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    ASX:DHOF introduction | recorded webinar


    Jodi Pettersen: Ok, everyone, let’s get started. Firstly, thank you for joining us, everyone today. My name is Jodi Petterrsen from Invest, and today I’m joined with Brad Dunn, who’s the portfolio manager of ASX  DHOF. The most recent ETF that has been launched in combinations with Daintree and Invest is launched on the ASX today. So we’re very lucky to have Brett with us because it’s a big day for you, isn’t it?


    Brad Dunn: Sure. Is very exciting.


    Jodi Pettersen: Yeah. So the purpose of this webinar is to provide you all the information that you would need to understand what ASX de Hoff is all about and decide if it’s right for you. Before we dive in a couple of housekeeping, we have a Q&A column segment down below in the little band, so please feel free to drop questions in there for Brad or me throughout the entirety of the presentation. We will just answer them when the time is right. And of course, remember that today we’re speaking in a general nature only today. So this is not financial advice. So disclaimer here we’re just you’ve got to take this into your own consideration. Please seek your own advice and always read the PDFs and TMD at We are also recording today’s webinar so we can share it with people who haven’t been able to join us, so keep that one in mind as well. So let’s let’s get let’s dive in, shall we? Brad, let’s go. Well, yeah, that was the housekeeping’s. We’ve done that. Great.


    Brad Dunn: Thank you very much, Jodi, and welcome one and all for our webinar this morning. Very exciting day. As we were discussing, we are alive and trading, so that’s that’s really, really excellent. And of course, the power of work from all of the team here at the Invest, Daintree and of course, our friends of perennials who have been instrumental in bringing the farm to market. Before I go into the details of the fund, I just thought I’d take a few moments to introduce the Daintree team. So the Daintree team is five good looking individuals. As you see there, Mark and Justin are our founders and directors and myself and the two Simons look after a lot of the analytical and quantitative work at Daintree Capital. We we run our three funds, the first two being the core income and the high income trusts or at each investor. You would know them as equal or impacts. So we have been together now for a little under five years and through that time, we of course, have bring our brought our unique expertise to together to bring these these funds to market. So it’s been a really, really interesting ride so far, but we’re only just getting started here at Daintree.


    Jodi Pettersen: And to provide a little bit of explanation, the Daintree team will be are the investment managers of DHOF, so you can make all the investment decisions and then invest in perennial. We are distributing partners.


    Brad Dunn: Thank you, Jodi. So in terms of our funds under management, pleasingly they continue to grow in a in a fairly steady fashion. But the other point to note is that we have got good recognition from ratings agencies. In particular, Zenith and Lonsec have rated equal and IMAX or the underlying funds of equal and IMAX, as the case may be. And we’re very pleased to have received a superior Four-Star rating from SQM as well for De Hoff. Now that’s probably more relevant for our advisor listeners here today, but it does go to show that the ratings houses are starting to notice and understand what we’re trying to do at day off, and they are very comfortable that we’ll be able to achieve our objectives over time, as are we.


    Jodi Pettersen: If you’re if you’re an advisor watching this today and you’d like a copy of the SXM rating, please either email me or you can also submit a request on the E Invest website. There’s in the Research tab this little form you can fill out.


    Brad Dunn: Thank you very much. All right. We were just going to move on to the next slide, just giving you a very brief insight into our investment philosophy at Daintree. And overall, what we do is when we come to fixed income markets, we approach them in quite a different way. So we try to avoid benchmarks wherever possible and we employ an absolute return style strategy. So what that means is we look to generate returns above the cash rate over time. So positive returns over time above a cash rate, depending on the particular strategies of the fund. We take an active approach and we’ll talk more about that in just a few moments about what active management means to us. But of course, being fixed income managers, capital preservation is still top of our list, so we’re always very keen to ensure that we’re preserving clients capital as much as possible. And finally, another point that we’ll touch on in just a few moments is that we like to take a global focus as well. We recognize that in fixed income markets more generally, the the Australian market is such a small sliver of the of the total market, and that’s very true in hybrid’s case as well. So when we take a global approach, there’s just a lot more opportunities, a lot more opportunities to add interesting securities to the portfolio to achieve our returns with the lowest possible risk. So with that introduction, I think let’s get into the the details of the fund itself. So the Hybrid Opportunities Fund has really been designed to extract the maximum potential from the hybrid asset class. What we noted at Daintree is that the hybrid asset class is a really, really interesting niche asset class in fixed income and that they offer really attractive returns with relatively high credit ratings. And that’s a good mix for us, and we think it would be a good mix for a lot of investors that are keen to obviously find those sustainable income sources while still not taking too much risk overall.


    Jodi Pettersen: Do you want to quickly describe exactly how hybrids work just in case there’s anyone on the call that’s not familiar with them? Sure. Just a little quick explainer.


    Brad Dunn: So, yeah, so the 30-second explainer on hybrids. A hybrid security is a unique security that combines elements of a debt security say, like a bond with elements of an equity security like like a share. And they often have equity debt characteristics in the early days. But in certain circumstances, and there are very detailed terms and conditions for these particular securities that spell out the instances where they can become equity, like in the sense of converting to equity in the underlying issuer or indeed trade like equity in in different market conditions. So as I said, there are very unique type of securities, so you need to sort of keep that in mind that they have elements of both. But one of the challenges is that those elements can often arise when you least want them to. So, you know, in strong markets, for example, they’re not necessarily going to participate in all of the upside, but they can potentially show higher levels of volatility, especially in down down type markets. So that’s something that we’ve taken into consideration very closely when we’ve constructed this fund and it goes to the active elements that I was I was mentioning earlier to try and ameliorate some of those deficiencies that I suppose we could call them when it comes to hybrid securities. So the fund itself, we’re looking to generate an investment return of 3.5 to four point five per cent per annum above the RBA cash rate overall in three to five year periods.


    Brad Dunn: And that’s, of course, net of fees. And the way we do that is primarily from a very strong, solid core book of securities that we estimate would generate approximately 80 per cent of the the net return of the fund. So that’s really just sort of, you know, finding a lot of great securities of great great issuers and then combining them together into a truly diversified portfolio of anywhere from 25 to up to one hundred and twenty five nines at any given time. And then on top of that, what we would do is bring in what’s called an overlay and in very simple terms, what that is is taking views on on things such as interest rates and other factors in the fixed income markets to achieve some additional return that’s not correlated to hybrid returns. So if anyone’s familiar with some of the basics of modern portfolio theory, what you want to have in a good diversified portfolio is lots of different securities, with lots of different return sources all working together because some will be performing well and some won’t be doing so well at any given time. And when you meld them all together, you get a portfolio that hopefully generates a great return, but minimises the volatility in doing so. And the overlay has been included in Darauf to achieve that aim.


    Brad Dunn: So the mixture of those two gets us to our investment objective, which we think we can achieve and is very realistic and sustainable over that three to five year periods and beyond. Now, I did mention the overlay contributing approximately one fifth of the overall return for day off and the way we do that is, as I mentioned, adding an additional uncorrelated return source which what which can be summarized as a value creation element. But the other important aspect of the overlay is risk mitigation. And when I say risk mitigation, it goes to that point. I was making earlier that sometimes when hybrids are trading in a down market and the equity market might be in a bit of a a bit of a negative period. Hybrids can often trade in a negative way and and the correlation to equities or the connection to equities can often increase. So we’re aware of that, and we’ve actually included within the detail portfolio some protection to remove some of the volatility that can occur in the fund when those periods wash through. So the overlay is really doing two jobs at the same time, and hopefully they can work together to to achieve our goals. Now what’s what’s what needs to be noted is the overlay is the exact same overlay program that we’re running in equal and impacts. So we’re not reinventing the wheel. We haven’t created something specifically for this fund.


    Brad Dunn: And the overlay program in Encore has been running for more than four years now. So we’ve got a track record that’s starting to build that we can demonstrate and shows that the overlay program can work. And what we’re doing is simply bringing that proven program into hole and then scaling up the amount of risk that it can take to meet the assets underlying the underlying fund. So that’s a very brief introduction to the overlay. I know it can be a little bit detailed for some people, but just know that it’s there to to manage risk and also to create a little bit of additional value where in an environment where every basis point counts and income is paramount, that’s what the overlay is is endeavouring to do for us in. So just a few more details on some of the specifics of the fund, as I mentioned, we can look offshore and look at global banks as part of our portfolio and up to 50 per cent of the value of the fund can look offshore. So we get a great mix of of Australian securities, which I’m sure many of you would be familiar with that are quite popular because they have franking credits and issued by names that you’re very familiar with and comfortable with. But what we proposed to do indeed is to then supplement that with some good quality banks from offshore to provide that through diversification.


    Brad Dunn: So whereas some of our peer funds have 90 per cent exposure to the four major banks, only here in Die-Off, we have a little little over 20 per cent exposure to the four major banks. So that just gives you some sort of sense of the additional diversification we’ve been able to achieve by looking offshore. Now, as I mentioned, the hybrid securities in general have great returns for the credit rating they offer, and we propose to keep the fund in that investment grade range. So when I say investment grade, it means a portfolio weighted rating of Triple B or Triple B minus, which would still be investment grade in the in the market size. So we want to keep that quality about the portfolio at the same time as generating our returns. And then, of course, we will be paying distributions. They’ll be at their quarterly distribution, which if you own hybrids or invest in hybrids at the moment, you’d be very familiar with because that is the most common payment cycle in the Australian market. But given that we’re listed now and trading on the on the ASX, we’ll have daily liquidity. So it’s as easy as simply dialing into your stockbroker or indeed your share trading account and investigating the fund. And you can see all of those details live on screen, as you can with any other ASX listed security.


    Jodi Pettersen: And it’s live now and people are already starting to put in trades. So it’s very exciting.


    Brad Dunn: And I’ll also note that the inception date of the fund so we do have about 18 months of track record to show you was accepted on the 1st of March 2020. And why I mentioned that date is you will see why in a short while. If you can remember back to that time, there were a few other things happening in the world.


    Jodi Pettersen: Yeah, that was an interesting timing.


    Brad Dunn: So I won’t spend too long on the next couple of slides. But just to just to let you know the way the fund is structured is under a retail PDS, but via what’s called a single unit structure. So that means that investors can decide to buy units in d off, either through the more traditional method of completing an application form or via a platform. And we’ll continue to work to get on more platforms over time, so that option is still available. Or indeed, as we’re talking about today, you can list you can buy units on the ASX. Now both of those units, be it application form and the listed units are all going into the one trust. So it’s all the one central pool of which you can decide as the investor how you wish to buy units in the fund. But I suspect, given that you’re dialing into the investor webinar here today, you’re very comfortable with the listed aspect and probably would be preferring that at this point. So we’re happy to help.


    Jodi Pettersen: What’s really good about that is that the listed structure is that there’s no minimum investment size. So whereas with if you wanted to go and the unlisted route with the what I like to call the 28 page application form from hell, that’s there’s a minimum investment size there. I might be a bit biased towards quoted funds just given my role, but what’s great about dying off is if you buy through the exchange on the exchange traded side, there’s no minimum. Only the minimum that is base is set by your broker, which is often $500. So what it’s really what’s very exciting about this is that it provides access to your, your and your team’s expertise to pretty much anyone can access that and invest that way. And I love that because it would be very difficult for a individual investor to replicate any type of portfolio like this themselves. So that’s what we at investor focus on is offering solutions that we’re active management by having portfolio managers like Brad really adds that additional value and thus why it’s very important that we partner with Daintree to to release this fund into the world because we think there’s nothing else quite like it. But let’s keep moving on into the slides. Oh yeah, how to invest. We kind of already covered that.


    Brad Dunn: Yeah, I think we’ve sort of covered that, but definitely helpful for those visual viewers. Yes, to conceptualize how to invest, but let’s let’s keep the show on the road. Sure.


    Jodi Pettersen: Oh, here we go. Here’s some example


    Brad Dunn: Names. Yeah, no. I’d like to spend just a few moments giving a little bit more context as to why we think global is such an interesting addition to a hybrid, but more generally. And it comes down to the work that we’ve done at Daintree, looking at banks around the world. So as I said, we’ve got a global focus. And what we’ve noted is there are several banking systems in parts of North America, in Europe and even in Asia, where the characteristics compared to Australia, the Australian banking system are very favourable, comparable in many cases and in some aspects, even better. So what we thought was being able to combine some of those issuers together means we could generate what’s called the best of breed portfolio. So we took a number of metrics that are important to us. When we when we consider banks and we we searched the world looking for the best operators in those particular metrics and we did more work and we found some. In fact, we found many. We found up to up to 70 actually, that pass muster in terms of our analytical process. And then it came down to do the issue. The types of securities that are interesting to us and can add additional value by being included with a portfolio of Australian securities. And here are two of them here for you the Royal Bank of Canada and Swed bankers out of Sweden. So what you can see is a lot of the metrics there are very comparable to CBA in one or another levels.


    Brad Dunn: But the interesting part comes when you look at the bottom line there, when we’re actually comparing the yields from hybrid securities that are similarly structured with similar call dates to the CBA security. And you can see that the uplift just in these two examples is 85 basis points up to 85 basis points. And that really is quite symbolic of what you can achieve offshore. The the relativities do shift around a little bit, but anywhere from 70 to more than 100 basis points of additional return, even when you include franking credits, which we have done in this case for the CBA security, which is Pools 11. You can see there that you don’t have to wait for some of those returns because they aren’t going to be frank returns from offshore. So you will have that income coming through and we can obviously pay quarterly distributions quite comfortably. So there’s just two examples, but on the next slide, what we’ve done is just taken that to the next level and included some more names and given a bit more comparison there for. Again, for those sort of visual listeners today. So this gives you two two things to to draw out of this slide. The first is that there are several opportunities offshore from very qualified and quality names when compared to the Australian only.


    Brad Dunn: But the second one is that I’ve included AMP on this chart. And from an Australian perspective, it’s the only name that we haven’t included in the portfolio. I did say that capital preservation is very important to us, and we think that the AMP story still has many more chapters to play out, and I don’t think they’ll all necessarily be positive in the in the story of AMP. So that’s why we’ve been a bit cautious to include that name, even though, as you can see, obviously by including it in the portfolio, it would improve our the look of our numbers. But it’s just it’s just something for us that poses the risk of potentially higher volatility than we would like to see in the fund. So that is that is why we’ve excluded AMP in the portfolio at this point. I would also like to tell a story from offshore, the equity fund managers have a great time. They’ve got so many great stories that they can tell about some of their stocks, some of the some of their winners and of course, some of the losers and the lessons that they draw from it. But I’ve got a great stock story to tell you as well from the Hybrid Opportunities Fund and it comes out of Canada, and it relates to a decision made by the Canadian version of APRA, who in Canada are known as Osby. And they made a decision regarding the banks and how they’re allowed to issue Tier one capital and the types of Tier one capital that they can issue.


    Brad Dunn: So following that change, there was a perception that the securities that we did own in Canada, which are actually listed on the Canadian Exchange, by the way, there was a perception that firstly, their call dates would be brought forward. And secondly, there’d be less issuance of this particular type of security because banks would have other options to diversify their funding sources. Long story short, for the 12 months through to the end of July 2021, those four securities that we owned in Canada averaged a performance of 42 per cent over that period, and it was a very strong contributor to our numbers over that over that time. So the moral of the story, I suppose, is that while I don’t necessarily say for a second that I positioned the fund for that particular outcome, the key point is that we were there. We were diversified into that different market. It didn’t benefit the Australian stocks, obviously, but it definitely benefited those Canadian securities because of that change in ruling, and it just demonstrates diversification in action in our mind. Having those different return sources and those those different investment venues gives us opportunity to take advantage when those things do occur, and in this case, it was a positive occurrence for us. So just a few more details here. A bit of a bit of the nitty gritty for those that enjoy this kind of thing.


    Brad Dunn: As you can see a very broad holding of securities at the moment. So in that table at the top left, you can see that there are 110 unique securities from 43 issuers in the portfolio right now. That that rating, as I said in that in the investment grade level in terms of currency so that the child of the middle bottom of the screen there, you can see that we have exposure to both US dollars in Canadian dollars at a headline level. But all of those currency risks ahead back to Australian dollars. And I will note that within the overlay program as well, there are times when we do take small currency positions from time to time. So that’s why you can see some additional currencies there that have been rounded, essentially a rounding error. But we do have very small currency exposures in the fund from time to time as part of the overlay program. But in context, they are a very small part of the overall assets. And you can see there on the chart on the right. An interesting breakdown of the types of countries of risk that we’re exposed to. Still, obviously a majority in Australia when we include cash, of course, but nevertheless you can see some, some interesting countries, some developed. Europe, for example, is featuring relatively heavily after the US and Canada.


    Jodi Pettersen: And I think also looking at those top exposures, this list right in the centre here. These are all high quality names that we would know, either in Australia or abroad. Yes. So they’re very familiar names, which I think is important.


    Brad Dunn: And so just briefly, touch on performance, as I mentioned, the first of March 2020 was the inception date, and it was an interesting time in March of 2020. We were trying to deploy seed capital at a time when markets were quite dislocated and quite disrupted. So it helped in the sense that when we were buying some of these securities, which we were confident that they would actually come through the other side and continue to perform and pay their coupons and like the yields that we were achieving by buying at that time were quite elevated. So all very comfortable that if we if we stuck it out and we waited for the recovery that we would see a lot of those securities come back to come back to par or come back to some sense of normality. But we were surprised by the speed at which that happened. And by the time we got set, the recovery was also well underway and you can see that come through in since inception numbers. Pleasingly, that some of that momentum has been retained and some of the earlier some of the more recent numbers are continuing to show that we can achieve our investment objective with with the tools we have at hand, including the overlay, which is starting to become albeit slowly, a more prominent part of the the monthly return profile.


    Jodi Pettersen: But I guess it’s like, is it realistic to expect 11 percent per annum forever? Oh, certainly not. No, that was a matter of timing and the fact that you launched the fund as an unlisted format, you know, back on a time of


    Brad Dunn: Yeah, and that’s true for the volatility in Sharpe ratio numbers as well. So for the statistical ones among us, we still think we can achieve a volatility number similar to that level. But we do think that it is benefiting from some of the early days and the since inception numbers. Likewise, the Sharpe ratio we still think we can. We can have a Sharpe ratio, definitely in the high ones over time. But I think we’ve got to still got a bit of a halo over us in terms of that Sharpe ratio that is going to slowly adjust back towards a more normal operating level over the next six to 12 months.


    Jodi Pettersen: Yeah, yeah. But it’s, you know, back to the purpose of the fund. You’re targeting 3.5 to 4.5 per cent above the RBA cash rate, right? So that’s what that’s what you’d expect to see as the timeline kind of expands out.


    Brad Dunn: Definitely. That’s really just a summary for those that like another visual. But we’ll we’ll keep looking at the at this breakdown. So this is the attribution of how we’ve achieved that return. No surprise, the movement in credit spreads or capital values is the key driver for now. But we think that that will reward, of course, to coupon being the the core core driver of return with help from the overlay. So these these numbers are to the end of September, but again, over time, I think you will see a progressive inclusion of overlay returns into this chart once some of the early, early days numbers are removed and the skew can be a little bit less obvious. So really, to wrap it up, what we’re what we’re really excited to bring to the market is the Daintree Hybrid Opportunities Fund, which looks at the hybrid asset class and really thinks about how we can achieve its greatest potential. And we think that the structure of our fund by investing in a mixture of Australian and offshore names, by bringing that active element through our overlay that not only brings that uncorrelated return source, but also seeks to manage risk through the investment cycle we think is the is the best combination to achieve our investment objective over time.


    Brad Dunn: And we do that with we do that with the full support of the Daintree and best and perennial teams that we’re all working together on this one. And it really just goes to show that when you take a disciplined and focused approach in the hybrid asset class, you introduce some true diversification into the portfolio. You really can start to achieve some some great results in your in your hybrid portfolio, which at the end of the day for most investors is going to be about generating sustainable income with franking credits. Of course, we’re available to work towards those income goals that I think all investors have, or I think over time will increasingly need to to think about. Because despite what we’ve seen in the last few weeks, about a fair bit of movement in interest rate and inflation expectations in particular, I think over over longer periods, we’re still going to be in a position where yields are going to be still quite low by by historical standards so that that search for income and sustainable income, I think, is going to remain for some time to come, Judy.


    Jodi Pettersen: Yeah, I agree. I agree entirely. Oh yes. Key terms of the Alpha. I think we’ve covered a lot of this already. But of course, the quotation date live today, which is very exciting. All you need to do is to type off into your online broker and you can buy units. The key phase was charging sixty five point zero sixty five percent management fee and point one percent in expense recovery fees. But wait on the fee stuff. I’ve got something special for you, so just hold on distributions quarterly focusing on. Of course, up to 50 percent of the holdings can be held in offshore hybrids, and we’re still targeting that investment grade credit rating profile. But I have something exciting to share. Guys, we are offering a little special deal for investors that get amongst day off early, so for any investor that invests before the 31st of December this year, they’re next. The following six months investment. So the first half of 2022 will be at zero percent management fee, so we won’t be charging any fees for those that invest before the 31st of December this year. What’s exciting about that is it means that we are rewarding our early movers and getting them into the fund early. So I recommend you reading more details about that in the PDFs, which is updated on our website with all this new information. But essentially you first. First half of next year fee free. Very exciting. Of course, this is the best team, you know, where to contact us if you’ve got questions, I’m going to stop sharing the screen now and. And we can answer some questions because I can see a few questions have come through. So what have we got here? Questions How do rising rates impact hybrid securities?


    Brad Dunn: Good question. The answer is it depends on whether they’re structured as a floating rate or a fixed rate security. So in our portfolio, we have both. But then what Justin does is manages the overall risk of the portfolio together. So generally speaking, a fixed rate security. If interest rates rise, the price of the security will fall. But Justin takes a view and we take a view collectively on what we think the overall exposure to interest rates should be at the portfolio level. So while individual securities might be moving underneath the surface, we take steps to make sure that we’re only exposed to the level of interest rate movements that we’re comfortable with. So I hope that sort of answers the broad scope of the question. But in the portfolio at the moment, we have a very broad mix of fixed and floating rate securities. So generally speaking, the Australian names all have floating rate, and the offshore names generally trade with the fixed rate. So that gives us a bit of diversification to start with. But as I said, we manage exposure to interest rates explicitly over the top using derivatives.


    Jodi Pettersen: I’ve got a couple of questions from Kerry. Thanks, Kerry. What made you decide to list on the ASX and do you only invest in banks?


    Brad Dunn: Yeah, okay. I might start with the second question first. So we only invest in banks at this stage. We don’t necessarily exclude other hybrids, per say. But what we found is when we looked at corporate hybrids, generally, what we found is that there’s often a different reason to issue a hybrid from a corporate, and it’s generally around making. They’re making their balance sheet look a certain way to a credit rating agency. Or there’s often an opportunistic element to issuing a hybrid, which means sometimes liquidity or the ability to trade it in the secondary market can be difficult. And to be honest, in parts of Europe, for example, where there are some corporate hybrids being issued, some of the yields on offer were just really, really low. Yeah. So even though they are opportunistic issuers, there’s a lot of demand for them. So for us, it didn’t really look very attractive on a valuation basis. But when we come to the banks, we know there’s a very specific reason why they issue it. And it’s because of the global capital rules that a lot of them subscribe to and their local regulators force them to be very strict with. So we know that there’s a very sort of programmatic level of issuance, and we know that if one gets called, we’ll need to be one to replace it and they need to keep a certain level of capital. So it’s a lot more predictable market and it’s also quite a bit larger. So we’ve got a lot more choice and a lot more trading ability and liquidity and so on. So that’s that’s the reason for banks over corporates, but we’re not explicitly excluding them from the portfolio. It’s just that they didn’t make sense at the moment.


    Jodi Pettersen: Yeah. And I think like if you’ve heard in the news where they talk about the Basel requirements in the offshore banks needing to be, well capitalised, it’s those types of regulations that really drive the demand for creating and then people investing in hybrids. That’s right. There’s a real structural kind of reason to do so. And in terms of like, why did we choose to list on the ASX? Well, obviously it’s a well-known exchange that lots of people already invest in and in terms of bringing it to the listed markets there. If if you I’m sure some people on the line have compared and had a look at other hybrid ETFs out there, you know that there’s not that many of them and very few of them, if not at all, invest overseas or invest in global hybrids. So we saw a real gap in the exchange traded market for something that is better diversified than just Australian hybrids. We know that investors are already like Australian hybrids, but in reality, hybrids. Australian hybrids represent only four percent of the global hybrid markets, so I think you could. You could argue that investors are doing themselves a disservice by only investing in Australian hybrids, and especially when Brad demonstrates with those earlier slides that they are actually even more attractive returns to be found offshore.


    Jodi Pettersen: So being able to bring this portfolio to the exchange, as I explained earlier, it means that anyone can invest in it and they have to do is just type in the code, hop into their exchange. Oh, I’ve got a question from Kerry about the fees. So brokerage fees, she says, are brokerage fees covered by the expense recovery of 10 basis points? No. So brokerage firms are charged by your broker. Which means that we do not those those fees are separate, and so they actually charged by the broker. There are some brokers where you can invest in invest ETFs without being charged a brokerage fee. Perla is one of them. There is a couple, I think, also self wealth are doing a deal at the moment as well, where you don’t have to pay brokerage on your ETFs. But again, that’s depends on what broker you use, and that’s a fee that’s guided by by them, not by us


    Brad Dunn: When it comes to expense recovery. It is all the expenses of the fund and it’s up to 10 basis points. So we certainly are not going to charge any more than we than we necessarily have to to ensure that the fund is is running smoothly. And then as the fund grows, I would very much expect that the amount that we would charge in that expense recovery column would drop. So we we don’t need to to to spend it, but as we get bigger, it will. It will drop.


    Jodi Pettersen: I’ve had a question come here. Interesting? How do the early investor promo work for an ETF? The fee free units transferred if traded. So how it works is essentially I mean, it’s definitely read the PDFs because we’ve got we’ve kind of detailed it in detail down there, but essentially the fees will be rebated back to you in the form of additional units. And so but you have to have been invested throughout that period. So read the PDFs. But all the details, that’s essentially how it works. And then once they’re additional units, you know, you can, in theory, buy it to sell them afterwards. It’s nothing stopping you from doing that. Alright, I’ve got another question here. In the past, some Aussie hybrids have been volatile and more like equity. What do you do to manage, manage that volatility with your fund?


    Brad Dunn: Sure. Great question. So as part of the overlay program, as I mentioned, we do look to manage the volatility that occurs from those periods where things are going along quite fine and then all of a sudden the market might drop by 10 per cent. It’s often the case that hybrids will drop by several percentage points at that particular point in time. So what we do in the fund is we we take some measures to put in some effectively some insurance policies, and we do that by using derivatives. So, for example, we might buy an option that says that if the market. Let’s just let’s just call the equity market because they are quite closely correlated equity markets. If the equity market drops by 10 or 15 per cent in a very short space of time, then we would get compensated and the value of that option would rise quite quickly. So we could then use that the rise in value of that option to offset some of the movement’s negative movements in the hybrid securities. And we continue to hold one of those in the portfolio pretty much all the time. So it’s always there sitting there and waiting for that potential moment where where markets can drop quite precipitously even in the space of a few days, in which case that option will increase in value to offset some of the the movement in individual hybrid securities or the portfolio in general.


    Brad Dunn: So that’s largely how we do it, but we’ve got a very strict budget, so buying options like that does cost money. So we need to have be very clear about how much we’re willing to spend and how much protection we’re willing to have in the portfolio to manage some of that volatility because we’re not going to remove all volatility. There will be times where the the fund will show some volatility and some negative performance, but that’s all part and parcel of the hybrid asset class. But what we want to avoid is those times where we have those really short, sharp drawdowns because we’ve identified that as one of the the the intricacies or the the speciality of hybrids. So that is that is largely how we do it, and there’s a number of ways we can do it, but it’s quite technical, but it is in there. It’s in there now, and it will generally be sitting there as a as a second layer of protection.


    Jodi Pettersen: Another question here. So do you have any global banks that have less residential property exposure compared with the Australian banks? I know that, you know, we know in Australia how exposed the Australian banks are. Is that what’s it like overseas and how will that impact returns?


    Brad Dunn: It’s definitely very varied. That’s right. So I think I can see in the question there that they’ve noted a couple of


    Jodi Pettersen: Banks Goldman, HSBC


    Brad Dunn: Holdings in particular. It’s not a very large residential exposure at Goldman’s. They very much are lending to corporates, generally speaking. So we know that there are a lot. Goldman’s in particular are a lot more connected to the the economic cycle, especially in the US, but around the world as well, because they have an exposure to corporates rather than rather than residential HSBC and other. Another similar example, so clearly a listener with some good knowledge of the banking sector under their belt, so yeah, great question, and we endeavor as much as possible to compile a portfolio that has lots of different characteristics and aspects to it. And that is one of the considerations.


    Jodi Pettersen: Indeed, diversification is our friend. I’ve got a question from Kerry. Are there likely to be capital gains in the distributions?


    Brad Dunn: Very possibly from time to time. The example that I mentioned they’re from from Canada means that there are very likely for for our seed investors going to be some capital gain elements involved. But of course, that’s that’s quite technical. It depends on when we sell the securities and the like, so it can get technical from from a tax standpoint. But generally speaking, yes, we’re always looking for opportunities. And if we find undervalued securities that we think are mispriced and underpriced and we’re going to buy them for, you know, we’re going to buy a dollar worth of value for 80 cents if we can find it. Yeah. And hopefully over time with that, that valuation discrepancy closes. So, you know, it’s very possible there could be capital gains. But again, we don’t necessarily think about capital gains as the number one driver of the return in the fund. But if we can identify some, then by all means yes, we’ll.


    Jodi Pettersen: Graduate historically, how risky a hybrids compared to, say, mortgage funds or other fixed income asset classes.


    Brad Dunn: Yeah, great. Great question. And I think if you ask 100 different people, you would probably get 90 different answers about where hybrids would sit on the spectrum. From our perspective, we think they sit closer to the fixed income side of the fence because 90 to 95 percent of the time hybrids are trading with that low correlation to equities and more akin to a fixed income style security. The problem is the five percent of the time or the 10 percent of the time when they’re not trading like fixed income, it can be quite violent, if you will, and they can change their nature quite quickly. So of course, we’re aware of that, and we’ve talked about some of the ways that we’re going to try and dull some of that when they do occur. But overall, we think they should sort of land more in the fixed income side of the of the spectrum, so to speak, and whether they’re a supplement to a core fixed income allocation in terms of income generation, that’s generally where we see them and where we place them. And the credit rating being as high as it is in on average sort of plays into that view as well.


    Jodi Pettersen: Last question. So if you’ve got more questions, please drop them in the Q&A because we’re on to our last one now knows you because I know you have a new puppy. What besides your dog keeps you up at night from a financial or macro markets perspective?


    Brad Dunn: Well, I’ll start with the dog question. Yes, we do have a nine month old puppy running around, and to be honest, she doesn’t really keep us up at night to say. But if there are bush turkeys in the immediate vicinity, then the whole suburb knows about it. So bush turkeys are our Achilles heel at the moment. But nevertheless, from a macro perspective, I think it is quite similar to what most would be thinking about at the moment. It’s been very prominent in the news and it’s around the, you know, the central bank and an inflation outlook and how central banks respond to those movements in inflation. So what we think we’ve seen we’re seeing at the moment is some really large disruptions to global supply chains and the movement of goods around and going into Christmas. That’s, you know, posing problems for everyone in terms of getting their Christmas presents on onshore in time and the like. And that’s leading to prices rising across the value chain. At the same time, we’ve got lots of movement in energy markets as well. So energy is quite expensive at the moment, whether it’s coal, whether it’s oil, whether it’s petrol at the bowser, all of those things as well are feeding into a perception that inflation could potentially be on the rise with our view is tempered a little bit by the fact that we think some of those factors that were very little weighing down on the inflation number only a few years ago haven’t left us. So the amount of debt in the world overall is higher than it was two years ago. All the support measures for COVID are making sure that that’s going to be the case for a long, long time. Demographics are still there. The world is still getting older and those people are leaving the workforce quicker than we are getting new workers in. So there are some other challenges there as well in terms of what that means for the longer term inflation story. So overall, if I had to say what was keeping me up at night, it was how central banks react to the evolving inflation story.


    Jodi Pettersen: Yeah. And I think that’s late on to the next question from Kerry that’s just popped up. How do you see rising interest rates affecting the share price? Will we say unit price because it’s in a fund, but same thing? Unit price of health What do you expect if rates were to rise? But what do you think would happen to the unit price of off?


    Brad Dunn: Well, given that our exposure to interest rates or the technical fixed income term is duration. Duration is positive, but it’s only very slightly positive. So if rates, for example, in some kind of alternate world rose at a linear pace for the next six to 12 months, that would have half a percent impact maybe half to three quarters of a percent negative impact on the fund over that over that time period. But that would be a relatively steady movement in rates. But we know that that’s not what happens. So overall, we’re keeping our exposure to interest rate movements for our duration quite low. By our standards,


    Jodi Pettersen: We’ve got compared to other people, other funds out there. It’s quite a quite low duration right now.


    Brad Dunn: Low interest in the year. So yes, quite quite low sensitivity. So we’re we’re taking a fairly cautious approach. So all all in all, interest rate movements are not going to affect the portfolio day to day because the other aspect is especially in overseas markets. But here in Australia, too, the perception is that when interest rates rise. Banks are actually able to change their interest rates that they charge their customers and makes them more profitable as well. So. So long as the the movement in rates is more controlled, if we get an uncontrolled movement in rates where the market starts to lose control and there’s large fluctuations that can be difficult to manage from a fixed income investment management perspective. But if rates are ticking along and rising fairly in in a controlled manner, that that can often be a positive for the markets overall. Yeah, yeah. As we’re seeing sort of equity markets in the US and and others close to, if not at record highs. So even though we do have this specter of potentially increased inflation in central banks starting to remove their support and increase interest rates, the markets aren’t too concerned yet because I think at the moment it’s it’s quite gradual and measured, measured. So yeah, that’s that goes back to the question before. What keeps me up at night? An unrestrained move in bond yields that the market isn’t expecting. That’s that’s really the worst case scenario for us and I think for the risk markets more generally.


    Jodi Pettersen: And I know just yesterday on, of course, the November Melbourne Cup rate decision with the RBA. Any insights? I mean, you would be watching that closely, right? Yeah, no. No. Melbourne Cup race for you. You’re watching, you’re looking at the what the RBA is talking about.


    Brad Dunn: You released at 2.30 and then the ratios of three. Ok. We were able to get a sense of what


    Jodi Pettersen: They were saying. Okay, good.


    Brad Dunn: So I’m still able to watch the race. So but overall, I think I don’t think the market was too surprised by what the RBA said. But what was surprising was the speed at which they’ve changed course. So effectively, what they’ve said is support will continue in the form of quantitative easing or the RBA buying bonds. But the the prospect of interest rate increases is effectively being brought forward by up to a year. Yeah, because conditions are changing, especially in inflation. But what the RBA said was that there’s another factor that they need to watch and see confirmed before. They’re a lot more comfortable, start raising rates and that is wages growth. Yeah. So we know that there’s actually a lot of anecdotal stories of shortages of workers, especially in the industries that have been shut down for many months. Yes. And I think that’s partly an immigration story, but partly a just a mismatch of workers and the types of jobs that need to be structural. Yeah, that’s right. So so those those aspects are sort of playing along in the background, but those market, those wage markets don’t move quickly. So I think the RBA is still going to be quite confident, quite relaxed to sit back and wait for some of those changes in wages markets to come through and and then make the decision then. So I think they’re going to try and, you know, be as be as measured as possible. But I can definitely see a sense in tone. A change in tone. Interesting.


    Jodi Pettersen: I’ve had another question pop in. Are you always 100 percent invested in hybrids?


    Brad Dunn: Basically, yes, we expect our cash position to sit somewhere between five and eight per cent, and we do that for a few reasons. The first is to support some of Justin’s moves in regards to the overlain. Sometimes you need to have a little bit of cash available to to back some of those trades. And the second one is we always want to have a little bit of cash up our sleeves just in case a new security and new issuance, a new opportunity pops up. We’ve got the ability to jump on it quickly and add it to the portfolio if we so choose so great.


    Jodi Pettersen: Well, I think that’s all our questions for today. If you’ve got any additional questions later on that you think, I should have asked that please just feel free to reach out to me and I’m happy to to give you a hand. I answer the chat bot on our website or our course. You can email me which you’ve all got my email by now. Brad, I want to thank you for joining us. It’s been a pleasure. Listeners, I want to thank you for joining us if I hope that you consider De Hoff as additional interesting additions to your portfolio. Remember that if investors who invest before the 31st of December this year get six months next year with no management fees, which is very exciting and congratulations on launching dying off.


    Brad Dunn: Thank you. Thank you, Jodie, and thank you all for joining in and listening and for all the great questions.


    Jodi Pettersen: Lots of good questions today. Thanks so much.

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