There are very few constants in investment markets, but the ability for diversification to spread risk and generate consistent performance has been a powerful strategy across all times.
For Matthew Lemke, fund manager (income funds) with boutique investment house, Prime Value Asset Management: “Diversification has earned a place in portfolio theory and practice as a reasonably easy way to protect capital and income generation across different market conditions, which is especially important in the current market environment with all its uncertainties.”
Mr Lemke says diversification is key to delivering the combination of income returns and capital gains consistently achieved by the Prime Value Diversified High Income Fund. “The diversification within the Fund’s asset portfolio is key to providing monthly redemptions to investors in the Fund.
“Diversification is also critical in striking the balance between delivering solid income and a modest degree of capital gains over time.
“This balance can be difficult to achieve – many other funds have income but little capital gains, or if they do deliver capital gains they may not provide income or monthly redemptions.
“The key is in targeting a large range of assets in the wholesale market, including unlisted investments in property and mortgages, which are very carefully assessed by very experienced professionals according to strict investment criteria.”
Diversity and discipline
The Prime Value Diversified High Income Fund has been a consistent performer since inception. “The Fund has been tested in different market environments.
“Returns for the Fund have remained consistent throughout its history, including the period after the COVID pandemic which began in early 2020 when the RBA cash rate and many market rates went to all-time lows, and then when the RBA hiked the cash rate 3.5% in 10 months. This tightening cycle was unprecedented in size and speed since the RBA implemented its ‘Cash Rate Target’ in August 1990, over 32 years ago.
“In the period of these rate hikes, the Fund was able to generate a higher distribution to investors and some capital gains too.
“Less diverse or higher risk strategies have lost performance during this period of market volatility. Or they have been locked into under-performing assets with no redemption option.”
Mr Lemke said a disciplined approach to selecting diverse, quality securities is a major factor in the Fund’s success. “We don’t seek to over-complicate or over-achieve. We don’t want to invite higher risk. Markets can change and we are seeing this again in 2023. It’s important to stick to our long-term diversified strategy, and being both defensive and attuned to risk because the type of risks involved in markets and their degree can change over time.
“We’re in markets we fully understand, and have been involved in for a long period of time.”
Investing in a sensible way means having the courage to avoid certain income producing securities and assets that look attractive at face value. “For example, we have avoided ‘hybrid’ securities due to their complexity – some of them contain triggers which can in some market circumstances introduce a large degree of risk to your portfolio.
“We construct the portfolio with the objective to avoid risk concentration in any sector or market beyond clearly specified limits.”
Transparency and simplicity, and stewarding investor capital, are essential keys in these uncertain times, according to Mr Lemke. “We have views but we don’t know what the future holds. Interest rates could stay high, inflation could stay high. For us, it is about risk-managing the portfolio to cover as many risks as we can identify, and being committed to investing in quality assets on the basis of a long-term, diversified approach.”
Mr Lemke’s Prime Value Diversified High Income Fund has paid a consistent monthly distribution to investors across various market conditions since it was established in 2019 – the Fund is currently paying a $0.49c per unit monthly distribution.
The Fund returned 6.99% per annum after fees for the 12 months to 31 March 2023 and has returned 5.87% per annum after fees to investors since inception.
To invest in the Prime Value Diversified High Income Fund please contact our Client Services Team at info@primevalue.com.au and 61 3 9098 8088