management team who are looking for funding for growth and profit initiatives.

TRANSCRIPT

Roger Montgomery: I’m Roger Montgomery from Montgomery Investment Management, and I’m with Brett Craig to talk about the Aura Core Income Fund.

Roger Montgomery: Brett, the word inflation, the word recession, there’s always something for investors to worry about, and that’s right when they’re investing their money. Tell me about some of the factors that could impact the Aura Core Income Fund.

Brett Craig: Roger, I think as a credit investor, we’re always looking at downside risks and how do we actually protect there? Unlike the equity space where you’re offering unlimited upside, for us, it’s about downside protection and provision of a stable capital base and stable income.

Brett Craig: Some of the things that we’re really focused on at the moment, obviously interest rate rises are occurring. Inflation is exceptionally high, and the RBA is trying to get that under control. We’re looking at the implications that will have on the business environment.

Brett Craig: What we’re really focused on right now is those businesses that have a good moat from a pricing perspective, where they can actually pass on any of those price rises to their end consumer. We’re looking at businesses that have strong balance sheets and strong cash flow so they can still pay back our loan exposure, which is really key.

Roger Montgomery: Brett, investors are always being told to worry about something. It may be that over the long run, they only need to worry about 10 per cent of the stuff they’re told to. Given that people are worried about interest rates, inflation, and potentially a recession, how do these factors affect the way you look at lending?

Brett Craig: As a credit investor, we always look at downside protection in our deal structuring. When we’re putting together a deal in any environment, we’ve always got that downside scenario in our minds when we’re putting the deal together.

Brett Craig: The key thing for us is ensuring that we’re funding quality businesses that aren’t trying to dig themselves out of a hole, that aren’t distressed. So we’re trying to fund businesses there that have a strong balance sheet, a strong management team, and are looking for funding for growth and profit initiatives, as opposed to getting themselves out of a hole.

Roger Montgomery: Brett, as a professional investor, I can see that we’ve moved from an aggressive, bullish environment to a much more cautious and possibly bearish environment. How is that affecting what you’re seeing in the credit market?

Brett Craig: We’re seeing a lot of movement in the credit market, Roger. When we saw a lot of government stimulus coming through the economy, credit spreads decreased. We saw the yield you could earn off the assets decreasing significantly.

Brett Craig: Since that government stimulus has pulled back, we’ve seen a normalisation of those spreads. As a result, we’re seeing significantly increased opportunities coming across our desk, but we are saying no a lot. That focus on downside protection means we say no to a lot of those opportunities and are exceptionally selective in the ones that we take up.

Roger Montgomery: The Aura High Yield SME Fund has an impressive track record over five years of delivering outstanding returns, even through the pandemic lockdowns around the world. How do you aim to deliver on the targets that are set for the Aura Core Income Fund?

Brett Craig: Roger, it’s a very similar strategy from an asset-type perspective. However, we are looking at lower risk assets to the Aura High Yield SME Fund. So we are using the same screening methodologies, the same structuring techniques as the Aura High Yield SME Fund, however, applying that to a lower risk asset type and a lower return as a result.

Roger Montgomery: The Aura High Yield SME Fund has an impressive track record of delivering excellent returns of over 9 per cent per annum over the last five years, which of course takes into account the pandemic lockdowns. The Aura Core Income Fund has a lower aim in terms of return. How do you aim to have a lower risk in the fund?

Brett Craig: Our objective as an investment team will be to have the Aura Core Income Fund sitting senior to the Aura High Yield SME Fund, therefore we’re in lower credit and default risk than the SME Fund. As a result of that lower risk, you do expect a lower return.

Roger Montgomery: Brett, over the last five years, the Aura High Yield SME Fund has provided a large number of loans to the agricultural space relative to all of the loans that have been written, and that makes sense because the agricultural sector has been booming. Things are changing now a little bit. What are you seeing?

Brett Craig: We still see a lot of opportunity in agriculture. We like the sector. It has provided strong returns, strong security for our investor base to date. We are also seeing a lot of opportunities in the services sector.

Brett Craig: Some of the sectors that we’re a little bit less keen on at the moment are construction. We’re seeing some strain running through that sector, as we’ve seen significant cost increases through there.

Brett Craig: Also, the high street retail sector. The bricks and mortar retail sector is something that the RBA is specifically targeting with their rate rises to reduce that discretionary spending.

Roger Montgomery: Indeed. That’s how they’re trying to bring down inflation. It might slow down the construction sector, slow down the retail sector, they’re number two and three in terms of employment in Australia and that makes perfect sense.

Roger Montgomery: Brett, thanks for your time today. Thanks for introducing us to the Aura Core Income Fund.

If you would like to learn more about the Aura Core Income Fund, please visit the fund’s web page to learn more:  Aura Core Income Fund

You should read the relevant Product Disclosure Statement (PDS) 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 Core Income Fund (ARSN 658 462 652) (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.

The Aura Core Income Fund (ARSN 658 462 652)(Fund) is issued by One Managed Investment Funds Limited (ACN 117 400 987 | AFSL 297042) (OMIFL) as responsible entity for the Fund. 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.  

You should obtain and carefully consider the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the Aura Core Income Fund before making any decision about whether to acquire or continue to hold an interest in the Fund. Applications for units in the Fund can only be made through a valid paper or online application form accompanying the PDS. The PDS, TMD, continuous disclosure notices and relevant application form may be obtained from www.oneinvestment.com.au/auracoreincomefund or from Montgomery.

Montgomery, ACH and OMIFL 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.

MORE BY RogerINVEST WITH MONTGOMERY

Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

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.