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FIIG Securities | Jul 02, 2024
Following sufficient FUM growth momentum, the Investment Management Team (IMT) has begun diversifying the Fund’s exposure to include senior and subordinate bank debt, corporate debt and Asset Backed Securities (ABS) alongside existing holdings of dominant state and federal debt. As the Fund continues to grow, our investment focus for the corporate sector has been on medium-term and higher-rated credits. Specifically, we prefer to invest in debt issued by corporations operating within the essential service sectors with high barriers to entry. As the Fund continues to grow, the IMT will diversify exposure to a broader level that will include lower rated investment grade debt assets that will deliver higher yields.
Holdings Spotlight
Auckland Airport and Victoria Power Networks (VPN) are corporate issues both rated A-, and both meet the ‘large infrastructure’ and ‘high barriers to entry’ criteria.
- Auckland Airport serves as the major gateway between New Zealand and the rest of the world. It is currently undergoing a substantial redevelopment aimed at enhancing travel infrastructure and creating a more sustainable airport. The airport industry typically faces high barriers to entry due to factors such as regulatory approvals, land availability, and substantial capital requirements. Auckland Airport’s strategic location and existing infrastructure contribute to these barriers.
- VPN manages and operates electricity distribution and sub-transmission networks in Victoria. The electricity distribution sector typically faces high barriers to entry due to regulatory requirements, infrastructure maintenance, and the need for extensive network coverage. VPN’s established presence and operational responsibilities contribute to these barriers. The Fund holds $500k (or 1.25% exposure) of each and are 7- and 5-year term assets, respectively.
Pepper Money (Pepper) is a major provider of Australian home loans and operates entirely online without brick-and-mortar branches. As a digital fintech lender, they offer low-rate residential mortgages and a convenient online service. Pepper is also one of the largest originators of ABS (including those secured by mortgages) and has issued over $30 billion of these Residential Mortgage-Backed Securities (RMBS) to the Australian securitisation market since 2003. The IMT secured a $500k allocation to a AAA-rated Pepper RMBS issue which is forecast to redeem mid-2026 and has repaid more than 30% of its principal. An RMBS issue (or tranche) achieves a AAA rating as its prepayment right ranks ahead of junior (or subordinate) tranches. The IMT holds a favourable opinion of this sector and will continue to build out exposure to more ABS issuers as the FUM builds.
The IMT secured a $500k allocation to a NAB fixed rated subordinate bond (rated A-), which has a final maturity in 2039 and an optional call date in 2034 (15NC10). This asset has played a crucial role in enhancing the Fund’s total return. Since its issuance, this debt has rallied approximately 32 basis points tighter, indicating increased demand and improved market sentiment. The IMT has noticed the market’s increased demand for long-dated subordinated debt issued by domestic major banks, driven by improving credit metrics as evidenced by the recent rating upgrades.
Quarterly Report
The June quarterly report will be available on the FIIG website in late July to provide a further update on the Fund’s performance, composition, positioning and outlook.