Hi, I'm Murdoch Gaddy and thanks for listening to the rate of change with York Wealth Management.
The rate of change is a podcast which explores the ever shifting momentum of financial markets
through the eyes of the leading managers in wealth management.
In today's Rockcast, Romano Salatena, one of the portfolio managers from Katana Asset
Management joins us to discuss their Australian Equity Fund.
If you haven't heard of Katana, they're an Australian based fund manager who've been
managing money since 2005.
We sat down with Romano late last year to record this Rockcast, so I thought I'd give
an updated insight on how the fund has been travelling using their January 23 fund fact
sheet.
The fund since inception has returned on average 10.13%, over 5 years it's 12.36%, 3 years
14.78%, 1 year 15.41% and it's up 5.58% in the last month.
What I find quite remarkable about what the team has achieved over these years was put
into a good article written by Tom Richardson from the Australian Financial Review.
The AFR highlighted in the top 10 Aussie Equity Funds in 2022, Katana ranked 7th.
Interestingly, it was the only top 10 manager in 2022 to be also ranked in the top 10 over
5 years at 2nd, whilst being ranked 4th over 3 years, which is quite an achievement.
Romano also dives into the inner workings of the fund, where he thinks markets are going
and how the fund is positioned to both protect and grow the portfolio with the upcoming volatility
we're seeing.
I really enjoyed hearing how Romano and the teams process very substantially to some other
managers.
As an example, if they don't like an asset class, I don't know, say the banks, they
will just not allocate, whilst other managers just hold the assets and reduce the overall
rating.
I found this approach quite interesting as a tactical method to deal with the volatility
we have been seeing in markets, especially in the past 5 years.
So with that being said, I hope you enjoy the conversation and if you have any questions,
keep the feedback coming and you can reach me at mgatty at ywm.com.au or reach out to
your cloth management.
So I hope you enjoy the conversation as much as I did and let's get into it.
Romano Salatena, welcome to the Rate of Change with your cloth management.
Thank you, thanks for having us.
Fantastic.
So why don't we start things off by telling us a little bit about how you got into financial
markets and a little bit about your background.
Sure, so yeah, did a commerce degree, major information systems, worked 7 years as a computer
programmer analyst.
Really enjoyed that, did a post-grad in finance and then made my way into stockbroking for
many years and then 2003 we started the process to set up Katana Asset Management and that
was a 2 year process and put out our first fund in December 2005, January 2006.
Right, so how does the IT component play into markets?
Yeah, there's a lot of really nice aspects to that, you know, in terms of the math side,
the programming side, the sequential analytical side, I think that plays into a really good
part of funds management.
Of course, funds management is part art, part science, so I think part of that, you know,
I think the left and right brain are constantly in conflict with each other in funds management
and you know, that's the case.
I'm sort of more leaning towards that analytical sort of problem solving phase but in funds
management you don't have the luxury to get all the information or you don't have the
luxury to have all the time so you constantly got to be making decisions based on imperfect
data and imperfect timeframes.
Yeah, right.
So moving into the fund Katana, can you tell us a little bit about the structure of the
fund, you know, how it's currently been performing and essentially what you're trying to achieve?
So firstly, we're very pleased with the performance.
We're outperforming the benchmark over every time frame for 17 years and what that gives
us confidence in is that there's something sustainable in what we're doing that enables
us to achieve over not just, you know, a front-ended result or a back-end result or in the middle
but over every time frame we look at one, three, five, seven years or whatever.
So that gives us some confidence that what we're doing is sustainable and replicable
and that's the important thing from our end.
What we've tried to do is deconstruct the funds management process.
So I'll put something to you which sounds rather ludicrous but if you didn't like a
company but you didn't dislike it, if you're a typical fund manager, you generally have
neutral weighting.
So let's say you don't like the big banks but you don't dislike them, so your starting
position is to have about 25% exposure to the banking sector.
Now for us that seems a bit ludicrous and if you looked at it from the lens of any other
industry you'd think that is ludicrous.
If we don't like something, we don't dislike it, our starting position is zero and then
we'll add anything that we believe adds genuine alpha to the process.
So let's go into that a little bit more.
Can you give our listeners an understanding of what's in the portfolio?
When you say you're looking at the Australian market, what does that exactly mean?
So we're exceptionally risk-averse.
There's a lot of things that we won't do in our portfolio which we feel confident we could
make money out of but capital preservation first and foremost is at the core of what
we do.
Secondly, we're very diverse so typically we hold 55 to 65 stocks in the portfolio at
any given time.
Right at the moment we're at 42 companies which is the lowest we've been in probably
a decade and there's some specific reasons why that is so low at the moment.
We then start to look at things on an alpha basis so we're not after beta performers.
Every stock in our portfolio we're high conviction on.
Clearly we get some wrong, we get a lot wrong but we're high conviction so we're only putting
stocks in the portfolio that we believe can outperform the index.
Now we understand that we have to be benched according to the all-orbs accumulation index
so people have something to assess our performance on but we don't let that constrain the way
we think as managers.
We don't think right if we're neutral the banks we hold 25% exposure.
We think if we're neutral the banks we hold zero exposure and then if we actually think
the banks can outperform this stage of the cycle we'll weight it upwards.
If you look at the last 16 years at graphs of our sector exposures you see that our exposure
to the banking index has gone from minus 20% to the index to sort of plus 10% so it can
rotate around quite aggressively.
So how much cash, if you're only holding 40-year-old companies right now what is that as a percentage?
So we're holding at the moment cash is just under 35% and that's in our mandate we can
go to 80% but 35% realistically is sort of the upper threshold where we like to see things.
Okay so let's go back to the banks.
You said if you're not going to, if you're going to be neutral to something you just
don't hold it all so what percentage of the portfolio is in the banks right now?
Approximately we'd be looking at around about 10% and that's weighted towards Macquarie
Bank and one of the regionals which thinks often particularly good value at the moment,
QQ given the work they've done on ME Bank and some other things that are going to add
as good tailwinds we suspect for them and then we've got some, including that basket
of courses, other financials so we've got some miscellaneous exposure to a pendle under
takeover and some bits and pieces.
So regarding market cap, you know on the ISX, do you, can you go anywhere?
Like can you go small caps or is it predominantly the top end of town or what do you generally
look at?
Well the vast majority of what we do is in the big end of the market.
We're not against taking the odd smaller position if we think it's got the potential to grow
into a larger company but what we do do is we absolutely respect what it means to take
a position in a smaller cap company.
You know smaller caps by definition have little or no research coverage, have less corporate
governance, have less diversification, have less track record and of course most importantly
have less liquidity.
So you know first and foremost we want to make sure we're preserving our capital.
They really are like lobster pots, very easy to get into, very easy to get out of, the
old cliché there.
So you know where is we'll trade, if we've got line of sight on Westpac Bank for trade,
if we've got imminent triggers and we can understand line of sight for why we think
we can make a trade, we'll trade Westpac Bank up and down for 10% day in day out.
But if we're looking at a smaller cap company or a mid cap we really have to be seeing 50
to 70% with a lot of clarity before we'd be prepared to take on that risk.
I really wanted to go down a different path and keep digging into these companies but
you said something before that you happily trade in and out on the day.
Is this a high touch portfolio or do you have a core as in you hold like a 60% and then
you trade around the edges?
Like what's exactly your style of investing?
On a day might have been a bit of a misunderstanding there.
So if we see Westpac an opportunity there, we'll trade that up and down.
It's unlikely to be within a day but certainly over weeks and months there.
So you know we've got companies that we've been trading now for close on 20 years and
our weighting in those companies go from 0 to 3%.
3% for us is exceptionally exceptionally high conviction.
We're in our 17th year operation now and we've had on three occasions we've been over 5%
individual stock weighting.
Normally if we like something it's 2%, for exceptionally high conviction it's 3% and
I said there's only been three occasions we've gone above 5%.
So that's with the specific companies.
Now as we discuss a lot in the rate of change with macroeconomics you know the top level
what's the actual underlying right?
And one of the things we discuss always with portfolio management is how much money you
should have in a particular asset class or a subcategory.
So you say 3% for specific holding in a bank but do you have parameters on say the banking
sector?
Do you even touch on resources?
And how much would you allocate as a maximum to a particular sector of the ASX?
We tend to find that nature takes care of most of those questions.
We don't let artificial constraints drive what we do but we are respectful and we do
analyse and understand it.
So our analyst Hendrik he works constantly to look at portfolio correlation.
So he's taking a separate view as to what we're the three portfolio managers are doing
in terms of how we're constructing the portfolio and he's running an overlay to make sure that
we understand exactly what risk we're taking on them and then we make a decision collectively
whether or not we take that risk on or not.
Just to get back to the heart of your question, I mean a holding in our portfolio can come
in one of two ways.
It can come in from a top down response or a bottom up response.
So top down is identifying a macro, identifying a format that we believe has got substantial
momentum in it and then trying to find the best way to apply that.
Or in a bottom up maybe where we're seeing an exceptional management team, we've seen
a particular growth number, a particular valuation that just looks too compelling and we'll start
our work from the bottom up.
And so quite often we find that a lot of the best ideas meet in the middle somewhere and
quite often we do find that we will be overweight like for right at the moment where we're overweight
materials.
That's a conscious decision we've made right here right now but it's not driven from a
macro, it's driven from a bottom up thematic.
Well let's look at some of the companies when you say in materials.
So can you give a couple of examples?
So right now our largest holding is Mineral Resources.
That's one of the three companies I mentioned that has been above 5%.
We first started trading Mineral Resources in 2006 when it listed and we've been trading
that stock for the last 16, 17 years continuously.
If you look at the beginning of the year our weighting would have been close on if not
0% and now our weighting is close to 7% due to some very strong stock performance.
And that's the absolute upper limit.
We don't sleep well at night even having it there but because we've got probably the
most detailed model of Mineral Resources in Australia and there's not too many stocks
we claim that for.
Because we've got such a high understanding of that company having traded in depth for
so many years we understand what that means.
So why are we in Mineral Resources right at the moment?
The main reason being the Lithium thematic, it's very hard to play the electrification,
decarbonisation theme in Australia.
The best way to apply it we think at the moment is still Lithium and Copper.
When we look at Lithium the two best stocks are Mineral Resources and Orkem and both of
those are prominent holdings at the moment.
Do you own any other exposure to Lithium or superconductor material or anything the equivalent
for Natium?
Yeah so we haven't gone down into the more niche metals.
The reason we haven't done that is because we do find it hard when there's not a deep
liquid market it is very hard to understand the true supply-demand dynamics there.
Graphite is an example, we did a lot of work on Cerate 40 cents and opted against it and
obviously it's increased multiple since then.
I know there's another phone manager that really likes Cerate and it is a good company
but the reason we've done that is because when we look at the existence of graphite,
graphite is in abundance globally in every jurisdiction.
So it will be lumpy yes as you get the supply-demand, the demand will have to increase until they
bring another mine and there will be too much supply on the price, you'll get depressed
and you'll have that supply-demand dynamic but we struggle to understand longer term
how there's going to be any shortage there.
The flip side is you look at something like copper, we think that Dr. Copper the best
indicator of the economic cycle, we really see that as being something that's being
neglected and that's one where we can do an enormous amount of analysis because there
are so many data points and we can really understand what that looks like.
So we've been rebuilding our position in a couple of copper companies, again very hard
one to play because up until recently there was four or five ASX listed companies that
were dedicated copper producers and of those a couple were sub-substandard.
So it is a hard space to play but in Australia if you want to play that thematic you don't
have a lot of options.
So I'm not sure if you said it, what percentage of the portfolio is in materials roughly?
I'd have to look at that, I'm guessing it's probably somewhere around about 15 to 20%
mark at the moment, maybe closer to 15.
So you're just so everyone can understand what they're saying, they're talking about
the maximum holding they'll have in a particular company is 3% but you're very comfortable
if you see a macroeconomic thematic occurring to go very heavy in a particular area of the
portfolio.
That's exactly our secret source is being able to have that confidence to understand
why you up weight a sector versus down weighting a sector and then taking that to a level that
some managers may not be prepared to do, some managers may not be prepared to step away
from the herd.
Still very, very risk averse, still very low risk but as an example having maybe 5% in
the big banks versus 20-25% market weighting, that's a big step away from the herd there.
But right at the moment we think that's the right move to make as we have done the past
decade a couple of times.
Well let's dust off the crystal ball and have a conversation on the thematic side with macroeconomics.
What hurdles do you see coming towards I suppose the end of the year, early next year and say
sectors you just want to completely avoid and where do you see opportunity?
I think it's probably the most, on that first question, it's probably the most challenging
market we've seen in a very long time and that's why we're close to our maximum desired
cash weighting of 35%.
I think at every juncture, at every turn we see threats, we see dangers, whether it's
QT now ramping up to 95 billion US a month from 1 September, whether it's the Fed's
rhetoric now has notably changed, whether it's what we're seeing in China with the
property crisis there and the focus on COVID lockdowns, whether it's we've seen some of
the supply bottlenecks, whether we see what I think if you look over the last couple of
decades, people probably haven't realised just how much the offshoring to China and
technology has held inflation in check.
Effectively every major company has moved their manufacturing offshore to China and
in doing so they've reduced the cost of doing business and added in the big uplift from
technology productivity, we've seen a massive probably once in a century deflationary event.
Now there's still some more incremental gains to flow through in terms of the technology
side but on the other side I think we're going to see now deglobalisation, we're going to
see nationalism come back to the fore and with it that's going to see a long term,
it's going to affect us today and tomorrow but over the next couple of decades or so
we're going to see the capacity to deflate costs by offshoring production, we're going
to see that start to sort of work as a headwind as opposed to a tailwind.
So we see a lot of potential threats.
The problem we have is that it's almost consensus positioning, is that every person to a tee
is saying that this market has to roll over, that we have to see a sizeable correction
and of course if everyone's positioned for that then they've done the selling, they've
got the cash in the sidelines, they're mentally prepared for that and so the path of least
resistance is probably more likely up than down.
So this is a conundrum we face at the moment in Katana is that we can see, if in six months
time you look back and say right we've just had a huge correction, everyone will say well
Blind Freddy could see that because you know all the things were lining up there but the
flip side is as I said before markets are part science, part art and the art in us is
saying it's very interesting that consensus positioning is to the downside.
So in Katana we are so risk averse, we will still play that even though we don't like
playing with the herd, we'll still run with the herd for the time being but we have got
one on the fact that we could all on mass be wrong at the moment.
Well okay so do you run a long short book or is it long only?
Long only.
Long only okay so in order to protect yourself you have the capacity to go to 80% cash, you're
currently in a high cash position right now so what sectors of the market are you looking
to deploy that cash and if you don't deploy that cash holding that amount of cash does
that have a major impact on returns?
Yeah look I mean our returns we're sort of number three in Australia over three years,
number three over five years in the Morningstar tables at the moment so you know and that's
including our cash drag, we generally run 15 to 35% cash through the cycle so even with
that cash drag we've been able to get those numbers and we don't think we'll change that
philosophy.
You can't hold 35% cash too long if the market starts to rip and continue to perform so we're
very cognizant of that but you know right at the moment we think that we're you know
we're going to buy ourselves a couple of months, we're going to reassess this at the end of
October and try and get an understanding of whether or not we're seeing some of these
drivers play out and if we're not then we'll continue to hold our nerve but I think this
time once we do see some of the factors play out even if we haven't seen the correction
you know the markets anticipating we will look to reverse that position potentially.
In terms of sectors what we'd like at the moment look the reason we've got 42, 43 stocks
at the lowest on record just about a full lease a decade is because we are finding it
very hard to find sectors we like, we can pretty much make a very compelling case as
to why you do not want to be in most sectors at the moment.
So the handful of sectors we have confidence in still we've got a specific theme around
you know EV decarbonisation which you know two sides of the same coin so we're still
looking to add exposure there, very hard to do in Australia obviously we've got the lithium
and the copper and so forth, very hard above and beyond that we've actually added a modest
position in a global ETF the hgen.axw which gives us exposure you know 20 of the best
hydrogen companies globally which is in our mandate being an ASX listed ETF.
Beyond that we still like the LNG thematic we think people have completely missed what's
happening there at the moment it's structural but look also at pricing you know through
the cycle LNG runs at sort of 7 to 8 bucks in MMB to you and you know it's been as high
as 80 recently but it's sort of plateauing around 40 to 50 dollars MMB to you now that's
only for spot sales that's probably about 10 to 15 percent of most producers you know
production but it's still a there's still windfall cargoes there so I also think what's
happening there is going to set up Sandhoss and Woodside in a good position for further
project FIDs and that's going to set them up globally so I think we're seeing a structural
change there and I also think you know it's very niche but I do think that Metcoil has
to play some catch up I've been in markets for 30 years and I've never seen thermal coal
trade at a premium to Metcoil at the moment your thermal coal markets out of Newcastle
sort of running at sort of 430 to 450 US a tonne and your spot Metcoil is running at
sort of you know 250 to 270 a tonne so what we're going to see is despite a lot of the
rhetoric you can there can be substitution taking place we will see some of the semi
soft getting spat into some of the thermal power producers even if it's only 10 percent
of the current Metcoil market that's going to create a huge deficit and when you've got
that huge price differential it makes it makes it worthwhile doing that so we expect to see
thermal coal come back a bit Metcoil rally a bit and so I think the Metcoil producers
out there in a very good position Coronado is a company for example we've started rebuilding
that'll be back in our top 10 soon.
So currently as it stands let's discuss LNG and gas so we're talking gas shortages it's
all over the papers Eastern shore you know there's stuff in the Northern Territories
well what's your current position and do you see that with all this push for supply that
there's still we will be a gas shortage or do you think that there is enough demand out
there?
If you look firstly domestically in Australia there's no doubt we've got you know more than
enough gas to feed our nation for the next hundred years the problem is you need to have
some state governments who should remain nameless realise that they actually need to you know
allow these projects to proceed otherwise there's no good important you know huge amounts
of gas from Queensland and you know and keeping your gas moratoriums on in onshore and offshore
and in your state.
We need to see a more balanced ESG discussion around some of these some of these projects.
I think what people fail to realise is that gas is absolutely 100% part of the transition
to renewables you don't have renewables without gas if even with you know battery technology
still some way off but even when that arrives you still need to be able to turn on and off
peaking power and to be able to do it on scale and you can't do it with coal plants I think
a lot of the problems we're having with coal fired power plants at the moment having so
many problems is because people are trying to use them as peaking plants at some level
you've really got to get to the stage where you have enough gas you can turn on and off
as you need to and that's a big part of the solution.
Over short to medium term what we're seeing obviously in Russia is a watershed moment
that is a structural change you are even if the war ends tomorrow you're not going to
have Europe go back independent 40% of the gas from a nation such as Russia.
That boat has sailed we are now going to see a paradigm shift in terms of how they see
the energy security future and so that has big implications for the Middle East you know
Qatar and so forth and also for Australia for Canada and the USA.
So with the portfolio on the energy how are you playing that thematic?
We don't have a lot of choices in Australia I mean you know all search has been taken
over by Santos and Woodside has taken over BHP Petroleum's assets so it's really just
those two big boys if you want to get serious exposure and we're in both those companies
still at the moment and we've done well out of them but we still see a lot more upside
from here and then of course you look at you know as much as I hate to say it's a dirty
word but some of the thermal coal and met coal players I think that's a reasonable way
to look we're doing a lot of work on some of the tier 2 players we have been in Corun
in a good size way we're out at the moment but reassessing that we need to rebuild that
position you know doing work on Beach Beach has been a big position in the past not right
at the moment but again doing the work on that.
So just sort of sticking to that top end of town where you know there's enough value enough
growth to be able to play the theme that which is the main part of the picture here.
So with the size of the fund a lot of fund managers always discuss you know constraints
with how much money they want to manage because the strategy which works at a particular level
might not work at another level right so how much money is currently in the fund and you
know what would your cap be if there is a cap?
We're running just under 100 million and our cap we think our first milestone we would
actually look to see how our performance is being affected is 800 million.
We've you know that bench is on 5% of our smallest holding effectively you know given
that mineral resources most of what we do is ASX 50, ASX 20 so really your capacity
to upsize your positions is not limited but we would think at 800 million we've agreed
to take a if we're fortunate enough to get there take a deep breath and do some work
on whether or not that's impacting our performance.
Right at the moment I think 27-28% of the money that we manage is our own money so you
know we're very heavily aligned and the same unit class as every other investor and what
we don't want to do is impact anyone's performance they learn our own so you know we are conscious
of that but we think what we're doing is replicable up to quite a scale.
So you mentioned that a lot of money is in the fund another question we always like to
ask to see exactly how your interests are aligned with running the portfolios how are
you guys remunerated how's the structure of that move?
Yeah our primary remuneration comes from compounding our own money you know we started this journey
in 2006 with 13 million and we're compounding it alongside everyone else so you know how
we end up our journey in this life will be determined by how we continue to compound
the Katana portfolio and that's how we think first and foremost.
Love and beyond that we do run a 10% performance fee that's for any performance above the
all-lords accumulation index with a high water mark so it's sort of the gold standard performance
fees and then each of the portfolio managers performance fees based purely on the amount
of alpha they've contributed to the portfolio.
So for example if I've had a great year and you know but I haven't contributed to the
team the other two portfolio managers haven't delivered then I might have a great outperformance
but as a team we may not outperform so I might get a hundred percent of zero which doesn't
quite cut it for me.
Flip side is you know in a lot of teams you either get the autocrats or you get passengers
if you've got passengers in the team the team might have a great year and outperform but
if I haven't contributed to that alpha then I'll get zero percent of a big performance
fee so again that doesn't inspire me.
So we've got that approach right where we're inspired as a team to work together to get
the biggest combined pool we can but then also above and beyond that I want to contribute
to the team and apart from that we've all got big egos and you know we all like to try
and outperform each other.
How many in the team now?
So there's three portfolio managers and Hendrick they're our analyst and that's the crux of
the investing team.
Is this the only portfolio current strategy running?
Are you looking at doing another strategy or?
Not at the moment I mean we don't you know we would love to set up international fund
but the reality is we've got no competitive advantage you know we've got 26 to 30 years
muscle memory on the ASX you can pick out any stock in the ASX 500 and one of us will
know something about it.
So you know that's our competitive advantage on the Australian landscape and international
fund would be lovely to do but we wouldn't be able to give out performance to our investors.
In terms of other strategies you know we don't think in terms of long short our brains aren't
wide that way we think long only we look for great companies great management teams great
business models it's how we think.
You know I think if I had a shorter to come be less company would have been enough to
pay $15 and it went to 150 so you know it just shows that you know we're not wide in
that way.
We know what we're doing we've just you know we've got a long term track record we just
need to keep doing more of what we're doing.
Incrementally improve you know evolutionary rather than revolutionary we don't need to
change what we're doing we just need to keep doing it and doing more of it getting slightly
better each year.
So the reason why we call this the rate of change is as everyone now knows when you're
looking at portfolios markets are always continuously changing right and some asset classes do well
or poorly given the conditions between growth inflation stagflation and deflation right.
So where how do you see your fund helping clients and investors you know in the current
mathematics in the market.
Well it's a tough question but I mean I guess we see it we see first and foremost we want
to just maximize our risk adjusted returns.
So you know whatever the underlying economic drivers are we're trying to maximize our
returns those drivers sometimes that means we go more cash sometimes we go less cash
sometimes you go growth assets sometimes you go value assets sometimes you go inflation
winners like you know energy and materials other times you go recession winners like
your defensives.
So we think that through the equity markets you can play any thematic or any potential
economic outcome but you have to be able to change rapidly and pivot identify where you've
got it wrong and always have a plan like you know our plans are invariably wrong but it's
in the fact that they're wrong that we know we were at and so right now we've got a plan
for how we think the future looks and as that unfolds and will be different to our plan
we know it will be but at least give us the signposts as to where we are and how we need
to pivot.
Question I've been asking everyone recently is how high do you think these interest rates
are going to go do you think that the central banks are running a break everything campaign
or do you think this is a tactical move and then they'll turn the tap back on what do
you think?
I think the first thing people have to realize is that this cycle is different right in the
last 10 years or so we have had a genuine power put we have had a Fed put because there's
been no damage to Main Street like if Main Street versus Wall Street Main Street is going
to win every time the politicians are going to protect Main Street every time.
If we go back to say 2018 to the taper tantrum what we saw there was Wall Street had a hissy
fit market dropped I think it was 18% in a very short time frame and so the Fed blinked
and reversed its course on interest rates when it should have actually maintained its
course.
And it did that because there was no cost to Main Street there was no you know inflation
wasn't out of control inflation wasn't eating into the savings and the lifestyles and the
living standards of the average person.
So it could get away with doing that at that stage is when it really should have held its
nerve and held course.
Fast forward now and we see that Main Street is getting seriously damaged inflation is
the number one so inflation has that the hardest hit on the lower to middle class earners okay
the cost of living.
So the central banks globally will now work more than ever to ensure that inflation does
not get out of control.
If you go back to pre the Volcker era you'll see that there's a 15 year period of inflation
sort of sitting at four to five percent level because they didn't get out the big hammer
and whack it on the head.
They need to stop this deadness tracks they will now do whatever it takes and if Wall
Street has a meltdown that's just collateral damages as how they see it now.
So we have fundamentally moved into new era and you know don't fight the Fed is that the
oldest cliche going around and people continue to ignore it at their own peril.
How high interest rates go look I think they'll go too far before they because they are a
it is a blunt instrument it does take a number of months for it to flow through.
So I do think we go too far I do say that we have more leverage in the system now than
at any time in history.
So in theory the interest rate should not need to go as high as I have in past cycles
because the amount of leverage and the amount of impact the transmission mechanisms through
the system.
So answer they've got more to go higher than we higher than they should but not as high
as in past cycles.
So if an event does occur and there is a big drawdown in the market what would be a couple
of companies or maybe a particular part of the market in the Australian space that you'd
be very happy to see come back down to favourable levels.
Look there's just we've got any given time a couple hundred companies that we're close
to between the four of us.
There's over 40 stocks in the portfolio.
I think if you were to see the meltdown that everyone's forecasting and if it was to occur
I think you know we would start to do a couple of things would start to reduce our exposure
to defensives because they would have played their part and they're going to headwinds
moving forward and then we'd start to look at we've got a checklist of how we see the
recovery stocks playing out you know consumer discretion etc etc etc but we need to just
see the different signposts and the different milestones before we start to put in place
those exposures but you know if once we do see a serious correction we think that it's
run its course then we want to look at recovery stocks.
What last thoughts do you want to leave our listeners and investors with?
Gee I don't know investing Katana.
Look it's I think right at the moment we are seeing the most uncertain period we've seen
in more than five years possibly a decade.
I think that you know if you're a more aggressive investor and manager you take advantage of
that uncertainty.
You know we always say that you can't get a great company at a great price with certainty.
You've got to give up one of those three things.
You either give up a great price, give up a great company, give up certainty.
You can't get all three.
So you know if you're a more risk aggressive individual or fund then you could certainly
use that uncertainty to get a great company at a great price.
The way we're wide is you know capital preservation is first and foremost in everything we do
and think.
So we're going to sit back and wait.
We're going to buy ourselves some time, get through these next couple of months and see
how things unfold and then make a decision about how the future looks.
If investors want to get in touch with you and learn more about the Katana strategy where
should they go?
www.katanarasset.com.
Fantastic.
Well thank you very much for joining us on The Rate of Change and I hope you have a great
day.
Thank you.