One of this investor's favourite places to hunt for alpha is Australia

Note: This episode was taped on Wednesday 2 October 2024.

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- This ultra-cheap Australian energy company has become one of this investor's most profitable calls

Australian credit markets are unique in many respects. While we may sit in similar time zones with many of our compatriots across the Asia-Pacific region, credit markets in Australia are less mature outside of the Big Four banks. And just like the public stock markets, we have far more resource companies and less of the technology or consumer-heavy exposures that exist in other regional markets.

But our biggest difference, by far, is the amount of risk you are taking. Australia is a developed economy with a strong regulatory framework, a primarily institutional investor base, and a perceived lower credit risk. Given these advantages, it's no wonder that John Stover of Tribeca Investment Partners has had a long affinity for Australian investments.

"It's always roughly been about 20% of the portfolio," Stover says. "

It is quite an interesting hedge in that it's more uncorrelated to what's happening in Asian credit because Australia tends to be more correlated to what's happening in developed markets."

In fact, one of the fund's longest-held long positions by stock is in a well-known Australian energy firm. As a hint, when they entered the position, the company was selling some of the cheapest individual credit assets in the entire continent.

To find out what that asset is and what else is catching Stover's eye, watch this episode of The Pitch or read our edited transcript below.

edited transcript

LW: Most people watching this video will be from Australia - who are incredibly home-biased. So why should they consider Asian credit?

Stover: I think we're at a really interesting crossroads for Asian credit. If you look at what's happened in terms of fund flows in the region, you saw money leave Asia around March or April 2020. That's because the Fed and the European Central Bank announced they were going to buy individual corporate bonds. That put a backstop for those markets. 

During that COVID selloff, you didn't see that same thing in Asia. And then really since then, you've had this cascading of negative factors in the Asian credit market. You had the Chinese property crisis, and you've had negative emerging markets sentiment because you've had the Russia/Ukraine situation, a rising US dollar, and rising interest rates in developed markets which are generally negatively correlated to emerging market sentiment. What we typically see is when interest rates are hiked, everyone buys developed market credit first because that's what they're more familiar with. 

LW: What do you like about Australian corporates, and especially how they stack up against Asian corporates?

Stover: Australia's been a great opportunity set for us actually, and it's quite interesting. A lot of the Asian credit funds traditionally did not invest in Australia, so the index didn't include Australian credits for us. We've been doing that and we've been running the strategy since July 2019, and that's always been roughly 20% of our portfolio. 

Part of that is my background. I've done a lot of investing in Australia in my career. I've been in Singapore for 14 years and throughout that time, I have been investing in Australia. 

And it is quite an interesting hedge because it's a bit more uncorrelated to what's happening in Asian credit. Australia tends to be a bit more correlated to what's happening in developed markets. That can bring an interesting, uncorrelated aspect that we can add to the portfolio. 

There isn't a deep high-yield investing community in Australia. So a lot of the companies raise money through the 144A market in the US. We've been able to get in front of catalysts in both value and event-driven opportunities relative to the global investor base. 

LW: Tell us about a couple of Australian corporates you are invested in.

Stover: Santos (ASX: STO) has been our biggest long for the past 1 to 2 years. So that's a BBB investment-grade name. It was one of the cheapest investment-grade names in the entire region in all of Asia Pacific. We've done a lot of work and our equity colleagues know the company well. We've collaborated on the research effort with them. That has done quite well this year. 

They've had talks with Woodside (ASX: WDS) on a merger, and even though those were called off, the spread compressed to around the level of Woodside's, which was trading much tighter. And then recently, there's been some speculation on M&A through the Middle East with Santos. So I think all of those have just sort of shown the market the value in why it was mispriced. So that's done quite well for us. 

We've also had some overweights in some of the financials, which have done well. There have been some recent revisions to bank capital rules, which have benefitted our portfolio as well. It's been a pretty deep opportunity set for us and one that we think we'll continue to find opportunities. 

Learn more

The Tribeca Asia Credit strategy uses a long short approach to extract high-quality returns from the Asia Pacific corporate bond market. For further information, please visit their website.