Damien Wood, head of research at Spectrum Asset Management. Picture: Hollie Adams
SPECTRUM’S PRINCIPAL, DAMIEN WOOD, WAS RECENTLY FEATURED IN THE ‘WEALTH’ SECTION OF THE AUSTRALIAN (14 April 2018).
Australian investors are fond of shares and cash, but rarely hold corporate bonds. Damien Wood is hoping to change that with his Spectrum Asset Management.
What is Spectrum Asset Management and what is your role there?
We are a corporate bond fund manager founded by veterans of the bond market. I do research on the corporate bond market to help our investment decisions.
Why would investors get into corporate bonds?
The feedback from retail investors is they want to earn more than deposits with a moderate increase in risk. Our minimum investment is $5000. At their best corporate bonds can help protect capital, provide steady income, diversify risk while giving the investor ready access to their funds.
What sort of assets does the fund look for?
The bonds are all in Australian dollars. The issuers are either based locally or from overseas, otherwise known as Kangaroo bonds. The ability to invest in offshore issuers is a great way to diversify from the Australian economy while not taking any currency risk.
How did you end up in this very specialised area?
I started as a credit analyst for Hambros in Sydney just before the last downturn in Australia in the late 1980s. Roll forward a few years, a stint in London and an MBA and I was leading Asia Pacific credit research teams at Barclays and ING Barings based in Asia. The last role was at Credit Suisse and I transferred back home with them. I wanted to move into funds management and also wanted to be entrepreneurial. Spectrum ticked both boxes while its business matched my 30 years-plus experience in credit research.
What are the main themes affecting your decision making?
Our prime focus is to avoid defaults. We spend much time analysing the credit risk of an investment. The second leg is to seek out cheap securities and avoid those that look expensive. The third leg is to position the overall portfolio to reflect our macro view of the market.
What is the outlook for interest rates in Australia and globally?
Interest rates and bond yields globally look like going notably higher over the medium term. The US Fed is signalling several more rate hikes. More importantly, though, major central banks are in the process of unwinding the greatest ever stimulus the world has seen. In short, demand is falling while supply is rising in the global bond market. Global bond yields may rise sharply. If this happens Australia will not be immune. The RBA may hold official rates at 1.5 per cent. However, it is the market that sets the yield on bonds. If US dollar bonds yields spike Australian dollar bond yields will probably need to adjust higher to entice buyers.
What does all this mean for private investors in Australia?
At first it could be negative but later potentially positive. The prices of fixed rate bonds fall as yields rise. Other interest rate sensitive assets, such as REITs, may also come under price pressure. Eventually, though, yields will stop rising. And then an investor may get the opportunity to own higher yielding assets with less risk of price loss.
So how would investors protect themselves against rising rates?
Recently there was around $US11 trillion of negative yielding bonds globally. This grossly distorted valuations for many investments. The reversal of the central bank policies risks sharp falls in prices for many investments. To shelter from this bank deposits are an option. Another is floating rate notes. As the name suggests the interest rate paid on these adjust to reflect the prevailing market rate. The prices and returns of these investments tend to be far more stable than fixed rate bonds. We primarily invest in floating rate corporate bonds.
What are they key investment lessons you have learned?
The importance of liability management. The Asian financial crisis and then the global financial crisis were exacerbated due to aggressive funding strategies. These asset bubbles were financed as though the good times would continue forever. The concern is there are parts of the Australian economy that resemble this. That is the banks have financed a 25-year residential property boom and now 35 percent of borrowers use interest-only loans. Much of this is a bet by the lender and borrower on further capital gains. The current financing structure may struggle to cope with a notable weakening in the borrowing environment. In turn the aggressive funding structure could exacerbate the severity of a downturn. The lesson learned is to ensure our assets’ liquidity reflect the nature of the liabilities.
What about investment lessons learned in your own portfolio?
There was an internal email at Credit Suisse about how staff could subscribe to the Google float — of which my employer was the arranger. This was unusual and it indicated there was very strong internal demand. I was busy and thought I would find the time to look into this later. I didn’t. In hindsight a little bit of quick research may have uncovered what was a potential home run!
Lesson learned: keep an open mind to new ideas and a little bit of preliminary research can go a long way.