 Hello, thank you for joining this recording of the Fixed Income Seminar. My name is Elizabeth Moran, I'm Director of Education and Research here at FIG, and I'm delighted to have with me today Simon Michele, who is National Manager of FIG Advisor Services. We've worked together for about nine years, so Simon and I have a long history and Simon presents very well, so you're in for a real treat. Before we get started, I just want to talk through the disclaimer. At FIG, we can only provide general advice, so if you come to us and want a direct bond portfolio, we will help educate you, provide you with the research and the tools that you need to make the decisions for yourself. Of course, if there's a bond that we suggest you might like and you don't like, we'll work hard to try and find another one, but that's part of the benefit and the attractiveness of this asset class is that it's very much bespoke service where we try and work with you to work out what's best for you. So without further ado, I'll hand over to Simon, but keep in mind anything we say is of a general nature. Thank you very much Liz, it's great to be here with you today to run through our Fixed Income Seminar as we approach the middle of the year. What I'd like to speak about today is provide a little bit of an overview of the current fixed income landscape in Australia. Why are we talking about bonds? It's a bit like the missing asset class at the moment. What's driving interest rates? Very topical at the moment. We know that the US Fed is looking to increase rates. You still have significant quantity of easing around the globe. And then looking at the benefits of incorporating bonds into an investment portfolio, how do they behave? How do they provide that defensive behavior? So I'd like to start here with a chart that shows the comparison between the MySuper Superannuation default funds and the asset allocation across the self-managed Superfund sector. And really this is to demonstrate that while you can see good correlation on the right-hand side in the equity and property space, significant difference on the left-hand side in that cash, term deposit and bond allocation. And that's really the lack of access that individual and SMS asset investors have had to being able to go to the bond market direct and buy their own bonds. You can see that the larger investment funds, the MySuperDefault funds, certainly incorporate a greater allocation of bonds being able to access that bond market. While SMS investors have really had to sit there and cash in TDs. And we know that with falling rates, that hasn't been a very pleasant experience. So what do we talk about when we're talking about bonds? Well, you can see here on the capital structure, which is of a bank. If this was a regular company, the top of the tier would be the senior unsecured debt. Fixed income is essentially everything except shares. However, when we're talking about bonds, we're talking about two points really on the capital structure, the senior unsecured debt and the subordinated debt, which is generally your bank and insurers. And that's because only at those two points on the capital structure do you have a couple of features and protections that work with the bonds used to essentially provide that defensive behavior in times of volatility. Can I just go on from that, so I'm just slightly, because as an analyst, I can provide a little bit more insight here. What I look for is the best return, but given the risk. So the risks are really important and as you come down that structure, you're taking on more risk and the terms of conditions are changing. But if you're actually always one of the highest return, you would always invest in shares, but you're also then investing in the greatest volatility asset class. So quite important that it's returned, but given risk. Absolutely, you need to be rewarded for the risk that you're taking on. Yes. Absolutely. So let's have a look, what are those two features of bonds that work to provide that defensive behavior and it's your fixed maturity date? The wonderful thing about a bond is that you know at a future point in time exactly what that bond is worth and you know it will pay you back in cash. You can rely on that and you also know that you're going to get regular, fixed coupon payments. They could be a fixed rate, they may be a margin over prevailing interest rates, they may be a margin over inflation. But you can rely on them, they're paid quarterly or semi-annually and you can build an income stream through the coupon payments of your bonds. There's so much certainty in this asset class. It really suits self-managed super fund investors very well and anyone looking for a cash flow, a constant cash flow that they can rely on. We have a lot of clients, as you would know, that are in the not-for-profit or the middle-market charity schools, but of course too, advisors putting clients, they're wanting to give their clients that certainty of this asset class. Absolutely, and being able to look forward at what the performance of the outcome of an investment in a bond is going to be as well. We know that the value of bonds move up and down, reflecting movements in interest rates as well, but that maturity date ensures that as your bond reaches its maturity date, it will always come back to that par value, that base value, and pay you back in cash. And that helps to preserve the capital volatility in your portfolio. That's right. So even if the price of your bond was to fall below where you bought it, that you have sort of a backup position that you can hold to maturity and that $100 face value will be repaid to you. So and in that instance, corporate bonds will always return a positive, always have a positive return. If you hold to maturity and the company, of course, continues to survive. So that's exactly right. And it's really only by owning your own bonds that you have that maturity date protection. Yes. In another structure, in an ETF or a managed fund, of course, you don't have the natural maturity date. You still have to decide to sell. So there's still is that decision there, which actually takes away your control or your power if you like. And I think that's a really important point. That's right. So that's the theory. Let's have a look at that in practice. And what we've done here is charted one of our largest companies. I think it's the largest company, the Commonwealth Bank. You charted three points on that capital structure. The equity, so the lowest point on the capital structure, in the dark blue line there. The hybrid, the CBA pearls in the light blue. So moving one notch up the capital structure above equity. And then the senior fixed rate bond. So that bond level, a couple of points above hybrids on the capital structure of the CBA. What we specifically outlined here is that volatile period of the GSC between about September 08 and March 09. And we specifically done that to demonstrate the different behaviors across the capital structure of the CBA. So let's have a little think about what was occurring during that period. Time of great volatility in central banks around the world, including the RBA, were looking to stimulate markets cheap in the cost of funds. And they were doing that by lowering the official cash rate. And I can tell you that between September 08 and March 09, the Reserve Bank Australia actually lowered the official cash rate from 7.25 to 3.25%. That's an interesting statistic, isn't it? That's huge, 4% in such a short time. Do you move? Big move. So let's have a look at what was occurring there. You can see the equity was obviously experiencing significant volatility. It was down about 50% since the end of 07. Hybrid, the CBA pearls was down about 30%. But you can see that the fixed rate CBA had actually increased in value. But let's think about why that would have occurred. If I'm holding a fixed rate bond and paying a coupon of 6%, and rates are at 7, that's a pretty attractive return. But if rates fall down to 3%, and I'm still holding a bond that pays a coupon of 6%, all of a sudden that bond starts to look a little bit more attractive. And Liz, if you want to buy that bond for me, I'm going to make you pay a little bit more for that bond. I'm going to make you pay me a premium above its face value, reflecting the value of that 6% coupon payment. And we know that at that senior bond level, there is no discretion for issuers around coupon payments. They must be paid. They can't adjust them according to the market. So it's that certainty of knowing you've got the protection of that coupon payment that you can see there reflected in an increase in the value of that bond. So really by diversifying across the capital structure of a company or a bank, it gives you more than one point for liquidation in terms of volatility. And you can see there that while you may not have wanted to sell your CBA shares, you certainly could have sold the bond and had a good result. I think this graphs very interesting, because I think it points towards a recovery period, if you like, after a GFC type of event. So you have, obviously, the share losing about 50% of its value during the GFC. But if you look at that Darwin line and follow it, it takes roughly five years to catch the senior bond. So to my mind, that's how you've got to think about your portfolio or your client's portfolio and structuring so that they can sustain the five-year recovery period, hopefully, and make sure that also they have a range of risk assets. Because if they're all invested in shares, and particularly looking at this chart, which is CBA, which to my mind as an analyst, is the lowest risk company on the ASX, think about some of the higher risk companies, the miners, the banks even just very recently, we've seen their share prices come off. Having to think about some of the other riskier companies, it's going to be a longer term and a harsher correction under a GFC type of event. Absolutely, and that goes back to your comments when we were looking at the capital structure, ensuring that you're being rewarded in return for the risk that you're taking and rare on that capital structure you're investing. I mean, interestingly, if you look at the hybrid, the pills there, you can see pretty volatile in times of the GFC. But if you look back when you see the recovery of the equity, it's a fairly flat line, very much more like a bond. So it's not going to provide that upside to you. No, no upside with hybrids. They only pay the face value opportunity. There is no sort of blue sky as there is with the share, but they take on the characteristics and at a stress market, as you can see. Absolutely. So we're talking about capital preservation and income generation, and that's growing in its importance to this market because we're living longer. And we're now fast approaching a time where the number of years in retirement is almost matching the number of years we're actually working to generate funds and capital for that retirement. So the need to ensure that our retirement portfolios last for a multi-phase retirement and meet our growing needs are vastly more important. Really, it's a challenge that financial advisors have out there in the market, especially as we approach into our 90s. Most people now retiring, they might still continue to work a couple of days a week before they go on a bit of travel around the place and then maybe into a low-care retirement village. But as we are lasting a lot longer into our late 80s and 90s, obviously requiring a higher level of care there. So really important that you lock your income in with bonds and fixed income so that you can ride the volatility cycles out in your other allocations. And it's interesting, we don't actually stay there in that particular graph, the percentage of growth or income assets. But one of the old additives used to be to own your age in fixed income or bonds, so that as you age, you need the more certainty. And I think that's interesting. Everyone finds their own level. That's right, and it's important to increase that over time as well, even in retirement. It's not about getting to retirement, making an asset allocation change, and leaving it sit there. You need to continue to adjust that, as you say, to provide more of that capital preservation protection in your portfolio as you age. Absolutely. So why are we talking about bonds? Well, investors, individual and self-funded superfunding investors can now buy the bonds that the bond funds buy, go direct to the market, and get those features and protections that the big institutional investors have had to themselves in recent times. Look, obviously, return to dropping, even in term deposits, rates of return are dropping, interest rates continue to fall, reaching new record lows. Even this year, we've seen fairly low performance in other asset allocations as well. So investors are really looking for an alternative and some certainty in their performance as well. We've seen changes in regulations in the hybrid space, and even in term deposits that now have a minimum 31 day break on them. So, again, it's about ensuring that you're at the right place on that capital structure for the return that you're getting. Transparency, just like going direct and buying your own shares, going direct and buying your own bonds and knowing what your exposure is to. You buy a Telstra bond, you know you're exposed to Telstra, CBA, Qantas, and being able to diversify across structure, incorporate some fixed rate, some floating rate bonds, inflation-linked protection, because your defensive asset allocation isn't about trying to preempt what interest rates are going to do, so that building the protections in your portfolio to deal with whatever interest rate view emerges over time. We've spoken about the maturity date, the certainty of income through your coupon payments. Liquidity really important. The bond market is huge. It's double or more than the equity market, and there's a lot of liquidity out there on a daily basis. You can sell your bonds at any time. You know, if you have a selection of bonds in a portfolio, you can certainly liquidate the majority of them within two, three days. And that's important, especially, as I mentioned before, when you actually can't break a term positive in less than a month. One of the key drivers has really been opening up the access by lowering the entry point for investors. Previously in Australia, to settle one single bond parcel, you needed to purchase a minimum of half a million dollars. So, as you can imagine, that locked a lot of investors out of the market. You'd need at least a couple of million dollars in your back pocket for a nice bond portfolio. What FIG and other operators in fixed income have done is lowered that right down to as little as $10,000 based on your parcels by facilitating that settlement process. When you look at the documentation, most bonds are actually available in $1,000 parcels. So, maybe you've got a bit of work to do, but at this stage, with as little as $50,000, you can actually buy a nice diversified portfolio, five bonds, five different maturity dates, five different sectors, five different coupon payments. I was just going to say, Simon, if you pay more than $10 per bond, if you invest $50,000 or $100,000 in, say, something like a Sydney Airport 2030, if you need some of those funds at any point, you can sell down in $10,000 parcels, which I think is an interesting thought as well. Just keep that in mind. And the only other thing I wanted to say is this big international global market, the bonds, and one of our recent trades has been to suggest people buy foreign currency bonds in US dollars or sterling or yen, and that's been quite a successful trade for a number of our clients, particularly as Australian companies themselves will issue foreign currency bonds. All the major banks do. A lot of the big mining companies are issuing foreign currencies, and sometimes they're not well-valued in biobusies markets as what we would value them here. So you can actually get a better return in a foreign currency. Of course, you are subject to the currency risk, but it's just another aspect of this very big global market that I wanted to highlight. Absolutely, and that's one of the wonderful things about the developing bond market here in Australia is you're growing the investor base, but you're also growing the number of issuers into the market as well. And we've seen offshore issuers such as Apple, Sam Miller come to the Australian bond market, issue bonds directly with the Australian bond market and meet a growing demand from Australian investors for that high-quality, senior debt level on the capital structure, the returns that certainly that can provide. And what a great time for companies to issue bonds. Rates at record lows, cheap financing, you're able to diversify your funding source away from pure bank funding, access a broader range of investors, and for Australian companies that have started to utilize the bond market, they can now grow their investor base away from purely equity investors to now actually have debt investors as well. The great benefit that has for retirees is that as you transition into retirement, you can actually continue to support and invest in the same companies as you have as a share investor, but now at that senior debt level with those additional protections that more certainty, lack of volatility in retirement. So I think it's wonderful that we're seeing that open up and driven not only by a growing number of investors looking for bonds, but also supported by a growing number of issuers and companies looking to access that market. The diversification's all there. It's all waiting for us. So let's have a look at interest rates at the moment and I'll put this chart up here just to demonstrate that we're not out of the woods yet. Around the world, we're seeing further support to markets. We've seen the EU increase its bond buying program this year from 60 billion euros a month to 80 billion euros a month. Japan continues to provide more money for bond buying, lower deposit rates, and obviously we've had China influencing their market through lowering deposit rates and throwing some capital at their markets as well to support. So while we know that the US has pulled back and taken back its quantitative easing program, what this chart shows is they're still sitting on about four and a half trillion US treasuries and continue to reimbest coupons on that. So they're still in the first half of this. We're yet to get to the halfway point and it's really important to know that around the globe, significant volumes of money are still being thrown at global markets to support markets and that's why you're seeing a lot of that flow back into bond markets and keeping yields significantly low. We're certainly not out of the woods yet. No, in fact the EU's just started buying corporate bonds. So not only do they buy the sovereign or the government bonds but they're entering into the corporate bond market to try and support the market and increase activity. It really hasn't worked. Interesting times ahead. Absolutely. And so if you're a beneficiary of all of that quantitative easing money hitting the global market every month, you're going to look at a place to put it. And you're going to have a look at this chart and this shows the two-year government bond rate across 20 developed economies. And you can see they're standing very proud out on the right-hand side. It's here in Australia about 1.56% less than our current cash rate. So suggesting rates like litigow lower but considering we have a triple-air credit rating a pretty good place to park your money. And that's why we see 60% of Australian Commonwealth government bonds held by overseas investors taking advantage of that higher return and the strength of the Australian economy. Moving a couple to the left there, you've got the US. We know that the US is trying to continue to increase their rates. I can tell you that the two-year rate just after the December increase by the US Fed actually hit 1.05%. You can see there is significantly below that at around about 65 or 0.65%. So certainly not moving the direction that the US would like to see. And on the left-hand side, we have Europe and we know that on the back of the people flying to safety in the lead-up to the current bricks that vote, German and European yields hit new loads as well as those investors locked into safe bonds. So you can see there that in a comparative basis, the challenge that the RBA has in trying to offset the competitiveness of our interest rates against what is a global market of fast approaching negative interest rates across major economies. And that's a real problem because it shows continued strength in our dollar and that is why we saw the Reserve Bank in May have to lower our cash rate from 2% to 1.75% and you see there reflected in the two-year rate, a view that that is possibly going to have to be lowered further by the RBA. That's certainly our thoughts from the research team. We're certainly thinking another interest rate cut by the end of the year. And also we query the US plan to increase rates. And they had at the beginning of the year, they were stating they were going to have four increases over the year. There's been none yet and we think again there'll only be one. It's when interest rates start to come back and hopefully they will, it'll be very slow. We're expecting this lower for longer for many, many years. Yes and that's certainly supported by this chart which is the Australian 10-year Commonwealth Government bond rate in the dark blue and the US 10-year Treasury rate in the green. And I've charted this from the beginning of 2014 because that was the period of the taping back of the US Quadrate of Easing and the world was preparing for higher rates. But you can see there reflected in that yield curve that the market certainly wasn't preparing for higher rates. 2015 was all about preparing for liftoff, as we called it. Originally we were going to see the US increase rates in September. They waited until December and you can see there in early 16 rates continued to pretty much fall off a cliff. And for 2016 you can see there that those 10-year rates have really hit a completely new lower band over that time. So certainly nothing in here in the 10-year rates which really give you an indication of inflation and growth. You can see that they're expecting rates to continue to remain low, continuing to touch new record low territory. Isn't it interesting, Simon, the difference between the two lines, how the gap has narrowed and we're much closer now. And I guess that's just what happens as you approach one or zero. Well, this is true. As the US trades fell, investors said, well, look, I'm happy to jump into Aussie bonds and take advantage of that extra half a percent. Or what was 1% a couple of years ago, it is now sort of about half a percent. So what the RBA would like to see is they would like to see the Fed stick to their timeline of increasing rates to take pressure off of the Aussie rates there. And the fact that the US has had to delay has essentially placed that additional pressure on the Reserve Bank of Australia to have to lower our rates and join the rest of the globe. Yes, sad but true. So here's the RBA, sorry, the Australian Commonwealth Government, Yill Curve, showing what the market believes the RBA will need to do. And I've charted the green line, first day of trading this year, 4th of January, and the blue line as of 21st of June. You can see them in the start of the year, the lowest point on that curve was 2%, the cash rate was 2%. Fairly consistent rates, they're out to the full year of which they started to move a little higher. You can see it moved forward six months and that Yill Curve has significantly fallen and below the current cash rate of 1.75. And that's the market suggesting that we're likely to see it further rate cut. Now, generally when the RBA steps in at lowest rates, you tend to get a steeper recovery on the right-hand side of the curve. You see here, however, that that gap is reflected right out to 20 years. So it shows you there that significant drop in expectation on the back of lower inflation and growth of the recovery of these interest rates. And again, back to that, lower for longer. Well, it's fascinating, isn't it? After 10 years, what this chart is saying is that they expect interest rates to rise by half a percent. Half a percent over 10 years is very, very low. And out to 20 years, well, just over 1%, maybe 1.2%. Over 20 years, it's a generational outlook, I think. And well worth thinking about your structure, how you've structured your investments at this point because that sort of interest rate curve implies low growth environment. And typically, for example, the share market doesn't do very well in the low growth environment because that's what people are targeting, no more growth. And having to think about how you secure that income and have the positive returns in that environment is pretty important. Absolutely. And especially considering Australia's been very much a growth-focused economy in recent times, we now have to start thinking more of the income side of performance. Couple of things we look at is, firstly, under-employment. And this is both the challenge here in Australia and the US in that we're seeing positive employment growth, but it's very much in casual work. So you can see that wages growth has been fairly benign. And that is because we don't have full utilization of full capacity. We don't have that demand for employers. So while you see more people working, the average hours work is pretty steady, reflecting the fact that a lot of that work is part-time work, casualized work, and people still need more hours. And that's where that demand goes initially. Growth, we know that Australia's had some good growth figures this year, which has been positive. But obviously, if you look at the world GDP growth forecast, we still see downgrades there. We have the IMF come out in the last couple of weeks and further downgrade global growth. And that's really reflected in those 10-year rates we were looking at a couple of charts ago. Commodities, that significant drop in commodities obviously reflected in that significant fall in inflation and that's still been reflected by lower rates and forcing central bankers around the globe to lower rates. Central bankers need inflation. They need growth in the lead-up to moving rates higher. And it's this fallback in inflation that's really inhibited the ability for the US Fed to continue its path of increases. And while we hear commentary from the US Fed that they continue to wish to move those rates up, it's really subject to these data points and they're certainly moving away from the US Fed at the moment. It's very finely balanced, isn't it? They can't afford to increase the rates because they risk tipping the country back into a recession. Of course, this year is an election year. Interesting enough for me having worked in the UK and what not many commentators are talking about is that after an election year, typically there is quite a big slowdown in the economy because you're not getting that spend on advertising, media, marketing, merchandise that you do in an election year. So I think even next year, watching the Fed try to increase rates when there's going to be a natural slowdown, I think, in many sectors in the economy is going to be very difficult. Very challenging time for them moving against the rest of the world at the moment. And this is the Australian dollar and the RBI managed to get it down below 76 for a couple of points there late last year and early this year. But you can see there that as the US Fed have delayed their action, the demand for Australian bonds and the Australian dollar has increased. In the lead-up to the May drop in the cash rate, you see there the dollar drop back, reflecting that. But again, as other economies have lowered rates, that stubborn Aussie dollar keeps creeping higher. Currently around 75 cents and I can tell you that if you watch this chart and it gets back up around that 78 cents again, you can pretty much put your money on another interest rate cut from the RBI. This is what Glen Steve is looking at and this is the challenge he has and why he has to continue to lower rates just to try to stop that offshore demand for Australian dollar. Well, it flows through so many sectors in our country, doesn't it? Exports, tourism, education are really important for us, so interesting to watch. I think there will be another cut. I think that's too high. Part of the reason it's high is we are getting that money coming in and investing in our assets. Simon talked about Australian government bonds but there's also quite a big demand from global investors in Australian corporate bonds and interestingly, one of the biggest investors in Australian infrastructure bonds is Canadian superannuation funds. Asian private buyers like corporate bonds as well. So there's a lot of people looking at us right now. Corporate bonds offering much higher returns than other places globally as well as the government bonds as well. And I put this chart up here because it really demonstrates the challenge that we had from the 1st of January 2014 to the end of June. You can see they're pretty much sideways. So really difficult to generate the type of returns that investors have become to rely on from growth and therefore from the share market. They've seen volatility not only in the value of shares but also in the dividend, the income from shares as well. Quite a few big cuts in the last half year. BHP notably, it was about 60% cut to their dividend. ANZ cut about 7% to their dividend. Difficult really to rely on a dividend for an income stream because it can be cut. Just to highlight that, you'd all be aware of that. You know, the bonds, they cannot cut whatever the rate is set at first issue, which is part of the attractiveness of them. But of course, if you've got the share price going down, however high the dividend is and however much you would enjoy franking, if you're still incurring a loss, quite damaging overall. So just to summarize, let's have a look again, there's a difference between being a bond holder or a lender to a business as opposed to a shareholder or a part owner of that business. As a shareholder, obviously, you benefit from the performance of the company through the growth in its share price and through dividends if they're paid as well. But you don't know what those dividends are going to be and you can't say what the share is going to be in a year or two years' time. So obviously, potential upside there but it can be quite volatile over time as well. As a bond holder and a lender to the company, you're essentially provided additional protections. We've spoken about the protection of a maturity date, a point in the future in which you know exactly what your investment is worth, its face value, and you get that paid back in cash. And also, obviously, the certainty of your income payments, your coupon payments, you know when they're going to hit your bank account, you can rely on them, you can build a lifestyle around them. They give you that certainty of performance. And you know also that you have the protection of sitting above both shareholders and hybrid holders in the event of a wind-up. Should a company fail to pay its coupon or fail to pay back its bond issue on maturity, it is a breach, it is a default and the company would go into liquidation. And so, you know, by sitting up further in that capital structure, those additional protections and the benefit of having your equity holders beneath you as a capital buffer. That's exactly right. The bonds are a legal obligation, really important. That interest payment and maturity date are a legal obligation and they cannot forego them. Just as, again, I'm going to put my research hat on again and just talk very briefly about this. I like to say to investors when they're thinking about getting into bonds, the key driver for me is survivability. Is the company, do you think the company is going to be there in five years' time and it has to repay you? So that's what I would look for, one of the key drivers if you like. Whereas if you're a share investor, as Simon rightly pointed out, you want growth. So is the company going to grow? Now, having a look at the forecast for interest rates, you have to question the amount of growth we're going to get over the next five, 10 years in this market. We think it's easier to identify some companies that are going to survive as opposed to companies that will grow. But they are the sorts of things you need to think about. When you're researching a company to invest in, by all means get a wide range of research, Google the company, see if you can get the equity research even if you're thinking about a bond investment. But it's very important to get the debt or the bond specific research cause those drivers are different. We're not interested in growth. It can actually be a detriment. We like those boring, stable companies that are consistently profitable. Whereas the equity hours guys, they don't like them so much. So just a couple of little hints there if you're thinking about investing in bonds. Absolutely. And as we mentioned before, you know, the wonderful benefit of the growth in the bond market is having those options, you know, in a time of low growth and volatility instead of being at the share point on the capital structure, the ability to actually move up. Being invested in the same business but with the greater certainty of the bond holder. Just a quick mention on hybrids. We've touched on them a little bit. But a lot of investors use them as their fixed income allocation. And there's been significant changes in the regulation globally around the security since the 1st of January 2013. Anyone that uses hybrids or has purchased hybrids recently would know that through the volatility of the capital price of a number of these issues. Not only that, but also the increasing margin of recent new issues in that hybrid space. And the recent issues of hybrids, what CBA did one at a margin of about 5.2. The AZ did one in the US recently, comparative margin about 5.5. You know, over BBSW, you're up around 7.5%. That's starting to get much more like an equity dividend return. And that reflects the greater level of risk in these hybrids that are very much more like equity in the sense that they can be immediately converted to shares or in some cases written off. So while they tuned in to look like a bond in the sense that they pay your regular payment, that payment is actually a dividend. That's not a coupon. You don't have the protections that you do as a bond holder. So it's really important to know, while we certainly don't have a problem with the quality of these issuers, they're generally good banks and they at the current margins pay a decent sort of return. But you know, there's something you want to look at as a comparison against equity rather than against bonds. You just need to ensure you have them in the right basket. So in times of volatility, you're not relying on these to provide that defensive behavior. So well put. That's perfect. I can't enter that slide. Well, that's an achievement. Thank you. So I mentioned before it's about diversified portfolio, not trying to anticipate what rates are doing and let's face it, a lot of people never thought rates would get this low. But those that have held onto their fixed rate bonds have had a wonderful experience through the protection of those coupons. So we incorporate both fixed rate, floating rate and inflation in bonds in the portfolio so that they can act with each other to offset volatility. A fixed rate bond, as the name suggests, pays you a set fixed rate of return for the life of the bond and then pays you your face value back on the maturity date. A floating rate bond, again, you buy the bond, it pays you at a quarterly coupon at a fixed margin over a prevailing interest rates. Generally the 90-day DBSW. So every 90 days you get a quarterly coupon and the margin resets over prevailing rates. So a floating rate bond will follow our interest rates up and down. Inflation-link bonds. Inflation-link bonds protect your money in two ways. The first thing they do is every quarter when the rate of inflation is released, every inflation-link bond's face value increases at the rate of inflation. So your capital is protected against the impact of inflation. Not only that, they also protect the value of your income stream or the coupon payment because the coupon is calculated against that indexed face value. So a pure inflation hedge, a real great way to protect the value of your money and also your spending power against the impact of inflation and very important in a low-rate environment where we are now, where the official cash rate is slightly below the rate of inflation. So being able to lock in a real return above the rate of inflation is a very attractive place to be at the moment. And a lot of those bonds too are infrastructure bonds. So they have very long-term contracts, a lot of certainty. They're often monopoly-type assets. Sydney Airport's the classic one. So many of our investors have invested in Sydney Airport in Amsterdam. Absolute monopoly. Prices of parking go up every year. The leases on the shopfronts go up every year. So their income is linked to inflation. So thus they want to borrow in an inflationary sense something that's linked to inflation. So they are tying off there. But yes, fantastic infrastructure assets there. I think a good place to start if you're new to bonds, to thinking about having some sort of inflation protected income. Often of course in mandates or trustee documents or SMSS, I'll hand back to you. I'm assuming you're going to talk about the index and utility bonds the other time. I am, Liz. And it's actually my favorite, especially in the current environment. Because in this low-rate environment, a lot of investors are looking to improve their return. And in a lot of cases they're doing that by taking a more risk. The thing I love about an index and utility bond is it allows you to rather take a more risk, just put your capital to work for you by drawing down some of the capital in your portfolio every quarter through your index and utility bond. Now these are wonderful assets because again, largely infrastructure assets, a lot of them guaranteed by a state government or federal government revenue stream. And again, a period inflation hedge. These are an asset, they're a bond. They can be sold. They can be passed on. And they have that period inflation hedge we're not speculating on inflation over a long period of time. And they're issued for periods out and you can buy a 20-year index and utility bond. So you can buy these over a long period of time. But they work in three ways. Every quarter, the remaining value of your annuity will increase at the rate of inflation, like an inflation-made bond. They will also pay you an interest rate of return on that remaining balance of the annuity over and above inflation. And they will also pay you back some of your capital every quarter. So unlike a traditional bond where you buy the bond and get your face value back on maturity, in the case of an index and utility bond, you buy the bond and you'll pay your face value back over the life of that bond with just one fine of quarterly payment on maturity. So important to know that there's no bullet payment at the end, but also it allows you to significantly increase the income from that bond by putting your capital to work for you. And really important in this low-ranked environment. I think really great investments for those in drawdown phase, because you can then take, you're taking, drawing out some of the capital. So if you've got a pension, you don't have to worry about selling the assets. You naturally get that repayment through that bond. But it does actually really help in trying to replicate that sort of income when you're working because it's quarterly. So you're getting this quarterly cash flow, which I think is a really great help to budgets and investors in drawdown. Absolutely. And so what we do is we blend the coupons from those different types of structures together. And I've got here a cash flow chart across four different bonds, an investment of about 200,000. You can see there are returns, total coupons of about 95, and face value repayments on maturity of about 150,000. So let's have a look at each of those bonds. The first one is a Qantas fixed rate bond. You can see there semi-annual payments, exactly the same amount of cash hitting your account every six months, right through down to 2020 upon reach on the right-hand side, you can see you receive a $50,000 base value payment back. Moving on to the right, an insurance-Australian limited floating rate bond pays a quarterly coupon. You can see there it's a little lower and that reflects the fact that the benchmark rates are quite low at the moment. You can also see that this has been priced against the current yield curve. So it actually drops in value before increasing in value. And that's that drop in the yield curve that we saw earlier in the presentation. Sydney Airport inflation link bond, you can see there quarterly payments, a little on the low side, because remember this is your return over and above the rate of inflation, because the inflation return is going to be reflected in the index face value of the bond. And you can see there on the right-hand side under the bullets column, when the Sydney Airport inflation link bond matures, it pays you above that 50,000 base value. Yes, that's a really good point. So the face value of those 2020 bonds now is up over $140. $143 or 6, I lose track a little bit. But most bonds have $100 face value. So that extra 43, 44, 45, 46 value is what's been accumulated with inflation over time. So that's part of your return that you expect at maturity. And as Simon rightly points out, at maturity, you see a higher level of return there of $53,187, but I'm assuming that's not a $50,000 initial investment or face value investment. That's right. That's been bought back at December 2015. So it would have been an initial investment probably around about that 50,000, about sort of 40,000 face value, which is now worth 50,000. Yes. So you can see there also that those quarterly payments just increased slightly every quarter. And that's that inflation indexation in practice as well. We use the mid-range of the RBA's target band over time, which is 2% to 3%. We use an inflation assumption of 2.5, obviously on the low side at the moment, but we do know that our central banks are looking to increase that. So incorporating some inflation-linked protection in your portfolio is extremely important in this environment. We then have the Preco, Inflation and Urity Bond. Preco is actually the issuing entity across the Australian Defense Force headquarters in Canberra, which is a wonderful big building if you ever get the Canberra, and obviously is supported by a revenue spend from the federal government. Significantly higher quarterly payments you can see there than compared to the other bonds. And that's because, again, as I said, you are getting some of your capital paid back over the life of that annuity. So you can see under the bullets that when that matures in 2020, there is no base value payment back to you. You've received that base value over the life of the annuity. You can also see those quarterly payments increase reflecting that inflation indexation as well. So by blending those four coupon streams together, you can see there, under total coupons, generating an annual return of about 20,000 off of that investment. So if rates were to go up, well, the Quantas Bond will keep paying the same amount. The Insurance Australia Bond will start paying higher rates. They'll be sending off a higher benchmark. Your inflation-linked payments would be generally off of a higher inflation benchmark. Higher inflation leads to higher rates. If we see rates fall, again, the fixed rate will continue to pay its coupons to semi-annually. The Insurance Australia Bond, those coupons would drop reflecting lower benchmark rates, and you would expect that your inflation-linked bonds would be resetting off a lower inflation point more around the 2% level. So by incorporating those four structures of bonds, you can minimize the impact of whatever future interest rate view emerges over time. If you lock your income with bonds, you can ride volatility out in your other allocations and not have to adjust your lifestyle according to market performance. I think that lifestyle point is actually absolutely key because that's what you want to protect. And I think that's whatever amount that is, that's what you need to think about as your defensive allocation. So whatever that is, I often would say to people, if you've got $15 million and you lose half in a share market crash, you can still live really well on $7.5 million, but somewhere less than that, and whatever point that is wherever you decide to need what you need to protect for your lifestyle, I think that's where you need to be thinking about having those assets invested in defensive assets, such as bonds and deposits. And especially increasing with your life as well. So some of the key factors that we are looking at at the moment is to reduce reliance on cash. We know that a lot of investors out there are interim deposits and cash accounts. It's been a terrible journey. The performance is now around inflation, if not slightly below. So you're running to stand still essentially on return. So we would definitely say be proactive and put that money to work. Hedrickens inflation, while inflation is currently on the low side, inhibiting the ability for central banks to increase rates, we know that they are doing everything they can to generate inflation and growth and to allow that to lead to them being able to increase rates off of these very low levels. Being able to maintain your income throughout cycles is really important, especially again in this time of volatility. You don't want to fall into the trap of having to adjust a lifestyle according to market volatility. And if you can lock in your income, it doesn't matter what the stock market or property market is doing, because your lifestyle is locked in through the income payments via the coupon payments of your bonds. And the bonds, of course, are that legal obligation, which is a very key point, I think, in this asset cost. That's exactly right. And obviously liquidity is really important as well. It's really important to have cash coming back in your hands for redeployment, rebalancing, spend importantly as well. And you can achieve that through a diversified maturity profile. If you have a bond maturing in a year, you can rely on that cash coming back to you on that maturity date. So if you have a bond maturing in one year and a bond in the two years and three years or four years, you constantly have that money coming back into your hands for redeployment. If you think about it, if you have five bonds and you have one in maturing every year, after three years, essentially 60% of your portfolio would have come back to you in cash to be redeployed. So that's how you can also manage the impact of rates moving higher. By having that maturity date protection, you know you've got cash coming back and that can be redeployed into what could be a higher interest rate curve. FIG is bringing a traditional asset class to you with a modern approach, and that means developing a lot of creative educational content for you to utilize and mark commentary and education to the sector as well. I'd like to do a shout out for Liz Brand who does some wonderful articles in The Australian Every Week and I would definitely suggest you look those up. They've also available on our WIRE website. We've recently launched a FIG app to bring the bond market to your hand and that is available by your phone or iPad. It gives you access to over 300 direct bonds, current and historical pricing, ability to put alerts in their pricing, access also to educational, informational and market commentary also via the app there. So bringing the bond market to you. Our Australian Guide to Fixed Income, a great glossary of terminology, educational content, really important for advisors and anyone operating in the fixed income space to have on the shelf to be able to refer to as credit rating tables, model portfolios, some really good content there as well. Definitely get your hands on one of those. And before we finish up, I'd also just direct you to our WIRE website. This is now a dynamic common to news website constantly updated with the latest from the market. You can see you can filter across research, educational commentary or market data and is also the place to go to access our daily institutional big bond rates sheet. Great resource there. And I would definitely suggest you utilize that when you're looking to improve the conversation around bonds and fixed income for you and your clients. I'm just gonna just have a couple of words about the wire. I mean, as the editor, a lot of work goes into that every week. We get multiple experts in this business commenting on the market and on different levels. So if you're wanting to learn, I think that's a really, really good place to start. There are also quite a lot of reports on companies and research, which so you can, if you're interested, for example, in those Sydney Airport bonds, you can go and search Sydney Airport and then you can see all the articles we've written about Sydney Airport over the last few years. So a fantastic resource. And one other thing I should mention is we do have quite a lot of webinars, live webinars and recorded versions as well. So there is an awful lot of information here. We really want to enable our investors to invest on their own behalf or on behalf of their clients. We're not going to tell you what to do. We're going to help you make the best decisions for yourself and I think that's probably one of the attractive things about FIG. You can speak to experts such as Simon or our head of research or our portfolio strategy manager. There are people here to help you. We're all about making bonds easy and making it efficient for you to access them and go direct to the market. Most investors in Australia would own bonds indirectly. We say now you can go to the market direct and access those protections yourself. Which actually fits perfectly with the SMSF psyche you're having control on knowing what you're investing in. And I think that's going to sum up our presentation, Simon, unless you have anything else to add. It's been lovely. Thank you very much, Liz. It's been great spending some time with you and running through the FIXingCup seminar. Absolutely delightful, Simon. It's been a while since we presented together but so enjoyable. Thank you very much for joining us. Please, if we can help in any way, please contact us. Thank you for your time.