The Basics of Fixed Income & How to Invest In It | Blossom

HOSTS Alec Renehan & Bryce Leske|7 September, 2021

Meet your hosts

  • Alec Renehan

    Alec developed an interest in investing after realising he was spending all that he was earning. Investing became his form of 'forced saving'. While his first investment, Slater and Gordon (SGH), was a resounding failure, he learnt a lot from that experience. He hopes to share those lessons amongst others through the podcast and help people realise that if he can make money investing, anyone can.
  • Bryce Leske

    Bryce has had an interest in the stock market since his parents encouraged him to save 50c a fortnight from the age of 5. Once he had saved $500 he bought his first stock - BKI - a Listed Investment Company (LIC), and since then hasn't stopped. He hopes that Equity Mates can help make investing understandable and accessible. He loves the Essendon Football Club, and lives in Sydney.

We talk about the need to diversify your portfolio a lot at Get Started Investing. This episode, Bryce and Alec talk to founder and Chief Investment Officer at Fortlake Asset Management, Dr Christian Baylis. With a PhD in Econometrics, Christian has previously worked at UBS and the Reserve Bank of Australia and charged with managing The Blossom Fund. Together they talk about why you should invest in fixed income, what role it plays in a diversified portfolio, and the process Christian goes through to assess a fixed income investment. Then, later in the episode, Bryce and Alec talk to Gaby Rosenberg, the co-founder of Blossom, the brand new micro-app, and she talks to the guys about the problem Blossom is solving.

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Bryce: [00:00:28] Welcome to Get Started Investing feed. In this podcast, we cover all the basics. You need to start your investing journey. Are you joining us for the very first time, or is this the start of your investing journey? Well, before you dive into this episode with us. Our fate is designed to go from the very beginning, so we strongly recommend that you scroll up and started episode one. However, if you are feeling brave and just want to dive in, then of course don't let us stop you here at Get Started Investing feed. Unpack all the jargon and confusing bits here, investing stories with the goal of making investing less intimidating. And of course, we have a good time along the way. My name is Bryce and as always I'm joined by my Equity Mates Ren. [00:01:01][33.6]

Alec: [00:01:02] How are you going? I'm very good Bryce very excited for this episode. We're going to be talking about different asset class today, different investing option that people may not be as familiar with, and that is fixed income and bonds. And really in today's world, where if you have a savings account, you're probably getting an interest rate that starts with a zero. I think mine is both. My bonus interest rate these days is zero point one five percent on my savings account. It can be tough to find a way to make your money grow in something that might be safer than the stock market. So to do it all and to try and understand this world of fixed income and bonds, we've partnered with Blossom who have sponsored this episode and who are trying to, I guess, make it more accessible for people like you and me. [00:01:56][53.9]

Bryce: [00:01:56] That's right, Ren. And to kick it off, we've got the fund manager of the underlying assets at Blossom, Dr Christian Baylis. Christian, welcome to Get Started Investing feed. Thanks. [00:02:05][8.9]

Christian Baylis: [00:02:05] Brosnan, who likes to play with you. [00:02:06][1.0]

Bryce: [00:02:07] So Christian is the founder and chief investment officer at Fort Like Asset Management with a PhD in econometrics. Christian has previously worked at UBS and the Reserve Bank of Australia. And today, as Alex said, we're going to be talking the basics of fixed income and bonds and and what that means to for your investment portfolio. So, Christian, let's start at the very top for a beginner. What is fixed income? [00:02:34][26.9]

Christian Baylis: [00:02:35] Yeah, it's one of these odd names which is actually quite mis representative, I think, of the asset class sometimes and fixed income, obviously, when you break it down into the two words is fixed and income implying that you get a set level of income for a period of time. But what's missed out in that, I guess, in that that particular title is that we also, as an asset class, invest in a lot of floating income type of securities, which means that a lot of the time it's not actually fixed that as interest rates go up and down, as will the income as well. So so it's equally as big a part of the market than the fixed side. And so really, it's just been, I guess, a legacy name that's that's been adopted to portray the asset class. But in fact, it's a little bit different to what that actually is. [00:03:25][49.9]

Alec: [00:03:25] So Christian, just in terms of like a very Basics 101 definition, tell me tell me if I'm mistaken, if you invest in equities, if you invest in shares, you become a part owner in the company and you own shares in the company and the share price moves up and down with the fortunes of that company. If you invest in a company's bonds, that's basically your lender to the company. The company is borrowing money from you as an investor, agreeing to pay an interest rate. And regardless of how well the company does, the company will pay you interest and then eventually pay back their debt to you as an investor. And that's how you make money. [00:04:02][36.4]

Christian Baylis: [00:04:02] That's exactly right. Yeah, I couldn't have explained it better myself. You do? Yeah. I mean, maybe you should take the side over here and I'll stop with you that. Yeah. Look, the the only bit of nuance I'd add to that is that yeah. As interest rates move up and down, you know, you do get, I guess, differences in the capital value of that arrangement that you've effectively set out with with the corporate or the government or whoever it is that you've lent to so so that they're not static valuations, despite the income side being pretty constant. And the key point of difference with equities, I would say, is that obviously with equities, you've got a dividend yield and that dividend yield fluctuates from year to year. If we take the fixed income, rationalise that you've got a set level of income for a period of one, two, three, four or five years. [00:04:49][46.9]

Alec: [00:04:50] Now, if people are a little bit confused about how interest rates can move the capital value of a bond, we will get to that. But let's let's start with, I guess, the Y. So, you know, we are a podcast that has primarily focussed on equity markets as Australians, as young Australians, we're all desperately seeking to invest in property and get on the property ladder. For most Australians, they probably haven't really thought about investing in bonds or fixed income before, so I guess why why should we think about investing in fixed income? [00:05:24][34.5]

Christian Baylis: [00:05:25] Yes, I think it comes back to that stability of income. You know, there's there's a few things that are certain in life. Death and taxes is the often referred to phrase that fixed income should be should be pretty certain. And unless you're going down, I guess the risk curve in investing in pretty poor quality companies, fixed income is a pretty stable investment. And, you know, if you if you look at Australia, we talk about, I guess a term in our little microcosm is investment grade bonds. And that's basically, I guess, the highest rated bonds that are in the market. And specifically what that is, is A rating of triple B minus and all the way up to Tripoli. So a government would be rated AAA and then a not so good corporate would be rated triple payments. And that's basically the width of the, I guess, the credit quality that we invest in. Now, what you've got there is you've never had an investment grade default across that particular range of investment quality. So that's a really interesting fact is that is that when we're doing modelling for insurers and and all of these large investors that invest in the bond market or the fixed income market, we usually have to take us data as a reference point for defaults because we've never actually had a default in Australia with investment grade bonds. So so there is a very high level of assurity around that fixed income component. [00:06:40][75.0]

Bryce: [00:06:41] Now, Christian, no offence, but fixed income is often thought of as an asset that goes in the portfolio of a lot of old people, particularly those particularly those that are nearing retirement for a number of reasons that you've just spoken about, the assurity of it, the fixed yield or payments that it gives on a regular basis, and I guess less fluctuation in some instances than if you were to go all in on Afterpay and growth stocks. So as a beginner investor, perhaps at an age, if you were to think about that millennial generation and then compare it to someone nearing retirement, what role does fixed income play in a portfolio? [00:07:21][40.2]

Christian Baylis: [00:07:22] Yeah, look, I think it plays a stabilising force. Stabilising factor is it's you're going to have you're going to want to allocate a portion of your capital to more volatile investments such as the Afterpay and the the equity component in particular, that you're always going to want to have a stable element as well. And I think that's really the role that applies. The volatility in fixed income is typically about one tenth of the equity market. So that's an important part. So you've got less volatility, more certainty around, I guess that the fixed the fixed component again. And that's really what it therefore is. It's a place to draw on in volatile times. And that gives you I guess it's like it's like the comfort food of asset allocation. You know, it's it's it's when things start to get rough and ready, you know, that that's going to be there is as a constant and not move around too much. [00:08:17][54.7]

Alec: [00:08:18] So, Christian, in terms of how much of a portfolio is allocated to fixed income, obviously there's not a one size fits all answer. It depends on your risk tolerance and I guess where you are in your stages of life. But how do you think about asset allocation towards fixed income and maybe for some of the bigger institutions that you invest on behalf of how much of their portfolios are they allocating to fixed income? [00:08:44][26.9]

Christian Baylis: [00:08:45] Yeah, so it really ranges. So if you go to what we call the captive buys a fixed income, which tend to be the major banks and and the big insurers at the world, they typically these days allocate almost 100 percent to fixed income. Now, they used to have a bit in equities and and stuff like that, but the financial crisis and the pandemic has scared a lot of people or a lot of those big institutions away from from the equity asset class and the risk charges or basically the penalty that the regulators put on them for holding equities is quite substantial as well. So so there's a big allocation with that particular cohort. And then you go to the balanced funds or the big super funds who tend to have, you know, anywhere from four, five per cent, up to 20 percent in fixed income. And then you've obviously got, you know, age demographics play a part as well. If we're going to individuals, typically a younger cohort like millennials who have basically no fixed income and they'll be purely in risk assets like equities and things like that. And to some extent, that's the correct allocation at a young age, because obviously you can withstand the volatility. What you do find is that over time, it's you want to grow out of that that risk allocation and start to put aside a portion into more conservative asset classes, because the older you get, it becomes more about defending the wealth that you've made over time, not so much growing it. And and that's where fixed income really plays a role in a lot of years. [00:10:07][82.4]

Alec: [00:10:08] Now, Christian, we've mentioned a number of, I guess, different types of bonds. In this conversation so far, and I think it's probably worth taking a step back and just establishing a fact that might surprise a lot of people, which is the bond market is actually bigger than the stock market. Correct me if these numbers are wrong, but I think the global bond market is about one hundred and twenty trillion and the global stock market is about 70 trillion. So the amount of investing options out there in fixed income is massive. And we're talking about everything from US government bonds, which, you know, as safe as safe can be all the way through to companies that might be on the verge of bankruptcy, that are desperately trying to raise money to keep themselves afloat with such a, I guess, a wide range of investing options from big governments to small governments to good companies to bad companies. How do you think about allocating your capital within the fixed income market? [00:11:09][61.1]

Christian Baylis: [00:11:10] Yes, it's almost like an asset allocation process within an asset allocation process, if that makes sense, is that is that you've got higher risk segments of the fixed income market, a bit like you've got high risk asset classes as well. So so an example of that would be a very stereotypical portfolio. It would be, I guess, a small proportion allocated to the really low risk areas like government bonds and state government debt and those sorts of things. And then the more yield you want, you obviously allocate a bit more to the to the higher risk areas of the bond market or fixed income market. Such as such as that can be through a particular name or can be through a particular part of the capital structure. And an example of that would be, you know, we were talking about hybrids before, is that they had very high quality issuers. But we can also go down the capital structure, look to to the hybrid level and take a bit more risk. But on a good name. Or we can go into it, I guess, a name that's not so not so good or lower quality and go higher up the capital structure. So there's a lot of ways in which you can slice and dice your risk profile and the areas that you want to go to. But it is a very complex asset class for that reason is with equities, you've got literally equity that you buy on one night and that's all you got to do. Whereas with with fixed income or bonds, you've got bonds issued in different currencies, different part of the capital structure. All of them have different risk profiles and all of them nine different things in terms of what happens when, you know, when there's a I guess, a risk off event or insolvency event as well. So it is it is about breaking all of that down, filtering it out, and then coming up with a, I guess, a risk profile that suits your investor type and also what their stated objectives are as well. [00:12:58][107.6]

Bryce: [00:12:59] We'll get to how do you can access them in bonds and the like in a moment. I think one of the major differences for me between the two markets, equities and bonds, is that access for retail investors is a lot easier in the equities market. So it'd be great to get your thoughts on how we can get involved in this space in a second. But when we're talking about getting started and we speak a lot about how you can analyse a company and what are some of the fundamentals you look for or types of investing styles, what is your process for assessing fixed income opportunities? Is there a difference between analysing a stock over a bond? [00:13:39][40.8]

Christian Baylis: [00:13:40] Yeah, I think there is. It's always interesting when you look at an equity manager or you look at the well-known ones like Magellan or or Berkshire Hathaway and some of those well known equity managers, they'll typically be out doing a slide presentation if look, this is the stock up board. I've gone and bought McDonald's and and this is the full fundamental picture of it. And this is why it's going to shoot the lights out and this is why it's going to do so well. Whereas as bond investors, really we shouldn't be effectively presenting like that. Is that really it's almost like about avoiding the downside with bonds if you allocate quite a substantial amount of money to a particular bond type Virgin Airways as an example, which is what which was what actually happened. So people had invested around a small portion of, let's say, one point five percent now that defaults and you get zero cents back in the dollar, that actually shreds your whole year's return just by one point five percent allocation to that bond. So in a low right world, having concentrated bets in fixed income is a very dangerous game. And really what it's about is it's about mitigating all of those individual exposures. A bit like how bank has your numerous exposures across so many different clients is that very rarely, unless they've got pool, a poor risk framework, they'll be very rarely exposed to one individual client. Or that shouldn't be at least. And it's for that exact reason. Is that the upside you don't get a lot for. But the downside is very painful. So with equity managers, they live and die by their concentrated bets, whereas with with with fixed income, you live and die by poor reselection and not being diverse. So it's it's a it's a. A very important difference between the asset classes, so [00:15:16][95.9]

Alec: [00:15:16] Christian, if we just pause here and sort of recap what we've what we've covered so far, you know, the bond market is an investing option out there that perhaps not as many people have thought about. Rather than owning the company, you're essentially a lender to the company and then the company pays you back with interest. Generally, it's considered less risky. And if the company does go bankrupt, you do get paid back before shareholders or people that own equity. And for that reason, a lot of investors, especially big institutions that are quite conservative or people, as they're getting closer to retirement, put more and more of their money away from equities and towards towards bonds because it's generally safer. We're going to we're going to take a quick break to hear from our sponsors. And then we'd love to talk about how we can actually access this market as retail investors. So, Christine, before the break, we sort of recapped, I guess, the overview of the bond market, but what we really want to get to is how we can actually access it, because as retail investors, traditionally, it's been nigh on impossible unless you have a lot of money behind you, but it is getting easier and easier. So for Bryce tonight, we're interested in fixed income. How can we how can we access the opportunity? [00:16:33][77.0]

Christian Baylis: [00:16:34] Yes, I look, I think the ASX had a few guys at it, but it really didn't take off. So I listed Bonds on the exchange. But the transaction costs were incredibly, I think, restrictive. And then what happened was interest rates came down in those transaction costs became quite a big portion of the overall return. So I think it ultimately ended up turning people off the asset class, at least on the listed exchanges. So I think what really we've had to go back to the drawing board and rethink about how we can make this market more accessible. So for a general retail buyer of this asset class, there's not unfortunately not many avenues to do it, I think, in an efficient way. So that's where obviously the bottom map has come in as a as a as a means to try to open up that market so people can basically transfer money directly out of their savings accounts into bonds. And we use an aggregated approach to do that so we can pool that money together and then get people access to the market in that type of way. And that's probably the most innovative way that I've seen to date, because it does it allows you to effectively aggregate and scale up all of the individual, subscale, subscale holders of cash and allows you to get access to it to a bigger market. And I think that's really the smartest way because it's more efficient and the transaction costs are a lot lower. You effectively get, I guess, aggregated bargaining power when you when you do that, i.e. you've got instead of having 10 people with ten thousand dollar balances, you've got a you've got one hundred thousand dollars which can go out and negotiate a better deal with the with the companies who, who do need the financing. And so I think that's that's probably the best approach. And it's typically why asset managers have never been able to do that in an effective way, because the cost of servicing like a low balance client is incredibly, incredibly punitive. So we've got anti money laundering cheques that we've got to do. We've got new client checks that we've got to do. And that process can typically be very involved and can take, you know, a week to two weeks. So streamlining all of that and aggregating it brings the cost down for the asset manager. But I guess that's facing one individual individual entity such as Balsom. And that means we can we can, again, give you access to the market. [00:18:49][134.4]

Bryce: [00:18:49] Sacristan, you mentioned there that interest rates can change the capital value of bonds. Now, this is something that as a beginner, it might be hard to sort of comprehend what that actually means. Are you able to explain the relationship and how and the mechanics of this? [00:19:04][14.9]

Christian Baylis: [00:19:05] Yes, it's sort of really comes back to opportunity costs that if you if you buy a bond with a with a one percent yield and then interest rates go up to one point two percent as an example, it doesn't mean you've actually lost anything on your on your set income. It just means you could have ultimately got that for a better price. And so that gets reflected into the price of the bond. So that bond will drop as a result of that opportunity cost. But whilst you have this momentary loss of capital, it's only an unrealised loss, but it will ultimately gravitate back and unwind over time if you hold to maturity. So so that's really all it is. It's nothing overly technical and quite simple. It's all about opportunity cost. And, you know, when you think about the amount of central banks that are buying bonds at the moment, this should be a pretty good indication if they're not worried about these momentary capital losses because they're going to hold to maturity as an investor. I think it's a good approach to take as well, is that if you buy fixed income, don't get worried about the intervening capital movements. It's one of those things that you're better off probably ignoring as long as you're comfortable with the quality and and it will ultimately, ultimately resolve itself over time. And again, the point I always make there is that if you're doing it across a diverse portfolio where the where the aggregated probability of default is very low. So as I said, there's never been an investment grade default in Australia. It's probably a good, good approach to talk [00:20:28][83.3]

Alec: [00:20:29] Christian just for my my own purposes and my understanding. Can I can I try and explain the mechanism? And you tell me if if I have understood it correctly, a company issues a bond and I buy that bond when they issue it and I give the money to do whatever, let's say that's one hundred dollars. The face value of that bond is one hundred dollars and it's for five years. If I just don't do anything and I hold it for five years, they'll pay me interest every year. And then at the end of the five years, they'll give me one hundred dollars back regardless of how the price moves during that time. But when we talk about the capital value moving, it's more if I if I get that bond at. One percent and then all of a sudden there are interest rates are at two percent and other investors could either buy the bond off me or they could buy other bonds that are being issued at two percent. They'll only buy the bond off me if the the the face value, the price they pay is lower than what I paid. So they get the equivalent of a two percent yield because that's what other bonds in the market are offering. Is that is that. [00:21:35][65.9]

Christian Baylis: [00:21:35] Yes. So the price the price will drop to a point which equates to a two percent yield, very similar to how a dividend yield works, that if you buy a stock at five percent with a five percent dividend yield in the equity value drops hard. That means the dividend yields going to go up to 10 percent. So exact same principal, exact same principle with bonds is that if you buy a bond yielding one percent and interest rates and the interest rate goes up to two percent, it's effectively just meant the capital values dropped enough to give you a yield of of two percent. [00:22:07][32.3]

Alec: [00:22:09] So I guess that means the the last few years of ever falling interest rates has been good for the face value of bonds, correct? [00:22:18][9.0]

Christian Baylis: [00:22:18] Absolutely. Yes, that's for sure. So it's you've had basically a 30 year bull market in bonds where, you know, we had interest rates up at 17 percent back in the early 1990s. And basically, since that point in time, it's just been one direction the whole way down to where we are today. So it's been an incredibly lucrative three decades of for investors. And yet you had to buy very long term bonds to get exposure to that Phanatic as well. [00:22:45][27.1]

Alec: [00:22:46] So I guess the question becomes with the cash rate at what is at zero point one percent at the moment. And, you know, we have seen negative interest rates, but, you know, the cash rate at such a low percentage, if you're buying bonds today, how do you think about managing the risk of interest rates actually going up and the face value falling? [00:23:07][21.4]

Christian Baylis: [00:23:08] Yes. So this goes back to probably what I was talking about at the beginning of the episode was that in our world, we've also got the option of buying a floating rate bonds which go up and down with interest rates. So at this stage in the cycle, it's very important not to buy fixed income securities that are very long dated by a longer than one year would probably be the max at this stage in the cycle. So because if interest rates go up, you don't want to be exposed to that capital loss that we were just talking about. So buying floating rate bonds, which means the yields will go up as interest rates go up, is a far better way of managing that risk. So you really want to be you really want to expose yourself to interest rates going higher at this stage in the cycle and not going the other way, because really at the moment, there's not really much lower in terms of where interest rates can go. The Reserve Bank of Australia has said that they don't want to go into negative rates unlike Europe and Japan. And therefore, if we take them at their word, that means interest rates can only go one direction, and that's higher. So so you really want to make sure that you're allocating to that that type of sector within the fixed income? [00:24:14][66.1]

Alec: [00:24:15] Yeah, I guess one one more question around, you know, the future of interest rates, and that's about inflation. And I guess for a lot of listeners to Get Started Investing feed and for Bryce and I as well, when we started investing really for everyone our age, you know, we've had it drilled into us that don't park all your money in the bank in cash because the interest rate doesn't beat inflation. You know, these days, you're lucky if you get any interest on a on a transactions account and you're getting you're getting something with a zero in front of it in a savings account most of the time these days. So, you know, in terms of, you know, trying to have your money grow and beat inflation, you can't really park it in the bank in this day and age. How do you think about, you know, with interest rates so low and talk about inflation sort of bubbling up around the world, how do you think about ensuring that the return you're getting in blossom or in the fixed income market more generally is beating the rate of inflation? [00:25:15][59.9]

Christian Baylis: [00:25:16] Yes. So we definitely the point you make is is very important with savings accounts. The thing that I often point out to people is that when you're when you have your money in the bank, you are losing at the moment, you know, between two and three percent. And that's because inflation is running at two to three percent. So if you're getting a zero yield on that on that money bank every year, you know, inflation is effectively eroding your capital value by two to three percent. So over one year, not such a big problem, but over five years, all of a sudden you could be down upwards of 15 percent on your capital after adjusting for inflation. And that becomes a serious problem. So so it's it's it's this slow cancerous type of element that that starts to erode, that the real value of your savings. And if you look in the US at the moment, I mean, inflation is just running at five point three percent. So if you've got one hundred dollars in the bank account, you've just lost five point three percent after inflation on that money for this year. And that's incredibly painful. And if that runs at that top rate, not that it will, but if it did, you know that that becomes much more risky than the equity market almost. So there's this falsehood that that savings don't have risk. It's just because you don't see them go up and down day to day. There's no volatility, but the actual cost of those savings is really quite large. And so it's very important to accept that, understand it and and mitigate against it. So what we actually do is we we hedge inflation and not wanting to get too technical, but that we typically enter into a range of transactions with banks and other intermediaries who would like to take the opposite view to us that inflation would go lower. And we take the view that inflation would go higher and we seek to hedge that and protect the capital value of the bonds that we buy for our investors. And really all that is, is that that simply means that if inflation is currently at two percent and inflation goes to three percent, that means what we do is we protect the capital value about about our investors by that that one percent difference. And that's that's really what I guess the motto is for us at Fort like, is that we we think the asset class should always be looked at through the prism of inflation because it's such a such a corrosive element to the fixed savings in particular. [00:27:41][144.4]

Bryce: [00:27:41] Nice Christian, that does bring us to the end of our conversation, but it's a good Segway into the next part of this episode. We have Gaby Rosenberg coming on, who is the co-founder of Blossom and Christian. You manage the underlying portfolio of fixed income assets that Blossom Invest in. Blossom is a micro investing app that takes your savings and invests across this portfolio of fixed income assets, which, as we've sort of spoken about, is a good alternative to sitting your money in a bank with zero point zero one percent interest or whatever it may be. So stick around. We're going to be chatting to Gaby about the journey of blossom and how it can help solve that problem of low interest rates. If you are looking at still putting some money into or keeping money in cash and investing across fixed income. So, Christian, very much appreciate your time. [00:28:31][49.4]

Christian Baylis: [00:28:32] Really appreciate you having me. Thanks again. [00:28:33][1.7]

Bryce: [00:28:36] So now we are joined by Gaby Rosenberg, who is the co-founder of Blossom, a micro investing app that takes your savings and invests across a portfolio of fixed income investments. And I think I've just stolen the answer to the very first question, Gaby, which is what is Bossom? So how about we start with why? Why Blossom? What's the problem that you're solving? [00:28:55][19.5]

Gaby Rosenberg: [00:28:56] So there are two main problems that we're solving. First, it's very hard to do more with your money, as we all know. On the one hand, you can keep your funds in the bank making near zero interest rate. And on the other hand, you can invest it in the stock market, which is very volatile at the moment due to the global uncertainty caused by the pandemic. So that's why we're providing access to the middle ground, which is the fixed income market. And the second problem is that fixed income is difficult to access for retail investors. So this is for a few reasons. We have incredibly high minimum investment amounts. So between 20 to two hundred thousand dollars, you can have long lock up. So saying goodbye to the funds for between three to six months, there's high fees for someone else to be managing the investments for you. And of course, there's no centralised exchange for us to trade bonds on like there is the ASX for shares. So Blossom's mission is to democratise the fixed income market and bring it to everyday Aussies and millennials for the first time. How are we doing that? So we are targeting three percent per annum returns. We provide very easy access to the Blossom Fund where the investing is done completely for you. You can get started with one dollar. We have no account fees and you can also set and track your savings goals through the app. And finally, we have a dedicated team to ensure we're investing ethically and responsibly. [00:30:26][89.8]

Alec: [00:30:27] It is a great mission. You know, the fixed income market is very difficult to access for retail investors. So the full credit for trying to democratise access and make it accessible for people like ourselves. Can you tell us a little bit about the founding story and the growth to date? [00:30:45][18.2]

Gaby Rosenberg: [00:30:46] Absolutely. I finished uni and had no idea what I wanted to do, for lack of a better word. And I knew I was never going into a corporate role. So throughout uni and after I went straight into tech start ups, which I enjoyed a lot, and I was in my previous role when covid hit and we all got stuck at home. So I found myself with some extra time on my hands to get on top of my personal finances. And I always draw the most inspiration from my family. So they were telling me what fixed income is that it likely will match my risk profile as well. And so I started doing my own research and found the very high minimums, the long lock ups, the high fees. And it would have been a perfect opportunity for me, but I couldn't afford it. So I started doing some research into why some of these barriers existed for retail investors like myself and tried to have a crack at creating some solutions around them. And this was all happening at a similar time to my participation in the Stock Make Fellowship. And this is a programme that introduces you to the full suite of opportunities within the Australian Start-Up ecosystem. And we were hearing from people of the likes of Melanie Perkins from Canberra and Catherine McConnell from Bryce. And that consistent message was that your Start-Up idea isn't a part time job. It's a full time job. And if you really want to make something of it, you should be diving headfirst. So I lean to that message and I took the leap. And that was about a year ago. And since then, we have launched Blossom on June 7th. And as of this morning, we hit eight point eight million in funds under management in just under 11 weeks. And what we were chatting about before is that it's been such a rewarding journey. So we're seeing new demographics like millennials understand that you don't need two hundred thousand dollars to invest in fixed income. And with blossom you can start with one point ten dollars. And that fixed income is an avenue that might be worth considering to help you reach some of your longer term financial goals. [00:32:50][124.4]

Bryce: [00:32:51] Nice, very inspiring. Love to get a business with assets under management of almost nine million in about a few months. So obviously the product is very appealing and we can certainly understand why. Now we've it's obviously causing some great conversation in the Equity Mates group only last night. There are a few questions coming through. So it's perfect timing that we have you here. You mentioned there that it's a targeted return of three per cent and also zero fees. So the questions that have sort of come through is when you say targeted three per cent, what happens if you don't get there and how you guys actually making money? [00:33:29][38.1]

Gaby Rosenberg: [00:33:30] All great questions. So we have three key risk mitigation strategies that make us confident we'll be able to continue to target the three percent return in the long term, because, as you mentioned, it's a targeted return, not guaranteed. So the first risk mitigation strategy is our expert team. And you've spoken to Christian. You know, this first hand. He has 18 years of experience in fixed income, previously worked at UBS and the ABA, where he managed close to 30 billion dollars. So he has tried and tested strategy. He also received Australia's only highly recommended rating from Zenith for his time at UBS. And I'm assuming he hasn't told you this, so I'm here to tell you this, we secondly have a threshold management agreement and it's somewhat a unique structure of the fund where when the fund makes more than three percent per annum and after we've paid our external fees, we're building a buffer to help us with liquidity. Thirdly, it's a highly diversified liquid investment fund and we're investing in a whole host of fixed income assets. So the average rating of this bond portfolio of our assets is a rated, and never in Australian history has an AA rated bond gone into default. And that's just for one credit. Imagine that times multiple credits and it gives you a little bit more of an idea of what we're dealing with here. And in the event the portfolio does run at a loss, we have three options based on what I just mentioned. So the aforementioned firstly the aforementioned threshold management agreement will kick in and can help us fund some of that loss, too. We can reduce the return temporarily. And then three, we can reduce the return more permanently. And in this case, it would return to risk mitigation strategy. Three, that never in Australian history has an AA rated bond gone into default. And the average rating of our portfolio is a. [00:35:30][120.4]

Alec: [00:35:31] Yeah, we were speaking to Christian about the the lack of defaults in the Australian high grade credit market in our conversation before. But I think it is important for us to stress because some people will think of Blossom as a savings up. And it is you know, it's a great alternative to the you know, the interest rate that starts with a zero you can get in in your bank account these days if, let's say, interest rates do rise and the face value of bonds fall. Can I lose money investing more, putting my savings into blossom? [00:36:04][33.4]

Gaby Rosenberg: [00:36:05] So another great question and just to explain the savings at this investment to begin with as well. So our app allows you to contribute to the Blossom Fund, which, like any fixed income fund, of course, is an investment. And the reason that we highlight the savings element of the app is because we have enough functionality that helps every Aussies build and foster healthy savings habits. So, for example, we have a savings goal function where you can actually choose a savings goal within the app, you'll receive a personal flower and then you can watch a flower grow as your savings blossom. And we're also rolling out a whole host of savings, features and education to help the customer along their savings journey and in terms of the face value and interest rates rising. So we hold the view that inevitably interest rates will rise. And I'm sure Christian touched on this as well. And our fund managers are planning for that and retaining short duration. So the weighted average maturity of our bond portfolio is three years and our three percent target return is also a floating rate. So if interest rates go up, it doesn't actually affect the values. It helps the running yield in the long term. And the first available three percent that the fund makes always goes to the customer first. And then if the fund makes more than three percent, we use that excess to pay down our external fees. And then once our fees are paid out, we use the rest to help us build a buffer. And then that's what we keep to run the business and to ensure we can continue to target the three percent returns for the long term. [00:37:39][94.8]

Bryce: [00:37:40] And so the short answer for can you lose money being an investment? There is a possibility. [00:37:46][5.8]

Gaby Rosenberg: [00:37:50] Sorry, that is a possibility. We we don't have a government guarantee. So, yes, there is a small chance that you can lose your money, but I would direct you back to the rating of our bond portfolio to assess that risk. [00:38:03][13.6]

Bryce: [00:38:04] Yeah, absolutely. I think that's no doubt there's plenty of mitigations and processes you have in place that ensure that the underlying assets that we're investing in here are highly rated. And yeah, we just obviously want to make it clear that investments being investments, there are risks associated. [00:38:20][15.7]

Alec: [00:38:21] Hmm. I think it might be worth you know, we're talking about credit ratings and people, you know, might be new to the concept of credit ratings or may not really be able to say, like, what an eye is, what a B is for people who are interested in blossom, but would like to know, like some of the company or government bonds that they would actually be investing in. Do you have any examples of the companies that the Blossom Fund holds? [00:38:50][28.4]

Gaby Rosenberg: [00:38:51] I can give you a little bit of an explanation of what the underlying investments are in the fund. So the Blossom Fund invests in cash and CDs, mortgage backed securities, corporate bonds, semi government and government bonds as well. Which is a little bit of a fun snapshot and an example of a government bond, for example, would be the New South Wales government and obviously the New South Wales government isn't going anywhere, which is why it would generate such a high credit rating. [00:39:21][30.0]

Bryce: [00:39:21] So, Gabbi, for listeners interested in finding out more about what Blossom can offer and how to get started, what's the best place to do so? [00:39:30][8.7]

Gaby Rosenberg: [00:39:31] You can head to Blossom Dotcom or you can download the Blossom app through the Apple the play store and get started for free. [00:39:37][6.4]

Bryce: [00:39:38] Awesome. Well, check it out. If you are interested in a doing something more than putting your money in the bank account and be understanding a bit about fixed income as well. I know that there's a lot to get your head around when sort of thinking about all of this compared to sometimes equities. But I really commend you on what you're doing, Gabby. I think, you know, Equity Mates is all about making markets accessible. And there's no doubt that the fixed income market for retail investors is an incredibly tough one to get involved in. So very much looking forward to seeing how blossom grows. Pun intended, and we'll keep in touch. [00:40:14][35.3]

Gaby Rosenberg: [00:40:14] Thank you so much for having me on. Appreciate it. [00:40:14][0.0]

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