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Wall Street rewards...but should you hedge? · The Money Puzzle

• 0:09
  Speaker 1: Hello and welcome to the Australian's Money Puzzle podcast. I'm
• 0:12
  Speaker 1: James Kirby. Welcome aboard. You know, the single biggest change
• 0:16
  Speaker 1: in investing we have seen as Australian investors, I would
• 0:20
  Speaker 1: think in decades, is the shift to overseas markets. It's
• 0:26
  Speaker 1: very important. It's endless and it's increasingly lucrative. OK, so
• 0:30
  Speaker 1: we know that the US market has returned much, much
• 0:33
  Speaker 1: better than the ASX, not just for years now, but
• 0:36
  Speaker 1: for coming up on a decade now. And we just
• 0:40
  Speaker 1: had the intergenerational report this week, big economic report, which
• 0:43
  Speaker 1: really does show that Australia, in terms of GDP, et cetera,
• 0:45
  Speaker 1: and key metrics, is not going to be shooting out tonight.
• 0:49
  Speaker 1: So I see no reason that this increased allocation from
• 0:55
  Speaker 1: investors to overseas markets, specifically Wall Street, will change. But
• 1:00
  Speaker 1: there is a risk here. It's been underreported to some extent.
• 1:05
  Speaker 2: It's currency.
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  Speaker 1: Professional investors hedge money. The guideline traditionally was that they
• 1:10
  Speaker 1: hedge maybe a third of their share investing out of Australia.
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  Speaker 1: So where does that leave us? I wanted to talk
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  Speaker 1: today to, I guess I've had on before, Dr. Sam
• 1:21
  Speaker 1: Wiley of the Wendell Stone Education Group and University of Melbourne.
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  Speaker 1: We'll start with this topic. I imagine knowing how it
• 1:29
  Speaker 1: goes with Sam, this conversation may go all over the
• 1:32
  Speaker 1: place sooner or later. But let's start with this. How
• 1:34
  Speaker 1: are you, Sam?
• 1:35
  Speaker 2: Good, James. Thanks for inviting me again.
• 1:36
  Speaker 1: Great to have you. Tell me, What's the academic principle
• 1:40
  Speaker 1: here in terms of hedging? What does the textbook say?
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  Speaker 2: Well, it would say that it makes sense to diversify
• 1:46
  Speaker 2: across currencies, to have assets denominated in different currencies, and
• 1:52
  Speaker 2: not to have all your eggs in one basket and
• 1:54
  Speaker 2: to have all your assets denominated in Australian dollars. So
• 2:00
  Speaker 2: if you invest in US shares, for instance, then if
• 2:04
  Speaker 2: the Aussie dollar goes down, then the value of those
• 2:06
  Speaker 2: US shares in Aussie dollars will be higher. And you'll
• 2:09
  Speaker 2: be glad if the Aussie dollar went down that you
• 2:11
  Speaker 2: had those US denominated shares.
• 2:13
  Speaker 1: But also, I mentioned there the sort of folk wisdom, basically,
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  Speaker 1: in the markets that you hedge roughly a third of
• 2:21
  Speaker 1: your currency risk. Is that accurate? Is that what people
• 2:24
  Speaker 1: generally do?
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  Speaker 2: Well, the super funds hedge about a half. The big
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  Speaker 2: super funds, you know, like Aussie Super and ART and
• 2:32
  Speaker 2: the like, they hedge about a half. But mostly... that
• 2:35
  Speaker 2: is driven by the benchmarks that they're measured against. The
• 2:39
  Speaker 2: benchmark has within it hedging to the Aussie dollar of
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  Speaker 2: about 50%. And, you know, the super funds, like everyone,
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  Speaker 2: if you're given a benchmark, if you're given KPIs, then
• 2:50
  Speaker 2: you're going to track those KPIs. Yes. And that's why
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  Speaker 2: they do it. But it's not really in the interest
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  Speaker 2: of their members to do that.
• 2:56
  Speaker 1: Okay, just before we go into that, so that all
• 2:58
  Speaker 1: the listeners basically understand what we're saying, hedging, folks, is
• 3:01
  Speaker 1: where you take a position– And you pay a fee, basically,
• 3:05
  Speaker 1: so that professionals hedge your currency for you so that
• 3:10
  Speaker 1: when the currencies move against you, it doesn't hurt you
• 3:13
  Speaker 1: as much as it might if it wasn't hedged. It's
• 3:15
  Speaker 1: as simple as that. Now, for most listeners, that would
• 3:19
  Speaker 1: mean whether they choose a hedged fund, like a managed fund,
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  Speaker 1: or an ETF. You might have an ETF that offers
• 3:25
  Speaker 1: a Wall Street, and you might have an ETF that
• 3:27
  Speaker 1: offers a hedged version of Wall Street. That ETF will
• 3:32
  Speaker 1: When the Australian dollar moves against, in any fashion, against
• 3:36
  Speaker 1: the US, which is the main one, you will not
• 3:39
  Speaker 1: win as much and you will not lose as much
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  Speaker 1: as you might have in an open market. Is that
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  Speaker 1: basically it, Sam?
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  Speaker 2: Yeah. So any kind of hedging, that is it, James.
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  Speaker 2: Any kind of hedging is undoing the effect of the
• 3:53
  Speaker 2: underlying exposure that you have. So, I mean, you take Qantas,
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  Speaker 2: for instance, hedging out the risk, the oil price risk.
• 4:00
  Speaker 2: If the oil price goes up, that's bad for Qantas
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  Speaker 2: because they're a consumer of oil. So they want to
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  Speaker 2: have a hedging instrument where in the bad state of
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  Speaker 2: the world for Qantas in their underlying business, the hedging
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  Speaker 2: instrument gives them a payoff. So in the bad state
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  Speaker 2: of the world for Qantas' business, the oil price goes up.
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  Speaker 2: They want to have a hedging instrument where they receive
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  Speaker 2: something in that bad state of the world. And they
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  Speaker 2: want to give up something in the opposite state of
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  Speaker 2: the world. Oil price goes down. That's good for Qantas'
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  Speaker 2: airline business. But in the hedging instrument, it'll be bad.
• 4:30
  Speaker 2: So the hedging instrument undoes the effect of the oil
• 4:34
  Speaker 2: price on the airline business. And so if you're hedging
• 4:37
  Speaker 2: out the Aussie dollar, you want to have a hedging
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  Speaker 2: instrument that undoes the effect or you want your fund
• 4:43
  Speaker 2: to have a hedging instrument that undoes the effect of
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  Speaker 2: currency fluctuations on the Aussie dollar value of your portfolio. Right.
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  Speaker 1: So basically, it's like a form of insurance. But so
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  Speaker 1: the very big funds, all those big insurers, and they've
• 4:57
  Speaker 1: done pretty well, the big industry funds, for instance, and
• 4:59
  Speaker 1: they hedge up to 50%. So it would seem at
• 5:03
  Speaker 1: face value that mom and dad should do the same.
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  Speaker 1: What do you think of that?
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  Speaker 2: Well, I don't think that the super funds should do it.
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  Speaker 2: It is, you know, hedging is the hedging here. I mean,
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  Speaker 2: Qantas has an operating business, whereas people who are investing
• 5:17
  Speaker 2: for their future, they really have an asset liability issue.
• 5:21
  Speaker 2: matching problem. And let me sort of unpack what I
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  Speaker 2: mean by that. So you are accumulating assets today in
• 5:29
  Speaker 2: your investing. You're saving for your future through your super
• 5:32
  Speaker 2: or outside of super. You're accumulating assets today where the
• 5:36
  Speaker 2: future liability that those assets will deliver on is you
• 5:40
  Speaker 2: living comfortably in your retirement and helping your kids or
• 5:44
  Speaker 2: doing all the things that you want to do. So
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  Speaker 2: you're accumulating assets to match the future liability of that
• 5:50
  Speaker 2: you've got. And you want to have a set of
• 5:53
  Speaker 2: assets that closely matches that. Now, some of your future
• 5:56
  Speaker 2: spending is going to be in Aussie dollars, and some
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  Speaker 2: of it's going to be on things that are denominated
• 6:01
  Speaker 2: in foreign currency. So most of your spending will be
• 6:04
  Speaker 2: on groceries and housing and transport and going to the
• 6:08
  Speaker 2: movies and whatever else in Australia. It'll be in Aussie dollars.
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  Speaker 2: So you want to have a lot of Aussie dollar
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  Speaker 2: denominated assets. But some of it will be buying foreign cars,
• 6:16
  Speaker 2: cruising down the Danube, doing all of the things that
• 6:20
  Speaker 2: that you can only do if you have, that will
• 6:23
  Speaker 2: be harder for you if the Aussie dollar goes down.
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  Speaker 2: Some of what you want to do will be spending
• 6:28
  Speaker 2: in euros, US dollars, yen, et cetera. So you want
• 6:30
  Speaker 2: to have some assets to match that liability, your future
• 6:33
  Speaker 2: spending in foreign currencies. So it really does make sense
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  Speaker 2: for you to, if all of your future spending was
• 6:40
  Speaker 2: going to be on domestic products, on Aussie dollar products,
• 6:44
  Speaker 2: then you would want to have Aussie dollar exposure in
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  Speaker 2: any foreign currency Any foreign currency fluctuations affecting your assets,
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  Speaker 2: like your share portfolio, you would want to take that out.
• 6:55
  Speaker 2: You want to hedge. Right.
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  Speaker 1: But as an investor, should we hedge, basically? Should we
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  Speaker 1: hedge like the big funds? Should we hedge one-third as
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  Speaker 1: the textbooks used to say?
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  Speaker 2: No, I don't think so. Right. I would leave it unhedged.
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  Speaker 2: And most investors do. I think they're doing the right thing.
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  Speaker 2: I think the super funds are doing the wrong thing.
• 7:13
  Speaker 2: And they're doing the wrong thing not because they're fools.
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  Speaker 2: They're the opposite of that. They're doing it because APRA
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  Speaker 2: gives them a benchmark that has 50% hedging embedded in
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  Speaker 2: the benchmark. Right. They're working against their benchmark. It's APRA
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  Speaker 2: that causes that. And some of the super funds have
• 7:31
  Speaker 2: been trying to unwind that. They've been telling APRA, look,
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  Speaker 2: this is not really in the interest of our members.
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  Speaker 2: You should adjust that part of the benchmark that we're
• 7:40
  Speaker 2: measured against. Right.
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  Speaker 1: Okay. What is the risk? What would be the worst
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  Speaker 1: case scenario for the unhedged investor who doesn't hedge and
• 7:47
  Speaker 1: who chooses the unhedged ETF or the unhedged fund every time,
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  Speaker 1: what's the worst price they might pay?
• 7:56
  Speaker 2: Well, the bad state of the world is that the
• 7:58
  Speaker 2: Aussie dollar goes up a lot. So we've got to
• 8:02
  Speaker 2: think in terms of your overall portfolio. But let's just
• 8:04
  Speaker 2: isolate your US shares, for instance. So you're unhedged. You're
• 8:08
  Speaker 2: invested in an ETF that invests in the S &
• 8:11
  Speaker 2: P 500, for instance. And it's not hedged. It's denominated
• 8:15
  Speaker 2: in US dollars. And then... The Aussie dollar goes up
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  Speaker 2: a lot. It goes into the 90s or to a dollar.
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  Speaker 2: It can go to 110.
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  Speaker 1: Yeah, sure.
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  Speaker 2: It could go to 110 like it did in 2011.
• 8:29
  Speaker 1: Yeah.
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  Speaker 2: The mining boom 2.0. So the Aussie dollar goes up
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  Speaker 2: a lot. So the value of your US dollar shares
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  Speaker 2: in Aussie dollars has gone down. And so if we
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  Speaker 2: just think about it in isolation, then If you're only
• 8:48
  Speaker 2: thinking about your US share portfolio, then you say that's
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  Speaker 2: the bad state of the world. The Aussie dollar went up.
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  Speaker 2: Those shares aren't worth as much in Aussie dollars. But
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  Speaker 2: if you think about your whole situation, I'm going to
• 8:59
  Speaker 2: be buying imported goods in the future. The Aussie dollar going...
• 9:03
  Speaker 2: I'm going to be going on holidays overseas. The Aussie
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  Speaker 2: dollar going up is good for you. In your overall situation,
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  Speaker 2: it's good. But in the isolated consideration of the US
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  Speaker 2: share portfolio, it's bad. And.
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  Speaker 1: Is it part of your view that in the long term,
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  Speaker 1: over the course of your investing life, this all more
• 9:24
  Speaker 1: or less evens out anyway?
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  Speaker 2: Yes, I think that is right. And I also think
• 9:29
  Speaker 2: that it is, look, and we don't know what's going
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  Speaker 2: to happen to the Aussie dollar. People who think they
• 9:34
  Speaker 2: can predict what's going to happen to currencies are just
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  Speaker 2: kidding themselves. Even hedge fund managers have very little ability
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  Speaker 2: to predict what's going to happen. The best model of
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  Speaker 2: currencies is just a random walk, basically. Right. Very good.
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  Speaker 2: So there it is.
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  Speaker 1: You heard it here first, folks. And you probably thought
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  Speaker 1: that all the time anyway. No one knows the future,
• 9:53
  Speaker 1: including highly specialized professional investors who get paid an awful
• 9:57
  Speaker 1: lot for trying to guess the next movement of. currencies,
• 10:01
  Speaker 1: including our own dollar against the US, which will be
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  Speaker 1: your main currency risk in your portfolio. But keep in
• 10:06
  Speaker 1: mind what we've said here. I think it's a very
• 10:08
  Speaker 1: good view and a very sound view. Okay, we're going
• 10:11
  Speaker 1: to take a short break. In the next part of
• 10:13
  Speaker 1: the show, we're going to take a look at where
• 10:16
  Speaker 1: do we go now With cash, because cash is so strong.
• 10:20
  Speaker 1: We mentioned this on the show with Will Hamilton, how
• 10:22
  Speaker 1: the bond yields in the US hit 5%. So we
• 10:24
  Speaker 1: have this situation where cash is looking pretty good and
• 10:26
  Speaker 1: it's getting harder to beat. How do you beat it?
• 10:28
  Speaker 2: Back in a second.
• 10:38
  Speaker 1: Hello, welcome back to the Australian's Money Puzzle podcast. James
• 10:41
  Speaker 1: Kirby here with regular guest, Dr. Sam Wiley of the
• 10:44
  Speaker 1: Windlestone Education Group.
• 10:45
  Speaker 2: Windlestone.com.au.
• 10:47
  Speaker 1: There you are. if you want to know more about
• 10:49
  Speaker 1: Sam's activities. Now, folks, we mentioned how on the show,
• 10:54
  Speaker 1: a former student of Sam's, Will Hamilton, we had talked
• 10:58
  Speaker 1: about rising bond yields and why it matters. And you
• 11:00
  Speaker 1: can get 5% in cash. You can get close to 5%
• 11:03
  Speaker 1: in at-call cash just now. So I want to put
• 11:07
  Speaker 1: a hypothetical to you, Sam. If I was drawing my
• 11:10
  Speaker 1: own money and my own investments, maybe my own self-managed
• 11:14
  Speaker 1: super fund, if I had cash... And shares and gold
• 11:21
  Speaker 1: in recent years, it would have been a damn good combination.
• 11:24
  Speaker 1: And I wouldn't have had the drag of bonds, which
• 11:27
  Speaker 1: was probably the only thing from stopping the big super
• 11:29
  Speaker 1: funds completely shooting the lights out. What do you think
• 11:33
  Speaker 1: of that idea? And is it a feasible way to
• 11:37
  Speaker 1: move forward in this particular climate?
• 11:40
  Speaker 2: Well, just take the shares and the gold part, James.
• 11:44
  Speaker 2: I like the combination of US shares and gold. because
• 11:48
  Speaker 2: gold is a hedge against there being a debt crisis
• 11:52
  Speaker 2: in the US. So, I mean, you know from me
• 11:54
  Speaker 2: being on the show in the past that I really
• 11:56
  Speaker 2: like US shares. I really believe in the economic dynamism
• 12:00
  Speaker 2: of the US economy and it being the number one
• 12:02
  Speaker 2: tech play in the world. So I like US shares,
• 12:06
  Speaker 2: but if you're a long-term investor in US shares, you've
• 12:08
  Speaker 2: got to think about how am I going to navigate
• 12:11
  Speaker 2: the debt crisis that's inevitable in the United States? I mean,
• 12:15
  Speaker 2: there's no will in the US to control government spending,
• 12:20
  Speaker 2: either on the Democrat or the Republican side. That's gone
• 12:23
  Speaker 2: out of them completely. So they will spend their way
• 12:26
  Speaker 2: and the Republicans will lower taxes. And so you will
• 12:30
  Speaker 2: get into a fiscal crisis, a government spending, a government
• 12:33
  Speaker 2: debt crisis eventually, and gold will help you when that happens.
• 12:37
  Speaker 2: And a big part of the reason that gold has
• 12:40
  Speaker 2: surged in the last few years is It's down off
• 12:43
  Speaker 2: its peak at the moment, but the reason it surged
• 12:45
  Speaker 2: and it'll surge some more is because investors are looking
• 12:48
  Speaker 2: forward and reasoning backwards. There's going to be a debt
• 12:51
  Speaker 2: crisis in the US. US will get through that. I'm
• 12:54
  Speaker 2: not saying that I don't like US shares long term.
• 12:57
  Speaker 2: It'll get through it, but it'll take a crisis to
• 12:59
  Speaker 2: solve the problem. And when that crisis comes, gold will
• 13:02
  Speaker 2: be your natural hedge. Yes, I do really like that combination.
• 13:08
  Speaker 1: Would you worry that someone didn't have bonds? Since all
• 13:10
  Speaker 1: the big funds have bonds, our listeners probably don't, unless
• 13:13
  Speaker 1: they have them in an ETF. It certainly hasn't cost
• 13:15
  Speaker 1: them not having them in recent times. Every year they
• 13:18
  Speaker 1: say bond markets will come right. Every year they do
• 13:20
  Speaker 1: about 3% total return. I mean, why would you bother?
• 13:23
  Speaker 2: Yeah, bonds also are something of a hedge. They're a
• 13:27
  Speaker 2: hedge not against the debt crisis in the US, but
• 13:30
  Speaker 2: they're a hedge against an AI winter. that the AI
• 13:34
  Speaker 2: expectations in the US not being fulfilled, not playing out.
• 13:40
  Speaker 2: I'm sure Will would have mentioned this, that a lot
• 13:43
  Speaker 2: of what is driving up bond yields in the US
• 13:46
  Speaker 2: and affecting the rest of the world is just the
• 13:48
  Speaker 2: demand for long-term capital. Now, some of that excessive demand
• 13:53
  Speaker 2: for long-term capital is just the government spending I was
• 13:55
  Speaker 2: talking about a moment ago, but a big part of
• 13:57
  Speaker 2: it is the AI build-out. We've seen recently Google and
• 14:03
  Speaker 2: and others come to the Australian debt market, come to
• 14:06
  Speaker 2: the kangaroo bond market, as they call it, issuing bonds,
• 14:10
  Speaker 2: big bond issuances into the Aussie dollar bond market here,
• 14:15
  Speaker 2: coming for our super money and issuing bonds in Aussie dollars.
• 14:18
  Speaker 2: And that's an expression of just how desperate they are
• 14:20
  Speaker 2: for capital, for the build-out. And that extra demand for
• 14:24
  Speaker 2: capital from the AI build-out and the excitement about AI,
• 14:29
  Speaker 2: which is driving up the S & P 500, is
• 14:32
  Speaker 2: driving up bond yields. Now, if we hit an AI winter,
• 14:36
  Speaker 2: or if we just hit a downdraft in AI, even
• 14:40
  Speaker 2: if it's only sort of for a relatively short period
• 14:44
  Speaker 2: of time, there'll be a big pullback on that CapEx,
• 14:47
  Speaker 2: there'll be less demand for that long-term capital, and bond
• 14:51
  Speaker 2: yields will go down. And of course, when bond yields
• 14:53
  Speaker 2: go down, everyone knows that bond prices go up. So
• 14:58
  Speaker 2: if we hit an AI winter, your S & P
• 15:00
  Speaker 2: 500 shares will be down, but your bonds will be up.
• 15:04
  Speaker 2: And so people want to be invested in US stocks
• 15:09
  Speaker 2: because it's the tech engine of the world, the US,
• 15:12
  Speaker 2: and this is the tech century. But they're worried about
• 15:16
  Speaker 2: an AI downdraft, and bonds can be a hedge for that.
• 15:20
  Speaker 2: And they're worried about a fiscal crisis in the US,
• 15:22
  Speaker 2: and gold can be.
• 15:23
  Speaker 1: And just to pin it a little bit further, in
• 15:26
  Speaker 1: terms of the bonds that will where the yields will
• 15:29
  Speaker 1: fall most severely and the prices will rise most dramatically.
• 15:34
  Speaker 1: I expect this is a ladder there, and it starts
• 15:36
  Speaker 1: with corporate bonds, and then it sobers as you go
• 15:41
  Speaker 1: through to government bonds. Would that be how it would work?
• 15:44
  Speaker 2: Well, it's not so much. So there's sort of more
• 15:47
  Speaker 2: than one dimension here. And the dimension that you mentioned, James,
• 15:51
  Speaker 2: is increasing credit risk. So I've got government bonds as
• 15:54
  Speaker 2: the lowest credit risk, and then we'd have bank bonds
• 15:57
  Speaker 2: and then highly rated corporates like BHP and then lower
• 16:01
  Speaker 2: rated corporates. And then we get into private credit and
• 16:05
  Speaker 2: junk bonds, et cetera. But there's another dimension, which is
• 16:08
  Speaker 2: short-term bonds versus long-term bonds. And long-term bonds are much
• 16:13
  Speaker 2: more sensitive to changes in yields. That's called duration. They
• 16:17
  Speaker 2: have longer duration. And so they're much more sensitive. And
• 16:21
  Speaker 2: so long-term government bonds, bonds that have a maturity of
• 16:25
  Speaker 2: 20 or 30 years, they have a sensitivity of 10
• 16:28
  Speaker 2: to 12 to 1. So a 1% change in the
• 16:32
  Speaker 2: yield causes a 10 to 12% change in the value
• 16:36
  Speaker 2: of the bonds. So if yields went down a percent,
• 16:39
  Speaker 2: their value would go up 10 to 12%. That's long duration.
• 16:44
  Speaker 1: Yes.
• 16:44
  Speaker 2: Yeah. So long-term bonds, if you want that hedge, it's
• 16:47
  Speaker 2: long-term bonds that you want.
• 16:49
  Speaker 1: It's actually the duration, as opposed to the classification, if
• 16:52
  Speaker 1: you know what I mean. Very interesting. And it's the
• 16:54
  Speaker 1: first time we've really explored that on the show. While
• 16:57
  Speaker 1: I have you, and we're talking of this issue, I
• 17:00
  Speaker 1: know we're going to move around, but that's how we
• 17:02
  Speaker 1: do it. Private credit, in this country at least, never
• 17:05
  Speaker 1: been anything that private investors went near. There was mezzanine
• 17:10
  Speaker 1: debt and that sort of thing, but mom and dad
• 17:11
  Speaker 1: never went near private credit. We've had about two or
• 17:14
  Speaker 1: three years of strong promotion of private credit to listeners
• 17:19
  Speaker 1: like listeners on the show. And there was some good years.
• 17:23
  Speaker 1: There's now, of course, a sudden sense of fear due
• 17:26
  Speaker 1: to the collapse of this Bathla housing group in Sydney
• 17:30
  Speaker 1: and all the private credit names are in there. How
• 17:34
  Speaker 1: do you think this will play out? Is this a
• 17:37
  Speaker 1: moment of a shakeout in private credit where it's part
• 17:39
  Speaker 1: of the maturing of our local market? Or is it
• 17:42
  Speaker 1: a point where we say there was a retail interest
• 17:45
  Speaker 1: in private credit way back there in 226 and everyone
• 17:49
  Speaker 1: got burnt and never went in again. How do you
• 17:51
  Speaker 1: think it would pan out?
• 17:52
  Speaker 2: I think that we're going full cycle for the first time.
• 17:57
  Speaker 2: So I know previously your guests have explained that private
• 18:01
  Speaker 2: credit really came about after the GFC. Banks were forced
• 18:04
  Speaker 2: by their regulators. We mentioned APRA earlier, who are the
• 18:07
  Speaker 2: regulator of the super funds. Well, APRA also regulates the banks.
• 18:11
  Speaker 2: And around the world, there's an agreement between the different
• 18:14
  Speaker 2: regulators of banks around the world called the Basel Agreement.
• 18:17
  Speaker 2: So after the GFC, which was a banking crisis, it
• 18:22
  Speaker 2: was agreed that banks would be forced to hold more
• 18:26
  Speaker 2: capital against risky real estate loans and other risky loans.
• 18:30
  Speaker 2: The banks were forced to pull back from that space
• 18:33
  Speaker 2: of lending for real estate development. And of course, nature
• 18:38
  Speaker 2: and finance, of course, are vacuum. So that created an
• 18:41
  Speaker 2: opportunity for private credit funds. And those private credit funds
• 18:44
  Speaker 2: flowed in there. And look, to begin with, there were
• 18:47
  Speaker 2: a lot of really good opportunities and there were high
• 18:50
  Speaker 2: quality operators. There was Alcyon, Qualitas, Wingate, et cetera, the
• 18:56
  Speaker 2: ultimately MaxCap and other high quality operators. But eventually a
• 19:00
  Speaker 2: lot of people who are less high quality and who
• 19:03
  Speaker 2: are taking less quality opportunities flow into the space. And
• 19:09
  Speaker 2: we haven't had a full cycle. We haven't had a
• 19:11
  Speaker 2: full credit cycle where that opportunity opened up after the
• 19:14
  Speaker 2: GFC and And now, 16 years later, we're getting to
• 19:18
  Speaker 2: the point where we're going to find out who has
• 19:20
  Speaker 2: been writing good credit and who have been the cowboys
• 19:24
  Speaker 2: in the industry and haven't been undertaking proper risk management.
• 19:28
  Speaker 2: We're going to find out. I think it has a
• 19:30
  Speaker 2: long way to go, James, basically. The battle is the
• 19:33
  Speaker 2: beginning of something. And you said a moment ago that
• 19:36
  Speaker 2: we'll look back on 2026 and say, okay, that was
• 19:41
  Speaker 2: when we had a big shakeout in private credit. I
• 19:43
  Speaker 2: think that is going to happen.
• 19:44
  Speaker 1: Do you think it could, even though it was a
• 19:46
  Speaker 1: business that emerged because the banks weren't taking part, do
• 19:49
  Speaker 1: you think it could hit bank stocks if it got
• 19:51
  Speaker 1: very severe?
• 19:52
  Speaker 2: Potentially. I mean, if there's forced sales of property, of
• 19:57
  Speaker 2: residential real estate developments, and even commercial property developments... then
• 20:03
  Speaker 2: it could affect their assets. Banks still lend a lot
• 20:08
  Speaker 2: of money, obviously, into the mortgage market. They are big
• 20:12
  Speaker 2: building societies, but they still lend a lot of money
• 20:14
  Speaker 2: into commercial property. If on the private credit side, we
• 20:20
  Speaker 2: have a crisis that forces the sale and we get
• 20:24
  Speaker 2: into a fire sale of commercial property and of residential
• 20:28
  Speaker 2: property developments, Yes, there could be contagion, that's what we
• 20:32
  Speaker 2: would say, into the banking system. But I don't think,
• 20:36
  Speaker 2: but we're not looking at the GFC. It could be
• 20:39
  Speaker 2: a problem for the banks, but we're definitely not looking
• 20:42
  Speaker 2: at the GFC. This is not the subprime crisis.
• 20:44
  Speaker 1: It's a localized property and credit moment, a storm basically. Okay,
• 20:49
  Speaker 1: very interesting. Folks, I'm going to stick with Sam. He's
• 20:52
  Speaker 1: going to tell us a little bit about what he's
• 20:53
  Speaker 1: been doing more recently, a very interesting project he's involved with,
• 20:56
  Speaker 1: and we have some questions.
• 20:57
  Speaker 2: Stay with us.
• 21:08
  Speaker 1: Hello, welcome back to the Australian's Money Puzzle. James Kirby
• 21:11
  Speaker 1: and Sam Wiley talking this morning. Sam, just to tell
• 21:14
  Speaker 1: listeners what you've been up to, you're always up to something.
• 21:17
  Speaker 1: This family office area, I'll give you an example. In
• 21:22
  Speaker 1: my world, the number of advisors who have been sort
• 21:24
  Speaker 1: of stolen away, rather like poached by family offices, I
• 21:30
  Speaker 1: can't keep up with it. The number of very good
• 21:32
  Speaker 1: advisors who have left and left advice and joined family
• 21:36
  Speaker 1: offices where they become sort of chair or whatever of
• 21:38
  Speaker 1: the family office. And they've removed from the market, but
• 21:42
  Speaker 1: it does reflect, I think, a boom in that area.
• 21:45
  Speaker 1: And you are looking at that area now. Are you
• 21:47
  Speaker 1: running a course or something like that, a module?
• 21:49
  Speaker 2: Yeah, we're developing a program at the Melbourne Business School
• 21:51
  Speaker 2: called the Family Wealth Program. It's a program of six
• 21:55
  Speaker 2: two-day weekend modules to help wealthy families, not just family offices,
• 22:01
  Speaker 2: that's right up the high end of it, but to
• 22:04
  Speaker 2: help high net worth, but especially ultra high net worth
• 22:08
  Speaker 2: families to create their investment strategy for the first time
• 22:12
  Speaker 2: or to remake their investment strategy, especially in the light
• 22:15
  Speaker 2: of the tax changes that have come along. Right.
• 22:18
  Speaker 1: Well, I hope you get them to consider philanthropy. And
• 22:22
  Speaker 1: open a path on each case, Sam. I hope that's
• 22:24
  Speaker 1: a little mini module in your course. It is. It is. Good. Now, folks,
• 22:28
  Speaker 1: that was a question without notice. I can add. Good
• 22:30
  Speaker 1: for you, Sam. Okay. Now, the question I want you
• 22:32
  Speaker 1: to deal with today is from Carl, C-A-R-L, Carl. He says,
• 22:36
  Speaker 1: your recent discussion on gold got me thinking about another
• 22:39
  Speaker 1: potential long-term investment, electricity infrastructure. And his point is that
• 22:44
  Speaker 1: with this huge shift towards electrification, particularly through batteries, through EVs,
• 22:50
  Speaker 1: He says, does the electrification trend ultimately make electricity infrastructure
• 22:54
  Speaker 1: more valuable? Or could rooftop solar batteries and EVs undermine
• 22:59
  Speaker 1: the traditional utility business model? Is this a trend you
• 23:03
  Speaker 1: think investors should be paying more attention to? Great question, Carl.
• 23:06
  Speaker 1: Really good. What do you think, Sam?
• 23:08
  Speaker 2: Look, that is a great question, Carl. And it goes
• 23:11
  Speaker 2: not just to really important investment things, but it goes
• 23:14
  Speaker 2: to the short term and the long term. So wholesale
• 23:17
  Speaker 2: electricity prices have been coming down because of rooftop solar
• 23:21
  Speaker 2: and batteries. The government has stimulated the use of domestic batteries,
• 23:25
  Speaker 2: and that has been bringing wholesale electricity prices down, which
• 23:28
  Speaker 2: is causing some problems for Chris Bowen, the federal minister,
• 23:33
  Speaker 2: and energy transition. But, you know, the question, Carl's question
• 23:38
  Speaker 2: taps into two massive themes, really two of the biggest
• 23:42
  Speaker 2: global themes. One is decarbonisation. And the electricity that we
• 23:47
  Speaker 2: need to power our electric cars and electric stoves and
• 23:51
  Speaker 2: in moving away from using hydrocarbons, then we are moving
• 23:55
  Speaker 2: towards electricity. So that's the biggest trend. But it's also
• 23:59
  Speaker 2: an AI trend. I mean, the power is part of
• 24:02
  Speaker 2: the stack. What goes into the AI at the bottom
• 24:06
  Speaker 2: of the stack, we've got AI data centers. But even
• 24:09
  Speaker 2: below that, we've got what goes into AI data centers
• 24:12
  Speaker 2: are chips and power. electrical power. And so you're really tapping, Carl,
• 24:19
  Speaker 2: into these two massive global themes. And following themes for
• 24:23
  Speaker 2: the long term is a great thing to do as
• 24:25
  Speaker 2: an investor. And sometimes people think, I'm too late. Everyone's
• 24:31
  Speaker 2: taken those opportunities. And that's almost always a mistake. Those
• 24:35
  Speaker 2: things go on and on and on. And it's definitely
• 24:39
  Speaker 2: not too late to tap into that theme of the
• 24:42
  Speaker 2: electrical infrastructure, electrical power infrastructure, that goes both into decarbonization
• 24:48
  Speaker 2: and into AI.
• 24:50
  Speaker 1: The other part of his question was whether the traditional
• 24:52
  Speaker 1: utilities that are on the ASX reflect that change you're
• 24:57
  Speaker 1: talking about.
• 24:58
  Speaker 2: Yeah, I think they will. Look, there'll be a lot
• 25:00
  Speaker 2: of new players will come in. So some of the
• 25:03
  Speaker 2: power generation, the electrical power infrastructure will be built, will
• 25:08
  Speaker 2: be built specifically for AI data centers, for instance. But
• 25:14
  Speaker 2: the companies like AGL, Origin, et cetera, the ASX 50 companies,
• 25:21
  Speaker 2: ASX 300 companies that feed into that electrical infrastructure, I
• 25:26
  Speaker 2: do think they're a really important and good part of
• 25:29
  Speaker 2: the ASX 300. And just ask ChatGPT. Just say, I'm
• 25:35
  Speaker 2: thinking about investing You've got such powerful tools nowadays.
• 25:38
  Speaker 1: Yes.
• 25:39
  Speaker 2: Just ask ChatGPT. I'm thinking about investing in electrical infrastructure
• 25:43
  Speaker 2: because it feeds into these plays. Always put very long
• 25:45
  Speaker 2: prompts into ChatGPT. That's right.
• 25:49
  Speaker 1: The more detailed the question, the better the answer.
• 25:51
  Speaker 2: The longer the better. Ask what shares will give me
• 25:55
  Speaker 2: plenty of exposure to electrical infrastructure.
• 25:57
  Speaker 1: Yeah.
• 25:58
  Speaker 2: And it'll isolate them, and then you can build your
• 26:01
  Speaker 2: theme around that.
• 26:03
  Speaker 1: Terrific. OK, we might leave it at that, Sam. Hey,
• 26:05
  Speaker 1: thank you very much for coming on this morning. Great
• 26:07
  Speaker 1: to have you as always.
• 26:08
  Speaker 2: Yeah, you're welcome, James. Really good questions. I really enjoy it.
• 26:11
  Speaker 1: You're welcome, Adam.
• 26:12
  Speaker 2: That's Dr.
• 26:12
  Speaker 1: Sam Wiley, Melbourne Business School and the Wendell Stone Education Group.
• 26:16
  Speaker 2: Lovely.
• 26:17
  Speaker 1: OK, keep the emails rolling. The money puzzle at the
• 26:21
  Speaker 1: Australian dot com dot au. We have some good questions
• 26:24
  Speaker 1: today and I want more as we go. Today's show
• 26:27
  Speaker 1: was produced by Tiffany Dimak.
• 26:29
  Speaker 2: Talk to you soon.