At the outset, let me declare my conflicts. I am a shareholder in the company that owns the promoter and Responsible Entity (RE), Switzer Asset Management Limited. I am also a member of the Compliance Committee of the RE. With that said, here is my road test of the Switzer Higher Yield Fund.

The Switzer Higher Yield Fund

The Switzer Higher Yield Fund is a short duration bond fund that seeks to provide investors with an attractive cash yield with low capital volatility, by investing in a portfolio of high-quality and liquid fixed income securities.

It is not a new fund, in fact it has been around for more than a decade, but it is being re-launched with a new investment manager and a structure that allows units to be bought and sold on the stock exchange.

The Fund aims to achieve total returns for investors which are 1.5% to 3.0% greater than the RBA overnight cash rate after fees and expenses on a rolling 12-month basis. With the RBA cash rate presently sitting at 0.1%, this means the Fund will be targeting a total net return of 1.6% to 3.1% over the next 12 months. If and when the RBA cash rate goes up to say 1.0%, the Fund will target a total net return of 2.5% to 4.0%.

A typical asset allocation is 50% to 90% in bonds (Australian government and semi-government, corporate bonds and commercial paper); 0% to 40% in asset back securities including residential mortgage backed bonds; 0% to 40% in hybrid securities (capital notes, subordinated notes, preference shares listed on an exchange); and 2% to 20% in cash and cash equivalents.

From a credit point of view, the Fund targets a dollar weighted average S&P ‘A-‘ credit rating across its bonds and deposits. A- is considered to be “investment grade”.

It won’t take significant interest rate or duration risk, with most securities expected to be floating rate and the maximum term of any fixed rate security limited to 24 months.

The portfolio of 30 to 60 securities will be actively managed, with the Investment Manager applying bottom-up fundamental analysis to identify and take advantage of mispriced securities and assets.

The Investment Manger

Coolabah Capital Institutional Investments (Coolabah) has been appointed to manage the Fund. Led by Chris Joye, the firm currently manages around A$4.5 billion of assets on behalf of institutional and retail investors.

Coolabah specialises in the generation of credit alpha through finding assets that are judged to be trading at a discount to fair value which are expected to realise capital gains as their credit spreads normalise. This contrasts with conventional fixed income managers that try to boost their yields by chasing credit default risk, liquidity risk and/or interest rate risk.

Distributions

The Fund is targeting a total return to investors of the RBA cash rate plus 1.5% to 3.0% after fees on a rolling 12 month basis.

Distributions will be paid quarterly, generally within 20 business days of the end of the calendar quarter (March, June, September and December). Distributions can be automatically re-invested into additional units.

Liquidity

Units will be listed on the stock market and trade under the ticker code SHYF. This means investors can exit their investment by selling units through their stockbroker or online trading platform, or increase their investment by buying additional units.

To help ensure the price that units change hands for on market reflects the Fund’s underlying net asset value (NAV), the RE has appointed a ‘market maker’ to aid liquidity. During each trading day, the RE will also publish an iNAV (indicative net asset value), which shows a real time estimate of the Fund’s value.

A relatively unique feature of the Fund is that it also provides a facility for investors to make a direct withdrawal request to the RE.

Investors who buy or sell units on the exchange will settle through CHESS and receive the normal CHESS holding statement.

Fees

The management fee is 0.70% pa (inclusive of GST). This is around the norm for a fund of this style. There is also the potential for a performance fee, which is 20% of the excess return of the Fund over the benchmark.

Risks

The Product Disclosure Statement (PDS) identifies 27 risks - three significant risks in market risk, interest rate risk and credit risk, and 24 other risks. In regard to the significant risks, because the duration is relatively short and the Fund is targeting an average credit rating of A-, the latter two risks are mitigated to a material extent. In regard to market risk, this also includes the Investment Manager’s ability to perform which is a risk with any actively managed fund.

The Fund should be relatively capital stable. That doesn’t mean that you can’t lose money on your investment, but you shouldn’t expect to see major movements in the NAV or the price units trade on the exchange.

Positionally, this product is riskier than a government guaranteed term deposit, but significantly less risky than a credit fund or a fund investing in long duration, lower credit quality securities. It has been designed to offer self-directed investor (who are typically overweight cash) a higher return than term deposits without taking on the volatility shares.

Initial Offer Loyalty Bonus

As part of the re-launch, there is an initial offer period. The initial offer closes on Friday 18 December with units expected to be quoted under ticker code SHYF from December 23.

Investors who apply during the initial offer will be eligible for a loyalty bonus of up to 0.50% of the amount invested during the initial offer. This should take the effective return for the first 12 months to RBA cash rate plus 2.0% to 3.5%.

The Initial Offer Bonus will be paid as a secondary interest amount to investors who continue to hold their units in four equal instalments at the same time as quarterly income distributions are paid, with the last payment being December 2021. Because the RE is paying it from their own resources rather than the Fund, there will be no adverse impact on non-participating investors.

Investors can apply at www.switzerassetmanagement.com.au/funds/shyf/  

My view

The Switzer Higher Yield Fund will suit investors who are seeking a higher return from their “cash” or “fixed interest” investments. Because it is exchange traded and settles on a “T+2” basis, the RE has engaged a market making agent, the transparency of its underlying unit value and the introduction of an alternative withdrawal facility, it should be fairly liquid.

It is not riskless investment, but it is also not high risk.

Chris Joye and his team at Coolabah enjoy a strong reputation in the fixed income markets as professional and expert managers. Fees are comparable to other leading industry products.

Worth considering. Before investing, please carefully review the PDS..