Trials and tribulations of trading

Christopher Joye

Coolabah Capital

In the AFR today I write that while the life of an investor/trader can be stimulating, it is also stressful. The active investor is effectively betting that the collective wisdom of the crowd is mispricing an asset, which is a bold assessment that cannot be made lightly. If you disrespect the market, it will beat humility into you mercilessly. And your wins and losses are judged harshly: simply put, you either make good money, or you do not. Click on that link to read the column for free or AFR subs can click here. Brief excerpt enclosed:

It is very easy to aggressively express an unaccountable opinion online or in a newspaper column: it is quite another thing to back your views with billions of dollars on the presumption that the masses may be getting it slightly wrong over a very specific time interval, and then live or die by those decisions.

It definitely helps if you are part of a close-knit team. I have 23 executives working with me. Going into a zero-sum battle each day against such a ruthless and formidable adversary as the global financial market creates a unique--almost familial--bond through the searing intensity of the experience. While it is not a vocation for everyone, trying to prove acolytes of the efficient markets hypothesis wrong day-in, day-out is an intellectually rewarding commitment...

Since 1 January we have bought and sold more than $10.6 billion of bonds. We net purchased $937 million over the peak of the crisis and have net sold $1.2 billion since the end of March. While we are holding more cash than we have for some time, we are still long assets that appear to have a lot of mean-reversion left in them. In April we hypothesised that the credit spreads on the major banks’ five-year senior-ranking bonds could compress from the 175 basis points level they touched during the darkest days of March to new post-GFC tights around 50 basis points.

During the week these assets were bid at 46.5 basis points above the quarterly bank bill swap rate, setting a new post-GFC record. And it is entirely possible their spreads could contract further. The pre-GFC “tights” are, after all, around 10 basis points.

At the same time, the major banks’ Tier 2 subordinated bonds, which we have liked for a few months now, remain cheap and are still trading on spreads that are some 60 basis points wide of their post-GFC lows. They have nonetheless been moving in the right direction: Tier 2 spreads have shrunk about 180 basis points since mid-March.

The same can be said for the major banks’ hybrids. The five-year hybrid curve is sitting around 350 basis points, 110 basis points above their post-GFC tights. Like the Tier 2 space, hybrid spreads have compressed nicely from their “wides” of 841 basis points in March. Those brave enough to buy in March have earned non-annualised capital gains of 20 per cent to 30 per cent over a few months.

For all the talk about illiquidity in credit, it is a much misunderstood concept. If you held high-grade assets issued by unquestionably strong entities, there was always a bid in size in March. If, on the other hand, you held lower-grade assets issued by companies that perform badly in recessions (retailers, commercial property trusts, unregulated lenders, airlines etc), most folks would not touch them with a 40-foot cattle prod precisely because they are so cyclical...

One of the most interesting facets of liquidity is that it can be one-sided in markets dominated by a lot of group-think. In March, for example, the herd was rushing for the exits, desperately trying to sell. If you were the bid in this environment, you had almost infinite liquidity. While we net bought $937 million, on a gross basis (before netting sales), we actually bought over $1.5 billion in late February and March. In contrast, if you were the offer, it could be hard to get the bid you needed. Market impact costs were excruciating. And in some assets, like lower-grade corporate bonds, there simply was no bid.

The converse is true today. Since 31 March, we have gross sold $3.9 billion (ie, after netting purchases, that falls to $1.2 billion). During this time the bid has felt infinitely deep because the herd has been rushing to buy-back whatever they sold in February and March. There has also been a fear-of-missing-out dynamic as the mother-of-all mean-reversion trades played-out. 

Read the full column here.

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General Disclaimer: Past performance does not assure future returns. All investments carry risks, including that the value of investments may vary, future returns may differ from past returns, and that your capital is not guaranteed. This information has been prepared by Coolabah Capital Investments Pty Ltd (ACN 153 327 872). It is general information only and is not intended to provide you with financial advice. You should not rely on any information herein in making any investment decisions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The Product Disclosure Statement (PDS) for the funds should be considered before deciding whether to acquire or hold units in it. A PDS for these products can be obtained by visiting Neither Coolabah Capital Investments Pty Ltd, EQT Responsible Entity Services Ltd (ACN 101 103 011), Equity Trustees Ltd (ACN 004 031 298) nor their respective shareholders, directors and associated businesses assume any liability to investors in connection with any investment in the funds, or guarantees the performance of any obligations to investors, the performance of the funds or any particular rate of return. The repayment of capital is not guaranteed. Investments in the funds are not deposits or liabilities of any of the above-mentioned parties, nor of any Authorised Deposit-taking Institution. The funds are subject to investment risks, which could include delays in repayment and/or loss of income and capital invested. Past performance is not an indicator of nor assures any future returns or risks. Coolabah Capital Institutional Investments Pty Ltd holds Australian Financial Services Licence No. 482238 and is an authorised representative #001277030 of EQT Responsible Entity Services Ltd that holds Australian Financial Services Licence No. 223271. Equity Trustees Ltd that holds Australian Financial Services Licence No. 240975. Forward-Looking Disclaimer: This information may contain some forward-looking statements. These statements are not guarantees of future performance and undue reliance should not be placed on them. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance or result expressed or implied by such forward-looking statements. Coolabah Capital Investments Pty Ltd undertakes no obligation to update forward-looking statements if circumstances or management’s estimates or opinions should change except as required by applicable securities laws. The reader is cautioned not to rely on forward-looking statements.

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Christopher Joye
Portfolio Manager & Chief Investment Officer
Coolabah Capital

Chris co-founded Coolabah in 2011, which today runs over $8 billion with a team of 26 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha...

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