Financial media is replete with stories observing the fastest increase in interest rates in recent memory, the end of the declining interest rate era, how the fastest rise in short-term rates is inverting the yield curve (2-year bond yields higher than 10-year bonds) and predicting a recession, rising rates are causing the property market to collapse, and how causal inflation is responsible for it all and the financial destruction of many peoples’ lives.
Investors are understandably fearful. Inflation, recession, more rate rises, central banks behind the curve. There’s a mountain to worry about.
The shift to a rising rate environment has not been without negative implications for many equity investors. Spare a thought, for example for those who ignored experience and wisdom and invested in what I call the “profitless prosperity stocks” we consistently warned investors about, some of which have fallen more than 75 per cent from their highs, and even after January’s bounce, remain at prices less than half their 2022 market valuations, such as Wayfair, Shopify, Tesla, Peloton, Carvana, Zillow and Coinbase.
But there’s also good news. Some investors are doing much better amid the higher interest rates.
Before exploring one of these now-more-attractive investments, two Warren Buffett quotes come to mind;
“The most common cause of low prices is pessimism — sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer.”
“Smile when you read a headline that says, ‘Investors lose as market falls’. Edit it in your mind to ‘Disinvestors lose as market falls — but investors gain’. Though writers often forget this truism, there is a buyer for every seller and what hurts one necessarily helps the other.”
The reason for the Buffetisms is that interest rates have been high before. What did investors experience then, and how did they respond? And can we learn anything from those experiences?
In the northern hemisphere autumn of 1981, the yield on the 30-year U.S. Treasury Bond hit 15 per cent (figure 1.).
Figure 1. New York Times article 1981
Source: New York Times, September 9, 1981, Section D, Page 12
The New York Times article observed, “Long-term Treasury bond yields rose briefly to 15 per cent yesterday, but even that record yield for a 30-year bond backed by the United States Government was not enough to attract much investor buying”, adding, “it’s a vicious circle,” one trader said, ”since the lack of investor demand deepens the gloom among the dealers, while dealers’ forecasts of higher rates in the future encourage investors to stay out of the market.”
Taking Buffett’s advice, ignoring the forecasts of impending doom, and just looking at the merit of the investment opportunity presented, surely you would have purchased these bonds offering 15 per cent for 30 years and backed by the U.S. Treasury all day long. What was wrong with locking in 15 per cent per annum, ensconcing oneself on a beach and living off the interest for 30 years?
According to the New York Times, precious few investors did.
That’s because inflation was roaring and the real returns weren’t nearly as high. Add to that, the prediction of even higher interest rates (which would produce unrealised capital losses for bond buyers), and the then hitherto capital losses from bonds as interest rates rose towards those fateful 15 per cent levels, and it’s easy to see why investors remained agnostic.
As an aside, you could have also bought into the S&P500 index, and with dividends reinvested over the next 30 years, returned 892.29 per cent, or 7.95 per cent per annum.
Today, returns from bonds aren’t nearly as high but the sentiment is largely the same. Meanwhile, returns from interest-earning investments have been improving. When risk free rates improve so do those along the entire risk curve. Treasury bonds, corporate bonds, private credit and high-yield bonds all begin offering higher income returns.
Investors in the Aura High Yield SME Fund have recently experienced rising monthly cash income commensurate with the rising interest rate environment already discussed. While the sell-off in some company shares can only be described as ‘carnage’, investors in the Aura High Yield SME Fund have continued to receive positive monthly income. And they’ve achieved this without diminution in the capital value of their units. Figure 2., illustrates the track record of monthly cash income payments.
Figure 2., Aura High Yield SME Fund monthly income
As interest rates have risen during 2022, and in February 2023, the monthly income paid to a hypothetical investor (with $1 million invested) in the Aura High Yield SME Fund has likewise risen from $6,000 per month ($72,000 annualised, on a $1.0 million investment) back in May 2022 to $7,900 per month ($94,800 annualised) in January this year.
The annualised rate of return for an investor in the Fund, based on January 2022 income, is 9.48 per cent. And keep in mind the five and a half-year track record of monthly cash income above takes into account the period of the COVID-19 pandemic.
The Fund has maintained its five and a half-year track record of monthly cash income as interest rates have risen. Indeed, returns have increased commensurate with the rise in interest rates.
Potential benefits of private credit
Importantly, unlike the stock market, the Aura High Yield SME Fund is not one that an investor might feel the obligation to time their entry into. Private Credit investors are not equity investors. Equity investors have the potential for very high returns because they participate in the volatility of equity markets. By withstanding the volatility, equity investors can receive capital gains and growing income over time.
Private Credit investors are not exposed to equity market risks and therefore avoid the equity market volatility.
While there are risks associated with funds that invest in small and medium enterprise loans – even a fund like the Aura High Yield SME Fund, which is diversified across more than ten thousand small short-term loans – some of those risks are different to the timing risks associated with entry into an equity market investment.
For a balanced portfolio, one role a private credit fund like the Aura High Yield SME Fund can potentially play is the defensive role. Conventionally, this role is satisfied by fixed-income products such as corporate bonds and hybrids.
Meanwhile, at the other end of the spectrum, higher risk, higher yield Private Credit products can be used as an alternative to generate equity market like income, without the associated volatility of equity markets.
Higher rates equal better yields
For many years, the declining interest rate environment pushed investors further and further out along the risk curve in an attempt to generate better returns. Investments in venture capital and private equity, bitcoin and NFTs (non-fungible tokens) were not uncommon even among regular retail investors. Higher rates, however, have put an end to that speculative bubble, crashing the value of many of those assets, but higher rates have also made other investments, such as credit funds, potentially more attractive.
In 1981 investors shunned the attractive returns available from U.S. Treasury Bonds. Speak to your adviser about how to avoid repeating that mistake today.
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).
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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.
The United States cryptocurrency sector received a jolt on Monday, as VanEck today marks the inaugural debut of its Ethereum-based exchange-traded fund (ETF). The innovative investment instrument is designed to offer investors indirect exposure to the second-largest cryptocurrency by market capitalization. This exposure is achieved by investing in contracts of Ethereum (ETH) futures.
The product, listed on VanEck’s website, commenced trading on October 2nd on the Chicago Board Options Exchange (CBOE). This milestone establishes VanEck as one of the pioneering U.S. investment managers to introduce an ETF grounded in Ether futures—cash-settled ETH futures contracts traded on the Chicago Mercantile Exchange, a registered exchange supervised by the Commodity Futures Trading Commission (CFTC).
VanEck had disclosed its plans to launch an ETF based on Ether futures last week, indicating that it had received the eagerly awaited approval from the Securities and Exchange Commission (SEC).
The competition for Ethereum futures-based ETFs gained momentum earlier this year when several managers, including Bitwise, ProShares, VanEck, and Grayscale, submitted proposals for such products. As of the latest count, approximately 15 entities have submitted their proposals to the SEC this year.
While U.S. regulators greenlit the launch of the first ETFs based on Bitcoin futures in 2021, they had not previously endorsed funds tied to futures of other cryptocurrencies. VanEck, at that time, emerged as the second manager in the nation to introduce a BTC futures ETF.
In addition to VanEck’s Ethereum futures performance-focused product, several others also made their debut on this Monday. ProShares, the same company that introduced the first U.S. Bitcoin futures ETF in 2021, introduced the ProShares Ether Strategy ETF, along with two others offering a blend of BTC and ETH exposure. Bitwise, another manager, announced the launch of two ETH futures ETFs: the Bitwise Ethereum Strategy ETF and the Bitwise Bitcoin and Ether Equal Weight Strategy ETF.
The crypto community is still awaiting the introduction of the first spot ETFs for both Bitcoin and ETH. In August, the SEC delayed it decision to issue spot crypto ETFs, although no official reason was cited in the decision.
Study uncovers function of mysterious disordered regions of proteins implicated in cancer
Credit: Courtesy of Dana-Farber Cancer Institute
Study uncovers function of mysterious disordered regions of proteins implicated in cancer
Study Title: A disordered region controls cBAF activity via condensation and partner recruitment
Publication: Cell, Monday, October 2, 2023 (https://www.dana-farber.org/newsroom/news-releases/2023/study-uncovers-function-of-mysterious-disordered-regions-of-proteins-implicated-in-cancer/)
Dana-Farber Cancer Institute author: Cigall Kadoch, PhD
New research from Dana-Farber Cancer Institute researcher Cigall Kadoch, PhD, along with colleagues at Princeton University and the Washington University in St. Louis, reveals a key role for intrinsically disordered proteins known as IDRs that are implicated in a wide range of human diseases, from cancer to neurodegeneration. Kadoch’s team studies large protein complexes called mSWI/SNF or BAF complexes that control which genes turn on and off in cells. BAF complexes are the most frequently mutated cellular entities, second only to TP53, a tumor suppressor. Intrigued by the fact that over half of the complex mass contains IDRs, including the ARID1A/B subunits in which a high frequency of disease-causing lesions, or mutations, accumulate, the group set out to define their contributions. They found that these IDR regions lead to two important functions: first, condensation, the tight clustering of proteins in close distance to one another in the nucleus, and second, protein-protein interactions that are required for the proper positioning and activity of BAF complexes along DNA. Kadoch and colleagues show that the right interactions depend on highly specific “sequence grammars” within the protein’s IDR amino acid code, a concept broadly useful to the burgeoning area of work in this area to understand and ultimately therapeutically target biomolecular condensates and their constituents.
IDRs comprise a large percentage of the human proteome and are particularly important for nuclear proteins that govern our genomic architecture and gene expression. Their disruption is frequent in cancer. This study sheds light on the sequence-specific contributions of IDRs to the highly disease-relevant mSWI/SNF (BAF) chromatin remodeling complexes, which have become top therapeutic targets in oncology.
Howard Hughes Medical Institute, The Mark Foundation, National Institutes of Health, United States Air Force Office of Scientific Research, St. Jude Research Collaboratives, Fujifilm, and The Wellcome Trust.
The former FTX CEO was reportedly invited by Vogue editor-in-chief Anna Wintour to be her special guest at the Met Gala, only to cancel at the last minute.
Michael Lewis, author of The Big Short, has painted an interesting picture of Sam Bankman-Fried (SBF) in his soon-to-be released book on the former FTX CEO.
In an excerpt of Going Infinite: The Rise and Fall of a New Tycoon published in the Washington Post on Oct. 1, Lewis described several interactions Bankman-Fried had with the media and influential figures prior to the downfall of FTX and his criminal charges in the United States. According to the author, he would frequently play video games in the background of online interviews — his League of Legends exploits are well reported — often giving little attention to people including Vogue editor-in-chief Anna Wintour.
“Sam didn’t want to seem rude,” said Lewis on SBF’s talk with Wintour. “It was just that he needed to be playing this other game at the same time as whatever game he had going in real life. His new social role as the world’s most interesting new child billionaire required him to do all kinds of dumb stuff. He needed something, other than what he was expected to be thinking about, to occupy his mind.”
At one point, Sam Bankman-Fried was worth $22.5 billion. No one but Mark Zuckerberg had become richer faster.
Lewis added that Natalie Tien, who moved into the role of FTX’s head of public relations and SBF’s “personal scheduler”, said the former CEO cancelled many highly publicized appearances — often at the last minute — for seemingly no reason at all. The Wintour interview reportedly led to FTX's sponsorship and Bankman-Fried as a special guest at the Met Gala, which he ended up snubbing.
“Sam treated everything on his schedule as optional,” said the book. “The schedule was less a plan than a theory. When people asked Sam for his time, they assumed they’d posed a yes or no question [...] All he had done, when he said yes, was to assign some non-zero probability to the proposed use of his time. The dial would swing wildly as he calculated and recalculated the expected value of each commitment, right up until the moment he honored it or didn’t.”
Other in-person showings by Bankman-Fried included testifying before the U.S. House Financial Services Committee in December 2021 and meeting with Senator Mitch McConnell. The appearances marked some of the rare times SBF appeared in public wearing a suit as opposed to his usual T-shirt and shorts — though social media users pointed to footage of the then CEO's shoes slipped on without being tied at the hearing.
It’s unclear what other information will become available once the book is released on Oct. 3, the same day jury selection begins for SBF’s criminal trial in New York. Amid the expected court proceedings, a slew of podcasts, news features, books, and other media have been released detailing aspects of Bankman-Fried’s life before and after the downfall of FTX. A 60 Minutes interview with Lewis revealed SBF had plans to pay off former U.S. President Donald Trump not to run for the office again based on the threat to elections and democracy as a whole.
On Oct. 4, Bankman-Fried will appear in a New York courtroom for the first day of his trial, scheduled to run through November. He will face 7 charges related to fraud at FTX and Alameda Research, for which he has pleaded not guilty.