How wealthy investors are dealing with the Iran crisis

0:00Hello and welcome to the Australian's Money Puzzle Podcast, I'm James Kirby, welcome aboard everybody. I was entertained by the lead headline in a daily financial in this paper which shall remain nameless. But it's said this week, investors bamboozled by peace talks. Now it's not a great headline but you know it's true, no one knows what's going on. As far as we know, as investors all we know for sure really in relation to the Iran crisis, is that there's been an award shark and a consequent inflation shark. So we've got to talk about how are you dealing with? And my guest today is a top advisor. He's one of the few advisors that's been at the upper end of the barren's top 150. Since it was started and it says, I'm just looking at his entry in the magazine, you need 5 million actually to deal with him and that's not uncommon by the way at the upper reaches of the list.

1:03I mentioned this because it goes to the heart of what I want to talk to him about, which is how will the investors are dealing with this crisis so far? And what way is it different since COVID for instance? It's been James, he is the managing director and partner and advisor and a scaler partner. How are you Ben? I'm very well thinking, James. Thank you for having me on the pod today. It's a pleasure to be here. It's very nice to have you on. And as I mentioned, we've ticked back over the years. I think you're I think you're one of a handful. I must count Bayes basically, but there's only a handful of that 150 that have been on the list since its launch once upon a time around the two 16 thereabouts. Okay, now here's the thing. As I say, all we really know, I mean, anyone else is kidding themselves. If they say they know any more than what we've got in front of us, which is an inflation shock, an energy shock, specifically a supply shock on energy. One of the things we were talking about before the show was how it's different. You feel at least in your experience with your cohort of investors, your clients, but not your just

2:07your clients, imagine your entire circle. It's different, right? So people are reacting differently. And maybe in the show, we'd explore how our listeners could move differently from here, but in what way are people reacting differently to this crisis? It's a really good question, James, because I think investors have been, you know, you're rightly say so challenged with so many different things over the last 15 or 20 years. And, you know, if I pull back a bit to the different types of crises we've had in recent years, we break them down to probably three major crises being geo-political. And arguably, we're in that now. We've also had financial crises, economic crises. And what our data shows is that crises that are deeper, you know, more damaging to financial markets are the financial crises. And if you look back to the GFC, I think even a balanced portfolio during that time probably fell 20, 25%. If you look at an economic crisis, you know, we look

3:12backwards to things that have happened in the past, I think we could all agree COVID was an economic crisis. And a balanced portfolio then probably fell about 20 odd percent as well. If we drill down the geo-political in crises and, you know, we're certainly in one of them now, take ourselves probably back to Ukraine and Russia in February of 2022. You know, balanced portfolios only fell about two or three percent during that time. If you go further back even 2003 Iraq war, the invasion during March and May, portfolios were actually up. So, you know, in many ways for us, the crises like these tend to be less damaging to financial markets. And if you look at what's happening in indices at the moment, it's almost surprising in some ways that the depth of retracement we're seeing hasn't been that great. Yeah, you're actually like going a number of people including the head of Goldman Sachs there who said, but he said he was surprised

4:14at the complacency of markets. Having said that, there's a couple of issues obviously that are of concern. I mean, our market at the ASX is down six or seven percent so far this year. That's very far away from where we thought we'd be. The US is down this year, a few percent. And I suppose crucially, the interest rate environment is going in an unexpected change direction. So, by that, I mean bonds, which were supposed to be the great defender. We're seeing total returns from bonds dropping. I've got that wrong, Stanley, but total returns from bonds are dropping. So, I understand what you're saying that there's nothing scarier than a financial crisis. In my life, I don't think there was anything that I can go back to the 1987 crash. I mean, it was anything as scary, as fearsome as a genuine financial banking crisis where you wonder, is the whole system actually going to stay as we know it? So, okay, that's not an issue just now. But in the nature of this crisis, then, and the resettings that are demanded, perhaps, of investors, tell us a little bit more about

5:19that in terms of what people should be doing. And I know you could explain briefly if you would, what you've told investors to do in the past, but we don't have you as an advisor bit. So, if you could tell the listeners, ideally, what you think are the most important things going forward. Yeah, yeah. Look, if we reflect back on those past crises and how investors are behaving now, I think what's important is actually changes investor behavior. And probably that's coming out through investor education. It's not because this matter or braver, I don't think. I do think it's because portfolios are better diversified and more thoroughly constructed. And, you know, I've got the privilege of dealing with wealthier investors that do have the ability to fully diversify into more diverse portfolios that do protect them in times such as that. So, it's not really the investors that are handling the best ones that are handling it with stronger nerves. They've probably got better portfolios. And, you know, we all, as portfolio stewards, we all understand

6:22that volatility will always prevail. For us, risk is what we need to manage, risk of bad decisions, risk of emotions taking over, and risk of following the crowd or risk of doing something that isn't part of your five-year plan. And in this cycle, I think it's particularly important, you know, to understand the divide in portfolios that are built for one regime or one market outcome. Yeah, if you look back to 2025, everyone was very excited about growth. And portfolios were tilted that way. But certainly there were parts in the portfolio that were probably boring. And you mentioned, illustrate markets, other alternative asset classes that might have lagged the growth of the market. But now they are actually performing okay. And, you know, I will challenge you slightly on the interest rate piece, you know, where we park or have been parking our interest rate exposures is in floating rate securities, short duration, very liquid, you know, T plus one

7:28style product issued by Aussie Banks and corporates that is available to you, you know, for when you need to transition your portfolios into more risky asset classes. And it's great if you're in short term duration bonds right now. But you can't be in them forever. I mean, if you're in them forever, it would take a lot of work, first of all. And it probably wouldn't be the best investment, would it permanently? No, no, and certainly not suggesting all of the portfolio. I think some of our portfolios at the moment would be 15 to 20% in that type of investment. And the way we manage risk for a new investor, for example, if they're starting with a brand new portfolio today is probably start with 100% in that floating rate product. And then as one gets more comfort or starts dollar cost averaging into other asset classes, you just sell down one and buy into the riskier asset. And what sort of ruling yield are you getting on that?

8:30The rolling yield on sort of a diversified 30 to 35 name portfolio in 16 come five and a half to six at the moment. Okay. So it is better than the best cash. Yeah. And importantly for investors to understand, it's actually better than term deposits as well. And, you know, five, 10 years ago, Banks would avail liquidity in term deposits. But you just can't do that now. And so, you know, TDs are locked up for the duration of their maturity period, whereas, you know, fixed income securities that we're referencing are very liquid. They're deeper than equity markets. Except to see Ben, for the conservative investor, the cash is government guaranteed, which you can't provide. There's absolutely no denying that. And that's correct. But, you know, we feel risk adjusted. That's a risk we're taking. And it's only been really been in those financial crises, whereby some of that has been questioned. Is there parts of the market that you feel it is now clear that people should never have been playing in, for instance,

9:36I'm thinking of crypto and the more speculative ends of things, the overpriced AI stocks. I'm talking about the really, obviously, frothy part of investing. Yeah. Yeah. Look, I think it really comes down to education of the investor. You know, we haven't participated in crypto. We have participated in certain parts of AI. But I think the investors need to really understand what they're investing in. And right size at versus the risk that they feel they're taking, you know, I don't have any great issue with a portfolio of having a three percent, three to five percent allocation to digital currency. Nor do I have a problem having probably even larger exposure to some of that growthier part of the market in AI tech. But, you know, you want lot of names, a lot of diversification and increasingly good liquidity. I want to talk to you. And we've got to talk to the next part about basically what to do now, where we go, about portfolios, what we should be looking for. But here's the thing. Just critically on that one other thing, I know I'm throwing questions

10:40at random. That's the nature of the show. Thank you for being cooperative so far. So good. Gold. Gold. Yeah. Where do you stand? I start by saying Morgan Stanley's chief investment officer a few months ago, saying people could have up to 20 percent in it. This is Morgan Stanley, biggest world advisor in the world. Where do you stand on us? I read that with great interest. So did I. What did you conclude? I think he's onto something. And we'll obviously explore this in the next part of the pod. But look, I think gold and other real assets as we call them. Certainly have a part in portfolios. What's been interesting, I think James over the last couple of weeks is how gold has behaved. One would expect during crises like this gold returns as a place of safety, a safe haven for investors. But gold's actually rolled over. And I just think that's probably due to the aggressive run it's had in 2025 on a 12 month basis. It's been a great performing asset. I feel you know, the big end of town have probably been taking a little bit off

11:43the table in their gold exposures because they've made good money. But yeah, we're happy to still be allocating the gold at the moment. Absolutely. Interesting. Okay, take short break back in a moment, folks. Hello, welcome back to the Australian's money puzzle podcast. I'm James Kirby. I'm talking to Ben James of the escala partners group, which is one of the one of the more prominent of the boutique. You might like the word boutique. I don't know. But Australian boutique style wealth managers of which there are not many. There's really only a handful. If you look at that 150 advisors list, you have the big names, the global names, then you have a handful of local boutique groups. And then you have sort of spread of all sorts of shapes and sizes. That's my take. And I've been looking at I've actually been running the list for 10 years. So it's an opinion, but it's an informed opinion. Okay, now Ben, let's talk about what people should be doing. Because I mean,

12:46everyone is listening. They know where they are. All their power is now what they can do next. Let's assume a few things. I want to put a few sort of lines on the ground. First of all, to see that we're all on the same page. Do you agree there's an inflation shock here? Do you agree that was unexpected? Do you agree that the structural inflation here that is not going to go back into the bottle anytime soon? Yes, to the first couple of questions. And regarding getting the toothpaste into the tube about whether the central banks can do that, I'm not quite sure. I probably agree on that point as well. So I think what investors are grappling with now, probably they didn't expect to be in this position a year ago. Yes, I mean, there was still talking about cuts to US interest rates. Yeah. I mean, until a few weeks ago, I mean, I never believed it, I have to say, but because the bond market said that was not true, but they were talking about that. That seems to be off the table now. So, okay, let's assume that we're in a structurally higher inflation environment. Let's

13:46assume the two to three percent target of the RBG, for instance, is a pipe dream in our market just now. So what should investors be doing? Looking investors should be focusing on having a portfolio with many different levers in it. We focus on diversification across asset classes, which we've talked about a little bit so far. But you also need to sort of position within those asset classes, diversification as well. You know, in your public equity market, whether it's Aussie or international, it's fine to have some growth. One needs to have some value, really, probably even more so. Now than a year ago, one needs to be looking at a long, short, more nimble manager. Increasingly, James, and you'd be well aware of this. And I know you've talked about it in some of the other pods is the evolution in the alternatives market. And, you know, alternatives for those people that are aware are really investment strategies that are designed to be non-aligned or uncorrelated

14:49to your other party of portfolio. And, you know, with a question of what to do now, we're basically filling that latter bucket. We're filling and investing in alternative assets. Okay. Can you specify what they are? Because I'm guessing it's not actually a private credit on listed private credit. I'm guessing it's not some of the more obvious, because you say they're non-correlated. Yeah. Spelled them out if you would. Yeah. I mean, one great example that we've been investing in recently is a royalty-stream fund. So, you know, these provide returns linked to production of a mine or revenue for a healthcare product or even from music or movie royalties. These are income-styled products that are designed to perform well regardless of the economic backdrop. That would be one. I think infrastructure and even energy transition is a very interesting space for us at the moment. We talked about gold as being a real asset. I think infrastructure

15:53probably is very aligned to being similar. Infrastructure has been, it's been a sleeper for a while, hasn't it? It was great for a long time, but it's not been great for the last few years, is that fair to say? Yeah, that's fair to say. But, you know, we've had a different environment in that time, low inflation, and now we're probably facing, as we just discussed, an inflation of the environment and real asset infrastructure funds with long duration contracts, often inflation protected contracts, you know, like a Transurban, for example, we all know, as inflation goes up, we're paying more on their toll roads. It's a good example of what other infrastructure assets do. It sounds like it's mostly infrastructure funds been rather than shares. If the average just your own investor, there's not many of them left. Cubes just gone off, which I suppose was infrastructure. Sydney Airport, of course, being the famous one. So, you mentioned Transurban. Utilities, do they fit into that? Yeah, they would fit into certain infrastructure funds absolutely. And really, the evolution, and you mentioned private credit, and we're seeing how

16:56aggressively that's grown. We're seeing the similar thing now in infrastructure, more and more infrastructure managers are knocking on our door. So, I think, you know, they're seeing where the money's flowing, sort of our end of town. So, I'd expect that trend to continue. And your clients are knocking on their doors, by the sounds of it? Well, they're getting well advised. So, they would. So, often reverse inquiry, James. And what would you expect? I know there's a difficult question, but an infrastructure fund, what's our interest range should an investor listen to this show, usefully expect from one, as above the cash rate? Well, depending on where the cash rate is, let's just talk about the net returns we'd expect from them, depending on their risk profiles. You know, some are really long and whole assets where more of the IRR is delivered via capital growth. Some of the other funds that we look at, their IRR is driven by yield. So, for those driven

17:58by yield, we'd expect to sort of see a seven to nine percent star return through a cycle, with a lot of that actually coming back as income into portfolios. Whereas those who are more growth focused, we'd be expecting sort of 13 to 15 percent whereby most of the capital is returned at sort of at the back end of the investment. Do you include data centers in that? Yes, they'd absolutely be a part of certain infrastructure funds. Okay. Okay. Very interesting. All right. Now, one of the points I know that I wanted to bring off with you was that we talked at the very start of we before we went on air. We were talking about the traditional notion of the 6040 afford folio and that 40 percent was defensive and that defensive element was substantially due on the pin by bonds. Yeah. But when I talk to people like you, I think that 40 percent is all sorts of different assets that weren't necessarily in the mix before. Is that the case and have bonds shrunk in terms of the pie when you have a bar chart in front of you looking at

19:04someone's portfolio? Absolutely. And if you take yourself back to the old, you know, lived to a hundred argument, you know, your age on 54, I should have 54 percent of my money in bonds. And that is not how my portfolio has reflected. But you know, I think it takes me back to that whole question about whether a 6040, 7030 portfolio is still fit to purpose. And we've been doing a lot of thinking about this internally. I don't think those styles of portfolios are fit for today's world. I think that style of portfolio was really set for a world of low inflation, stable geo politics, predictable policy from governments, a global growth market where trade was free and open. But you know, I think it was Mark Carney, the Canadian who mentioned recently that the curtains come down on that old rules-based order. Today's more volatile returns are more dispersed. Can I just, can I just, for the listener, can I just clarify something? Yeah.

20:08It's the composition of the defensive part of the portfolio that's changed. Rather than it being in place, is that right? That's absolutely correct. And you know, I talked a little bit about alternatives and we can dive a little bit deeper into why that's replacing our fixed income allocation. Or do just tell us briefly what you're thinking. Yeah. I mean, look, it was interesting because 2022 was a really challenging year for investors. And we had a lot of clients, you know, new money coming in that year. And correlation of that whole year was a terrible year for investors because everything was correlated. I think equities were down 20, but the bond market was down about 13 as well. So nothing worked. And I think there was a real kill switch moment for us because highlighted that inflation mattered. And so now, rather than building a rules-based portfolio of balanced growth defensive, you know, we're really looking to build portfolios. And I mentioned

21:09the word levers before, where we have, you know, different outcomes that we prepare for. And then invest in different investment products that match those allocations or where we think that macro event will play out. So, you know, at the moment, we're saying inflation probably looks like it's going to be around for a longer. How do we invest for that? And, you know, we've talked about gold, we've talked about infrastructure. We'll real estate come back in probably. But there's also other things we need to invest for growth may come back. So we can't ignore growth. But how do we invest in that as well? So, so inflation thinking is at the heart of it now. That is. Okay. Now, I just want to think before I water questions, this were questions which I've got some for you. The major super funds, the big super funds. I've had people coming through to me during the week. These are not academics as such, but people just spent their whole life talking and looking at portfolio construction. And they're making the point that they think the big super funds are exactly what

22:12you're saying you shouldn't have. That is that they are all school in their construction and heavily reliant on bonds. Now, I know they were early into on this to the assets, but I wonder, do you have any sense whether their portfolios are appropriate for the era where it seemed to be entering? It's a really good question. Often we reflect on, you know, I think we see a quarterly update on what the future fund's doing. And we look through their allocation and we always marvel about how small the allocation is towards the equities, you know, how large it is to things like private credit and private equity. But I think groups like that have probably got it right for our style of investors. The other super funder, I'm probably not well qualified enough to comment, but those where you do need to be active. I think what this world is showing us. And so those that are being a little bit more active and a little bit more tactical, I suppose the word is, I would think would be well positioned for the current environment. Okay, all right, very good.

23:16We'll take short break. We'll go to deal with some questions back in a moment. Hello, welcome back to the Australian's Money Puzzle Podcast. James Kirby here with Ben James from a Scala Partners. Now, Ben, I just, we're running out of time. I just do two of these questions. The one from Suzy, I will leave to another day. Can I just bounce down to the one from Andrew, who says as of today, the ASX200 is pretty much flashed due to the recent uncertainty in the Middle East. Yes, it is. They're worse than flat, depending on the time period. Andrew, although the conflict is still paying out, this seems like an opportunity for those with the capacity to put in extra concession contributions to get to their 30,000 limit. Yes, would you agree? But he then says, do you think the conflict could have an impact on the expected dividends paid in the future? Or would some companies pose their distributions? Well, we saw that in COVID, no talk of it yet.

24:23What do you guys think? Is that coming up with your investment committee and is it a concern? Look, I'll take the first part of the question about the concessional contribution. I'd absolutely be making the benefit of that opportunity. I think the governments are going to get harder and harder for investors to get money in. So I think the question about getting money into super should absolutely be taken up. So I would encourage that to happen. The second question regarding dividends, look more and more, what we're seeing in the Aussie equity market, a gradual dilution of the dividend yield across the ASX200. I think at the moment, it's probably 3.7 to 8 maybe. Yes, it could be a little bit wrong. Just before and a half. So it has shrunk and that's for a number of reasons. The makeup of the ASX200 is changing, payout ratios in some companies are lowering. But we look to fix the income and we've talked a lot about that as being a replacement for some of those dividends. They're great for investors when

25:26you can get them, franking credits and magnificent as well. But I think in Aussie investors will start looking at their portfolio through total return rather than a yield plus a total return. Because of the dividend shrinkage, basically. Yeah. Okay. Yeah. I think so. But on the specific question of whether there might be dividend pauses, skips or whatever, basically dividends, nothing paid, is there a risk? That's an absolute risk. Investors are always dealing with risk. I think the risk of that happening would be if we entered really into that economic crisis and when companies try and shore up their balance sheets for obvious reasons. But whether that's going to happen in the next 12 months, I'm not so sure. Probably not. Yeah. All right. Probably not. But of course, one last thing, something I think I should have picked up on. You mentioned infrastructure and you mentioned energy transition and possibly property. Could you be a bit more specific about what you guys are thinking about there in terms of going forward for investors when you say energy transition. I wonder what you mean

26:33for the investor and property. I wonder which end of property you're thinking of. Yep. Both are good questions. Look, on the energy transition side, we're dealing with an oil crisis right now. And you know, with crises come opportunities. Do investors, will they start looking at Uranium? Will nuclear come back on the horizon? I think investors need to be open to where an opportunity presents as a result of the crisis somewhere else. So that's something that we're looking at that dives into something more deeper than like a resources investment. I think that makes something worth considering energy transition in other things like infrastructure funds around solar wind. I think every time we get these type of focuses on one part of the commodity market currently being oil, you know, something else pops up. The second part of the question, property, I think we're looking at property where we can underpin high yield. I'll take it from the last 12 months, we've been investing in sort of retail shopping

27:36centres. We think demand for these styles of assets will continue and where we can get a large part of our return from yield. Again, that total return being skewed to yield. We're very happy to be investing alongside good partners in that space. Melbourne's a challenge. I think I'm a Melbourneian. We're looking at moving our offices right now. There's plenty of opportunity, but our leases locked in your 2028 and I'm being told that in 2028 there'll be a shortage. So, you know, we're actually looking at whether office in Melbourne is something worth looking at based on those thoughts. We have listeners from all around the country, so I don't want to bore them with local talk, but the vacancy rate on the same killer road district office district is 35%. So I don't think there's going to be a shortage too soon, but hey, you never know that registered agents might be telling you the truth, Ben. I'm talking more Colin straight. Of course you are. You're talking prime prime prime prime. Yes, indeed. Thanks very much for coming on the show Ben

28:37James. Great to talk to you. Great to talk to you James. That was Ben James of the Scala partners. Thanks folks for listening. Do keep the emails rolling. The money puzzle at the Australian.com.au will just have one show next week, not two because of Easter. Watch out for that. Today's show was produced by Tiffany Tim. I can talk to you soon.