What makes the table-topping Prime Value Cash Plus Fund tick?

September 2017

Prime Value’s Cash Plus Fund, launched in 2014, currently tops the ‘enhanced cash fund’ tables for performance over both the one year and three-year time periods.

The Fund has delivered a 6.0% net return including franking credits for the year to 30 August 2017, and has returned 4.3% net annually, including franking credits, since inception in June 2014.

What does this fund do differently from other enhanced cash funds? Portfolio manager, Matthew Lemke, was interviewed by Yield Report in August 2017 – here is his take on the Prime Value Cash Plus Fund’s unique offering and its performance:

What type(s) of investors would your fund be suited to?

This fund will suit investors seeking an income stream in excess of what they can achieve in traditional bank accounts, term deposits and cash management trusts, whilst preserving liquidity and security. As the fund maintains a mix of short term investments and cash, it means the fund is “liquid” and can redeem investor capital within 2‐3 days of a redemption request, which is unlike a term deposit where investors will typically incur penalties on early withdrawal.

There are no exit fees or penalties for redeeming units in our fund. We truly seek to provide a “cash” type investment with higher returns than traditional cash investments whilst still at all times protecting investor capital, and giving investors quick access to their funds as required. This is our paramount objective and fully governs all our investment strategies and security investments.

In terms of your strategy, can you briefly describe your investment strategy?

The Prime value Cash Fund’s strategy is to provide a return at a reasonable margin above the RBA cash rate whilst protecting investor capital. We achieve this by being spread across investment‐grade entities in securities that meet our stringent liquidity and return characteristics, and that pass our credit tests on an ongoing basis.

We are a cash fund and therefore place a high emphasis on being able to return investors’ money quickly upon an investor redemption request. We have only invested in Australian securities issued by Australian entities thus avoiding complications that can emerge in offshore markets and investments.

A differentiating factor in our portfolio management focus is the ability to earn and distribute franking credits to investors. We have been successful in this regard and our clients have found this strategy beneficial according to their individual circumstances.

Under what conditions would you expect your strategy to not perform/not outperform relative to RBA cash rates? What strategies do you have to mitigate this?

A major credit market meltdown would impact the portfolio. We mitigate this risk by ensuring that we are only invested in Australian domestic investment‐grade stocks that exhibit exceptional liquidity characteristics. Our entire portfolio is able to be sold down in a matter of a few days. This is because we are primarily invested in the professional/wholesale market where stocks can be bought or sold in large volume through the professional market.

We can also shorten overall credit duration if we become nervous about the state of the credit or bond market. This is done quite simply by relevant stock switches.

What was your best performing asset over the 12 months? What were the return metrics for this?

There was no single stand out performer over the year. The performance of the fund has come as a result of a mix of securities, which met our criteria for how exposed to a single stock or a single sector we felt comfortable with. These securities also had to meet our liquidity and credit criteria. We aim for diversity and a spread of risk and as a rule we do not like to single out securities as they all play a part in the portfolio.

The main factors influencing the portfolio return is a combination in roughly equal percentage terms of:

  • Investing in securities that are clearly under‐valued by the market according to our experience and research
  • Credit duration
  • Credit rating
  • What was the highest and lowest rolling 12-month return over the period and what impacted those return outcomes (both positive and negative)?

    Our best rolling 12-month period returned 6.5% in the April 2016 to March 2017 period. Our lowest one-year return was 2.3% during the August 2015 to July 2016 period.

    We have learnt from our best‐performing securities that taking a position based on a well-researched view and being prepared and patient to wait for the correct entry‐price level will ultimately be rewarded. Our main lesson from our worst‐performing securities is that being in liquid securities is paramount to be able to exit efficiently when the fund wishes to no longer hold that security.

    Given your exposure to hybrids, how much emphasis do you place on franking levels?

    We don’t invest in hybrids just to earn the franking credits. However, this is a clear benefit to investors, both offshore and onshore and particularly to investors that have a low or nil tax paying status such as private individuals, SMSF’s and charities/foundations.

    Approximately 60‐70% of the portfolio is invested in floating rate notes which are traded on an over-the-counter market, which is available only to professional investors. Many investors and advisers aren’t familiar with this market and in fact are unable to access it themselves.

    Given our benchmark is the RBA cash rate, we naturally want to be invested in floating rate securities. Floating rate securities are a large part of the domestic debt market along with fixed‐rate bonds. The floating rate market has been in existence in Australia for decades and pricing and trading conventions are well documented and understood, particularly in the professional market in which we predominantly invest. The fund has only a minor exposure to the fixed interest/bond market.

    What are some potential black swan events that fixed income markets may not have factored in over the next 12 months?

    The potential major “black swan” event not factored in by the credit market would be a significant melt‐down in equity markets. However, whilst the credit market would be surprised by this, we have adopted a portfolio strategy that would mitigate this eventuality, notably:

  • being able to liquidate investments very quickly and efficiently
  • our credit duration is low which would mitigate any volatility flow through effects
  • being only invested in investment‐grade securities mitigating any flow‐through credit issues
  • We watch the market extremely closely and can react quickly to events suggesting an equity market meltdown is imminent.

    Have you made any additions to your investment team as a result of the fund’s growth?

    The Prime Value Cash Plus Fund is part of a team of 10 analysts and portfolio managers in the cash plus, equities, agricultural and property investment teams where ideas are exchanged on a regular basis. This combination of perspectives and market involvement is powerful and helps us have a full view of the market so we are not blind‐sided by cross‐over effects that can happen in markets.