December 1

Impact of Royal Commission on Bank Credit Outcome – Neutral

30 November 2017

Impact of Royal Commission on Bank Credit Outcome – Neutral

Following the announcement of a Royal Commission into Australian banks, the following are our thoughts on the impact to bank credit.

The Royal Commission is not a surprise as the Opposition has been agitating for an inquiry since mid-2016, and the major bank CEOs are being questioned regularly by the senate on their business practices.

We believe any impact on credit (ratings) and funding costs will be small, most of the costs to be borne by shareholders in terms of equity prices through higher costs for increased risk management/compliance costs, and slower revenue growth (however some of this is already priced in). As holders of bank debt, further focus on risk management is a strong positive.

Key points to note are

1. Divisions owned by banks which have caused most concerns have been sold, with any findings from these businesses not significantly impacting future revenue.
2. The enquiry is to take in all banks and the Superannuation funds, not just the big 4.
3. Banks are in the process of shrinking their balance sheets as they sell off capital intensive assets in response to new capital rules.

It is worth mentioning that ANZ successfully raised $650mm of 1-year funds in an oversubscribed offering, post the Royal Commission announcement. The margin of 25bpts was the tightest raising we have seen in this cycle, showing the market is still happy to keep funding the banks.

Wayne Buckingham
Managing Director
0413 465 207

Brian Buckley
0468 931 347

September 14

Mutual Limited-Bringing Wholesale Bonds to Retail Investors

Mutual Limited Enhanced Cash (MIF) APIR PRM0015

Mutual Limited are a Melbourne based fund manager with in excess of $2.5 billion in FUM, specialising in Australian bank bonds with low interest rate duration. Prudent Australian investment advisors are actively seeking opportunities to gain exposure to corporate bonds, and are looking to MIF to fulfil these exposures.

Mutual Enhanced Cash (MIF), invests in a low interest rate duration portfolio of bonds issued by Australian retail banks, with a focus on ANZ Bank, Commonwealth Bank, National Australia Bank, and Westpac. MIF has no leverage or derivatives. Current running yield is 3.30%, and performance of 4.06% net for the year ending 30 June 2017. All securities in the portfolio are obligations of the banks, with the interest rate reset every 90 days i.e. Floating Rate Notes (FRNs). Hybrids (or Tier 1 instruments) are excluded. MIF produces a consistent and dependable income stream for our investors, managed defensively to achieve a positive return over each historical quarter since inception.

MIF Performance

MIF has a strong and consistent performance, beating benchmark through all periods

  3 months
6 months
12 months
3 years p.a.
Incept. p.a.
MIF (pre-fees) 0.86 2.13 4.45 3.95 4.18
MIF (post-fees) 0.77 1.93 4.06 3.49 3.70
Bloomberg AusBond Bank Bill Index 0.44 0.89 1.82 2.22 2.36
Relative Performance (Net) 0.33 1.04 2.24 1.27 1.34

Who is investing in MIF

MIF is recommended for long term cash holdings, and term deposit investors who wish to invest in a secure and defensive portfolio while achieving a higher return than available in cash trusts and term deposits from banks. MIF offers investors liquidity; which Term Deposits no longer offer post changes to bank regulations.

MIF is a strong alternative for investors currently in bond and credit funds, offering a low interest rate duration portfolio. Interest rates are at all-time lows, and investors looking to protect their gains and retain exposure to credit should look to low interest rate duration funds like MIF.

Why does MIF invest in Australian bank debt only?

The Australian Prudential Regulatory Authority (APRA) is considered a leading banking regulator. MIF only invests in APRA regulated Australian banks.

APRA are consistently increasing the capital requirements of banks. APRA is continuing to implement rules to ensure the big 4 banks remain in the top 25% of all banks worldwide. Since the GFC, banks have increased their capital reserves by almost double pre-2007 levels, providing greater support to bond holders who are cushioned by this capital against any losses made by banks.

MIF invests a minimum of 60% of funds in big 4 bank debt.

Australian banks issue over $100 billion of debt per annum, with maturities/call dates usually out to 5 years. MIF participates in this large market, with high liquidity and price transparency. MIF restricts the weighted credit duration to less than 2.5 years.

For more information on MIF, or other Mutual Limited Funds, please contact Wayne Buckingham (Managing Director) or Brian Buckley (Director) on 03 8681 1900

September 7

Mutual Limited adds experienced duo to Credit Advisory Committee

Mutual Credit Advisory Committee, has appointed independent members Justin McCarthy and Brad Newcombe to the committee. Wayne Buckingham, Managing Director of Mutual, welcomes the experience Justin and Brad bring to credit analysis, enhancing the processes of the Mutual team.

Mutual Limited manage over $2.5 billion of funds, predominately in cash and credit, and have out-performed benchmarks consistently across all timeframes.

Justin McCarthy is one of Australia’s leading credit research analysts with over 25 years of financial markets experience, specialising in banking and insurance regulation. Justin commenced his career in 1992 at Ferrier Hodgson in Melbourne. After being admitted as a Chartered Accountant in 1997 he moved to Hong Kong and took a role as Credit Manager at National Australia Bank. Subsequent roles included Credit Manager at Credit Suisse First Boston (London) and Head of Credit, Asia for AllianceBernstein (Melbourne). In 2007 Justin moved to FIIG Securities as Head of Research and established the fixed income research and education functions. Since 2016 Justin has been the Head of Research at MINT Partners Australia (a division BGC Partners, a NASDAQ listed company) where he is responsible for coverage of investment grade securities, including the banking and insurance sectors. Justin had a Bachelor of Commerce from the University of Melbourne and a Graduate Diploma in Business Administration from the Australian Graduate School of Management.

Brad has over 20 years’ experience in equity and fixed income markets roles, including roles at Westpac Treasury and a Director of Fixed Income Research (Credit) at FIIG Securities and Head of Fixed Income Research at Millinium Capital Partners. He currently advises ultra-high net worth clients on their investments with a focus on equity positions and credit (and other) risks in their fixed income portfolios. Brad has a Bachelor of Business (Accountancy) and a Masters of Commerce from QUT. He has also completed the Institute of Chartered Accountants professional year program.

For any information or if you wish to discuss your requirements with Mutual, please call Wayne Buckingham on 03 8681 1903.

July 11

Significant Investor Visa (SIV) – Balancing Investments

Balancing Investments for Significant Investor Visa (SIV)
Mutual Limited has successfully completed over $100 million of SIV applications, and offer MIF as a complying Balancing Investment for SIV purposes.

About Mutual
Mutual Limited is a conservative Melbourne based Fund Manager with $2.4bn FUM/A. Importantly, we manage our fund in order to ensure compliance to SIV investment guidelines and can provide investors with a monthly statement certifying the compliance of investments to all SIV guidelines.

Why is a certification important?
It is an investor’s obligation to ensure their Fund Manager invests only in complying investments, and should the Fund Manager invest outside the guidelines any SIV application will be deemed ineligible.

For this reason, Mutual will provide investors with confirmation their funds are invested in accordance to SIV guidelines.

MIF offers high capital security, with low volatility.

Returns consistently outperform cash management trusts and the Bloomberg AusBond Bank Bill Index.

Key features of the fund are:

• Australian bank debt securities only
• Minimum 40% with major banks
• Low volatility
• Short duration
• Targeting 1.50% to 2.00% above benchmarks
• No derivatives

Mutual can be contacted with the following details.
03 8681 1900

*All returns are pre-fees

June 28

MIF – Impact of Brexit

Brexit has triggered a large sell-off of all risk assets, particularly those with exposure to the UK. Financials have been the hardest hit as London is the heart of the European bank system and the Head Office to the majority of the financial worlds European operations.

MIF invests in debt securities of Australian retail banks only, and therefore has no direct exposures to London’s financial issues. The MIF strategy of being exposed to APRA regulated banks has protected the portfolio, and while we have seen some impacts, they have been quite small.

Brexit will impact bond and credit markets by movements in interest rate and changes to the cost of credit (including credit rating downgrades). MIF mitigates the interest rate changes by investing in low duration securities (floating rate notes) and MIF credit is limited to Australian banks, which have no direct impact from Brexit.

Outcomes since 24th June referendum
After the initial four days that the market has had to absorb the surprise exit vote, the outcomes to MIF from Brexit have been muted. The market is functioning well, with buyers and sellers participating (albeit with lower volumes) and prices coming off by just 0.20% to 0.30%. The moves in credit is has only partially re-traced the strong rally over the last two to three months and at this point is within recent trading ranges. Major Banks have completed the majority of their debt financing needs for calendar year 2016 and are well positioned in this market.

Current Status
MIF will post a strong June quarter return (currently over 1.00%) and continue to have a running yield approaching 4%, with a low duration portfolio that is well placed to continue its strong 2016 performance.

June 28

MCTDF – Impact of Brexit

Brexit has triggered a large sell-off of all risk assets, particularly those with exposure to the UK. Financials have been the hardest hit as London is the heart of the European bank system and the Head Office to the majority of the financial worlds European operations.

MCTDF invests in term deposits from the major 4 Australian banks only (ANZ, CBA, NAB and WBC) and therefore has no direct exposures to London’s financial issues. The MCTDF strategy has protected the portfolio and ensured a positive return each day.

Outcomes since 24th June referendum

There has been no change to the bank term deposit market, and zero impact from Brexit

Impact on MCTDF
MCTDF may benefit from wider term deposit margins as banks look to shore up their deposit base. We see no negative impacts.