1 00:00:00,000 --> 00:00:28,080 Hi, I'm Murdoch Gaddi and thanks for listening to the Rate of Change with York Wealth Management. 2 00:00:28,080 --> 00:00:31,480 Hi, I'm Murdoch Gaddi and welcome back to the Rate of Change. 3 00:00:31,480 --> 00:00:35,840 The Rate of Change is a podcast which explores the ever-shifting momentum of financial markets 4 00:00:35,840 --> 00:00:39,520 through the eyes of the leading managers in wealth management. 5 00:00:39,520 --> 00:00:44,240 In today's Rockcast, I'm really excited to speak with Josh Manning, the founder and portfolio 6 00:00:44,240 --> 00:00:46,600 manager at Manning Asset Management. 7 00:00:46,600 --> 00:00:50,960 Manning Asset Management is an Australian-based fund manager that specializes in investments 8 00:00:50,960 --> 00:00:52,940 in the private debt markets. 9 00:00:52,940 --> 00:00:57,440 They have an all-weather strategy approach that targets an interest and income return 10 00:00:57,440 --> 00:01:00,560 within the fund of 5% above the cash rate. 11 00:01:00,560 --> 00:01:06,400 This fund is income generating, pays distributions monthly and has consistently delivered 5% 12 00:01:06,400 --> 00:01:09,920 in income over the past 6 years. 13 00:01:09,920 --> 00:01:14,680 I think you will find Josh is an insightful speaker, really knows his stuff in the private 14 00:01:14,680 --> 00:01:16,080 lending space. 15 00:01:16,080 --> 00:01:19,840 If you like what you hear, please reach out to me with your thoughts and questions at 16 00:01:19,840 --> 00:01:24,320 mgaddi at ywm.com.au. 17 00:01:24,320 --> 00:01:28,520 Before considering any investments, we encourage you to both listen to the disclaimer at the 18 00:01:28,520 --> 00:01:31,840 end of the Rockcast and seek professional advice. 19 00:01:31,840 --> 00:01:36,880 We would like to reiterate that this Rockcast isn't designed nor is it intended to be specific 20 00:01:36,880 --> 00:01:37,880 advice. 21 00:01:37,880 --> 00:01:51,360 I hope you really enjoy the discussions as much as I did, so relax and enjoy the conversation. 22 00:01:51,360 --> 00:01:55,680 Josh Manning, welcome to the Rate of Change with York Health Management. 23 00:01:55,680 --> 00:01:56,680 Thank you for having me. 24 00:01:56,680 --> 00:02:02,120 Why don't we start things off by you telling us a little bit about who Josh Manning is, 25 00:02:02,120 --> 00:02:05,600 your background and your journey into financial markets. 26 00:02:05,600 --> 00:02:06,600 Excellent. 27 00:02:06,600 --> 00:02:10,720 So, yeah, Josh Manning, the portfolio manager at Manning Asset Management. 28 00:02:10,720 --> 00:02:14,180 We're Australian fixed income and credit manager. 29 00:02:14,180 --> 00:02:20,960 So my journey into financial services, I guess, started when I left university. 30 00:02:20,960 --> 00:02:26,440 Lucky enough to work at a number of institutions like Macquarie Bank and then more recently 31 00:02:26,440 --> 00:02:32,720 a very large asset consultant called JANA, which is advisors of many of the largest institutional 32 00:02:32,720 --> 00:02:35,360 investors in Australia. 33 00:02:35,360 --> 00:02:39,600 The journey into Manning Asset Management really started back in 2015. 34 00:02:39,600 --> 00:02:46,240 I was working for JANA at the time and I saw a gap in investor portfolios and that gap 35 00:02:46,240 --> 00:02:55,080 was really in that some in assets that you can put into portfolios, which genuinely do 36 00:02:55,080 --> 00:02:56,480 perform through the cycle. 37 00:02:56,480 --> 00:03:04,960 So genuinely have that capital stability attributes, but can deliver an attractive income based 38 00:03:04,960 --> 00:03:05,960 return. 39 00:03:05,960 --> 00:03:11,420 So it can really play a very valuable role in adding diversification, complementing existing 40 00:03:11,420 --> 00:03:14,680 sort of stocks bond property type portfolios. 41 00:03:14,680 --> 00:03:18,520 But really delivering on that income type objective. 42 00:03:18,520 --> 00:03:23,640 And there's a number of assets that historically played that role, but I felt like there wasn't 43 00:03:23,640 --> 00:03:28,440 really enough, you know, portfolios quite barbell, sort of low risk and high risk. 44 00:03:28,440 --> 00:03:30,700 So there was a real gap there. 45 00:03:30,700 --> 00:03:35,000 And at the same time, I also saw the changes in financial markets, specifically in the 46 00:03:35,000 --> 00:03:39,560 banking sector and the non-bank sector and that creating investment opportunities that 47 00:03:39,560 --> 00:03:44,400 I personally was very excited about investing in and started investing in and thought there's 48 00:03:44,400 --> 00:03:50,040 a real gap for a specialist fund manager to really focus on that sector and there was 49 00:03:50,040 --> 00:03:51,920 born Manning Asset Management. 50 00:03:51,920 --> 00:03:52,920 Perfect. 51 00:03:52,920 --> 00:03:53,920 Yeah. 52 00:03:53,920 --> 00:03:54,920 Okay. 53 00:03:54,920 --> 00:03:57,360 So with the landscape, that's a really interesting one. 54 00:03:57,360 --> 00:04:00,340 So when did you see this actually change? 55 00:04:00,340 --> 00:04:02,460 Was it after the GFC? 56 00:04:02,460 --> 00:04:07,000 Was it most recently like with 2017 where the bank said, look, we don't want the risk in 57 00:04:07,000 --> 00:04:08,000 our book anymore? 58 00:04:08,000 --> 00:04:13,640 Like what specifically in the in a landscape saw this opportunity and, and why did you 59 00:04:13,640 --> 00:04:19,360 think a fund was best instead of like just going private or, you know, sure. 60 00:04:19,360 --> 00:04:20,360 Yeah, sure. 61 00:04:20,360 --> 00:04:21,360 Yeah. 62 00:04:21,360 --> 00:04:22,360 Like it's quite interesting. 63 00:04:22,360 --> 00:04:26,680 Like when I, when I started or was starting the business, I did a couple of research trips 64 00:04:26,680 --> 00:04:34,040 to the U S where the banking system has evolved and changed and very different to the Australian 65 00:04:34,040 --> 00:04:37,560 banking system in terms of a number of factors. 66 00:04:37,560 --> 00:04:45,240 But one very important one is the split between the traditional banks and the so-called non-banks. 67 00:04:45,240 --> 00:04:49,800 So they are lenders, they directly compete, but they're regulated quite differently for 68 00:04:49,800 --> 00:04:51,840 a variety of reasons. 69 00:04:51,840 --> 00:04:54,840 Most notably those non-banks can't accept deposits. 70 00:04:54,840 --> 00:04:59,920 So they're a different construct than a bank and therefore have different regulations around 71 00:04:59,920 --> 00:05:07,320 them in the U S about half of the loans are originated by banks and half by non-banks. 72 00:05:07,320 --> 00:05:11,080 Whereas you compare that to Australia and while it is changing, it's still largely about 73 00:05:11,080 --> 00:05:19,800 90% of loans originated by Australian banks and 10%, but very quickly growing or by the 74 00:05:19,800 --> 00:05:21,320 non-banks. 75 00:05:21,320 --> 00:05:26,420 And those non-banks are an interesting space because there are some really interesting 76 00:05:26,420 --> 00:05:32,240 credit and fixed income opportunities that those non-banks offer in order to fund the 77 00:05:32,240 --> 00:05:34,360 loans that they originate. 78 00:05:34,360 --> 00:05:41,920 And I saw that really in its infancy, but having quite a high degree of sophistication. 79 00:05:41,920 --> 00:05:45,960 And I thought that is an area that really is going to boom. 80 00:05:45,960 --> 00:05:51,400 And it is particularly attractive from that investor perspective that I talked about before. 81 00:05:51,400 --> 00:05:56,120 And I sort of married those two up and thought, okay, this is really going to be a booming 82 00:05:56,120 --> 00:05:57,160 sector. 83 00:05:57,160 --> 00:06:00,560 And I don't think it's sort of like a point in time. 84 00:06:00,560 --> 00:06:05,920 I think the regulations, there's a lot of changes in regulations that have continued 85 00:06:05,920 --> 00:06:09,400 to support the non-banks. 86 00:06:09,400 --> 00:06:12,320 And I didn't see that abating. 87 00:06:12,320 --> 00:06:18,080 So as I say, I thought there was a really attractive opportunity for a broad cross section 88 00:06:18,080 --> 00:06:23,280 of investors to access these opportunities and the fund was designed to extract that. 89 00:06:23,280 --> 00:06:25,360 Yeah, very nice. 90 00:06:25,360 --> 00:06:32,240 So when you say the fund was developed to extract that, which loans essentially was 91 00:06:32,240 --> 00:06:33,520 attractive for you? 92 00:06:33,520 --> 00:06:35,520 Are you looking at corporate loans? 93 00:06:35,520 --> 00:06:38,320 Are you looking at retail loans? 94 00:06:38,320 --> 00:06:42,840 What specifically, in an ideal world, if someone knocked on your door and said, look, we would 95 00:06:42,840 --> 00:06:46,520 love some money, who would you like to lend to? 96 00:06:46,520 --> 00:06:53,640 What does your avatar, I suppose, of your ideal borrower look like? 97 00:06:53,640 --> 00:06:58,440 Yeah, so I think that the sort of founding principles of the business is, what are we 98 00:06:58,440 --> 00:07:00,040 trying to do for investors? 99 00:07:00,040 --> 00:07:06,960 Yes, there's all sorts of consumer business, structured finance, every type of loan under 100 00:07:06,960 --> 00:07:12,560 the sun, but what are we really trying to do for investors who we work for? 101 00:07:12,560 --> 00:07:19,400 And that is we're trying to give them a asset or a fund that we genuinely believe will perform 102 00:07:19,400 --> 00:07:20,760 through the cycle. 103 00:07:20,760 --> 00:07:26,520 So that means it's genuinely when we enter an asset, we think even in an adverse environment, 104 00:07:26,520 --> 00:07:31,640 we are going to get 100% of our money back when the loan matures. 105 00:07:31,640 --> 00:07:36,200 And that naturally puts a lid on the types of assets we can go into. 106 00:07:36,200 --> 00:07:46,240 So we can't go into things that are speculative, that are high risk, areas that are sectors 107 00:07:46,240 --> 00:07:48,120 that are very cyclical. 108 00:07:48,120 --> 00:07:52,720 We've talked about mining before, property development is another really good one, where 109 00:07:52,720 --> 00:07:56,520 in the good times it's good, in the bad times there is issues. 110 00:07:56,520 --> 00:08:01,560 And that just naturally creates a risk aversion to those sectors. 111 00:08:01,560 --> 00:08:04,760 You're looking at from the other side of the thing, we're also not looking for a government 112 00:08:04,760 --> 00:08:07,920 bond that's delivering 1%, 2%, 3%. 113 00:08:07,920 --> 00:08:12,280 We really think there's a really attractive place where you can be in between those, delivering 114 00:08:12,280 --> 00:08:19,080 a higher rate of return than those very low risk, very long duration bonds, but not having 115 00:08:19,080 --> 00:08:24,480 to go right up the risk spectrum into these some are very cyclical, high return, but high 116 00:08:24,480 --> 00:08:26,720 risk products. 117 00:08:26,720 --> 00:08:33,360 So that means that if we want to play in that middle space where we do provide an attractive 118 00:08:33,360 --> 00:08:37,400 rate of return, but that capital stability, then we really need to find things that are 119 00:08:37,400 --> 00:08:38,880 typically asset backed. 120 00:08:38,880 --> 00:08:44,520 So we've got security over a property or an asset or something like that. 121 00:08:44,520 --> 00:08:50,380 They need to be very sensibly structured in terms of how we actually manage those loans 122 00:08:50,380 --> 00:08:54,720 and making sure there's the right governance around them. 123 00:08:54,720 --> 00:08:59,880 We need to make sure that there's a strong alignment of interest, that we're not pulling 124 00:08:59,880 --> 00:09:03,400 in opposition to the borrower. 125 00:09:03,400 --> 00:09:06,280 And I think most importantly that the loan makes sense for the borrower. 126 00:09:06,280 --> 00:09:11,600 There's a lot of lending out there done on an asset basis where people just think, well, 127 00:09:11,600 --> 00:09:14,040 I've got an asset there, it doesn't matter. 128 00:09:14,040 --> 00:09:16,920 Kind of if the loan makes sense, I'm secure. 129 00:09:16,920 --> 00:09:20,960 I think some of those attributes are troublesome. 130 00:09:20,960 --> 00:09:23,000 And as I say, we like to stay away from that. 131 00:09:23,000 --> 00:09:29,800 So it's really sensibly structured loans where we have a strong asset backing to good borrowers 132 00:09:29,800 --> 00:09:34,200 where we know with a pretty high level of conviction that we will get our money back, 133 00:09:34,200 --> 00:09:36,240 even in adverse scenario. 134 00:09:36,240 --> 00:09:40,520 That's kind of high level what we're trying to, where we play. 135 00:09:40,520 --> 00:09:41,520 Yeah. 136 00:09:41,520 --> 00:09:47,840 So on that as well, if you think about the type of people which you're lending to, right? 137 00:09:47,840 --> 00:09:54,240 So with the portfolio now, how many loans are actually in the portfolio and what size 138 00:09:54,240 --> 00:09:56,680 parcels are you looking at? 139 00:09:56,680 --> 00:09:58,640 In what would the average be? 140 00:09:58,640 --> 00:10:00,280 Or what would the minimum you lend to? 141 00:10:00,280 --> 00:10:01,280 Is there any maximum? 142 00:10:01,280 --> 00:10:03,280 What would that be? 143 00:10:03,280 --> 00:10:04,280 Yeah. 144 00:10:04,280 --> 00:10:09,000 There's definitely maximums and that's because we want to make sure there's sufficient diversification 145 00:10:09,000 --> 00:10:12,000 in the portfolio and there's not so-called concentration risk. 146 00:10:12,000 --> 00:10:16,800 We don't have a big position to one particular borrower. 147 00:10:16,800 --> 00:10:22,800 What we think is the really attractive place to be is in purchasing pools of these loans. 148 00:10:22,800 --> 00:10:29,880 So this isn't just having $1 million loan to somebody, but for example, in the consumer 149 00:10:29,880 --> 00:10:38,720 loan space, we might buy $10 million worth of numerous underlying $30,000, $40,000 personal 150 00:10:38,720 --> 00:10:43,280 loans to buy a car for a variety of different reasons. 151 00:10:43,280 --> 00:10:48,760 But these very, very diversified pools of loans where you don't have the concentration 152 00:10:48,760 --> 00:10:54,320 risk and there's a lot of sort of structural protections when we purchase these asset pools 153 00:10:54,320 --> 00:10:57,960 that provides that level of capital stability. 154 00:10:57,960 --> 00:10:59,520 So I don't know what the stat is. 155 00:10:59,520 --> 00:11:05,760 I think there's about 8,000 different underlying exposures in the portfolio today, which is 156 00:11:05,760 --> 00:11:07,920 great from a diversification perspective. 157 00:11:07,920 --> 00:11:13,640 But the key thing that we're really looking for is that what are the capital preservation 158 00:11:13,640 --> 00:11:16,560 characteristics of this transaction? 159 00:11:16,560 --> 00:11:21,360 And when we stress test it looking at a number of different historical and future looking 160 00:11:21,360 --> 00:11:26,840 scenarios, do we have that conviction around being able to realise our capital on time? 161 00:11:26,840 --> 00:11:29,960 And that's the real test that we put it through. 162 00:11:29,960 --> 00:11:38,200 So you talk to essentially the capacity to have investment that can withstand the cycles. 163 00:11:38,200 --> 00:11:43,400 So what happens if you have an asset which you lend to in the portfolio? 164 00:11:43,400 --> 00:11:45,760 I suppose sours, right? 165 00:11:45,760 --> 00:11:49,800 Something happens, what's the risk around that? 166 00:11:49,800 --> 00:11:53,760 Or how do you look at mitigating against that risk? 167 00:11:53,760 --> 00:11:55,120 Do you take, is it only first mortgages? 168 00:11:55,120 --> 00:11:56,120 Is it a second? 169 00:11:56,120 --> 00:11:57,120 Is it syndicated? 170 00:11:57,120 --> 00:12:04,160 Do you mind giving a list, is it a bit of colour of how you protect against those interests? 171 00:12:04,160 --> 00:12:10,560 Yeah, so the thing about us is that we're not just a property development or a consumer 172 00:12:10,560 --> 00:12:11,740 loan specialist. 173 00:12:11,740 --> 00:12:14,040 We have capabilities right across the spectrum. 174 00:12:14,040 --> 00:12:18,880 So we look all across the different assets, consumer loans, business loans, property-based 175 00:12:18,880 --> 00:12:23,020 loans, and we're able to essentially pick the eyes out of the market. 176 00:12:23,020 --> 00:12:25,600 So each of those sectors are unique. 177 00:12:25,600 --> 00:12:30,280 So one sector that we really like is bridging mortgages. 178 00:12:30,280 --> 00:12:33,960 So these are typically a 65% loan to value ratio. 179 00:12:33,960 --> 00:12:37,640 So the building might be worth a million dollars. 180 00:12:37,640 --> 00:12:41,360 They're wanting a loan of $650,000, so 65% LVR. 181 00:12:41,360 --> 00:12:45,240 It's a 12-month term. 182 00:12:45,240 --> 00:12:49,760 Director's guarantees or personal guarantees, so the strong alignment of interest. 183 00:12:49,760 --> 00:12:52,240 First mortgage security over the property. 184 00:12:52,240 --> 00:12:56,760 No construction, they're not knocking it down and rebuilding it. 185 00:12:56,760 --> 00:13:00,680 So we like those transactions because firstly, alignment of interest. 186 00:13:00,680 --> 00:13:05,240 There's an asset there that we're lending conservatively against. 187 00:13:05,240 --> 00:13:08,040 But scenarios do occur. 188 00:13:08,040 --> 00:13:11,640 There might be an unforeseen personal issue with the borrower. 189 00:13:11,640 --> 00:13:15,600 And that's where all the other risk mitigants that we put in really come into play. 190 00:13:15,600 --> 00:13:21,560 So firstly, in that particular scenario, we have got a first ranking security over the 191 00:13:21,560 --> 00:13:22,560 property. 192 00:13:22,560 --> 00:13:29,200 So if in the event they don't pay, there is protections there for us to obviously compel 193 00:13:29,200 --> 00:13:34,560 the borrower to realise that security to repay our loan. 194 00:13:34,560 --> 00:13:39,240 From a portfolio perspective, though, we also think very much around, well, what happens 195 00:13:39,240 --> 00:13:43,960 if that security, there's an issue in selling it or whatever. 196 00:13:43,960 --> 00:13:48,240 And that's why we also then have a second line of defence, which is very much around 197 00:13:48,240 --> 00:13:55,400 taking small chunks of many, many loans so that even in the event there's some idiosyncratic 198 00:13:55,400 --> 00:13:59,240 risk with that one property and they have trouble selling it or they don't get as much 199 00:13:59,240 --> 00:14:05,120 as what we think they should, from a portfolio perspective, investors are very much protected 200 00:14:05,120 --> 00:14:08,780 because it's a very small part of the aggregate position. 201 00:14:08,780 --> 00:14:13,440 And that's why over our sort of six and a half years, we've never had a negative return 202 00:14:13,440 --> 00:14:14,880 from credit. 203 00:14:14,880 --> 00:14:20,440 So it's been very robust by spreading your bets, adding that diversification, having 204 00:14:20,440 --> 00:14:26,360 a security that you can rely on and having that strong alignment and interest. 205 00:14:26,360 --> 00:14:31,400 And also, to be honest, it's very much around just being active in managing these things. 206 00:14:31,400 --> 00:14:33,840 When we see there's an issue, we're on it straight away. 207 00:14:33,840 --> 00:14:37,260 I mean, this is all that we do. 208 00:14:37,260 --> 00:14:41,700 And that's sort of the squeaky wheel gets the oil. 209 00:14:41,700 --> 00:14:44,960 And that's very much how we work. 210 00:14:44,960 --> 00:14:47,600 Yes, a good bit of colour around that. 211 00:14:47,600 --> 00:14:53,760 So regarding duration, so a number of our clients really do like this lending space, 212 00:14:53,760 --> 00:14:54,760 both privately. 213 00:14:54,760 --> 00:14:59,280 A lot of our clients lend privately and also in markets. 214 00:14:59,280 --> 00:15:03,400 They always find durations the biggest thing because different risk profiles, as you can 215 00:15:03,400 --> 00:15:04,480 appreciate. 216 00:15:04,480 --> 00:15:09,920 So we're seeing a lot of people out there, a lot of fund managers looking for about 18 217 00:15:09,920 --> 00:15:14,760 months, like lock in, you know, quarterly and a couple out there for three years and 218 00:15:14,760 --> 00:15:17,640 a couple of the private ones are substantially longer. 219 00:15:17,640 --> 00:15:21,600 The phenomenal infrastructure assets are available. 220 00:15:21,600 --> 00:15:27,480 So the biggest question that I always get asked is how do you manage to have your redemptions 221 00:15:27,480 --> 00:15:30,240 only one month? 222 00:15:30,240 --> 00:15:33,960 Like you can be in and then out again within a month. 223 00:15:33,960 --> 00:15:36,720 How do you make that work? 224 00:15:36,720 --> 00:15:43,040 So there's I guess there's, you know, we have our own views on lockups. 225 00:15:43,040 --> 00:15:47,440 And I think it is they are appropriate in some circumstances. 226 00:15:47,440 --> 00:15:53,400 I do sometimes questions the motives of the manager and locking in that capital. 227 00:15:53,400 --> 00:15:58,600 But outside of that, there's really three lines of defence that we incorporate into 228 00:15:58,600 --> 00:16:03,860 how we construct the portfolio to give investors that liquidity. 229 00:16:03,860 --> 00:16:09,320 So the first one is the thousands of these underlying loans that are constantly being 230 00:16:09,320 --> 00:16:10,720 repaid. 231 00:16:10,720 --> 00:16:16,480 So on an ongoing basis, we're having money being returned to us and we're reinvesting 232 00:16:16,480 --> 00:16:19,840 that with new client monies that is coming in. 233 00:16:19,840 --> 00:16:24,980 If there is a redemption and an investor wants some money out, we can simply just invest 234 00:16:24,980 --> 00:16:28,960 less to meet those redemptions. 235 00:16:28,960 --> 00:16:34,160 And in a six and a half year track record, we've never not met a redemption even through 236 00:16:34,160 --> 00:16:38,320 what's been quite a sort of turbulent time over that period. 237 00:16:38,320 --> 00:16:42,960 The other feature of the fund is that we also keep target of five percent cash holdings. 238 00:16:42,960 --> 00:16:44,800 That's cash at banks. 239 00:16:44,800 --> 00:16:52,960 So that also promotes natural liquidity there to pay for redemptions as and when they occur. 240 00:16:52,960 --> 00:16:56,560 And then from a third perspective, we also very careful in how we sell the fund. 241 00:16:56,560 --> 00:16:58,520 This isn't an enhanced cash fund. 242 00:16:58,520 --> 00:17:02,160 We're not saying to people come in, come out month by month. 243 00:17:02,160 --> 00:17:05,480 This is very much a core holding investor portfolios. 244 00:17:05,480 --> 00:17:10,960 And we've been very deliberate in attracting investors that see it not as a piggy bank 245 00:17:10,960 --> 00:17:13,600 that can be raided whenever they want. 246 00:17:13,600 --> 00:17:16,320 But if they need liquidity, there is liquidity there. 247 00:17:16,320 --> 00:17:22,800 So I think those three things are very deliberate strategies by us, but do create that monthly 248 00:17:22,800 --> 00:17:27,480 ability to either come in or redeem from the fund. 249 00:17:27,480 --> 00:17:31,240 So since we're talking about the structure of the fund, one cheat question we always 250 00:17:31,240 --> 00:17:35,920 love to ask is essentially how are you remunerated? 251 00:17:35,920 --> 00:17:41,800 Because what we find by that question is an investor understanding exactly how you're 252 00:17:41,800 --> 00:17:46,920 remunerated means you know how you're aligned with the fund. 253 00:17:46,920 --> 00:17:52,560 So how does the remuneration structure work within the fund? 254 00:17:52,560 --> 00:17:57,640 So there's really a few elements to it. 255 00:17:57,640 --> 00:18:00,200 So firstly, all our fees are fully disclosed. 256 00:18:00,200 --> 00:18:02,080 There's no below the line fees. 257 00:18:02,080 --> 00:18:08,080 There's no sort of questionable tactics by us around the fees. 258 00:18:08,080 --> 00:18:11,800 We very much believe in that transparency. 259 00:18:11,800 --> 00:18:17,000 The fees that we charge is really broken down into two components. 260 00:18:17,000 --> 00:18:24,480 But at the starting point, we believe for a fund targeting the RBA cash rate plus 5% 261 00:18:24,480 --> 00:18:29,160 net of fees, a fee of 1% we think is fair. 262 00:18:29,160 --> 00:18:35,720 We think that's the right level that balances the effort involved first and the value we 263 00:18:35,720 --> 00:18:38,280 create to investors. 264 00:18:38,280 --> 00:18:40,600 That's kind of the natural balance. 265 00:18:40,600 --> 00:18:43,060 That's the right level of fees. 266 00:18:43,060 --> 00:18:49,960 So when we started the funds, we spoke to a lot of investors, both small and large. 267 00:18:49,960 --> 00:18:54,080 And what it was common is that they liked two things about a fee. 268 00:18:54,080 --> 00:18:57,940 They like to know that you can keep the lights on with a base fee. 269 00:18:57,940 --> 00:19:01,240 But secondly, they want to know there's an alignment there. 270 00:19:01,240 --> 00:19:03,600 So we've got the fee essentially split in half. 271 00:19:03,600 --> 00:19:11,660 So it's half a percent base fee and then 10% performance fee over the RBA cash rate. 272 00:19:11,660 --> 00:19:19,680 So essentially, if we deliver the RBA cash rate plus 5%, we're getting 10% of that 5%, 273 00:19:19,680 --> 00:19:22,400 which is another 50 basis points. 274 00:19:22,400 --> 00:19:27,780 And then there's a small expense recovery fee that just pays for some of the trust costs. 275 00:19:27,780 --> 00:19:31,760 So we think it's quite compelling because it does create alignment, but also gives the 276 00:19:31,760 --> 00:19:37,640 business stability that it needs to hire top talents, reinvest in infrastructure, technology, 277 00:19:37,640 --> 00:19:38,640 et cetera. 278 00:19:38,640 --> 00:19:44,640 We're talking off air, and I really hope you can elaborate more on this point regarding 279 00:19:44,640 --> 00:19:45,640 that structure. 280 00:19:45,640 --> 00:19:53,080 You were saying that you don't really have that high of a watermark in general because 281 00:19:53,080 --> 00:19:54,960 of what you're trying to achieve. 282 00:19:54,960 --> 00:19:59,560 You were saying something along the lines of if you put that in the current vehicle, 283 00:19:59,560 --> 00:20:03,360 then it might incentivize to take more risk in the portfolio, which is not what you're 284 00:20:03,360 --> 00:20:04,360 currently about. 285 00:20:04,360 --> 00:20:07,200 So do you mind just giving a bit of color around that? 286 00:20:07,200 --> 00:20:15,600 Yeah, so I believe it was in relation to talking about where the high watermark set. 287 00:20:15,600 --> 00:20:21,800 So having the benchmark that we outperform of the RBA cash rate can be seen as quite 288 00:20:21,800 --> 00:20:22,800 low. 289 00:20:22,800 --> 00:20:23,800 People say, well, why is it so low? 290 00:20:23,800 --> 00:20:30,280 And I guess for us, it's not why is it so low. 291 00:20:30,280 --> 00:20:35,080 You don't want to have it too high because some people will say, well, it should be over 292 00:20:35,080 --> 00:20:36,240 cash plus 5%. 293 00:20:36,240 --> 00:20:39,200 We should get a higher performance fee. 294 00:20:39,200 --> 00:20:46,200 And for us, all that does is incentivize additional risk taking when we're near cash plus 5 because 295 00:20:46,200 --> 00:20:49,760 we think, well, if we're just a bit over cash plus 5 and get all these great performance 296 00:20:49,760 --> 00:20:51,500 fees. 297 00:20:51,500 --> 00:20:56,840 And I think we've spent a lot of time thinking, how do you promote the right mindset right 298 00:20:56,840 --> 00:21:00,640 from inception to deliver the right results? 299 00:21:00,640 --> 00:21:07,400 And one thing we thought about is how do you fairly deliver an outcome for the business 300 00:21:07,400 --> 00:21:13,240 and our shareholders, but also make sure that we're not influenced in our investment decision 301 00:21:13,240 --> 00:21:15,620 making to think about that. 302 00:21:15,620 --> 00:21:20,640 So I don't know if that really answers it, but I guess it's making sure that we're not 303 00:21:20,640 --> 00:21:26,920 doing anything that incentivizes risk taking because that's exactly against what the core 304 00:21:26,920 --> 00:21:29,760 philosophy of the business is. 305 00:21:29,760 --> 00:21:31,320 Thank you very much for elaborating on that. 306 00:21:31,320 --> 00:21:34,480 Let's do a bit of a pivot to macroeconomics, always the fun part of the conversation. 307 00:21:34,480 --> 00:21:37,760 There's a lot happening in the industry right now. 308 00:21:37,760 --> 00:21:43,200 Past two years, huge amount of stimulus has been pumped in, then they took it all back. 309 00:21:43,200 --> 00:21:47,920 And there's a lot of commentators saying around town that if they increase rates by a particular 310 00:21:47,920 --> 00:21:50,980 amount, Armageddon might not be so bad. 311 00:21:50,980 --> 00:21:58,480 So what's your opinion on the rising rate environment we're currently seeing and how 312 00:21:58,480 --> 00:22:03,120 may that impact who you're lending against and the fund? 313 00:22:03,120 --> 00:22:04,760 I think you're exactly right. 314 00:22:04,760 --> 00:22:06,280 There's two elements to that. 315 00:22:06,280 --> 00:22:11,400 There's a commentary on what we think of the environment and then the second is implications 316 00:22:11,400 --> 00:22:12,400 for the fund. 317 00:22:12,400 --> 00:22:22,760 So if I can break it down accordingly, I think people are very... the reason why there's 318 00:22:22,760 --> 00:22:29,120 such rapid increase in cash rates globally and each country is unique in the factors 319 00:22:29,120 --> 00:22:34,320 that they face, but it's because there's such strong economic activity and growth and typically 320 00:22:34,320 --> 00:22:36,600 such low levels of unemployment. 321 00:22:36,600 --> 00:22:43,200 So the environment is actually from a fundamentals actually very, very strong and they're trying 322 00:22:43,200 --> 00:22:45,360 to cool that down. 323 00:22:45,360 --> 00:22:49,280 Whether there's a policy mistake and they get too aggressive in any one country and 324 00:22:49,280 --> 00:22:56,320 that has a domino effect or globally, central banks get too aggressive on managing inflation. 325 00:22:56,320 --> 00:23:02,240 That's a separate question, but right now we've got great fundamentals for lending and 326 00:23:02,240 --> 00:23:06,600 you can see that in a lot of the statistics where we've got very low rates of unemployment, 327 00:23:06,600 --> 00:23:08,600 3.5%. 328 00:23:08,600 --> 00:23:15,800 You've had a big shift from part-time to full-time employment, very strong rates of employment 329 00:23:15,800 --> 00:23:19,560 growth from females locally. 330 00:23:19,560 --> 00:23:25,760 So there's a lot of very good signals to say the employment market is very, very strong 331 00:23:25,760 --> 00:23:28,640 and that is very good for us. 332 00:23:28,640 --> 00:23:32,800 If you then look out and sort of think about some of the other factors, you've got declining 333 00:23:32,800 --> 00:23:39,960 consumer sentiment, business sentiment, investments, some of those sort of four-look indicators 334 00:23:39,960 --> 00:23:41,800 are a little bit more worrisome. 335 00:23:41,800 --> 00:23:50,480 So I guess from where we are, it's a very good environment, but it does highlight that 336 00:23:50,480 --> 00:23:55,000 we're at a little bit of a turning point now where we've had very strong level of stimulus, 337 00:23:55,000 --> 00:23:57,840 we've had very accommodative policy. 338 00:23:57,840 --> 00:24:02,960 The new environment isn't going to be the same as that and I think that just warrants 339 00:24:02,960 --> 00:24:07,520 that additional level of caution. 340 00:24:07,520 --> 00:24:11,160 I think there's some interesting things particularly that's going to happen globally. 341 00:24:11,160 --> 00:24:15,320 Everyone's very sort of fixated on the US and where they're at. 342 00:24:15,320 --> 00:24:19,600 I think Europe's going to be very interesting after a long period of zero interest rates. 343 00:24:19,600 --> 00:24:25,240 They're talking about potentially 150 basis point of cash rate increases before the end 344 00:24:25,240 --> 00:24:26,240 of the year. 345 00:24:26,240 --> 00:24:30,800 So that's going to be quite a big shift for them and we can already see other areas of 346 00:24:30,800 --> 00:24:33,940 Asia lifting rates aggressively. 347 00:24:33,940 --> 00:24:39,800 So from a macro perspective, I think you can't look backwards to think about what rhymes 348 00:24:39,800 --> 00:24:40,800 going forward. 349 00:24:40,800 --> 00:24:45,040 I think it's a new environment and I think investors need to be very cognizant of that 350 00:24:45,040 --> 00:24:51,320 and perhaps not just apply historical asset locations, but think more diligently about 351 00:24:51,320 --> 00:24:52,760 that. 352 00:24:52,760 --> 00:25:03,000 From a portfolio perspective, how we're thinking about it, in January we produced a client 353 00:25:03,000 --> 00:25:08,280 note and we talked about the different scenarios that we've been thinking through, stress testing, 354 00:25:08,280 --> 00:25:13,720 modelling, et cetera, one of them was a high interest rate, high inflationary environment. 355 00:25:13,720 --> 00:25:17,500 And that scenario is no longer a scenario, it's very much reality. 356 00:25:17,500 --> 00:25:23,040 So we've done a lot of work in positioning the portfolio for these rising interest rates 357 00:25:23,040 --> 00:25:27,400 and you can see this month we've delivered 55 basis points. 358 00:25:27,400 --> 00:25:33,780 So the benefits of that planning have very much come through into investor returns. 359 00:25:33,780 --> 00:25:38,080 I think going forward, we're very cognizant of the risks, we're very careful around that, 360 00:25:38,080 --> 00:25:45,080 but fundamentally a higher level of interest rates is good for us because it delivers typically 361 00:25:45,080 --> 00:25:48,320 a higher rate of return to our investors. 362 00:25:48,320 --> 00:25:53,600 So it's a very favourable environment if you make sure you're well prepared for it in advance 363 00:25:53,600 --> 00:25:59,520 and I think we've done a reasonable job at doing so. 364 00:25:59,520 --> 00:26:02,840 And that leads me into my last question. 365 00:26:02,840 --> 00:26:09,720 How long do you think this beautiful opportunity of what the bank has created by essentially 366 00:26:09,720 --> 00:26:15,480 saying we do not want this level of risk on our books, fund managers please take it, they've 367 00:26:15,480 --> 00:26:20,960 just opened up a door and a number of people like yourself have stepped in and our clients 368 00:26:20,960 --> 00:26:26,280 are very happy about it, but how long do you think they're going to keep this portal, I 369 00:26:26,280 --> 00:26:27,820 suppose, open for? 370 00:26:27,820 --> 00:26:32,240 Do you think it's going to be closed anytime soon or what do you think? 371 00:26:32,240 --> 00:26:36,240 It's funny, I think there's two things and I might challenge you on one thing there Murdoch 372 00:26:36,240 --> 00:26:46,800 and that is going back to the 65% LVR mortgage, I don't think that is particularly high risk. 373 00:26:46,800 --> 00:26:53,080 I think when you have an existing house, a common house in a common suburb where there's 374 00:26:53,080 --> 00:26:57,840 a high degree of liquidity, yes the property market's going through some changes, but at 375 00:26:57,840 --> 00:27:03,080 65% LVR I think you'd pretty readily find a buyer for that type of property. 376 00:27:03,080 --> 00:27:07,560 So I don't think it's around they're pushed outside the banking system because they're 377 00:27:07,560 --> 00:27:08,560 high risk. 378 00:27:08,560 --> 00:27:16,040 I think they're pushed outside the banking system because people typically they want 379 00:27:16,040 --> 00:27:19,000 two things, they want flexibility and they want speed. 380 00:27:19,000 --> 00:27:24,720 So a lot of the borrowers that are going to these non-banks, they're happy to pay away 381 00:27:24,720 --> 00:27:29,440 for greater flexibility because their situation might be unique. 382 00:27:29,440 --> 00:27:34,960 Or most commonly in this sector we're seeing people are buying a property and part of them 383 00:27:34,960 --> 00:27:39,840 getting a good deal on a property is that they can move very quickly. 384 00:27:39,840 --> 00:27:43,640 They can move quicker than other people that are bidding in the process and therefore secure 385 00:27:43,640 --> 00:27:49,640 the property, potentially at a discount, warranting paying higher interest rates. 386 00:27:49,640 --> 00:27:52,960 So I'm not convinced it's pushed outside the banking system. 387 00:27:52,960 --> 00:27:59,880 I just think maybe the banking system doesn't suit all participants and therefore it creates 388 00:27:59,880 --> 00:28:01,960 this opportunity. 389 00:28:01,960 --> 00:28:12,560 In terms of how long the windows open, lending has been around since the start of civilization. 390 00:28:12,560 --> 00:28:19,720 It's obviously the stamping of coins and so forth, but around that time there was elements 391 00:28:19,720 --> 00:28:26,440 of lending practices there so I don't see it lending and particularly non-bank lending 392 00:28:26,440 --> 00:28:29,880 to be a short-term occurrence. 393 00:28:29,880 --> 00:28:34,240 If anything I think it's just going to continue to grow and perhaps even resemble elements 394 00:28:34,240 --> 00:28:40,960 of the US system and Europe as well for that fact. 395 00:28:40,960 --> 00:28:47,440 Will there always be a need for participants like ourselves who are highly skilled, highly 396 00:28:47,440 --> 00:28:54,800 experienced in providing capital and who can move quickly and provide financing in a way 397 00:28:54,800 --> 00:28:58,720 that's attractive from an investor rate of return? 398 00:28:58,720 --> 00:29:00,840 I don't think that's going away. 399 00:29:00,840 --> 00:29:07,320 And secondly, from an investor perspective, will there continue to be a need to have a 400 00:29:07,320 --> 00:29:12,160 product that delivers strong income but has capital stability elements? 401 00:29:12,160 --> 00:29:15,000 I can't see that going away. 402 00:29:15,000 --> 00:29:20,320 So yes, we need to change and evolve with the market to stay relevant to our investors 403 00:29:20,320 --> 00:29:28,400 but I don't think this type of fund and the target market we're targeting will be going 404 00:29:28,400 --> 00:29:29,400 anywhere. 405 00:29:29,400 --> 00:29:33,760 In fact, we are experiencing incredible growth and that's been evident in that sort of six 406 00:29:33,760 --> 00:29:38,440 and a half years since we started. 407 00:29:38,440 --> 00:29:42,280 Well Josh, thank you very much for coming onto the Rate of Change and sharing your thoughts 408 00:29:42,280 --> 00:29:46,160 with us and I hope you have a great day. 409 00:29:46,160 --> 00:29:47,160 Thanks Murdoch, nice having you. 410 00:29:47,160 --> 00:29:48,160 Cheers. 411 00:29:48,160 --> 00:30:16,480 Cheers. 412 00:30:16,480 --> 00:30:20,480 Any reference to financial product does not constitute advice or recommendation and before 413 00:30:20,480 --> 00:30:24,440 any action you should seek proper advice from your financial professional. 414 00:30:24,440 --> 00:30:31,280 Australian listeners should head to www.moneysmart.gov.au to find more information on obtaining financial 415 00:30:31,280 --> 00:30:32,280 advice. 416 00:30:32,280 --> 00:30:47,720 If you want to get in touch with York, head to our website www.yorkwealth.com.au.