In the latest Meet the Manager profile, Money Management speaks to Alexander Funds Management senior portfolio manager Adam Scully.
Scully has worked at Alexander Funds Management since 2019 and previously worked as a senior credit portfolio manager at the Victorian Funds Management Corporation.
Melbourne based fund management boutique Alexander Funds was founded in 2009 by Chris Black to provide access to fixed income credit markets. Its first fund – Alexander Credit Opportunities – was launched in 2009 followed by the Alexander Credit Income fund in 2018.
Over one year to 31 August, the Alexander Credit Opportunities fund has returned 7.4 per cent versus returns of 5.4 per cent by its benchmark of the AusBond Bank Bill Index + 2%.
Read on as Scully discusses the firm’s fund range, his views of the RBA’s monetary policy and the reason why credit investing requires professional management.
Money Management (MM): Can you please give us some background on your company and your experience in funds management?
Adam Scully, Alexander Funds (AS): I joined Alexander Funds four years ago and am a senior portfolio manager in the team and I run the two products that we have with Chris Black, who’s the founder of the firm. So Alexander Funds, we’re a credit-focused asset manager. We have two core products, the Credit Opportunity Fund and the Credit Income Fund. Our universe stretches everywhere, from senior bank bonds all the way through to privately originated loans and private securitisation transactions. And by having that broad universe, it just means that we can find the pockets of inefficiency wherever they are.
Before joining Alexander Funds, I spent 10 years at VFMC Victorian Funds Management Corporation, which is sort of a centralised investment authority that sits within the Victorian state government.
MM: How much does the firm work with financial advisers?
AS: We do a lot of work with advisers and that is our core market in terms of distribution. We do a huge amount of work trying to build our understanding of the credit space and what we’re trying to achieve in the space. The last thing we want is somebody investing in us expecting something different to what we’re aiming to provide because that’s going to lead to disappointment which doesn’t serve us or our clients.
It can be challenging at times because, like any market segment, there’s a level of technical expertise and jargon that comes with this. So we make sure that we’re trying to do the work to boil down what can seem like technical concepts into messages that are digestible and understandable for advisers.
That’s an ongoing part of our engagement with the market, particularly in the securitization space which is an asset class within fixed income that isn’t intuitive. So how we translate that in a way that’s meaningful for our investors and our potential investors is a big part of our overall marketing efforts.
MM: How do you view the monetary policy decisions taken by the Reserve Bank of Australia and how do they affect the average consumer?
AS: The Australian situation is really interesting. If you think about the backdrop we have, consumers have added more and more leverage on average to their balance sheet to buy into more expensive housing and it’s a market that is generally acutely exposed to changes in the interest rates. The mortgage market here is variable rate market as opposed to the US which is a 30-year fixed rate market, so it has different dynamics. Here any changes in monetary policy generally directly flow into consumer balance sheets.
But what we’ve seen over the last few years has been unprecedented in terms of the local market because of the emergency measures launched by the RBA in response to COVID, particularly the anchoring of the three-year government bond rate which created that sub-2 per cent three-year fixed rate mortgage that most banks were offering in 2020 and 2021. And Australians quite rationally gorge themselves because it was a fantastic opportunity to lock in a rate that is probably unlikely to ever be seen again in the Australian mortgage market.
That changed the dynamic and the structure of the Australian lending market. That means the RBA has effectively been forced to make policy decisions based on data that doesn’t truly reflect the impact of rate rises. Our concern is the RBA has already gone too much, that delayed impact from monetary tightening we’ve already seen is fertile ground for a policy mistake.
The other interesting dynamic which counterbalances that to some degree is the level of savings built up which was built up during COVID. So that puts them in a stronger position coming to a higher rate environment but it will be interesting to see the typical psychology of a consumer where they’ve had a significant reset on their mortgage but have savings to lean on. If they decide to use all their savings to support spending then it could keep strength in the economy for another 12-18 months.
MM: Are credit funds the same as fixed income and what are the significant differences between them?
AS: The labels can mean different things to different people but credit is a sub-set of fixed income. Credit can be senior bonds issued by Australian banks that are really highly rated and, depending on the maturity, trade at pretty tight spreads to cash or swaps. But it can stretch all the way through to potentially distressed and special situation strategies which are highly liquid. Then it can sit anywhere between that such as property and corporate bonds.
When we talk about credit, we think of it as three broad buckets; the first being the debt capital market which is effectively bank bonds, the structured credit market so that’s your ABS and RMBS market. To the casual observer in Australia, they can be surprised by how large those markets are, they are on par with the size of the corporate bond market and are a significant part of the domestic credit universe. Then lastly there will be a private credit markets as well which could be loans to a single company or private securitized structures.
Credit is a multi-headed beast and it offers sustained informational asymmetries and inefficiencies, which is great. But you just got to have the platform to be able to access them, because those efficiencies will change in position over time, and you just need to find the bit that works.
MM: Why is professional management crucial in the credit markets?
AS: It’s a difficult market to access directly as an individual investor for a number of reasons such as the minimum parcel size for particular bonds that are difficult to achieve, the settlement mechanics are different to the ASX so being able to settle a transaction can be difficult, understanding how to price a trade is difficult…
Running a share portfolio functionally is pretty straightforward and can be understood by a non-professional investor but credit and fixed income is a lot different in terms of being able to access the product, being able to understand how it operates and being able to manage it on an ongoing basis. None of those things are insurmountable but it does make it harder.
It’s an asset class that does lend itself to professional management to assist you in gaining access because doing it on your own is quite challenging.
To listen the full interview with Adam Scully and a range of other experts, you can access the Relative Return podcast here.
