Noninstitutional fixed income and the future

On 20 July, KangaNews and National Australia Bank hosted their second annual Fixed Income Beyond the Institutional Sector Summit in Sydney. With more than 500 delegates in attendance the event went to a new level in 2017, as speakers shared views on how noninstitutional investors will engage with the fixed-income asset class in a rapidly changing world.

“National Australia Bank’s expertise and capability in debt capital markets means we are uniquely positioned to introduce investors and borrowers to each other, which is an important part of supporting growth in the Australian market. This growth also allows us to hold less debt, which is favourable in terms of how we manage return on equity and risk-weighted assets.”

“The typical return objective for a balanced superannuation fund is around CPI plus 3 per cent. In this context, we can accept all the sell-side arguments about constrained growth in the banking sector and, frankly, not care – because the banks are still offering gross yield of around 8 per cent. We shouldn’t lose sight of what we are and what our objectives are.”

“A lot of people have interpreted ‘unquestionably strong’ as a benign outcome for the banks. But the banks have been forced to raise 250 basis points of equity since June 2014, which is almost A$40 billion. When unquestionably strong was first canvassed, most analysts thought the shortfall would be A$10-20 billion – so we have already gone a lot further.”

“There are ways for private or smaller investors to access wholesale bonds – which is important for diversity and income. This includes organisations – like Laminar – that provide access to smaller parcels, typically A$50,000. For those qualified as sophisticated investors this is an important investing opportunity.”

"Our business at the moment is about 85 per cent fixed-rate bonds, though we offer floaters and probably expected greater takeup of them – given virtually everyone believes we are either in or close to a tightening rate environment. The reason for this preference is that our investors are generally hold-to-maturity types, and they are investing over short enough duration that forthcoming rate hikes don’t scare them as much as one might think.”

“I would love every Australian corporate bond to be available to all investors, for instance via XTBs. Australia is antiquated compared with the rest of the world in the ability – or inability – of small-scale investors to access senior bonds. Senior debt is the safest part of the capital structure, and it should be a government imperative to get all investors more active in secure fixed income.”

"There is certainly a desire to make bonds as accessible to noninstitutional investors as equities are, and we have seen some steps forward including on the regulatory side. But it is still hard to persuade corporate issuers to access this liquidity, so it will be important to continue to lobby on behalf of this asset class.”

“We’re trying to do things a little differently to ensure we get supply to the whole market. We tackle the provision of debt capital as more than just as on-balance-sheet lending and we look at financing solutions from the client perspective within NAB. This is really important in the way it allows us to put a range of solutions to borrowers and thus bring a variety of supply to the market.”

“The scale of demand for assets in Australia, including the number of investors looking for fixed income, gets larger all the time. We’ve seen this coming for 10 years but it’s playing out now. In this context I think it’s important for us to be working to provide more, and more interesting, product to the market.”

“In our lifetimes, we will see AI providing the greatest opportunity to enhance human intelligence. If the rate of computing growth continues, by 2023 you will be able to buy a computer for A$1,000 that has the computational power of the human brain. By 2050, for A$1,000 you will be able to buy the computational power of the human race.”

“Information has become ubiquitous in the investment industry. Historically, institutional investors often had privileged access to information – but I think this has changed. What has not changed is the need for insight, and it is this that will continue to separate great returns from average ones.”

“Artificial intelligence will create numerous business opportunities in the next 5-10 years – in fact, I think it will fuel the whole economy and the next generation of jobs. The cost of modelling is set to drop dramatically. This will reduce the costs and improve access to services and markets, making it easier to innovate and create new businesses and jobs.”

“People often jump to the 'Skynet scenario' of machines being in control when thinking about this technology. When I ask scientists when we will reach the point in time where machines can do all of what I do, they tell me this will not be in my lifetime. This is all happening incrementally. We should be aware of the technology, we should think about the technology, we should take care with the technology. But we should also move with it without being scared of it.”

“The revolution in how banks fund themselves since the opening up of wholesale markets and the drive for longer-dated funding has really driven our interest in socially responsible markets. It is vital for us constantly to monitor our investor base, understand what it wants and have a handle on where it is going.”

“The volume of capital held by asset owners globally is more than US$70 trillion – about the same as the GDP of the world. The way this capital will be deployed over the next 20-40 years will have tremendous ramifications, and the externalities of this deployment will increasingly have an echo-chamber effect on the performance of all funds.”

“If I look at our ultra-high-net-worth and next-generation client base, what they really engage with is purposeful investments. For impact or innovative investments the return is a consideration but the investor is also excited to think about, understand and participate in what his or her investment is actually doing.”

“The advice we give noninstitutional, not-for-profits and mum-and-dad investors really matters when it comes to sustaining fixed-income investing to deliver consistently beyond the institutional sector. Advice is absolutely crucial for the sector going forward.”

“I would like to see a change in the framework to give retail investors access to more fixed-income product. Even when we get a bond allocation, the current framework we’re forced to operate under means we often can’t get bonds to the clients we would like to. This is a very big issue for us.”

“Retail clients struggle to get access to the corporate bond market and are often restricted to hybrids to gain yield in the capital structure. So it is important to ensure that the statement or record of advice make clear the risks in a high-yield security. I can’t imagine too many retail investors would bother reading a product disclosure statement so they are reliant on their advisers explaining to them how these instruments work.”

“Technology isn’t just about high-tech sectors, and there are many ways we use technology to gauge efficiencies. We check drivers are driving the trains in the best way for optimum fuel efficiency. We also have monitoring equipment on tracks that can determine the exact moment train wheels need repairing, rather than doing this on a per-kilometre basis.”

“A lot of the noise around bank capital regulation has focused – and will continue to focus – on how profitability and bank equity will be affected. I think a more interesting angle is to think around how bank executives will address the challenges their organisations are facing, and how they choose to respond.”

“I’m not sure the government has done the best job of explaining its fiscal position – it certainly doesn’t seem to resonate with the populace. Australia’s government debt-to-GDP ratio, including federal and state governments, is less than 40 per cent. The US is above 100 per cent, and the UK is at 90 per cent. There is plenty of space to stimulate if needed.”

“We raised our bond at what we deem to be a reasonable interest rate with competitive terms, so I am not sure what benefits we would have gained from accessing the market as a rated company. For Capitol Health as an issuer, the benefit of getting a credit rating really wasn’t there at the time.”

“Investors that understand our funding structures are very comfortable with them – we know this because they invest over and over again. What’s disappointing is how big – or small – this pool is. The pool of fixed-income investors is small overall in Australia, but even within it further education on our asset class would help.”

“The positive state of the RMBS market has been supported by nonbank and regional-bank issuance, which itself reflects the changing nature of loan origination and distribution. Specifically, roughly one in every two home loans in Australia is sourced through the broker channel.”

“As you go down the capital stack, the historical losses in the Australian mortgage market remain negligible – the market performed well through the financial crisis and every other cycle. A single-A rated RMBS note might pay a significant premium over the current Australian rental yield and still offer many times the level of protection in the form of excess spread and credit support.”