Smarter Money Investments Portfolio Manager, Chris Joye provides an overview of the company's funds and outlines why cash and fixed interest funds should be a part of every portfolio.
Jessica Amir: Hello I’m Jessica Amir for the Finance News Network. With me today from Smarter Money Investments is Portfolio Manager, Chris Joye.
Hi Chris and welcome back.
Chris Joye: Hi, Jessica.
So, for those who haven’t heard of Smarter Money Investments, just give us a quick introduction.
Chris Joye: We’re an active Aussie fixed income fund manager. We run $3.2 billion today, 70 per cent of that money is for institutional investors. We offer three core strategies. The team comprises four Portfolio Managers and seven analysts, it’s quite a large team. We own 75 per cent of the business, we have a large family office that owns the other quarter of the business. Technically, the investment team is Coolabah Capital Investments and we run the Smarter Money Investments portfolios.
Jessica Amir: Before we talk about your actual Funds. Just tell us about the case for investing in cash and bonds, given that we’re at record low interest rate levels?
Chris Joye: I think the first point is that by investing in cash and bonds, you’re reducing the risk of capital loss. So we saw during the Global Financial Crisis, equities fell 60 per cent, cash and bonds performed much much better. If you’re targeting a return of about three to four per cent above the inflation rate, over the last 40 years, the optimal portfolio would have been 60 to 70 per cent invested in cash and bonds, with the rest in equities and property.
We see in Australia most superfund portfolios have the reverse. So they tend to be 60 to 80 per cent in equities and very little cash in fixed income. Even though the asset classes are very very large. So if you want a stable low risk return and you’re worried about equity volatility, then there is a diversifying role for cash and fixed income.
Jessica Amir: Now to the Funds. Tell us about your approach?
Chris Joye: Some people think that as interest rates increase that’s bad for fixed income, because a fixed rate bond can decline in price, as rates rise. But we only invest in floating rate bonds and so that means that as the RBA’s cash rate increases, our returns will improve.
We try and avoid the three main risks that you generally find in fixed income. So the first risk is interest rate risk and we don’t take that, because we’re floating rate. Our second risk is called credit risk and the vast majority of all of our portfolios, are investment grade. And the average credit rating in our portfolios is in the A band, which is a very safe and highly rated outcome. The final risk in fixed income that folks will try and leverage off is liquidity risk.
The way we do generate returns is through a valuation alpha. What that means is we revalue every bond in the market, in Australia and globally everyday. And we’re looking for the cheap bonds that are paying too much interest. And when we find those securities and the market figures that they don’t need to pay that excess interest, or that excess spread and the interest rate actually normalises to our target, we actually get capital appreciation.
So historically, if we look at the last 2,300 bonds we’ve sold, our win ratio has been 99 per cent. And about 50 to 60 per cent of our return has come from capital gains, or valuation alpha.
Jessica Amir: You mentioned returns. Just tell me about the products and their respective performance?
Chris Joye: We offer the Smarter Money Active Cash solution. That targets a return of one to two per cent above the RBA cash rate, after fees. And it’s historically over the last seven years, delivered at the top end of that range and is certainly in the top decile of cash costs, or short-term fixed interest products in Australia.
We have a second solution called Smarter Money Higher Income Fund. It has a slightly higher return target of up to three per cent above the cash rate, and it’s outperformed the Active Cash strategy by about 70 basis points per annum, pre fees.
And then we have a new Long-Short Credit Hedge Fund and that’s a leveraged version, of the first two strategies. Over the last 12 months that has delivered about six per cent, pre fees with less than one per cent vocality. So very very low volatility, quite high returns. The fees on that product are negotiable, so we have an array of different fee regimes.
Jessica Amir: Lastly Chris. Why should someone invest with SMI in terms of their cash and bond exposure?
Chris Joye: I think we’re a very very different manager, we’re incredibly active, we’re typically buying and selling bonds up to 30-40 times a day. We tend to hold very high conviction portfolios, much more like an equities manager. So your typical bond manager might hold 500 securities, whereas we’ll typically hold 40 to 80. And we’re only acquiring bonds that we think are cheap and that are paying excess interest. And that will deliver capital growth as well as yield
Jessica Amir: Thank you so much Chris Joye for your time and your insights.
Chris Joye: Thanks Jessica.
Jessica Amir: And thank you for watching.