Meet Damian Czarnecki

Each month we give our readers a little insight into a Powerwrap team member by asking them ten questions about their role, life and personality. This issue we speak to Damian Czarnecki from the Powerwrap Model Manager team.

Name: Damian Czarnecki

Company role: SMA Portfolio Service Manager

How long have you been with the company:  Almost 4 years

What does your role at Powerwrap entail?  My job is to make sure SMA runs smoothly on a daily basis. The SMA environment is on an Omnibus structure and as such there are a lot of moving parts that need to be managed including daily rebalances, Investments/settlements, payments, corporate actions, queries etc.

What nickname do you prefer to be called?  Damo

What is your favorite Hobby? Motorcycling, nothing else even comes close

What do you like most about Powerwrap?  I love the small company culture.  There’s not one person in the company that I wouldn’t have a beer with.

What were you like in high school? I was into anything fun, so hung out with most kids. The Headbangers were my favorite group though.

Do you have any kids? I have 3 children, two boys and a girl.

If you could be someone famous, who would it be? Mick Doohan. Amazing talent, focused and laid back. (ex bike racer)

What has been your latest accomplishment? I won an argument with my daughter

Which AFL team do you barrack for? Carlton

Powerwrap’s Model Portfolios

Blackmore Capital Equity Investors Monthly Portfolio Update

Entrenched uncertainty is exerting a pervasive depressing effect on global economies. A growing number of global manufacturing & services indexes are now in contraction territory. There is also the concern of a deeper slowdown with the U.S. no longer immune to slowing global growth or the impact of trade tensions, with the U.S. Institute for Supply Management declining to a level previously seen a decade ago.  Closer to home, The Reserve Bank of Australia (RBA) cut interest rates to a new all-time low as the economy recorded its slowest growth since the global financial crisis. As broader economic activity slows the importance of earnings quality and balance sheet strength becomes a vital tenet in equity portfolios.

Recent changes to the Blended Australian Equities Portfolio

Purchased Northern Star Resources Ltd (NST)

We recently added Northern Star (NST) to the portfolio following a correction which saw its share price decline more than 25% from its peak in late July, while the gold price declined by just c.4% in AUD terms and actually increased by more than c.4% in USD terms. The share price of NST and other gold stocks had moved ahead of the gold price so this decline unwound some of this relative outperformance which had reduced the margin of safety in the sector.

We favour gold miners with diversified operations, low sovereign risk, strong free cashflow generation, low gearing and organic growth prospects. We try to minimise sovereign, financial and operational risk for an exposure which should offer uncorrelated risk diversification for the portfolios. NST’s balance sheet is net cash and it has operations in Australia (WA) and the US (Alaska), with considerable exploration potential and production growth through relatively modest capital expenditure. Its dividend yield is less than 2% but the payout ratio is only c.25%, so there is capacity to grow dividends at a faster rate than earnings in the future. 

Purchased National Australia Bank (NAB) The prospect of further interest rate cuts by the Reserve Bank of Australia has garnished the appeal for higher dividend yielding companies. We have re-introduced National Australia Bank (NAB) after an extended absence in the Australian Income Portfolio. A rejuvenated board and management team and the rebasing of its dividend to more sustainable levels should provide impetus for NAB to deliver more sustainable investment returns. In its most recent quarterly result NAB delivered “slightly higher group margins”, a commendable outcome in the current challenging banking environment. While loan growth is expected to remain at historically low levels, we feel that the regulatory imposts are now adequately recognised, and impairments have remained largely benign. 

NAB is trading at 13.5 times FY20 price-earnings ratio and a dividend yield of 6%, fully franked. NAB’s action at its 1H19 result to reduce its elevated payout ratio provides confidence that its dividend is now sustainable, providing investors with an attractive dividend yield.

Portfolio Update – Adding Spark NZ (SPK), National Bank (NAB) and Skycity Entertainment (SKC)

Recent changes to the Blended Australian Equities Portfolio & Australian Equities Income Portfolio

Purchased Spark New Zealand Ltd (SPK) We recently added Spark NZ back to the portfolios following its FY19 result, which showed cost discipline and modest revenue growth, while the company committed to maintaining its 25 cents per share dividend for a prospective yield of 6%. Spark NZ (formerly Telecom NZ) is the incumbent provider of digital communication services in New Zealand including mobile, broadband, entertainment media and cloud services.

Its FY19 result saw modest earnings growth from increased share of mobile revenue and connections through increased uptake of unlimited data plans, growing wireless broadband services and ongoing investment in preparation for the roll out of 5G mobile services. Revenue growth in Mobile (+2.7%), Broadband (+3.0%) and Cloud (+8.1%) offset ongoing decline in traditional voice revenue (-18%), while lower costs (-2.4%) improved gross margin and resulted in a 2.2% increase in net profit. Cost reductions are expected to continue in FY20 and free cash flow conversion to rise above 95%, underpinning the dividend guidance mentioned above.

We view the structure of Spark NZ’s markets more favourably than the communications markets in Australia, which combined with conservative leverage at c.1.2 times EBITDAI provides greater dividend sustainability than some comparable Australian companies.

Recent changes to the Australian Equities Income Portfolio

Purchased National Australia Bank (NAB) The prospect of further interest rate cuts by the Reserve Bank of Australia has garnished the appeal for higher dividend yielding companies. We have re-introduced National Australia Bank (NAB) after an extended absence in the Australian Income Portfolio. A rejuvenated board and management team and the rebasing of its dividend to more sustainable levels should provide impetus for NAB to deliver more sustainable investment returns. In its most recent quarterly result NAB delivered “slightly higher group margins”, a commendable outcome in the current challenging banking environment. While loan growth is expected to remain at historically low levels, we feel that the regulatory imposts are now adequately recognised, and impairments have remained largely benign. 

NAB is trading at 13.5 times FY20 price earnings ratio and a dividend yield of 6%, fully franked. NAB’s action at its 1H19 result to reduce its elevated payout ratio provides confidence that its dividend is now sustainable, providing investors with an attractive dividend yield.

Purchased Skycity Entertainment Group (SKC) SkyCity Entertainment Group (SKC) is New Zealand’s largest tourism, leisure and entertainment company. It is listed on both the New Zealand (NZX) and Australian (ASX) stock exchanges. SKC is one of three major publicly listed casino operators in Australasia. SkyCity operates integrated entertainment complexes in New Zealand (Auckland, Hamilton & Queenstown) and in Australia (Adelaide).

For the 2019 financial year SKC reported a normalised Net Profit of NZ$173m marginally ahead of consensus estimates. SkyCity Auckland (80% of group turnover) delivered solid top-line trends. The completion of SkyCity Auckland/SkyCity Adelaide capital investment program is expected to deliver an attractive uplift in returns and improve free cashflow. There is also scope for returns to benefit form management’s greater focus on enhancing portfolio returns via the divestment of its SkyCity Darwin property and sale of its Auckland car parks. These transactions will release significant capital (c.$450 million) with proceeds used to reduce gearing levels. Overall, valuation multiples look undemanding with SKT trading on c.10 times EV/EBITDA multiple coupled with a 5% dividend yield. A combination of surplus cash due to asset sales saw SKC proceed with an on-market share buy back of up to 5% of issued capital.


Pendal Sustainable Future Australian Shares Portfolio

Market commentary
The S&P/ASX 300 fell -2.3% in August as China and the US dialled up the pressure in their trade dispute. The Australian reporting season painted a picture of a sluggish domestic economy but was, in aggregate, not as bad as many had feared. Discretionary retail spending, in particular, has shown some signs of resilience in recent weeks, helped by better sentiment on house, lower interest rates and tax cuts. Nevertheless, the market was in a defensive mood in the face of heightened macro-economic uncertainty. Ten year bonds yields fell 30bps in Australia – and 53bps in the US – which generally helped bond-sensitive stocks do well. This was reflected in the strong performance of the Real Estate sector (+2.4%) – one of the few to post a gain. Goodman Group (GMG, -2.0%) gave up some of it recent gains – while still outperforming. However Scentre Group (SCG, +4.2%) and GPT Group (GPT, +2.9%) both did better. Healthcare gained +3.4% to be the best performing sector. In this instance, its defensive qualities were augmented by strong results from CSL (CSL, +4.9%) which continues to build upon a strong market position and has seen a recovery in its Albumin volumes sold into China. Information technology (+0.7%) eked out gains as bond-sensitive growth stocks continued to outperform, led by Afterpay Touch (APT, +15.9%) and Wisetech Global (WTC, +15.6%).
A spike in trade and indications of a recovery in Brazilian iron ore production weighed heavily on the miners. BHP (BHP) fell -11.0% and Rio Tinto (RIO) -8.4%. Gold miners outperformed; however the Materials sector ended the month down -7.3%. Fears the effect of trade on global growth and demand also weighed on the energy stocks. Woodside Petroleum (WPL) fell -5.8% and Origin Energy (ORG) -3.9%. Santos (STO, +1.0%) delivered a well-received result and managed to buck the trend.

Stock specific drivers of monthly performance relative to benchmark

Underweight BHP Billiton (BHP) (-11.0% return)
BHP delivered results in-line with the market’s expectation, generating strong cash flow after a year of high iron ore prices. There are signs that capex will pick up as its rail network in the Pilbara is showing signs of strain – however it was a weaker iron ore price which weighed on the stock in August. BHP is excluded from the portfolio due to exposure from fossil fuel extraction.
Overweight Qantas (QAN) (+7.0% return)
QAN delivered a decent result despite the headwind of higher fuel costs and softer demand in the domestic market. It also dialled up their capital return by $100m to $600m for the half year, which was well received. At the same time, rival Virgin Australia (VAH) announced that it is looking to close unprofitable routes, helping keep a lid on capacity growth in the domestic Australian market.
Overweight CSL (CSL) (+4.9% return)
CSL delivered a strong set of results, helped by continued growth in its core range of products as well as a recovery of sales of Albumin into China, following a change to its distribution model there. CSL’s investment in plasma collection in recent years puts it in a good competitive decisions, with competitors struggling to boost production to meet strong demand.
Underweight Woolworths (WOW) (+6.0% return)
WOW’s result met market expectations. The key takeaway was that there are lower levels of grocery discounting, helping ease revenue pressure. We do not hold WOW.
Underweight CYBG (CYB) (-17.7% return)
CYB’s most recent updates have revealed that margin pressure is not abating as mortgage competition remains intense in the UK. Coupled with the disappointing margin outcome of its merger with Virgin Money, we now see the timeline of our investment thesis pushed out. As a result, we sold out of the position in August.
Overweight Ramsay Health Care (RHC) (-9.8% return)
RHC met the market’s expectation for FY19 but disappointed on the outlook, guiding to 2-4% eps growth as opposed to 8% consensus. We believe that there is a degree of management conservatism here and would not be surprised to see something in the order of 6%, before a better year in 2021.

Market Outlook

  • August’s reporting season certainly reflected the fact that economic growth and consumer demand has slowed over the past twelve months, however it was not as bad as many feared would be the case. While the overall market declined, this was driven more by macro uncertainty over the US-China trade dispute – which saw the MSCI World TR index fall -2.33% in August – rather than an overly negative reporting season.
  • Around 42% of companies which reported downgraded their earnings guidance for the next twelve months, versus an historical average of just over 30%. Conversely, only 10% upgraded compared to the historical average of just under 20%. The greatest pressure came in areas such as steel – which saw earnings estimates for the next twelve months fall 15% – and also in media (down -13%) and telcos (-10%). Very few sectors of the market saw aggregate upgrades – and where they occurred, they were small. Consumer Discretionary (+1%) and health care (also +1%).
  • In aggregate, earnings expectations for the ASX200 for the next twelve months fell 3%, which reflects an environment in which housing construction has slowed and where weaker house prices have weighed on consumer demand.
  • That said, price action tended to reflect the both the view that broad outcomes were not as bad as some had feared. There is also a broad expectation that stimulus – in the form of cuts to interest rates and taxes as well as the possibility of more fiscal spending – could help underpin demand and prevent further falls. Signs of an improvement in the housing market are helping in this regard.
  • Hence media and steel – the two sectors with the largest downgrades – both outperformed the market and posted positive gains in August. Building materials did likewise, despite downward revisions. Discretionary stocks also did very well as companies like JB Hi-Fi noted in their outlook that demand and sales had started to tick up again in recent weeks.
  • All in all growth remains muted, however further signs of an uptick in the domestic economy could drive stock specific opportunities given how cheap many domestic industrial cyclicals are. We retain our exposure via positions in Qantas and Nine Entertainment among others.
  • We are mindful that both growth and defensive yield stocks have had a strong twelve month run on the back of falling bond yields. Yields are likely to remain depressed for a period – now is not the time to go aggressively underweight. However these stocks are unlikely to replicate the same degree of outperformance over the coming year unless Australian bond yields fall to near zero. Our preferred growth stocks include CSL and Xero, while we continue to like Transurban and Atlas Arteria among the defensive yield stocks.

New stocks added and/or stocks sold to zero during the month

Sell to zero in CYBG Group (CYB)

The portfolio is liquidating its small position in CYBG, owner of the Clydesdale and Yorkshire Bank and Virgin Money brands in the UK. The investment thesis is grounded in the view that the company’s ability to deliver earnings growth on the back of increased loans and material cost savings was not reflected in valuations. We also see the risk from Brexit as relatively asymmetric, in that a lot of the negativity had already been priced in. That said, we have been mindful of this exogenous risk, which is why the position has always remained relatively modest. Recent updates from management have revealed that the combination of the additional loan book acquired from Virgin Money, coupled with strong mortgage competition, continues to weigh on group lending margins. This has pushed out the timeline of our thesis and, while CYB continues to offer a decent yield, we are redeploying this capital into other opportunities, including a new position in Metcash.

Buy new position in Metcash (MTS)
Metcash is a wholesale distribution and marketing company. The introduction of new management with a strong focus on cost control and revenue growth in the last three years, combined with the sale of non-core assets, has allowed the company to manage a good turnaround despite the structural challenge that increased competition has posed for the Australian supermarket industry.
MTS’s recent underperformance reflects consensus downgrades for FY20 following their FY19 result. Some of this is driven by a moderating outlook for its hardware business, however we believe it also implies an overly negative outlook for its IGA wholesale business and the supermarket sector in general. There are signs the grocery price deflation – a key headwind for supermarket earnings in recent years – is easing on reduced promotional discounting across the sector. At the same time we believe that MTS’s Diamond Store Accelerator programme will help it generate a better than expected share of sales. There are also signs that its cost reduction strategy could also exceed consensus estimations.
From a sustainability perspective, Metcash has been utilising its IGA Community Chest Trust Fund for over 30 years to support the local communities reached by its widespread store network. The company has a focus on diversity and gender equality with key initiatives including reporting on gender targets, strong representation on the board (66%) as well as being cited as a WGEA Employer of Choice for Gender Equality. Other sustainability initiatives includes reporting on Modern Slavery as well as reducing waste and responsible sourcing of products particularly for its private label brands.
MTS trades on 12.9x price-to-next-12-month consensus earnings versus 19.6x for COL. While we believe that MTS should trade at a discount to COL, we see MTS as below its intrinsic value and implying a very depressed valuation for the supermarkets business. Given its greater upside in terms of cost control and leverage to signs of a reduction in grocery price deflation, MTS is our preferred exposure in this sector.

Meet the Manager Series

These ‘Meet the Manager Luncheons’ are hosted by Powerwrap as part of the Step Ahead Program. We provide a open forum that allow fund managers the opportunity to meet and discuss their products or macro or micro issues with Powerwrap’s Dealer Group clients.

Set-Top Boxes, Conference, Interior Design, Tv

Upcoming Meetings

DateFund ManagerDetailsLocation
22 October 2019Adviser Forum 2 – Melbourne
3 Fund Manager Event – See below
12:15 for 12:30pm start – 2pm
Colins Quarter
Private Dining Room
86 Collins Street
Melbourne
14 November 2019Schroders – Meet the Manager Thursday 14 November
12:15pm for 12:30 start – 1:30pm
Schroders Level 20 Angel Place
123 Pitt Street, Sydney
Sydney

October 22 – Adviser Forum 2

Powerwrap would like to invite you to the Adviser Forum 2 luncheon on “Generating high returns in a low yield world”. Speakers for the day are Hamish McCathie (Multi Asset Diversified), Andrew Walton (Renewable Investment) and Matt Harry (Bitcoin).

November Event – Schroders & Powerwrap “Delivering Income in a yield constrained world”

Recent additions to the Powerwrap Approved Products List – September 2019

Recently, Powerwrap has added the following funds to our Approved Products List (APL). Some are subject to close. If you are an adviser who would like access to any of these funds please raise a ticket through Hive or the Service Desk. 

APIR CodeFund name – Fund manager Description
DFA0029AUDimensional World Allocation 70/30 Trust (Wholesale)Equities & Fix Interest
Off-Platform FundAustralian Diversified Bond Series II Bonds
RGL5177AU  The Regal Global Equity Income Fund  Listed and unlisted options and futures
Off-Platform FundCloudbreak Bitcoin Investment trustBitcoin
Information MemorandumTEM – Kilara CapitalESG – Creation, purchase, trading and marketing of carbon credits
GTU5547AU Invesco Global Property Fund  Property Fund
FSF7298AU Affirmative Global Bond Fund Bonds
Information Memorandum Foresight Renewable Energy Income-Fund (WINSTON) Debt Fund – Infrastructure Solar
PIM6769AU ATLAS Infrastructure Australian Feeder Fund Infrastructure
Information Memorandum KM Property Funds – Laverton North Property Fund Property Fund
ELLERJAADE Ellerston JAADE Australian Private Assets Fund (Retail)  Pre IPO investment fund
Information Memorandum JP Morgan – Global Transport Fund to Power Wrap. Infrastructure

Participate in the IPO of the KKR Credit Income Trust (ASX:KKC)

Dear Adviser,

Opportunity to participate in the IPO of the KKR Credit Income Trust (ASX:KKC)

Powerwrap clients have been offered the opportunity to participate in the KKR Credit Income Trust IPO and Powerwrap will be acting as a co-manager of this capital raising.

As a valued client of Powerwrap, we would like to invite you to participate in this IPO offering by placing bids through the Powerwrap platform.

Advisers that are eligible for the offer will receive 1.25% selling fee (incl. GST) for their allocation on this transaction.

By way of background, KKR is a leading global investment firm with 42 years of experience and a strong track record of investment excellence.  KKR has US$200B+ in AUM globally, and is a leader in Credit investing, with 120 dedicated credit investment professionals managing ~US$70B in AUM.

KKC seeks to provide a differentiated return profile as compared to Australian income securities through exposure to income generating global credit. The strategy seeks to produce a high return relative to volatility, targeting a net return of 6-8% p.a. with a target net cash yield of 4-6% p.a. through the market cycle.

The Trust seeks to provide this exposure by investing in to two underlying KKR credit investment strategies:

  • Global Credit Opportunities Fund (GCOF): long-term target portfolio allocation of 50-60%; and
  • European Direct Lending (EDL): long-term target allocation of 40-50%  investment strategy.  

Below is a copy of the DRAFT PROSPECTUS which is due to be lodged on Monday 16th September and have also outlined Terms of the proposed transaction with the associated timeline.  

To read the PDS please click here.

If you wish to run through the capital raising in more detail, please feel free to call me or our Investments Manager – Ishan Dan on +61 3 8681 4658 . Otherwise please complete the below form to lodge your interest / bid and we will contact you as soon as possible.

Regards

Ishan Dan | Investments Manager

US Treasury Term Premium: Pricing for Disaster

Realm Investment House | Ken Liow, Head of Portfolio Risk Management
Realm Investment House

Apocalypse, War, Destruction, Damage, Fire, Smoke

The term premium is the difference between bond yields for a given maturity and the expected path of short term interest rates over the same period. By examining the term premium of the US treasury market, we find that this is now of a similar magnitude as for the OPEC oil shocks in the 1970s. The market appears to be fully pricing an event of similar magnitude to the combined effect of a US-China Trade War and a domestic demand shock in China. Investors relying on the term premium for portfolio protection may wish to consider the implied cost of doing so.

Bond yields can be divided in to two components: the expected cash rate over the term to maturity; and the term premium. The term premium can be considered as a price for bearing risk and variations in this figure provide an insight into the concerns which investors are pricing. When the term premium for bonds is negative, it implies that investors are essentially expecting to pay for protection against poor outcomes. They would rather hold a bond even if the expected yield to maturity of this bond is lower than the expected path of rates they would obtain over the same period. If economic outcomes deteriorate unexpectedly, this would provide a buffer.
The Federal Reserve of New York provides daily estimates of the term premium for US Treasuries1. The series is calculated from 1961. The term premia for the 1, 2 and 3 year maturities are shown in the following chart. The term premia have never been lower in the history of the series. The most recent plunge coincided with a deterioration in the outlook for trade negotiations:

Historical Comparison
Whilst the term premium is only one indicator of risk aversion, the only times we have observed figures in the vicinity of these outcomes were as follows:

For context, the economic impacts following the Oil Shocks and the GFC were very significant:

The ‘Kennedy Slide’ was a period during which the S&P 500 declined by over 20%. It followed an extended period of share market gains commencing from the Crash of 1929. The sharp movement in the term premium in this period was short-lived.
In relation to Brexit, the shock of the event could be readily seen in the expected inflation forecasts that accompanied the outcome. The FOMC’s preferred measure of the 5-year, 5-year forward inflation expectations at the time, of 1.4% per annum, have only been seen during events like the worst of the GFC and during the Asian Financial Crisis. At present, the expectation matches the Fed’s inflation target, implying high confidence in the Fed’s ability to successfully navigate economic circumstances.
In contrast, the US economy is currently growing ahead of trend, although inflationary outcomes have been below the mandate target of 2% per annum. Unemployment is exceptionally low. Whilst concerns have been raised about the weakening outlook for manufacturing, the uncertain outlook for trade negotiations and the persistent risk that the Chinese economy will stumble, the pricing infers that the market is fully discounting an exceptionally poor economic outcome.
It should be noted that the term premium is estimated using econometric methods and these are subject to a range of estimation and specification errors. However, cross-checking these with another principal term premium estimator utilised by the Fed2, albeit with publication history from 1990, also results in a similar conclusion. For this cross-check, the term premium is still lower than for Brexit. It was similar to the period where the Euro bond markets were fragmenting in 2012, leading Draghi to make his “whatever it takes” statement to address the deterioration in the transmission of monetary stimulus which threatened the longevity of the Euro.

Fully Pricing a Trade War, China Demand Shock…and then some
The market price for insurance, as estimated from the term premium, is fully pricing a scenario similar to the combined effect of a full scale US-China trade war and a significant deterioration (2%) in domestic demand within China. The OECD has recently3 estimated the cumulative impact on GDP from each of these events through to 2021-22. Whilst significant, the combined impact of these outcomes is unlikely to create a deep recession in the US. The US is a reasonably closed, services oriented, economy in that it is relatively resilient to international economic developments. This is one reason behind President Trump’s repeated utilisation of trade as a means of coercion in international negotiations. The following illustrates the OECD’s estimated impact for a deterioration in the trade conflict:

The OECD also estimated the impact of a significant 2% fall in domestic demand in China:

Over a two year period, a significant deterioration in the trade dispute would subtract approximately 0.9% to US growth. A significant disruption to demand in China, in isolation, would cumulatively subtract approximately 1.4% from US growth over a 2 year period. Note that the China demand slow-down scenario assumes that monetary policy is unable to act. The estimated economic impacts do not make allowance for any special fiscal support which might be forthcoming. For example, the US is supporting soy bean farmers for losses incurred as a result of the tariff dispute via subsidies. Hence, to the extent that the US would stimulate the economy fiscally during an adverse development, the scenarios would need to be even worse to justify the existing pricing. The US GDP baseline expectation is for growth in 2020-2021 to be 1.9%per annum. Even if the combined effect of a full US-China Trade War and demand shock in China were to take place, there is a significant buffer between this scenario and the outcomes which unfolded or, in the case of Brexit and the Kennedy Slide, were feared, during the only other times when the term premium was this low.

Distortions from international flows and Fed balance sheet activities
Non-conventional use of central bank balance sheets to manage the yield curve as part of stimulus efforts operate by influencing the term premium. Although the Fed has unwound some of its balance sheet, its remaining holdings would still be exerting downward pressure on the term premium, however this is most strongly influential on longer term maturities. The prospect of the ECB restarting bond purchases in the Eurozone may also be driving capital from European debt in to the US and contributing to the more recent compression in the term premium. More generally, significant monetary accommodation and associated asset inflation may have had the effect of compressing term premium since sentiment strongly deteriorated from late 2018. The above may go some way to understanding the lower premium observed following the introduction of large scale asset purchases. Nonetheless, the estimated impact of the Fed’s balance sheet activities4 would not be sufficient to negate the general observation that the term premium is pricing an extreme economic development. Even allowing for these effects, the market is acting materially more defensively than when the Euro faced an existential threat and the Brexit referendum was passed, both of which took place when the US economy was not as strong as it is presently.

Conclusion
There are many looming threats to the recent recovery in the US economy. The term premium for treasury bonds, which can provide an indication of the extent to which the market is concerned for downside risk, is at an extreme. Should the worst-case scenarios not develop, we may expect a significant steepening of the US yield curve. Investors relying on duration to provide a measure of protection to portfolios may wish to consider the implied price for this insurance.

Below are the Realm Investment Management fund figures as at the end of August.

Confidentiality Notice: This document is confidential and may also be legally privileged. If you are not the intended recipient you may not copy, forward, distribute, disclose or use any part of it. If you have received this document in error, please delete it and all copies from your system and notify the sender as soon as possible.
General Advice Warning: Realm Pty Ltd AFSL 421336 Please note that any advice given by Realm Pty Ltd and its authorised representatives is deemed to be GENERAL advice, as the information or advice given does not take into account your particular objectives, financial situation or needs. Therefore at all times you should consider the appropriateness of the advice before you act further. Further, our AFSL only authorises us to give general advice to WHOLESALE investors only.

1 https://www.newyorkfed.org/research/data_indicators/term_premia.html

2 Kim and Right (2005) Term Premium Estimate via FOMC

3 OECD Economic Outlook, Volume 2019, Issue 1

4 Bonis B, Ihrig J and Wei M; 2017; “The Effect of the Federal Reserve’s Securities Holdings on Longer-term Interest Rates”; FEDs Notes