Investing in Bonds - Why it should be in your Top 3 choices

Our next speaker is Ray Trevisan from OTG Capital.

Ray is a fund manager and director of OTG Capital.

Established in September 2018, OTG Capital's Asset Back Investment Trust has delivered an average of 6.75% since inception.

Simplicity and reliability is forefront of their delivery model, and they continue to deliver results to clients quietly and confidently.

Ray's presentation topic today is investing in bonds.

Why it should be in your top three choices.

Welcome to the stage, Ray.

Thank you so kindly.

Can you hear me fine?

Going to go to my share screen.

OK, so first of all, thank you so kindly for having me along.

What I'm going to cover today really is an introduction to bonds 101.

And again, this may be fairly simple for some investors out there, but I always find that covering the simple things first is a great place to start.

And as normal, our standard disclaimer that we're providing a commentary, which is general advice only.

So shares or cash, cash or shares.

I have been in this game long enough to, I guess, talk to many investors and their primary focus is equities or cash.

And so this middle asset there where I'm talking about fixed income rarely gets a look in because people think of bonds as being very boring or they just simply don't understand them.

And so hopefully today I'm simply going to do a bit of an introduction and provide some basics about what bonds are all about.

So they're not understood.

And again, if you believe the statistics, less than six percent of Australian investors actually play in that area of bonds.

Now, I find they're easy to invest in, and certainly they have an incredibly wide range of choice yields and also risk profiles.

They aren't always boring.

Some of them can be potentially very, very risky.

So what is a bond?

Now, a bond, I guess, basically, it's a loan.

Now, when we look at loans, you'd be very familiar with the word mortgage, and mortgage is actually a French word meaning engaged until death, engorgé à mort.

And so quite a fascinating

definition when you think about it.

But when you think about it, Australians, almost every Australian consumer at one time or another has engaged in a bond, whether it be a home mortgage, whether it be a credit card, personal loan, payday lenders, or even after pay, zip pay type of point of sale lending facilities.

And so there are many types of bonds out there as well.

And so people are usually very familiar with government or treasury bonds because that's what gets quoted in the markets quite a lot.

So the US Treasury bond rate, for example, is what's commonly quoted.

We have corporate or municipal bonds and we also have investment grade bonds.

And I'll talk a little bit about more in just a moment.

Asset backed is what we is what we deal with in OTG capital.

And then I guess the non securitized and open type of bonds or loans that I guess from that perspective, I look on those fairly cautiously.

So the types of bonds now, investment grade bonds are issued by investment vehicles, like trusts, funds, broking houses that have been rated by reputable agencies like Moody's or Standard and Poor's.

Now, I add an air of caution there.

Just because they've been rated doesn't necessarily make them less risky.

They've been reviewed by a third party.

But we also know that history tells us that even those ratings agencies let the markets down.

And the GFC, I think, is a very salient lesson.

And for anybody out there, the seventeen point six billion dollars worth of Credit Suisse bond owners that got zeroed out with the acquisition by UBS,

would be sitting there scratching their heads going, what the heck just happened?

So specifically mortgage backed bonds is what I deal with at OTG.

So they're issued by investment trusts and funds, and we use real estate usually to secure a loan in case of a default by a borrower.

And I guess from that perspective, when we're talking about an asset backed security, which they sometimes called or an RMBS, a residential mortgage backed security,

They, I guess, commonly get confused.

And so many people start asking, oh, Ray, are you in a mortgage fund?

And it's like, no, we are a bond provider.

We lend money.

We're simply using a real asset, real property.

And usually for us, that is in the capital cities where we find it very tradable.

And that's the kind of asset that we use to collateralise all our loans.

So other kinds of loans that are done without regulation, an AFL or an ACL without rules or protection, the schemes to fund projects that what I would say are not standard, and I refer to them as really being the Wild West.

And you can put crypto in their pine forests, and various livestock that have been the subject of

a number of very interesting projects and schemes over many, many years that those of us that are certainly around my age and older will have a wry smile, I guess.

And so bond terminology is also one of those factors that if you've ever borrowed money, bond terminology, I think, is there to confuse rather than assist.

And so a bond is often called a loan or a bearer bond, a registered bond.

And so you have all these different types of, I guess, ways of expressing the same thing and same thing with an interest rate.

So coupon rate, a return, a yield, a payment, a coupon payment is simply how much cash are you getting back for the loan that you're providing?

The term is the maturity date or the loan duration.

Principle, how much you're actually lending, security, what are you going to get back if you don't get your cash?

So what's actually backing this particular loan in case something goes wrong?

And again, we need to have an agreement in place when we are lending money.

So this is plan B.

What happens if something goes wrong?

And so I've got something in my e-books that you can go to my website and download for free e-books and considerations when investing in bonds.

They're simple things.

And I like to really personalise this when you are investing in bonds because the tables are now turned.

you are doing the lending.

And so I often try and when I'm talking to a new client, trying to relate to, you know, if you were lending money to somebody in your family, okay, what are the things that you would want to consider if you're lending that money?

And I guess, you know, someone else has got your money now.

And I guess from my perspective is, how am I going to get it back?

because it's very, very easy to lend money.

The real trick is getting it back with the interest that's been committed to you.

And I guess when you are evaluating a bond, part of what you need to be able to do is ask yourself, how much do you want in return?

And when do you want that cash back?

So these are all tied into the terms and conditions of the bond that you are potentially investing in.

So I have these six key factors that I illuminate in my ebooks when I'm looking at bonds.

Reputational is really, really important.

So are you dealing with somebody that's reputable, has a good track record, has not defaulted on their loans or their borrowings and have good customer records?

And again, the Internet's a wonderful thing.

You can look people up very, very easily.

Maturity, how soon do you want your money?

So if you've invested in a bond that has a three year maturity, obviously you can come back four or six weeks later and say, excuse me, I need my money back because then you're going to create problems and you may not actually get the cash back when you want it.

So maturity is important and risk reward.

Now, this is really important in my, I guess, in my day to day running.

I look at contracts, I look at deals on a daily basis and

It's not just a gut feel, you need to do your numbers, you need to do your due diligence, but you need to evaluate is my risk versus the reward when you are evaluating bond.

And so if somebody is offering very, very strong returns, you've got to scratch your head and say, well, if that's above market rate, what am I risking?

And is the reward commensurate with what I'm getting back?

And again, you know, the bonds that are particularly I like this particular one because this graphic is of a Domingos kind of bond in South America.

Not quite so good as maybe a US Treasury bond, for example.

So collateral and security and you've you'll have heard some of the presenters before me talk about collateral and security.

you have to make a judgment call.

If push comes to shove and you've got to turn something back into cash, one of the things that I often get asked about why I focus on real estate only is because it turns back into cash very, very well, particularly in highly sought after locations of the country.

So from that perspective, when I look at business assets, yes, they're real, but if you had to go and actually liquidate them and turn them back into cash,

I simply ask the question, are you going to get 100 cents and the dollar back?

Yes or no?

And so when we look at corporations that have reputational, I guess that kind of collateral that says, you know, if I invested in a Microsoft bond or an Intel bond, are they likely to go out of business or not pay my bond back?

And I guess on the balance of things and looking at their track record, you'd say to yourself, well, that sounds like a reasonably safe bet.

Plan B, what happens when the bond holder comes back and says, You know what, I can't give you your cash back, but I'm going to give you some shares in my company in exchange for the cash that you gave me a few years back.

Now, some people may look at that and go, Hey, that's fine.

I'm happy with that.

Others, they may sit there and go, I actually want my cash, please.

And so you need to be wary

that if there's a plan B there, what that plan B is in the bond that you're investing in.

And the last one, and most importantly, is your liquidity and tradeability.

So there are many bonds out there.

There's a bond market out there today that you can invest in, and they will print in their terms and conditions what their liquidity is and whether a fund is liquid or illiquid in that regard.

So how do I invest in bonds?

Where do I start?

So you can talk to brokers, you can talk to your financial provider, bond providers directly.

You can deal directly with companies that issue the bonds or they're appointed brokers or third parties.

Me, for example, I run an investment trust.

You can simply go to our website, you can invest online.

And I guess there are many other providers today that would be offering similar kinds of entrees into the way they operate their bonds.

There are also exchange traded funds out there, ETFs, that specialise in bonds.

So they will accumulate a basket of bonds and provide you an ability to enter the market in that manner.

There are stock exchanges as well.

And so in conclusion,

Bonds are as safe or as dangerous as you make them.

The idea that bonds are totally safe I think has been debunked certainly in the last couple of weeks when bondholders from Credit Suisse got zeroed out and they woke up and all of a sudden there's a 17 point plus billion dollar hole in people's budgets.

So they can be dangerous as well as very, very safe and boring.

Remember the six key factors of bonds that I've provided.

And again, we'll make these slides available.

And if you like, please go to our website.

I've got these four e-booklets.

They're very easy read and I provide them free of charge.

Please download them, have a read.

I find they're very, very useful in being an entree to people that are simply dipping their toe in the water and saying, you know what?

I'd like something slow and steady and I don't have to lose too much sleep or fingernails investing in equities, for example.

Understand what you're investing in.

I can't stress this enough and take a considered view of the return versus the risk of you losing your cash.

Remember, you are now the lender.

It's your money and you need to get it back.

And is the security real and tradable for cash?

And I'm sure you'll hear not just from me, from other presenters as well that talk very specifically about that.

And I guess bottom line, if it doesn't make sense, don't do it.

I can't stress that enough.

If any bond, mine included, if it doesn't make sense to you, don't invest in it.

I mean, very, very common sense in that regard.

That's it for me, investment markets.

Thanks so kindly for having me.

All of this information will be made available on their website.

And obviously, please come to our website or give me a call if you have any questions.

And thank you so kindly for your time today.

Thanks, Ray.