What's next for income and property

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If 2020 was a wild year for equities, 2021 has been just as exciting for fixed income investors. In February, a sharp rise in bond yields and inflation expectations led to drawdowns for many exposed to government debt. On the other hand, cheap debt and a nation obsessed with property lead to a residential property boom in Q1.

Rising bond yields, inflation expectations and a property boom has kept fixed-income investors on their toes, but where to from here? We spoke to experts at Trilogy Funds to find out. Navigating these types of difficult environments are where fundies like Trilogy thrive.

In this video, Henry Elgood, Head of Investments for Fixed Income, reveals his take on the current fixed income market, the key lesson he has learnt in the last 12 months and where he sees the property market heading.

Edited transcript

How would you describe the current investment climate for fixed interest? 

Right now, I think there's been a lot of pent up demand coming out of last year. We saw very little new issuance coming out from the corporates, but the government debt and fiscal support that we saw north of $200 billion over the COVID period appears to be somewhat tapering off in terms of JobSeeker and JobKeeper. Where we see the opportunity right now is making sure that, as the economy grows and continues to rebound, there will be different businesses in different sectors which recover at different rates. So making sure that we are exposed to businesses with strong balance sheets, with tailwinds across the economy, is a key focus for us. We've always been a big supporter of bank debt, and right now with the property tailwinds, with the recovery, we've seen in terms of their balance sheet and capital management, and some of the more recent announcements made, we're really confident in terms of holding that debt as a key part of our portfolio exposure.

How did a sharp rise in bond yields and inflation expectations affect your portfolios? 

We saw that coming through the back end of the first quarter, absolutely. I mean, the Aussie 10-year rate rose over 80 basis points in terms of that yield across the first quarter. We were monitoring that and assessing that as it grew. What we saw was some repricing across some of our underlying investments, but the strategies which we are exposed to meant that we were protected to some degree. For example, in our government debt exposure, we weren't exposed to an absolute return long-only government debt position. Our exposure there was through a relative value strategy. The volatility which that produced across the first quarter actually meant we were well-positioned to come out of it into the second quarter with some strong returns being seen from that particular exposure, as well as not as such a large drawdown in the first quarter as compared to other government debt managers. That was, I think, part of our portfolio arrangement and part of our portfolio allocation, which held us in good stead.

What is a key lesson you have learned in your investment career?

I think one key lesson would have been last year during COVID and seeing the market turmoil that was seen in such a short period of time. What started as a health crisis that was potentially turning into some kind of financial crisis was very much avoided by the support of monetary and fiscal policy. Now, what we'd undertaken before then as part of all of our portfolio management strategy is to have a number of scenarios and stress testing across the portfolios. If we saw returns drop by x%, or if we saw certain economic indicators fall across the market and economic metrics fall, how would we be positioned? Would that impact us? And to what degree?

We like to monitor and undertake the relevant due diligence at the very start of any investment, but we equally monitor and assess that ongoing to ensure that we have the right exposure in our eyes at the right time. I think for anyone taking lessons from the fixed income market and that turmoil we saw last year, it's making sure that you are comfortable and satisfied with the due diligence you undertake first and foremost, but at the same time, not making any overly rash decisions or trying to play a broader game. Because, again, there are a number of exogenous and extraneous factors that will dictate where the markets move outside, I guess, your underlying thesis as to why you're investing in a certain strategy or underlying thesis as to why you're investing in a certain instrument.

In light of this year’s property boom, how has this impacted your portfolios and what is your outlook for the future?

Well, the Trilogy Monthly Income Trust had a number of projects that we're always funding in terms of construction deals, so we're always in the midst of the construction boom, which we saw last year and we're continuing to see this year. One thing we are conscious of moving forward is the pricing pressures within the market. We'll continue to be working with our developers to make sure that we can fund new projects that they have, in particular, up and down the eastern seaboard and in and around the middle ring area, as we like to call it, around those major cities. One thing which we do see coming back into the market in 2021 is investors. They've been out of the market in terms of in-stock deals and taking completed stock off of the hands of construction developers since probably 2017. If investors were to step back into the market, we continue to be cautiously optimistic that the price appreciation we've seen to date will continue, and investors and first home buyers will step into that market across 2021.

Find out more

To find out more about fixed income and property funds such as mortgage trusts and whether they may be a suitable investment option for you, visit their website.

This communication is issued by Trilogy Funds Management Limited ACN 080 383 679 AFSL 261425 (Trilogy) as responsible entity for the Trilogy Monthly Income Trust (Trust) ARSN 121 846 722 and the Trilogy Enhanced Income Fund (Fund) ARSN 614 682 469. Application for investment can only be made on the application form accompanying the Product Disclosure Statement (PDS) dated 17 December 2018 for the Trilogy Monthly Income Trust (Trust) ARSN 121 846 722 and 28 July 2020 for the Trilogy Enhanced Income Fund (Fund) ARSN 614 682 469 available at www.trilogyfunds.com.au. The PDS contains full details of the terms and conditions of investment and should be read in full, particularly the risk section, prior to lodging any application or making a further investment. All investments, including those with Trilogy, involve risk which can lead to loss of part or all of your capital or diminished returns. Trilogy is licensed to provide only general financial product advice about its products and therefore recommends you seek personal advice on the suitability of this investment to your objectives, financial situation and needs from a licensed financial adviser. Investments with Trilogy are not bank deposits and are not government guaranteed.

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