Strategy commentary cont'd: Here it is sobering to note that the US sharemarket has now returned more than 20% for two years in succession for the first time since 1998 and 1999. The late 1990s was similarly gripped by rhetoric around a tech-led "productivity miracle" that was going to completely disappear the business cycle. Hence we had the tech boom, which preceded the unexpected tech bust.

The practical reality was, therefore, far more grim: the US would plunge into recession in the early 2000s, which resulted in the S&P500 index posting total return losses of 9.1% in 2000 and 10.9% in 2001. This represented a cumulative drawdown of almost 20 per cent. The intra-year losses were a lot worse: the S&P500 sank a stunning 29% between January and September 2001.

It was a comparatively more sombre affair across the rest of the world with returns of less than half the US numbers in Europe (Eurostoxx 50 up 11.90%), Australia (the ASX200 up 11.44%), New Zealand (the NZX50 up 11.39%), and the UK (FTSE100 up 9.59%).

As we gaze ahead, investors should focus on the big questions: will a mercurial Trump roil markets and amplify volatility during his final term in power; will profligate political spending continue to crowd-out private activity; will inflation reaccelerate or normalise; will interest rates decline or rise again; will the default cycle deteriorate or modulate; and will the great powers of the world find themselves embroiled in kinetic conflict?

To accent the final point, China has unveiled not one, but two, sixth generation fighter jets in the new year. Officially, the US has yet to even decide if it will produce one. Unofficially, it has probably had several for years zipping around Area 51…

The juxtaposition of modest declines in short-term interest rates against sharp increases in long-term rates meant that floating-rate bond strategies materially outperformed their fixed-rate counterparts (where the latter suffered given that fixed-rate bond prices decline as yields rise).

So whereas the duration-hedged, or effectively floating-rate, Bloomberg Global Aggregate Corporate Index returned 8.60%, its long duration, or fixed-rate, equivalent only delivered 3.69% in 2024.

The floating-rate benchmark in Australia, which is the AusBond FRN Index, returned 5.69% in 2024, which is an attractive 1.34% margin above the RBA's cash rate (and circa 1% above bank deposit rates). This index similarly bested its fixed-rate alternative, the AusBond Composite Index, by 276bps.

Coolabah's most aggressive, daily liquidity, floating-rate strategies, which have average A+ credit ratings, also provided robust returns of circa 9-10% after retail fees (or 12-13% gross). In 2024, the Long Short Opportunities Fund returned 10.0% to 10.2% net of retail fees followed by the Long Short Credit Fund (9.6% to 9.8% after retail fees) and the Floating Rate High Yield Fund (9.0% to 9.2% net). Coolabah's more ambitious customised institutional mandates stretched further with total returns as high as 16.1% after fees.

On behalf of BetaShares, Coolabah manages Australia's largest active ETF, known as HBRD, which is a full capital structure investor in securities issued primarily by local banks and insurers in both Aussie dollars and foreign currencies, including cash securities, senior secured bonds, senior unsecured bonds, subordinated bonds, and hybrids.

In 2024, HBRD returned 7.80% after fees (inclusive of franking), beating passive floating-rate credit benchmarks, such as BetaShares' QPON product and Van Eck's FLOT, which returned 5.94% and 5.63% net of fees, respectively, in 2024.

HBRD also outperformed more aggressive passive floating-rate ETFs, such as Van Eck's popular SUBD, which only allocates to subordinated (known as Tier 2) bonds. In 2024, SUBD delivered 7.1% net.

Under HBRD's documentation, it is benchmarked against unfranked indices produced by Solactive, which track the performance of bank and insurer hybrid securities. Despite only being about 30% allocated to hybrids (the remaining 70% was invested in bonds), HBRD outperformed the Solactive benchmark by 92bps in 2024 after fees. Indeed, HBRD has beaten the major bank hybrid indices after fees since inception notwithstanding that it has been historically underinvested in the sector (and allocated to higher-ranking bonds).

Strategy commentary cont'd: Given APRA's decision to phase-out bank hybrids by 2032 (insurer hybrids will remain afoot), Coolabah expects HBRD's benchmark to be eventually upgraded to more appropriately reflect its current universe, which primarily amounts to investment-grade bonds issued by banks and insurers in Aussie dollars and global currencies, hedged back to AUD. Once again, we would note that HBRD will still have the capacity to allocate to insurer and corporate hybrids.

Coolabah's lowest risk floating-rate strategies are the daily liquidity, A+ rated Smarter Money and Short-Term Income funds (ETF: FRNS), which target returns of 1% and 1.5% above the RBA cash rate, respectively. In 2024, they delivered 6.0% after fees (6.9% gross) compared to cash rate's 4.37% and the AusBond FRN Index's 5.69%.

Coolabah's global long duration strategies also significantly outperformed their benchmarks, as evidenced by the 215bps of gross excess returns rendered by the Pacific Coolabah Global Active Bond strategy (5.45% versus 3.29% in GBP terms). This is particularly pleasing given that this strategy, which is not available to Australian investors, has a higher average A- rating than the index's BBB+ rating. It also carries the same 5.9 years duration as the index.

Staying in the long-duration, or fixed-rate, domain, Coolabah's domestic Active Composite Bond Fund (ETF: FIXD), which has a 5.1 year duration exposure, also comfortably beat its benchmark, the AusBond Composite Bond Index, by 288bps after fees (or by 367bps before fees). In absolute terms, FIXD returned 5.81% net (6.60% gross) compared to the index's 2.93%.

Finally, one of Coolabah's newest strategies, the AAA rated Active Sovereign Bond Fund, beat the RBA cash rate by 117bps in 2024 after fees (or by 217bps gross). The long-duration unit class, which is benchmarked against the AusBond Treasury Index, outperformed by 90bps net or 176bps gross. This is a unique solution that is designed to be extremely liquid by only allocating to Commonwealth government bonds with little correlation to equity or credit markets.

See enclosed below a summary of Coolabah's 12 month returns and current running yields as at 31 December 2024. Note that past performance is no guide to future returns. Please read the product PDS to better understand its risks and consult with an independent financial adviser prior to making decisions.

Strategy commentary cont'd: