I was recently asked by a client what the long-term expectations were for various asset classes offered by Montgomery. Taking work done by Elroy Dimson, Paul Marsh and Mike Staunton¹ from the London Business School and the results produced from Montgomery’s business partners, Australian Eagle Asset Management, Montgomery Lucent Investment Management and Polen Capital, I concluded that equities deliver an average annual (nominal) return of around 10.0 per cent, assuming reinvestment of dividends/ distributions/ income.

And according to Jeremy Siegel, Professor of Finance at the Wharton School of the University of Pennsylvania, equities have returned an average of 6.5 per cent to 7.0 per cent per year after inflation over 200 years. This is known as the Siegel Constant.

It is also important to point out that timing any equities investment needs to be considered. For example, if an investor entered the equities market just prior to the Global Financial Crisis (say 30 September 2007), then their longer-term average annual returns will be a fair bit lower than if they entered the equities market close to the bottom of the Global Financial Crisis (say 18 months later, on 31 March 2009), when most markets had approximately halved in value.

The second consideration for any investor is the variability of those average annual returns, also known as the standard deviation of returns. In short, equities relative to bonds and short-term deposits deliver the highest annual average return but are also much more volatile. Whilst this volatility will vary during periods of unusual inflationary and deflationary pressures, most analysts assume an annual standard deviation of at least 15 per cent for equities. With an average annual return of 10.0 per cent for equities, this means in around 7 years out of ten annual returns will cluster in a range of between negative 5 per cent and positive 25 per cent. Further, in around 9.5 years out of ten, annual returns will cluster in a range of between negative 20 per cent and positive 40 per cent. And the long-term average sees equities produce a negative return (inclusive of dividends) around one year in four and a half.

The question then is how does an investor who is either approaching retirement, or who needs shorter-term preservation of capital, approach investment markets?

I have concluded that for a portion of one’s investment pie it is worth considering a product like the Aura High Yield SME Fund. This Fund is priced monthly and designed for “wholesale” investors with a minimum initial investment of $100,000.

There are three big advantages to this product.

Firstly, it endeavours to pay out monthly income. 

Second, the volatility of that monthly income is expected to be very low (and positively correlated to the direction of the RBA official cash rate, by nature of its split floating and short-term fixed rate exposures).

And third, the thesis is the unit price of the Aura High Yield SME Fund returns to $1.00 per unit, post the payment of the monthly income (usually the tenth business day of the ensuing month), so “timing the market”, relative to the Equities alternatives, plays a less significant role.

Further analysis of the Aura High Yield SME Fund is required to illustrate these three advantages. Launched on 1 August 2017, it had its five and a half year (66 month) anniversary on 31 January 2023. The Fund has paid out income, ranging from 0.93 per cent per month to 0.60 per cent per month and averaging 0.77 per cent per month, throughout its 66-month track record. And post the monthly income payment, the Fund’s unit price has returned to $1.00. The returning of the unit price to $1.00 has meant, to-date, investor’s capital has not once deviated in value, even throughout periods of elevated market volatility such as the COVID-19 outbreak and calendar year 2022.

That said, investors need to appreciate they are not investing in bank bills from a risk perspective, and any redemption requires notice of at least one calendar month. Payments typically take around 45 days from receipt of the redemption notice (and include the interest income from the calendar month in question).

As per the table below, the compound annual average return of the Aura High Yield SME Fund over its 66-month track record, assuming reinvestment of monthly income, was 9.54 per cent for a total return of 65.07 per cent. While the timeframe to 31 January 2023 is relatively short, investors in the S&P/ASX 300 Accumulation Index received a compound annual average return of 9.25 per cent (for a total return of 62.66 per cent) and investors in the MSCI ACWI Accumulation, in A$, received a compound annual average return of 10.05 per cent (for a total return of 69.33 per cent) over this period.

Offering equity type returns, with very low volatility of monthly income, may help to take the questions of timing and volatility out of investing. 

Overall, the Aura High Yield SME Fund offers investors a high yield monthly and should, given its relative advantages, account for a reasonable portion of an investor’s portfolio.

And for those investors who are not considered “Wholesale Investors” under the Corporations Act (Assets of $2.5m; or pre-tax earnings exceeding $250K over the past two financial years; or making an investment of $500K), Montgomery have partnered with Aura with the launch of the Aura Core Income Fund. Its inception was 4 October 2022.

Similar to the Aura High Yield SME Fund in terms of its attributes, but further up the collateral stack (less risky), the objective of the Aura Core Income Fund is to deliver investors the RBA official cash rate (currently 3.35 per cent per annum) plus 3.5 per cent to 5.5 per cent per annum, paid as monthly income. In the four months since its inception, the Aura Core Income Fund has paid four consecutive income payments totalling 2.09 per cent after all fees and expenses (2.10 per cent with distributions reinvested).

Summary

^{1 Pages 12-16}

If you would like to learn more about the Aura Core Income Fund, please visit the fund’s web page to learn more:  Aura Core Income Fund

If you would like to learn more about the Aura High Yield SME Fund (wholesale clients only), please visit the fund’s web page to learn more: Aura High Yield SME Fund

You should read the relevant Product Disclosure Statement (PDS) or Information Memorandum (IM) before deciding to acquire any investment products.

Past performance is not an indicator of future performance. Returns are not guaranteed and so the value of an investment may rise or fall.

This information is provided by Montgomery Investment Management Pty Ltd (ACN 139 161 701 | AFSL 354564) (Montgomery) as authorised distributor of the Aura Core Income Fund (ARSN 658 462 652) (Fund). As authorised distributor, Montgomery is entitled to earn distribution fees paid by the investment manager and, subject to certain conditions being met, may be issued equity in the investment manager or entities associated with the investment manager.

The Aura Core Income Fund (ARSN 658 462 652)(Fund) is issued by One Managed Investment Funds Limited (ACN 117 400 987 | AFSL 297042) (OMIFL) as responsible entity for the Fund. Aura Credit Holdings Pty Ltd (ACN 656 261 200) (ACH) is the investment manager of the Fund and operates as a Corporate Authorised Representative (CAR 1297296) of Aura Capital Pty Ltd (ACN 143 700 887 | AFSL 366230). 

You should obtain and carefully consider the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the Aura Core Income Fund before making any decision about whether to acquire or continue to hold an interest in the Fund. Applications for units in the Fund can only be made through a valid paper or online application form accompanying the PDS. The PDS, TMD, continuous disclosure notices and relevant application form may be obtained from www.oneinvestment.com.au/auracoreincomefund or from Montgomery.

The Aura High Yield SME Fund is an unregistered managed investment scheme for wholesale clients only and is issued under an Information Memorandum by Aura Funds Management Pty Ltd (ABN 96 607 158 814, Authorised Representative No. 1233893 of Aura Capital Pty Ltd AFSL No. 366 230, ABN 48 143 700 887).

Any financial product advice given is of a general nature only. The information has been provided without taking into account the investment objectives, financial situation or needs of any particular investor. Therefore, before acting on the information contained in this report you should seek professional advice and consider whether the information is appropriate in light of your objectives, financial situation and needs.  

Montgomery, ACH and OMIFL do not guarantee the performance of the Fund, the repayment of any capital or any rate of return. Investing in any financial product is subject to investment risk including possible loss. Past performance is not a reliable indicator of future performance. Information in this report may be based on information provided by third parties that may not have been verified.