Searching for income as interest rates rise
Investors focused on market volatility could be overlooking one of the great opportunities hidden in plain sight in credit markets, according to Brett Craig, Portfolio Manager at Aura Group.
Picture a market tipped to meet $200 billion in unmet demand, according to recent reports by Judo, and that sector provides over 70% of the Australian workforce with employment. Better yet, the current market could offer benefits such as the ability to negotiate better credit spreads in the context of rising interest rates & inflation.
Craig is referring to the Australian SME lending space, a market which may not be front of mind for many investors but is his key focus as the manager of the Aura High Yield SME Fund.
While many income-focused funds face challenges as a result of rising interest rates and inflation, this isn’t necessarily the case for private debt investment in SME loans.
“Assets are either priced as a floating margin above either the RBA Cash Rate, or BBSW, or at a fixed rate on relatively short duration exposures, enabling capital redeployment at a higher interest rate as the principle is returned to the Fund,” says Craig.
This investment space is also typically less correlated to public markets. A reason for this is that SMEs are less likely to use banks, as the capital lending requirements for them tend to be unfavourable to banks and SMEs alike. As an example, Aura Group invests in pools of Australian SME business loans, originated by tech-enabled non-bank lenders, with the Aura High Yield SME Fund currently backed by over 8000 SME loans.
Wholesale investors seeking to diversify their income streams and sector exposures to manage the challenges of rising inflation and interest rates could consider incorporating Australian SME credit exposure as part of their strategy. It is a space that not only offers the potential of future growth but offers income uncorrelated to public markets, along with diverse sector exposures. The Aura High Yield SME Fund offers investors exposure to the Australian SME credit space and seeks to provide capital preservation.
Find out more about the Aura High Yield SME Fund
The Aura High Yield SME Fund has returned 9.68% p.a. net return (as at 31 May 2022) after fees and an average monthly distribution of 0.78% in the 4+ years since launch.
If you are a wholesale investor, find out more about investing in the Australian SME space and the Aura High Yield SME Fund here.
Aura Funds Management has a Distribution Partnership with Montgomery Investment Management to distribute the Aura High Yield SME Fund. Visit here if you are a Financial Adviser or a Retail Investor who would like to find out more regarding our upcoming retail fund