Podcast: Special Guest: The Hunt For Yield – How Investor Behaviour Is Changing | Ep. 241

Posted by Ed McKnight on 12/05/20
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Show Notes

What's Covered in the Show?

In this episode, we are once again joined by Darcy Ungaro from Ungaro and Co. and the NZ Everyday Investor Podcast.

Here, we discuss how investor behaviour is changing. Falling interest rates are causing investors to look at higher risk assets in order to get a return on their investment. This decreases yields in general and forces all investors to move towards slightly riskier assets than they were previously investing in.

If you are keen to listen to a recent NZ Everyday Investor Podcast episode with Andrew and Ed, then click here if you listen on Apple Podcasts, or here is you listen on Spotify.


Transcript of the Podcast

Ed McKnight: Hello and welcome along to the Property Academy podcast. I'm your host Ed McKnight, and I'm Andrew Nicol, and I'm Darcy Ungaro, and today on the show we're talking about some changes and trends that we're seeing within the wider investment game.

And so of course we are once again joined by Darcy Ungaro from Ungaro and Co and the NZ Everyday Investor podcast and Darcy interviews investors and people who are specialised in lots of different investments all of the time. And one of the key trends we're seeing is a hunt for yield.

So Darcy, can you walk us through what this trend is and how it actually plays out in the market?

Darcy Ungaro: Yeah, thanks Ed. So in the podcast that I've been doing, it's like I always think of it as exploring the edges of what I feel comfortable with so that I can get a better understanding of what the middle should look like. And I pick up some trends and pick up some vibes as we go through.

And one of the biggest things is this trend of people who, you know, maybe they've got money in their term deposit or they have this notion that they can put a pot of money somewhere, invest maybe half a million or more, and they just get a good chunk of cash coming out of that return without having to sacrifice the capital. But as interest rates trend downwards, we're seeing investors everyday investors kind of move up the spectrum and start to invest in slightly riskier asset classes.

So no matter where you're at in that spectrum, whether it's cash in fixed interest, you might move up to property. People who are into property might move more into shares. People who are into shares might move into alternative investments like investing in start-ups or even Bitcoin and gold, and it just keeps on going and going and going because people can't get the same rate of return, but they're getting nailed in terms of their risk profile as they make that move.

Ed McKnight: And this is really interesting. We've seen this in the commercial property market as well, particularly in the lower end of commercial property. I'm quite good friends where I'm friendly with a guy who is quite big into commercial property and he's been telling me, Ed commercial property the yields keep going down and down to you know where it might be around 3% or something along those lines.

He says it's just not worth it to buy a cheaper commercial property in some senses, because the yield is low. And why that really is happening is when you have increased demand for an asset type the yield starts to come down, the return you get starts to come down. And we've actually seen that with the large scale asset purchasing program from the Reserve Bank.

Remember they're putting money into government bonds and when there's more money available for an asset type, the yield goes down. So those people who were otherwise going to buy government bonds and don't like where the yield's at will move into a different asset class. Now that provides more money into that group of assets, yields go down.

So people start searching for others and going up the spectrum, which is kind of really interesting. Now, just walk us through with what that actually means in terms of people's risk profile and some of the things to think about there. I know you touched on it Darcy, but let's dig into that some more.

Darcy Ungaro: So, let's say you are in your mid-forties and you've got a decent runway between now and your retirement, say 20 years. Maybe you consider yourself a balanced investor. You've got your own home, you've been repaying the mortgage, you've got your KiwiSaver, you might start dabbling a little bit more in shares.

And so let's say you set up a Sharesies account and buy some direct shares. Outside of that, you're trying to get a bit of alpha. You're trying to sort of experiment with other ways that you can get a better rate of return. And as more people start doing that, you get this kind of feedback loop. And I hesitate to use the phrase, but it's almost in a sense like a mini Ponzi scheme in these asset classes where, you know, values go up because more people are piling in on it, and then it creates this feedback, which reinforces it so people do it even more.

And so the thing is, is that you might not necessarily be of that I guess ilk or you might not be designed to withstand the volatility that those higher risk assets hold. So for example, like what we've seen with current events, when there's a decent dose of volatility where the values drop, the people that are involved in KiwiSaver and they consider themselves growth investors.

They see the value of the funds go down, they freak out, and they change into a conservative fund. And what have they done? They just locked in their losses. So it's really important that these people understand who they really are in terms of their risk profile. They understand what their horizon is and they've actually modelled and they've really got a dose of reality before they actually start investing in these other things.

Andrew Nicol: And actually, that's a really interesting point Darcy, because it reminds me of back before the GFC. So back in about 2007 what we saw is a lot of people investing in riskier investments because they were chasing a higher return because they weren't getting the returns in their current investments.

And so, people would invest in finance companies, which as we all know, went broke and people lost a lot of money in the likes of BridgeCorp and so on. And so you really have to understand what your risk profile is and only be playing with the money that you can afford to lose if you're going to go into those risky investments.

So do you mind if I ask you another question, what do you invest in personally? Because you probably have this profound knowledge of all these different asset types. What's your, what's your investment of choice at the moment?

Darcy Ungaro: You'd think so. So it's kind of like, I guess you think about me is I'm a bit more like a, in the, in the investment space, I'm kind of like a, like the foodie equivalent where I've got this privileged position where I can catch up with people that are on the forefront of digital innovation or they're investing in start-ups or they're, you know, they're into Bitcoin or gold.

And so when I explore it, I start to actually go, wow, there's actually a whole world here. And I kind of have to stop myself from getting carried away sometimes. Yeah, investing in everything, but no. So what, and what I have been doing is that slowly I'm building my own paradigm. I'm building my own, I guess, view on how to construct a portfolio progressively and fine tuning it as I go.

As I learn things, I'm bolting on new things and I'm changing where I'm investing, but primarily, you know, I'm still hugely a fan of property and I've been investing in property for I guess, over 15 years now because in and of itself property is awesome is because of leverage, and that's by far and away the best thing to do when you're young is to leverage up, get as much debt as you possibly can.

But now I'm at the stage where my runway is getting a bit shorter. I'm a little less keen to sacrifice things and to risk things and put things on the line. So I'm not using leverage, but I am directly owning more shares. I'm putting more into managed funds inside of KiwiSaver and outside of KiwiSaver, and I'm a real big fan of Bitcoin and physical precious metals as well.

Ed McKnight: Awesome. Really interesting. And I love what you're saying about leverage, Darcy. One of the things we're saying to people at the moment, in some of the conversations we've had with that property investors is saying, hey, look, we're not necessarily saying that you should get into property because property is awesome or property's XYZ.

Actually just the fact that you need more leverage within your portfolio, you need more leverage within your financial plan because if you're going to get growth and very large capital growth, it's only going to come through leverage. And property is that most leverageable asset class out there, which is really interesting.

Darcy Ungaro: And it is actually really important to point out, sorry to interrupt Ed, but it's really important to point out that you know, you can use leverage either directly or indirectly. For example, if you had a mortgage and you were at that crossroads where you were either deciding to pay down your mortgage more before you invested, or you invested more into shares, one or the other, indirectly, you've decided to use leverage to buy more shares, if you've forgone the ability to pay down your mortgage faster so that you could buy more shares, so you don't necessarily have to borrow to buy more shares directly, but indirectly, sometimes it just involves that choice to actually start building a share portfolio, for example, instead of, or at the same time as your debt repayment strategy.

Ed McKnight: Yes very interesting. And the other thing that I just picked up on as well is around this trend of hunting for yield. Obviously gross yields in terms of actual properties, rent as a proportion of the value of a property. Gross yields have been trending down for a significant period within property investment.

And one of the things that's interesting when people start reading older books that were written at the start of the two thousands when gross yields were much higher they are shocked then when they come to find that these days, gross yields on properties are quite low. You know, 4% in Auckland, perhaps 5% in Christchurch, where previously people are talking in investment or property investment books about up to 12% yields in some, you know, at the very extreme end, and those aren't achievable today.

Why? Because as interest rates decrease obviously people, investors are able to offer more for properties and there's more commercial gain there if they are still able to achieve those high gross yields, but have lower expenses because their mortgage costs have gone down. And so we have seen gross yields decrease, but net yield staying relatively constant over that time. And I think that's just an interesting point as well.

Both if you're reading older investment property books, but also just looking at that trend as well. And perhaps if interest rates were to rise in a decade's time or whenever they eventually do, perhaps we will see gross yields increase again to compensate that so that their net yield stays the same.

Darcy Ungaro: And you nailed it. And I think the other thing is, is not to forget the fact that because of the low interest rate environment, we're seeing more fuel put on that fire with the asset prices themselves. So thinking about, you know, that gross yield, for example, you should actually be thinking about also what effect the capital gains will have over time, because we need to almost adjust the paradigm that we look at these things with.

Because historically, all those things apply when interest rates were a lot higher, but now things are different. We have to look at things very, very differently in the new world.

Ed McKnight: I always think as well, Darcy as an economist and you read analyses of previous events from 10 or 20 years ago, and you read whatever the narrative happens to be about what happened in the eighties or the nineties.

And you think, oh, that makes a lot of sense. And right now, as we're going through our current period with record low interest rates with a pandemic happening, I'm sure that in 10 to 20 years time, people will look back, make some very shrewd economic comments, give some good analyses and write some narratives, and it'll all make sense. It does make you wish that it all made sense right now, and people will wonder how did they not miss X, Y, Z.

But I tell you what, let's wrap it up there, but please don't forget to rate, review and subscribe to the show. It really does help us get the message out to more people. And hey, if you're interested in some of the things we're talking about, and in terms of broad investment types, then why not check out the NZ Everyday Investor podcasts, which Darcy hosts. It's a great weekly show where he interviews a whole heap of different experts who specialise in different types of investments. Now we're going to link to that in the show notes. So tap or swipe over that cover art ,it'll take you right there. Otherwise, just search for NZ Everyday Investor podcast in your favourite podcast listening app.

Thanks for listening to the Property Academy podcast. I'm your host Ed McKnight, I'm Andrew Nicol, and I'm Darcy Ungaro, and we're going to be back again tomorrow with even more daily strategies, tactics, and insights to help you get the most out of the New Zealand property market.

Until next time.