Searching for income as interest rates rise

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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

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Since inception (August 2017). Net returns as at 31 May 2022 and assume reinvestment of distributions. Past performance is not a reliable indicator of future performance. This information is for accredited, qualified, institutional, wholesale or sophisticated investors only and is provided 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). Aura Funds Management Pty Ltd is the Trustee of the Fund and a subsidiary of Aura Group Pty Ltd. Any financial product advice given in this report 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. Aura does not guarantee the performance of its funds, 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 is based on the information provided to Aura by third parties that may not have been verified. Aura believes that the information is reliable but does not guarantee its accuracy or completeness. Aura is not able to give tax advice and accordingly investors should obtain independent advice from an accountant and/or lawyer before making any decision based on the tax treatment of its investors. You must read the Fund Fact Sheet or Information Memorandum and seek professional advice before making a decision to invest in any of the funds. Livewire gives readers access to information and educational content provided by financial services professionals and companies (”Livewire Contributors”). Livewire does not operate under an Australian financial services licence and relies on the exemption available under section 911A(2)(eb) of the Corporations Act 2001 (Cth) in respect of any advice given. Any advice on this site is general in nature and does not take into consideration your objectives, financial situation or needs. Before making a decision please consider these and any relevant Product Disclosure Statement. Livewire has commercial relationships with some Livewire Contributors.

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