Retirement income products always protected

Our next speaker in the Australian perspective is Craig Racine from Jai Rostec Capital Management.

His presentation topic is Retirement Income Products Always Protected.

Jai Rostec delivers diversified low and non-correlated investment solutions, addressing sequencing and portfolio drawdown risk while delivering equity income.

Gyrostack Absolute Return Income Equity Class A is designed for capital growth and income whilst hedging equity market risk.

Craig is the Managing Director and Chief Investment Officer of Gyrostack.

He has worked in asset management, private equity, investment banking in Australia and Hong Kong for companies such as KPMG, Asian Development Bank, Soros Funds Management, and AMP Capital.

Welcome, Craig.

Hi, Angelina.

So I set up Gyrostat capital management for investors who wanted peace of mind.

I've been through three financial crises, the Asian financial crisis, the boom and bust of the tech, and also the GFC as an investor.

And the traditional approaches typically didn't work very well.

versus those that constructed their portfolio with a hedge or some sort of protection always there did quite well.

So that's what I looked for with JIRA, something specifically to give you that peace of mind.

And we've delivered that.

For the last 13 years, we've never breached our predefined risk parameter of 3%.

And to give you an idea, since rates have risen up to September over the last couple of years, we're up around 26%, with the worst drawdown about 1.2%.

So what is it we do?

The most significant thing is that we are a risk managed fund with capital always protected, reliable income and returns in rising and falling markets, including in a market crash.

So our big distinguishing feature is that that protection is always there.

So for instance, let's say that we received $100,000 investment into the fund, 95,000 of that will buy ASX 20 shares.

So let's use for an illustration, perhaps we might buy a certain number of BHP shares at say $45.

our sophisticated systems will then go into the options market and look for the lowest cost protection.

There are many, many contracts to choose from.

And in that case, the effective price would be something like 44 and we will buy that protection.

So for instance,

about 95%, let's say we bought 10,000 BHP shares, we would buy protection over at least 10,000 shares as well.

And then we move that protection around.

So that's really the essence of what we do, but with that diversified ASX20 stocks.

So what are the real features of our fund?

The first and most significant for that peace of mind is capital is always protected.

And as I've mentioned, we've never breached our hard limit of the 3%, and that's because the protection's always there.

The second is that we have reliable income even when dividends are cut.

So most of the income comes from passing through those high yielding dividends, commodities, banking stocks, retail, etc.

For instance, when the banks cut their dividends to zero, the risk management overlay or that protection increased significantly in value and that provided a dual source for that income.

Significantly, the returns are in rising and falling markets.

So no matter what, protection always goes up in value at any stage of the market on market falls.

So as a result of that, our returns are non-correlated with the market.

If they're non-correlated, that means you get the benefits of diversification.

And what you find with many other approaches is when markets fall, they fall as well and you suffer large losses.

Whereas ours is designed in such a way that we will gain on market falls and particularly on significant market falls.

And the other is there's always, in addition, a separate downside tail for those bigger sell-offs to address the sequencing risk.

So we also generate positive returns in market pressures.

So the key message here is that we can get higher risk adjusted returns just through portfolio construction.

Diversification, you must have non-correlated assets as measured by beta to reduce the portfolio risk.

And we have that because in addition to the protection one for one on the stock, we'll always buy just a little bit extra

And as a result of that, that bit extra will reliably increase in value.

The other thing is that the market price of protection varies significantly.

Sometimes it's very benign, sometimes people are panicking, and it's quite different across all different timeframes.

So these protections can be quite liquid most months out for the next couple of years.

So we really take advantage of where is the cheapest protection.

And then as the stock and protection moves, we identify that and then move the protection to that spot.

So, for instance, let's say in our BHP example, all of a sudden the stock has gone down from 45 to 40.

Well, we've protected and made some money, but that protection level now needs to move down.

So what we will do is move that down in combination, perhaps to the, in that case, 39 level, but extract a large amount of cash.

So that's where the gyro stat came from.

As the market moves, we reposition the options a bit, such that we'll always have about 95% of the stock and 5% within the options.

And that's what we're doing on a day to day basis.

Now, when you're managing your portfolio, they're really those four key stages of the market that you can see there.

And if you're in a long only fund, for example, that's the top layer that may be your portfolio.

So falling markets are unfavourable.

Big, large one-off falls are particularly unfavourable.

But in stable markets and rising markets, you tend to do well.

And to get better returns, you have better correlation coefficients that do not necessarily move with the market.

And often you'll find that that layer

They all have a beta correlation coefficient of about one.

So you don't really get protection in those sell-offs.

So then if we move to the next level, there's a whole heap of other products that you may be familiar with.

There's the long shorts.

There's the cupboard calls.

There are some that use algorithms to try and predict when protection should be done.

And as a result, they sell some futures.

So that requires correct market timing.

So if you get your timing correct, you can mitigate the losses.

And we see a number of the clients who use us also use those type of approaches.

However, our approach, the dynamic hedging as protection is always in place.

At our website we've got quite a lot of our news and media section on the significant global firms that are using this approach and the academic as well as practical papers are all there.

But the key point is when you blend us with the other approaches in falling markets and particularly large one-off falls, we've done particularly well.

So by having that blend, you're able to get for your portfolio higher risk adjusted returns.

Just if we look, for instance, since we've been going in 2010, these are the worst periods with the ASX.

So for instance, during the COVID sell down to June to March, the market fell 23%, but we're up 9.2%.

And you can see a similar characteristic across all of those larger sell-offs.

Again, it's not that we've predicted it, it's just literally that protection is always there.

This is a chart over the last couple of years since rates have started to rise.

A is Gyrastat, our class A that we're talking about here.

So you can see our returns are around 13%.

Now this is up to the end of the September 2023 quarter.

So that's shown on the vertical axis.

And on the horizontal axis, you can see we're much lower risk than the, for example, the Australian index.

And there's various other indexes that are shown there.

And the icon F is various other of these absolute return strategies.

So they have lower risk, but they also haven't generated very much returns.

So that just puts into context how we've done.

That's showing the last couple of years, but we published it outside across a number of other periods.

That one is really because that's when interest rate rises have started to happen.

And our team, extensive experience, I guess, funds management, private equity, industry investment banking, financial services law, and equity research.

So with that, I'll hand it over to you, Angelina.

Thank you very much, Craig.

Now I've got two questions for you.

The first one is, how did 10 years of retirement income with protection product reviews assist in Girostech's product design?

It's really on the market research.

So there were a number of reviews happened and the industry contributed the criteria that they were looking for in product design.

So at a very broad level, it said some sort of growth asset so the capital can grow for the investor.

With some sort of protection mechanism, as I've detailed in our presentation, there are quite a number that are happening, and a robustness of income.

And as I mentioned, we've got those dual income, not only from dividend, but also from that risk management overlay.

I've then listed a whole heap of other criteria, things like daily pricing, counterparty risk, in our case, the stock exchange, no lock-ins for investors, et cetera.

So in designing our product, we have used all of those reviews as market research and as the features which we offer within our fund.

Thanks, Craig.

I have another question.

How is risk being priced in the market at this time?

I'm referring to the cost of protection and where are the opportunities?

Yes, somewhat surprisingly to me, Angelina, since October 2022, protection costs have fallen significantly.

They have of recent times moved up a little.

But in the context of the last 30 years,

relatively low levels.

So for someone like us, that means we're able to get protection in place relatively inexpensively, quite longer data.

So that really is what I'd see is the anomaly.

You've got all these geopolitical and macro risks, as well as rising interest rate, yet protection costs are low.

So that's for the here and now.

Where do the opportunities come from?

Humans being human, they continue to price the risk very differently as events and use flow come.

So by virtue of our systems, we're able to go in and get all of those prices and instantly see where they are.

So the opportunity comes from being able to move from where you currently are into that cheapest protection spot.

And that's what really gives us our competitive edge or our offer, and hence the excess returns that you've seen on the offer, but with far lower risk.

That makes sense.

Thank you very much, Craig.

It's good to see you.

Take care.

Thank you.