Welcome And Guest Introduction

SPEAKER_04 0:02

Welcome back to Finance Friends. I'm your host, Fabian, and this is season four. This season we're diving deep into the world of investing. Not just where to put your money, but how to think like a professional investor. We are bringing you conversations with highly intelligent, incredibly motivated investors. With weekly episodes, make sure you stay tuned in. Today we had Martin Simpson, who's lived in five countries, including a stint in Iraq. He's the portfolio manager at Colchester Global Investors, a roughly about$45 billion fixed income fund manager. He talks about investing in government bonds all around the world and factors that influence the performance of those bonds. Have a listen in. Welcome, Martin, to the Finance Friends Podcast. How are you today?

SPEAKER_00 0:54

I'm good, I'm good. Well, thanks for having me here.

SPEAKER_04 0:57

Well, it's good to have you on board. We were just talking, it's uh it's five, almost five o'clock, uh five pm, that is. And uh we're just talking about getting a coffee in Melbourne, and a lot of the good cafes in Melbourne don't open past 3 p.m.

SPEAKER_00 1:10

Well, that was it. Mom told me on the way, she said we're at that hour where the coffee shops have shut, but it's probably too early to get the beer in, you know.

SPEAKER_04 1:17

We haven't had anyone have a beer before the podcast, maybe after we did find somewhere to get a coffee. A bit of liquid courage uh never goes astray. But um, but thanks for coming in. So you're you're where are you living at the moment?

SPEAKER_00 1:29

Well, I'm actually living in Dubai at the moment. Okay. I moved there about 18 months ago. Uh I used to live in Singapore with so I was yeah, I live I was in Singapore for about 12 years, uh, moved out to Dubai, so like I say, about 18 months ago. So I had about 17 and a half months of good the war, not quite so good, you know.

SPEAKER_04 1:50

But uh Well, we're all recording this uh, what is it, the 18th of March at the moment. So obviously Middle East is in in massive conflict at the moment and lucky to get a flight out to Australia.

SPEAKER_00 2:02

Yeah, I don't uh it kind of I don't know if it's funny, but it kind of kicked off over a weekend about three weeks ago, and I think everybody thought, oh, this will just be a couple of days. Yeah. Uh so I don't think anybody was hitting the panic button. But it was meant to be down here because I'm doing a conference tour with uh our marketing team here. Yeah. Um and it kind of got to Tuesday, Wednesday, and it didn't look as though it was going to finish anytime soon. So we were looking at trying to get out through Saudi Arabia, trying to get out through Oman. Um eventually you know I did manage to do it, but uh yeah, it was a bit touch and go.

Colchester And Global Bond Mandate

SPEAKER_04 2:37

Well, you're here today, which is which is that all that matters. So um so maybe just to run through, you work at Colchester Global Investors, they're a UK uh uh founded in the in the UK, is that right?

SPEAKER_00 2:49

That's right. So the company was founded in 1999 uh by two gentlemen, Ian Sims, who's now uh the chairman, and uh a guy called Keith Lloyd, who's actually from New Zealand, so but don't hold that against him, you Australian listeners. Uh and he's the deputy CIO CEO. So uh it started obviously very small, but now we're about 45 billion uh Aussie dollars under management. So the company's grown over time, but still the headquarters are back in London, yeah.

SPEAKER_04 3:18

Yes, that's great. And and so your role at the moment, it's uh your portfolio manager, is that correct?

SPEAKER_00 3:25

That's correct. So um technically I'm one of the senior portfolio managers because I've been there about 11 years. Maybe if you just stick around, you get a you get a nice title. Uh so and we invest well purely in in government bonds and currencies. So that's been my focus almost since the start of my career is in fixed income, largely in in government bonds.

SPEAKER_04 3:47

Yeah, okay. And we talk about government bonds and and currency. How much of a weight do you put on like the actual underlying bond versus the currency? Are you currency managers? Are you fixed income managers? Are you, I guess, both?

SPEAKER_00 4:01

I suppose we've got to be a bit of both, but what we what we say is that we try to add two-thirds of our alpha from bonds and one-third from currency. You know, because you're hiring us to be a bond manager, not necessarily a currency manager, it goes along with it. And over time, that's kind of the split that we get. But obviously, we've got to, if you think about it, you've got to think about both parts. I always like to give this example. If you think of my favorite banana republic, the United Kingdom. Uh, you know, if you'd have invested, say, in government bonds around Brexit, you'd have done quite well because they rallied because it was a big shock to the market in the UK. But at the same time, Sterling fell about 10% on the day. So if you'd have done that without taking the currency into consideration, it wouldn't have looked that great in hindsight. So you've got to look at both of them when you're investing internationally in bond markets. Or that's what we believe, anyway.

SPEAKER_04 4:51

Yeah, and and do you only focus on developed world like you know, UK, US, Australia, etc., or do you look at at um countries outside of the Western world?

SPEAKER_00 5:02

We look at the full spectrum. So we say we do government bonds, but you know, are we go from all the way, as you said, Australia, US, AAA rated countries, all the way down to our frontier front. The frontier fund isn't available in Australia, but we've got an emerging market fund here and a developed market fund and index links. So kind of all flavours of government bonds.

SPEAKER_04 5:23

Yeah, it's okay, so across different uh how do you obviously your team's a global team, so you you must work together with other, you know, analysts and other portfolio managers to have a bit of a house view. Is that right?

Valuation First Plus Fundamentals

SPEAKER_00 5:38

Um, yeah, I mean we're very much valuation driven, so that's what kind of drives us. But underneath those valuations, we check that let's say the fundamentals in the country are solid as well, and that's where the teamwork comes in, and we all work together covering different countries, uh, to ensure I suppose that the valuation is justified, i.e., that you know the country underneath is, I suppose at the end of the day, going to pay us back. Um, that the foundations are secure.

SPEAKER_04 6:05

Yeah. So so what are some of the things you look for to make sure the foundations are secure?

SPEAKER_00 6:11

Yeah. Um, well, I mean, I suppose we look at it from two angles. Um, let's say when we're looking at the government finances, you know, quite simply how much taxation do you bring in? Do you have a deficit or a surplus? Um kind of economic fundamentals that I think most other asset managers would look at. We also look at it from an ESG perspective, and you think, well, you know, how do you do that in government bonds? Well, to us, G is the most important, the governance. Um, I say that because it's very hard to think of a country in the world that's got good environmental standards or good um social standards that doesn't have good governance at the top. Uh, and what do we mean by governance? It's not necessarily, you know, Bob Hawke drinking the world's fastest uh yard of beer at the top. You're probably not gonna get a prime minister like him every time. But what you do do is you look at the institutions of the end. If you've got strong institutions, even if you get the odd lemon in charge, uh the institutions keep the country going. Uh, you know, so an independent central bank, civil service that's not corrupt, all these kind of factors, yeah.

SPEAKER_04 7:17

Yeah. And do you look at how big the government debt is? Because there's a lot of talk around the US, you know, debt ceiling and and what that is as a percentage of GDP. How much does that play into, you know, your decision making as to where you allocate capital?

SPEAKER_00 7:32

Yeah, obviously it's a big factor. Um, I suppose, you know, in its simplest terms, if I go to the bank and ask for some money and I'm already mortgaged to the hill and I've got a car loan and I've got a loan that I've rent on for my last holiday, the chance of your friendly bank giving you more money uh decreases. And I suppose it's like that for governments to a certain extent, that the more indebted they are, I suppose in some ways, the more reluctant we are to lend them more money. Now, you know, you've kind of picked on the US there. Um, you know, they do have a lot of debt. I'd be a bit more worried about, say, countries like the UK, because I think the US, with its unique position in the world, has a good ability to bring capital in. So I don't think you're necessarily going to get a buyer strike on US government debt, or at least not yet. Whereas, you know, you saw the Liz Truss incident in the UK. It could have happened a bit more likely in a slightly smaller economy where debt levels are high. That would probably be a bigger worry.

SPEAKER_04 8:30

Yeah. And for our listeners, can you maybe just in layman's terms explain trustonomics and and what that the UK guilt, which is bonds in Australia, what actually happened there?

SPEAKER_00 8:41

Yeah, okay. Well, I think I think Liz Trust was a bit unlucky in some ways, because if if you remember, it was kind of just post-COVID. So I mean, what she essentially said she wanted to do was cut taxation, and she wasn't going to fund that taxation from somewhere else. So, in other words, we're going to cut tax. Her idea was if tax levels are lower, the economy's going to be freer, entrepreneurs are going to go out there and make more money, and eventually that will bring more money into uh the government coffers. Now, if she'd have done that 12 to 18 months earlier in the middle of COVID, when lots of governments around the world were spending lots and lots of money, I think she'd have got away with it. But I think because it was post-COVID, everybody started to worry about the money we had spent during COVID. So this kind of plan of we're gonna cut tax and hope that it brings in more money didn't really meet, let's say, the Zeitgeist of the at the time. And uh once again, I think it shows how powerful bond markets can be because if people aren't prepared to lend you money as a government and you need that money, which you know like the government did at the time, then things can go wrong pretty quickly.

SPEAKER_04 9:49

Yeah, and is that ultimately what's happened in some countries like Argentina, for example, where the government hasn't been able to pay back their debt and have to default?

SPEAKER_00 9:58

Yeah, I mean, obviously, you know, this is a bit further away from the UK, I'd like to think, but the that that's exactly it, you know, in countries where they borrow too much money, or another factor is they borrow too much money, especially for Argentina in US dollars. Because what happens if you borrow in a foreign currency is if your currency starts to go down in value, your ability to repay in a different currency starts to go down as well. And it can move down very quickly. Often you've seen in, you know, I'd call these kind of frontier markets, they're not even merging markets now. Some of these frontier markets, it's normally the foreign debt that's the real problem because their currency starts to fall, investors lose confidence, it goes down even further. Yeah, and your ability to repay in that foreign currency really gets hammered. You know, normally it's IMF bailout that kind of stops it.

SPEAKER_04 10:51

Yeah, so it's it's it's quite quite interesting because obviously, you know, there are rating agencies around uh the world, like um Finch as an example, and I think SP Yeah, Moody's the big three, yeah. Yeah, so they're the ones, and they'll they'll effectively put a rating on on government bonds, but also corporate bonds.

SPEAKER_05 11:10

Yeah.

SPEAKER_04 11:10

And generally, and and maybe it would be good for you to share your insight to this, depending on the rating they give them, will uh sometimes determine the rate at which these you know governments or uh credit houses uh sorry or or companies can actually borrow at? Is that right?

SPEAKER_00 11:26

I think I think that there's there's a lot in that. Now let's say, for example, the US got downgraded by some of the rating agencies from triple A, did that really make a difference to what the US could borrow at from that triple A to A? Probably not much, if at all. If you look though, between going from triple B to double B, in other words, going from investment grade to sub-investment grade, or as some people call it, junk, yeah, that could make a big difference because suddenly you go from perceived as safe to to risky. You know, it's it's there's a big cliff there. Uh and certainly moving down that kind of level can significantly increase your borrowing costs, not just as a company, but as a government as well.

Debt Risks Ratings And Defaults

SPEAKER_04 12:07

Yeah. And we talked about um obviously currency and and selecting the right investment valuation driven. Can you always share some insights into what other macro factors affect the price of bonds?

SPEAKER_00 12:21

Okay. I think the biggest macro factor that affects, let's say, developed market bonds is the rate of inflation. Um and why is that? Well, uh, it's called fixed income, kind of, for a reason. And that's because what the government pays out is normally fixed. So, for example, if the Australian government issued a new 10-year bond tomorrow, uh 4% coupon, then you will get paid 4% every year for the next 10 years, and in the final year you'll get all your money back. Uh the problem is that if inflation jumps tomorrow to six percent, uh, then you think, well, every year I'm making a real loss on that income coming in. So what will happen is the price of the bond will come down, and just by bond mathematics, that means the yield you get or your kind of interest rate will go up. Um so if you get high inflation, it's very bad for bond investors normally.

SPEAKER_04 13:21

Yeah, so there's an inverse relationship between interest rates or high inflation, which results generally in high interest rates, yeah, and then the price the price of the bond. Because that is the the the the bond price will float. Is that right?

SPEAKER_00 13:36

I mean the best example I can give you is say, let's say today uh the Australian government issue that 10-year bond at a 4% uh interest rate, and then the next day they issue one at 6%. Which one would you want?

SPEAKER_04 13:51

Well, you'd want Of course you'd want the six percent.

SPEAKER_00 13:54

The six percent, yeah. So what happens to the price of that four percent one that you bought the day before? Well, it falls uh until you can get a six percent return from it because otherwise nobody would buy it. So you get that inverse relationship between yield and price.

SPEAKER_04 14:08

Yeah, it's quite interesting because when I started working in financial advice, uh finance screen, but I didn't really know a lot about bonds. And I will as a as a financial advice, he's sort of taught in basic terms that you know, if someone is a you know a risk-averse investor, they invest in you know fixed in interest instruments, yeah. But ultimately, you know, the capital can go down in value if as we saw in what 2000. 22, I think, is the worst one, yeah. Interest rates went up really quickly, rapidly, because there was so much free cash in the market and inflation rose rapidly, and as a result, bond prices um went down quite quite quickly.

SPEAKER_00 14:50

Yeah. Uh and that but in some ways, everybody remembers that because it was so unusual. You know, normally if you do invest in fixed income products, they are, or certainly investment grade or government bonds, normally they are very stable, and that's why people are buying the interim. So though that kind of one exception in the last probably the last 20 or 30 years is the one that every remembers because it's very unusual. So but you are correct. I mean, there's no guarantee with this kind of thing.

SPEAKER_04 15:18

And the other thing is do you do you when you look at different um investments? Obviously, there's different maturities.

SPEAKER_05 15:26

Yeah.

SPEAKER_04 15:27

So, you know, do you um invest in different bonds that have different maturities, or do you try and keep the maturity date the same?

SPEAKER_00 15:36

Yeah. Uh I mean, without going too technical, we do, yeah. I mean, with we because every country kind of has a yield curve. So what does that mean? Well, they've issued different bonds across time, and so they have different maturities. So we have issue if you have a 10-year bond today, next year it's a nine-year bond, then an eight-year bond. You know, so they issue across the yield curve, and then it's for us to choose the most attractive point on that yield curve. And what tends to happen is that the longer the instrument you choose, the longer the maturity, probably the more, the higher interest rate it tends to have. That rule doesn't always hold, but that's kind of the thing is that if I'm holding something for a long time, there's more risk, so I want slightly more return. Yeah. Whereas, you know, if I bought something for just three months, the risk of something really bad happening in the next three months is is quite limited. So my return that they're prepared to offer me is much lower.

SPEAKER_04 16:30

Yeah, so effectively you're willing to receive a high return for a longer investment.

SPEAKER_00 16:34

Yeah, the longer investment, you know, that's what you want, isn't it? Because you're locking up your money for longer in theory. So you want to get a better return.

SPEAKER_04 16:43

Yeah. And if we go back to 2022, um, just in a big picture, was it is it easy to see something like this coming, or was were a lot of people shocked by how quickly interest rates went up?

SPEAKER_00 16:56

Um, I think yes and no is the simple answer. I mean, when we were looking at valuations in bonds were quite expensive then, did everybody expect it to go back as quickly as it did? I think that was the thing that kind of surprised people. And if you think back to COVID, what happened is initially uh the governments and central banks basically threw everything they had at the problem. They put a lot of fiscal spending in from the government side, and interest rates were lowered dramatically, even got QE as well, trying to get rates as low as possible to support the economy through this period. And I think what probably surprised people is how well the economy kind of adjusted and went through this. Uh, and I think the reason is is that everybody got to work at home and it worked successfully. You know, it's the kind of thing if you'd have said to me at the start of it, you know, Colchester are going to work at home for a year, I thought you're gonna be kidding. I mean, is this gonna work? But it wasn't just a small company like us, but large companies as well managed it very successfully. So I think the economy stayed better, which meant inflation went higher. And even then, central banks probably thought, well, surely there's some damage to the underlying economy, but it wasn't as bad as people thought. So that inflation stayed higher, and there was suddenly a very rapid kind of rise in interest rates once central banks realised they'd maybe made a mistake by not moving sooner.

Inflation Bond Maths And Yield Curves

SPEAKER_04 18:21

Yeah. So if we we touch on uh inflation, it's the start of the uh episode we spoke about what's happening in the Middle East, and uh as of today, I think uh the oil is at over a hundred US dollars a barrel, and you know, ever uh oil inflicts uh affects inflation globally and also food prices and and everything. Yeah. So how do you when you there's a lot of uncertainty around how long this war is going to last for, what are you thinking as a team to you know uh position your portfolio?

SPEAKER_00 18:54

Yeah. I mean, this is one of the more difficult periods because it's kind of a push-me-pull me for bonds. And what I mean by that is that obviously the impact of a higher oil price, as you say, doesn't just affect filling up your petrol tank. But you know, if you imagine if your coals in Australia, you have all your food delivered to you in trucks, you know, vans, this kind of thing, they're using energy, the farmers are using fertilizer, that comes so the the feed through into the economy can be quite big. However, you know, as a central bank, if you've got very high oil prices, chances are the underlying economy is going to suffer. You know, at its simplest level, if I have to pay more to fill up my car with petrol, that's money I can't be spending, you know, on the coffee shop around the corner or whatever it is. So you'd expect the underlying economy to maybe contract. So central banks have got a very difficult decision of do I hike interest rates to try and control this inflation, or do I look at the underlying economy and think, well, if you know, if oil prices stay high, chances are the underlying economy is going to suffer. So I actually probably want to cut rates because I want to try and support the economy, because what they'll say about the oil price is it will be temporary. Yeah, let me give a good example of that. Let's say it goes up to 120. So you've had big inflation initially, but after one year, if the price is still 120, the way that inflation is calculated is what was the price one year ago. So, in other words, after one year at that level, inflation is zero.

SPEAKER_05 20:28

Yeah.

SPEAKER_00 20:29

Um, but if you've collapsed the underlying economy in the meantime, then that's probably not a great job.

SPEAKER_04 20:35

Yeah, because it's quite interesting because the Reserve Bank of Australia met y yesterday, yeah, and uh inflation's quite high at the moment, and they increased interest rates, well the overnight cash rate from 3.85% to 4.1%. Yeah. Um, and therefore there were nine people that voted, and five voted for an increase, and four went against an increase. Um, and the counter-argument will be well, if uh you know, oil prices are high, means there's less disposable income, and then interest rates go up and the average person has a mortgage. Yeah, so their disposable income drops even further. So it's really um, you know, at a certain point in time they're making that decision rather than arguably looking forward.

SPEAKER_05 21:13

Yeah.

SPEAKER_04 21:14

So yeah, it's quite interesting with Reserve Bank having the balance between, you know, where's the economy being economy going to be in three or six months versus where is it today?

unknown 21:22

Yeah.

SPEAKER_00 21:22

I mean, it's interesting because once again, from a Colchester perspective, we've looked at Australia for some time as having slightly higher inflationary pressures than most other economies. Now, you know, that sounds bad, but the good news is if you look, the the Australian economy is reasonably buoyant, so that that's good as well. That's why inflation is a little bit higher here. Um, as for what the Reserve Bank did, I was quite surprised they did it. It doesn't surprise me there was a split because, as you say, it's a very difficult decision that they've got to make. Inflation repressions were already quite high, they want to address that, but you know, there's something going on in the world that is very uncertain of how it's going to. And so uh I'd have thought they'd have done nothing, but you know, I don't want to criticize them too much because that's obviously not my job, is it?

SPEAKER_04 22:06

Yeah, yeah. But your job is obviously to not necessarily predict what reserve banks uh are gonna do, but have an understanding because that could have a big impact on bond prices.

SPEAKER_00 22:17

Exactly, yeah. I mean, is it we don't try and predict what central banks are going to do because like I say, we're very much valuation driven. However, it's the kind of thing we're always thinking about. You know, it's almost impossible to work in the bond market and have no opinion on this kind of thing.

SPEAKER_04 22:33

Yeah. So we talked a lot about um bond markets and and Colchester, but we're here to talk about you as well. And so, you know, fixed income is it's quite unique. There's not a lot of uh obviously it's it's a massive market globally, and you know, a lot of uh governments need to borrow and corporates need to borrow, and they do that through, you know, um through markets. Yeah. Uh but how did you get into fixed income? Did you were you were you uh at at university or high school and thought, you know what, I want to be a government bond manager?

SPEAKER_00 23:06

Yeah, yeah, there's probably not many primary school kids you're gonna go to and say, do you want to be a fireman, a spaceman, or a bond manager? Then they go for number three. I'll give you that. But um, you know, it was something that I suppose it came to me a bit later in life. I started university studying politics and economics. Yeah. And if you're interested in those two subjects, I think bond markets are a great thing to go into because it's that interaction of politics and economics that kind of drives prices, you know. So you think about Argentina, the example we gave earlier, you know, they didn't have particularly good economics or politics, and it kind of went against them. Uh, whereas, you know, I think if you've got an interest in that, then like I say, you know, bond markets are pretty good. Obviously, the other way is to go in is into equity markets, but I think you've got to have a real kind of maybe going into the industry kind of specifics and stuff like that, and a lot of financial analysis, which I've done some of in the past, but it wasn't quite as interesting, I felt, as looking at the country and the macro picture. Yeah.

SPEAKER_03 24:07

So so your first, what was your first job out of out of university?

SPEAKER_00 24:11

Yeah, so um, well, first of all, I had quite a long university career. You know, I'm quite lazy, so I uh I I started doing politics and economics, but then I switched to politics and East Asian studies. Okay. So I studied out in South Korea in the early 90s. So yeah, it was very interesting. I think I think when I was there, there were 50,000 foreigners. I've looked this up later. There were 50,000 foreigners in the country, and I'm pretty sure that included 35,000 American troops. So there was you know, we we'd go out into the countryside there, and you know, I've still got pictures of myself signing autographs for little kids because they'd never seen a white foreigner before.

SPEAKER_02 24:52

And quite fair skinned as well. No, that's because I'm not from Australia, mate.

SPEAKER_00 24:57

I mean to say though you're quite dead. Yeah, yeah, but like I say, I mean, we we'd go around and we'd stand out like a sore thumb everywhere we went. Um, so I did that. Uh I then actually spent some time in Australia. Then I was a backpacker here. Nice. Uh I lived in Wollamaloo in Sydney. Oh, yeah. And I go there now, and I've been told that Russell Crowe's a house on the wharf there. Okay. Uh, but it was derelict when I lived there. So it wasn't quite as glamorous as it is now.

SPEAKER_05 25:22

Yeah.

SPEAKER_00 25:22

Um, so I did that, then I did a master's degree at London in Korean studies, and then I went back out to South Korea and did further study there. So I was quite a long time before I got a real job. But my first job uh was at Bering Asset Management on their graduate training scheme in London. So it was about 99 when I started work. Yeah.

SPEAKER_04 25:44

So what did the graduate program involve? Is it a traditional graduate program where you spend periods in different areas of the business?

SPEAKER_00 25:52

It was, it was. And it it was a really good learning experience because obviously you get to see what you like, but also what you don't like. And also it gives you a good idea of how the whole business comes together. Whereas I think you know, nowadays you tend to specialise a bit more early on, and you know, you can just go through your one part of the job, and you you sometimes lose sight of what we're actually trying to achieve as a company because all you look at is your little silo and if I'm good at this. So hopefully, people in my company think I'm reasonably helpful to the other departments because I've some idea of what they're doing.

SPEAKER_04 26:28

Yeah. And then how long were you at Bering Asset Management for?

SPEAKER_00 26:31

It was about five or six years, I was there. Yeah. Uh, and then I moved to a company called RAN Merchant Bank, and by the name of that, they're a South African company. Um, and I spent about five years there. So we were running their offshore global bond program from London.

SPEAKER_04 26:46

Uh so when you say offshore global bond program, for for our listeners that might be not familiar with that, okay, or for the host who's got no idea. Well, no, we're not worried.

SPEAKER_00 26:58

It was quite unusual because you see, the thing is, in in South Africa at the time, you could only take 15% of your money offshore. So I'll maybe use it a bit to a terminology there. So the South African bank, uh, or the the Saab, the Reserve Bank there, who were doing regulations, said to like pension schemes and asset managers, I was working for an asset manager, you can only take 15% of your money offshore to invest. Uh and it was quite interesting because I worked there through GFC, and everybody used to complain to the reserve bank saying it should be a higher percentage, it should be a higher percentage. And then GFC happened, and of course, a lot of people who went and bought offshore assets got burnt.

SPEAKER_05 27:35

Yeah.

SPEAKER_00 27:36

So they thought they were geniuses at the time, but I mean limited what you could take offshore. Yeah. So, like I say, you're only allowed to take a bit of money offshore, and I ran the bond portion of that in a team.

SPEAKER_04 27:46

Yeah, okay. And then was were you do you have any restrictions on where you allocated capital in that bond? I know it's a long time ago.

SPEAKER_00 27:53

Yeah, yeah, no. I mean, there were still restrictions around it. I mean, I think that once again it was largely investment grade. We we had a little bit of high yield, but not very much, because once again, it was that kind of thing that you know the vast majority of bond investors initially go in for a kind of secure, safe asset. Now, that doesn't mean that all bond investments are secure, you know, you can go and buy high yield and things like this and really take a lot of risk, but um most people like something relatively safe, and that's what I was doing as well.

SPEAKER_04 28:22

And and was that during the GFC that you were there?

SPEAKER_00 28:25

It was through the GFC, that is correct.

SPEAKER_04 28:27

So um And how I I didn't work through the GFC, I was uh a uni student at the time. I was drinking my way through the GFC.

SPEAKER_00 28:34

So was I, mate, you know.

SPEAKER_04 28:38

And uh so you what what what obviously it's it's you could argue what probably once in a lifetime that we s we saw this happen. What were your like maybe can you talk us through that experience?

SPEAKER_00 28:50

Yeah, I mean it it's interesting because once again, you know, you when you're in the day-to-day of it, it it's kind of easier to miss the big picture. But as you say, I mean, it was this like once in a lifetime, hopefully, kind of experience where there were huge moves in markets and there was huge fear in the market, you know. So even in the UK, there were banks that kind of went under. Yeah, you know, and like we actually remember going with my friend one day because Northern Rock was this bank. Uh I mean, in in hindsight, what they were doing was absolutely crazy. They would give you a hundred and twenty percent mortgage. So, what does that mean is well you buy your house and your house is worth a hundred thousand dollars and they'd lend you a hundred and twenty thousand dollars. Uh so if you can't pay it back, they you've lost more money than the house was even was it ever worth, you know what I mean? But at the time it was just grow the business, it's the it's the rah-rah years. Um so you know, Northern Rock were one of the first banks that went under, and you know, when I actually took a picture of people queuing up outside Northern Rock to get their money back, yeah. So, you know, it was this extraordinary period to work through. Uh and and just before that, I'd been in Iraq with the army. Uh so I'm in, I think in Australia you call it the reserve.

SPEAKER_05 30:06

Yeah.

SPEAKER_00 30:07

Uh and I'd been in the in the TA, so we'd been out in Iraq. I was there 06 to 07. So I came back just as GFC was starting. I'm thinking I should go back to Iraq, it's safer, mate. You know, yeah.

SPEAKER_04 30:18

So let's let's touch on that. So when you say you spent time in Iraq, so you were working at Red Merchant Bank at the time. Yeah, yeah. And then there was that a period between there. Did you did you get called out to Iraq?

SPEAKER_00 30:32

Yeah, yeah. So what it was is I joined when I went to South Korea, yeah, I got a scholarship from the British Korean Veterans Association.

SPEAKER_05 30:40

Okay.

SPEAKER_00 30:40

Uh my uncle had served in Korea, and obviously, you know, quite a few Australians served there as well. So I met some of the Australian veterans when I was there. They used to do these reunion tours, and um, and I thought, you know, they all got these kind of like boys' own stories, you know. And I thought this sounds really interesting. So I went back and I joined what's called the territorial army in the UK. Uh so it's like part-time, I suppose, like the reserves here. But by the time I got to Iraq, we were telling nine, so that you know, we must have been there five or six years already. So we were kind of running out of regular soldiers to send there. So they were calling up uh reserve soldiers to go.

SPEAKER_02 31:16

And did you have a choice whether you went? Kind of, yes.

SPEAKER_00 31:19

You know, I mean, I could have I could have said I really don't want to go. Yeah, but I mean, really, what I'm saying in my regiment is lads, my life is very important. Yeah, but yours isn't that important, you know, because if I didn't go, somebody else would go. Uh so once I got called up, it was you know, it's kind of okay.

SPEAKER_04 31:36

It's quite a unique experience. And and what during that time, how long were you in Iraq for?

SPEAKER_00 31:41

About seven months.

SPEAKER_04 31:42

Yeah, so what skills did you learn in that period, whether it be a mindset skills or or yeah, I guess you're a mindset that's helped you to be, you know, the best investment manager today?

SPEAKER_00 31:56

Well, I'm not sure I'm the best investment manager, but what helped me make it better, but what made me be better than what I was? Yeah, I think staying calm and under pressure, you know, because obviously the pressure environment there is if we get this wrong, we're dead. Um and you know, when you're under fire and stuff like this, if you lose your head, it's not great. Now, once again, in it so you come to it back to investment, if it's being able to kind of maybe separate yourself from the day-to-day. Like I say, when we went through you know GFC, you know, there's so much going on, but you kind of need to stand back and take you know in in the bigger picture of what's going on rather than just reacting all the time.

SPEAKER_05 32:36

Yeah.

SPEAKER_00 32:36

Um you know, and I think that's one of the things we do quite well at Colchester without you know going overboard, but because we've got a valuation metric that we're looking at, um, it helps you through the difficult times because you've got something to anchor yourself to. Whereas, you know, I think just reacting to events doesn't always help that much.

SPEAKER_04 32:55

Yeah, and there's a lot of talk around retail investors tend to react a lot quicker, where institutional investors or asset managers uh fund managers uh tend to know what their valuation is and and ultimately stick to stick to their you know long-term goal or or process. But can be obviously challenging when you have a hopefully once-in-a-lifetime event like the GFC.

SPEAKER_00 33:17

Yeah, and and and like I say, I mean, you know, it's the old one that every crisis tends to throw up something slightly different.

SPEAKER_05 33:24

Yeah.

SPEAKER_00 33:24

Um, and you know, you you you've got to react to that. Now, whether retail investors do a bad job and institutionals do a good job, I'm not sure it's it's quite that simple. Um you know, sometimes in hindsight, you think maybe I should have reacted a bit quicker. Uh, but you know, I think having some kind of framework around the way you invest doesn't have to be the same as what we do, but having a kind of way of thinking about it, I think, is quite useful uh for the medium term at least.

SPEAKER_04 33:51

Yeah, definitely. Um, and then from from uh RB rand merchant bank, you went to to Mercer? I went to Mercer, yes, that's right. So so MERSAR is a pretty big business, global business. But what part of the business were you in? What were you doing?

SPEAKER_00 34:06

So we were in something called investment consulting, and in the UK, uh there's lots of called define benefit pension schemes. Yeah. And uh what they are is say in Australia you've got a super, so you invest in your super every month, and at the end of your time, your retirement pot is basically the money you put in and how well the investments did. So all the risk kind of is on you. Yeah, the investor. Yeah. Uh defined benefit pension schemes almost the opposite, where if I worked at a company all my life, they would give me two-thirds of my final salary and they would index link that. So all the risk is on the company. Yeah, there's not many of them left, but basically MERSA, its main business on the investment consulting side, was advising these kind of companies on how to invest those pension schemes.

SPEAKER_04 34:58

Uh yeah. So, in other words, you get a guaranteed annuity for life under a defined benefit, and obviously that guaranteed annuity, the risk is by the person that's provided or the the company because it was the company who were providing it.

SPEAKER_00 35:11

So, you know, if you worked in the past, you know, if you worked at you know Lloyd's Bank in the UK, they will give you a defined benefit pension scheme where they would guarantee your pension essentially. Yeah. Uh now that that's kind of changed over time because it was such a big risk on the company.

SPEAKER_04 35:27

And especially during COVID when interest rates went to zero, then you know, you can't get a risk-free rate, income rate of return. So these people that are guaranteed to get this annuity, it's hard to provide that.

SPEAKER_00 35:40

Absolutely. Uh and it was very interesting when I worked at Mercer, but without going into the technicalities of it, but interest rates were a bigger kind of mover of the deficit or surplus of the fund rather than the equity market. So you think, well, if the equity market's up, you're in a surplus? Not necessarily, because if interest rates are very low, you had to discount back what you were going to pay out over time. So low interest rates was very tough for them. Because you say they couldn't get a risk-free income coming in. And also their future liabilities were discounted at a much smaller rate, which meant they look bigger.

SPEAKER_04 36:14

Yeah, and that's a lot of what you do is matching your future uh liabilities. Is that right?

SPEAKER_00 36:21

Going back to our Liz Trust moment, the uh one of the reasons the UK bond market reacted is the way it did, is that um in the UK, as you say, these companies want what they wanted to do was buy government bonds in the future. So why do you want to do that? Well, if you know you have to pay Martin X money in 20 years when he retires, what can give me that guarantee? Well, if I buy a government bond that matures in 20 years, I can pay Martin then. You know, so it was a very nice trade from them. They wanted to do this, but if their um pension scheme wasn't fully funded, they couldn't afford they couldn't go out and just buy government bonds because they didn't have enough money. So what they did is they got asset managers, not Colchester, but different ones, to use derivatives to kind of hedge their future exposure. And then they would use the current money they had to go and invest in riskier assets to hopefully gain them the money that they could then just close out all these derivatives and just use government bonds. Yeah. So what happened is that well, it it's kind of uh low, it's what it's a low probability high-risk business. Yeah, and that went wrong because as soon as Liz Truss announced her budget and things started to go wrong in the guilt market, you were losing money on your derivatives in the future. So you had to find money in the short term, and one of the things they could sell very quickly was other government bonds they owned. So they sell them, the price goes down again, you're making bigger losses, and the well, thankfully, the IMF didn't have to step in and save us this time. But obviously, the bank the Bank of England had to step in and there you go, and list trust goes no more.

SPEAKER_04 38:08

Yeah, so if you like from what what I've heard during this discuss discussion, which I've really enjoyed, is obviously you know having uh you've lived in Korea, you've lived in Iraq, you've lived in Singapore, you're obviously originally from the UK. Dubai, lived in Japan, you know. Dubai, Japan. Yeah, surely understanding all these different economies and how they react and interest rates, etc., has it has has put you in good stead to to do what you do today?

SPEAKER_00 38:36

Um I think so. I mean, you you can always in some ways you can overdo it because they say that sometimes the worst person to ask about something is somebody who lives in that country. Because, you know, if I turn up to Australia, I think, oh, what a great place. Look at all the sunshine, and you've got these great beaches. But you know, you talk to an Australian taxi driver, he might give me a slightly more downbeat version of living in Australia because you know all the problems as well. Uh, but I think you know it is a good experience to go and live in these places, see something different, and bring all that experience back uh to your job. So I do think I think it's helped me anyway. Let's put it that way.

Picking Managers And Career Advice

SPEAKER_04 39:14

Yeah, definitely. And if you are an advisor, financial advisor that you are looking at allocating to uh, you know, a fixed income fund manager, what are some questions potentially that you might want to ask? Now put you on the spot. I don't normally ask this question, but sort of come to me because obviously there's you know a lot of different funds available, but what are some key things that you'd want to know about the fund? Obviously, portfolio manager and and working through various crises, which would be very important. You mentioned the GFC, because there would be some portfolio managers that never experienced it, like myself.

SPEAKER_00 39:49

Yeah, yeah. I mean, experience is good, uh, but you know, for all you know, he could have lost a fortune in GFC. I suppose maybe you wouldn't make that mistake again. Yeah, yeah. I mean, experience is certainly good. I think you know, it comes back to that what's your core philosophy and how do you invest over time? Because certainly from my time at Mercer, we go and see lots of fixed income managers, and some of them you know, paraphrasing a bit, but realistically, what's your process? The process is we've got a couple of clever guys who make some really good decisions, and that can work, but if that starts to go wrong, when do you get rid of that manager? You know, how when when is the clever guy, you know, if he leaves or she leaves, you know, how badly does it. Whereas if you've got some kind of fixed philosophy that you're always implementing, it doesn't mean you're always going to outperform, but at least you get a good idea of what they're going to give you through time. Um, so I think that that's kind of important. And then obviously, you know, just simple things that you probably ask an equity manager, you know, risk control, how do you size your positions, how do you think about exit a position, you know, pretty simple stuff of the nuts and bolts of how it all fits together. Yeah. But, you know, to me, I'd say it was interesting because once again it works at Mercer. So you got to see lots of different people do it. And I've what I've noticed is that there's no one right way. But the the companies I thought that were the best, or the portfolio managers I thought were best over time, were ones that had a very set mind and set idea in their mind of how they were going to invest over the medium to longer term. So longer term view, process driven, valuation driven. Like I say, I mean, that that's the kind of way we do it. Valuation doesn't necessarily have to be valuation. There's other factors they could have looked at, yeah, but at least they're consistently doing something. Because I suppose then it's like there's no guarantee they're gonna get it right, there's no guarantee anybody's gonna get it right. But it means that when you buy into that fund, you have a very good idea of what might happen through different conditions.

SPEAKER_04 41:49

Yeah, and there's obviously going to be external factors like what's happening in the Middle East or you know, reserve banks that you know you have no control of, but what is your process if something like that happens? Exactly.

SPEAKER_00 41:59

How how do you think about these issues when they turn up?

SPEAKER_04 42:02

Yeah. And and the last question, because we have been talking for a while. No, obviously we both have a share a level of passion about investment markets. But um, what advice would you give to maybe someone that is a uni student or you know a young graduate that wants to, you know, work in in uh in fixed income? Yeah what advice would you give him to get to where you are today?

SPEAKER_00 42:27

Okay. Uh I'll tell you what, this is interesting because I've inter I've in I've interviewed grads. Uh you know, so you're coming fresh out of uni and you've come, not necessarily I don't think I've done it at Colchester. Maybe I've scared people off from letting me interview them. I don't know, but I've done it at other companies. And I think you've got to demonstrate that you've got a real passion for it. To get getting your first job in, I think, out of university is the hardest thing. Why is that? Well, you know, heaven forbid I left the mighty house of Colchester today. Well, how many jobs are out there? Or, you know, if there's a job looking for somebody with somebody with 25 years experience who can speak Korean, you know, whatever it is, you don't have anything in bonds, you know, there's there's a very small number of people applying for that job. So I've probably got a one in five chance of getting it if I apply for it. When you come in at the graduate level, I I interviewed at Behrings and it was quite good because I got in there. Yeah, I think there were 800 applicants and four people got a job. Wow. So I think to myself, did I ever have a 0.5% chance of getting a job after that? No. So so your first job is the hardest. And I think what you've got to show is that you were really interested in markets and investing. Even if it's just read the Financial Times every day or read what do you call it in Australia?

SPEAKER_04 43:41

The Australian Financial Review, yeah.

SPEAKER_00 43:43

Australian Financial Review, just read it every day. Give yourself some knowledge. Because even people who'd studied, say, economics and things like that, we'd ask them questions, you know, that our economics knowledge was very good, but we'd ask them a question about the market, and they'd just give us a blank look.

SPEAKER_03 43:58

Yeah.

SPEAKER_00 43:58

And, you know. If for something that in theory, if something well, first of all, I'd advise you not to come into it if you're not passionate about it, because it's a hell of a long career, you know, if you're not enjoying it. Um, but if you are trying to convince somebody that you're genuinely interested in this and you don't know the basics of you know what's been happening in the market, what the implications of so is so you understand the economic theory, let's follow that through on what's happening now with oil prices or something. If you can't do that, you're probably gonna struggle to get your first kind of job. And like I say, and that's the hardest.

SPEAKER_04 44:35

Yeah, be curious, be interested.

SPEAKER_00 44:37

Absolutely. You know, nobody's ever said to me, Martin, I think you've read too much.

SPEAKER_04 44:42

I agree, and and it's interesting because uh a quote that I say a lot the more you know, the more you realise a lot you don't know. Exactly.

SPEAKER_00 44:50

It's even now there's stuff, I suppose, that you know, every situation is new. So suddenly like the Straits of Hormuz. Yeah, I'd heard of that loads of times. What happens if this gets short? And it suddenly is short. I'm like, well, how big is it? You know what I mean? And you gotta go look this kind of stuff up. And there's always something new to be learning about, you know, especially when we look at us for countries, you know, the countries are always changing. They're governments are always changing. Exactly. There's always something you can be learning.

SPEAKER_04 45:18

Yeah. Well, Martin, thank you very much for coming on the Finance Fritz podcast. I've enjoyed the discussion and clearly passionate and wish you all the best with your future um growth with Colchester.

SPEAKER_00 45:28

Okay, well, thanks for having me, and I've really enjoyed it myself. Thanks a lot. Cheers. Cheers.

Wrap Up Disclaimer And Where To Follow

SPEAKER_04 45:35

Thanks for listening this week. Stay tuned for our next episode and keep up to date with us by following the Finance Friends podcast on Instagram and TikTok. Plus, connect with us and our guests over on our LinkedIn page, all linked in the show notes.

SPEAKER_01 45:53

Disclaimer: This podcast exists for informational and entertainment purposes only. The personal opinions of the speaker and guests do not represent the view of any other party. If this recording contains reference to financial products, that reference does not constitute advice nor recommendations and may not be relied upon. Information relating to Colchester Global Investors is only relevant to wholesale clients or wholesale investors and is not suitable for retail investors.