Perpetual Credit Income Trust: PCI Monthly Investment Report – December 2021
HOW WE INVEST
The manager employs a robust, active and risk-aware investment process to invest in the broader universe of credit and fixed income securities. It aims to find the most attractive credit investment opportunities at all times on a risk-adjusted basis. The investment strategy is described in more detail below.
Diversification – the Trust is actively managed and through its flexible investment strategy, diversification can be achieved across asset type, credit quality, maturity, country and issuer. The allocation to high yield assets (sub-investment grade and unrated assets) offers the possibility of generating higher returns for the portfolio while complementing the allocation to investment grade assets. The manager typically focuses on assets at the top of the capital structure, such as senior assets or
alonesubordinated debt because these assets are higher in the order of priority of payment in the event of liquidation of the issuer of the asset.
LIT Australia Focused Credit – although the Trust has the ability to invest globally, the preference is generally to focus on Australian issuers which may be listed or unlisted and denominated in AUD or foreign currencies . The manager believes that its local presence and ability to meet borrowers and their management team is an advantage in assessing opportunities and managing portfolio credit risk.
Income – the Trust’s income is primarily generated from coupon payments on corporate bonds and asset-backed securities, and interest income from investments in loans. It is important to note that the receipt of these payments by borrowers is reliable, as there is an obligation to pay unlike dividend payments from listed companies which are at the discretion of the board of directors.
useTherefore, the predictability of coupon payments is generally high. The Trust’s income also contributes to the current yield which is the expected yield (based on net tangible assets) of the portfolio assuming the assets are held to maturity. The Trust achieves its current yield by investing in a diversified mix of assets across issuers, sectors and asset types.
Investment performance – this is generally determined by the Investment Manager’s selection of assets for the portfolio and the evolution of credit spreads. Credit spreads refer to the compensation or return provided for accepting credit risk, i.e. the risk that a borrower or counterparty will fail to meet its principal and/or interest payment obligations. at their due date. When credit spreads tighten, it indicates improving market conditions and/or a more positive view of borrowers’ risk profile. This means that the value of an existing asset in the portfolio will increase. Conversely, when credit spreads widen, the value of the asset in the portfolio decreases. This is usually the result of uncertain economic conditions or when the perception
staffthe borrower’s creditworthiness has deteriorated.
Asset pricing – assets in the portfolio are typically bonds and floating rate notes that are tradable with daily pricing and liquidity. When external prices are not available, loan valuations are reviewed by the Perpetual Loan Valuation Committee (LVC) and fair valued. This means that if there is a market price dislocation, as we have seen in 2020 with the pandemic, or an impairment risk on a credit, the fair value changes.
Regular access to information is essential to the manager’s investment process to enable ongoing monitoring of credit risk. This allows loan appraisal to be up-to-date and timely. The total value of portfolio assets is reflected in the Trust’s estimated Net Tangible Assets (NTA) published daily on the ASX.
COMMUNICATION TO INVESTORS
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