 Good afternoon. Welcome to the FIG Securities webinar this afternoon, an individual corporate bond story. I have with me Graham Botrell, who is a FIG bond investor, has been for the last five years and also the President of the Australian Investors Association. My name is Elizabeth Moran and the way that Graham came to us, or I first met Graham, was through the Australian Investors Association maybe five or six years ago even. It's quite a while, wasn't it? But just at the most recent National Conference, Graham gave a presentation about his investment in corporate bonds and that's one of the things the Association does. It has different members talking about their investment journeys and it was such a great presentation. I asked him if he would give it to our clients today. So welcome, Graham. Thank you for joining us. Hello, Liz. Thank you very much for having me today. I suppose you've been here. Fantastic. So before we start, just a couple of housekeeping things really. On your screen, you should see an orange arrow and a panel on the top right-hand side. If you can't see that, click on the orange arrow and the panel will expand and you'll see about three quarters of the way down that panel there's questions, an area where you can type in questions to us. So we'll be answering questions possibly through the way through, but I might leave most of them today towards the end. So Graham can give his presentation because it's a different sort of a presentation. But and we will try and answer your questions. Also, if there's parts you don't hear or want copies of the slides, we will make a copy of the broadcast available once we're finished. So without further hesitation, Graham, thank you very much for joining us and I'll hand over to you now. Thank you very much. All right. So let's get started here. An individual corporate bond story. I guess this is just about my journey. I'm not saying it's a disclaimer. I'm an amateur. This is what we're going to talk about is how and why did I get interested in bonds? What have my experience been? What have I done and what have I learned? So the presentation is basically in three parts. There's a bit of an introduction about how I arrived at getting interested in bonds. The next bit is some results of bonds that I have bought and sold in the last two years, just going back a short while in history. And the third part is the current ones and what I've learned and hopefully I've learned a lot through the way. So if we get started here, why did I become interested in bonds, Liz? Well, the first answer to that is I wasn't interested in bonds. In 2012, were there about I wanted to reduce my workload and start taking a bit of the pension from our self-managed fund and I needed to increase the return a bit. And we're holding lots of cash because we'd sold out of all our equities in late October 2007 before the global financial crisis and went to cash. Holding lots of cash rates were good, but then they started falling and they saw they were going to fall further. So what are we going to do with our money to get a decent return? So why not property or cash or equities? Well, I had a problem with that because cash returns are now almost negative or they are negative after inflation. Property, we've got in our mind enough allocation to property and everyone will have their own view about this. We've got a nice tonne. That's a significant percentage of our total wealth and so I didn't want to have any more. I don't believe in owning one property and being exposed to one rogue tenant. Yes, and illiquidity if you need that cash. Exactly. Quickly, yes. So I didn't want to go there. And then that left equities and I could see some risks ahead and my comment here is I didn't have 40 years to recover a serious loss because that was not going to happen. So what was the risk that I saw? Okay, there were three influences here. There's, and you might have seen on my CV that I'm interested in technical analysis. A bit of a nerd if you like on technicals. So that brings me to Elliott Wave and GAM and then not technical, but Benjamin Graham. So if we look at these influences, Elliott Wave theory, Ralph Nelson Elliott says that the market moves in five waves. And if we look here, we've got one to five and the point five up the top there would represent November 2007, which was the high in the ASX 200. And then after that, Elliott says we have a three wave correction ABC corrective. Okay, so if we apply that to the ASX 200, from second of November seven, which you can see on the top left over there, down to March 09. And then across to wave B, and then something down from there to who knows where. So I thought, oh, that's not pretty. No, we're waiting for that clip. That's not pretty. So, okay, then if we look at GAM, another technician in charting in modern rules, but GAM's methods are based on biblical packages, passages. And it's basically what is this been, and what will be this been so GAM saying, patterns repeat. So if we apply GAM theory to the ASX 200 from the time, we've got the range down from second of November seven to the March 09. And GAM says that range will be repeated or likely to be repeated at some stage in the future. So if we're up here around about the 6000 point, and GAM says, you know, watch out for a range down of 3683 points, which is the same as the range down back from November to March. Well, that's a bit scary as well. That's a lot scary. Not too comfortable with that. And then I started to read Benjamin Graham, because I've been hearing some speakers mention Benjamin Graham, and in book called The Intelligent Investor. And I thought I'd heard it about three times. I thought someone's trying to tell me something I should read this. And I discovered that Benjamin Graham says, recommend that the investor hold never less than 25% or more than 75% in bonds versus common stocks. I thought, oh, okay, this guy's got some credentials because he was meant or a white buffer, etc, etc. I should take some notice. So let's see what this bond story is, what returns are possible, how does it work and that sort of thing. So research follow it. Now, here's a Vanguard chart from the UK. With an example of potential returns and potential losses with a portfolio comprising bonds and stocks. And if you see on the left hand side, it's got 100% stocks. And it's saying you could expect the highest gain in the year of 54% and the worst loss of 43. And then if you go across to the right hand side of that chart, you can see that if you have 100% bonds, you're only going to make a maximum of 32% in a fantastic year, not 54. But you can only expect a loss of maybe eight instead of 43. And if you go somewhere in the middle, then your expected gain has reduced a bit, but your expected loss or potential loss has reduced by a larger amount. I thought, oh, that's pretty interesting. There's a bit of safety in there. And as I said, I can't afford a 40. I haven't got 40 years to make up a loss. So that's pretty good. So if we move on, and there's another Vanguard chart that's proposing in a moderate portfolio, 50% equities in the middle there, 45% bonds and 5% cash for those adventurous souls go to 80% equities, but still have 20% bonds. And okay, more of the story. This is good. So what's the history of the performance of equities versus bonds over the last few years? So did some more research and came up with another Vanguard UK chart. And this is based on indices. And so it's not actual bonds. But it's, you know, averages. So it's got some meaning. And if we look at these, we can see that I actually go to the next slide. Bonds have the highest return in four of 21 years. But the bonds return is greater than equities in seven out of 21 years. So okay, the bonds didn't win more than four out of 21. But they did better than equities in one third of the number of years. So that's worth taking notice of. That's good. So then we looked at equities one in five out of 21, which was really only one more year than bonds one. So that's pretty impressive too. And property wins in 11 out of 21 will us Australians in Melbourne and Brisbane and Sydney can probably just, you know, be happy about the property thing you're going at the moment. And cash one just in one year, which is probably what we could expect. Now, when property won at one big, really big equities are all over the place. And bonds have given a reasonably consistent return, even though it's often not the best return. So I was starting to feel comfortable at this point. Okay. Excellent. So what types of bonds? And if you're a big time, and you would be if you're listening to this, then you probably know all this fixed rate, floating rate, inflation of LinkedIn, annuity or index annuity, and some variants of that, which is some that amortise, etc. So we can probably, when fixes fixed, obviously, floating is usually based on the bank bill swap rate, often the three months, I think that's right. Yes, that's right. Inflation linked is some base rate plus the ABS inflation annuities. I have some because they were available. But I'm not a great fan because I really don't need some of my capital back each time. That just gives me a problem of finding another home for it. What a nice problem to have. Bond prices. Now, there's formula for calculating bond prices aren't going into that today. But it's basically the present value of the future interest payments, plus the present value of the face value, which you get back at maturity. But I'm not sure what use the formula is when the market determines the price anyway. So that's right. So when I'm considering a bond, I'm looking at the coupon rate. Is that a reasonable return? I'm happy with that. The rating of the bond, if it is rated, the yield, which if I'm buying an offer, then the yield and the rate of the same. But if I'm buying an existing bond, the market has re-valued up or down, then yield will be different. Time to maturity. Potential calls. When is the bond going to be called or potentially called? And how often do I get paid? When's the next installment? And how often is that? Alright, so moving on. So what did I do? Well, I started really slowly. I bought one, which was Sydney Airport back in 2012. Great. And within a few months, it had adjusted upwards. And my big guy said, you've done pretty well out of this, why don't you think about moving from A to B? I can't remember what the suggested alternative was. I said, yeah, okay, that sounds reasonable. I made money on the bond price. And I had no idea. I thought I was just buying a good one. So there you go. Alright, so experiences. These are some that I bought and sold in the last two years or so. I haven't gone right back to 2012, but just some of the recent ones. So SCT Logistics. It's a rail freight operator. They have a bit of a stranglehold on the east west rail link from Sydney to Perth. They're pretty big in the north south area. They're building a Anita change thing, I think parks or something like that with the rails are going to cross over. Yes, they actually ship like high consumables or consumables some more works type groceries and alcoholic beverages and things. So they have and they have some very big, large and consistent contracts over many years. So quite a nice stable infrastructure based type business. Yeah. Well, that's good. The you can see I only held that for sort of five months from June 15 to November 15. The SCT issue from fig was you took the fixed and the floating to participate in the deal. And I was happy with that. And then there was a good offer for the fixed and I kept the floating. I think I've still got it today. And the market valued that from 100 to 103.6 in four and a half months. And I thought that was a pretty good offer. And I thought that was likely fully valued. So I decided to bail out. Now this screen for the people listening and looking. This is just a screen done from an Excel spreadsheet. And I've got dozens of these in Excel. It takes the purchase price at the top there. It's got the sale price at the bottom. It's got the difference, which in this case is a nice profit on the bottom price. In the next column to the right, there's coupon interest and you can see I didn't stay long enough to actually receive any interest on this one. So the total return was $1,800, which is 3.65% of my 50,000 investment held for 135 days. So annualized that's 9.86%. So the way this spreadsheet works is that 135 days calculator on the second last column there is just doing an Excel calculation between the two dates, the purchase date and the sold date and then doing the annualized thing by multiplying 365 by 135 over 365 days. So hopefully people can follow that. Do you think that's enough explanation? I think that's pretty good. I think people should be able to follow that. So 9.86% happy with that. Next one, G8 education. People would know these early learning centres people. Purchased in August 13, sold in January 16, profit of 2700 on the bottom price for interest receipts on coupons there. Total return of $10,000 on the 50 over that time. That's 20% but annualized 8.47 and that was sold to fund a new issue. I had no particular desire to sell that one but there was another opportunity and I needed to pick something to sell. You've got a nice profit from that one as well. While we're talking, David has just asked, wants to ask what were the costs involved with buying new bonds? I have no idea what fig charges for brokerage because it's incorporated in the buy and sell price. This is very different to equities because those of us that trade equities know that our contract note has the brokerage on there. We look at that thing, that's a lot of money or whatever. It's a bit different in bonds because you don't see that. I've been asked before, don't I have a problem with that? No, I actually don't because if I go to the car dealer to buy a new car, I know he's making a margin and I don't know what that margin is nor do I care because if the price of the car is attractive, I'll buy it. The same thing here with the bond, I'm offered a price to buy or sell which includes whatever the margin, whatever the brokerage is built in there but if I'm happy with the overall price then I do the deal. I don't know whether people find that strange or not. It's really how the market works. That's how the global market works. Actually, a lot of the bonds Graham's talking about, he's bought at first issue. Yes. There is no brokerage although we are paying a commission on behalf of the company issuing the bond. We do get paid. I think generally I would say to people it's generally about 1%. It can be more and it can be less than that depending on many factors including how big the issue is, how hard it is for us to source the bonds. We very much are the middle man if you like. We match buyers and sellers so if we've got a lot of or if we've got the bonds for sale already, we don't have to source them or it's a very big liquid issue. It's easy for us to find them. It might be less. Equally the amount investors have invested with us so very large investors will get much better rates and smaller investors will pay a bit more than the bigger investors. Like anything, it varies. I think about a 1% I think is fair enough. A couple of other questions while we're on questions. Russell has asked, have you applied your Elliott Wave and GAN analysis to a long-term bond value return chart? No. I'm not sure that there's any real point in that. I suppose you could technically argue that there is but I think the technical analysis thing works best really long-term or does for me anyway. I find it very difficult to apply GAN or Elliott Wave in a short period of time like a few months or something less than a year or maybe 18 months. It always is clearer to me when I'm looking at GAN charts or Elliott charts if it's 5 or 10 or 20 years. I don't have a strategy of holding bonds for 5 or 10 or 20 years so I've never done the technical thing on it. Well it's slightly different isn't it because the bond maturity date and if it continues to survive it you're going to get your money back. You always know what the best case or the expected case is. I mean the worst case is the company goes belly up and it goes into a wind up and you're not sure of what you're going to get. However Moody's have done an analysis of all rated bonds that they've rated and any companies that have gone into like a wind up investors on average still get back 40% in their capital. So but it's not that it's a sort of a different dynamic to the market perhaps. It's a reasonable question I've never sort of thought that there was any benefit in me doing that. No no well no. A couple of other just quick questions while we're here asking questions. Max wants to know about the costs of flying to the secondary market of bonds. Yes I'd still use about a 1% roughly cost, a brokerage charge if you like. Again it could be more or less than that. We do if you do become a FIG client or RFIG client we would know that there are custodial fees. So clients need to open an account to transact and we need to provide a custodium and our custodian is JP Morgan and they charge us fees so we charge a fee for account keeping purposes and it starts at 0.2 of a percent. And nobody likes fees but some of them are inevitable. No yeah exactly this is true. I might let you keep going Graeme. Okay well we'll move on next slide. Fortescue, FMG Resources. Now this was a US dollar bond and look I confess right here I have never had a huge amount of success with US rated bonds. I always seem to pick the wrong side of the currency battle. Maybe that's just my luck but currency never seems to go the way I thought it was going to go. So this one was bought in January 15 which a while ago now and it was $50,000 in US so 59 in Australia. Sold in March 16 and it was struggling because of the currency but again there was a new issue coming so I needed to sell something. Suddenly Fortescue had a report where they trend their costs considerably. They started making a profit and the bond market suddenly went up a bit and I saw that as an opportunity to bail. Yes well that's a thing isn't it with foreign currency bonds it's not just the credit risk of the company that you're exposing yourself to it is the the currency as well unless you already hold US dollars or sterling or so you do have to factor that in. I don't like playing two games at the same time but sometimes you have to. Anyway 12.4% happy with that why am I complaining? Lutro financial seemed like it would never perform to me. I mean this is one of the low ones you'll see 4.7% annualized on the bottom right hand side there. I actually lost a little bit of money on the bond price and made a bit more on the coupon interest so you know I just looked at this month after month after month and I held it for you know a year but I'm not happy let's go. I think that's a good way to approach it too if you're not happy or things aren't looking as good there's possibly something better out there and yes so that was a residential mortgage back security that one which do they do pay principal and interest back there as you can see it's pays monthly which is quite attractive to some investors and residential mortgage back securities are actually one of the things we've been recommending now because most of them are investment grades so low risk but you can see higher returns. Equally they have like a capital structure diagram I'm hoping you understand what I'm talking about there but they have different tranches so you can choose your risk in in those tranches. This was the area as you can see. Yes so you were down the list a bit you're in a higher risk one so but even so I mean it was meant to be sort of around about 8% and I got four so yeah anyway that didn't work out. Sometimes Newcrest another US dollar again I've said here probably a mistake taking US dollars because I don't seem to be able to win that game but that's all right it paid me 5% over about 18 months so please complain. Well 5% is pretty good. Can I just answer a question there from Malcolm who's just typed in is there an opportunity for retail investors to purchase US dollar denominated bonds? Unfortunately Malcolm no there isn't. You must qualify as a wholesale investor to do that to invest in residential mortgage backed securities and US dollar denominated bonds and to do that you need to have a net of $2.5 million under your control or have earned $250,000 dollars gross for the last two consecutive years and we need an accountant's letter to state that so unfortunately not at this time. Okay CML group factoring and payroll and whatever um boarded issue March 16th held it for just eight months it seemed to be fully valued if you look at the the price there of $51,600 that's 103 basically and I thought yeah that's probably as high as that's going to go and I guess there was another opportunity somewhere so I sold that one. This is starting to look pretty interesting though with the return you can see there's $1,600 gain on the bond price $2,600 in interest over the time 12.75% return that's higher than I would have dreamt. Yes. So happy with that. Just a very quick question from Steady wanting to know if your spreadsheet brings each coupon down to a net present value or does it just take the total coupon? It's very simplistic and I know it's simplistic it could be have all sorts of more sophisticated calculations in there at the end of the day I think it's probably only going to make 0.1 or 0.2% on the return different anyway so I'm looking at broadly answers rather than fine detailed answers and also I guess too it depends on you know your your spreadsheeting skills and the amount of time you want to put into it and if you think you know about 12% well that's good enough yeah or plus or minus or if it's 11.9 I don't care no no okay Eric Insurance again this was an original issue from July to February earlier this year and it's an insurance company and insurance companies have their fortunes good and bad as the circumstances change this is a smallish company so I decided I'd keep it a bit short so I got out of there you know in less than a year hello for 208 days you'll see there so 9% is the total return which equates to about 16 annualized again we're starting to get some fairly high numbers so you know people out there will be saying whoa yeah I didn't think bonds could do that Newcastle Coal this is a consortium of coal companies that run the Newcastle Coal Terminal this was a US denominated bond as well from March 15 to July this year again currency small loss on the currency you can see I can't pick this currency game but enough interest to get me out of trouble so whereas the bond you know was denominated 12.5% I got 8 after a bit of a loss on the currency but 8% not to be sneezed at so no happy with that cash converters had them fairly long time you can see it goes back to September 2013 and would have been an original big issue sold in July just sorry September just gone very small profit on the bond price quite happy with the coupon interest 8% annualized return there's maturity September next year and the price at the moment is higher than the maturity price obviously the 100 so I thought oh well let's get out here take a little bit of a profit while it's on the table great and that's the ones that we've bought and sold in the last couple of years if we look at the current holdings now I'm still holding McPherson's no I learned this a while ago she doesn't like McPherson oh I just I've been a retail analyst and I just never felt it was doing well to be to give the company credit they've really uh to change things around and it's doing much better than when I think than when it was first issue so yes I've been happy happy enough to hold it now McPherson's is a bit of a you know everything but they're in manicure and I've got here lady Jane swispers Wiltshire Stanley Rogers you're a maid you know it's a real multifaceted business and sometimes that's good and sometimes it's not from March 15 then I sold 20 000 of it back in 16 and what I've done is done a calculation it's not shown on this page but you'll see on the right hand side in days held 376 days from the first sale of the part of it and then 569 days for the balance so I've actually calculated the annual return based on the amount of the capital that was applied for those two numbers of days so it's actually doing a proper calculation not down to the individual interest though so nine round about nine percent happy with that I think let's see these logistics this is the floating rate note which was issued at the same time as the fixed rate which I showed you in the sales earlier a little bit ahead on the bond price so far coupons are quite nice and that's showing 7.4 percent currently so these ones that I've held these are all bad as at the end of October which is now couple of weeks ago but it's the current numbers that I've used so that's potting along quite nicely integrated packaging this is an interesting one September 15 to October 17 so there's a couple of years there that's annualized holding period return of 8.15 percent but these will actually be redeemed tomorrow yes about 40 million dollars going back into investors profits and a bit of a bugger because we all have to find homes for that money yes yes there's a bit of a shortage of bonds so okay we're going to be tipped out of this tomorrow but we get 102 plus accrued interest so I'm happy with that that October valuation is about the price that it'll be redeemed at so I'm happy with that I'll get about 8 percent for my trouble it's not a bad day's play oh it's all right um Sunland Capital a property development model I think based by some Asian Hong Kong people or not sure but anyway there's there's Asian money in there somewhere as well um they've got a development just near where I live up on the northern beaches of New South Wales so I'm watching that with interest the development was probably 60 or 70 town homes and they were all sold the day of the release wow off the plant wow that quick yeah all sold the day about three four months ago thought all right I'm happy to hold the bond a bit longer so we're considerably ahead on the bond price you can see that's valued at about 106 which is getting up there a bit and starts to let you think oh maybe that's too high maybe it's going to come down from there maybe I should sell I haven't because nowhere else to put the money but 9.6 percent annualized at the moment and a payment due I think this week November 17 that's right impact group this is amortizing approximately two percent each coupon bought in February last year in the current valuation in October after the amortization we're a little bit ahead on the bond price a few nice coupons and a annualized return so far of 11 percent hello again happy with that I might just ask a couple of questions I've got a couple regarding the portfolio John asked do you mainly only buy the new issues I love to buy new issues if I can get them and if they're available and they come through the fig new issue pipeline then I'm always keen and I haven't seen one that I've rejected certainly not recently but sometimes you buy outside the new issues for instance I was chasing next DC for a while talk about next DC in a little while and I wasn't able to get their original bonds and there was a another one issued not so long ago and my fig guy was able to get me some of that and I would like some more of that so the problem with those is the market's already valued it up yeah that's been the case hasn't it that anything that we've bought to market pretty well has traded up and delivered good returns yeah so hence the keenness in acquiring a new issue if they're available but alas they're not always and um max has asked there appears to be a trading approach to your investment as opposed to a passive investment like approach do you have any comment on that yeah that's right I would call it active investment I have this thing in my head that says trading is more speculative than investing and I probably you know and the world outside listening to this might disagree with me they might be laughing now that's fine but I think it's active management rather than trading but I don't really mind which name you apply to it it's not a set and forget idea I'm not buying highly rated bonds that I feel I can leave for a year and come back and I'll still be there I'm pushing the boundaries a little bit and so I think you have to be active and and manage that a little more closely that's great I sort of sort of ties in with a question from Graham hello Graham nice to have you on the line here today and this is a different Graham than I know quite well he says that to the grant sitting next to me um you said you don't want capital back from annuities as it gives you a a reinvestment problem so why do you bother selling your bonds why not just enjoy holding them to maturity especially one like Sydney airport which was a great credit and a hedge against inflation well that's good question but if if a bond has gone from 100 to 102 or 103 in six months my view is it's not likely to double again in the next six months because the market has assessed it and validated what the market is and unless interest rates change the bond price is not going to change and figs pipeline is occasionally offering me new issues so a lot of the time I sell something to fund a new issue or I'm concerned that um yeah there's a call coming up and I really would rather take the price it's offered to me now rather than take the call price I don't know whether that's a good answer but no I think it's good and it actually just a game plays into another question from David who asked very early you suggested that determining the value is not worth it as the market determines value and I think both of us sort of would say that um we look at yields we look at what interest rates are doing we look at what competitors are doing what similarly rated bonds are doing or what companies in the same sector are doing there's a lot of things that we might assess as opposed to looking at net present values of coupons and and capital at maturity so it's a sort of it's a different way of looking at things but there's a lot of sort of indicators out there that we might use to judge whether it's good value or not and just simply the coupon on any given day if you're getting a six percent coupon today if I was showing an investor that I would say this is a high yield bond understand there are high risks with this you do need to keep an eye on it and here are your risks whatever they are I might try and list a few for the person but then if I was showing another bond with three and a half percent that would likely be investment grade much lower risk something you could set and forget and hold to maturity with a much greater at a much greater comfort level so it really depends on I think finding your tolerance for risk and the amount of work you want to do and do you think that's fair Graeme you have any other comments it's a case of part of it is I enjoy the game I suppose a friend of mine said to me a couple of years ago and I said remember it and he's way more wealthy than we are and he said oh how much do you need and I said Terry it's not about that it's about the game I enjoy the game yeah yeah and it's not it's nice to walk away with a profit yeah so well I made 11% on my bond or my portfolio's made double digit return this year so and you know typically people now if they haven't heard about bonds or haven't read about them they just think bonds are government bonds paying two percent and that's the problem because the commentators and the uncollers and those sort of people put bonds are this or bonds are that and then you've got to delve in and see what are they actually talking about yes and they're not always talking about what we're talking about they might not yes us treasuries and what they're talking about let's keep going okay yes let's keep going I think we've got a couple more of these CF Asia Pacific they're financing railway rolling stock and locomotives and that sort of thing 10 percent I won't go through the individual details people can see that to themselves but that was bought at the end of last year so held it for almost a year now a little bit of profit on the bond price although it's amortising there as well and some nice interest so about 10 percent happy with that I'm if Bentham litigation funding well there's always seems to be in need for litigation funding so I think they're probably going to be around a little while from April this year so it's a relatively recent one to October that's you know not quite six months I suppose and that wasn't an original issue you can see I bought that in the market or big sold it to me in the market a bit of profit on the bond price so when I looked at buying that I thought 51 that's 102 it's 7.5 percent it's senior secured the market's likely to take it up a little bit higher from there I thought and it has it's taken up to 106 if you like would you agree with that Liz I mean would you have bought that at 51 for seven I still like this bond it's been one of my favorite bonds since it was first issued of the originated bonds I like business I think they're smart guys I just I like I like this this particular bond so yes I even at the higher rate today I'd still probably be a buyer of this bond I think it's a good risk return equation and you know the fact you've got a double digit return in a short period sort of reinforces your decision to buy in the market at a higher price doesn't it look at that thought okay I need a home for some money to be invested what about this yes it still seems reasonable it still seems like a good deal let's do it and 12 um actually let go back to that one other one that was I going to mention which is not on here was next DC yes we talk about yes yeah we did yeah I was able to get next DC I don't have a slide of this but July this year and I paid $51,800 for the bond at the end of October it was valued at $53,000 so that's $1,100 profit on the bond price I haven't received any interest yet because it hasn't come around but I'm eight percent annualized ahead on next DC in well I've got here 99 days yes so I think that was probably a reasonably good decision as well yes I'd say yes looking at that I think very definitely yes um we've got a few questions do you have to take them now so um Alan asks where do the current valuations come from given that the bonds are unlisted so Alan the current valuations come from our facilitation group so they're the group within fig that trade bonds so they're buying and selling and they mark the prices of the bonds so they will adjust the prices according to supply and demand if there's a significant demand and not enough supply they'll push the prices up and equally if there's a lot of bonds being offered for sale they'll push the prices down so it's what we would term our own internal mark on the on the bonds Lars asks about what does amortization of the bond mean so an amortizing bond means that um it's repaying principal as it goes along so it's you are reducing your exposure to the company each quarter or half year or month it's repaying some principal to you it's similar to annuity but different yes it's similar to annuity but different um Kim asks Graham are you concerned about the lack of liquidity in another crisis yes yes absolutely um it's one of those things that I don't really feel that there's any real alternative to doing anything about it and the problem is I can't see that I could sell all my bonds tomorrow and put it all in term deposits at 2 percent um that's not going to cut it so I think that I come back to the active management and watch it very closely um and just try and be sensible be careful and probably I'm very interested in what the stock market's doing right now because um can I digress a little yes of course yes um I said we sold all our equities in October 2007 actually we sold some before then a few months before we went to Europe for holiday we came back and we sold the rest and I was following the GAN chart for 1987 and 1997 in 2007 so the 10 year and the 20 year chart and 1987 and 1997 were pretty much an exact pattern match for 2007 so I was pretty confident that early November was going to be the high and so we sold out if you go forward another 10 years from 2007 to 2017 the patterns are not quite the same but there are similarities so is that pattern going to be repeated I don't know and I'm not making any predictions at all but I'm seeing there's um maybe a need for some caution probably leave it at that I think fair enough fair enough um so John asks what objective research material do you access to evaluate weight of potential bond purchase oh look I read all of the research that comes with the with the new issues and and there's company research on existing issues as well um but more than that I like to have a gut feeling about the company now I'll give you an example here which comes to mind a couple of years back I was holding a bond called plenary now the plenary group is a project management project erecting company and in my construction days I worked on a project with plenary we built about a hundred million dollars worth of defense force housing on five or six defense force bases and plenary put the deal together they employed the design consultants they employed the contract to the builders and they had people to maintain it for 20 30 40 years afterwards and they were a slick professional well-oiled machine and so when their bond became available I had no hesitation in purchasing a slice of that action because any heck would they were and my big guy um said a couple of times oh great you've done well out of this bond why don't you sell us no I love this one and it was about three or four times he tried and eventually I said come to my salt and it was for the right reasons but so I try and get a bit of a feeling for the company as well a bit like we talked about sct earlier and looking at rail freight east west and north south and the fact that they've got the stranglehold on the interchange in parks and all that sort of thing I think oh this is a pretty sound business what's the research say research was okay so we're ahead yeah our researchers fairly detailed on the new issues typically sort of a 20 page report will list strengths but also risks because we certainly want our investors to understand the risks of what they're investing in and to make that you know round of decision so um I think that's pretty important uh we give it a very thorough going over because we certainly don't want any of our clients to lose any money so um no absolutely not and um we have a question um from Alan asking do you buy any boring bonds such as Australian government um when you think the the market yields might be temporarily too high I haven't yet but um you know that's got to be in the back of your mind as a possibility for the future because if we are headed for a bit of a downturn then that'd be the first place to go um yes uh and we have a comment from Simon hello Simon it's so nice to hear that you're on the line um and he he just mentions vulnerability the stock markets are at risk he's Simon saying a correction would affect higher risk and longer dated bonds a case for going shorter and less risk yes that is certainly what we're suggesting to our clients at the moment are shorter dated lower risk and that's one of the things I didn't mention as Graham was going through his portfolio you'll recognise he's got quite a number of bonds in there with different maturity dates and because he has uh quite an extensive portfolio with different maturity dates in any one year some of the bonds may um mature and so there will be a sort of a liquidity coming back to him uh and that's what you do with a shorter dated portfolio if you're uncertain of of markets and maturities you do have some rolling off in the next 12 months or um the next two years three years uh that's quite a reasonable strategy to employ and Pat's ask do you only purchase bonds in $50,000 or do you also buy in smaller denominations I've tended not to go below 50 um but uh it depends a bit on what you can get to um I know that that McPherson's one I think I've only got 20 or 30 of that left after selling some and uh you know if if uh there's a nice bond and it's only available in the smaller parcel I'd still be interested yes and most of them are from $10,000 so you can you can still have a very uh diversified portfolio with uh our minimum which is $250,000 you could have 25 bonds of $10,000 each yeah I might let you keep going so we'll digress a little bit then that's all right the this is the sort of final bit to wrap up about what I've learned and how I've done and all that sort of thing so if we go into that now um this is just a chart that you can get off the fig website that shows you you know the percentage of floating fixed annuities um and by asset type senior sub debt whatever um sector corporate financials property etc um you can look at that later um the cash flow the the fig website gives you your cash flow every month for the next x years depending on when the last maturity of the bond you've got so I can know to the dollar uh how much income I'm going to receive every month next year every month the year after as long as I don't buy and sell stuff um and I think that's that's probably more solid information than I get with equities because if I'm holding you know the banks or Telstra or BHP or whatever then I've got an expectation about what the dividend might be next year but I don't know for sure no whereas with the bond I do um and I can plan my cash flow because obviously you can see here there are some high months and low months now um some bonds will pay you back I don't think I've got any that are just annual I've got some six monthly quarterly and some monthly so obviously some I've spawned in one given month and you'll get a lot of money in the door and others uh it's a bit lean so you have to balance out your cash flow to live on that sort of thing but it's all there for you to see so however done all right well if we look at the ace x200 over the last three years um the last year was pretty good 9.45 but average three years um 3.67 per cent per year not sure equities investors are smiling you know all that much at the moment uh and my portfolio uh last year was 10 under 10 percent you know nine point high nine percent so it's fine so whatever look thought I was just buying a coupon as I said at the start I had no idea and probably if they want to dance that the bond price was going to change the way it can I I figured that there was a little bit of movement but I had no idea that uh we could actually make a little bit of money on the bond price I was just buying a coupon I learned to watch the call days because a couple of years ago I was caught asleep um didn't cost me any money but I don't know how did this happen be aware of market interest rates now everybody out there listening will have their view of what they think the market interest rates are going to to to do for me personally I can't see anything changing for a couple of years but there are various commentators that says oh well next year the RBA is going to put rates up uh don't know that I can quite agree with that but the RBA is smarter than me so won't say and don't have favourites not to withstanding what I said about plenary because that was certainly a favour I like new issues we've already covered that I look for companies with stable cash flows so um you know well covered in current times we've talked about this also looking for shorter dated and high yield um talked about that too so how long are you going to hold a bond well there are only three options really you can hold to maturity receive the coupon interest along the way and the face value comes back at maturity so you run a risk of interest rate movements over the time so if the bond is five or ten years then what's market interest rate is going to do in that five or ten years um and the risk of the company fortunes changing uh so again you know you've got to manage that as well or monitor that as well I think option two is sell private maturity so you're holding for a period you can receive the coupon interest along the way sell when you think it's appropriate and hopefully make a little bit of money or maybe a loss the risk is you sell too soon and the price goes up after you sell how often have we been in that trap or the risk of not being able to achieve the same yield elsewhere um so you're watching that as well or third option you get called and the issuer pays you back which is happening yes yes that's that's right is that they think they can get cheaper funding somewhere else they're taken over and the company um you know has other funding availability ability exactly uh they they will will repay much to our um our horror our horror times especially when there's a good coupon so considerations this is a is that a new issue obviously a power and existing by the premium or a discount okay what type is it is it fixed floating inflation ring you know if I've got I think only three floating at the moment because the floating rate notes are not easily available all that much at the moment no but there's not a plethora of them out there looking for them well with interest rates so low yeah companies natural preferences to issue fixed yeah because yeah they think interest rates might go up they'll take that two or three or four percent yeah and be happy and be happy exactly um what's the yield we know what that is how long is it the maturity yeah likely interest rate moving in the time and what might affect this one and what do I think about the company I don't know what are their prospects uh they're manufacturing fax machines mm don't like that coffee is it rated um a lot of them are not these days and and ratings an interesting thing I think it's more a question of if the company can issue a bond and have it taken up by the market unrated why are they going to pay money to the rating agencies they don't need to no unless they can they think they can get it at substantially cheaper um coupon than what they would otherwise pay if it's rated yeah it's rated yeah call dates how are the market value at what risk am I taking now we talk about risk in a minute am I being adequately rewarded of course read the research understand the business all this is obvious stuff so I've already said you know last year nine plus percent le 10 annualized holding period returns you've seen between about three and 27 typically in the eight to ten percent range and my logic says that's all I need to live on and to cover inflation and all for better times now um probably I'm very heavily weighted in bonds at the moment I don't really expect to stay that way forever I'll be more the Benjamin Graham 50 50 perhaps thing and I'll get back into equities when I'm comfortable that equities market has a future uh I don't think it does at the moment very hard to find value it is it is indeed so I monitor performance every bond every month so those spreadsheets screenshots I showed you I update those every month with the end of month valuation report fill that in and monitor and see how it's going we've already said it's active um I've got a watch list there's a couple of bonds at the moment which um would be on my sell list when the opportunity comes up and I turn over the more risky stuff more frequently than the less risky stuff their fortunes may change um my last point really is about this risk we reward curve and everybody would have seen versions of this that show you know the higher the risk the higher the reward should be and you can see bonds there between cash and property and safer than shares and less rewarding than shares now back to Benjamin Graham Benjamin Graham disagrees with this and says old sound principle those who can't afford to take risks should be happy with low return and he says that the rate of the return which you should aim for is proportionate amount of risk you read your right the Benjamin Graham says no our view is different the rate of return should be dependent on the amount of intelligent effort you put in rather than the risk that you're prepared to take the amount of work you're prepared to do so the maximum return would be realized by the alert and enterprising investor who exercises maximum intelligence and skill and there's nothing in there that Ben Graham says about maximum risk so do the work Warren Buffett says investing successfully you don't need to be super clever you just need to concentrate I think the point that I want to leave people with here is that I don't claim to be super clever there's a lot of people listening today that'll be way cleverer than me my take on this is that I do a fair bit of work and I think it's the work that gets the results rather than the exceptionally high IQ or cleverness so that's pretty much it for me well there's a plethora of questions so let's start with peter peter asks in the case of bonds how important in your selection process is the issue of repayment or refinance at maturity I don't that that's probably down number 10 or so on my list of things to do and I don't usually get too interested in that because I don't really plan to hang around that long if if a bond is 10 years then I'm not going to still hold that bond in maturity unless you know the whole world turns pear shaped and I have to my plan would be not to hold it that long and a five-year bond I probably want to be out before the first call date refinancing risk for the company isn't really on my radar maybe it should be oh well you everyone has their own strategy and they find what they're comfortable with so it you know roughly 50 percent of our investors would be hold to maturity and roughly 50 trade so right or active investors like yourself so peter also asks this is another very good question what are the main exit signals used for both for both shares and equity shares and bonds big problem exit signals for shares and bonds well in my head they're completely different if it was equities let's cover that because it's simple for me an exit signal would be completely technical support and resistance on the chart break of trend and that sort of thing that would be my exit signal if it was an equity and that's pretty straightforward and pretty easy exit signals for bonds I suppose if you have a view that the company fortunes may change then there's a subtle sort of exit signal there perhaps but I think the exit signal for me on bonds is they're a call approaching and is the current market value higher than the call value then that's an exit signal I'm not too sure that there are many other you know straightforward exit signals for bonds the company fortunes and the approaching call possibly if you had a view on interest rates you're holding a fixed right bond or you had you know you wanted to go floating to move to floating or vice versa or you know a tail risk inflation a nasty inflation sting that might be another one lots of other questions here Russell's asked this lovely question have you ever made a loss on a bond oh yeah I'm not not in the last couple of years so they didn't figure in today's presentation but oh well there was one there which was the US one the the losses on I mean I've got one or two where there might have been a hundred dollars or something so small really small but those US ones I mean there would that new castle coal infrastructure I think was about a nine thousand dollar loss which was currency yes so yes I've made a loss yeah and hopefully I'll learn something yes yes um so a number of other questions here and I'm just going to run through them do you outperform the bond indices or the bond funds have you ever compared your company to those I can tell you that you would outperform right uh the particularly the bond funds so the bond funds uh we find in a low interest rate environment they're still taking the management fees right so they typically underperform the indices nearly nearly all the time I think something like 75 percent of managed bond funds underperform their benchmark so hard very hard to uh to pick a winner um in terms of the indices it's you're at Australian high yield predominantly your portfolio there there is uh only just um there is an Australian high yield index but it's not very old it's quite a young index because it's not a very developed market and figure at the forefront of the market there are other issuers nams issued a couple um there's a there's a few other issuers there and um john asked do you prefer fixed or floating rate bonds you have any preference there um I think it's uh really depends on the times and I think sort of in the near future maybe in the next six months I'll start to look for some more floating rate bonds because obviously as the although I don't think interest rates are going to increase anytime soon ultimately they will yes um and one would need to move into floating but the problem is the supply at the moment that's very true we're really chasing hard for uh for bonds and uh if you are interested in any um you may be waitlisted for them because they're they're just there isn't the issuance we would would like and uh sorry I forget I've forgotten the gentleman that asked but someone did ask you know do we expect any new issues or inflation link bonds uh not at this stage we don't um and certainly we would hope that FIG will with FIG originated bonds continue to issue roughly one a month uh there'll be a quiet period leading into Christmas and January but otherwise roughly one a month we would uh hope hope to issue but there has been record record issuance of bonds this year in the institutional over-the-counter market but demand has been significant from Australian investors as well as Asian private buyers and Canadian super funds it's very much a global market and there is a lot of cash out there looking for a home and bonds are one of the favoured places because you do have that uh that that um certainty that if the company or the entity survives you get your capital back so it's the game sort of has become a bit more about capital preservation rather than high returns and that's probably about where it should be too um I'm obviously aware that internationally the corporate bond market is way way bigger than the equities market and yet in Australia it's minuscule um so hopefully we'll catch up uh at some point we sure hope that that's true a couple of other questions Alan's asked is there a lack of is the lack of franking credits a concern when holding such a large bond waiting I think the franking is always part of your return calculations so if you're looking at equities particularly if it's a self-managed fund like ours is in pension mode then the franking comes straight back as cash if you like so that's part of the income received that obviously part of the calculation you're looking all right well if I'm getting x equities return including the franking why return from bonds um you're looking at the total return so franking's part of that yes yeah yeah um Tony asks um if he doesn't have equities in his self-managed super fund what's the maximum percentage of your portfolio that should be invested in corporate bonds so no equities how much how many corporate bonds should you and do you want to have a go at that well I'm just going to go back to Benjamin Brian because I can't um offer any more insight than his he says 75% bonds and 25% equities at this time in the cycle um confess that my bond portfolio is a little bit more than 75% not a huge amount but a little bit more than that um but Ben Graham says that's the maximum so you know yes yeah it's um I think it just goes to show that really well um known in global investors recognize the need for investors to hold an allocation to bonds and Warren Buffett's the same he follows the Ben Graham 75 25 percent and in fact he uh not that long ago said to his wife when I die make sure 10% of everything we hold is in government bonds US government bonds so imagine that amount 10% of his entire value well it's a lot of money so they're a government that's issues that much yeah that's true um but I think that's uh you know that's one of the major points for me in this asset class that it is it is generally low risk and defensive and protective but you can um make it work and you can get better returns than what your um what has shown up front and um let me just say with Graham's portfolio and I should make this point it is a high yield portfolio and he works hard to get those returns it's not a set and forget and I know have known Graham for years and I know he follows those names closely and he reads the research in the wire the new the weekly newsletter um so if you are interested in becoming a FIG client and interested in our high yield bonds please make sure you do read the research and understand the risks our minimum investment now to become a FIG client is $250,000 it has increased this year from a smaller amount but we found our business is a we give a nice level of service I think we talk to our clients you can talk to the analysts we have events like today we produce a lot of education and research and um we want to have that relationship with our clients and to have smaller clients you know smaller volumes more clients with smaller volumes it just wasn't it wasn't really working so again we're here we would love to talk to you I'm very happy to talk you through possible portfolios that are available there are some now available on the website if you go on to fig.com.au there are portfolio samples there so you can get an idea of what bonds are available at what returns I'm going to try and sum up Graham do you want to have any last word or any last piece of advice general advice I just want to make the point that everybody out there shouldn't thinking that I'm sort of smarter or anything like that because I said there's a lot of people out there at least as smart as me and most smarter and I think if people are prepared to do the research put in the work and the study and whatever then they can do pretty well thank you very much I just want to thank you all for joining us today it's been a delight to have Graham along I hope you've enjoyed his presentation when I saw it at the Australian Investors Association the National Conference it was a different way of looking and thinking about how to get into bonds which I particularly liked and you're very frank way of and very thank you for being so open and sharing with us your returns and your your thinking and I hope that's helped that's helped you we are all here there's a lot of experts in fig happy to talk to you at any time and thank you very much for joining us this now concludes the afternoon good afternoon thanks everyone