1 00:00:05,790 --> 00:00:08,220 Sean Aylmer: Welcome to the Fear and Greed Business Interview. I'm Sean 2 00:00:08,460 --> 00:00:10,740 Sean Aylmer: Aylmer. Last week we saw a sell- off in local 3 00:00:10,740 --> 00:00:13,740 Sean Aylmer: equities, with the ASX recording one of the worst weeks 4 00:00:13,920 --> 00:00:17,910 Sean Aylmer: so far this year. The markets have run very hard 5 00:00:17,940 --> 00:00:20,880 Sean Aylmer: in 2024 with plenty of market watchers saying maybe they've 6 00:00:20,880 --> 00:00:23,850 Sean Aylmer: gone too hard, so where should investors be putting their 7 00:00:23,850 --> 00:00:26,940 Sean Aylmer: money with that as background? How should they be thinking 8 00:00:26,970 --> 00:00:30,629 Sean Aylmer: about asset allocation? Remember, this is general information only and 9 00:00:30,630 --> 00:00:33,750 Sean Aylmer: you should always seek professional advice before making investment decisions. 10 00:00:34,229 --> 00:00:37,620 Sean Aylmer: Matt Wacher is the Chief Investment Officer, Asia Pacific, at 11 00:00:37,680 --> 00:00:39,780 Sean Aylmer: Morningstar. Matt, welcome to Fear and Greed. 12 00:00:40,050 --> 00:00:41,160 Matt Wacher: Thanks a lot for having me, Sean. 13 00:00:41,640 --> 00:00:43,500 Sean Aylmer: I want to get to asset allocation, but let's just 14 00:00:43,500 --> 00:00:48,269 Sean Aylmer: talk equities first. The market, notwithstanding last week's pullback somewhat, 15 00:00:48,509 --> 00:00:51,330 Sean Aylmer: it's run pretty hard this year. Is it a surprise? 16 00:00:51,330 --> 00:00:53,370 Sean Aylmer: Has it run too hard? What's your take on that? 17 00:00:53,879 --> 00:00:55,080 Sean Aylmer: I'm talking the local market here. 18 00:00:55,350 --> 00:00:58,770 Matt Wacher: Yeah, yeah. I think that, even with the last quarter 19 00:00:58,770 --> 00:01:01,080 Matt Wacher: last year and what it's done this year, I think 20 00:01:01,080 --> 00:01:04,920 Matt Wacher: it's been a pretty heroic effort for the market to get 21 00:01:04,920 --> 00:01:07,440 Matt Wacher: up to where it's at. I think probably a little 22 00:01:07,440 --> 00:01:11,309 Matt Wacher: bit ahead of itself in certain pockets. I think that 23 00:01:11,459 --> 00:01:14,669 Matt Wacher: it's probably due a pullback, whether this is something more 24 00:01:14,670 --> 00:01:17,730 Matt Wacher: substantial or not is yet to be seen, but I 25 00:01:17,730 --> 00:01:22,110 Matt Wacher: think the market's not overly valued, it's not cheap, but 26 00:01:22,260 --> 00:01:25,770 Matt Wacher: it's reasonably valued at the moment, but you want to 27 00:01:25,770 --> 00:01:28,799 Matt Wacher: be searching for those pockets where you've got a bit 28 00:01:28,799 --> 00:01:30,719 Matt Wacher: of a margin of safety is how we would play 29 00:01:30,719 --> 00:01:32,850 Matt Wacher: it. But certainly due for a bit of a pullback, 30 00:01:32,880 --> 00:01:34,259 Matt Wacher: it's not unsurprising. 31 00:01:35,010 --> 00:01:37,200 Sean Aylmer: So, I'm just going to keep this line of questioning, 32 00:01:37,440 --> 00:01:40,679 Sean Aylmer: if you're searching for pockets, we know in the U. 33 00:01:40,679 --> 00:01:44,190 Sean Aylmer: S. for example, the Magnificent Seven, well, probably the Magnificent 34 00:01:44,190 --> 00:01:47,219 Sean Aylmer: Five, have actually really led that market for a long 35 00:01:47,219 --> 00:01:50,070 Sean Aylmer: time and this year a couple of those stocks have 36 00:01:50,070 --> 00:01:53,370 Sean Aylmer: dropped out a bit, but is it the same in Australia? Has 37 00:01:53,370 --> 00:01:56,070 Sean Aylmer: there just been some stocks that have really pulled the 38 00:01:56,070 --> 00:01:57,870 Sean Aylmer: rest of the market along or some sectors? 39 00:01:58,469 --> 00:02:01,290 Matt Wacher: Well, maybe we'll just focus on the way we think 40 00:02:01,290 --> 00:02:03,509 Matt Wacher: about it, if you look at the banking sector, for 41 00:02:03,509 --> 00:02:06,810 Matt Wacher: example, CBA has been the standout really. The other banks 42 00:02:06,810 --> 00:02:09,600 Matt Wacher: haven't done badly, but CBA has got to a point 43 00:02:09,600 --> 00:02:13,440 Matt Wacher: where it's value, we think its valuation is pretty high 44 00:02:13,440 --> 00:02:16,620 Matt Wacher: at this point in time, so we would steer away 45 00:02:16,620 --> 00:02:20,189 Matt Wacher: from CBA and look at other banks like Westpac, NAB, 46 00:02:20,460 --> 00:02:23,609 Matt Wacher: ANZ, and I guess that's what I'm talking about in 47 00:02:23,609 --> 00:02:27,030 Matt Wacher: terms of pockets, looking away from the largest of the 48 00:02:27,030 --> 00:02:30,060 Matt Wacher: large caps, similar to the Magnificent Seven, and looking for 49 00:02:30,330 --> 00:02:33,000 Matt Wacher: where you can get slightly better value, but still being 50 00:02:33,000 --> 00:02:35,970 Matt Wacher: exposed to the market. We don't think it's a real 51 00:02:36,210 --> 00:02:38,549 Matt Wacher: huge risk- off time at the moment. 52 00:02:39,240 --> 00:02:41,850 Sean Aylmer: I love the term risk- off, because it seems to 53 00:02:41,850 --> 00:02:45,330 Sean Aylmer: be, I don't know, the phrase du jour at the moment. Let's talk 54 00:02:45,330 --> 00:02:49,350 Sean Aylmer: about asset allocation then, more broadly. When we talk about 55 00:02:49,350 --> 00:02:51,750 Sean Aylmer: asset allocation, we talk about equities, we talk about bonds, 56 00:02:51,750 --> 00:02:54,508 Sean Aylmer: we talk about alternates. Now alternates might be... And this 57 00:02:54,508 --> 00:02:57,508 Sean Aylmer: is for infrastructure, it might be real estate, it might 58 00:02:57,508 --> 00:02:59,669 Sean Aylmer: be private equity, all sorts of things in that very 59 00:02:59,669 --> 00:03:04,680 Sean Aylmer: generic term. How should investors be thinking about asset allocation 60 00:03:04,680 --> 00:03:07,559 Sean Aylmer: at the moment, given where bond yields are, equity markets 61 00:03:07,560 --> 00:03:08,220 Sean Aylmer: are, et cetera? 62 00:03:08,940 --> 00:03:12,389 Matt Wacher: Yeah, we're in an environment now that is much more 63 00:03:12,389 --> 00:03:18,000 Matt Wacher: conducive to having a diversified portfolio. I think obviously two 64 00:03:18,000 --> 00:03:22,108 Matt Wacher: years ago, end of 2021, bond yields very low still, 65 00:03:22,260 --> 00:03:26,099 Matt Wacher: equity markets at extremes in terms of valuation, and there 66 00:03:26,099 --> 00:03:27,750 Matt Wacher: was really no place to hide. We think you can 67 00:03:27,750 --> 00:03:30,480 Matt Wacher: build a much more diversified portfolio at this point in 68 00:03:30,508 --> 00:03:33,238 Matt Wacher: time, and that's really on the back of bond yields. 69 00:03:33,240 --> 00:03:37,170 Matt Wacher: We think that yields, government bond yields in the U. S., in 70 00:03:37,170 --> 00:03:40,980 Matt Wacher: Australia, pretty much globally are pretty attractive at this point 71 00:03:40,980 --> 00:03:42,540 Matt Wacher: in time, and they're going to give you that real 72 00:03:42,540 --> 00:03:45,359 Matt Wacher: diversification benefit, if something does go wrong, if we do 73 00:03:45,360 --> 00:03:48,210 Matt Wacher: get a recession. And I think for those that are 74 00:03:48,210 --> 00:03:53,369 Matt Wacher: scarred from 2022 when bond yields rose significantly and the 75 00:03:53,850 --> 00:03:57,600 Matt Wacher: poor, old conservative investor might've probably had a capital loss, 76 00:03:58,410 --> 00:04:00,540 Matt Wacher: I think we're at a point now, if you just do 77 00:04:00,540 --> 00:04:03,210 Matt Wacher: the basic, well, it's not that basic, but the maths, 78 00:04:03,540 --> 00:04:05,820 Matt Wacher: you're not going to be hurt as much. If there 79 00:04:05,820 --> 00:04:08,130 Matt Wacher: is another rise in yields, you're going to be protected 80 00:04:08,130 --> 00:04:12,210 Matt Wacher: by the current yield of around (inaudible) 4.3, 4. 81 00:04:12,450 --> 00:04:15,810 Matt Wacher: 5% from a 10- year bond. You're going to get some 82 00:04:15,810 --> 00:04:19,770 Matt Wacher: protection there from any continued rise in bond yields, because 83 00:04:19,770 --> 00:04:22,618 Matt Wacher: you get that as the coupon, you get paid that, 84 00:04:22,920 --> 00:04:27,120 Matt Wacher: so it's reasonable to hold a much larger, a much 85 00:04:27,120 --> 00:04:32,100 Matt Wacher: more significant perhaps, rather than larger allocation to bonds in 86 00:04:32,100 --> 00:04:36,750 Matt Wacher: portfolios. We've certainly done that. And interestingly, for a growthy 87 00:04:36,779 --> 00:04:40,678 Matt Wacher: type investor, you can probably hold more growth assets, because 88 00:04:40,678 --> 00:04:44,339 Matt Wacher: you've got that diversification benefit coming from bonds and conservative 89 00:04:44,339 --> 00:04:46,949 Matt Wacher: investor on the other side of the fence, no need 90 00:04:46,949 --> 00:04:50,159 Matt Wacher: to take as much risk, because you're getting yield from 91 00:04:50,160 --> 00:04:54,360 Matt Wacher: your bond markets at this point in time. So, bonds 92 00:04:54,360 --> 00:04:57,238 Matt Wacher: are really able to be the cornerstone of a portfolio 93 00:04:57,240 --> 00:05:00,330 Matt Wacher: again at this point in time, and it allows you 94 00:05:00,330 --> 00:05:04,198 Matt Wacher: to do things in the equity market. Potentially, if we 95 00:05:04,199 --> 00:05:07,350 Matt Wacher: think that we're going to get another leg up in 96 00:05:07,350 --> 00:05:11,279 Matt Wacher: growth, like GDP growth I'm talking about, or where we're 97 00:05:11,279 --> 00:05:15,299 Matt Wacher: not going to get... That recessionary scenario seems to be 98 00:05:15,300 --> 00:05:18,540 Matt Wacher: fading, then you can actually, with bonds where they are, 99 00:05:18,540 --> 00:05:21,899 Matt Wacher: you can actually take on more growth assets at this 100 00:05:21,900 --> 00:05:24,510 Matt Wacher: point in time, than what you could say two years ago. 101 00:05:25,049 --> 00:05:27,810 Sean Aylmer: Okay, so let's stay with fixed income. What about investment 102 00:05:27,810 --> 00:05:31,020 Sean Aylmer: grade credit, so it might be bonds from banks, things 103 00:05:31,020 --> 00:05:34,200 Sean Aylmer: like that, right out to high yielding credit, where do 104 00:05:34,200 --> 00:05:35,040 Sean Aylmer: you sit with that? 105 00:05:36,509 --> 00:05:40,440 Matt Wacher: Investment grade credit spreads, all credit spreads are pretty tight 106 00:05:40,500 --> 00:05:44,700 Matt Wacher: at this point in time. All-in yields are very attractive, 107 00:05:44,910 --> 00:05:47,880 Matt Wacher: don't get me wrong, but we think you want to 108 00:05:47,880 --> 00:05:50,730 Matt Wacher: have a slightly diversified portfolio of bonds. You don't want 109 00:05:50,730 --> 00:05:53,070 Matt Wacher: to have all your eggs in one basket. You probably 110 00:05:53,070 --> 00:05:57,449 Matt Wacher: want to look across the credit spectrum, but, for example, 111 00:05:57,450 --> 00:05:59,700 Matt Wacher: with high yield, if we're looking at high yield bonds, 112 00:06:00,119 --> 00:06:02,760 Matt Wacher: the spread that you have to take on now, very, very 113 00:06:02,760 --> 00:06:05,279 Matt Wacher: tight relative to history, and even though you're getting a 114 00:06:05,279 --> 00:06:07,890 Matt Wacher: big yield, if high yield bonds are going to do 115 00:06:07,890 --> 00:06:10,200 Matt Wacher: well, equities are probably going to do well, and so 116 00:06:10,200 --> 00:06:13,289 Matt Wacher: we'd rather take the risk through the equity market at 117 00:06:13,290 --> 00:06:16,440 Matt Wacher: this point in time and some of those pockets that I was 118 00:06:16,589 --> 00:06:19,620 Matt Wacher: talking about before where you can get better valuations and 119 00:06:19,620 --> 00:06:22,950 Matt Wacher: better exposures rather than high yield. In terms of investment 120 00:06:22,950 --> 00:06:28,349 Matt Wacher: grade credit, again, there's some value there, but we'd rather actually 121 00:06:28,349 --> 00:06:32,490 Matt Wacher: just own duration government bonds to be honest and take 122 00:06:32,490 --> 00:06:36,120 Matt Wacher: risks through the equity markets where we think it's warranted. 123 00:06:36,779 --> 00:06:38,460 Sean Aylmer: Stay with me, Matt, we'll be back in a minute. 124 00:06:46,230 --> 00:06:49,740 Sean Aylmer: I'm speaking to Matt Wacher, Chief Investment Officer, Asia Pacific, 125 00:06:49,799 --> 00:06:55,319 Sean Aylmer: at Morningstar. What about alternatives, and as I said, it's a 126 00:06:55,920 --> 00:07:01,589 Sean Aylmer: broad name that many seen as amongst alternatives, but property, 127 00:07:01,589 --> 00:07:04,170 Sean Aylmer: infrastructure, PE, those sorts of things, how should we think 128 00:07:04,170 --> 00:07:07,830 Sean Aylmer: about those products, particularly given what you're getting on a 10- 129 00:07:07,830 --> 00:07:08,700 Sean Aylmer: year bond today? 130 00:07:09,299 --> 00:07:12,389 Matt Wacher: Yep. Look, I think that, I'll start with property, I 131 00:07:12,389 --> 00:07:18,540 Matt Wacher: think property, there's probably some stories out there to come in 132 00:07:18,540 --> 00:07:21,870 Matt Wacher: terms of commercial property, but I think that that's starting 133 00:07:21,870 --> 00:07:25,590 Matt Wacher: to look reasonably attractive then. It hasn't been like that 134 00:07:25,590 --> 00:07:29,189 Matt Wacher: for quite some time. We're starting to see a bit 135 00:07:29,190 --> 00:07:31,680 Matt Wacher: of a bottom in terms of listed property at this 136 00:07:31,680 --> 00:07:35,520 Matt Wacher: point in time, and so we're starting to take a 137 00:07:35,520 --> 00:07:38,490 Matt Wacher: nibble there. We think that in terms of where interest 138 00:07:38,490 --> 00:07:41,820 Matt Wacher: rates are, obviously with interest rates rising, you had the 139 00:07:41,820 --> 00:07:45,510 Matt Wacher: double whammy of a bit of oversupply in terms of 140 00:07:45,719 --> 00:07:49,530 Matt Wacher: lots of areas in terms of commercial property and interest 141 00:07:49,530 --> 00:07:51,929 Matt Wacher: rates starting to bite, but we think that we're in a 142 00:07:51,930 --> 00:07:56,640 Matt Wacher: situation now where things will start to stabilize. We've started to 143 00:07:56,910 --> 00:07:59,790 Matt Wacher: look at a few REITs around the (inaudible) in 144 00:08:00,450 --> 00:08:03,179 Matt Wacher: our portfolios, not just here in Australia, but globally as well. 145 00:08:03,780 --> 00:08:05,010 Sean Aylmer: Okay, infrastructure? 146 00:08:05,309 --> 00:08:11,250 Matt Wacher: Infrastructure, yeah, infrastructure, good, long- term asset. I think that 147 00:08:11,370 --> 00:08:17,250 Matt Wacher: we try and stay away from communications infrastructure or anything 148 00:08:17,550 --> 00:08:20,519 Matt Wacher: tied to development, and I'd say the same for property 149 00:08:20,520 --> 00:08:22,949 Matt Wacher: at this point in time, development we'd stay clear of, 150 00:08:23,309 --> 00:08:27,900 Matt Wacher: but you're starting to also get pretty reasonable returns, expected 151 00:08:27,900 --> 00:08:31,620 Matt Wacher: returns from infrastructure as well, but we think property out 152 00:08:31,620 --> 00:08:34,139 Matt Wacher: of those two is probably more attractive at this point 153 00:08:34,139 --> 00:08:38,580 Matt Wacher: in time, and so leaning, in terms of alternatives or 154 00:08:39,179 --> 00:08:43,710 Matt Wacher: unlisted asset classes, leaning more towards property rather than infrastructure 155 00:08:43,710 --> 00:08:46,470 Matt Wacher: at this point in time, in terms of adding to 156 00:08:46,470 --> 00:08:49,290 Matt Wacher: the portfolios. And then if summing up in terms of 157 00:08:49,290 --> 00:08:54,419 Matt Wacher: private equity, we're still fairly cautious on private equity. I 158 00:08:54,420 --> 00:08:57,689 Matt Wacher: think that, again, there's going to be opportunities out there. 159 00:08:57,929 --> 00:09:01,110 Matt Wacher: You want to be picking the right investment managers to 160 00:09:01,110 --> 00:09:05,010 Matt Wacher: partner with there and make sure that they have the 161 00:09:05,010 --> 00:09:07,800 Matt Wacher: skills and that they've been through these kind of environments 162 00:09:07,800 --> 00:09:12,269 Matt Wacher: before where it's been hard to get realizations on the 163 00:09:12,270 --> 00:09:15,420 Matt Wacher: assets that you have, been a falling market for private 164 00:09:15,420 --> 00:09:19,770 Matt Wacher: equity the last probably year, 18 months, but again, probably 165 00:09:19,770 --> 00:09:21,838 Matt Wacher: starting to see a bottom in that market and there's 166 00:09:21,840 --> 00:09:25,380 Matt Wacher: certainly IPOs coming back on board globally, so that's a 167 00:09:25,380 --> 00:09:27,990 Matt Wacher: good sign that there's a bit more confidence out there. 168 00:09:28,559 --> 00:09:30,718 Sean Aylmer: Matt, it almost sounds old- fashioned what you're talking about. 169 00:09:30,719 --> 00:09:34,229 Sean Aylmer: It's like an old- fashioned asset allocation, suddenly. 170 00:09:37,830 --> 00:09:39,570 Matt Wacher: We were in the camp a couple of years ago 171 00:09:39,570 --> 00:09:44,639 Matt Wacher: saying the old 60/40, 70/ 30 portfolio is dead. We think it's 172 00:09:44,639 --> 00:09:47,849 Matt Wacher: been resurrected. It took a bit of a hit in the markets, 173 00:09:47,849 --> 00:09:51,990 Matt Wacher: but yeah, you're able to build a pretty reasonably diversified 174 00:09:51,990 --> 00:09:55,860 Matt Wacher: portfolio at this point in time. It's going back to the future, 175 00:09:56,250 --> 00:10:00,059 Matt Wacher: but I guess the key thing is that what's going 176 00:10:00,059 --> 00:10:02,340 Matt Wacher: to actually happen in the markets and while we don't 177 00:10:02,340 --> 00:10:05,790 Matt Wacher: forecast things along those sorts of lines, we really think 178 00:10:05,790 --> 00:10:08,999 Matt Wacher: that focusing on valuation at this point in time and 179 00:10:09,030 --> 00:10:11,399 Matt Wacher: having that margin of safety in any of the assets 180 00:10:11,850 --> 00:10:15,088 Matt Wacher: that you're looking at is important, because things can turn 181 00:10:15,090 --> 00:10:18,570 Matt Wacher: very quickly, especially with some parts of the market. You 182 00:10:18,570 --> 00:10:23,670 Matt Wacher: mentioned the Magnificent Seven and the Magnificent Five, it may 183 00:10:23,670 --> 00:10:27,510 Matt Wacher: be now, the risk- reward there is certainly in favor... 184 00:10:28,289 --> 00:10:31,679 Matt Wacher: The risk is certainly higher than the reward, looking at 185 00:10:31,679 --> 00:10:35,189 Matt Wacher: it this point in time. They need to generate, particularly 186 00:10:36,600 --> 00:10:40,590 Matt Wacher: the NVIDIAs, etc, they need to generate some pretty hefty 187 00:10:40,590 --> 00:10:43,828 Matt Wacher: free cash flow over the next little while to give 188 00:10:44,219 --> 00:10:47,069 Matt Wacher: investors what they want in terms of the returns that 189 00:10:47,070 --> 00:10:50,968 Matt Wacher: they've already brought forward. And that can happen, these are 190 00:10:50,970 --> 00:10:54,630 Matt Wacher: great companies, but again, you might be wanting to look 191 00:10:55,770 --> 00:10:59,520 Matt Wacher: somewhere else to get a better risk- reward at this point in time. 192 00:11:00,420 --> 00:11:02,160 Sean Aylmer: Matt, thank you for talking to Fear and Greed. 193 00:11:02,790 --> 00:11:04,078 Matt Wacher: No problem. Thanks a lot, Sean. 194 00:11:04,619 --> 00:11:08,010 Sean Aylmer: That was Matt Wacher, Chief Investment Officer, Asia Pacific, at 195 00:11:08,010 --> 00:11:11,130 Sean Aylmer: Morningstar. This is the Fear and Greed Business Interview. Remember, 196 00:11:11,130 --> 00:11:13,650 Sean Aylmer: this is general information only and you should seek professional 197 00:11:13,650 --> 00:11:17,099 Sean Aylmer: advice before making investment decisions. Join us every morning for 198 00:11:17,099 --> 00:11:19,230 Sean Aylmer: the full episode of Fear and Greed at Daily Business 199 00:11:19,230 --> 00:11:21,750 Sean Aylmer: News, for people who make their own decisions. I'm Sean 200 00:11:21,750 --> 00:11:23,010 Sean Aylmer: Aylmer. Enjoy your day.