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    Inflation, interest rates and international forces | recorded webinar


    Jodi Pettersen: Everyone, I want to welcome you. My name is Jodi Pettersen and I’m driving with Justin Tyler today. I’m from Invest. I look after investor relations and of course, Justin is the portfolio manager of the eInvest Core Income Fund and the Daintree Hybrid Opportunities Fund. Both active ETFs, which are issued by  eInvest and we have lots of investors who are attending the webinar today and people that are interested in these two funds. Before we dive into picking Justin’s brain, I want to do a couple of little housekeeping bits and bobs. We have a Q&A function. It’s in the bar at the bottom of your screen. And so you can drop in questions there. Just feel free to drop them in throughout and we’ll we’ll get to them when the time is right. We are recording this today so we can share it with others that can’t attend. So just keep that in mind. And more importantly, we’ve also got an important disclaimer here. So basically what this disclaimer discusses is that, of course, we’re speaking in a general nature only today. This is not financial advice, so always seek your advice and always read the PDF and TMD at Okay, here’s what we’re going to be talking today is there’s a lot has happened right since and a lot is going on right now.


    Justin Tyler: Justin There is, yeah.


    Jodi Pettersen: I’m very lucky to have Justin in the office. He’s a very busy man, but we managed to sneak 30 minutes of his time to ask him the important questions. What I’m interested, Justin, is understanding what has changed, what’s the important stuff and what’s the noise and how is it impacting our portfolios?


    Justin Tyler: Sure. Well, there’s a lot of important stuff that’s changed since. So, look, it’s been a while since since we had one of these these webinars. So welcome, everyone, and thank you very much for taking the time. There’s two things that that I can talk straight off the bat about that have changed a lot. And clearly, of course, the tragic situation in the Ukraine is one of them. We’ll be talking about that from the perspective of how it’s impacting fixed income markets and how it might do so going forward. And the other one, not so much a change as much as an acceleration is the inflation situation in the US. I mean, inflation was an issue the last time we spoke, but I think it surprised people as to a the fact that it’s still an issue and B just how much of an issue it is. And those two issues, the inflation point and also unfortunately the geopolitical point, they’re interrelated. So yes, we’ll discuss that a bit more detail.


    Jodi Pettersen: Thus the heading inflation, interest rates and international forces date. I’ve got this. You want to start with the slide?


    Justin Tyler: Yeah, yeah, I’ll just I’ll talk through the slides. I mean, yeah, look, this is a little bit geeky for some people who are interested in finance, but it’s just so, so important to to both of the funds that we’re talking about today. So both both of the best products that Jody mentions, the core income trust and also the Hybrid Opportunities Fund, they invest in credit. So what that means is they invest in bonds, but they’re not bonds that are issued by government issuers, which are sort of classified loosely as risk free assets. They’re issued by companies and other entities, but largely companies. And because they’re corporate bonds, not sort of sovereign bonds, they’re classified as as more risky bonds. Now, what that means is that people tend to look at the value of those bonds by way of the yield pick up, if you like, of yield spread that they offer over government bonds, the higher the better. Right. So if you want to invest in in credit, you’d like to be compensated for the extra risk go for government bonds. And so these charts that you can see here are charts of credit spreads. And you can see a couple of things. They tend to sort of bubble along and not do very much, but then all of a sudden they spike up quite quickly and come back down again. That’s the nature of the credit market. And it’s interesting because right now we’re moving through one of these credit spread widening environments.


    Justin Tyler: And so the question is, are we going to have an environment that’s sort of like a 2099 to 2001 or 2003 period on the left hand chart whereby credit spreads gradually widen out over a period of time, or are we going to have something that’s more like a 2008, nine or 2020 period where spreads spiked really quickly and came back? Now I don’t know the answer to that in. You know, there is a chance that credit spreads continue to widen. And if they do, what does that mean? It means that you’ll get some mark to market losses on these two portfolios. But what’s really important and in fact, the main reason that I raised this point is that bonds are very, very different to equities. And the main difference is that when you buy a bond, you know, when we buy a bond in the fund, what happens is that we then that issue of money for a certain amount of time and at the end of that period, we get paid that money back. Right? So what that means is that bond values are sort of pulled back to where they started over over time. You invest in a bond at 100. This sort of stuff might go on that you can see on the chart. But ultimately, at the end of that period, you get your $100 back, very different to equities where you might have a loss in value and that loss might be permanent.


    Justin Tyler: Right. So as long as all the issue is that we invest in pay us back, and indeed that’s what we expect. And we spend a lot of time ensuring that that that’s most likely to be the case. Then what these periods are are actually investment opportunities. They’re not times to run for the hills and say, oh, you know, there’s a there’s a loss in value here. They’re investment opportunities because you’re getting into assets cheaper. But you know that when they mature, you’re going to get your money back. And that’s what fixed income is all about. You know, can I invest at a higher yield? Because if that’s if that’s true, then I’ll get a higher income. At the end of the day, it’s all about how much income can we harvest. So I wanted to highlight that mainly for that reason, but also, you know, it means that you’ll see some volatility in the unit prices going forward and the industry to show you that we’re doing everything we can to mitigate it, that ultimately if these yields move higher over, that will be spreads, I should say, move higher over the next year or so. That’s ultimately going to be a good thing if you’re holding period is sort of two or three years or longer, which is what we what we recommend for the coin come just.


    Jodi Pettersen: Yeah, exactly.


    Justin Tyler: Next we can move on. So the question is, okay, so if these credit spreads that I’ve just mentioned are widening, well, why what’s what’s causing that? And there’s typically two main causes. Firstly, and we just saw I just mentioned the 2009 episode in 2020, I would say, which spreads moved wider very quickly. Those sorts of shocks are going to impact all financial markets. And you saw during those periods, equities obviously fell very significantly and various other things move sharply as well. That’s just what happens sometimes. And so it can be something like that that makes credit spreads wider. But the longer periods when spreads move that sort of grind wider over a longer period of time, that’s usually because there’s something in the outlook that’s changed, indeed, something that might be causing people to worry that the economy is heading for a recession. And I think there’s elements of both going on at the moment, hence the title of the presentation. So clearly there are geopolitical risks that we’re living through at the moment that’s definitely having an impact on markets and market volatility has picked up. But at the same time, as you can see on on the chart here on the left, we’ve had rate hike expectations picking up in the US for quite some time now. You can see on the left hand chart this is the difference between what markets expect interest rates to be in December of this year and what they expect them to be in June of this year. You can see how that’s how that’s moved a lot higher over the last year or so.


    Justin Tyler: So that is to say that the market has been pricing interest rates to move higher in the US. So indeed from Thursday night through to December, the market expects interest rates in the US to be to be increased by seven times. So that’s a significant increase in interest rates from near zero levels. What I would say is that there’s probably limited room for that pricing to change. Right. You know, there’s a lot expected, a lot in the price already for for interest rates in the US. But if you look at the right hand chart, this is where I think things can change. The right hand chart is talking about where what we call the terminal rate is. So what it is, it’s looking we’re looking at the average interest rate change over the period of 2023 to 2025. That is to say, let’s get these interest rate increases in 2022 out of the way. Then what’s happening? Well, what the market expects to happen is that interest rates will fall again, which is really interesting. So, Mac, markets are basically so. That will raise interest rates in the US really quickly this year. And if we do that then inflation will fall under control from. It should be said. Almost record, not quite record, but levels that haven’t been seen for decades. The CPI there at around 8% at the moment. If you’re not aware, markets are saying if we raise rates over this this year, 2022, then that problem would be brought under control and interest rates can fall again.


    Justin Tyler: I’m here to tell you that I think that’s very unlikely. What I think is likely to happen is that this terminal rate pricing that you can see on the right hand chart will rise. Because I don’t think the policy intervention that the market is pricing is sufficient. Markets are expecting this is going to be a problem that’s quickly solved. I think it’s going to be a problem that’s not going to be quickly solved. And so ultimately what that means is that interest rates can continue to rise even into 2023 or 2024. And so therefore, we might be moving into one of these periods where credit underperforms for not just a short amount of time, but for perhaps a longer amount of time through perhaps to the end of the year. It’s worth pointing that out because I want investors to know what might happen over the next little while, at least to the best of my ability to tell you what I think is going to happen. But again, to leave you with the fact that even if that does if that is the case, this is a time not to be redeeming funds unless you need to use them in the near term, of course. But if you have an investment horizon of 3 to 5 years, use this period, make use of it. If you have extra capital to deploy, then you might want to consider deploying it over the coming months if these yields continue to rise because it’ll just lock in a better income for you going forward.


    Justin Tyler: So so if we move to the next slide, the obvious question is, well, what’s the inflation outlook likely to be given what we’ve seen in the US, particularly in Australia? What are we expecting now? I would say that we should expect some upside and in fact when the March CPI is released in in the latter part of April, you’re probably going to see a number with a full handle, which is the highest inflation we’ve seen in Australia since around 2008, if not before. So inflation is definitely picking up everywhere, Australia included. But if you think about what’s causing inflation in Australia, well you only need to look as far as your local petrol station. You know, fuel prices are a big driver of inflation at the moment and so therefore I would expect that there’s upside, but I expect it to be limited. And you can see why on the left hand chart unit labour costs are the broadest sort of measure of of the compensation of labour markets. And you can see that there’s not a great story for inflation there at the moment. You know, the labour market is not priced for inflation. You know, we’re not in this situation where the cost of labour, you know, when you take account of productivity and all those other other wonderful things, the cost of labour is not increasing in a way that gives me worry. The inflation in Australia is going to be a long lived problem.


    Jodi Pettersen: When you say cost of labour, you mean like essentially the salaries or salaries.


    Justin Tyler: But what you should expect as an employee is that your salary goes up to the extent that you’re more productive at your work. If you produce more and do a great job, then you should expect your salary to go up. So in a very imprecise way, labour costs are trying to measure that not just wages, but, you know, are wages. Compensating people for being more productive is what what that image is trying to do. And if that’s the case, then you might expect inflation to pick up. But it’s not the case. You can see that unit labour costs there are quite low. That might change over time. Look at the right hand chart. This is just one banks record at trying to forecast inflation. You can see how wrong they’ve got it. So I’m not putting my hand up to say that I’m better at it than they are or anyone else for that matter. But my expectation, for what it’s worth, is that inflation in Australia will not have the same sort of trajectory as what we see in the US.


    Jodi Pettersen: And I think that’s consistent with what Brad’s been telling me every month in the last few months. In our monthly update for the audience listening, I interview Brad, who’s one of your colleagues, Justin every month on the portfolios and how they perform for that month. And that is something that’s consistent with what he’s saying, that while the inflation situation in the US has been exaggerated, it’s not exactly the same here. And I think that’s important to recognize.


    Justin Tyler: Something that Brad, most of the rest of the team are kicking around all the time. But yeah, we keep coming back to the same viewpoint.


    Jodi Pettersen: Yeah. Although the. So the petrol bowsers are getting lots of news right now. News dot com today is full of all these articles.


    Justin Tyler: That’s right. That’s right. And so you ask us all. Okay. Well, what’s going on with fuel prices? Now, of course, the geopolitical situation is the main driver of that. But if you put fuel prices to one side, there are broader issues in the economy globally that I think most people are probably aware of. But it bears repeating. It’s the fact that post-COVID supply chains are just under stress. You know, you go to the supermarket, you’ll notice that some of the things that you might normally want to get are in short supply, even though the pandemic is hopefully in its in its sort of final stages. Touchwood if you know, if that’s the case, if the pandemic is in its final stages, you might ask yourself why? Why are these supply chain issues long lived? And again, it goes in part back to the geopolitics that governments are now aware that there are certain things that perhaps that were imported that perhaps shouldn’t be, you know, anything from safety equipment to defence perquisites and so on and so forth. You know, there is a big reassessment of supply chains going on and it will take some time. So that’s one of the reasons that that, you know, inflation is picking up globally because that period, that period of time is going to be quite a long one, as I’ve said.


    Justin Tyler: But going back to the war, the other thing that that’s happened, if you look at the left hand chart here, this is the chart of industrial metals from from Bloomberg. You can see how much it’s spiked. That’s largely the price of nickel, of which Russia is a large exporter, but it’s other industrial metals as well. So the reason I put this on, on a risk to be aware of chart is that if you think about what happens when you see a price rise like that, what would happen if you had an expectation that you needed to pay $100 for something and then you woke up in the morning and instead you needed to pay $150 and you didn’t have that money. Right. If you if if that was the situation that you’re in writ large, this is what has happened here. Supply chains are essentially payment chains in reverse. When you have big spikes like this, you can bet that there’s someone with a big position somewhere who is under stress. So when we see these sorts of things, we buy because the second round impacts are very difficult to predict. So there are impacts in markets that we think are sort of coming down the pipe as a result of this and other things that are going on that make us a little bit wary at the moment.


    Justin Tyler: So we do have all sorts of positions in our portfolios just to reduce risk, at least at this point. And the other reason we’ve done that is if you look at the right hand charts, one of the things that’s really important in markets is what we call liquidity. What that means is how easy is it to get in and out of your positions? And there’s there’s two charts there. I won’t bore you with the details, but essentially what they’re saying is that it’s getting harder to get in and out of positions at the moment, particularly if those positions are large. So our portfolios aren’t massive. You know, there are other managers with sort of 8 to 10 times more funds under management than us. So we’re well placed to deal with this market environment. But again, as the second round impacts, you know, if we are finding it difficult, we’re not. But if we were, then imagine what someone down the road might be feeling. It might be almost impossible for them to move their portfolio around. So again, this is why in our portfolios at the moment, we’ve got all sorts of positions on just to reduce risk at the margin while we wait for these sorts of events to play out.


    Jodi Pettersen: This graph on the left, the Bloomberg Industrial Metals Index, you’re saying that a lot of this price spike is related to nickel. Is there is that opportunity for producers to produce more nickel, like to to meet these like for production to increase to meet these price spikes to take advantage of the spike.


    Justin Tyler: Yeah.


    Jodi Pettersen: And is that.


    Justin Tyler: Yeah. Unfortunately these sort of these sorts of commodities, it’s not the same as other markets where yeah. If you have a price spike like this, there’s some markets where it’s very easy to to increase capacity, but there are other markets where it’s very difficult and you know, industrial metals are likely a result of sorry, like the example of the latter, very time consuming and expensive to build nickel mines and to explore and make sure that you’ve, you’ve positioned yourself to, to mine good quality ore and so on and so forth. That’s why these sorts of markets are prone. In times of stress to this sort of price action.


    Jodi Pettersen: Interesting, because this is something that I don’t see the news talking about. That’s lot. Not as much as not as like the mainstream news is not talking about that. So that’s very interesting. Let’s jump to the next slide.


    Justin Tyler: And so I just and this is where I’ll sort of stop talking about the the the specifics and and zoom out a little bit. This is a chart that shows two things. Firstly, the the darker green line, the cash rate. You can see at the moment, it’s it’s at record lows. As we all know, there are expectations in interest rate markets that the cash rate will increase in June. Now, I have to say personally, I don’t believe that some people are even saying may. I think that at the earliest the cash rate will move later this year. It might even move in in 2023. However, the risks are skewed to an early move, not a way to move. You know, the times that we live in have changed. And so, yeah, we are solidly now into a period where interest rates are much more likely to rise than fall. And that that that raises the question that if they’re rising, how high are they going to rise? And that’s why we put the latter green line on this chart. What that shows is the difference between ten year bond yields and that cash rate. And what’s interesting is that you can see that over time, typically, that ten year yield has has peaked at around sort of 5% of over cash. And you can see that happened in the seventies, actually.


    Justin Tyler: But what was interesting about that period is that just a casual inspection of the graph tells you U.S. interest rates were much more volatile at that time. And so the question is, do we think that that bond yields and therefore the entire term structure of interest rates is going to rise all that much further? And I’d say if you look at this light green line, maybe we can rise a little bit further. But if we did, we’d be moving back to a sort of nineties paradigm. And that nineties paradigm is when expectations of inflation were not as well anchored as they are now. So inflation really very important at the moment. Yeah. Yeah. So what does this all mean? At the end of the day, what it means, as I mentioned before, is the monetary policy is normalizing now. We all, all of us individuals as well as all of us in markets and indeed in time markets have to deal with that because it is really a step change to the environment that we’ve been in really since the GFC in the late 2000. So early 20 tens, late 2000s, that’s changing. And so we have to be aware of that, that the good news is that in Australia is we should lag other central banks in making these moves. As I’ve mentioned, the Australian backdrop is quite different to the backdrop in the US and elsewhere.


    Justin Tyler: However, inflation is is not the only issue if if we have a continuation of the geopolitical situation, if the war continues for several more months, then that is not only going to cause inflation to pick up more, it’s actually going to have a deleterious effect on growth. That’s called a state inflationary backdrop. This combination of low growth and high inflation, it’s really quite a bad backdrop for financial markets. It’s a backdrop where you really want to be considering, Look how much of my investment portfolio is defensive and how much is risk seeking, because at the moment we feel that having a bias towards defensiveness is sensible. The other uncertainty for us and that we’re something we’re watching closely, is how willing will the US Federal Reserve be to act decisively in the face of not only high inflation, but the fact that as they act, the equity markets around the world are likely to fall sharply. In the past, that’s been enough to scare the Fed off and to slow the pace of policy tightening. I think that going forward that won’t be the case. And so this policy normalisation is something, as I mentioned, everyone needs to really be aware of and sort of get used to because it changes the backdrop.


    Jodi Pettersen: Yeah, it’s definitely I’m sensing in this discussion a real kind of change in tone.


    Justin Tyler: Yeah. I think that’s fair. I think that’s fair. And there should be a change in time from anyone in markets at the moment. We’re all aware that the backdrop has changed. And for those those people who are on fixed incomes, it’s actually a really good thing because, you know, those rock bottom yields that that everyone sort of unfortunately had to get used to. I think that period is coming to an end. And so for income investors, we’re moving into a period of much more much more sensible yields, basically. But let’s not forget that, you know, COVID, as I’ve said, I think we’re on the tail end of that, but we can’t leave it in the rearview mirror. There’s always the chance that there’s a mutation that hits our shores that causes further disruption, and we are moving into the Southern Hemisphere winter. So that’s something that we continue to keep a watchful eye on, particularly since, as I’ve already mentioned, supply chains are under stress anyway, given the past of the pandemic and also given the geopolitical backdrop. So that feeds back into the inflation story that I’ve been telling.


    Justin Tyler: And it all means that markets are going to be volatile and we really have to be discriminating. Discriminating well between assets that are you know, we’re at that time and our and our hard earned capital and those that aren’t. It’s been interesting over the years prior to that. Sometimes that analysis has not led to the sorts of gains you might expect. You know, everyone’s just bought things without a lot of discrimination. You only need to look at main stocks, for example. We think that that period is coming to an end and that really careful analysis that we do is going to be much better rewarded. So yeah, the summary is that a difficult market environment, we’re doing everything we can to protect capital. And certainly if you’re in the core income fund or the hybrid income funds, you know, we argue a much better place versus riskier assets like equities right now and also a much better place than there have been in the past. Just with yields rising, that that income generation is going to really come to the fore over time.


    Jodi Pettersen: Yeah, the expectation of interest rates rising is great for income investors who who realised so many investors in Australia who rely upon income for their supplement, their pensions in their retirement phase. So I think this is for that audience. This is really good news. Can we maybe we’ve got one more slide here. And what this slide really demonstrates, I think, is how you’re taking synthesising all this information and applying it to the portfolios. Yeah, yeah. Like what are you actually doing when you take this information? How you implementing it into a cool and die off?


    Justin Tyler: Sure. So we’ve mentioned the volatility piece. And so as I mentioned this, this is something that’s concerning for all markets. It doesn’t matter where you are. And as far as what we’re doing in our portfolios at the moment, as I’ve mentioned, we’re doing things to reduce risk to the extent that we can. So bonds in the portfolio that have tended to be more volatile over time, we’ve sold those down and moved into things that that are less volatile. We reduce the amount of exposure that we have to interest rates, because as interest rates rise, the value of bonds tends to fall better. That is the value of fixed rate bonds, I should say, tends to fall. We’ve reduced that exposure. We put some some actually very specific protections in the portfolio, specific credit as well. You know, if there are things that we want to sell, we’ve sold them. If there are things we want to hold for the minimum term, we’ve tried to protect the portfolio in the sort of near term against the volatility that might result. And the reality is, as I’ve said this, this affects all markets and defensive assets just the same as risk assets might stay under some pressure in the near term. So as I’ve mentioned, it might mean that there’s some volatility. We might underperform cash over the next sort of 3 to 6 months. But what’s difficult about that for investors who aren’t looking at markets all the time, what’s difficult is, okay, if you if you pull your money out as a result of that, when do you put back very, very difficult to make that call? I would say it’s difficult for us as professional investors to make that call. So what is important, I think, is to stay the course over over this challenging period, knowing that if you do so, as long as your investment horizon is the correct one for the product, that you’re just going to be earning higher income over the remainder of that horizon. So as I said, I think that’s a that’s a good thing.


    Jodi Pettersen: So there might be some volatility, but hopefully at the end you’re rewarded for holding through.


    Justin Tyler: Exactly right. Exactly right. And when I’m talking about volatility, you know, if we have one of our portfolios that falls. You know, I bought 5.2% anything up to 1%. You know, in that environment, equity markets might be falling 5 to 10 times as much. So we.


    Jodi Pettersen: Saw relative write.


    Justin Tyler: That that really should be. I think it’s always important to bear in mind. And of course, what’s driving all of this, in addition to the Russia-Ukraine situation, it’s interest rates rising. You know, so what’s interesting in fixed income markets is just how diverse they are. You know, we’re talking about equity and at the moment, there’s lots of other products out there. One of the things that you need to be mindful of looking at products is what’s actually going on under the hood. And I’ve mentioned that one of the things we’ve done in our portfolios is really reduce the amount of interest rate exposure that we have. That’s not the case everywhere. And in fact, if you’re in a passive fund, lots of advisors use passive funds because it’s well known that the fees are low. But if you’re in a passive fund, you likely have a lot of interest rate exposure. And in your sort of bond allocation, if you do, you’ve probably seen already in the last few months that that struggled. So I’m here to tell you it’s probably going to continue to. You might want to rethink that.


    Jodi Pettersen: Yeah, I think yeah, sure. Keeping duration short right now makes a lot of sense. I can see a number of questions that people have been submitting, so I’m going to stop sharing this screen and let’s answer them. All right. Here we go. Let’s have a look. With. I think we’ve answered this already, but with spreads with spreads expected to widen. Do you have any concerns with liquidity, with the assets you hold?


    Justin Tyler: Yeah, so I touched on that. The short answer is no, we don’t have concerns around any of the assets that we hold that looking at the market in general. Yes, we have increasing concerns about liquidity, liquidity across markets. That that’s equities as well as bonds has been falling just as a result of the backdrop that we’re in. So yeah, we’re definitely considering our liquidity very carefully. We have lots and lots of cash in the portfolio at the moment. There’s various other things that we’ve done to ensure liquidity is not a concern for us, even though in the markets it’s something that people I think should be taking a lot of care off right now.


    Jodi Pettersen: Yeah, I have another question here. The general indebtedness of the Australian consumer, is that a concern for you, for RBA and how does that relate to interest rates?


    Justin Tyler: That’s a really interesting question actually, because if you think about what monetary policy does, if if the RBA raises interest rates, what are they trying to achieve? Well, they’re trying to get the economy to slow down by largely persuading consumers to spend a little bit less. So if inflation is being caused by people wanting to go out and spend too much, you know, maybe they look at the price of some good in the supermarket and go, well, actually, the price might be higher next week. Let’s buy more. Now, if that sort of economy, that sort of backdrop happens across the economy, you end up with demand driven inflation. And so monetary policy is really effective at addressing that. It’s less effective at addressing things like petrol prices being higher, as I mentioned before, high petrol prices. That’s essentially an example of a regressive tax. What does that mean? It’s a tax on consumers that really impacts those who are least able to afford the tax more than it impacts those who are most able to afford it. And increasing interest rates to try and fight that problem would seem to be exacerbating it rather than sort of helping to solve it. So, yes, I think the general level of indebtedness is a concern and I think it will. It’s one of the things that might cause the RBA to be quite slow, you know, in terms of the pace they raise interest rates certainly slower than in the US, but I don’t think it it gives rise to any sort of concerns around, around Australia’s banking system. It shows banking systems very, very well capitalised. Most mortgages have significant buffers on them. You know, people have amassed savings during the COVID pandemic. So yeah, I think Australia’s banking system will pass any test that comes in the next year or so with flying colours.


    Jodi Pettersen: Right. I’ve got another question here at the moment, which in the fixed income world right now, which is most attractive to you, is that the investment grade or the triple digit triple base rate of space? Yes. Abs loans.


    Justin Tyler: So there’s so many different sectors isn’t there. Yeah.


    Jodi Pettersen: And I don’t want to get too technical either, but like, where were you digging?


    Justin Tyler: It’s always a danger. So we were in a situation where post the pandemic, what the what policymakers did was provide banks with very, very cheap funding. That’s why you’re able to go out and get fixed rate mortgages for three and four years, you know, for for less than 2% for a while because you know, that was enabled by policymakers. And what it meant is that banks didn’t need to go out and fund themselves. And so what happened is that the price of the existing stock of bank bonds got very, very expensive in the Australian market because there was just no supply that’s now changing. So during that period we were not big participants in, in the sort of the highest quality bank bonds because we just didn’t think there was a lot of value there. But as that’s starting to change, that’s that’s a part of the market that we’re starting to re-engage with.


    Jodi Pettersen: Yeah, that makes a lot of sense. I’ve got someone here who’s asked if you haven’t invested yet, would you consider waiting now? Daniel and I ask this question. We can’t tell you when to invest. We’re not advisors. So please take Justin’s response with a grain of salt.


    Justin Tyler: Yeah. You reckon? Look, no, that’s a great question. And and it’s sort of like, you know, going to the zoo and asking the lions, do you want some food? Right. At the end of the day, a fund manager. And you might expect me to say yes. Yes, give us the money to to manage that. In all seriousness, I would say, yeah, you probably are right to wait. The environment that I’ve painted is one where, as I said, it’s it’s getting better and better every day for for fixed income investors. But if you can consider if you can consider weighting, yeah, it’s probably not a bad time to just sit in cash and hope that those yields get even higher. But what I can’t tell you is when to engage is the issue. It’s all very well for me to say, wait, that when then do you stop waiting and engage with the market? That’s something that I can’t tell you. Hence the financial advice point that that Jodee put. And what I would typically say, given those sort of competing elements of what I’ve what I’ve said, that it might be a good time to await, but I’m not sure when to re-engage. Usually averaging in is a good idea. If you have $100 and you’re considering waiting. Warshaw Wait and maybe put $10 in sort of soonish and then wait some more and and put another $10 in. That sort of approach tends to work well for most people.


    Jodi Pettersen: Yeah. Is that the risk? I hope that helps you, Daniel. It’s not often you hear fund managers saying don’t invest, which is not exactly what you said, but I appreciate your candor.


    Justin Tyler: I’m sorry.


    Jodi Pettersen: We’ve got another question here. Any comments on the performance of the FAANG stocks or Alibaba and Tencent? So, I mean, I know you do your investing in fixed income, not stocks, but it’s all part of the broader picture, right? Yeah.


    Justin Tyler: Yeah, of course. Now, what’s interesting about those stocks and you some some people on the call might be aware of of a quite a well known ETF in the US called ARK and it invested in a lot of these sorts of stocks and it shot the latch out for a very long had quite a long run actually until very recently where it’s done very, very poorly. And the same could be said about a lot of these stocks. And what I think people are starting to realize is that a lot of these moves are not due to the genius or otherwise of the fund manager. What people in equities often get carried away with is the sort of bottom up analysis that’s their bread and butter. But they some of them don’t look at the top down very much, whereas in bonds were the opposite. When you look at the top down all the time. And what I would say is that a lot of those stocks really are bets on on low interest rates. And there’s interest rates have started to increase. It’s perhaps it’s it’s not perhaps a surprise to me, even though it’s perhaps a surprise to others that these stocks have underperformed. And I expect that they might continue to fund the going to.


    Jodi Pettersen: I mean, a lot of the in the markets is the general expectation that these those types of stocks, the fangs are quite sensitive to interest rate rises.


    Justin Tyler: And you might you might ask why? And the reason is, well, if interest rates are very low and growth, therefore, in the economy, in markets is is quite hard to come by, then you’re going to be more willing to pay for a stock that sort of growth, which is what these what these stocks are. That also works in reverse. And so I think that’s what we’re seeing now.


    Jodi Pettersen: I’ve got someone here clarified, Nathan. It’s is it not the inflationary effect of, say, a petrol price increase, a one off effect as in if it hits one quarter, but then if it keeps hold on, but then unless it keeps rising, does it then not hit the subsequent.


    Justin Tyler: That’s a that’s a really good point. So what what Nathan is saying that if if petrol petrol prices rise by by $0.02 and then we end up with a 2% inflation number, then next month, they need to rise 2% a game. If they go nowhere and you have a 0% move, then obviously that inflation effect reverses out. And that’s precisely why one of the very many reasons why, but it’s an important reason why the RBA will wait. We think once they start to raise interest rates they’re not going to be in a rush. There’s no reason to to raise interest rates quickly in Australia. I think I would say actually that when you look at the Australian interest rate curve and the expectation that interest rates are increased five times over 2022, I think that’s overdone in Australia. I think there’s very little chance of interest rates being increased five times by December in the US. That might happen, but in Australia, no, I think we get an interest rate increase perhaps later during the year, then a pause and then another interest rate increase. And I think the only thing that would that would cause that to go into reverse is a very significant inflation surprise, which Nathan, you’ve just pointed out, is actually quite a high bar because prices need to continue to rise.


    Jodi Pettersen: Yes. The ongoing rises as opposed to just one off. Look, I think. That’s all the questions we’ve got for today. If you’ve got additional questions, drop them. I’m going to give you 1/2 to drop them now. Justin, I want to thank you for joining us today. I know that we promised we’d keep this to 30 minutes. I’ve made it 40 minutes. And this is I can tell you this, that we’re at a real nexus point right now. And I imagine that that’s keeping you and your team super busy. So thank you for taking the time to brief everyone today. I’ve got what Bruce got in a quick question. Are the funds mostly in Australian dollars or international?


    Justin Tyler: Are they mostly? Well, there’s two elements to that. They’re in Australian dollars. If we buy international currency or the US dollar or euro or whatever denominated assets, we hedge that currency risk. So it’s all Australian dollar risk. But when you look under the hood, the funds have around core, for example has around 30% of its exposure to offshore assets and the Hybrid Opportunities Fund has more like 50 to 60% of its exposure offshore. So the important point there is that the diversity is good, but at the same time, we’re very aware of the risks that those sorts of exposures present, not the least the currency risk which removes. Yeah.


    Jodi Pettersen: So you hedge out the currency risk, but you’ve still got global exposure. And I also want to say I was saying thank you. So thank you, Justin, and thank you to those joining us. We’re also making a donation to the Save the Children’s Ukraine appeal. For every attendee today, $5 will be donated. So thank you to everyone for attending. If you’ve got additional questions that you’d like to ask, please feel free to contact me all have my email address and you know where your website is. I’m the one who answers the chat bot, so just, just type to me there and I’m happy to answer any questions. And again, thank you for joining us, Justin.


    Justin Tyler: Thanks trading. Thank you.

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