Barwon Global High Income Fund Update – September 2022

Dec 9, 2022

James: Good morning, Lisa. Thanks for joining us today.

Lisa: It’s good to be here

James: Lets jump right in. Inflation concerns, rising interest rates, recession fears, geopolitical uncertainty – all themes that continued to weigh heavily on markets in September.

We’ve seen broad-based declines across risk assets particularly in equities and high yield bonds. Now, with the backdrop, how has the Barwon Global High Income Fund performed and more broadly, how have the listed private debt funds fared?

Lisa: It has certainly been a more challenging quarter for the market. Just as a quick reminder to our viewers, Barwon’s Global High Income Fund holds an actively managed portfolio of listed private debt funds.

In the September quarter broader equity markets declined 3 to 4% compared to listed private debt funds which were down approximately 8 to 9%.

Over the quarter rising concerns of a global recession and increasing credit risk, saw the listed private debt sector trade out to a 20% discount to their June 2022 net asset values. We last saw that level of a discount in November 2020 as the sector recovered from the COVID-19 drawdown in share prices.

But if I may to provide some context to those performance numbers. Listed Private Debt Funds outperformed the market in the first half of this year so some of that third quarter under performance has been catch up as recession concerns have increased.

James: Ok, so rising credit concerns are seeing the market prices fall in anticipation of credit losses impacting valuations of the private debt funds’ portfolios?

Lisa: Exactly. And in previous cycles this has offered some attractive opportunities with the sector trading down to valuations well below actual credit losses incurred. And the market often selling the private debt funds indiscriminately, failing to distinguish between the quality of managers and their portfolios.

James: In this market, then, what are the opportunities for private debt funds? Are private debt transactions still happening?

Lisa: The opportunity for the list of private debt funds continues to widen with borrowers increasingly turning to private capital as a preferred source of financing. And in today’s market when public market transactions aren’t happening, borrowers can turn to private debt funds which can offer flexibility greater certainty of close and rapid execution; all especially valuable in challenging markets.

James: Thanks Lisa. One of the key features of listed private debt funds is their floating rate exposure – Can you expand on this, and how are the lenders benefitting from rising rates?

Lisa: Private debt funds are well positioned for rising rates. On average over 80% of the loans in private debt portfolios feature a floating rate. So this means, as base interest rates increase, private debt funds will see higher net interest margins and increased annual net income, enabling them to pay out higher dividend income to shareholders.

James: Lisa, we’ve seen the sector trade out to meaningful discounts in the past – what has been the investor experience investing through these periods?

Lisa: Yes, the sector has historically exhibited more volatility than we believe is warranted, given the quality of underlying loan portfolios. While some credit weakness can’t be ruled out, and the market may be choppy for some time yet, the listed private debt funds have delivered very healthy returns when you’ve been able to enter the sector at a 20% discount to book value.

James: Thanks for your time Lisa. Barwon offers the Barwon Global High Income Fund in both a currency hedged and unhedged unit class. For more information on the Fund, please in touch with Barwon’s distribution team,

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