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A look under the hood

The Income Asset Management business is a little over two years old. In April 2022 we see our market capitalisation fall along with other micro-cap companies, especially those in “fintech” or growth mode. We feel we have built something more substantial and vanilla. IAM is a very common-sense business seen in most financial centres globally, but never successful so far in Australia. It is simply a debt-focused investment house, with three core businesses, graphically portrayed below.

IAM is in great shape to take advantage of recent repricing of the core asset class that is broadly referred to as fixed income. There has recently been a Commonwealth Government review of the corporate bond market, trying to evaluate why it is has never blossomed in Australia. We think IAM is the answer.

The background to IAM

It’s been two years since the (then) Cashwerkz Board decided to remodel the company, to expand the deposit-only broking service, into a full-service investment house – focused on income investments.

In April 2020 I came onto the team as CEO and bravely expected a few profitable months in FY21-FY22. This proved to be too bullish, I under-estimated the headwinds we were facing with COVID-19 and more recently, inflation and geopolitical stresses. As we assess our position internally now, it seems the original predictions of the growth trajectory were not far wrong in terms of growth trajectory – but we are running 12 months late. We hover each month ever nearer break-even and, especially with much better fixed income market conditions now, we are well placed to be profitable in the Capital Markets business, with the turbo-boost of Funds quickly catching up. Let me explain further below.

We were frantically hiring in 2020/21 but often new joiners would not meet their co-workers for months due to lockdowns. More importantly they could not meet their clients and other industry participants either. These headwinds have slowed the uptake of the business – but we now find ourselves in very good shape.

So, what have we built? Let’s have a look under the hood of the newly named, Income Asset Management.

Deposits, the heritage of the firm

The deposit business was largely focused on retail “mum and dad” deposits, the Cashwerkz service enabled them to search for the best rate across dozens of approved deposit takers, and then our team would facilitate the cash movement from one bank to another, without touching the money. It is a good system but wasn’t going to get to scale as interest rates were heading to near zero and banks were reluctant to take deposits.

We earn revenue from brokerage the banks pay us for sourcing deposits for them. In this low interest environment, our best market for scale is the middle market – corporates, charities and family offices.

We closed the retail element of the deposit business and focused on this middle market client base. Despite closing the retail deposits our book of deposits has remained steady. Importantly, the opportunity in the deposit markets has now re-emerged. Already the demand for longer term deposits wildly fluctuates with some banks keenly bidding much higher rates than their competitors, even amongst the big-4 banks.

We not only offer clients a search service for rates and technology that enables clients to shift from one bank to another without going through the onboarding procedure each time – but we also can guide clients on how to build a deposit portfolio. We have extensive bank funding and risk management expertise in the team, to enable clients to get the best rates while managing their liquidity needs.

Trustees Australia Limited (TAL) – our Responsible Entity

TAL was the original listed entity that morphed into Cashwerkz and now IAM, it was listed back in 1987 and run simply as Trustee business for decades. When we started this recent journey, TAL was effectively dormant and not prepared to take on external business. Since 2020 we have worked closely with the financial services team at EY, to build an industrial scale compliance and management structure. Today TAL is the RE for external fund managers and facilitates our new issues in the IAM Capital Markets business. Presently this business facilitates the IAM Group revenue providing crucial capabilities to service the clients in the Capital Markets and Fund businesses as a custodian, responsible entity and trustee.

Capital Markets (CM). “The Hare”

This is a young business. We only started hiring people in Q3 2020 and effectively started trading in Feb 2021. Of course, on day-1 we didn’t have any clients, we have built that number to 600 wholesale qualified clients in the past year and we now have in excess of $600m of bonds held in custody.

The revenue generated within CM falls broadly into two pillars, debt capital origination and secondary trading. As we grow, we expect secondary trading will generate enough revenue to pay the ongoing costs of IAM – and primary debt origination will be our profit margin, with revenue from this area going straight to the bottom line.

The CM team, across advisors, origination, trade facilitation, operations and compliance – has self-originated 11 new issue transactions and participated in 50+ transactions led by global banks. We are transacting up to 50 trades a day across the spectrum of clients. This is over $2.3bn in trades going across the desk annually.

Once we became operational, IAM’s growth has been rapid to date, but this is just the beginning. The client acquisition continues as clients see the value in our markets currently available and they learn the key differences between IAM and our direct competitors.

Transparency is at the core of our business as we believe this has held the industry back in Australia compared to the rest of the world.  Transparency at IAM means:

  1. Margin. We will show our clients the margin we charge.
  2. Spread. Our fees are very fair – our intention is to help clients build an income portfolio, not to price gouge them on each trade.
  3. Market rates. Our competition will sell a new issue to SMSF investors at whatever that client base will accept. We will always have professional investors such as Fixed Income Fund Managers, as investors in our new issues. So, our broader investor base knows they are buying the credit at the current market price necessary to attract institutional investors to accept the associated credit and investment risks.
  4. Research. We subscribe to Bond Adviser research, a completely external producer of quality fixed income research, which is available to our clients. In addition, our IAM Research team will also produce “Sale notes” that is directly used to market our new or secondary issues to clients.
  5. Fees. We do not charge an “exit fee” to change custodians (an abhorrent fee-for-no-service in our opinion). Our revenue is from the margin we charge between where we buy the bond and the price we sell to the customer – always transparent. We also generate revenue from new-issue origination fees charged to the issuers/borrowers.

The CM team also provide a managed portfolio service, targeted at larger portfolios for family offices and NFP/charity investors. We will build a portfolio within the risk guidelines of the client, we will execute the required transactions with complete transparency, taking an agreed margin but not an ongoing management fee. We recommend any changes we think should be considered – but the client must authorise each trade. Unlike our competition, we work with the client and do not over-trade nor over-charge. We also do not charge exit fees should a client want to leave.

A key feature of our CM business is our market coverage. Our facilitation team have daily interaction with 18 domestic banks/investment banks, 6 offshore banks and 6 offshore brokers and provide unparalleled liquidity for investors.

The exciting thing about the CM business is how rapidly it has grown. It took us longer to establish the business than we hoped, but once under way we have gone from zero to a business that is self-funding (meaning CM is already profitable) and a key pillar of the fixed income market in Australia.

We are now getting flow from the desks of stockbrokers as some of their larger clients allocate into corporate bonds. We are also very focused on Wealth Advisers, as it is an efficient way to market to end investors, we talk to one adviser, and they talk to their many clients.

The future is exciting.

Funds. “The tortoise”

Our clients often do not have the time nor interest to invest in direct markets and particularly not bonds. Given this, we wanted to offer investors a managed approach to fixed income investing as early as possible.

Our business model is to invest in new and established fund managers where we can offer them some or all of our services. The business generates revenue through three areas:

  • Fees for services provided such as RE and operational support
  • Revenue from holding over 20% investment in the fund manager through equity accounting and dividends over time
  • Fees from our internal sales team attracting investments into the funds

Our first fund in this model was when we were introduced to Dr Christian Baylis in 2020 and later that year, we assisted him to establish Fortlake Asset Management (FAM). Since December 2020 the returns from FAM funds have been outperforming its peers, during some of the most volatile fixed income markets ever. While IAM owns 25% of FAM, we do not control its management style nor investment decisions whatsoever. Indeed, IAM and FAM have not transacted a single bond deal between each other. Investors can be assured that FAM will be looking after their investors’ best interest, alone.

To assist FAM in getting established, we ensured our compliance and operations departments were functional as a fund incubator. Once we had this in place, we looked for more funds to incubate, to offer our clients a wider range of investment choices.

More recently, IAM purchased 25% of the well-established and respected Tactical Global Management (TGM). Established over 20 years, primarily focused on derivate overlay strategies for institutional clients, TGM intends to launch its own funds and financial products. The key features of these funds will be their focus on SDG and impact investing, including some strategies that will only invest in climate-friendly equities. Stay tuned.

We intend to incubate only a few more investment managers. This ensures that these managers will be well resourced as they grow and that our funds distribution team have only the best possible strategies to take to market. There is potential that our next investment manager will be in the Private Debt space, an area that is enjoying a much better investment environment as rates move higher and credit spreads widen.

The revenue opportunity for our Funds division takes time, as these investment managers get established and then grow. We expect 2-3 years to build an investment track record and then really expand their funds under management. IAM will benefit from dividends when paid by the funds and will reflect increases to the value of our investments in the funds under equity accounting, showing 25% of the profit/loss of the businesses as a non-cash item. Importantly we will also be paid a distribution fee by the fund manager for investors we introduce. The beauty of this revenue is that it is recurring – so each year as the team builds upon last year’s work, it will earn fees on revenue earned that year and the prior year(s).

In addition to the revenue, the value of the equity held in the underlying fund managers will likely grow in line with the performance of these companies. While equity reporting for these assets on our balance sheet is on a historical cost basis, over time we anticipate that these investments will grow to represent significant value to underlying shareholders.

Each year it snowballs. This is why we look at our IAM Funds business as “the tortoise” – it takes a while to get going but as it grows with recurring, stable income, we expect to be in a position where the revenue from IAM Funds eclipses that of the other divisions. We are patient and confident.

The market conditions for an “income” investment house, could not be better. Inflation concerns point many investors to floating rate or inflation linked investments, which are available to both bond and private debt loan investors. However fixed rates have more than doubled in yield in the past few months, so many of the better investment grade bonds are now offering a compelling return to retirees and other long-term holders. These conditions will force a rethink in the mindset of investors globally, away from “growth” to “income” – and Income Asset Management will be in the thick of it.

Jon Lechte
Chief Executive Officer
Jon has more than 30 years in Australian and international fixed income and cash management. He held senior positions at UBS Investment Bank and FIIG Securities before joining Income Asset Management as CEO in 2020. He also holds multiple directorships on both listed and unlisted companies.