There is a worrying lack of disclosure in the product disclosure statements accompanying the recent offers for a raft of new ASX-listed credit funds. Investors are piling into these funds, which promise high yields on investments in a range of credit securities, including corporate loans and mortgage-backed securities.
Several of these funds invest some or all of their money in established underlying funds, which have established track records.
The problem is that there is zero information in the disclosure documents for some of these offers about the arrears rates and losses incurred by these underlying funds.
When banks produce their financial reports, they provide detailed analysis of arears rates and losses in different parts of their loan portfolios. Why should it be any different for these credit managers?
The KKR Credit Income Fund, which was launched last week with the release of a product disclosure statement, will be managed by KKR Australia Investment Management. It will invest in two established KKR funds, the Global Credit Opportunities Fund and the European Direct Lending Fund.
The Global Credit Opportunities Fund invests in the sub-investment grade credit market, purchasing securities on the secondary market. KKR has an 11-year record of investing in the sector. Over the three years to the end of June, the fund returned an average of 9.1 per cent a year.
The European Direct Lending Fund is a portfolio of senior corporate loans largely originated by KKR and not traded on secondary markets. Loans are senior secured and floating rate. Loans in the portfolio are expected to pay a yield of around 6.5 per cent.
The PDS says nothing about arrears or defaults in the underlying portfolios.
When Perpetual Investments launched its Perpetual Credit Income Trust in March, it offered investment in a portfolio of 50 to 100 credit and fixed income assets, with a spread of credit quality, loan maturity, country and issuer. It will not hold any government or semi-government debt securities.
Exposure to corporate loans may be gained directly or through investment in the Perpetual Loan Fund. The Perpetual Loan Fund was established in June last year.
Perpetual did not include any meaningful information about the underlying loan fund in the product disclosure statement.
One argument for non-disclosure is that these managers are operating in the private credit market and details of their transactions are confidential.
However, it would be possible to reveal the borrowers without the details of each loan. Metrics does this in some of its investor material. It lends to Ramsay Healthcare, Brickworks and Charter Hall.
Anyway, in some cases the confidentiality argument does not hold up. Some of these managers buy debt securities on the secondary market and there is no obligation on their part to keep details of these transactions quiet.
Many years ago, equity fund managers treated their retail investors with the same arrogant disregard, refusing to tell them what was in their portfolios. Increasing competition and the arrival of index ETFs with full portfolio disclosure changed that game.
It’s time for a change in the credit fund market.