Vincent Chin says investors contemplating a wider range of investment options as they look for income solutions must keep an eye on risk.
Chin is a portfolio manager at Clime Asset Management, where he looks after the Clime Fixed Interest Fund and the Clime Australian Income Fund, which is a mix of debt securities and equities.
During the December quarter, when the Australian sharemarket fell heavily. While the S&P/ASX 200 fell by around 9 per cent, Clime’s Australian Income Fund lost just 1.1 per cent.
Vincent says the fund, which was launched in mid-2015 “passed its stress test”. He says: “We have a strong focus on risks.”
Michael Armitage, the head of fund advisory at actuarial consultant Milliman, says investors need to focus more on risk-adjusted returns. “Lower volatility and lower drawdowns allow the power of compound interest to work its magic on the final result,” he says.
“As markets turn into negative territory, a portfolio that retains most of its account balance is best poised to benefit from the market rebound. By avoiding the worst of the market downturn and volatility, investors have less need to capture the maximum return when markets are strong.”
The Clime Australian Income Fund’s biggest holding is debt securities, which make up 37.3 per cent of the portfolio. Currently it does not hold any government bonds. Chin says that with bond yields as low as they are it would not take much of a pick-up in yields to cause big losses in a bond portfolio. The fund’s debt securities are corporate securities.
It has a large holding of listed property trusts (A-REITs), which make up 21.7 per cent of the fund. A-REITs have had a strong run over the past year – up around 19 per cent over the 12 months to June – and Chin concedes that a correction is possible.
“People wants yield and some REITs are paying 6 per cent and above. On a long-term basis we think the sector is still cheap as a bond proxy.”
The fund has a target return of the cash rate plus 3 per cent. Over the 12 months to 30 June, it produced a return of 7.4 per cent, which was made up of 4.6 per cent income and 2.6 per cent capital growth. Volatility, which is measured as standard deviation, was 2.6 per cent.
Since the fund was launched, it has produced an average annual return of 7.1 per cent, made up of 3.9 per cent income and 3 per cent capita growth.
Chin says: “A lot of people looking for yield from equities buy bank stocks. Our multi-asset strategy has 25 per cent of the volatility of the bank stocks. We do that by holding A-REITs, utility stocks, preference shares.”
The fund’s top holdings include Multiplex convertible notes, Commonwealth Bank capital notes (hybrids), Macquarie Bank perpetual notes, National Australia Bank hybrids and Centuria Diversified Property Fund.
In June it participated in a NextDC three-year bond issue, as well as building on its holdings in AGL and Wesfarmers.
Clime launched the fund as a wholesale fund with a minimum investment of $200,000. Earlier this month it launched a retail version of the fund.
