Mark Kiely, Senior Portfolio Manager, Antares Capital, talks about the recent spike in volatility following stronger than expected US January jobs and wages growth.
Ross Kent: Good afternoon. I'm Ross Kent and I'm responsible for the institutional client group here at NAB Asset Management. With me this afternoon is Mark Kiely, a portfolio manager with Antares Capital. Mark, at the end of last year you wrote about the extremely low volatility that's been pervasive in fixed income and indeed most listed markets over the last couple of years, and yet as we sit here in early February, we've just had a couple of days of much higher volatility. Can I ask, how have you been positioning the portfolios in readiness for this?
Mark Kiely: Yeah, good question. I guess as I mentioned last year in the paper I wrote about the low volatility environment that isn't going to stay that way forever and there's going to be bouts of volatility as you mentioned, these last few days have been one of those bouts so to speak. When we look at investment portfolios and we see that real extreme low volatility that is very compressed, credit spreads as an example in the fixed income space, we start to take risk off the table and give ourselves what we call dry gunpowder, so that we're ready to pounce when we do get times when the volatility comes long. So what we were doing, I guess, in the later part of year and early this year we were buying protection in synthetic credit for example. We were also shortening up some of our credit term premium in our portfolios and also building up the Qudian portfolios. That enabled us to then look into bouts of volatility and say are these buying opportunities or opportunities of putting more risk in our portfolios and as you reposition portfolios in the face of those bouts of volatility.
Ross Kent: I suppose, what you're saying is, you’re building up a little bit of a reserve capital to the side of the portfolio so to speak. How liquid is a market when you want to redeploy those gunpowder that you've built up, in an environment where it's volatile like it has been?
Mark Kiely: Yeah, absolutely. You tend to find that when you get those risk of environments like we had on Monday and Tuesday this week, liquidity tends to dry up. That's simply because a lot of people are already fully invested, and they don't have that dry gunpowder to step into the marketplace. So things just start to freeze. If you actually have money that you can actually put to investing in that market place, you could actually find some very good opportunities. Liquidity tends to be one way, I guess is the way I'm sort of phrasing it. When there's risk of environments it tends to be sell side liquidity, looking for a home. So, if you're a buyer it's a great opportunity, but if you're obviously a seller and you're a forced seller then it's not a very good opportunity at all. It's about having yourself pre-positioned to take advantage of those bouts.
Ross Kent: So, from an Australian bond investors perspective, with this environment perhaps now of increased volatility compared to what we've been used to, do you see the opportunities to deploy that dry powder over the next six to twelve months increasing?
Mark Kiely: I think that opportunities will come and go. These last few days, we had a good bounce last night, so it could just peter out from here and continue on the same sort of general shift that we're seeing in the 6 months prior to that where global bond yields were drifting up higher and higher in fairly measured sort of way. Growth continues to be strong, and in that environment, you continue to want to keep an element of investment in your portfolio that you are getting a good yield and good return. That doesn't mean that we won't have further episodes where things will revert back and you can actually really get more risk in a portfolio as well. So, it's about getting an element of investment in there as well as getting an element of what I call dry gunpowder.
Ross Kent: So from the perspective of the shorter dated investor, the client whose looking to deploy cash I guess, what's your positioning of the portfolios, looking after the needs of those clients at the moment?
Mark Kiely: Yeah, so if I look across our various types of portfolios that we manage, particularly in the credit space and the cash type space, let's say the short duration space specifically, we're tilted towards shorter duration simply because structurally rates are rising, and we are probably defensively positioned when it comes to credit assets. So, we've got assets in the portfolio where we're getting extra yield, credits security, etc., but we've got also some bought protection positions in there, limiting let’s say the capital losses that might eventuate should we get credit spreads widening in the portfolios. We're keeping our yields up, but in the defensive sort of measured way. We're certainly not shooting for things like high yield etc., which we find incredibly tight in this market environment.
Ross Kent: And I presume therefore, that means that as you see the market evolve and the outcomes increase volatility might give you an opportunity to deploy more of that dry gun powder into credit or what have you.
Mark Kiely: Absolutely, the last few days has only been to me a small blip. The last decent volatility event we had was probably January, February 2016 where we had global growth scares around the world and the market sold off very aggressively. That was a very good opportunity to get set. And we got set during that period. That set us up for the next twelve months. When those opportunities come, it's very important that you have the ability to actually get into the market versus being forced to get out of the market. That's the way we like to see it and that's the options we like to have at our disposal.
Ross Kent: So, Mark I think the advise for clients there is to keep some powder dry over this next little period and to really give yourself the opportunity to embrace the benefits that are a little extra volatility might present.
Mark Kiely: Yeah, absolutely. I think that's the way to approach it, particularly with what I would say is very stretched valuations in both credit assets and equity markets as well.
Ross Kent: Mark thanks very much for you time this afternoon. Thank you for watching.