The Aura High Yield SME Fund recently received a “Very Strong” Investment Rating from Foresight Analytics, indicating a “very strong conviction” Aura “can deliver a risk-adjusted return in line with the investment objectives of the Fund.” And given its “Complex” designation, I thought it valuable to reiterate some of the more insightful points in the report.

To recap, the Aura High Yield SME Fund is targeting returns above its benchmark, the RBA Official Cash Rate (currently 3.6 per cent p.a.) plus 5.0 per cent p.a.

Launched on 1 August 2017, the Fund has delivered returns of 8.43 per cent in the last 12 months, and annualised total returns of 9.52 per cent, after all expenses, over the 67 months to 28 February 2023. The Fund has paid out cash distributions in every one of the 67 months, ranging from a low of 0.60 per cent, to a high of 0.93 per cent with an average of 0.77 per cent. By comparison the compound annual return of the RBA Official Cash Rate plus 5.0 per cent was 7.06 per cent for the 12 months to 28 February 2023, and annualised total return since inceptions was 6.11 per cent.

The Aura High Yield SME Fund indirectly invests in loans to Australian small-to-medium businesses (SMEs) and does so via a tranche-based warehouse finance funding structures through special purpose vehicles (SPV) or managed investment schemes. The lending platforms are specialist lending providers to different market and geographic segments and examples include working capital, asset backed, property backed, livestock secured, invoice secured and legal disbursements. Given the big banks propensity to withdraw from SME lending for reasons associated with the Basel III capital rules (which penalise business loans over home loans), non-bank lenders and the Aura High Yield SME Fund have a relatively high exposure to earlier stage companies. This means the portfolio is riskier than a traditional credit portfolio made up of investment-grade debt.

The Aura High Yield SME Fund attempts to mitigate the risk be conducting due diligence on those lenders. The Fund is currently invested in 7 such lending platforms (of 70 screened since 2017) via circa 10,500 loans of which 60 per cent of the loans have a duration of under six months. Loan security most often includes general security agreements, directors’ guarantees, asset-backed lends, registered second mortgages and insurance protection.

The focus of the management team behind the Aura High Yield SME Fund is, firstly, to mitigate downside risks and preserve capital, and second, to achieve the targeted return. So far, so good – on both fronts; and this is largely attributable to the strong discipline regarding originator quality, whilst also remaining firm on pricing relative to risk (and collateral).  Brett Craig and his team have sensibly assumed the Australian economy will experience a considerable slowdown later in 2023, and are seeking to manage exposures accordingly. If it can navigate such an environment unscathed, this should engender a lot more confidence in the business model for the future.

Warehouse investor economics – an example

Mathematics:

1. At origination, the Lender Principal has the $10 million First Loss Equity Note.
2. The functioning of the retention of the Lender Net Interest Margin (NIM = $5.5 million) is progressively added to the first loss buffer. We assume the Origination Fee ($3.0 million) paid by the SME borrower remains intact.
3. The NIM is calculated as the difference between what the Lender charges the Borrower, in this case at 12.0 per cent p.a. and what is charged by the two Note holders on their component of capital, specifically 5.0 per cent p.a. for ACIF (x $50.0 million) and 10.0 per cent p.a. for AHYSMEF (x $40 million). This amount will increase from Day 1 and hit a steady state (on a relative basis) once the loan book has been in play for a period equal to the weighted average loan expiry, or duration of the lending book.
4. So, what has started as a $10 million first loss buffer has, over time, jumped to $15.5 million (and to $18.5 million if the Origination Fee is included). And if we include the interest receivable for ACIF ($2.5 million) and AHYSME ($4.0 million), this figure jumps to $22.0 million, i.e. a 22 per cent portfolio loss (or $25.0 million, a 25 per cent portfolio loss, if the Origination Fee is included) before the ACIF and AHYSMEF principal is at risk.

Access the Foresight Ratings report here

View the Foresight Analytics details and disclaimer

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

For retail investors, 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

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.