Perpetual Credit Income Trust (ASX: PCI) - Income - Asset Manager

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OVERVIEW
The Perpetual Credit Income Trust (‘the Trust’ or PCI) is proposed to list on the ASX in May
2019 and is seeking to raise between a minimum A$150m and a maximum $400m (with
the ability to accept $40m in oversubscriptions). The Trust will be managed by Perpetual
Investment Management Limited (the ‘Manager’) and its highly experienced eight person
specialist credit and fixed income team led by Michael Korber. The Trust is based on an
unconstrained credit strategy that seeks to generate stable monthly income at a target level
equivalent to RBA Cash Rate plus 3.25% p.a. (net of fees), the equivalent of 4.75% p.a.
currently. The Manager will endeavour to do so through a flexible investment strategy that
allows active portfolio positioning in order to focus on the most attractive credit and fixed
income opportunity set focused on Australian securities and offshore securities issued by
global participants in the Australian market. The Trust is managed similarly to the Perpetual
Pure Credit Alpha Fund, which has consistently delivered on its performance objective and
generally been top decile performance within the unconstrained / diversified credit global
peer group average since its inception in February 2012. While the unconstrained nature
of the strategy may, on the surface, appear to introduce greater risk, the intention is quite
the contrary - it is designed to mitigate risk and be conducive to a more consistent income
profile over time with limited downside risk. The Perpetual Credit and Fixed Income team
are pioneers in Australian Credit with Michael Korber launching one of the first Australian
corporate bond funds in Australia in 1997. The team is highly experienced across the credit
and fixed income asset class spectrum, has a long tenure of investing together and is well
resourced. The portfolio will be diversified by asset type, issuers, credit quality, maturities,
country of issuance and capital structure and will be based on a ‘core/plus’ strategy, with
at least 30% investment grade and a maximum 70% in high yield and loans. The portfolio
is constructed based on a long-standing, rigorous and repeatable fundamental investment
approach, that ultimately seeks to understand the financial strength of debt issuers.
INVESTOR SUITABILITY
The Trust is seeking to pay a stable and consistent monthly distribution and to do so
with a strong emphasis on capital preservation and downside risk mitigation. We note
that historically the Pure Credit Alpha Fund, which has a very similar strategy and returns
objective, has delivered strongly on effectively the same objective since inception. The
unconstrained nature of the investment strategy tied with active portfolio positioning with
respect to the most attractive opportunity sets across a broad range of credit and fixed
income assets and up and down the credit spectrum and capital structure positions the
Trust as a one-stop fixed income solution for debt and credit instruments for Australian retail
investors. Further, it represents a key point of difference with a number of fixed income and
credit LITs that have been issued on the ASX over the last 12-months, which are intentionally
specialist strategies. More broadly, the Trust has the ability to fill a gap in many portfolios,
with Australian retail investors being heavily underweight the fixed income asset class, and
hence provide diversification benefits. In the current environment, we also note that the
asset class is not subject to the political risk of equities (potential abolition of franking credits
for zero and low tax rate investors) and property (potential abolition of negative gearing).
RECOMMENDATION
IIR ascribes a “RECOMMENDED PLUS” rating to the Perpetual Credit Income Trust. IIR has
conviction in the Manager’s ability to at least achieve the stated investment objectives over
the foreseeable future. This is based on a comprehensive, proven and repeatable investment
process, a highly qualified investment team, strong risk-management processes, and a
long-term track-record of generating alpha (partly by mitigating downside risks in less benign
market environments). We believe the investment processes, with a strong emphasis on
downside risk mitigation, accords well with the investment objective of stable and consistent