Challenger High Yield Fund Fund report and commentary – 31 December 2009 Performance Quarter 1 year 3 years 5 years 10 years Inception (%) (%) (%) p.a. (%) p.a. (%) p.a. (%) p.a. Challenger High Yield Fund 1.51 4.94 -10.02 -3.47 - 0.70 Growth return -0.20 -0.25 -15.68 -8.99 - -5.40 Distribution return 1.71 5.19 5.66 5.52 - 6.10 UBSA Composite (All Maturities) Bond Index 1.03 1.73 6.56 5.72 - 5.85 UBSA Bank Bill Index 0.88 3.47 5.92 5.90 - 5.69 Challenger Wholesale High Yield Fund 1.68 5.71 -9.36 -2.79 - 1.38 Growth return -0.25 0.00 -15.55 -8.71 - -5.11 Distribution return 1.93 5.70 6.19 5.92 - 6.49 UBSA Composite (All Maturities) Bond Index 1.03 1.73 6.56 5.72 - 5.75 UBSA Bank Bill Index 0.88 3.47 5.92 5.90 - 5.69 Challenger Professional High Yield Fund 1.70 5.77 -9.31 -2.73 - 2.71 Growth return -0.24 0.05 -15.76 -8.96 - -3.72 Distribution return 1.93 5.73 6.46 6.23 - 6.43 UBSA Composite (All Maturities) Bond Index 1.03 1.73 6.56 5.72 - 6.07 UBSA Bank Bill Index 0.88 3.47 5.92 5.90 - 5.56 Returns are calculated after fees have been deducted, assuming reinvestment of distributions. No allowance is made for tax. Past performance is not a reliable indicator of future performance. Asset allocation Investment objective Current (%) Range (%) Securities 80 70-100 - Domestic 74 The Fund aims to outperform the UBSA Bank Bill Index and - International 6 UBSA Composite (All Maturities) Bond Index over any 12 Cash 20 0-30 month period. Top five positions Fund Investment manager weight (%) Multiplex Sites Trust 6.63 Challenger Managed Investments Limited Sydney Kingsford Smith Intrst Earnings Securities 4.79 Australand Holdings Trust - Assets 3.92 Dexus Rents Trust 3.74 Investment strategy Orica Sps 3.19 Challenger adopts an active approach to managing the Fund. Maturity/Duration Challenger is an active participant in the fixed interest and Duration (years) Fund 0.16 hybrid securities markets and has considerable expertise in UBS Australian Composite Bond Index (All Maturities) 3.40 assessing the investment potential of rated and unrated fixed interest and hybrid securities. Fund facts High Yield Wholesale High Professional Fund Yield Fund High Yield Fund Distribution frequency Inception date 31/08/2002 16/09/2002 03/07/2001 Fund size ($M) 36.4 580.4 75.8 Quarterly APIR code HOW0143AU HOW0141AU HOW0142AU Fees High Yield Wholesale High Professional Suggested investment timeframe Fund Yield Fund High Yield Fund Entry fee Up to 4.0% Nil Closed At least three years 2008/09 ICR 1.50% 0.75% 0.69% Management fee 1.50% p.a. 0.75% p.a. 0.69% p.a. Performance fee 20% p.a. of the Fund’s after management fee return over and above the performance of the UBSA Composite (All Maturities) Bond Index. Buy/sell spread +0.20%/ +0.20%/ +0.20%/ -0.20% -0.20% -0.20% Challenger High Yield Fund Fund report and commentary – 31 December 2009 Sector exposure Security type Fund weight 60% 48.8% (%) Asset Backed Securities 1.05 40% 19.7% 20% 6.9% 9.2% Commercial Paper 0.00 0.0% 4.0% 0.0% 3.8% 0% Capital Notes 1.61 -20% Collateralised Debt Obligations 0.92 Health Care Consumer Cash Derivatives Discretionary Energy Financials Industrials Consumer Staples Convertible Notes 0.71 Corporate Bonds 9.79 Floating Rate Notes 24.23 Income Securities 16.94 Listed Unit Trust 3.09 Mortgage Backed Securities 10.50 Ordinary Shares 0.00 Commentary Converting Preference Shares 3.19 The Fund’s amendment to the withdrawal process remains in place. Converting Preference Units 0.00 Challenger will make a withdrawal offer to investors in the Fund which will be open from 22 January 2010 to 19 February 2010. We Reset Securities 8.19 will make 10% of all investors' units in the Fund available for Cash 19.74 withdrawal which is significantly greater than previous withdrawal offers due to generally improved conditions and the maturity of a Swaps and FX 0.04 significant holding in the Fund. Our ability to make future withdrawal offers depends principally on the available liquidity within the Fund which we continue to monitor. BBB rated corporate bond spreads bps (1year maturity) Market review Investor risk appetites increased during the quarter as conditions in 500 financial markets improved. Sentiment in credit markets however 450 was somewhat dampened during the quarter following concerns of 400 December credit default of state-owned entity, Dubai World, but fears quickly 350 quarter dissipated on the news of a US$10bn bailout by Abu Dhabi. The 300 impact on Australian credit was subdued with asset prices 250 continuing to rally over the quarter. Unsecured issuance totalled 200 $21.0bn. Whilst the majority of this issuance is Government 150 Guaranteed, the volume of this issuance is slowly decreasing as 100 issuers are beginning to find non-Government Guaranteed paper as a cheaper funding alternative indicating further normalisation of 50 credit conditions. Confidence in securitisation markets has improved 0 significantly with a number of deals being issued during the quarter, Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 most notably Westpac’s residential mortgage backed security (RMBS) Source: CBA, Challenger Managed Investments Limited issue. Westpac is the first of the ‘big four’ banks to return to the RMBS market. The deal size was increased to $2bn from $1bn following strong demand. Listed hybrid securities have been the key contributors to The RBA lifted the Official Cash Rate by 0.75% to 3.75% during the performance, supported by improving liquidity, investor quarter with the RBA’s accompanying commentary noting that the sentiment and the equity market rally. Security specific domestic outlook has improved. contributors included Multiplex SITES, Australand ASSETS and Sydney Airport SKIES. Multiplex and Australand have benefited Portfolio update from improved fundamentals in the property sector while The Fund delivered strong positive returns for the third consecutive Sydney Airport is benefiting from the economic recovery as quarter with returns now up 14.18% (Challenger Wholesale High passenger volumes have increased. Mortgage backed securities Yield Fund, net of fees) over this 9 month period. The chart opposite also contributed positively to performance on the back of the shows how credit spreads have contracted throughout 2009, housing market recovery and increasing confidence in the asset stabilising in the 4th quarter. backed security market. Challenger High Yield Fund Fund report and commentary – 31 December 2009 Detracting from performance during the quarter were two unlisted Timbercorp securities. In line with Timbercorp Limited going into voluntary administration, the probability of recovery from these securities is minimal. Accordingly the value of these securities has reduced. Fund outlook Global economic conditions have stabilised however many developed economies may now face potential downside risks in the recovery given the fiscal challenges ahead. Domestically, the outlook is stronger as a solid recovery is underway supported by a robust fiscal position combined with close economic ties to the growing Asian region. Credit markets have rebounded strongly since March 2009 and the outlook for the asset class remains positive as liquidity and appetite for the asset class improves. Performance however will likely be a more measured pace moving forward. We continue to actively manage the Fund to its investment objectives, whilst seeking to raise liquidity where appropriate. Any information contained in this publication is current as at 31/12/09 unless otherwise specified and is provided by Challenger Managed Investments Limited ABN 94 002 835 592 AFSL 234 668, the issuer of the Funds. It should be regarded as general information only rather than advice. It has been prepared without taking account of any person’s objectives, financial situation or needs. Because of that, each person should, before acting on any such information, consider its appropriateness, having regard to their objectives, financial situation and needs. Each person should obtain a Product Disclosure Statement (PDS) relating to the product and consider that PDS before making any decision about the product. A copy of the PDS can be obtained from your financial planner, our Investor Services team on 13 35 66, or on our website: www.challenger.com.au. If you acquire or hold one of our products, we will receive fees and other benefits, which are disclosed in the PDS for the product. We and our employees do not receive any specific remuneration for any advice provided to you. However, financial advisers (including any Challenger group companies) may receive fees or commissions if they provide advice to you or arrange for you to invest with us. Some or all of the Challenger group companies and their directors may benefit from fees, commissions and other benefits received by another group company.
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