Daintree Trusts – Quarter to 31 December 2018

Welcome to all our new clients in the Daintree Core Income Trust and thank you to all our early supporters. This December concludes the first eighteen months of performance for the Fund. For the quarter, the Fund returned 0.49% after fees. Since inception, the Fund has returned net 2.68% annualised; approximately 1.18% above the RBA cash rate.

This year has been one of the most challenging for risk markets since the global financial crisis (GFC). Almost every asset that is considered “risky” has had a poor year include equites, credit, most industrial commodities and their related currencies such as the Australian Dollar. While safe havens such as highly rated government bonds performed relatively well, especially in the December quarter. Australian investment grade credit spreads, for example, had their second worst year in the last twenty outside of the GFC. We are proud to report that despite all the volatility witnessed over the last year and a half, we have still managed to report a positive return every month since inception.

We have been relatively bearish on risk assets for most of the year and therefore defensively positioned, however the extent of the rally in government bonds has caught us a bit by surprise. Given the substantial leverage embedded in the system and the near historically low levels of interest rates, we did not expect to see the rally we have. We had some positions on to take advantage of the rally, but we should have had more in retrospect.

The outlook for 2019 is modestly negative. We believe the market has finally capitulated with respect to risk assets. Importantly, the US Federal Reserve chairman does not appear to see it as his responsibility to prop up financial assets. Combining this with higher cash rates, spikes in volatility, shrinking central bank balance sheets, concerns over Brexit and Italy, trade wars, low oil prices, systemic leverage and a yield curve that continues to flatten there is a fair bit to be concerned about in the coming year.

With respect to cash rates, we do not expect to see any rate hikes from the RBA this year and possibly even next year and likely only one or two more from the US Federal Reserve before they finish this hiking cycle. With respect to credit spreads, we do expect to see further widening in at least the first half of the year, but we do expect the pace of widening to slow as the market has already priced in a fair bit of bad news. In Australia the main risk continues to be the residential housing market where we’ve already seen a modest correction but there is likely more to come.

Daintree will continue to maintain its focus on capital preservation and income generation. As always, we will work to achieve our targeted returns for our investors while minimising risk.

Where to go for more information

If you have any questions in relation to the information contained within this letter, please do not hesitate to call your financial adviser or contact a Client Services Representative on 1300 011 088 (+613 8623 4200 from NZ) or email at invest@daintreecapital.com.au.

Thank you for choosing to invest with Daintree.

Yours sincerely,

Mark Mitchell

Director

Daintree Capital Management Pty Ltd

Anthony Patterson

Director

Perennial Investment Managemetn Limited

Responsible Entity: Perennial Investment Management Limited ABN 13 108 747 637 AFS Licence No. 275101

Investment Manager: Daintree Capital Management Pty Ltd ABN 45 610 989 912 AFS Licence No. 487489     www.daintreecapital.com.au