In any given month, Wattle Partners meets with many different professionals offering a new investment product, idea or scheme. Most are a pass from us, but now and again some pique our interest.

We met with the team at Yarra Capital this month, who are in the process of marketing their Absolute Credit Strategy. The fixed income and credit sector has seen a great deal of change in recent months with many junk bond managers launching listed investment companies and paying the much discussed  ‘stamping  fees’.  Yarra  Capital  is  the opposite, offering a traditional managed fund structure from an experienced credit manager.

You can be forgiven if you are finding it difficult to understand what is what in the new world of listed credit products, junk bonds, high yield and direct lending; we are finding it difficult ourselves. The most important factor to keep in mind is that every investment can be appropriate at a given level of return, however, it’s important to have a real understanding of the risk involved.

The Absolute Credit Strategy has not yet been opened to investors, rather the manager, Phil Strano from VFMC, has been managing a pool of employee capital to gain a track record for over 12 months. On first blush, it appears to be a high- quality strategy, not unlike that implemented for solid results by the likes of Australian Super and the Future Fund. It is well researched and benefits from Yarra Capital’s existing capabilities in both debt and equity markets. The group has around $2bn in fixed income assets under management and $6bn in equities, meaning they have strong fundamental understanding of the companies that are investing into.

The strategy is based around investing into high quality, albeit low rated, listed and unlisted bonds issued by corporates, not governments. The opportunity set is $1.5 trillion in Australia and it targets a return of cash plus 3% by investing into fixed bonds, floating bonds, hybrids, deriviatives and asset backed securities.

The opportunitity lies in the fact that the spread on corporate debt particularly lower than BBB is around historical averages, compared to Government debt which is at multi decade highs. Yarra suggests that the threat of inflation is the biggest risk to bond yields and returns, whenever

that may occur, but that credit is much better protected due to its wider spread in traditional comparisons. They also look to insure against spread widening by buying Credit Default Swaps of the businesses they own, as these move in the opposite direction.

The fund carries an average rating of BB+, offers a 4.85% yield, -0.13 year durartion and its current top holdings include preference shares CBAPD, NABHA and most importantly MBLHB which was redeemed at a substantial profit unexpectedly during January. They have an internal credit rating and legal team to understand the terms of each bond, which is incredibly important, comparing their ratings to S&P. The 1 year return of 7.96% and 7.15% since inception has been unexpected by exceptional.

The fund will be opening to investors in the coming months.