Investment Matters

Company news: Lynas and Ardea Real Outcome Fund

Australian Equities sub-portfolio

Lynas (positive impact) received approval from the Malaysian government for construction of a permanent disposal facility at Bukit Ketam. Establishment of the facility is a key condition of Lynas’ operating license in Malaysia which will be used to store precipitated residue from the water leaching process. Shares in Lynas finished the week 20% higher.

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Income Securities sub-portfolio

The Ardea Real Outcome Fund (ASX: XARO) is a new addition to the Income sub-portfolio. The investment is managed by Ardea Investments, a fixed-income manager founded in 2008 with $14bn of assets under management (AUM).  Ardea manages funds on behalf of some of Australia’s largest Institutional Investors and provides unique exposure to income securities that could otherwise not be achieved.

This unique exposure is accomplished through a strategy that takes advantage of the relative mispricing of securities that are closely related (developed market government bonds, state and territory bonds and money market securities). The fund identifies opportunities where similar exposures can be achieved at different prices, with the difference representing profit. A simple example can be seen below, where a 10-year government bond temporarily trades at a price below its associated futures price. By buying the bond and selling the futures instrument, a profit is made as these prices converge that is independent of market movements. The fund establishes 30-50 of these positions, which are modestly sized and uncorrelated.

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As highlighted in our CIO events, in the current environment investors are being paid relatively little for the credit risk they are taking on, while also taking on the risk of a fall in capital value if interest rates rise.

In taking positions based on exposures being undervalued relative to each other, the fund generates returns that are less impacted by the level or direction of interest rates. The fund is also structured to benefit from periods of high volatility and the possibility of higher inflation, which helps smooth returns and provides added diversification against inflationary or volatile conditions.

The result over the past 7 years returns has been steady, but importantly relatively uncorrelated returns - not only with equity investments but with other income investments (both credit and government bond securities).

Overall, the investment targets a return of CPI +2% and has returned 4.2% since inception.

The investment therefore provides an important source of diversification (which has been difficult to achieve in income portfolios, particularly in a low-interest-rate environment) structured to provide a modest return with low volatility.