Hastings High Yield Fund

The Hastings High Yield Fund (HHY or the Fund) seeks to provide a regular source of income by making quarterly cash distributions supported by a portfolio of debt securities.

In August 2011, Hastings advised the completion of a review of the Fund and a number of actions intended to narrow the gap between market capitalisation and NTA. These actions included:

–     HHY would not consider further investment while a significant discount to NTA exists;

–     Expansion of a capital management program to include a buy-back of units;

–     Seek the opportunity to exit non-core investments; and

–     Enhanced reporting.

Prior to the announcement of these initiatives on 26 August 2011, the share price was $1.05. At the cessation of the buy-back program on 9 August 2012, it had risen to $1.285, a gain of 22.4 percent during this period. Coupled with annual distributions of 15.00 cents per unit, this reflects a total return of 36.7 percent. The gap between the share price and NTA has narrowed from 32.1 percent to 11.0 percent over the same period.

The Fund has continued to accumulate a substantial cash balance, and the gap to NTA has not reduced to a level where investment is in the best interests of investors. Hastings believes it is no longer appropriate for the Fund to retain cash for further investment, and will return surplus cash to investors as part of an orderly run-off and wind-up of the Fund. Specifically HHY will:

–     Not consider further investment at this time;

–     Opportunistically look to exit existing positions where considered in the best interests of investors; and

–     Seek to return all surplus cash to investors including the proceeds from interest income, repayments and/or assets sales.

Investment strategy

Historically, the key elements of the Fund’s investment strategy were as follows:

–     Target investment in unlisted and unrated securities that are not otherwise readily accessible to Australian Securities Exchange (ASX) investors;

–     Invest in debt securities issued by Australian and international entities that:

•      are exposed to the infrastructure and essential services

•      industry sectors;

•      hold a significant market position;

•      generate predictable cash flows;

•      rank ahead of an appropriate level of shareholder equity; and

•      share an alignment of interests with management and shareholders;

–     Invest in debt securities that provide for potential gains flowing from re-rating, early repayment and equity participation;

–     Target active involvement to generate fee income and positively influence the terms of investment; and

–     Hold investments for the medium to long term.

HHY will no longer consider further investments and will return surplus cash to investors as part of an orderly run-off and wind-up of the Fund. This process is expected to take in excess of three years and the market will be kept informed.

Generation of returns

Returns to unitholders comprise regular cash distributions, distribution of annual tax credits and movements in the traded price of units listed on the ASX.

Returns to unitholders comprise regular cash distributions, distribution of annual tax credits and movements in the traded price of units listed on the ASX. Cash distributions are predominantly derived from:

–     Periodic income, in the form of interest and dividends, generated by the Fund’s investment portfolio of debt securities;

–     Fee income associated with investments;

–     Any realised gains, in the form of gains on sale, early repayment and equity participation; and

–     Excess cash.

Movements in the net asset value of units reflect the valuation of investments held by the Fund, including any unrealised gains or losses on investments.

Unitholders should be aware that the net asset value of units may differ from the traded price of units on the ASX.

Information on distribution history and guidance is available in the HHY Investor Centre.

Assets

investment portfolio

At 31 December 2012, the Fund was invested in eight securities; the details of each investment are set out below:

(1)Cory Environmental interest figures include interest that has been capitalised;

(2)EnviroWaste interest figures include interest that has been capitalised;

(3)Includes interest income from cash of $793,000

The latest Product Disclosure Statement, Annual Report and Quarterly Report can be downloaded in the Reports section of the HHY Investor Centre.