[GRTV] Coolabah Capital: new funds and long-short strategies

GRTV talks to Coolabah Capital CIO Chris Joye about how his firm gets double digit returns.

Wednesday, November 29th 2023, 6:08AM

by Andrea Malcolm

Sydney-based Coolabah Capital is an active long and long-short manager with over A$9 billion across global bonds. It has 30 portfolios, half institutional and half retail, and two New Zealand funds: a short term income fund and a long short credit fund.

Joye who, as well as being CIO founded the firm, says it is the most active trader of Australian and NZ bonds globally, trading $300-400 million per day and turning over about $150 billion since the start of last year.

As an active manager, Coolbah has a highly quantitative process. Of its 40 staff, there are 12 traders and 13 analysts - mostly quants with technical backgrounds in engineering, maths, stats and finance.

The firm which sponsors the Crusaders and NZ’s top ski racer is committed to NZ and is bringing three more strategies to this side of the Tasman.

“Unusually for fixed income we run both long-only strategies for NZ, the short term income fund and also long-short strategies, which is a long-short credit fund.”

In the last year the long-short credit fund, after fees, has returned about 17.3% and the long-only strategy about 7.6% net of fees.

What that means, says Joye, is that in the long-short fund Coolabah can profit from bond prices falling and credit spreads or interest rates rising.

“So for example, many of our peers owned Credit Suisse hybrids. Credit Suisse blew up in March, those hybrids were wiped out. We were actually shorting Credit Suisse bonds last year. And we had a ban on any exposure, on the long side, to Credit Suisse that we introduced in May 2021.”

Yields and trades

Bonds are kind of like the new black, says Joye, and the performance of Coolbah’s strategies is a function of two things – firstly yield.

Its long-short credit fund currently has a yield of 10.6% per year without investing in risky debt – the average credit rating is A+.

Joye says the firm has daily liquidity in all products, with the long-short fund being so liquid, the portfolio is turned 15 times or more a year.

“Where we do enhance the yield is through some gearing. And then the other part of the return is trading.”

Coolabah has a very high level of trading activity using 60 to 80 proprietary quantitative models to value bonds. It then looks for cheap bonds that are mis-priced and paying too much interest as well as expensive bonds which it can short.

“So if you think of that 17.3% return, a decent chunk has come from yield but also a very big chunk has come from that trading alpha. And the same is true of our short-term income fund.”

That’s a cash-in-hands product with no gearing, he says, and both funds are floating rate so they don’t have fixed rate bond exposures. The yields will rise and fall with the RBNZ cash rate.

Joye says fixed rate bonds have performed very poorly over the last couple of years as yields have increased but now that yields are so high, fixed rate bonds are quite attractive so for the first time, Coolabah is bringing its fixed-rate bond portfolio to New Zealand.

“It’s called a long-duration strategy. That strategy is the best performing in Australia over all periods. It’s beaten all peers and rather than being floating rate, that active composite bond fund, as it’s called, has five years fixed rate bond exposure.

“And if people want to lock in that exposure and they think that maybe the RBNZ will be cutting rates sooner or later, then fixed rate bonds will probably perform really well.”

Three new funds

The three new funds will be PIE-wrapped for tax efficiency. As well as the active composite bond fund which is long duration (double A rated, fixed rate with daily liquidity), there will be a new floating rate high yield fund which is Australian and NZ bank bonds paying a yield of 11%, and thirdly a triple A rated sovereign strategy. This will have two options; a floating rate version and a long duration version.

Joye says in Australia in the last year, Coolabah has been running the sovereign strategy in its current portfolios where it has returned 14.5%.

The floating rate strategy in Australia has returned about 10.5% net of fees since it launched 11 months ago.

Meanwhile the composite bond strategy has beaten the benchmark index in Australia by about 6.5% over the last year and has typically beaten the benchmark by 2% pre-fees since it was launched in 2017.

Equities and bonds outlook for NZ

Joye says the RBNZ has put the cash rate at 5.5%, while in Australia the RBA cash rate is 4.35%.

“On our numbers, it basically looks like NZ is heading into a recession. Unemployment has risen here from 3.2% to 3.9%. In Q4 last year you had negative GDP growth. In Q1 this year GDP growth was basically flat. Q2 was a bit stronger.

“Obviously you’ve got to deal with the natural disasters and the recovery effort associated with that and Treasury puts that at roughly the same cost as the Christchurch earthquake. So I think around $13-15b NZ dollars worth.”

Unfortunately the times are going to be tough, says Joye. According to its own projections, the RBNZ doesn’t intend to cut rates until mid-2025 so rates are going to remain high for a long time.

“I think for asset allocation that means, in our view, you probably won’t be long cash because cash is very attractive. I think bonds are providing incredible returns, particularly in New Zealand where the cash rate is high compared to the rest of the world.

“Our outlook for equities is pretty dim. I think equities globally look over valued. And our outlook for private debt and risky debt – junk bonds, high yield bonds, commercial property – we’re incredibly negative because we’re going through a big default cycle and it’s just starting.”

Joye says looking at NZ bank balance sheets, delinquencies are just starting to rise off a low base. The banks are very strong and we don’t think there’s risk on bank balance sheets, but in Australia particularly, the non-bank lenders have picked up a lot of the risky borrowers and we think many of those guys will fail.”