Interview: Where the richest investors are putting their money

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Sean Aylmer: Welcome to the Fear and Greed daily interview. I’m Sean

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Sean Aylmer: Aylmer. Last week, we saw the US Federal Reserve pause

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Sean Aylmer: on interest rates, but more hikes are in the offing,

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Sean Aylmer: well, at least, we think they are. And in Australia,

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Sean Aylmer: with a hot labor market and inflation that’s still too

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Sean Aylmer: high, economists expect the Reserve Bank to keep increasing interest

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Sean Aylmer: rates. So what’s it all mean for investors? Where are

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Sean Aylmer: the opportunities in this environment, both here and overseas?
Remember,

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Sean Aylmer: this is general information only and you should seek professional

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Sean Aylmer: advice before making any investment decisions.
Anto Joseph is the

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Sean Aylmer: Chief Executive Officer and founder of investment FinTech Stropro. Anto, welcome

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Sean Aylmer: to Fear and Greed.

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Anto Joseph: Thank you, Sean. It’s good to be here.

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Sean Aylmer: So how would you characterise the investment environment right now?

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Anto Joseph: Yeah, it’s actually interesting that you sort of mentioned about

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Anto Joseph: the Fed pausing. I think even though US inflation is

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Anto Joseph: cooling and the S&P 500 is at sort of 13

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Anto Joseph: months high, economic uncertainty is still very much persisting, particularly

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Anto Joseph: because it’s challenging a lot of what the Fed decisions

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Anto Joseph: might look like. I mean, core inflation exceeded expectations at 5.3%.

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Anto Joseph: So I think we’re still fairly a long way away

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Anto Joseph: from that Fed reserve target of 2%. But to characterize

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Anto Joseph: the environment, to sort of answer that question, I think

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Anto Joseph: there are three things that are really vital, what investors

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Anto Joseph: are thinking about, and that’s really, there’s a clarity of

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Anto Joseph: market direction. The best reflection of this is probably seen

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Anto Joseph: in the trading volume we saw in the Australian equity market,

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Anto Joseph: which was down 30% year- on- year in May. And

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Anto Joseph: volatility has remained very low and there’s less buyers in

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Anto Joseph: the market at the moment.

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Sean Aylmer: Is that because of a lack of certainty? Is that what

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Sean Aylmer: triggers that?

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Anto Joseph: I would say that it’s, yeah, very much a lack of

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Anto Joseph: certainty. I think you can look at even the Fed

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Anto Joseph: as an example where terminal rate forecast is still struggling

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Anto Joseph: to reach a consensus, the point at which interest rate

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Anto Joseph: curve really reflects the highest point of future rate expectations.

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Anto Joseph: It’s not very clear what’s happening.
As you mentioned, Citibank

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Anto Joseph: is forecasting up to two more rate hikes further this

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Anto Joseph: year, but that current pause might sort of suggest otherwise.

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Anto Joseph: More interestingly, I think what investors tend to forget a

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Anto Joseph: little bit about is the market impact of the rate

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Anto Joseph: hikes, we’ve already seen this, it tend to be a 15 to 20-

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Anto Joseph: month lag on the impact of fiscal tightening, which will

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Anto Joseph: be only felt in sort of medium to longer- term.

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Anto Joseph: But the other thing that’s very interesting is, I guess,

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Anto Joseph: this liquidity cliff conversation, that passing of that debt ceiling

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Anto Joseph: in the US obviously has led to a bit of a rally in

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Anto Joseph: US rates, it’s because the US treasury has had to

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Anto Joseph: rapidly raise debt to maintain liquidity, which means that the

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Anto Joseph: Federal Reserve balance sheet is likely to shrink. And so,

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Anto Joseph: you’re seeing this that this forecast of, potentially, a trillion

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Anto Joseph: dollar withdrawal of liquidity between now and July, which could

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Anto Joseph: bring back a little bit of volatility into the market

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Anto Joseph: and maybe lead to a bit of a pullback overall.

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Sean Aylmer: Okay. That’s the US, and we are always very focused on

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Sean Aylmer: the US. I just want to ask you, Anto, about

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Sean Aylmer: Japan, because that’s had quite a run in recent months.

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Anto Joseph: Yeah, absolutely. And I think that’s very interesting. At Stropro,

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Anto Joseph: one of the things that we do is we work with a

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Anto Joseph: panel of investment banks. So we understand where a lot

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Anto Joseph: of investors, particularly institutional flow, is moving. And the Japanese

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Anto Joseph: financial system, which we’ve observed over the last sort of

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Anto Joseph: six months, has been the healthiest it’s been in the last

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Anto Joseph: 40 years. The largest Japanese banks have strong retail deposit

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Anto Joseph: bases, there’s higher liquidity coverage than US banks at the

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Anto Joseph: moment. Year to date, Japanese markets have 18.5%, it’s at a 30- year-

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Anto Joseph: high.
And I think there’s a few contributing factors that

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Anto Joseph: sort of lead to that. One, the weaker yen has

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Anto Joseph: also strengthened exports, which is important as a GDP driver. The

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Anto Joseph: Bank of Japan is maintaining a fairly dovish stance to

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Anto Joseph: try and heat up the economy.
But what we saw

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Anto Joseph: at the start of the year, which is quite interesting,

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Anto Joseph: is that the Tokyo Stock Exchange has increased some of the

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Anto Joseph: regulatory reporting requirements for Japanese equity market, which address some

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Anto Joseph: of the historic inefficiencies that existed there, which means that

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Anto Joseph: you’re likely going to see a little bit more value

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Anto Joseph: creation in the equity market as that cleanup happens.
And

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Anto Joseph: so, balance sheets of Japanese companies at the moment seem

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Anto Joseph: to be stronger than their global counterparts, and that’s where

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Anto Joseph: you’ve seen a significant amount of flow move into public

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Anto Joseph: markets like Japan.
But on the other side, when you

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Anto Joseph: talk about where flow’s going, a lot of high net

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Anto Joseph: worth investors are sort of veering away from that 60/ 40

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Anto Joseph: split between equity and bonds and leaning more towards alternatives.

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Sean Aylmer: Stay with me, Anto, we’ll be back in a minute.

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Sean Aylmer: I’m speaking to Anto Joseph, CEO and founder of investment FinTech

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Sean Aylmer: Stropro. You do a lot of work with ultra- high

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Sean Aylmer: net worth individuals or you have data about where they

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Sean Aylmer: are putting their money. When you’re talking about alternatives, just

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Sean Aylmer: define that for us and then, maybe dive a little

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Sean Aylmer: deeper into what they’re interested in.

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Anto Joseph: Yeah, absolutely. And I think that’s a great place to

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Anto Joseph: start. Alternative investments can be quite broad, but they typically

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Anto Joseph: are anything outside of those traditional asset classes, equities, bonds,

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Anto Joseph: property. And so, they can include things like private equity,

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Anto Joseph: private debt or asset- backed debt or private credit, hedge

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Anto Joseph: funds, venture capital, private equity, and structured investments. So the

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Anto Joseph: primary objective of an alternative investment is to provide investors non-

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Anto Joseph: correlated market exposure to enhance diversification in the portfolio. So

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Anto Joseph: I think alternatives are very much on the rise in

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Anto Joseph: that sort of ultra- high net worth segment. We’re seeing

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Anto Joseph: that in portfolios globally, the average is sort of 26%

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Anto Joseph: equity, 17% bonds, and the rest being allocated to alternatives,

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Anto Joseph: whether that be property, private equity, venture capital. So there’s

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Anto Joseph: clearly a strong trend to have lower correlation to the

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Anto Joseph: market or non- correlated market exposure.

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Sean Aylmer: So the obvious question, why?

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Anto Joseph: Yeah, so I think, really, here is because probably, as

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Anto Joseph: I mentioned before, there’s less buyers in the market. And

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Anto Joseph: I think if you talk to most institutional commentators, they’ll

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Anto Joseph: talk to you about this sort of subdued equity market and

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Anto Joseph: subdued growth environment, at least over the next 12, 24 months.

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Anto Joseph: And typically, where alternatives will play really well is in

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Anto Joseph: these types of sideways markets or highly volatile markets, they’ll

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Anto Joseph: try to provide sort of consistent returns without relying on

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Anto Joseph: a bull market. So we’re seeing this flight to alternatives,

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Anto Joseph: but more importantly, a flight to quality alternatives. So typically,

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Anto Joseph: assets like venture capital, private equity, they need to be

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Anto Joseph: held fairly longterm and have liquidity challenges. What we’re seeing

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Anto Joseph: right at the moment is we want non- correlated market exposure,

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Anto Joseph: but we also want this kind of nuance of liquidity.

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Anto Joseph: And so, what we’re seeing, particularly in Asia, US and Europe,

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Anto Joseph: is this appetite towards structured products and structured products or

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Anto Joseph: structured investments have been financial instruments that have been really

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Anto Joseph: customised to meet specific investor objectives, and they’re packaged up

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Anto Joseph: through a combination of bonds and derivatives by large institutional banks.

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Anto Joseph: But you are seeing this huge appetite for structured products

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Anto Joseph: because they can be really tailored around any sort of

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Anto Joseph: market scenario or investor objective.

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Sean Aylmer: Okay, so you’re going to have to break that down

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Sean Aylmer: even further for people like me. So what you’re talking

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Sean Aylmer: about, it might be an asset that has some inflation

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Sean Aylmer: protection built in, it’s got a floor in it, so

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Sean Aylmer: if an asset price falls below something, it might trigger

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Sean Aylmer: a sale or something. It’s almost like taking a bunch

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Sean Aylmer: of things out of the toolkit and creating a product

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Sean Aylmer: around that using derivative products and hedging, am I right

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Sean Aylmer: in that?

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Anto Joseph: Yeah, you’ve pretty much nailed it. Structured product, by virtue

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Anto Joseph: of the term structuring, you’re structuring a series of components

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Anto Joseph: together. And so, firstly, they’re typically issued by a global

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Anto Joseph: investment bank and can be linked to any listed asset

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Anto Joseph: class predominantly across the world.
We work with sort of

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Anto Joseph: nine institutional trading teams, but whether a client is looking

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Anto Joseph: to get enhanced income and mitigate some of that downside

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Anto Joseph: risk, that can be a structured product or investment they can put

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Anto Joseph: together. If a client’s really concerned or an investor’s concerned about, ”

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Anto Joseph: I really have no certainty where the market’s going, I’d

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Anto Joseph: rather protect against maybe a bearish move,” you can provide

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Anto Joseph: strategies which are hundred percent capital- protected, but can provide

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Anto Joseph: some layer of exposure to the market, or you can

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Anto Joseph: structure a product if you have a growth mindset to

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Anto Joseph: take advantage of that and participate in growth while still

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Anto Joseph: maintaining some level of protection. So they’re highly versatile, but

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Anto Joseph: can be really structured around any objective a customer has,

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Anto Joseph: but also gives you that advantage of having liquidity as well.

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Sean Aylmer: Okay. So a couple of questions in all this. So we’re getting into structured

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Sean Aylmer: products and high net worth individuals pushing into alternatives. First

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Sean Aylmer: question is, is there a concern when so much money

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Sean Aylmer: is going into alternatives and not in the traditional bond

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Sean Aylmer: equity area? Is that a concern, just the fact that

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Sean Aylmer: so much money’s going into that? And the second question is,

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Sean Aylmer: those products themselves, they’re not always that easy to understand.

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Anto Joseph: Yes, of course. And to answer your first question, within

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Anto Joseph: that alternative bucket, there’s so many vehicles to invest. So

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Anto Joseph: you can actually diversify quite a fair bit across alts,

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Anto Joseph: so whether that be buying a hedge fund or a private

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Anto Joseph: equity fund or a commodity fund, ESG impact, there’s so

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Anto Joseph: much in that sort of umbrella that an investor can

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Anto Joseph: diversify into. So regardless of a large portion of capital

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Anto Joseph: globally moving to alts, it’s actually being diversified well. And

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Anto Joseph: really, the question comes down to do you want liquidity

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Anto Joseph: or not? And then, choosing the right vehicle. What’s the

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Anto Joseph: investor objective and is that the right vehicle? So you

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Anto Joseph: still have plenty of options of diversification there.
In terms

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Anto Joseph: of the complexity of understanding around a lot of alts, that’s why a

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Anto Joseph: lot of platforms like us exist in the market because

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Anto Joseph: we’ve understood that, one, alternatives are complex and can be

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Anto Joseph: complex because there’s such a myriad of options globally. But

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Anto Joseph: for Australian investors particularly, this is fairly new. The average

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Anto Joseph: high net worth in clients or investor in Australia invest roughly around

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Anto Joseph: 12% of their portfolio towards alternatives. And that was by

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Anto Joseph: a premium report wealth report that sort of came out

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Anto Joseph: almost a year and a bit ago. That’s on the rise.

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Anto Joseph: But unfortunately, the education needs to kind of match with

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Anto Joseph: the growth of that sector. And so, platforms like us

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Anto Joseph: are designed to provide educational material, content, which is relevant

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Anto Joseph: to the alts market, which will help facilitate that process a

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Anto Joseph: lot easier. But yes, there is an education curve that

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Anto Joseph: needs to be met.

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Sean Aylmer: Well, I’ve been educated today, Anto, thank you very much

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Sean Aylmer: for talking to Fear and Greed.

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Anto Joseph: Pleasure, Sean. Thank you.

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Sean Aylmer: That was Anto Joseph, CEO, and founder of investment FinTech Stropro.

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Sean Aylmer: This is the Fear and Greed daily interview. Remember, you

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Sean Aylmer: should get professional advice before making any investment decisions. Join

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