BDO Private Wealth is pleased to welcome you to the second edition of our Meet the Manager series. In these interview-style videos, wealth adviser Kelly Kennedy deep-dives into key issues with Australian fund managers, from their investment philosophies to their take on topics such as interest rates and diversification.
In this edition, Kelly speaks to Chris Joye from Coolabah Capital, who manages the Smarter Money Higher Income Fund. Chris is the founder and Chief Investment Officer, responsible for investment decisions, portfolio management, research, asset pricing, and general business management.
Chris is also a contributing editor with the Australian Financial Review and well known as one of Australia's leading economists, policy advisors and fund managers. Prior to founding Coolabah Capital in 2011 and kicking off the Smarter Money Higher Income Fund in 2014, Chris worked for Goldman Sachs in London and Sydney, as well as the Reserve Bank of Australia.
Investment philosophy and approach
Coolabah Capital’s style is distinctive in the market, being an active trader of bank bonds globally. Chris says they are focused on very liquid bonds with very low default risks, that are floating rate or hedge to floating, which reduces the interest rate risk.
Coolabah are “constantly hunting out those cheap securities that will give us capital appreciation,” explains Chris - looking beyond the yield on the portfolio through active individual security selection, much like an active equity portfolio.
Coolabah capital drives total returns through active selection of high grade, very liquid bonds. These bonds are floating rate - typically A rated or above - and deliver capital gains on top of any yield paid. Specifically, Chris targets returns of 1.5 per cent above the RBA cash rate after fees, with volatility of less than 2 per cent premium.
The risk factors to control include the term to maturity of the bond, the credit rating, and the bond where it sits in a capital structure.
“In the market, what’s normal is to have investors who hold to maturity,” Chris says.
“They’re not actively buying and selling bonds, they’re looking for cheap securities that give capital gains, and because they’re holding the bond to maturity, they’re just earning the yield. If they want more return, I really have to chase more risk, [which] could be in the form of bonds that have high default risks, bonds that have more liquidity risk, opponents that have more duration risk - we try and minimise those risks.”
What are bonds?
Bonds are debt securities. Unlike buying stocks, bonds represent a loan, as opposed to ownership rights.
There is a large market for bonds in Australia – Chris remarks that approximately AUD $1 trillion of bonds are issued by Australian companies yearly. A further approximately AUD $1.2 trillion of bonds are issued by both the Federal Government and state governments. Combined, this is more than AUD $2 trillion of liquid investment grade.
What is floating rate?
Floating rate, or floating interest rate, refers to a debt instrument (such as a bond) that does not have a fixed interest rate over the life of the loan. Floating rates will change based on a reference rate – that being the cash rate set by the RBA.
Watch the full interview to learn about Coolabah Capital and discover more about Chris’ work with the Smarter Money Higher Income Fund and his strategy for investing in bonds globally.
Should you wish to discuss how your portfolio is positioned in the context of your investment objectives and market risks, please speak to your local BDO Private Wealth adviser.
Smarter Money Higher Income Fund is licenced to provide general advice. The information contained is not advice, is general in nature and does not take into account your objectives, financial situation or needs. Before making a decision to invest in this fund please consider the relevant Product Disclosure Statement and Target Market Determination to determine if the product is right for you.
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