In the current low interest rate economic environment, it is becoming increasingly challenging for investors to receive competitive returns from the cash and fixed income investment asset class without proper active and risk management.
Trilogy offers a professionally managed investment option within the fixed income asset class, the Trilogy Enhanced Income Fund. As active managers, we aim to ensure a competitive return is provided to investors while keeping risk front of mind.
Below, we discuss how Trilogy chooses investment options – issuers, fund managers and products – and manages risk in the cash and fixed income asset class.
Some of the most important criteria considered when looking to purchase from an issuer or choose a fund manager is their management type, the team managing the fund and their history.
Pedigree is important. Trilogy typically deals with ‘major players’ who are well-established and reliable with a proven track-record. The issuers and fund managers we choose are hand-selected and purpose driven; not selected on a whim or because we simply need to make an investment.
Where we may consider the challenger bank area who offer more competitive returns, we typically only consider larger challenger banks who are backed by government support, have a good capital raise history and are on a growth trajectory. As a result, the liquidity and viability of the business is not as large a concern for us. We do not invest with institutions we deem too high risk.
Type of strategy
When considering fixed interest fund managers, or issuers to buy bonds from, the type of investment strategy they employ is a critical consideration as investment strategies should reflect individual circumstances, investing timeframes and tolerance for risk. Trilogy will choose an issuer or manager based on an assessment of the level of risk, and whether we wish to invest in the particular asset or asset class on offer.
To ensure this, we may pursue a direct investment mandate which places specific criteria around which assets can and cannot be bought. Alternatively, we will ensure the manager discloses in their offer documents where they invest and what types of investments they buy, reviewing this in line with our internal risk and asset strategy. If we do not agree with an investment strategy, we will not pursue the investment.
Returns on offer
The returns on offer are a key consideration when choosing a fixed income or other financial asset investment.
Returns on offer are often directly dictated by current monetary policy and the cash rate. In the current economic environment influenced by expansionary monetary policy, term deposits are paying record low rates. Despite historically being a competitive offering, returns have sharply fallen from the 2% per annum offered by some banks 12 months ago.
Where possible, we aim to achieve more competitive returns through other investment opportunities, however we always remain cognisant of the risk-adjusted returns on offer and consider offerings within our internal risk parameters or variances. Where there is an exception or opportunity with a challenger bank which offers higher returns on investments to compensate for higher risk, we may find this palatable and will consider investment. However, we avoid investments that offer unrealistic or highly volatile returns. In this scenario, we aim to optimise returns while maintaining a level or risk we are satisfied with.
Market volatility is the level of uncertainty associated with the stock and bond market based on changes in the value of securities. High market volatility indicates that the price of securities can change dramatically in a short period of time, and thus, higher risk.
Trilogy aims to provide consistent and reliable returns for our investors in our cash and fixed income investment options. As a result, we avoid large degrees of volatility where possible. Of course, volatility cannot always be avoidable. In 2020, market volatility has been elevated by several uncontrollable factors, including the COVID-19 pandemic, a resulting technical economic recession and uncertainty surrounding government stimulus measures.
How we manage risk
The Trilogy Enhanced Income Fund invests approximately 65% of investor funds into cash, cash style assets and other financial assets, both directly and indirectly through registered managed investment schemes. Other financial assets may include a range of short to medium bank term deposits, bills of exchange, promissory notes, bonds, fixed or floating rate debt securities and income securities. To enhance returns, the remainder is invested in the Trilogy Monthly Income Trust, a pooled mortgage trust that invests in loans secured by registered first mortgages over Australian property.
Trilogy employs a dedicated team who perform due diligence, review onboarding, conduct management, and maintain constant dialogue with any manager or issuer we use to understand their perspective and what’s shaping their strategy – and use that to shape our views as well.
We are satisfied with the current risk profile and return profile of the Trilogy Enhanced Income Fund, which can be attributed to its effective management and our comprehensive understanding of the investment strategies implemented by our underlying managers.
Australia Ratings Analytics (Australia Ratings) recently reviewed the Trilogy Enhanced Income Fund and upgraded it to Very Strong. This is the second highest rating in Australia Ratings’ scale and is used to indicate a very strong level of confidence that the Fund can deliver a risk-adjusted return in line with their investment objectives.
Learn more about the Trilogy Enhanced Income Fund >
This article was prepared by Trilogy Funds Management Limited ACN 080 383 679 AFSL 261425 (Trilogy) and does not take into account your objectives, personal circumstances or needs nor is it an offer of securities. Application for investment can only be made on the application form accompanying the Product Disclosure Statement (PDS) dated 28 July 2020 for the Trilogy Enhanced Income Fund ARSN 614 682 469 or 17 December 2018 for the Trilogy Monthly Income Trust ARSN 121 846 722 and available from www.trilogyfunds.com.au. The PDS contains full details of the terms and conditions of investment and should be read in full, particularly the risk section, prior to lodging any application or making a further investment. All investments, including those with Trilogy, involve risk which can lead to loss of part of or all your capital or diminished returns. Trilogy is licensed to provide only general financial product advice about its products and therefore recommends you seek personal advice on the suitability of this investment to your objectives, financial situation and needs from a licensed adviser to conduct an analysis based on your circumstances. Investments with Trilogy are not bank deposits and are not government guaranteed.
The information contained in the Australia Ratings Analytics report and encapsulated in the investment rating is of a general nature only. The report and rating reflect the opinion of Australia Ratings Analytics Pty Limited (AFSL 494552). It does not take into account an individual’s objectives, financial situation, or needs. Professional advice should be sought before making an investment decision. A fee has been paid by the fund manager for the production of the report and investment rating.