Monthly Investor Update from La Trobe Financial – July ’24

Welcome to our monthly Business & Portfolio Update.  And we start with some very exciting news, a milestone moment for the business:  the successful launch of our La Trobe US Private Credit Fund which is now available for retail investors.

We’re delighted to have launched the PDS to market, giving Australian investors access to this asset class for the very first time through a strategy carefully curated with our product partners, Morgan Stanley.

Our US Private Credit Fund is the inaugural product in La Trobe Global Asset Management.  A strategy launched to market as we bring the best of the world’s investment offerings to Australian investors.  It will provide Australian investors the opportunity to invest into asset classes which are traditionally hard to access, and strategies traditionally held exclusively for institutional investors.  And it is through this lens that we have brought our La Trobe US Private Credit Fund to market.

Before we dive into that product further, I’m pleased to report that our $11bn La Trobe Australian Credit Fund continues to go from strength to strength, currently providing investors with investment returns which sit at their highest point in a decade.  In the month of May, we passed a milestone: 100,000 investors in the Credit Fund^.  A big thank you to each and every one of our investors and partners who have helped the business grow to almost $20bn in assets under management.

Pleasingly, our portfolio accounts remain in terrific shape with borrowers continuing to perform very well notwithstanding that we are two years into a rate-hiking cycle and two and a half years into a cost of living event.  In fact, arrears have decreased over the last few months, and now sit at just 3.1% within the Credit Fund.

That is ultimately a reflection of the high quality borrowers we look to target and our deliberately conservative approach to the construction and management of our portfolios.  Portfolios which are incredibly diverse. Over 11k individual loan assets across the Fund as we look to insulate and protect investors and their investment outcomes.  It is these portfolios which facilitate the delivery of a premium, low-volatility income across all market and economic cycles.

If you are familiar with La Trobe Financial’s existing portfolios, then you will immediately recognise similar characteristics within the La Trobe US Private Credit Fund portfolio.   And it all starts with the disciplined approach to portfolio construction and management, all of which is undertaken by our product partners, Morgan Stanley.

Firstly, it’s the quality of the asset, and we are targeting direct loans to high quality corporate borrowers who operate in the US middle market.  These are companies with market leading positions, high barriers to entry, with strong & stable free cash-flows.  Companies which don’t operate in cyclical industries, ensuring stability in earnings and performance across the market and economic cycles.  Morgan Stanley are highly selective in the assets that find their way into our portfolios, rejecting 95% of the 1000+ loans they are rejecting each year.

And rather than taking big bets on a small number of high-quality assets, it’s all about diversification.  With the wholesale class having launched in December 2023, our underlying portfolio has been living, breathing and performing for six months now and, at over $160m in size, is already diverse.

Diverse from a borrower perspective, with 49 individuals borrowers across our portfolio with an average loan investment size of US$2.9m.  Diverse from an industry perspective, with those borrowers operating in 22 individual industries.  You can see that while we avoid the cyclical sectors, we do have a bias towards service industries.  Companies which are providing essential or non-discretionary services, such as veterinarian or H/VAC services.

Having a diversified portfolio of high quality loan assets – just like in our La Trobe Australian Credit Fund – provides a higher yield and similarly low-volatility income profile for our investors.

Of course, all investments carry risk, so you should carefully consider the PDS before making any investment decision.

So that’s the portfolio which will ultimately be driving the performance of the product which, at a headline level, seeks to provide monthly income with a target distribution return of 8.50%* per annum, and this is net of fees and expenses, but before adjustments for FX rate fluctuations.

It has a minimum investment amount of $10,000, and provides quarterly liquidity access**, with withdrawals of up to 5% of the total investment class units available each quarter.  We are also hedging the AUD investments exposed to USD.

But the good news doesn’t stop  there.  What better way to launch our La Trobe US Private Credit Fund than with a competition.

Eligible investors in the La Trobe US Private Credit Fund will have the chance to win an incredibly unique opportunity to Meet the Manager, the Morgan Stanley Private Credit team, in New York.  One lucky investor and their guest will enjoy an all-expenses paid trip to New York, which includes business class flights, five nights’ accommodation and spending money.**

For a chance to access this once-in-a-lifetime opportunity, make a minimum investment of $50,000 by 20 August. Each $50,000 invested will earn one entry into the prize draw, and you can visit our website to learn more and view the competition terms and conditions.

It is with these strongest of foundations that we are able to offer investors even greater investment opportunities with the launch of the La Trobe US Private Credit Fund. If you have any queries or would like to learn more, simply call our friendly Asset Management team on 1800 818 818.

Welcome to our monthly economic update.

Are we in a recession, or aren’t we?  This month, we take a look at economic growth, what’s driving it, and what lies ahead.

In recent decades, Australia was the envy of the economic world.  From the early 1990s recession, we had a 30 year window of positive economic growth.  No recessions, subdued inflation, low unemployment, cash rates that still encouraged investment, and Governments running budget surpluses.

After the tough economic periods through the late 1970s and 1980s, it was – economically speaking – a great time to be alive.  Of course, nothing lasts forever.  The supply shock that was COVID saw our 30 year run end, and the subsequent supply shock from the invasion of  Ukraine, saw re-emerging inflation spike.

The tools to cut inflation are fairly blunt..  At its simplest, Governments use  fiscal policy by cutting their spending, and central banks use monetary policy by hiking interest rates.

Both levers have been pulled, and, et voila.  Inflation, which spiked to x% in [date] is seemingly returning towards target.

If only it were that simple.

These fiscal and monetary tools don’t directly reduce inflation.  They are a second-order effect.  The first order effect is to take the steam out of an economy: people and governments spending and investing less cuts demand, slows economic growth, lowers wage growth, increases unemployment.  These factors are what causes inflation to fall.  Which is why the narrow path of controlling inflation, without blowing up the rest of the economy, is such a difficult path to tread.

Let’s talk about GDP, or, economic growth.  In Australia, our long history of performance was the envy of the world.  Consider the U.S.  In the early 2000s with the tech wreck & Asian Financial Crisis, it was hit much harder than Australia.  Just as it was also hit much harder through the GFC.  Australia has tracked a smoother path of economic growth.

Looking ahead, however, and both economies have benign growth forecasts.  With the steam being taken out of each economy, according to the IMF, neither is really likely to set the world on fire for the rest of this decade.

But it’s how the growth is being produced which is the most important, and what separates the U.S. and Australia.  And the U.S. is doing a much better job of it than we are.  We have used these updates previously to talk about productivity, and how in Australia, our productivity growth is weak.  Consider the GDP per capita.  This means,  the amount of output each individual is contributing to economic growth.

In America, output has lifted.  There is a very clear increase in GDP per capita post COVID.  That is an economy genuinely ‘back to work’.  Here in Australia, we can’t say the same.  GDP per capita was barely positive in the years prior to COVID, and for the past five quarterly readings has either been neutral or negative.  So, we are in a recession in all but name.

But how is this possible, when the IMF forecasts had both of our economies set to grow by similar amounts to the end of this decade?  Consider population growth.  In Australia, the RBA confirms our annual population growth was 2.5% in 2023.  More people, buying more, spending more, employed and paying taxes.  Overall, contributing to our economic growth, and keeping it positive.  In the U.S. we saw population growth of just 0.5% in 2023.

So, we have two countries, one sustainably increasing productivity to grow its economic output, the other with outcome derived from policies which ultimately are not sustainable in the long-run.  The discussion for productivity in Australia isn’t going away anytime soon, and the sooner we have it, the better.

Thank you for watching.

Welcome to our monthly property and credit update.

Just like the property market itself, market commentary moves in cycles.  For some reason, like no other asset class, property can only seem to be spoken of in terms of either boom, or bust.  It’s not particularly helpful!

So where are we, here in July 2024?

Commonly, the winter period spells a gentle slowdown in market activity.  Fewer listings, and few auctions are common to the cooler months.  And that tends to cool the market itself, prior to things picking up again in springtime.

This year it’s no different, with total listings down, and the market through July cooling ever so slightly to 0.5% growth in the month to 18 July, down from 0.7% growth in the month prior.  This is not a market bust, and it is nothing to worry about.  As markets go up and down, it’s important not to be frightened when they do fall when fundamentals are otherwise in your favour.

Consider the past 12 months.  In the year to 30 June we saw national prices rise by 8% and regional areas grow by 7%.  So, fairly uniform results overall.  You may recall in our recent update we mentioned that divergence was starting to appear between markets.  This trend has continued.  Overall the 8% national growth was driven by strong performance across our smaller capital cities, in particular Perth, Adelaide and Brisbane, against lower growth across the larger markets of Sydney and Melbourne.  And while Sydney’s prices remain at peak, Melbourne’s most recent cyclical peak was March 2022, with prices having retraced by a very modest 3.9% since.

So there is divergence, with some areas are growing faster than others.  Total stock on market is continuing to be thin, meaning supply  remains modest.  And clearance rates remain firm, so whatever stock is on the market, continues to be snapped up.

There will be some cyclicality, at an individual city level.  The larger markets of Melbourne and Sydney are seeing an increase in distressed listings, so you can expect some choppiness with these bigger, expensive cities.  Those smaller cities experiencing growth in prices, like Brisbane and Perth, are seeing big decreases in their distressed listings.  And across the nation as a whole, total distressed listings remain down year on year by 4.2%.

So, if you witness downwards movements in the coming months, these are not pointing to deep cyclical bust.  These are pointing to conditions you expect to see in any market across the fullness of a cycle.

Moving to credit, and strong performance continues to reinforce the underlying resilience of property.  Overall, Australian borrowers continue to perform really well.  Demand for new lending is running within longer-run trend levels, and performance remains strong.

Across the market, consider that pre-Covid, Australian mortgage arrears we running at 1.8%.  The market was universally comfortable with those settings.  In the March quarter of 2024,  following a pandemic, following two years of cost of living pressures, and following nearly two years of interest rate hikes, sector arrears remained lower, at just 1.6%.  And while there is a likelihood that these numbers could increase, these, again, are part of normal market movements, and are in no way pointing towards a bust.

Overall, property and credit in Australia are characterised by stability in prices, with borrowers in the market continuing to demonstrate capacity to meet their loan obligations.  A good position to report.

Thank you for watching.