welcome to another episode of equity
Mater podcast where we explore what's
possible in the world of investing if
you've just joined us for the very first
time a huge Welcome to our community my
name is Bryce and as always I'm joined
by My Equity buddy Ren how you going I'm
very good Bryce very excited for this
episode you know I am always excited but
one thing that we love to see uh is
accessibility improving for everyday
investors absolutely and uh one part of
the Market that has been less accessible
is uh fixed income yeah just because if
you want to buy bonds directly what
parcel size is normally start at like
$50,000 and if you want to access a bond
fund not many of them are listed so
you're dealing with quite High minimums
unless you have an advisor and can go
through a platform which leaves people
like us out in the cold y until now
that's right today we are joined by Sam
Watkins managing director and head of
Pimco Australia and New New Zealand now
Pimco are one of the world's largest
asset managers and we are fortunate
because they have just launched four
ETFs that now do give us exposure to
this asset class yeah that's right so in
today's episode we're going to chat to
Sam about Pimco get him to make the case
for fixed income because I think for a
lot of investors they're probably
underweight fixed income uh so we'll
make him pitch we'll then talk about the
Eternal debate active versus passive
investing uh yes it exists in the fixed
in come world as well so we're going to
chat about how we should think about
that decision and then we're going to
talk about these new range of active
atfs that have come to Market uh that
have made this asset class more
accessible for Australian investors yes
they've got some pretty bullish
assumptions on where rates go over the
next 12 months as well now before we get
into it we want to say a massive thank
you to Pimco for sponsoring this episode
and helping us keep all of our content
here at Equity mates free and accessible
so with that said let's get to our
conversation with Sam Sam welcome to
equity mates thank you great to be here
so we want to start with an introduction
to Pimco because wels you'd be pretty
familiar amongst the sort of
professional uh Finance industry for
many of the equity mates audience they
may not have have heard of you as much
so can can you give us an intro who is
Pimco yeah and look I think that's
that's that's very true by the way uh
you know Pimco when we do the barbecue
test as we call it where you sort of
mention where you work often it's not a
name that's known that well uh to to
most people um Pimco is a uh a fixed
income manager we're actually the
largest active fixed income manager in
the world our assets under management
are approximately $3 trillion I'm sure
when you say that at the
barbecue get interested
yeah sometimes it ends the conversation
honestly like
okay but uh look Pimco uh it's a it's a
a firm that actually originates from the
US our head office is over in Newport
Beach California and uh that of course
is um you know where the the firm began
nearly was about 50 years ago now uh but
we've been in Australia since 1997 so
very much uh I guess a local footprint
and one that's very well known to the
institutional and the advised Community
here now fixed income for many retail
investors won't form a big part of their
portfolio partly due to accessibility uh
for some of the the funds and and I
guess bonds themselves but then also due
to the low rate environment we've been
through for the last you know decade
post GFC uh QA falling rates uh fixed
interest wasn't really the place a lot
of investors were going but things are
changing so for those new to the asset
class for those thinking about fixed
income again in a you know different
rate environment make the case for fixed
income for us sure so I think as you
rightly mentioned at the start fixing
income hasn't historically been a large
part of retail investors uh portfolios
whereas in the institutional space it
tends to make up as much as 40% now
there's a lot of reasons for that uh but
I'd start off with the defensive
characteristics of fixed income um but
the other aspect that I think is really
important and and you brought that up
around the environment that we find
ourselves in is that interest rates
having gone through the largest increase
in the interest rate cycle uh that we've
seen in over 30 years are now at a level
where they represent very attractive
returns for uh for end investors and so
uh for example the some of the
strategies that we're going to discuss
later on today uh have a uh yield to
maturity that is in the sort of sixes
and even as high as 7% in some of the
strategies so very attractive returns
and an environment that we find
ourselves in at the moment which has a
lot of uncertainty can represent an
attractive alternative to other asset
classes just to contextualize that 6 or
7% like where where is that on average
or sit on on average compared to I guess
the last sort of decade or so it's
easily the most attractive uh level of
yields that we've seen in over a decade
uh so that sort of gives you a rough
idea of how to contextualize that and
the other thing that I think i' I'd use
to contextualize it is that right now if
you were to look at Major Bank uh term
deposits which are often seen as an
alternative somewhere to park your cash
while you're waiting to look for perhaps
a more racy investment um those are
presenting at around about
3.95% so you know with yields in in that
sort of five uh you know plus percent uh
for yield to maturity for the strategies
that I mentioned a pretty attractive
alternative and and one that has a uh
fairly safe and stable uh Outlook that
is defensive now uh Bryce and I here at
Equity mates are quite uh big proponents
of the core and satellite approach to
portfolio construction so how do you see
uh fixed income fitting in a COR and satellite
satellite
portfolio the traditional answer to that
question uh which would be 6040 everyone
I think might have been familiar with
hearing that term of the 6040 portfolio
that would have 60% of your portfolio in
equity or Equity like um exposure 40% in
bonds and fixed income for a traditional
balanced portfolio uh now let's let's
take that as being the midpoint uh
depending on your age stage and uh your
investment objectives that might range
uh from being as low as perhaps 20% for
someone who's very growth focused uh and
as high as 60 or 70% for someone who is
more uh towards the pension phase where
income and stability of assets is
important so very much in the core is
how I would describe it I read somewhere
and it's like very general but you can
you can say 110 minus your age is your
allocation to equities and like that
that like changes over your lifetime
then interesting have you ever heard
that before I I haven't heard that
before very scientific pretty scientific
I was trying to remember as I was saying
I think that's yeah 110 Min age is what
you should have to equi so for example
we're we're in we're 30 so you say 110
mons your age thank you so you say 80%
Equity 20% bonds but then like our
parents who might be you know in the C
70 then it's like 110 minus your age so
then they have 30% no 40% Equity yeah
yeah yeah do your own research yeah
anyway something to think
about so Sam um one of the biggest
debates in the equity markets is active
versus passive and you get people lining
up on both sides of those debate and um
it's it's become you know really big in
the context of the huge boom in passive
index investing over the past 10 years
there is a similar debate in the fixed
income World active vers versus passive
so give us a sense of the debate and
Pimco as an active manager give us why
you think active makes sense in fixed
income look the first point I'd make is
that it's a very worthwhile debate to
have uh it's a debate that I think uh
shifts through time and depending on
what regime that you find yourself in
and certainly is different across asset
classes um beginning where you did with
which is with equities uh I think you
have to look at the data uh you look at
the historic performance uh the um the
data that that I would refer to would be
uh Morning Star research that was put
out late last year uh where it shows
that over the last 10 years
approximately 40% of active Equity
managers have outperformed the Benchmark
so you had to be lucky to make sure that
you were invested with the right manager
and that that manager fell within the
40% every year looking at fixed income
it's actually the opposite story 70 25%
of active managers have beaten The
Benchmark over that same time frame so
you had to be unlucky to choose a
manager who was underperforming The
Benchmark and uh I think taking that one
step further what we hold ourselves to
is our own uh I guess peer group of
fixed income active managers and for
Pimco Over The Last 5 Years uh our
rolling performance for all of the
strategies that we run globally has been
that we have beaten 81%
uh of the median active manager so
pretty good statistics pretty good
numbers that suggest that active uh
Management in the fixed income space has
a strong
Foundation what are the some some of the
I guess characteristics that retail
investors should look for in an active
manager when I guess trying to decide
who who to who to back when considering
an active manager the one of the most
important aspects is the size of the
firm and the resources that are
available because for fixed income the
fixed income indices quite different
from equities are highly complicated so
to put that in perspective into
perspective the S&P 500 funnily enough
it does not have 500 uh shares or stocks
that make it up it's I think believe
it's 503 uh but the uh the Bloomberg
Global Bond U index which is of course
the equivalent Benchmark uh you know
really at a global level has over 35
,000 underlying constituents and of that
35,000 a large portion of those don't
trade regularly so when you think about
how complex that is how hard it is to
make sure that you are managing an
exposure that uh not only matches but
exceeds The Benchmark uh what you
require is an organization with a lot of
breadth and depth to be able to reach
research those individual names and to
be able to transact in those individual
names right across the world so I think
size is an important aspect and then
history and performance I think history
and track record is another important
ingredient yeah and I think for people
who are newer to the fixed income Market
to try and get their head around that
complexity there's for me there's like
four different vectors that they need to
understand it's like the actual issue of
themselves like is it a corporate is it
a government then the duration so you
know is it a short-term bond is it a
long-term Bond if it is long-term how
long does it have left um to its
maturity and then there's credit ratings
as well so people probably heard like AA
a double A B um and then there's also
currency like the the bonds denominated
in so many different currencies and so
the complexity of that market even just
trying to explain it there it's it's
tough to get your head on I I spend my
whole life in that space and it sounds
complicated even when you explain it to
me there um look I I think what you've
done is paint the picture as to why
active management in the space is so
important uh it is a complicated space
it is very hard to access fixed income
as an end investor on a direct basis so
much of what active managers do is uh is
not only you know of course have that
obligation to chaperone towards the best
investments within that space but also
provide access which is not an easy
thing to have so let's ground uh active
decisions in the market of the moment
which is full of uncertainty I think uh
Pimco released a paper recently
uncertainty is certain seems to be the
only thinged know at the moment so uh
take us into the investment uh committee
uh at Pimco or like take us into the
room and talk to us about how the F how
your fund managers are approaching this
moment with that active haton and trying
to maximize outcomes for their clients
we have investment forums each quarter
and uh in each of those quarterly
investment forums the most senior
portfolio managers get together and
debate uh the different settings of um
of our portfolios and we start with the
big picture the macro so as you rightly
say uncertainty is certain that's our
theme at the moment and a lot of that is
being driven by the policy uncertainty
emanating from uh the the US
Administration uh but we also find
ourselves at a place where uh we have a
lot of geopolitical uncertainty uh and
we have Equity valuations that are close
to record highs we have a lot of moving
Parts here that make the landscape quite
an uncertain one so the start point for
us when we're making decisions around
how we construct the portfolios is to
try and design a portfolio that is going
to perform under a number of different
scenarios so of course we design it uh
with a A View to what our base case
might look like but we want to make sure
that it's something that is going to be
uh also um somewhat you know all weather
the other point that I'd make uh looking
at today's landscape and that
uncertainty is certain element of our
our current U view is that we have come
to the conclusion that looking at the
relative um yields that are available in
fixed income you don't have to stretch
out the risk curve uh in order to
achieve an attractive return our
strategies our core view at the moment
is to be up in quality uh and what that
means is to be more at the higher end uh
at the higher rated end of the
investment grade Spectrum uh on average
for our portfolios to increase those defensive
defensive
characteristics and so when you say base
case like perhaps using Australia as an
example like what what is your base case
from a macro point of view yeah so our
base case at the moment is a slowing of
growth uh and uh sticky inflation so uh
not a great mix for investors frankly
andir nice yeah that's right so not a
not not a great sort of base case but I
think the the one thing that maybe some
people you know people can take some
Solace from is that certainly our base
case is not a recession um although we
do see that as being a a higher
probability than it's been for quite
some time in that environment that is
quite uncertain one where we think that
growth is slowing uh inflation you know
we we don't think is going to accelerate
but we think is going to remain quite
sticky um that's an environment where
bonds and fixed income uh perform very
strongly and how how does that extend to
the US uh very similar sort of viewpoint
there uh but Al but with a backdrop of
of course policy uncertainty which at
the moment I think is making the job of
the US Federal Reserve a really tricky
one you know they is I'm sure you know
you're aware have a dual mandate
employment uh and inflation and at the
moment what we feel is that uh where
they may have in the past had some level
of policy flexibility to be ahead of the
curve and uh you know cut potentially in
anticipation uh of a weakening of the
employment Market uh because inflation
is sticky uh it may keep them on the
sidelines for longer than they might
otherwise be that said uh our our view
at the moment is that we will see uh 50
basis points worth of cuts so half a
percent of cuts from the Federal Reserve
uh throughout this year yeah right I
mean we got to ask this question well as
soon as you start talking about rate
Cuts do you have a base case for rate
Cuts in Australia yeah of course it's
something we spend a lot of time
debating um our case sorry our viewpoint
on rates in Australia is that we will
see uh three more rate Cuts this year so
75 basis points of rate Cuts still to
come so Sam on your uh base case for
Australia you said um slowing growth
which you would think okay well the RBA
needs to loosen policy and cut rates but
then sticky inflation which might sort
of temper that uh impulse so how do you
think they balance those two um parts of
your base case and I guess why does
three then become the right number what
we look at uh is the really I guess the
timing of each of those two things which
is to say uh what is the data telling us
about the speed of the economy how fast
will that slow down and how does that
play into where rates are set right now
so the starting point and the starting
point for us uh is a is a view that we
have restrictive settings today which is
to say that if the uh RBA was to move
back to a neutral setting uh there would
already need to be Cuts before you start
to take into account uh what we think is
a softening picture of growth uh and
that's really how we get to the 7 2
basis points worth of cuts and the
expectation is for that to be
represented by three um 25 basis point
Cuts uh and uh and that as I say is is
currently our base case God imagine if
they did three in one Australian housing
market would go crazy oh goodness me I
think unfortunately if they would do
three in one it would be an emergency
and other things might be going terribly
wrong so let's let's not hope for that
no no
no well Sam we're going to take a very
quick pause here on the other side we're
going to dig into the range of new
active ETFs that uh Pimco have launched
that are giving retail investors access
to your strategies but first a quick
message from you guys for over 50 years
Pimco have been at the Forefront of
fixed income investing blending deep
Market expertise with Innovative
strategies with their Rich history in
atfs having been one of the first
managers to list an active Bond ATF in
the US back in 2008 they continue to
focus on delivering innovative solutions
for investors around the world pimco's
new ETF range that we'll be unpacking in
a moment offers Australian investors
access to the same portfolio management
teams the time- tested investment
process and inhouse research that have
helped it to become an industry leader
delivering strong outcomes for their
clients over decades and across every
different Market environment so a
massive thank you to Pimco uh for
sponsoring this episode and helping us
keep all of our content here at Equity
mates free and to learn more about pinco
visit their website pin.com
all right well Sam thanks for bearing
with us there and thank you for helping
us keep our content free here at Equity
mates let's turn to the range of active
ETFs you've launched four active fixed
income ETFs uh in Australia not doing
anything in half measures you love to
see um why was now the right time uh to
launch these as I as you just mentioned
we launched our first active ETF in the
US in 2008 and uh it feels like I'm sure
and and is a very long time between that
and launching in Australia and there's a
few reasons behind that and what really
drove us to look at now as being the
right time to launch the ETFs uh the
first thing is the rate picture and uh
the environment that we're in right now
being one where fixed income as an asset
class is attractive from a return
perspective uh the second one is that
the uh exchang traded fund Market in
Australia uh really has uh grown and
accelerated as uh as an asset class uh
and what we've seen is uh something in
the order of 30% compound growth in that
market over the last decade so really
rapid growth but at the same time the
fixed income asset class is quite
underrepresented in terms of the range
of options that are available for
investors and so we took the decision
that we would uh look to our Flagship
funds that have historically only been
available to institutions and to uh
advisers professional advisers uh and
bring those to The Exchange to open them
up to a broader range of investors it's
uh yeah we love to see it because I
think for years since starting the
podcast we've we've both felt that uh
getting access to this asset class has
been very difficult so I think that's a
good point for us to explore the the
funds uh in a bit more detail can you
take us through the four funds that uh
have been launched so before we go into
detail on each of the funds uh I'll list
those four funds out for you so so the
first one is the Pimco Australian Bond
active ETF which has the ticker of
pus uh the second is the Pimco Global
Bond active ETF that has The Exchange
ticker of
PBF we also have the Pimco Diversified
fixed interest active ETF uh that has
The Exchange ticker of pdfi and finally
uh there is our pinco Global active ETF
uh that has the ticker of
PCD now if you think about how they fit
together and what the key differences
are between them uh the Australian fund
is one that of course is made up of
Australian fixed income securities uh it
is uh very much focused on high quality
uh fixed income it it benchmarks against
uh the Bloomberg um osbond Composite
Index which of course is is what we were
talking about when we were describing
the active versus passive before that
would be your passive Benchmark um and
uh it's a fund that has around about
$2.5 billion worth of assets that are
currently being managed uh within it um
for the Pimco Global bond fund uh that
is the largest fund that we have in
Australia and it's uh 8.3 billion of
assets under management currently and
The Benchmark for that one uh is the
Bloomberg uh Global composite sorry
Global aggregate index and that
Bloomberg Global aggregate IND index is
the one I referred to before that has
over 35,000 constituents uh now that's a
fund um uh that uh is is not just a
large one in Australia but is a very
substantial uh portion of the assets
that the Pimco run at a global level um
the third fund that I mentioned was the
Diversified fixed income fund and what
that is is actually a 50/50 split
between the Australian Bond and the
global bond fund and it's a a very
simple way for people to be able to add
a diversified fixed income exposure to their
their
portfolio uh the final one which I'll
I'll touch on um is the global credit
fund and the Global Credit fund uh that
moves a little bit further out the risk
Spectrum while still maintaining a high
quality investment grade Focus uh which
is to say that there's a little bit less
of the well there is less of The
Sovereign uh that makes up uh that uh
index um and uh the uh Global Credit
fund is one that has around about 1.2
billion worth of assets uh but maybe to
put it in perspective of yields uh
compared to the global Bond index which
has the much higher waiting towards uh
Sovereign or government bonds uh and
that has a yield to maturity of around about
about
6.3% yeah I I did want to ask a question
about the terminology there so it's it's
useful that you've um raise the
difference between the global Bond uh
fund and the Global Credit fund because
um I was was going to ask what's the
difference in this case between bonds
and credit so you mentioned there that
the credit fund has less government
bonds but is there any other key
differences uh well the global bond fund
uh that Benchmark has approximately 40%
of the total Benchmark which is made up
of uh Government Bond issuers uh for the
Global Credit index it's the same
Benchmark without the sovereigns oh okay
so it is it is as uh as simple as that
it's the exact same Benchmark just
excluding the Sovereign the government
issuers yeah okay yeah right and so Sam
for for many of uh the equity mates
listeners today thinking you know um
just here's more ETFs coming to the
market how do you see people use these
four funds is it choosing just one or is
it a mix of both how how would you uh I
guess advise us to to think about the
portfolio construction look the way in
which we would uh propose uh is to start
with your core question of how much
fixed income should you have at a
portfolio level the question as to what
part of that uh should be tilted towards
the Australian versus the global Bond
that'll often be driven by people's
preference uh for where their
performance drivers might come from um
so for example uh we have a number of
clients that are uh much more focused on
a domestic portfolio they will hold
asx200 uh style uh Equity exposures and
they far prefer to have Australian bonds
and then we have others who are more
Global in their approach and uh prefer
to have something which is far more
Diversified uh that will instead use
either a component of of the global Bond
or or perhaps even uh a total sort of
skew towards the global Bond allocation
um the credit fund that I mentioned
before uh is a um move towards a more
performance oriented or performance
focused fixed income so think about that
being one step not a large step but one
step out the risk curve within fixed
income uh and so that is possibly uh
something which is more suitable um as
being a smaller allocation than a core
Global Bond um component or Australian
Bond component uh but one which will add
a higher expected return to uh to your
fixed income allocation nice now uh a
lot of these ETFs the underlying funds
have been around for decades I think
we're having a look the global Bond fund
uh Inception date was July 1998 so more
than 25 years at this point give us a
sense of their uh performance to date
and how how they've gone as unlisted
funds uh so for the global bond fund as
you rightly mentioned it's been around
since 1998 and since Inception the
performance of the global bond fund uh
has delivered after fees around about
half a percent uh of uh of performance
above the Benchmark and of course when
you're talking about what is that 26
years uh 27 years half a percent
compounds to a very large number of you
know amount of out performance
additional return over time uh and
looking at a shorter period of time
which is to say how it's performed in
the last one year uh it's delivered net
of fees uh just under 90 basis points or
or 089 of a perc uh of performance above
the Benchmark so very strong returns uh
over both the uh very very longterm and
the short-term time
Horizon well Sam that uh brings us to
the end of today's episode we thank you
so much for coming in um congratulations
on the launch of of the ETFs we love uh
seeing Global fund managers bring their
their funds to Australia and make them
active uh make them available for us as
retail investors so uh we look forward
to seeing what else comes and uh and
yeah thanks for coming in today
fantastic thank you very much for having me
thanks I will say about investing
everything you do learn is cumulative
what I learned at 20 is use [Music]
