Arculus Preferred Income Fund

The Arculus Preferred Income Fund is a domestic fixed income portfolio invested in Australian Government and Semi Government Bonds, Corporate Senior & subordinated Bonds, and cash.

The Fund aims to provide unitholders with returns higher than cash and traditional debt securities over the medium to long term with a target rate of return of the 90-day BBSW rate plus 350bps. The return is a combination of income distribution and capital growth. The Fund does not employ leverage either directly or using derivatives and has no offshore currency, structured credit or leveraged securities.

Up to 30% of the Fund can be invested in non-investment grade securities (S&P, Fitch rated below BBB-, Moodys rated below Baa3). The Fund is best suited to investors who seek a medium risk investment over a 3 to 5-year period.

ESG

Environmental, Social and Governance issues form part of the risk analysis framework.

Fund availability

This Fund can be accessed by investing directly, or indirectly, using the Wealth02, HUB24, Netwealth, OneVue, Praemium Investment, Ausmaq, BT Panorama, Macquarie Wrap and Australian Money Market platforms.

1. We don’t take a performance fee, so we are capital preservation focused.  Many of our peers take performance fees that reward them for taking risk in an asset class where returns are driven by the coupon yield. Given that the 90-day BBSW rate is at 4.41%, investors should not be taking added risk at this time.
   
   
2. We are an absolute return manager. What this means is that we are benchmark unaware and will vary duration at different points in the economic cycle. In times of rising rates (and we believe the inflation story is just getting going) we are very low fixed duration and due to the systemic economic risk of the rate rises also currently low credit spread duration. When rates peak, we will increase duration and benefit from the capital gains in a falling rate environment.
   
   
3. We focus on running the portfolio and leave the operation and administration of the Fund to specialist third parties, unlike some other fund managers. The funds are monitored for mandate compliance by DDH Graham Limited ($14bn FUM) and valued by DDH Graham Limited. There are 4 eyes on every transaction: Custody - Administration - Investment Management and the Responsible Entity.
   
   
4. The investment universe for all our funds is Australian issuers only in AUD. What this means is that there is no currency risk, and regulatory risk changes are limited to Australia and bonds that are issued under Australian law. This means reduced risk. We do not employ leverage either directly or through the use of derivatives.
   
   
5. We have a strong and simple ESG approach that will deliver an ESG outcome that is easily explained.
   
   
6. We have no mandated exposure to the MBS, CMBS or ABS securities and no property loans or property developer exposures..

Fund objective

To provide unitholders with returns in excess of cash and bank deposits over the medium to long term by investing in Australian sovereign bonds, senior & subordinate debt issued by Australian financial institutions, senior & subordinate bonds issued by Australian corporates and ASX-listed hybrid and debt securities. The return is a combination of income distribution and capital growth. The target rate of return is the Bank Bill Swap Rate plus 350 basis points. The Fund is best suited to investors who seek a medium risk investment over a 3 to 5-year period.

Fund strategy

The Arculus Preferred Income Fund (PIF) is a domestic fixed income portfolio. The portfolio benefits from holding a medium number (40-60) of fixed income securities, diversified by issuer, instrument type and position in the capital structure. The fund is actively traded to improve returns rather than be a static portfolio. Managers are constantly seeking to increase the core portfolio yield by trading inefficiencies in the capital structure from both within a bank and between like banks. Up to 30% of the Fund can be invested in non-investment grade interest rate securities giving some flexibility to improve returns from this ignored sub-sector. The Fund does not employ leverage either directly or using derivatives and has no offshore currency, structured credit or leveraged securities. The aim is to generate moderate-high yield income and total returns with minimum volatility.

• Hybrid securities alone have a similar yield to the fund however suffer from being near the bottom of a bank’s capital structure and are prone to equity market volatility.
• The fund predominantly holds yield securities better ranking up the capital structure than hybrids, however our active management delivers returns at or above that of hybrids.
  

Hence better returns and much lower risk.

Arculus applies a disciplined and conservative approach to the task of optimising returns to investors. The portfolio manager has a universe of internally approved fixed interest securities from which to select the portfolio. Approval is initially granted for the issuing company based on credit analysis. Subsequently the structure of the individual interest rate security from that company is assessed in detail and approved for investment if appropriate. The pool of available securities is then constantly monitored in terms of yield provision as well as continuing to meet required credit standards.

The table below shows the Fund’s portfolio construction asset class weights:

¹ _{Investment grade is defined as the security being rated at least BBBby S&P (or equivalent by a recognised rating agency). In the case where there is no specific security rating, the investment manager will assign a rating for the security relative to the company’s senior rating. If there is no senior rating the investment manager will assign a senior rating and subsequently a security rating.}

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