Talking Money To Us | Cameron Duncan – Shaw and Partners

Candice: [00:00:10] Hello and welcome to talk money to me. This is your need to know financial podcasts. Thanks so much for joining us. I'm Candice Bourke. [00:00:16][5.9]

Felicity: [00:00:17] And I'm Felicity Thomas. Now, this week, we're bringing you an expert in the Australian floating fixed interest market, also known as hybrids or preference shares. Now, given the market volatility, rising interest rates and recession backdrop we're facing, this type of investment is a critical asset allocation in the current market conditions. So we wanted to bring you the best in the business to help explain exactly what hybrids are and why some investors find them attractive. [00:00:43][26.2]

Candice: [00:00:44] 100% correct, Felicity. So without further ado, we won't leave anyone hanging. Welcome to the show. Cameron Duncan from Shaw and Partners. [00:00:50][6.5]

Cameron Duncan: [00:00:51] Thank you very much. Lovely to be here. [00:00:53][1.5]

Candice: [00:00:53] We're so excited to sit down and chat with you. Now, I guess we know you very well, right? We've had the privilege of getting to know you while we've been working at Shaw and Partners. But for our listeners benefit. You have worked in the industry, the financial markets for over 30 years, including a six year stint as division director at Macquarie Group. So I got to ask, what the heck is division director all about? [00:01:15][21.7]

Cameron Duncan: [00:01:15] Look, that's a very good question. Didn't completely figure it out even after 16 years. But look, it's just it's just a sort of a classification there. And effectively, I guess it means that you ended up with a degree of expertise in your area that might have been a little bit of management involved. But, you know, essentially, I did really specialise sort of in the fixed interests and convertible note and hybrid area. And so that's the sort of where I ended up. [00:01:46][30.5]

Felicity: [00:01:46] Amazing. So I guess that kind of brings you back to where you are now presently at Shaw and Partners, where you joined Shaw back in 2015. And essentially you got straight into establishing the Shaw SMI model portfolios with your partner, Steve Anagnost, which we'll get into now. You're well known in the credit hybrid market as the portfolio performance speaks of your expertise and impressive skill set in this space. So I guess since 2015, when you set up the SMI, which is Shaw Managed Account, the hybrid model portfolio has returned 5.56% per annum, which I say is quite incredible, seen as have been in a decreasing rate environment. Now the make up of that has actually been 4.75% income and 0.81% in capital growth, beating the benchmark generating alpha of 1.75%. Is that right? [00:02:38][51.8]

Cameron Duncan: [00:02:38] Can Yep. Now that those figures sound pretty spot on at the end of the day it is an income focussed strategy and portfolio, but as you alluded to, we do try and sort of generate a little bit of capital gain. We don't we don't sort of market or talk to that normally. But you know, there is some active management that takes place and given we're very close to the market and talk to institutions and do have a lot of information which is freely available to everyone, but it's so you have to go and seek it out that that sort of thing gives us a competitive advantage. [00:03:09][30.9]

Felicity: [00:03:10] That's it. Well, we all like a bit of alpha, don't we, especially on Talk Money to me. [00:03:14][3.4]

Candice: [00:03:14] Now we're going to hear more from Cameron about what hybrids are, how they work, the risks involved. But before we do that, guys, just a really quick reminder. Our chat today is not considered personal advice, even though we are registered financial advisors at Shriram Partners. Please note that this podcast and the content discussed does not constitute a financial advice, nor is it a financial product. [00:03:35][20.6]

Felicity: [00:03:35] That's right. Now we're here to educate our listeners, so I want to kick us off so. CAMP Can you give us a brief overview of the history of the Australian hybrid market for those not familiar with this asset class? How do they work and how long have they been around? [00:03:49][13.9]

Cameron Duncan: [00:03:50] That's a great question, Felicity. I think they've been around since the 1990s, if not longer, but that's sort of when I came into contact with them and that was sort of originally structured as converting preference shares. So they had characteristics of debt and characteristics of equity, and they've changed over the over the years. And of course there's bank hybrids and corporate hybrids which both have different characteristics too. And we've had, we have focussed more in recent times on the bank spectrum, so I'll sort of steer my conversation towards size. But what we saw during the global financial crisis was that the regulator came to the conclusion that the banks probably weren't well enough capitalised, given that many of them had to bail out well supported during the GFC. So what we ended up with was as far as the financial issues were concerned, was the form of Basel three compliant capital notes. So as I said, these things have got characteristics of both debt and equity in the capital structure. Hybrids sit above equity and you have a thing called a distribution stopper. So where any amount of an ordinary dividend has been paid by a bank or a financial institution that has a Harvard on issue, they must pay the full hybrid distribution, typically 5 to 7, 5 to 8 years. Call it after issue date. There's an optional call date and in virtually all cases subject to APA's approval, the regulator. These securities are called for their face value at that time, but they needn't be. They can actually be left out on issue, and then they mandatorily convert into $101 worth of shares in two years time after the call date. We've never seen that happen, by the way. But, you know, it's all it's all that structure exists to provide the banks with capital effectively. [00:05:54][123.7]

Candice: [00:05:54] So Australia's quite unique, right, because we're the only ones that have this type of market, is that correct? [00:05:59][4.4]

Cameron Duncan: [00:06:00] There is a very similar structure that banks issue over in Europe. They're referred to as Cocos contingent conversion securities. And look, they are very, very similar to our securities that we have here, the bank hybrids, couple of nuances and differences. They're probably a little bit more investor friendly here generally, but pretty similar. The US only has PREF shares. It's different market over there. [00:06:22][22.4]

Candice: [00:06:23] Okay. And you mentioned a couple of technical terms. Don't worry, guys. We're going to unpack what that means a little bit later in our chat. But I want to just pick up what you said in simple terms, really preference, shares, hybrids, whatever you want to call them. They're really in between the risk scale of equities and bonds. Right. So why would an investor, do you think, want to look at a hybrid market today in this current climate? [00:06:45][22.0]

Cameron Duncan: [00:06:45] Yeah, look, as I said before, all all sort of focus on the bank hybrids. And I think what's really important to understand is the credit quality of the issuer. So even though these things have characteristics of both debt and equity, the fact of the matter is, you know, most of the securities certainly that we put in our portfolio are issued by the major banks. We've seen what happens when the major banks get into a bit of strife here, they typically do garner some support from the central bank, i.e. the Reserve Bank. So what we saw in the GFC was that to ensure their funding integrity, effectively the Reserve Bank came out and guaranteed the banks senior debt so they could keep raising funds. Now you could go and buy, you know, a senior secured debt piece in a in a corporate, but it might be a really lowly rated corporate. If they go into liquidation, you may only receive ten, $0.20 in the dollar. And I think a good example of that was the Virgin notes. So, look, you know, you really you are buying a piece of paper that's issued by a very strong credit, you know, the right and I'm honest, the major banks in Australia. So this is an investment grade rated piece of paper that you're buying. And and look, you know, they whilst they do have characteristics of both debt and equity, they err on the side of behaving more like debt and equity. But you're quite correct to say that they do sit between the two. [00:08:10][84.8]

Felicity: [00:08:11] Now, you mentioned a virgin note. So I guess, you know, on the riskier end of the scale, what actually happened to those hybrid investors in the Virgin note when it went into administration during the COVID crash? [00:08:22][10.9]

Cameron Duncan: [00:08:22] Well, that note, it wasn't actually hybrid. It was actually was debt. So the difference being that, for example, the distributions paid on a hybrid, technically discretionary. In other words, the bank doesn't have to pay them. But as I said to, you know, if they're paying an ordinary dividend, they must pay the full hybrid distribution. And in fact, even when we saw a dividend emitted in one deferred in 2021, the day the pandemic hit, they still paid their full hybrid distribution. So I think the regulators is very focussed on maintaining confidence in our banking system and so they would prefer that to be the case. But just digressing a little bit there. But I mean, Virgin was in fact an unsecured note, but it was issued out of a company that didn't actually have any earnings. And you know, whilst it had sort of a it was almost in a duopoly effectively, it was just a much lower credit. So I think they were unrated from Memory Virgin. So it doesn't always help you to be in a security that's technically further up the capital structure if the issuer is not strong. And so I think that's the situation that they were faced with. I think from memory, they got a recovery of circa $0.13 in the dollar around that sort of number. So it was pretty draconian outcome. [00:09:38][75.7]

Felicity: [00:09:39] Yeah. And I guess there's a lot of I guess notes issued by some speculative mine. Is that a way that's again, probably something that we we wouldn't touch. I think what Qantas and I really like about the shore managed portfolio is that it's mostly, you know, your major bank hybrids, you know, and some other banks as well. Yeah. [00:09:57][18.3]

Cameron Duncan: [00:09:57] No, no, absolutely. And look. We did actually include a few corporates when we first started, initiated the portfolio, for example, and we were quite successful in some of the ones we own. We bought Origin notes I think at about $0.90 in the dollar and they were deemed at 100. Origin of course, was always a very good credit and various other names, a couple of property issued hybrids. But we came to the conclusion that and the feedback we received from our investors was that I really wanted to maximise capital preservation. Of course they understand that there is greater risk in those than, you know, obviously a term deposit or something like that where you've got minimal credit risk. However, you know, you've got to you've got to take more risks to receive return. But they they were just investors were very comfortable with the bank's investment grade credit rating. They understood them. I think just the fact that you've governed by the regulator and you've got the Reserve Bank that you're interacting with, that gives people a lot of comfort. [00:10:56][58.5]

Candice: [00:10:57] Yeah, and as you've eloquently put it, you know that nothing comes of that risk, right? Or you go into cash or something like a term deposit. But the regulator and the high regulation that we have in the financial industry here in Australia is quite unique and I think that's what makes our credit markets stand out to others. So I'm going to go there with you, Cam. You know, let's talk about APRA, who they are for the benefit of our listeners. How often do they meet and talk and I guess how tight do they have their reins on our banking system? And what does it mean if they're giving guidance to the Tier one capital ratio for the banks? You know, what does that mean, short term impact to the hybrid market that you guys look after and watch on a daily basis? [00:11:35][38.0]

Cameron Duncan: [00:11:36] Yeah, look, they have obviously the acronym that stands for the Australian Prudential Regulatory Authority. They govern the banks in terms of, you know, how much capital is needed and various other rules and regulations that they do abide by. And you know, the capital discussion probably is the key. So what we saw was in 2015, the regulator, I come out and say we actually don't think we think the banks need more capital. So they made the the major banks and Macquarie raised circa north of $20 billion in equity capital. And that's that's that was one of the reasons we found this asset class even more attractive because you know, the more equity capital buffer you've got underneath you as a hybrid investor, the safer they become. So all that equity was raised through share space and various placements and so forth, but since then has gradually increased the threshold of what's called common equity tier one that's required to be held by the banks. In other words, just bank equity, normal ordinary equity, rather. So that now sits at circa 11 and a quarter of a century, although they sort of effectively say they'd like the banks to be above 11 and a half per cent in this common equity tier one. Now that's a pretty high number that would involve the banks having to really experience a very high level of bad and doubtful debts and writedowns to get down to the level where this is something we haven't talked about. So these bank hybrids do actually have what's called a capital trigger. So in the event that their common equity tier one falls below 5.1 to 5%, so five of them and an eighth per cent, you would then be converted into $100 worth of shares. [00:13:19][103.4]

Candice: [00:13:20] Because I'm just going to interrupt you there and that's what the regulators say. That's considered stress levels. So we want you to be at like 11, 12% ratio, but if you get down to that, you got there, you've got a trigger. Now just rewinding the clock just quickly, how low have we ever got here in Australia, in the GFC and in covered crash. [00:13:37][16.7]

Cameron Duncan: [00:13:38] Look I don't think we've that's a good question and I'm not entirely sure what the answer to it is without reference. But I would say to you that it's certainly been nowhere near 580% in recent times. You know, that time, even during the pandemic, they were well above, certainly above nine and I think above ten. [00:13:55][17.1]

Candice: [00:13:56] Yeah. And that's the sense that we get through our research showing partners. I think. I think it was Martin Crabb that said it was around eight, like you were saying, eight or 9%, like it was never really got into those distress levels. And like you said at the start of the chart, we've never seen a trigger ever happen right to equity. So that's good. [00:14:13][17.4]

Felicity: [00:14:13] I think that's why people are comfortable with banks in Australia, right? Like we have some of the most prudent I guess systems here that prevents I guess a lot of issues. So I think, you know, overseas investors also want to invest in our credit market because it is fairly safe compared to, you know, the US or you know, the UK. [00:14:34][20.8]

Cameron Duncan: [00:14:35] Yeah, absolutely. And you know, there's other levers that the regulator can pull to which such things this is part of why the Capitals never got down to really low levels. So the regulator will start insisting once you get below, I think it's 8% that the banks stop paying profit share to employees. They're probably going to be pushing them to do an equity raise. They'll look at, tell them to have a look at some of their costs. So there's. A whole bunch of measures they can take to shore up the capital of the bank. And that's kind of what happened in 2015 when they decided that the banks needed more capital. That's one of the favourable things about being regulated by a diligent sort of body. LACAPRA It just keeps the integrity of the system intact. [00:15:15][40.0]

Felicity: [00:15:16] That's really interesting, and that gives a lot of investors quite a bit of confidence, to be honest. So let's go to our next question. Right. You're responsible for co running the Showroom Partners Hybrid Model portfolio, which Steve or we like to call him Aggie. Now, can you give us a brief summary of the recent investment changes you've made in the portfolio? And I guess give us a comment on the, you know, the recent month and what the portfolio is made up of. [00:15:41][25.6]

Cameron Duncan: [00:15:42] Thanks, Felicity. The the portfolio, it's got about 22 different bank hybrid securities in it. We always like to keep it sort of up towards 20 or more for the simple reason that it gives you diversity out to different call dates, which is nice. So you can adjust your credit duration, as we call it, or you sort of tenor if you like. And the other thing is, it gives you better liquidity because you trend, you know, you're able to transact up to 20 plus securities in the market. So you don't need to buy or sell too much of a concentration or huge amount in any one security. So that's all helpful. What we've been doing recently is over the past few months, because we were getting a little bit concerned that the market was a bit toppy and that credit spreads might broaden. And by the way, when, you know, when credit spreads widen, it means effectively that people require a big return to invest in the same assets. They're applying a bigger risk margin to those assets or issuers. And we've seen that happen across the board over the past month or two, obviously, with, you know, risk markets, equity markets coming off and credit spreads widening. So what we did over the past few months was actually sell out of our longer dated securities and buy more of the shorter dated securities. Now, the reason for that is when you're closer to the call date, which is when you typically receive your $100 face value back. So you pay $100 upfront, which is your face value, and that's the amount upon which your distributions are calculated. You know, called out you receive the same amount back. So when that's closer to happening, it means the securities become less volatile. When it's further away, you get more volatility and fluctuation in price. So we did that rebalancing over a over a considerable period of time. And we're probably getting to the point now where we start going the other way because we've seen those securities cheapen up. And so that's that's one of the ways we smooth the portfolio out over over a longer period of time. And so in equity terms, it's almost like buy low, sell high, which is a pretty good trend. [00:17:46][123.8]

Felicity: [00:17:47] That see it. And there's been quite a lot of new issues recently as well, hasn't there? We've had about three that have come through, which are all very exciting. Now we've heard about the portfolio update and we're going to next hear the outlook for the hybrid market. And we're also going to hear the importance of understanding all of the risks associated with this type of investment. But before we get into the risks, we're going to take a short break and hear from our sponsors. [00:18:12][24.9]

Candice: [00:18:15] Okay. And we're back. So let's get into the outlook for the hybrid market. Let's just focus on the banks like you're just speaking about can. But also if you've got any thoughts on the corporate hybrid market as well. [00:18:26][11.0]

Cameron Duncan: [00:18:26] Yeah, look, Candace, it's an interesting situation. I mean, there are a few corporate names out there. In fact, we've just we just about to lose cram because, you know, Blackstone's redeeming them as we expected. But the level of corporate issuance is sort of dwindled over sort of, you know, the past decade or so, really. Because what's happened is it's a funny situation in Australia. A lot of the corporates just go to the banks for finance. Some of the bigger, the bigger corporates do quite a bit of funding offshore because it's cheaper for them, they go to the US etc. and achieve very competitive financing there. So look, there is a corporate bond market in Australia. Most of it's over the counter, so we're very much listed, ASX listed focussed. We like the listed market particularly for more retail clients because it's very transparent. You can see the prices on the screen. It's it's you know there are very appealing things we think and also retains its liquidity when you get into more stressful environments. For example, when the pandemic hit some of the really high quality debt securities like even even US Treasuries became quite hard to trade and certainly you saw some volatility in them. But you know, lower down the credit spectrum, a lot of corporates just ceased trading. So bank hybrids, because they were listed, you could continue to transact. The price did move quite dramatically in some cases, which it normally doesn't. But, you know, you can have those events and we maintain liquidity. So that was interesting. But there is a few corporate names out there on the boards. But look, we we we do tend to pretty much exclusively stick with the financials. Now. We will look at the regional banks. Sometimes they offer up some value, but we do prefer the risk return in the major banks. And you got better liquidity in the securities, too. [00:20:14][108.2]

Felicity: [00:20:15] That was really interesting, though. We've had a lot of financial jargon. So I think for our listeners sake, let's go through a couple of really important factors in technical terms, commonly known in the space. All right. So yield to call. What does that mean? [00:20:29][13.8]

Cameron Duncan: [00:20:29] The yield to call is effectively akin to an internal rate of return, and that probably doesn't help you too much. But let me explain what it is. It's when you talk about equities and dividends, you really talk about something that is effectively a running yield. So you just divide the yield into the current price of the share. And that gives you the the the return, if you like, with a hybrid because you've got hopefully an end date at you called it timing is all important so you might pay for a security you'll earn a certain distribution rate along the way, normally at quarterly payment intervals, and then you will receive your $100 back a call date. Now, if you've let's say you paid $95 for that security, you're actually going to crystallise a $5 capital gain at call date. So the yield to call takes into account the timing of all your cash flows, whether or not there's a capital gain or loss and the yield along the way, effectively the return along the way. So it's a bit more sophisticated than just your normal running yield. It tells you what your genuine overall annualised return will be for that security. [00:21:36][66.5]

Felicity: [00:21:37] Okay, that's really interesting. And I guess, you know, we did talk about it at the desk that probably one of the best trades ever was buying some of the major bank hybrids when they came down to about $76.78 in the COVID crash. Because you're not only do you get the current distribution, but you also get that significant upside. And I know that you and Aggie were really on the ball, cashed up and took advantage of that, didn't you? [00:21:59][22.7]

Cameron Duncan: [00:22:00] Yeah. Look, we were I mean, it was a bit fortuitous. I mean, we did have surplus cash in any case, but there was a two or three securities term securities that were withdrawn because of the volatility at that period, which means we end up ended up with a lot of cash plus a maturity in another security. So but certainly it was an opportunity to take advantage of real dislocation that we saw into the market, as you termed it, the COVID crash. And it really was it was a flash crash. We didn't expect such a quick recovery was it was quite astounding. But, you know, you had a situation when it hit that there really was quite a bit of panic. And, you know, markets don't always behave rationally and you had pretty much people selling everything to go back to cash, which you guys saw, too. And it happened very, very rapidly. And and I think what what we've seen before in these securities is sometimes because they don't move as abruptly as shares, people go to them to sell crystallised cash so that they can then go and buy shares that have been heavily sold off. So we saw that happen. But as you alluded to, Felicity, I mean, you know, some of these prices got down to as low as into the $70 spectrum. And it was crazy, really, because, you know, over time, we've always. Those things main revert and at the call date, typically they repaid $100. So, you know, the recovery happened in a matter of a month or two. Basically, that's. [00:23:26][85.5]

Felicity: [00:23:26] It. And they were all operating over $100 again. Right. So that's a lot of upside. All right. The second term yield to maturity. [00:23:34][8.0]

Cameron Duncan: [00:23:35] That's pretty much the same as yield to call. The only difference is it's normally used in reference to a true bond where you you have a hard maturity date. So you might recall I referenced the fact that these are normally called at the call date, but they don't have to be and that they can then go to a mandatory conversion date. So a yield to maturity. Some people, the hybrids refer to that as the yield to mandatory conversion. But in a normal bond where you've got a hard bullet maturity date, that's what a yield to maturity is. But it's calculated in exactly the same way as a yield to goal takes into account all buys and timing and whether there's any capital gain or capital loss. [00:24:17][42.5]

Felicity: [00:24:18] What about face value then? [00:24:19][1.5]

Cameron Duncan: [00:24:20] Face value is fundamentally the amount that is used to calculate the distributions. So as you reference point if you like, so it doesn't really happen in the hybrid market, but in the bond market, sometimes you'll have a, you know, on face value is normally $100 or $1,000 or $100,000. That's normally around number 100 being the most typical. But sometimes in the bond market, they will then go and issue a security at 9950. But the coupons or distributions are still calculated on the face value. So because we're talking about hybrids, all that happens there is your face value is the hundred dollars that you put out upfront and that's the amount you expect to receive when you are called at called I. [00:25:05][44.7]

Felicity: [00:25:05] Now, the final one is B.B. S.W.. So everyone would say that a lot. Like, can you explain what that actually means for our listeners? [00:25:13][7.6]

Cameron Duncan: [00:25:13] Yes. So baby is w the baby is W right for full term bank bill. Swap rate is effectively the setting of where the market sees the 90 day bank bill right on each day, each business day. And that it happens, I think used to happen at 10:10. I think it still happens at that time. So there's these contributing banks that put in a bid in an offer and they take the average of all those bids and offers and I think there's like six or eight of them or something along those lines that then becomes your bank bill swap rate for the day. Now, if you happen to have a hybrid that is paying its distribution on the 15th of July, that will also be the day that the next quarter right is set on. So all the hybrids have what's called an issue margin. So that's a margin that's set at issue date. And that issue margin, which is permanent for the life of the security, is added to three month baby test. W and that then becomes your distribution rate for the next quarter. [00:26:14][60.9]

Candice: [00:26:15] That's important to note. So these investment style of hybrids, they have a fixed margin, let's call it three and a half percent. And the floating aspect is the best use of the bank or 90 day swap rates. So what's the current best you can? [00:26:30][14.9]

Cameron Duncan: [00:26:31] It's the current three months. Baby's W is around 1.82%. And you know, it's gone up significantly because of the anticipation of further rate rises. You know, literally three months ago it was at its circa 0.25%. So it's move very dramatically. And that's good for investors who are in these securities because they're floating rate and that moves with the prevailing level of 90 day bill rate. Well, three months go right. That's going up at the moment. So that's good news. [00:26:59][28.6]

Felicity: [00:27:00] So it's kind of a way to hedge against inflation, am I right? [00:27:03][3.4]

Cameron Duncan: [00:27:04] It really is. I mean, it's it's a hard thing to hedge inflation because, you know, there's inflation linked bonds out there, but because they are utilised, the consumer price index that reacts as a function of what's actually in it in terms of what's in the basket. Whereas these things just, you know, you're right, your distribution rate goes up directly based on the three month bank bill swap rate. So it's it's a very direct hedge, in my view. [00:27:29][24.8]

Candice: [00:27:29] Okay. And so I guess all that technical term, guys, if we put it into the context of what Cam's in charge of, the current yield to call for the portfolio is 6.4% on the expected 3.8 years to maturity. That's the time horizon, really. As an investor, you're going to wait to get that 6.4%, which it's pretty attractive when you when you think about what's going on. And you've mentioned I'm going to go to the risk part now of this market. So you've mentioned it. You know, the big the big ticket item there for the risk is the trigger into equity. I guess we know that interest rates are rising. You kind of alluded to that's a good thing for the hybrid market. So it's not a risk that's a benefit. You're going to make money on the upside. But what are the risks, I guess, should we be aware of going into this space? [00:28:13][44.3]

Cameron Duncan: [00:28:14] She just taking a step back the. It is worth noting to the the yield to call that you mentioned is grossed up for franking. So it includes the value of franking in it. That's just a convention in this market. [00:28:26][11.5]

Candice: [00:28:26] A lot of good franking credit. [00:28:27][0.8]

Cameron Duncan: [00:28:27] Yep, I messed up the franking credit too. It can preclude offshore investors. They'll tend to look at something more like a macquarie that's only 40% franked, which means the cash returns higher. But the other risks that exist out there are, I mean, there's two triggers fundamentally that that these securities contain. And as we discussed before, you know, that's something the regulator inserted so that these things look a bit like equity and, you know, effectively provide a capital foundation for for banks. One of them is the capital trigger that we discussed, you know, the five and 1/8 per cent, if the banks equity capital gets below that level, then those things will convert into a variable number of shares to acquire $200. And that's never happened and we hope it never happens. And because I would say to you that the whole banking system would be in immense trouble if that occurred. And as we discussed, the regulator's got many tools to to avoid capital being eroded to that level. So that's one the capital trigger. The other one is a thing that's a little bit esoteric and it's called point of non viability effectively. So what that means is and this was born out of the GFC, if a situation arises where the banks actually have to be bailed out, that is government or taxpayers money has to be applied to keep those things as a going concern, then they can actually be either converted into shares or even written down. So it's never happened. It's you know, it's it's a pretty it would be a pretty severe situation. And because it's never happened, no one's entirely sure what it really means because it's at the discretion of APRA as to whether a bank is non-viable or not. But I think the view that certainly the big institutional investors have taken and retail investors is that if things actually get that bad, harberts is not going to be your only problem. [00:30:24][116.3]

Candice: [00:30:24] It's like apocalyptic, bad, right? [00:30:26][1.5]

Cameron Duncan: [00:30:26] It's like Armageddon. [00:30:26][0.3]

Felicity: [00:30:27] Gunshots. If the banks go down, everyone else goes down, essentially. So I guess, you know, to summarise all of this, I think it's really important that as a long term investor, if you do buy the hybrid at $100 and then you hold it for the six or seven year term, you'll essentially get your $100 back as well as the coupons along the way. Now, this is going to be a tricky question for you. Can in the current climate, what factors are keeping you up at night or are you sleeping fairly well at the moment? [00:30:56][28.7]

Cameron Duncan: [00:30:57] I think the biggest thing for us is just keeping people comfortable. When you do have periods of dislocation and credit spreads expanding and we're going through one of those at the moment effectively, you know, we've had a couple of months of sort of -1 to 1 and a half per cent returns. And of course if you don't crystallise that, it doesn't happen top thing. But when credit spreads widen, prices go down and it's all about sentiment. So over time and we've got a great chart for you to flush the Candace of by saying that shows how income prevails in these securities. So even though you do get periods of capital gain and capital loss on a mark to market basis, every quarter your income comes through and over. That's why we say to people, don't go, don't ever put your money in these things for too short a period of time. And by too short a period of time, I mean, three months is really too short. I have a horizon probably sort of a year plus because then the income will smooth out any of those fluctuations. So, you know, we're we're we're always sort of looking out for what we think credit spreads are going to do. We don't have to worry about interest rates, particularly because it's floating. Right. But all we do really is shift our credit duration by moving a bit shorter or moving a bit longer to try and deal with that. So it's more about giving investors comfort that that their money is still in a good spot. [00:32:22][84.7]

Candice: [00:32:22] Which is the most important thing, right, when you're in the funds management business. So you've been in the industry for a long time, you know, over 30 years. Has there been a similar time that you can recall in the markets that sort of feels like we're going through what we're going through now? You know, like what is the state of play like? History. Can it repeat itself, do you think, in this space? [00:32:41][18.8]

Cameron Duncan: [00:32:42] You know, I've actually been in the market for 36 years. The year I started was 1987. So that was an interesting year. [00:32:49][6.5]

Candice: [00:32:49] That's a good year to start your debut. [00:32:50][1.2]

Cameron Duncan: [00:32:52] So I have seen plenty of cycles. And you know, this I mean, this is an interesting one because, you know, we've had such a long, sustained period of QE and effectively, if you like, printing money, a very easy monetary conditions and incredibly low rates. And obviously we've come to the end of that. And there was always going to be a. Ray of pain associated with that. We've had a confluence of other factors, obviously, in terms of supply chain disruption and, you know, commodity price rises and so forth that has caused this inflationary situation. So I guess the risk of rates going up has been heightened and that's caused the sort of current volatility. But fundamentally, we think that, you know, the banks and believe it or not, the consumer is still in pretty good shape. Most people have prepaid on their mortgages. [00:33:44][51.3]

Candice: [00:33:44] Lots of household savings. [00:33:45][0.7]

Cameron Duncan: [00:33:46] Still lots of household savings are still pretty good. And you do have, you know, corporates never really recovered to some extent past the GFC, but the post, the COVID crash they haven't, I haven't really, really levered corporate balance sheets are in pretty good shape actually. If you put all that together, I think that we're going to be able to weather this storm better than than most people would think who are very focussed on the now. [00:34:09][22.9]

Felicity: [00:34:09] Yeah. I wonder if we'll miss both recession as well. Australia, the lucky country if we won't actually go into recession. What are your thoughts, Kam? [00:34:17][7.5]

Cameron Duncan: [00:34:17] Look, it's, it's, it's, I think we've got to remember that really all a recession is, is negative growth for what, a couple of quarters, right. So, you know, I say that flippantly in a sense, because it obviously causes a lot a lot of pain for the those that are involved. I think it's about a 5050 thing, Felicity. [00:34:35][17.6]

Felicity: [00:34:36] Well, I think didn't we talk about China? Norway and Australia have both continued growth. [00:34:41][4.8]

Cameron Duncan: [00:34:41] Yes. [00:34:41][0.0]

Felicity: [00:34:42] Quite interesting. Yeah. [00:34:43][0.7]

Cameron Duncan: [00:34:43] Well, I mean, Norway is you know, they're they're an incredibly wealthy country and obviously not, you know, just bank. And they were they were so insightful the way they invested their oil revenues. Quite a lesson for other other sovereign countries, I would have thought. Australia has done pretty well to avoid recessions. That's for sure. [00:35:00][17.2]

Felicity: [00:35:00] Yeah, that's fantastic. So I guess we need to do a little bit more research into Norway and how they've managed things. So final question now. We love investable ideas. Here it talk money to me. Can you give us your top three hybrid ideas at the moment? [00:35:16][15.4]

Cameron Duncan: [00:35:17] Yeah. Yep. So, you know, the hybrid curve at the moment is reasonably flat. And what that means is actually a lot of the hybrids at the shorter end are looking pretty attractive because they're offering almost as big a return as the potentially more volatile and risky, longer dated securities. So there's one in particular that we've been recommending, which is the CommBank Pulse seven, which comes up for call at the end of the year. So it's a six month return, it's got about a six months, a 6% sorry, yield to call and you've effectively got two more distributions. You called it 15th of December. So you know, that's, that's a really attractive short dated trade. And then potentially you've got the option to if they offer a reinvestment offer and roll investors into a new security, you've got the option to have a look at that and invest in that should it be there and you know, within appealing margin. [00:36:11][54.4]

Felicity: [00:36:12] Now what's the code for that? [00:36:13][1.0]

Cameron Duncan: [00:36:13] One can say BHP Day. [00:36:14][1.7]

Felicity: [00:36:15] Okay, great. [00:36:16][0.4]

Cameron Duncan: [00:36:16] And then I think it's just a case of look, it varies day to day, but rather than giving you three picks, I'd say if you looked further out the curve now there's some pretty big yields. You know, given the shape of the swap curve, which is like a longer dated baby, is w essentially, you know, the likes of CBA. K ANZ, P.K. ANZ. PJ Sorry. Oh, they look pretty attractive. [00:36:39][22.5]

Felicity: [00:36:39] ANZ. PJ So you've heard it fast here. Those are the best three ideas at the moment. Now final question, I promise, and we like to ask all of our special guests this coffee, tea or tequila? [00:36:54][14.3]

Cameron Duncan: [00:36:55] Well, look, I can I really say tequila to you? Listen, I didn't approve of anything else. [00:37:00][5.1]

Felicity: [00:37:01] That's it. Well, thank you so much for speaking with us, Cam. And if someone's keen to learn more about your model, should they try follow you on LinkedIn? Or they can also follow shore and. [00:37:11][10.2]

Cameron Duncan: [00:37:11] Partners either or? Yeah, certainly. Probably Shore and partners because there's a broader array of information there. [00:37:18][6.1]

Felicity: [00:37:18] That's it. Well, thank you so much and we'll see you soon. [00:37:21][2.4]

Cameron Duncan: [00:37:21] Thanks very much, Candice. Felicity, appreciate the time. [00:37:23][2.2]

Candice: [00:37:24] Alrighty, well, that's a wrap. But before we do sign off, guys, as always, please remember, although Phyllis, you and I are financial advisors at Sharing Partners, obviously today's discussion is not considered personal advice and you should always go out and seek professional advice before you make any of your investment or financial decisions. The facts and also information we spoke about today with CAM are based on the 5th of July 2022 on the date of recording budget. [00:37:49][25.1]

Felicity: [00:37:49] The July already. That's crazy. Now make sure you follow us on and talk Money to me podcast on Instagram for daily market updates. And if you enjoyed this podcast, please give us a good review. Five stars on Apple Podcasts or Spotify. And remember, if you have any questions or you want to ask any of our guests any questions, you can contact us at Tim. Tim at Equity Mates dot com. We'll be back next week with another. Really. Exciting episode, so stay tuned. Until next time, stay safe. [00:38:17][27.8]

Candice: [00:38:18] See you then, guys. [00:38:18][0.4]