Salt Funds has lifted the distribution rate on its newish income fund for the first time as rising interest rates, dividends and credit spreads accommodate higher yields.
Greg Fleming, Salt head of global diversified funds, told investors last week that the manager’s Sustainable Income Fund would hike the quarterly distribution rate to 1 per cent beginning May 9, up 0.25 per cent from the previous pay-out.
Fleming said the projected annual distribution rate of 4 per cent reflected changing global financial conditions as interest rates move off near-zero lows to combat inflation.
“We see this increase as sustainable over the next year, due to changes in global monetary policy, in the risk premia available on international fixed interest assets, and in the expected dividend yields available through active management within both domestic and international equity asset types,” he said in a note to investors. “A prudent security selection process assures us that modestly-improved portfolio yield levels will continue to be available, as persistent global inflation re-defines the tools and tolerances required in order to protect and preserve investor purchasing power.”
While the Russian invasion of Ukraine last week might slow the pace of expected interest rate rises, Fleming said the conflict should not disrupt the inflation-battling trend.
As well as lifting rates, central banks were also committed to slashing their balance sheets to reverse emergency quantitative easing measures, he said.
“That should see a gentle upward elevation for yields,” Fleming said. “We’ve also already seen a slight widening in global credit spreads that we think will gradually continue.”
He said the sharp drop in the amount of negative-yielding government bonds of late highlights the significant mood-change in financial markets.
“Globally, the proportion of government bonds offering negative yields is now 18 per cent: 12 months ago it was 30 per cent,” Fleming said.
Launched in May 2021, the Salt income fund has grown to about $45 million – a level high enough, he said, to also support the higher distribution.
In addition to Salt for internal Australasian equities strategies, the income fund includes an allocation to global fixed income (managed by the now Harbour-owned Hunter, which invests via PIMCO) with third-party managers Morgan Stanley and, Cohen and Steers offering exposure to global assets.
“The Fund’s underlying asset mix has shown gains in 2021 followed by declines in value in early 2022 on rising global risks, but these short-term dynamics are independent of the primary focus of the Sustainable Income Fund, which is its focus on holding a well-diversified set of securities with sustainability credentials and reliable income generation features,” Fleming said in the note.
He said the distribution is paid out of actual income received by the fund rather than capitalised gains.
The note says the current “rate will be held until it is reviewed on 31 October in the light of intervening asset market developments, and ahead of the November 2022 distribution payment”.