Income investing done differently: Global reach, lower risk and less volatility

Chad Padowitz

Talaria Asset Management

There are other ways for Australians to generate investment income, beyond the well-worn approach of harvesting fully franked dividends from ASX stalwart stocks.

We take a broader view, using a high-conviction, value-oriented process to identify high-quality large-cap companies from around the globe. And with a 16-year track record and around $750 million in funds under management, the Talaria fund generated an average yield of more than 9% p.a. in the last decade.

How did we do this? Our use of derivatives is a key distinction of the Talaria Global Equity Fund. Specifically, we sell a put option for each share we wish to buy, which provides additional income and reduces volatility. 

But crucially, there is:

  • No use of leverage – if we want $1 million of exposure, we have the same amount in the bank.
  • No counterparty risk – as exchange-traded vehicles, there are always other buyers and sellers.

On the macro front, it’s clear that global markets are now transitioning from a period of elevated capital growth driven by historically high asset prices. In this environment, we believe the importance of income – as a proportion of overall investment returns – will be magnified.

Read or watch below to learn more about Talaria's distinctive approach to global equities income investing, and its potential role within a diversified investment portfolio.


Edited transcript

Hi, I'm Chad Padowitz, co-CIO of Talaria Asset Management. For the past 16 years, we have generated consistent income, lower market risk, and greater certainty of returns through a differentiated approach to global equity investing. Our objective is to compound real wealth over time, and we do this via a strategy of investing in 25 to 40 global companies from developed markets, using our strong Value orientation.

Established in 2005, we now manage over 750 million dollars, and over the last 10 years have averaged over 9% a year in income, highlighting our differentiated approach to investing,

We are on all major platforms, while also offering an active ETF, meaning investors can access us via platforms, through our responsible entity, or via a stockbroking account. As discussed, our objective is to compound real wealth over time, and as you can see, we have continued to deliver against that and this covers multiple market environments.

It's important to remember that our investment process is a bottom up fundamental one, and the investment team has over 120 years of collective investment experience. And once a share goes through our rigorous investment process and is added to our portfolio, we apply a differentiated approach in implementing that.

Every share we own, or seek to own, begins life as a put option. That process is shown in the image below.

Let's assume a company we want to own is trading at a hundred dollars a share, and we believe it's worth $120. Rather than buying that share directly, we sell a put option, which is an obligation on us to buy that share for $97 in two months’ time. For that obligation, we get paid $3, an option premium. This means that, in two months’ time, if the share is above $97, we won't get it. But importantly, we keep the $3 premium. 

But if the share price falls below $97, we do get it, while also keeping the $3 premium, so our net cost is $94. So, as you can see, there is a 6% buffer against the loss. This is to get a share that if we do end up owning, we believe it's worth 120, so we're happy to own it. And we get this $3 income regardless, which annualises at close to 20% a year.

Importantly, there are things to remember about our implementation process and approach to risk. 
There is no leverage. So if we want a million-dollar exposure, we've got a million dollars in the bank. 
And secondly, these are exchange-traded options, so there is no counterparty risk.

Our process achieves three important outcomes. Firstly, a consistent level of income from diversified sources. As shown in the below chart, the option premium we generate in dark blue is a very high and sustainable number. When combined with dividends and some interest, this produces a very high consistent income component, which compares favourably to other equity funds.

Secondly, we provide a structurally superior risk-return profile, capturing most of the up, but much less of the down, meaning you have far more money working for you when the market ultimately recovers.

And lastly, we deliver lower volatility. The journey matters. We have significantly lower volatility than most other equity funds and the index. 

Talaria's performance in the current context

It's important to contextualise the Talaria Global Equity Fund in the 2022 financial year, which is a highly challenging one for global equity markets. And what we have done is we've compared our performance and our volatility against those of the top five Australian-based global equity funds by inflows for the 2021 year.

The Talaria difference

It’s not just our performance that is superior, but the way this is delivered with far lower volatility. We know that many of our investors look to blend us with growth managers. In this context, it's worth highlighting our very low correlation to NASDAQ, which means investors can achieve our high level of diversification by including Talaria into their portfolios.

Income versus valuation - The bigger picture

We've been talking about Talaria specifically, but now I'd like to zoom out and talk a little bit about income and valuation. What you can see here is the total return by decade over the last 140 years. And what you can see in the light blue is income and dark blue is capital contribution. What's very obvious is that every single decade income matters and does contribute, but capital doesn't actually contribute every decade. In fact, there's been three, the 1910s, 1930s and more recently the 2000s where you had no return from capital appreciation.

The importance of income usually increases after a period where capital gains have been very strong, as you can see in the above graphic.

And the most recent period is certainly one of those environments, which leads us to believe the decade we're currently in is very likely to be one where capital gains will be a far lower contribution of return, highlighting the importance of income.

Looking at valuation across regions, across sectors, one can see there is quite a big difference between these. And in an environment where much of the market is very expensive, it is important to take these into consideration as we do about where investors allocate their capital.

In summary, I'd like to leave you with the following slide, which highlights the key benefits of the fund and how we've been able to help clients and communities enjoy a more certain financial future for more than 16 years.

For more information, please head to our website or get in touch with a member of the sales team – and thanks for watching.

Managed Fund
Talaria Global Equity Fund
Global Shares

A little certainty can be empowering, especially in volatile times

For more than 16 years Talaria has been delivering a greater certainty of returns through its unique and alternative approach to global equity investing, with over 9% p.a. average income distribution for the last 10 years, low volatility and lower market risk.

Click here to learn more.

As part of our 2022 Income Series, Livewire has brought together powerful insights and actionable ideas from some of Australia’s leading financial minds, to help you navigate the new era in income investing. To learn more, please click here. GET THE INSIGHTS
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Units in the Talaria Global Equity Fund (Managed Fund) (the Fund) are issued by Australian Unity Funds Management Limited ABN 60 071 497 115, AFS Licence No. 234454. Talaria Asset Management Pty Ltd ABN 67 130 534 342, AFS Licence No, 333732 is the investment manager and distributor of the Fund. References to “we” means Talaria Asset Management Pty Ltd, the investment manager. The information in this document is general information only and is not based on the objectives, financial situation or needs of any particular investor. In deciding whether to acquire, hold or dispose of the product you should obtain a copy of the current Product Disclosure Statement (PDS) and the target market determination for the Fund and consider whether the product is appropriate for you. A copy of the PDS and the target market determination is available at australianunity.com.au/wealth or by calling Australian Unity Wealth Investor Services team on 1300 997 774. Investment decisions should not be made upon the basis of the Fund’s past performance or distribution rate, or any ratings given by a rating agency, since each of these can vary. In addition, ratings need to be understood in the context of the full report issued by the rating agency itself. The information provided in the document is current at the time of publication. The Zenith Investment Partners (ABN 27 103 132 672, AFS Licence 226872) (“Zenith”) rating (assigned (assigned November 24, 2021 for funds AUS0035AU and WFS0547AU) referred to in this piece is limited to “General Advice” (s766B Corporations Act 2001) for Wholesale clients only. This advice has been prepared without taking into account the objectives, financial situation or needs of any individual, including target markets of financial products, where applicable, and is subject to change at any time without prior notice. It is not a specific recommendation to purchase, sell or hold the relevant product(s). Investors should seek independent financial advice before making an investment decision and should consider the appropriateness of this advice in light of their own objectives, financial situation and needs. Investors should obtain a copy of, and consider the PDS or offer document before making any decision and refer to the full Zenith Product Assessment available on the Zenith website. Past performance is not an indication of future performance. Zenith usually charges the product issuer, fund manager or related party to conduct Product Assessments. Full details regarding Zenith’s methodology, ratings definitions and regulatory compliance are available on our Product Assessments and at Fund Research Regulatory Guidelines. © 2018 FE Money Management. all rights reserved.The information, data, analyses, and opinions contained herein (1) include the proprietary information of FE Money Management and Lonsec (2) may not be copied or redistributed (3) do not constitute investment advice offered by FE Money Management or Lonsec (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security (5) are not warranted to be correct, complete, or accurate. FEMoney Management and Lonsec shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses, or opinions or their use. FE Money Management and Lonsec does not guarantee that a fund will perform in line with its Fund Manager of the Year award as it reflects past performance only. Likewise, the Fund Manager of the Year award should not be any sort of guarantee or assessment of the creditworthiness of a fund or of its underlying securities and should not be used as the sole basis for making any investment decision. The rating issued 04/2022 is published by Lonsec Research Pty Ltd ABN 11 151 658 561AFSL 421 445 (Lonsec). Ratings are general advice only, and have been prepared without taking account of your objectives, financial situation or needs. Consider your personal circumstances, read the product disclosure statement and seek independent financial advice before investing. The rating is not a recommendation to purchase, sell or hold any product. Past performance information is not indicative of future performance. Ratings are subject to change without notice and Lonsec assumes no obligation to update. Lonsec uses objective criteria and receives a fee from the Fund Manager. Visit lonsec.com.au for ratings information and to access the full report. © 2022 Lonsec. All rights reserved.

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Chad Padowitz
Co-Chief Investment Officer
Talaria Asset Management

Chad is the Co-Chief Investment Officer and co-founder of Talaria Asset Management. He has more than 20 years’ experience in the financial services industry in the UK, South Africa and Australia. Talaria's investment strategy seeks to increase the...

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