The Rules of Investing

The goldilocks buying opportunity is *almost* here in fixed income

Fixed income has always served a defensive role within investor portfolios. Normally, when growth is down and risk assets underperform, fixed income outperforms.
That’s under normal circumstances, though. In 2022, the Bloomberg aggregate bond index lost 13%. Why?
Introduce inflation, and the higher rates employed to combat it. When this happens, risk assets and fixed income fall in lockstep.
But those dark days seem to be behind us.
We’re now at or near the peak in interest rates. So with bond yields set to stabilise and fall, the value of fixed income assets look poised to rebound.
Today’s guest on The Rules of Investing is Jay Sivapalan - Head of Australian Fixed Interest at Janus Henderson Investors. Jay manages Janus Henderson’s Aussie fixed income portfolios, and holds ultimate responsibility for formulating interest rate and sector strategies.
We discuss:
The macro backdrop that’s shaping fixed income
The best times to buy fixed income, and how; and
where Jay sees the best risk-reward right now. 
Transcript
2:10 - Where are we in the cycle?
5:50 - How will fixed income respond during a recession?
19:10 - The best risk adjusted return right now
12:40 - Chasing yield has a time and place
14:00 - Why fixed income over term deposits?
15:10 - The dangers of passive management
17:25 - Qantas (ASX: QAN) still has wings
18:40 - A contrarian call on commercial real estate
21:00 - Semis vs treasuries
22:15 - Don't fall for the consensus view
 28:06 - A fixed-income security for the bottom drawer

Jun Bei Liu: Top stocks for today’s markets

Earlier this month, the Reserve Bank of Australia was forced to cough up internal documents under Freedom of Information laws. This included an internal modelling exercise from September 2022, which revealed the risk of an Australian recession could be as high as 80% by September 2024.
Meanwhile, a recent Bloomberg survey of 14 economists saw the probability of a recession in Australia climb from 35% to 38% in April. 
Investors themselves, through their positioning, seem to be suggesting the same. Shares in classic defensive names such as Transurban (up 14%), Woolworths (up 15%), Wesfarmers (up 9%), Coles (up 15%), Telstra (up 10%), Origin Energy (up 9%) and AGL (up 11%) have continued to tick higher since the beginning of the year. 
And yet, Tribeca Investment Partners' Jun Bei Liu is unflinchingly bullish. She doesn't believe the Australian economy will nosedive into a hard landing in the next few months or years. Instead, she argues the noise in markets has created extraordinary investment opportunities today. 
In this episode, Liu shares: 
Three rules for investors to live by. 
Her macro outlook for the years ahead. 
Why there is still fuel left in the tank when it comes to the China reopening. 
Her top long and short positions right now. 
Note: This episode was recorded on Wednesday, May 24, 2023
Timestamps 
0:00 - Intro 
1:25 - Three rules investors should live by
4:58 - Jun Bei's North Star for volatile markets 
7:34 - Jun Bei's base case: Why she doesn't believe Australia will experience a recession 
12:38 - The China re-opening theme isn't over yet (and the stocks' Jun Bei is backing)
19:53 - Jun Bei's earnings outlook for the ASX 
21:55 - Companies facing margin pressure over the months ahead 
23:11 - Why Jun Bei is shorting Super Retail Group (ASX: SUL)
26:20 - And why she's backing A2 Milk (ASX: A2M), NEXTDC (ASX: NXT), Macquarie Group (ASX: MQG), REA Group (ASX: REA), Xero (ASX: XRO), TechnologyOne (ASX: TNE), Pilbara Minerals (ASX: PLS) and Treasury Wine Estates (ASX: TWE). 
28:55 - The unloved stocks Jun Bei is loving right now
32:26 - The importance of emotional intelligence when it comes to investing 
36:49 - The best CEO and management teams in Australia 
39:30 - The Rules of Investing's three favourite questions (what investors are getting wrong, a big win and loss, and a stock Jun Bei would back for the next 5 years)

This fundie found Afterpay at $6. Now he’s found his next opportunity

Investing hasn’t been easy these past few years amid a pandemic, soaring inflation and monetary tightening. The ASX200 did 1.4% in 2020, 17% in 2021 and then -1% last year. Hugely volatile. 
But it's in times like this when the cream rises to the top. As most fund managers struggle to match the benchmark, Datt Capital’s Absolute Return fund has returned an enormous 25% per annum over the last three years. It's a staggering performance that most fund managers would give their left arm to get.
In this week's episode of The Rules of Investing, Livewire's David Thornton speaks to Emanuel Datt, founder of Datt Capital. Datt’s modest demeanour belies the rockstar performance he’s generated.
Not one to rest on his laurels, though, he’s about to launch a new small-cap fund that seeks to outperform the Small Ordinaries Index by 5% per annum. While the fund may be new, Datt's experience with small cap stocks certainly isn't - he bought market darling Afterpay at $6, long before it became Australia's largest ever takeover at a cool $39 billion. 
Datt discusses:
the processes and investments that netted the absolute fund such stellar numbers;
how he found Afterpay;
why he believes now is the time to get into small caps; and
the investment opportunity he sees in rare earths. 
Note: this episode was recorded on Tuesday May 16, 2023
Timestamps
1:50 - The man behind Datt Capital3:20 - Opening up shop4:30 - Achieving 25% p.a.7:30 - Rare earths12:00 - The opportunity in small caps19:00 - The sectors leading small caps21:00 - Spotting Afterpay24:00 - Red flags27:00 - Finding sustainable companies30:10 - Inflation can't be understated31:20 - Winning big with Adriatic Metals (ASX: ADT)

Is this the least crowded opportunity in the market today?

In the world of investing, listed markets dominate the airwaves due to their ease of access, broker coverage and liquidity. For that reason, unlisted shares can often take a back seat.
But companies aren’t born on the listed markets. Many of the best opportunities exist in the unlisted, pre-IPO space.
Today’s guest is Dane Roberts – a portfolio manager at Fifth Estate Asset Management. Fifth Estate invest in pre-IPO, IPO, unlisted and listed microcap and small cap companies. Its first fund was launched in 2021, delivering 13.29% since then – impressive considering the extreme volatility of that period. That fund’s closed to new investment, but they’re about launch their second fund with much the same strategy.
In today’s episode, we discuss what it takes to invest in unlisted companies, how they compare to their listed peers, the outlook for unlisted stocks, and why now could be the perfect time to invest at the pre-IPO stage. 
Note: This interview was recorded on Friday May 5, 2023. 
Timestamps
1:49 - Birds-eye view of pre-IPO and IPO
4:00 - Liquidity in unlisted markets
6:00 - Debt vs equity
10:30 - The perfect time to put money to work
12:45 - Finding and filtering unlisted companies
15:30 - How unlisted assets are priced
18:40 - When should a company list?
22:20 - A company storming towards IPO
27:20 - Fund 2
30:24 - In it for the long haul
33:00 - Monetary policy on the street
35:40 - The comeback kid (ASX: NXT)
38:45 - An infrastructure company surrounded by moats

No lithium, no worries for this outperforming small cap manager

When volatility rattles markets, micro caps and small caps typically suffer the biggest drawdowns. But markets have a reliable habit of reverting to the mean sooner or later. That’s very good news if you’re investing in small caps, arguably, now!
This week’s guest is Matthew Booker, portfolio manager and co-founder at Spheria Asset Management. Matt’s managed small company portfolios for over 15 years, consistently outperforming the index.
The Spheria Australian Microcap Fund has outperformed the S&P/ASX Small Ordinaries Accumulation Index by over 7% per annum since inception, while the Smaller Companies fund has outperformed that same index by over 3% per annum. Just as importantly, they’ve managed to preserve capital and outperform the benchmark through the volatility of the past year. And he's done it without lithium stocks!
We discuss:
where we are in the small cap cycle;
the opportunities Spheria are targeting;
capital preservation; and
the former market darling that’s back in business. 
Timestamps
1:50 - Where we are in the small cap cycle
3:30 - Lessons from the past year
5:30 - Preserving capital
6:50 - Outperforming without lithium
10:00 - The best is ahead for small caps and microcaps
11:00 - Filtering down an enormous universe of stocks
12:40 - "Inverse broker" indicator
14:00 - Investing in "legitimate growth"
16:55 - Red flags
21:20 - Takeovers
23:00 - Outlook for M&A
28:00 - Return of an unloved market darling?
35:30 - A bottom-drawer stock (from New Zealand)
Note: This interview was recorded on Wednesday April 19, 2023. 

James Gerrish: Low risk equity returns are back (and these stocks provide them)

Some fund managers don't freely disclose how they go about business, for fear of losing a competitive edge (or maybe letting on that they don't have any edge at all). 
Then there's the other school of thought - tell investors how you operate, what you're thinking, and forge ahead as a thought leader. Then, if you're worth your salt, investors pick up what you're putting down and entrust you to manage their capital. 
Today's guest on The Rules of Investing occupies the extreme latter end of that spectrum.
James Gerrish  is the 9th most followed contributor on Livewire. Subscribers might know him best as author of the daily match out report, but that’s certainly not the only hat he wears.
He’s also on the tools – running money at Market Matters across portfolios specialising in growth, income, international equities, emerging companies, and global macro.
We discuss:
the benefit of holding short-term views when long-term investing;
the market signals that matter most
the sectors with the best risk adjusted return
and the one thing investors should fear
Note: This episode was recorded on Wednesday December 12, 2023. 
Timestamps1:20 - Managing short-term views with long-term investing4:30 - Short-term noise8:50 - Banking crisis and deposit flight10:40 - The most important signals across sectors and asset classes15:30 - Are bond yields too high?19:40 - Investing is a game of inches, not yards23:50 - How important is the index?25:00 - Risk across today's sectors28:00 - The best risk-adjusted return33:00 - Know your risk, and invest accordingly35:40 - Discounting macro is a cop out42:00 - The thing that should frighten all investors45:50 - Look for companies with warts48:00 - The market's getting ahead of itself49:00 - Biggest career win and loss52:00 - A company for all seasons

Why Morgan Stanley is overweight passive in this volatile environment

We all know the stats. Over the long term, the majority of active investment managers will underperform their benchmarks. 
According to SPIVA data, more than 78% of funds underperformed the S&P/ASX 200 over the past decade, while more than 91% of funds underperformed the S&P 500 over the same time period. These rates improve significantly over shorter time horizons, with 42% of Aussie managers outperforming their benchmark over a one-year period, and 49% of US-based managers doing the same. 
Given the volatility of today's market, and his own findings from more than 15 years specialising in asset allocation in global and Australian markets, Morgan Stanley Wealth Management's Head of Research and Investment Strategy Alexandre Ventelon believes investors should remain conservatively positioned. 
This means a greater emphasis on (and portfolio allocation to) fixed income markets, but also, a greater reliance on passive products - like index-tracking exchange-traded funds (ETFs) - as we continue to navigate this short-term volatility. And right now, Morgan Stanley's model portfolios are heavily skewed towards passive products. 
"With a short timeline, the best way to get there is with a passive instrument," Ventelon explains. 
"The managers that have outperformed their markets on a one-year basis are often very different from one year to the other, and that's the issue. If you want to go with a tactical trade and you just choose one manager, based on how they performed last year, the odds will be against you." 
In this special Listed Series special of The Rules of Investing podcast, Livewire's Ally Selby learns which asset exposures are best played with passive products in today's market, the circumstances in which passive and active products should not be used, as well as Morgan Stanley's outlook on the ETF market over the next decade.  
Ventelon also shares why Morgan Stanley still remains bullish on the outlook for bonds. Plus, for a little bit of fun, we asked him to build a portfolio of listed products for the market today, while only picking one ETF from each asset class. 
Timestamps
2:12 - How efficient the market is today 
5:37 - How passive funds have changed the world of investing 
8:12 - Are passive or active products better suited to today's market 
13:22 - The instances where passive products should not be used in portfolios 
18:17 - The instances where active products should not be used in portfolios 
24:42 - Criticisms of passive products - do they hold any weight? 
28:20 - What the market will look like in 10 years’ time
33:53 - Why Morgan Stanley is bullish on bonds (and why he is using VGB, VIF and VACF to play it) 
38:45 - Ventelon's top ETFs for today's market (A200, WVOL, QUAL, VGB and VIF) 

John Ayoub reveals WAMs playbook for volatile markets

Events of the past few weeks have cast doubt over the stability of the financial system. First Silicon Valley Bank and its troubled regional banking peers, then Credit Suisse.
In typical fashion, the US Federal Reserve has stepped in to backstop the sector. In the case of Credit Suisse, UBS scooped it up for cents on the dollar. 
These events have changed the way corporations perceive risk, according to this week's guest on the The Rules of Investing John Ayoub, Portfolio Manager for the Wilson Asset Management's Leaders Fund (ASX: WLE). 
How does this play out for investors? Equity markets remain investable, according to Ayoub, but to do it right takes an approach that factors in the macro and micro. 
Which is good, because that's exactly the approach taken by the WAM Leaders Fund, which was launched by Ayoub and colleague Matthew Haupt. 
In today’s episode, we discuss: 
the global banking crisis, and how this risk affects the Australian market;
the political risk investors are underestimating;
the way WAM use macro, micro and catalysts to find their winners;
and we also touch on what defensive quality means, and why it’s the play in the current market.
Ayoub colours the conversation with a tonne of stocks, so there's sure to be something in here for everyone. 
Note: This episode was recorded on March 21, 2023.   
Timestamps
1:30 - Global banking crisis3:20 - Moral hazard in equity markets6:50 - Where do bank deposits go?10:15 - The hole left by Credit Suisse11:20 - Political risk is exploding15:00 - Doubling down after big hits17:00 - The companies that make it into WAM Leaders 22:45 - Finding opportunities in beaten-down sectors25:30 - Spotting inflexion points in markets30:00 - Hunting for defensive quality34:00 - A big win and a big loss36:30 - The death of the office is overblown