Transcription of Finance News Network Interview with Peridiem Global Investors LLC is CEO and Lead Portfolio Manager, Andrew StenwallClive Tompkins: Hello Clive Tompkins reporting for the Finance News Network. Joining me from Peridiem Global Investors is CEO and Lead Portfolio Manager, Andrew Stenwall. Andrew welcome to Australia. Can you start by introducing Peridiem Global?
Andrew Stenwall: Sure, thanks Clive for having me here. Peridiem Global Investors is a macro hedge fund manager focused on fixed interest, with a particular focus on global fixed income long/short rates, long/short currency and US high yield credit. We launched in January of 2011, the team and I felt there was an opportune time given our long/short approach and relatively low interest rates in the marketplace available today. And today we manage about $300 million across three main strategies.
Clive Tompkins: Thanks, so what is your experience and that of the team?
Andrew Stenwall: I’ve been investing in bond portfolios for the better part of 25 years. My team and I have an average of 18 years investment experience, and as a group we’ve been investing in our long/short strategies for over 10 years now.
Clive Tompkins: Andrew you’re here in Australia, the fourth largest private pension fund market in the world, albeit one with a heavy leaning towards equities. What do you do to interest investors in fixed income?
Andrew Stenwall: As you all know that fixed interest and yields around the globe have fallen to all-time lows, so really what Peridiem does is offer two different strategies. One focused on attracting equity investors and one focused on attracting fixed income investors. We – Australian equities returned around roughly 9/10 per cent over the past 10 years, with about 14 per cent volatility. So we offer Global Fixed Income Opportunities Fund, which looks to generate a cash plus 10 per cent return with about seven per cent volatility.
And we offer a Global Absolute Return which offers a return of cash plus five to seven per cent, with about a four per cent volatility. We do that by investing not just in long only strategies, but long and short strategies. This gives us the flexibility to control overall risk in our fixed interest portfolios, as well as add return when rates start to backup.
Clive Tompkins: And Andrew, fixed income is a big investment plus. What specifically do you invest in?
Andrew Stenwall: Peridiem Global Investors focuses on four main principal value added strategies. Those are long/short global sovereign debt, long/short currencies, long/short US high yield and something we call yield curve overcharge; where we basically look at yield curves around the globe and try to find odd shapes, and things that we can take advantage of. In terms of long/short interest rates, what we’re doing is we’re trying to identify countries that have high real rates of interest, those with inflation adjusted interest. And number two, we’re looking for countries with very steep yield curves. The idea being is that if you have a steep yield curve, you can hedge out the currency risk at the short term rate and invest in the long term rate, and earn that spread.
So for instance, you might have a country with 10-year rates of say, five per cent and short term rates of say, three per cent. We can invest in the 10-year treasury in that particular market or government bond and we can hedge out their currency risk at three per cent, and earn 200 basis points through time. On top of it, if that country has a high real rate of interest, it means that growth is fairly rapid or certainly on a relative basis, growing more rapidly than other countries. And that it’s likely that growth will slow over time and those interest rates will come down over time.
We also then invest in countries with flat yield curves, where the short term rate is about equal to the long term rate. This means that the country might have, I don’t know, three per cent long term rates, three per cent short term rates and it literally costs us nothing to be short that country. On top of that, if the country has low real rates of interest, it means that growth is very slow in that country and the central bank through quantitative easing or through cutting interest rates, is trying to stimulate growth in that economy. As growth comes back, it’s likely that those interest rates are likely to increase over time. So by investing in countries with bonds that are likely to rally and bonds that are likely to trade off, we can capture the meaner version or the collapse of spread between those two countries.
The second thing we do is yield curve overcharge. A lot of times investors are expecting central banks to act in a certain way – they’re going to cut rates, they’re going to raise rates. And this creates weird shapes in the yield curve. Where say for instance, in anticipation of interest rate cuts, sometimes two-year treasury notes or government bond notes, trade substantially below short term or the overnight cash rate from the central bank. In those environments what we can do, is you can actually short the two-year treasury and make a spread because the funding spreads higher, and then invest in the long term bonds. So you’re investing in the long term bonds and hedging it with two-year bonds.
This does two things. One it allows us to take advantage of the additional spread that you can earn by investing in the longer term bonds, while also reducing risk in that if rates as a whole backup, you’d be protected because the two-year’s likely to underperform the ten-year. The last thing that we do is we invest in currency markets long and short. A lot of people call this the carry trade and it’s probably a derivative of the carry trade to a certain extent. And what we’re looking for again, is for countries with high growth, high roll rates of interest particularly on the short end of the curve. And what that means if you have high roll growth, it means that capital’s flowing into that country - foreign direct investments flowing in because there’s great investment opportunities.
In contrast, for short currencies where interest rates are relatively low because there isn’t robust growth in those countries and money tends to flow out of them, and those currencies tend to depreciate over time. So we can make the spread and then look for appreciation between those two currencies. Combining these together, we think we can offer a product somewhere in the 10 to 15 per cent return range with about seven per cent volatility, to attract equity investors. And then by cutting our exposures in half, we can measure around a four per cent volatility and generate something like a, you know, five to seven per cent return.
Clive Tompkins: Now Andrew the last year has seen yields fall across the board. While this delivers capital gains for investors, it also means yields going forward will be lower. What strategies do you employ to combat this?
Andrew Stenwall: Our strategies are designed to make positive returns regardless of the direction of interest rates. Unlike traditional long only fixed income investors, we actually look for both long and short opportunities. So by finding countries where rates are likely to rally and counter balancing that by investing in countries where rates are likely to backup, we can make that spread through time. So a low interest rate environment actually works quite well, we’re sort of indifferent to it given the sort of global nature of our fixed interest investing.
Clive Tompkins: Good thanks Andrew. So with these hedge fund strategies, what level of return are you targeting and what risk are you taking?
Andrew Stenwall: As I mentioned before, the two main strategies that we have are Global Fixed Income opportunities. We’re targeting a 10 per cent total return over cash rates, plus with seven per cent volatility. And then we offer Global Absolute Return which offers a return of five to seven per cent, with about four per cent volatility. The idea is that the Global Opportunities Fund is an alternative to traditional equity investing with lower volatility. And the Global Absolute Return Fund is targeted more towards fixed interest investors, who are used to something like a four to five per cent volatility.
Clive Tompkins: Thanks Andrew and while the US bond market is the biggest by far, where else do you go in search of yield?
Andrew Stenwall: We actually research and invest in about 30 different countries. In the Global Sovereign Debt strategy, we’re focused on basically government debt within those countries. And we exercise the three types of strategies that we talked about, which are relative interest rates, yield curve overcharge and currencies. Within the corporate market, we focus solely on the US high yield market; US high yield market is about a trillion dollars. You can actively follow about 200 or we actively follow about 250 different issuers in that market. We cover about 80/85 per cent of the total issuants within the US market, it’s very liquid. And there’re also a number of useful tools, derivatives and things that we can use to hedge risk and control the overall volatility of our portfolio.
Clive Tompkins: And last question. In a climate where government paper is at record prices, what chance do you give a selloff in bonds should economic growth pickup faster than expected?
Andrew Stenwall: I think our personal expectations are that interest rates will remain relatively low, but there will be two phases to the backup in interest rates. The first will be the reduction in the flight to safety bid. So there’re a lot of investors that are investing in higher quality government bonds, pushing yields down – the US, Germany, Australia because they’re afraid of what might happen given a Euro crisis, Euro debt crisis. They’re also concerned about the US fiscal cliff. We think both of those issues will be resolved over the next six to 12 months. You know, clearly there won’t be an all clear bell, but ultimately they will resolve themselves.
So the first leg up will be interest rates moving up maybe 40 to 50 basis points, due to this lack of risk aversion in the marketplace. The second leg up which will come with increased growth and higher inflation, will probably take more like 12 to 18 months. So we don’t think there is a large probability that rates will backup, you know, 100 or 200 basis points in the next 12 months. But having said that, if you look at global bond yields they should be around nominal growth rates, I use the US as an example. US growth we think in 2013 will be about two per cent. You are going to have about 0.5 per cent reduction, 0.5 to one per cent reduction due to the fiscal cliff.
And then - but you’d think that’ll be offset a little bit by the mortgage market and the housing market returning in the US, which will add about 0.5 per cent. So net-net, we’re thinking maybe about two per cent real growth rates. In inflation, we think it’s going to average also about 1.5 to two per cent. So it seems that lower number 1.5 per cent plus a real growth rate of two per cent, you now have 3.5 per cent nominal growth rate in the United States in 2013.
Historically US nominal interest rates, non-inflation adjusted have averaged about the same as nominal growth rates. Right now your interest rates are 1.75 per cent; they should probably be more like three to 3.5 per cent. So clearly, when the time comes when growth is stable and we’ve gotten through the sort of risk aversion period, you’ll see a substantial backup. But again, that’s not something we’re overly concerned about over the next say, 12 months.
Clive Tompkins: Andrew Stenwall, thanks for bringing International Fixed Income to our attention.
Andrew Stenwall: Thanks for having me.
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