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Michael Korber: chasing quality returns in tightening credit markets

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Credit markets are facing a challenging environment of tightening financial conditions and slowing earnings growth where risk management is more crucial than ever. Most recently, the impact of the sharp tightening of global monetary policy was observed in March as credit spreads were impacted by concerns over the strength of the global banking system. Perpetual’s Managing Director, Credit & Fixed Income, Michael Korber gives his views on the impact this is having on - and opportunities being created for - the Perpetual Credit Income Trust (PCI).

“The PCI portfolio is designed to be the bedrock of people’s portfolios. To do this we don’t chase the highest possible return, we chase the highest quality return. And we think current events globally reinforce the virtue to this approach,” said Michael. “Our credit outlook improved slightly in the first few weeks of March but more recent events, including the collapse of SVB, Signature Bank and Credit Suisse, significantly changed market sentiment and volatility.”

Refinancing risks
Whilst the epicentre was the US regional banking sector, the widening of credit spreads, softening liquidity, and risk aversion spread globally. This has been a further headwind in a market environment already facing up to a spike in inflation and lower economic growth outlooks.

“All of this leads to liquidity pressures in financial markets, making it harder to borrow money in the short term, but also raising refinancing risks for even good borrowers over the next couple of years,” said Michael. “I think we are going to have this tighter, more challenging environment going forward but it is also one that creates opportunity for our portfolio.”

PCI is broadly a corporate credit portfolio, with a focus on large Australian corporates, and so had (and continues to have) little exposure to global banking risk. Where PCI does have offshore exposure, these are to large, systemically important banking franchises in big domestic markets and they meet our investment criteria of being quality issuers with good balance sheets, predictable cash flows and have quality, capable management.

“Our portfolio is unconstrained which allows us to invest very broadly across the fixed income universe,” said Michael. We’re not constrained to particular sectors or particular types of assets. In tough times this allows us to cherry pick the best assets.”

Focus on diversification
In terms of positioning the PCI portfolio to take advantage of the market environment, the focus is on diversification.

“At the moment we hold 127 assets across 91 issuers with 37.4% investment grade, 56.1 % high yield (sub investment grade and unrated) and 6.5% cash,” said Michael. “But diversification is not just about having a large number of issuers or different types of credit quality. We also spread the risk in the portfolio across a variety of sectors/industries and asset types such as bonds, RMBS/ABS and corporate loans1.”

Michael Murphy, Perpetual Senior High Yield Analyst and Portfolio Manager of the Perpetual Loan Fund, outlined the importance of fundamental research when identifying quality issuers to appropriately manage risk when investing in high yield assets and loans offering attractive coupons. At the end of March, the Perpetual Loan Fund comprised 46.2% of the PCI.

“In terms of what we look for in the portfolio, the borrowers are typically large corporates with a strong market position, significant economic moats and high recurring revenues that are resilient to economic downturns,” he said. “A couple of examples would be Arnott’s and Colonial First State.”

Michael added that it was also worth noting some absentees from the portfolio.

“We have very little exposure to companies that have exposure to discretionary spending,” he said. “We also have no exposure to property development, which is more dependent on economic cycles, and we’re mindful that many investors are already heavily weighted to the property sector with their own direct investments. This ties in with the earlier theme of diversification and our intention to provide retail investors access to credit assets that may typically be harder to access or only for wholesale/institutional markets.”

For more information, please visit Perpetual Credit Income Trust (ASX: PCI)

[1] As at 31 March 2023

Michael Korber.jpg
Michael Korber
Managing Director, Credit & Fixed Income
Michael Murphy
Credit Analyst
BEng, BEc, MPhil (Econ)
Michael Korber
Michael Korber.jpg

Michael Korber

Managing Director, Credit & Fixed Income BEc

Years of experience: 41
Years at Perpetual: 18

Michael Korber is Managing Director, Credit & Fixed Income and is responsible for the ongoing strategic review and development of process, reviewing the weekly credit process and reviewing the analysis of all new credit securities. Michael joined Perpetual in August 2004. 

Michael has over 39 years industry experience and prior to joining Perpetual worked as the first Head of Credit at Macquarie Funds Management, spending six years developing its credit investment processes and building the business from inception to over $7 billion in funds under management.

Prior to this, he spent seven years as Divisional Director in Corporate Banking and four years as second in charge to the Head of Macquarie Bank Credit. Earlier, he had spent five years as a Credit Analyst with Westpac Corporate Banking.

Michael Murphy

Michael Murphy

Credit Analyst BEng, BEc, MPhil (Econ)

Years of experience: 10
Years at Perpetual: 4

Michael Murphy is a High Yield Analyst at Perpetual Asset Management, focusing on the high yield and private debt markets.

Michael joined Perpetual Asset Management Australia in October 2018, having previously worked as an Investment Associate at Metrics Credit Partners, responsible for covering leveraged finance and corporate private debt.

Prior to this, he was an Associate Credit Analyst at Morningstar and before that, a Credit Risk Analyst at Commonwealth Bank.

Michael has a Bachelor of Engineering (1st class honours) and Bachelor of Economics from the University of Adelaide, along with a Master of Philosophy (Economics) from the University of Oxford.

This article has been prepared by Perpetual Investment Management Limited (PIML) ABN 18 000 866 535, AFSL 234426. Perpetual Trust Services Limited ABN 48 000 142 049 AFSL 236648 (PTSL) is the responsible entity and issuer of the Perpetual Credit Income Trust ARSN 626 053 496 (Trust). PTSL has appointed PIML to act as the manager of the Trust. It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. You should consider, with a financial adviser, whether in the information is suitable for your circumstances. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.

Prior to making any investment decisions in relation to the Trust you should consider the product disclosure statement (PDS) of the Trust, issued by PTSL, dated 8 March 2019 and the Trust’s other periodic and continuous disclosure announcements lodged with ASX available at www.perpetualincome.com.au.

No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor's capital.