SGH Enhanced Income Trust update – Q2 2025

Enhanced Income Trust update: Navigating rate cuts and credit volatility

In this Enhanced Income Trust update, Stratton Bell, Portfolio Manager of the SGH Enhanced Income Trust, discusses Q2 2025 performance and positioning. He explains the impact of Trump tariffs on credit spreads, the RBA’s rate cut in May, and shifting interest rate expectations. The strategy remains focused on capital preservation and is gradually increasing fixed-rate exposure to support long-term yield.

Watch/Listen to the Q2 2025 Enhanced Income Trust update ⏬:

Transcript:

Quarterly performance recap

The performance for the last quarter was just above 1% after all fees. This underperformed the benchmark by about 0.3% over the period. Over the past 12 months, the performance, after all fees, was 6%. We were pleased with our 12-month performance. However, we were a bit disappointed with the last quarter.

What impacted performance in Q2?

The biggest headwind for the quarter was credit spreads expanding. These expanded over the quarter, especially the first week of April. As Trump imposed his tariffs, we saw a large spike in credit spreads. As we continued to drift across the quarter, the credit spreads came further downward. It wasn’t a level that we saw pre-tariffs, but at pretty close levels. So, that was the major headwind for the portfolio. The other minor headwind for the portfolios we saw short-term interest rates, so the three-month bank bill swap rate continued to drift downwards, and that reflected the RBA cash rate, reduced it in May, and the expected cut in July, which didn’t actually come about. So, we saw the BBSW come down to about three point, 3%.

Tailwinds from fixed rate exposure

On the positive side, as interest rates continued to drift lower, we saw fixed rates drift lower, but that was very positive for our fixed rate investments that we have in the portfolio. So, we had one headwind, which was credit spreads, one minor, which was the flooding rate, but fixed rates were positive and a very much a tailwind for the portfolio.

Our position for the portfolio, going forward, is that the majority of the fund remains in flooding rate notes, and we expect to reduce this over time. About 30% of the portfolio is in fixed-rate notes, and that will gradually increase over the next three to six months, as we continue to see opportunities to invest.

Why invest in the SGH Enhanced Income Trust now?

There are a couple of good reasons to invest in this product right now. The first one would be if you are worried about all-time equity prices across the share market in the US and Australia; this provides very good diversification and low volatility. And then also when we look at the cash return, the expected cash return of more than 5% after all fees over the next 12 months. We think it represents very good value given the current climate.

Outlook for the next quarter

We expect to increase the level of fixed rate investments over the next quarter. That will provide a baseline level of yield for the portfolio on an ongoing basis. And we expect the RBA to decrease interest rates by 25 basis points. That should provide more opportunities for us to continue to invest in fairly good assets at reasonable prices.

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*The text has been edited for clarity.

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Disclaimer

This fund update has been prepared by SG Hiscock & Company (SGH) to provide general information only and is not intended to take the place of professional advice. It does not take into account the investment objectives, financial situation or particular needs of any particular person.

Equity Trustees is the responsible entity for the SGH Enhanced Income Trust. Neither SGH, Equity Trustees nor any of its related parties provide any warranty of accuracy. Past performance should not be taken as an indicator of future performance. You should obtain a copy of the Product Disclosure Statement before making a decision about whether to invest in this product. Follow the link for the full disclaimer: https://sghiscock.com.au/podcast-disclosures-and-disclaimers/.