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    Positioned for a changing tide| recorded webinar

    Transcript

    Jodi Pettersen: All righty. Let’s do this. We’re here. We made it. What? Hi. Let’s fix that. There we go. Hi, everyone. My name is Jodi Pettersen, and today I am joined with both Brad Dunne and Steven Bruce. He can’t see you on screen, but he’s just over here. And we are going to be talking about the types of opportunities that can be had in a rising rate environment. So let me make our introductions first. Next to me here, I’ve got Brad Dunn. He is the portfolio manager of the Daintree hybrid opportunities fund under the Code DHOF and he’s also involved in the eInvest Core Income Fund under the Code ECOR. We’ve got Steven Bruce, who’s the portfolio manager of the eInvest Income Generator Fund, and both of them here are here today to bring the, I guess, broader perspectives and different perspectives into what types of opportunities arising rate environment throws up today. Now before we’re going to dive in, a couple of things. So both so of course, Steven, he manages the EIGA portfolio which invests in Australian shares, whereas Brad is a fixed income investor, so he’s invested in credit and bonds.

     

    Jodi Pettersen: So we’re going to get two sides of the coin here today and hopefully you can get some tips and some ideas of where the portfolios are positioned to take advantage of what is a fairly challenging time right now. So before we dive in, let me remind everyone that today the webinar is being recorded for those who can attend. We also have a Q&A function along the bar there. So if you’ve got a questions you’d like answered, please submit them and we will get to them when the time approaches. We’re hoping for the webinar to be about 45 minutes today. So lastly, the other most important housekeeping is of course, the disclaimer. Now what this disclaimer suggests is that we, of course, are investors, we’re not advisors. So always seek your own advice and please read the PDS and the TMD at eInvest.com.au and remember that of course past performance is not always a reliable indicator of future performance. So. But that’s that. So Brad. Hello. Hi. I’ve got my first slide here and I have to say, what’s going on with this graph because I don’t understand it.

     

    Brad Dunn: Well, I thought I’d get all the good, bad news out of the way. First start from the start from a low base, and then build it up from there. So I thought I’d just give a little bit of background as to what’s happened so far this year for someone who might not be following the fixed income markets as closely as we do. But really what’s happened is probably the worst start to a year since World War two. So what this chart is really telling you is the the paths that the fixed income market represented by a very broad fixed income index, the paths that they’ve taken over many, many years with the dark black line, line being this year to date, it is a week or two old, but it gives you a pretty clear indication of just the the sort of a sort of environment we’ve been in, in the fixed income world. But when we talk about fixed income, it is two sort of largely different markets, one in one being fixed in gold, sovereign bonds, government bonds, the other being credit. And the driver of this rally or this this weakness here has been rates or the interest rates on government bonds. And that’s really just been a factor of markets worried about inflation. It’s really been the topic du jour of 2022, and that’s being reflected in the fact that if you have sustained inflation, central banks need to step in and raise interest rates. And we’ve seen many of them around the world start that process. And to be honest, I think they’ve only just started. There’s still much more to come.

     

    Jodi Pettersen: So we know that, of course, today is the first Tuesday of the month. So the RBA is sitting in their meeting room right now deciding whether to raise the rates here in Australia. That will be announced in about 30 minutes. So I’m going to have one of my colleagues poke their head in and tell me what happens. What are your expectations?

     

    Brad Dunn: It’s going to go up.

     

    Jodi Pettersen: Yep, that seems to be a consensus.

     

    Brad Dunn: It’s only the matter of size and timing. So it really it really what’s more important is, as is usually the case, is what the language is from the from the board following the following the announcement of the number that’s more insightful than the actual number itself, because the reality is they could do it in small steps or they could do it in large steps. The markets have already effectively priced in several more of these movements over the next year or so. And the market, for what it’s worth, is guessing that they’ll get to about 2% on the cash rate before perhaps pausing or waiting to see for further information once they get to that point. So the timing of course could be a little bit up in the air still, but 2% is largely what the market is saying where we could get to in the meantime. But we’ll leave that until 230. For now, though, looking back at the performance so far this year, the other aspect of the broader fixed income markets is credit. And what we’ve seen is credit spreads have been widening in a very sort of almost methodical mechanical fashion, if you will, but since November of last year. So it’s been it’s been a more a slow burn, so to speak. And that’s actually quite typical in broader terms. Credit spread, widening cycles can go from anywhere between nine months up to even two years, the last of which we saw in in 2018. You may recall back then that the US Federal Reserve is actually increasing interest rates through 2018 as well. They were they were taking their first steps to try and normalize after a long period of quantitative easing. But yeah, we saw we saw a period of about 12 months or so where credit spreads very slowly widened, but but quite methodically widened over that time period. And we’re seeing and we’ve been seeing that, as I said, for about eight months or so this year so far.

     

    Jodi Pettersen: And how does a widening of the credit spreads impact investors?

     

    Brad Dunn: Well, in in bond world, if you if you think about yields and prices going in opposite directions, it works the same way with spreads. So a credit spread is the additional yield that you need, that you require to buy a corporate bond or a bond from a company that has a higher default probability than a government. Governments can generally print their own currency, so it’s much less likely that they will get to the point where they they default. But in corporate in a corporate, they certainly don’t have the ability to print money. So to the extent that they have a higher risk of defaulting, you require an additional return over the over the base return to. To achieve that.

     

    Jodi Pettersen: So it moves the next slide. We’ve got a few more points on our notebook.

     

    Brad Dunn: Well, I was going to say that one other point I’ll make while this chart is up, is that what history tells us over long periods as well is if we’re starting to look a little bit more forward as opposed to what’s happened, what we see is that the peak in rates occurs before the peaks in spreads do. So what that means is I think the market needs to become a little bit more comfortable with the outlook for inflation, that inflation perhaps has indeed peaked and that will start to flow through to traders guessing where the high level of rates will be, interest rates. And then from there they can start to move towards finding a peak in peak in spreads. And again, that lag can be anywhere between three months and nine months based on based on our work on historical data. So that’s the other point I’d make here in that while we’re seeing sort of rates move quite quickly and in absolute terms, I still don’t think there’s a lot of consensus as to where inflation could get to or how long it could persist. And while there’s still that that tension in markets, I think spreads are vulnerable to continue widening for a little while longer. So that that doesn’t really give us too much pause for pause for thought. But as active managers, it gives us lots of opportunity to continue to to work on individual opportunities and make sure that we can unearth them before others. So that’s for us as medium to long term viewing active managers. It’s actually a really great time for us to be continuing to sort of sort through the sort, through the piles of ideas and find the best ones coming through because there are increasingly some really interesting things starting to pop up.

     

    Jodi Pettersen: Thanks a lot.

     

    Brad Dunn: So moving on yet? Moving on. So the second thought I really have is here sort of looking forward and it’s one of the models that we use internally to try and guess where credit spreads could go into the future. So this is a quite a sophisticated model from our team that takes in a whole range of factors, not just traditional credit and fixed income factors, but it draws on equity market data, commodities data and a whole range of other factors as well that come together and have historically had a good, good track record of predicting high spreads go in the near future. So what it’s saying is that it there’s some tentative signs that we might be seeing a peak in spreads. But as I said before, without that sort of certainty around the rates outlook, that’s still sort of a low conviction call for us at the moment. So that just sort of gives you sort of one indication of of where we think spreads might be heading. Indeed, potentially could be sort of stabilising here for the next little while, notwithstanding with continuing hostilities in Europe, with inflation uncertainties and now the growth outlook starting to become a little bit murkier as well. That’s throwing a lot of still throwing a lot of questions into the mix. So overall, as I said, we’ll continue to look for ideas and I think there’s still plenty out there to find. We’re not necessarily taking big steps to sort of take advantage of those just yet.

     

    Jodi Pettersen: And can you go into a little bit more detail as to what ideas and opportunities you guys are uncovering at the moment?

     

    Brad Dunn: Yeah, so there’s there’s a number of them across the spectrum. We’re generally finding better ideas in companies that have good, good market positions. So they’re bigger operators in their in their respective markets or industries. And that’s because in an inflationary environment, you need to be able to have the power to put price increases through to your to your end customer as as as frustrating as that might be to the end user. From a corporate perspective, if you can’t push price increases through. Over time that’s going to impact your profitability, it’s going to impact your margins and that’s going to impact your attractiveness to people like myself as a professional investor looking at where to allocate our our scarce capital. So that’s one thing I’d say. So looking at the large retailers such as Woolworths and Wesfarmers, good, good example of strong market market power in their respective space. Yeah. So, so things like that. And the other thing I’d say more broadly is that we’re coming a lot more, more short dated. So as, as you would know whether it’s a long dated bond or a long dated credit security, the longer you go out to maturity, the more time there is for volatility to impact on the spread and thus the price. So because interest rates are moving up quite quickly and at the front end of the curve as well, we’re finding really interesting ideas with a quite short dated nature because while the yields in some cases have doubled or more. Excuse me, the probability of default certainly hasn’t doubled.

     

    Jodi Pettersen: So that’s the interesting part.

     

    Brad Dunn: Yeah. So. So the relative value is starting to show through just on a raw numbers basis. And that’s, as I said, that’s what sort of giving us confidence that over time, as these factors play out, as the market gets comfortable and finds its and finds its level, we will then be able to rebase portfolios and sort of take advantage of these higher yields and lock them in. Because at the end of the day, the when you see sort of week to week, month to month movement in in fixed income, so long as you’re comfortable that the underlying issue is still going to be solved, they can pay their coupons on time and pay their capital back to you at maturity. Ultimately, the volatility from any sort of month to month basis is more it’s much more mark to market and it’s much less final.

     

    Jodi Pettersen: Yes.

     

    Brad Dunn: Than, say, for example, if you’re investing in something, a private equity, for example, or a private security where the market isn’t generally pricing it on a day to day basis, and in these sorts of environments where rates go up, you’re susceptible to having that valuation drop out from under you. Yes. And there isn’t that that sort of underlying basis of call to power or trading to maturity where you know that you’ll get your capital back.

     

    Jodi Pettersen: And the end. So this this graph says, however, recession risk is rising. How does that show in this graph or is that is that some additional color that you’ve added here?

     

    Brad Dunn: You know, so the graph here is relatively short term in its outlook, so it doesn’t necessarily factor in some of those longer term fact. That was really just a comment saying that despite the fact that we’re seeing potentially some some stabilization, like we’re not seeing the spread or predicting the spread to continue to widen quite so fast so far this year that there are other factors looming on the horizon that may necessarily extend that widening period for a bit longer than perhaps the.

     

    Stephen Bruce: Model is suggested.

     

    Jodi Pettersen: So I guess, to summarize, the key opportunities here are the relative value opportunities between the larger corporates and the the smaller ones.

     

    Brad Dunn: Yeah. Yeah. So there’s, there’s opportunities arising between the, the type of corporates, i.e. higher quality, higher rated and the returns that you’re getting for those where the relative position hasn’t changed too much over the last three months yet yields have. Yes. So that’s where we’re sort of thinking and of course, I’ll toss in right at the end as well. In fixed income, it’s always very important to say diversify, diversify, diversify. Yes, that’s not always easy as an individual investor. But there are a whole range of funds, including ours, where we can do all that for you. So when you buy it on the ASX, you’re getting a fully diversified portfolio?

     

    Jodi Pettersen: Absolutely. With all the.

     

    Stephen Bruce: Work already done.

     

    Jodi Pettersen: Well, I’ve got a couple of questions that have popped in and then when do you expect inflation to peak and what are you looking for to indicate this?

     

    Brad Dunn: Yeah. So it’s a well, it’s a good question and I think everyone is grappling with it at the same time. I think I won’t necessarily put myself out there and guess in a specific time, be it be it a month or a quarter. But what we would say is we’re quite convinced internally that inflation is going to stay at an elevated level for quite some time. I don’t think there are easy fixes to the particular situation, and that’s because the inflation is being driven by a couple of different factors. The first is strong employment markets. And we’re going to I think we’re going to see continued increase in wages to respond to that. But I think the other aspect is there’s a lot of supply chain disruptions and of course, rising energy prices, all of which can’t be dealt with in any meaningful way by the central bank increasing its interest rate. So the fact that prices at the pump for petrol, for example, are rising so quickly, that’s going to sort of potentially affect demand on its own. So nothing that the RBA can do, can, can print more oil, so to speak. So these supply chain supply side issues are going to linger for some time still. So the inflation rate could stay elevated for quite some time. And then for the market, the decision is if if inflation starts to plateau even at a high level. At what point does the RBA start to then rebalance its thinking towards impacting growth outlooks by continuing to raise interest rates against an inflation rate that is sticky for reasons that it can’t control? Where do they get that balance? Where do they get that balance right? And to that question, we’re still trying to work out the answer.

     

    Jodi Pettersen: Watch this.

     

    Brad Dunn: Space. Yeah. So that’s that’s probably a roundabout way of answering the question. But as I said, inflation, we think, will be stickier at higher levels for longer than most people would be hoping for. So that is that is probably one of the challenges that.

     

    Stephen Bruce: We’ll work through over the rest of this year.

     

    Jodi Pettersen: Interesting. Well, thank you, Brad, for that update. I’m going to get you to swap seats for Steve. We’ll still hang around and ask additional questions. So if you think of things, just drop them in and we’ll get to them at the end. Thank you.

     

    Brad Dunn: Okay. Thank you very much.

     

    Jodi Pettersen: Saban is here now. Of course, a lot of you know who Steven is. He’s the portfolio manager of the Invest Income Generator Fund under the code Eiger. I will assume that a lot of you know this fund already as well. But to be to be clear, do you want to do it the briefest of brief overviews?

     

    Stephen Bruce: Oh, hi, Jody. Hi, everybody. Thanks for your time and interest. Yes. So really, as many of you will know, the Invest Income Generator Fund, it’s a fund which uses equities to generate income. And so what that really means is that we tend to invest in reliable, stable, proven kind of companies, sort of companies that have strong balance sheets and have generally been around for a long time that make profits in good times and bad times and can pay you a good, reliable stream of dividends. So in a way, it’s actually the kind of companies which do pretty well in a in an uncertain environment. And we seem to be entering into a fairly uncertain environment at many levels just at the moment. So, you know, one of the features is that the fund pays a monthly distribution throughout the year. So you have that sort of constant stream of income. So that’s that’s the quick overview. I just touching on on the performance, you know, as I said, it’s about generating a good high level of income. And we can see in the first line in this little table here that since the fund’s been running, it’s generated just under 10% per year in income distribution. So that’s like after fees and including the franking credits that you claim back in in your tax return. And if we look down at the bottom here where we’re comparing the total returns, so that’s the income distributions plus the capital growth with the market.

     

    Stephen Bruce: You can see over the life of the fund, which is sort of going back to 2018, it’s been a little bit behind what the stock market has done overall. But in the last couple of years there’s been some good outperformance compared to the market and that’s been the result of the market. The market’s been changing for the first couple of years. It was all about growth and momentum and exciting tech stocks. But in more recent times we’ve had that rotation to value style stocks and typically the sort of stocks that this fund invests in, and that’s driving some sort of good outperformance of this fund. And if you want to sort of look at that graphically, what we’re showing here is the unit price of the fund. The blue squiggly line. We could see it’s been fairly flat over the last few years. And then the shaded area below just shows how that sort of cumulative income has built up as it’s paid out its distributions each month. And there was a big step up. If you look at the earlier part of the chart, and that’s because what we do at the end of it, we pay an equal distribution each month during the year and then if we have extra income to distribute, we do that in a big lump at the end of the end of June. Now, there’s going to be a big lump at the end of this June because we participated in a number of of buybacks and also Woodside and BHP did a transaction which resulted in in a large dividend being recognized.

     

    Stephen Bruce: So we’ll expect a big a big bump at the end of this financial year as well. So you just move on. So it’s a move to get on to the topic of opportunities in a rising rate environment. I think there’s actually a lot more going on in the world at the moment than just interest rates going up. A whole bunch of factors have causing some really quite big changes in how the world and the markets have been operating now compared to well, probably have as they have or how they have for as long as many of us can remember we’ve had COVID is still having impacts. You know, you still have lockdowns in China. You have, as Brad was saying, you have these big supply chain disruptions in all manner of industries. And it’s manifesting itself in hospitals, not working, not being able to get computer ships, you name it, that’s still around. You’ve got, you know, Vlad causing all sorts of trouble. You’ve got issues in the property market and etc. in China. And then, of course, we’ve got inflation and interest rates going with that. And all of these things are quite, quite interrelated. So there’ve been a lot of changes and if you just sort of think about some of those things, if we put them into some some sort of some little summary buckets, you know, we’ve seen this move to to a lot of fiscal policy, which we haven’t seen for a long time in the economies.

     

    Stephen Bruce: You know, it’s all been about interest rates and and that sort of thing. But now governments are spending more money and that’s having effects on markets and companies in the economy, supply chains, you know, it’s always for decades, it’s all about outsourcing, offshoring, lowest cost. Now, people actually wanting resilience in their supply chains. And in a way, we’re saying people are moving from just in time to just in case supply chains. And again, that’s having implications for investments and the economy and stocks. And this we’ve had globalisation as long as anyone can remember. But with what’s going on with China and Russia and COVID and so on, we’re actually starting to see that pull back. So we’re experiencing some globalisation and that of course has impacts around inflation and investment and so on. And of course there’s the the impetus to decarbonize, which is going to have caused massive costs and opportunities across the market. And of course, this is all feeding into moving from what’s been a deflationary environment for many, many years to now a strongly inflationary environment. And of course, that’s driving this turn in the interest rate cycle. So there’s a lot of things going on at the moment changing the landscape that have quite big potential implications for markets and things. But you know, I guess the positive in that is that these things tend to favor the style of investing that we practice in this fund.

     

    Stephen Bruce: What it doesn’t favor is investing in very expensive stocks like loss making tech stocks and buying things like cryptocurrencies. Now, people have had a great run out of some of these things, but I think, as you all know, these things have really started to come unstuck in recent times. Now, this is a direct result of a rise in interest rates, because when interest rates go up, that means the value of profits out in the far distant future become a lot less. And it also means that loss making companies find it much harder to get people to give them money to keep funding their loss, making start up behaviors. And that’s sort of, I guess, summarized in the chart on the left, which is the Ark Innovation ETF, which is a very famous fund that many of you may have heard of run by a lady called Cathie Wood in the US. And it performed absolutely stellar the pretty much from the onset of COVID. But now unfortunately it’s kind of back where it started and most of the people in that fund got in a little higher than was today. And similarly with Bitcoin in the Child on the Ride, a lot of people did quite well out of Bitcoin. But anyone has your own view, but it is inherently an asset with no intrinsic value and no yield, and therefore no theoretical floor to what its price could be other than maybe zero in a worst case.

     

    Stephen Bruce: So what we’re seeing is these sort of things, you know, be it loss making tech, really expensive growth, other sorts of alternative assets are really having the rug pulled out of them at the moment. And so it really makes it important to focus on good, reliable businesses in periods like this. And so if we just sort of touch on how we manage your money in this fund, you know, it’s this value style investment process where we’re looking at proven businesses with that track record of profitability, where the valuations are not stretched, you know, good cheap value and with really strong balance sheets. And so we’re looking for companies with those characteristics plus ones which pay you a good dividend yield that we can then pay out in your distributions. And we’ve been doing this for sort of 16 years in various funds using the same strategy. So getting on to the actual stock opportunities and investment opportunities in this environment. So we’re in this sort of unusual, tricky environment that has risks and opportunities and is quite different to what people have been experiencing for for many, many years. So the way we look at things is we see that there is still although growth is slowing as interest rates rise and stimulus is withdrawn, we do see that there is still this ongoing reopening process as the lingering effects of COVID sort of come out of the system and at the same time.

     

    Stephen Bruce: So that gives you some some positivity. But at the same time, we know there is a lot of risk around. So what we want to do is balance, have a portfolio that balances stocks which are going to benefit from this sort of ongoing normalisation with stocks which do give you good protection to the downside sort of defensive stocks. So we just use some examples like we’re in the left hand little group of stocks here. We call them reopening and recovery stocks. Now, with interest rates going up, of course, that’s going to pressure how much money people have and how much discretionary spending you’ll see in the retail sector. So we’d be pretty cautious of just buying any old retailer like, say, JB Hi-Fi. That’s done really well through lockdowns and everyone bought extra computers and things. But there are still some opportunities to buy stocks, which haven’t really seen a pickup yet. For example, things which are related to travel. So in the retail sector, something like a Kathmandu, for example, you know, you buy Kathmandu when you go travelling or skiing or what have you. And obviously people haven’t been doing those things so much, but as the borders reopen, that will pick up. So there are some retail exposures that you can buy, which is still going to be driven positively by this by this reopening story and aren’t reliant on people to spending more money.

     

    Stephen Bruce: And in a way, one of the things we’re going to see is during COVID lockdowns, we all bought heaps of stuff. But as we are full, we go out and start travelling and doing things again. We’re going to be spending more money on kind of experiences and services. You’re going to have this switch from stuff back to services. Similarly, you want stocks which have a really sort of unique driver themselves, and city chic is another example of a retailer. But it’s not just any old retailer. It’s a retailer which specializes in women’s apparel, and its strategy is it’s bought up struggling retailers around the world, their online operations, and it puts its good merchandise through their through their distribution channels and is growing really, really fast. So if we then move on to. Resources. Now, resources have been very strong in recent times. And there’s a number of reasons for this because in spite of everything, demand for commodities has been quite strong. But there’s two sides to everything in supply and demand. And the other thing that we’ve had partially due to COVID disruptions, partially due to political things and a bunch of other reasons, is that the supply of commodities has been quite constrained. So commodity prices have been high. So there’s been really good opportunities to invest across the whole suite of commodities, really, be it iron ore or base metals, etc., or or lithium and some of the stocks that we have here.

     

    Jodi Pettersen: Well, I just got a quick update. The rates been rise, 0.5% gone up.

     

    Stephen Bruce: Very good, very bold. So that gets us to what point is it up to 2.5 or up oh five?

     

    Jodi Pettersen: Is there a 0.5 percent?

     

    Stephen Bruce: Yes. But was that the rise or what? It’s now that’s what it’s up. Okay. So 0.85.

     

    Jodi Pettersen: According to maybe Blankenship on his phone, we just we just had a check. Someone put a sign up up the door. It’s like my views.

     

    Stephen Bruce: Yeah. So commodities have been a happy hunting ground for investors and we think their strength is going to continue because, you know, China obviously is the biggest consumer of resources in the world. And at the moment you’ve had COVID lockdowns on Shanghai and Beijing, and while 300 million people have been subject to it, and that’s really slow growth down now they’re going to get out of in the next month or so out of this, they’re going to see second quarter GDP as being like zero. They want to hit their 5% target, which means it’s highly likely there’ll be some very strong stimulus in the second half of the calendar year. And the way China historically stimulates its economy is it rolls out infrastructure projects and it loosens up the controls around the property market and all of those good things. All those things are good for demand for for resources like copper and iron ore. And then the other thing that sort of is really exciting and positive is with decarbonisation and the demand obviously for things like lithium and nickel and cobalt and copper that go into electrification and batteries is going to be really, really strong. So a company like or their independence group or Oz Minerals, which is a copper company, we think the outlook for those companies is really good in the financials. Now, financials generally do better in a rising interest rate environment so long as interest rates don’t go too high and cause a recession that causes bad debts. But as interest rates start to come up, that means that banks the price between what they lend money out for their mortgages and what they pay you on deposits starts getting wider.

     

    Stephen Bruce: So bank profits start to grow. And one of the headwinds banks have had in recent years is that rates have gone down and down and down, their margins have got squeezed. But we’re now at the point where bank margins will start to expand a bit. So banks and financials in general are pretty good. So these sort of columns on the left, these are the sort of opportunities that we see in this environment which are more sort of leveraged to to the economic growth and recovery. But then we want to balance that with a range of stocks which will do do better on a rainy day for you. So that’s our sort of defensive bucket. So things like telcos and insurance companies, they’re typically quite defensive earnings. You know, you keep paying your insurance, you’re going to keep paying for your mobile phone. And so they they’re good, solid companies. And we just think about something like a Telstra, the mobile phone. They’ve just been putting their prices up 3%. The industry is quite rational. They’ll pay their $0.16 per share dividend come what may. We all seen our insurance premiums starting to go, starting to go up and insurance companies. They take in money and they hold it and they invest it before they pay up their claims and they invest a lot of it in fixed income. And the higher that the rate they’re investing at, the greater the profit they make on that pool of money.

     

    Stephen Bruce: So their profits have a big leverage, higher interest rates as well. And then you want to have some some stocks which are kind of defensive in nature, like health care, where people still get sick, for example. So we have Ramsay Ramsay health care, which was recently subject to a to a takeover, etc.. And then we have some companies like in the in the in the agricultural sector, like United Malt, for example, which has got, you know, serves a brewing industry. And again, that’s going to be performing very, very well. So again, you want to get that balance of stocks across the portfolio. That gives you both the upside, plus some good defensives there. So really in summary, when we look at the market out there, we’ve seen some very big changes in the backdrop between where we stand today and how things have been historically over time. And this is presenting both some risks and some opportunities. But on balance, it really suits our conservative style of investing where we just have that focus on companies which have strong balance sheets and reliable earnings, and they’re not the sort of companies which are being sold off aggressively in this in this market. And when we look at stocks, we do see a number of companies that have some really good stock specific opportunities. So putting that together, we come up with a fund with reliable earnings, which is really aiming to give that tax effective income to it, to investors, plus some capital growth over time. So that’s the end of my my chart.

     

    Jodi Pettersen: Excellent. Let’s take the questions. I’ve got one that’s floating here. Given the outlook, why investors invest in fixed interest now and then. So that’s a question that we’ve got for Brad. So I’m going to scoot this over. Brad There we go. Brad, why why invest in fixed interest now?

     

    Brad Dunn: Given the outlook?

     

    Jodi Pettersen: Yeah.

     

    Brad Dunn: Well, the reason is because there’s different types of ways that you can invest in fixed income. Now, it’s not the case that your only option is to invest in a passive high duration index of where manner. Yeah, that’s the reason. So there’s, there’s ways that you can invest in fixed income and not necessarily be totally insulated from volatility altogether. But as I was talking about earlier, there are lots of opportunities starting to arise with with with securities, with yields of four and 5% again, whereas they were very, very difficult to find nine months ago. Yes. So there are there are funds that are offering that right.

     

    Stephen Bruce: Now.

     

    Brad Dunn: Without the exposure to interest rates, with the with the ability to exclude names that don’t pass any any type of criteria that the active manager has on hand. So there are opportunities to then then sort of take advantage of that today without taking taking on some of those traditional risks and thinking about it in terms of a 6040 portfolio, the old traditional 6040, where 60% are equities, 40% are bonds. And the bonds help to alleviate some of the volatility in your equity portfolio over time. We think given the environment at the moment, what has worked for the last 30 plus years is certainly not going to work the same way as it did in the coming 30. And therefore you need to think a little bit more broader when it comes to your fixed income choices. And given that we’ve got a whole range of them listed on the ASX now, not to mention the broader range of funds that you can access via traditional channels, the choice is really there and it comes down to doing the work and understanding the risks that you’re taking on as opposed to just bucketing fixed income or all into the one segment.

     

    Jodi Pettersen: I mean, and that is a fundamental change that even three years ago you could not access a core funds like a core or deal on the exchanges and ETFs. This is a very new space. And so I think in summary, active management is the time is now to be able to navigate this. You need to be something a little bit more passive. I’ve had another person coming through with a question What is the relationship of the DOT share price? And the current background has its fall related to any one factor.

     

    Brad Dunn: It’s been primarily credit spreads. The health portfolio for those that aren’t familiar is a mixture of Australian and offshore hybrids. And I think in most.

     

    Stephen Bruce: Recent months.

     

    Brad Dunn: It’s been fair to say that offshore hybrids have been a little bit more volatile than Australian hybrids. Australian hybrids have been very resilient in relative terms, but it has been credit spreads so that that same concern for markets more generally has filtered through to bank securities as well. And we’ve seen.

     

    Stephen Bruce: The spreads widen on their security.

     

    Brad Dunn: So that’s been the key driver. But yeah, look, ultimately, again, we can’t design a portfolio to be fully insulated from that sort of volatility unless you all 100% cash. So it has responded.

     

    Stephen Bruce: To those credit spread movements primarily.

     

    Jodi Pettersen: And I’ve got another question here for Eiger. Steve, have you got any examples where companies are paying extra large dividends this year? And do you think that later on in the year 2022 and into 2023, dividends will continue to be what we think is quite high right now?

     

    Stephen Bruce: Yeah, well, I guess the banks have all been increasing their dividends over the last over the last year or two as we’ve come out of we’ve come out of COVID. But I think the sort of bigger increases have been seen. So we’re probably going to go back to more modest increases. Now, similarly, buybacks, there’s been a lot of buyback activity this year, be it on market buybacks or off market buybacks. And companies have done that. They’ve released their surplus capital, got their balance sheets back to probably in most cases, there’s kind of back to the bottom end of their gearing range. So they’re still relatively lowly geared, but they don’t have the big surpluses anymore. So we’re kind of in an environment where the step ups are probably going to be going to be less. Certainly resources have had big increases in their dividends, and what their dividends look like over the coming 12 months is going to be entirely a function of what commodity prices do, and your guess is as good as mine other than to say we’ve had we have quite a positive, positive view on that. And with the resources though, I mean, their balance sheets are by and large geared at the moment. So they’re. Starting to pay out. Continue to pay out very significantly. Higher dividends will continue. But I’d say overall, the sort of step ups that the recovery step ups that you’ve had over this year, plus the rehearing buybacks largely finished. So I’d say we’re getting back to an environment of incremental growth and a relatively healthy net.

     

    Jodi Pettersen: Right. I’m going to ask for the final question, so please drop them in. I’ve got one here. If you had to look at both, this is for both of you. If you had to look at one signal that would change your views that what you’ve said today dramatically, what would that signal be? I’ll start with you, Steve.

     

    Stephen Bruce: For my my my concern signal would be if you saw a really sharp deceleration in global growth. Now we know growth is slowing from the very high level it was at when you had the rebound from COVID and the stimulus. But in this environment of higher inflation and rising rates, if we saw the consumer start to fall apart globally and unemployment, which is currently very, very low, move beyond back to a sensible our normal level high. That would obviously ring the alarm bells.

     

    Jodi Pettersen: And what about you, Brad?

     

    Brad Dunn: I have to agree with I’ll couch it a little bit differently. I think the worst case scenario for for everyone, be it an equity investor or fixed income investor or other, is is a period of stagflation. So sort of building on what Steve just said, an environment where inflation stays high, that it’s not able to be brought down. So for whatever reason, while at the same time, central banks continue to increase rates to try and deal with that, but in the meantime, bring growth down to a level where the gap between inflation and growth just just widens, because that is that is really the worst of both worlds. That will always have impact on on equity pays and at the same time, it will have impact.

     

    Stephen Bruce: On yields as well.

     

    Jodi Pettersen: Yeah, exactly. And what did you think of the rate rise that has been suggested? Yes. So actually, right now.

     

    Brad Dunn: I got a chance to skim the statement while we’ve been answering some of the questions. And it was a 50 basis point increase to 85 basis points, quite aggressive. In short, the RBA board thought that the Australian economy was robust enough to handle a faster pace of interest rate increases. But they have said that incoming data will be driving their decisions going forward. So I think what that means is they’re on a path of of higher, quicker subject to the data suggesting that the Australian economy is still able to handle that pace. And they did mention a couple of times the removal of extraordinary support because rates at the levels that they have been has been extraordinary for for a number of reasons. And the board views that as not necessary at this point in time to have such an accommodative.

     

    Stephen Bruce: Stance.

     

    Jodi Pettersen: And.

     

    Stephen Bruce: Policy.

     

    Jodi Pettersen: Do you think that this is an aggressive move or too much, too little?

     

    Brad Dunn: So the market the market consensus was for somewhere between 15 and 40. There were some in the market saying 40 and some saying 15. Ultimately, they’ve sort of come to surprise the market because I couldn’t see anyone that was calling.

     

    Stephen Bruce: For a 50 basis point.

     

    Brad Dunn: Loss, the across the across the group of commentators. So it was it really is sending a bit of a message that on one’s on one hand they think the RBA is quite confident in the strength of the Australian economy overall, but nevertheless they’re also concerned about bringing that.

     

    Stephen Bruce: Number for inflation down.

     

    Jodi Pettersen: And what about you using on that stage? Is that the too aggressive?

     

    Stephen Bruce: I think it’ll be okay.

     

    Jodi Pettersen: Interesting. Let’s leave it at that. Thank you, everyone, for your time today. If you’ve got additional questions, please feel free to hit me up. You know where to find me. Our emails, our website or socials. And thank you to both Brad and Steve for providing this update today.

     

    Brad Dunn: Thank you. My pleasure. Good afternoon.

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