Joye: Investors no longer need to reach for risk in order to secure their return objectives

I am a self-confessed market nerd. I love process, I want to know how the sausage is made, and I'm intrigued when I see someone doing something different than everyone else in the market. 

That was the case when I recently sat down with Christopher Joye, Chief Investment Officer at Coolabah Captial, to talk about the launch of his new funds and how he sees and does things differently. 

The Coolabah process involves actively trading bonds, as opposed to the more traditional investment style of buying and holding to maturity. 

It's an aggressive approach that requires intellectual grunt, a well-drilled team of analysts and portfolio managers running models across the globe, and the ability to execute with efficiency. 

Coolabah has continually refined this approach and today runs north of $8 billion of investor capital, and Joye thinks that will continue to grow given the secular shift that is occurring into fixed income. 

"In late 2022, we were running $6 billion of FUM. Today we're running $8.2 billion, and I think that reflects the fact that investors want to access those very high interest rates you can get on cash, government bonds and bank bonds, and they're trying to reduce or hedge their risks in higher volatility asset classes or liquid asset classes". 

In this Expert Insights interview, Joye discusses the two new funds in detail, shares some of the inner workings of Coolabah, and explains why investors no longer need to reach for risk in order to secure their return objectives.

Please note that this interview took place on 13 September, 2023

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Edited Transcript 

LW: Why did you create Coolabah's Short Term Income Fund ETF (CBOE: FRNS), and where does it fit within an investor’s portfolio?

The Coolabah Short-Term Income Fund or FRNS, now an ETF, is actually a cash enhanced fund that we've been running since 2014. 

There's been a huge surge in demand in the listed markets for ETFs that specialise in cash, cash enhanced, or short-duration fixed interest, and that's what Coolabah's Short-Term Income Fund does.

Historically, it's delivered very strong returns, net of fees above the RBA cash rate. So it's returned about 1.4 to 1.5% above the RBA cash rate since inception. In the last year after fees, it's done about 1.8% above cash or a total net return of 5.1%, and it's currently yielding about 5.5%.

The Coolabah Short-Term Income Fund is a floating rate product, which means it has no interest rate duration risk, it only invests in floating rate bonds or fixed rate bonds hedged to floating. The average credit rating normally sits in the A to AA band and it's very liquid. We typically turn over the portfolio as much as two to three times a year.

LW: At the other end of the return spectrum you have the Long-Short Credit Fund - how does it differ from FRNS?

The Long-Short Credit Fund is a high yielding product and it can also invest in global bonds, not just Australian bonds. 

It invests in Aussie bonds, US bonds, and Euro bonds and it goes long and short. So it can basically profit from credit spreads widening, but also credit spreads tightening. Over the last 12 months, the Long-Short Credit Fund has returned 9.5% net of fees, or about 600 basis points - a little bit more than that - over the RBA cash rate. 

It's currently yielding about seven and a half percent, so it offers more yield and it's also a daily liquidity product that's fully floating rate. It has no duration risk and we typically sit the credit rating in the A to AA band.

So again, focused on companies that are government-guaranteed, or implicitly so, that are super liquid and we turn over that portfolio as much as 15 to 20 times a year. So it really is incredibly liquid.

LW: How do these strategies differ to what your peers are offering in the market?

Coolabah's focus is driving returns through active trading. 

Specifically, we have the largest team in investment-grade fixed income. We have 38 staff, 12 traders and PMs, and 12 analysts, and we've also built 60 to 80 different proprietary bond valuation models. 

What we're looking for is bonds that are paying too much or too little interest versus our modelled assessment of fair value. 

If a bond's paying too much interest, we'll go long and wait for the spread to compress and then sell. If a bond is paying too little interest, we can go short and wait for the spread to expand, the price to fall, and we profit as well. 

But really we're trying to drive total returns or capital gains through identifying this mispricing alpha.

So I guess where Coolabah differs from peers is we tend to have a much larger team. We have a much more quantitative focus. Our holding periods tend to be much more active and we tend to turn over our books many more times a year than peers. 

I'd say the normal bond fund would turn over their portfolios 0.5 to one times a year, whereas we are running strategies that are turning over anywhere from three to 19 times a year. And ultimately we're not just chasing yield. 

Our total return is really going to be driven a lot more by trading and the application of that intellectual edge to consistently identify those mispricings in both long and short opportunities, and now in both the government bond market and the credit market.

LW: You've grown your FUM to $8.2 billion - what has been driving that?

I think investors are looking for managers that are incredibly well-resourced on a global basis.

They want teams, like ours, that have 12 traders and portfolio managers, 12 analysts. Teams that have intellectual edge that can run scores of different models around the world to identify unique mispricing opportunities, teams that can execute with negative transaction costs. 

But obviously there's also a secular shift, I think, into fixed income, particularly high-grade bonds, and that's what we're observing in our client base.

In late 2022, we were running $6 billion of FUM. Today we're running $8.2 billion, and I think that reflects the fact that investors want to access those very high interest rates you can get on cash, government bonds and bank bonds, and they're trying to reduce or hedge their risks in higher volatility asset classes or liquid asset classes. 

That spans equities, venture capital, private equity, commercial real estate, infrastructure, high yield bonds, and private credit. Basically all the asset classes that won during that 15-year period where people thought we'd have low rates for long and there was this huge reach for risk and search for yield.

The beneficiaries, the commercial real estates, the high yield debt, and private credit markets are likely to be the casualties of a world where you can get incredibly attractive, risk-free or near risk-free interest rates from cash and very liquid bonds. 

Investors no longer need to reach for risk in order to secure their return objectives.