In December of 1998, FIIG Securities was officially incorporated, and in March of the following year, our doors opened for the very first time. The Fixed Income Investment Group was born out of a missing piece of a rather large jigsaw puzzle – a need that our Founder recognised whilst working abroad in fixed income investing.
Fast forward 25 years, and our homegrown Australian business is celebrating a memorable milestone - so we took a trip down memory lane with two FIIGsters, who have played an integral role in the firm. Our Founder and former Managing Director (and now non-executive director), Jim Stening, and FIIG 20-year veteran Lincoln Tragardh, Head of Fixed Income Sales & Trading.
We discuss why they believe our core purpose of making fixed income accessible to all Australian investors has been the catalyst for the company's success, and how our DNA to constantly innovate and evolve our offerings to suit our clients' investment needs is what has helped the company to stand the test of time and continues to make us relevant today.
Founding and Early Years
While working abroad in a global investment bank, Jim identified the opportunities in the Australian fixed-income market and how there was a lack of service for sub-institutional investors that otherwise existed everywhere else in the world!
"Every other sophisticated capital market provides access to direct equities, managed equities, managed fixed income, and direct fixed income, but in Australia, we only had managed equities, direct equities and managed fixed income, so it was like a big missing piece."
Jim saw first-hand how direct ownership of bonds was that missing piece in Australian investor's portfolios who typically have a bias towards property and enjoy their franking credits on dividends. The characteristics of bonds, with their reliable income and capital stability, made them a necessary investment option, and Australians were missing out.
Looking at selected Pension Fund Asset Allocations for OECD countries in the chart below– you can see Australia fourth from the bottom, this chart shows the overall asset allocation to bonds. As you can see, Australia's allocation is very low. Additionally, the ATO tells us that just 1% of SMSF funds is allocated to bonds!
Jim, what were your initial goals and aspirations for FIIG, and how have they evolved over the years?
"The original focus was to provide access to over-the-counter bonds, but we were limited in Australia by the convention of transaction sizes, i.e. a minimum of 500k per bond per transaction. Ultimately, what we wanted to do was move from servicing just middle market clients to providing greater access to all investors; it was about making bonds accessible for all Australians, thereby offering a better return than cash with lower risk than equities and other asset classes.
To do this, we needed growth to reach a critical mass to enable the provision of liquidity that investors needed. We wanted to attract more investors to bonds, and particularly when you look at the distorted level of current asset allocations, I think we were (and are) really well placed to do that – we have as a firm a lot of experience and a deep understanding of the markets and opportunity."
One of the reasons fewer Australians invest in direct Corporate Bonds than their US, UK and European counterparts is that up until 2010, Corporate Bonds were only available in parcels of $500,000, limiting access to this market.
How has the company evolved regarding its products, services, or market presence since its inception?
"The firm has changed materially; when we started the business, we were unknown, and we have evolved to be a very well-known and trusted brand in fixed income here and abroad; we have a large and supportive client base, sophisticated systems, a lot of experience and a deep understanding of the market," said Jim.
The Launch of Direct Bonds in 2010
Speaking to Lincoln, who celebrated his own 20th FIIG anniversary this year, he looks back at the time when bonds weren't directly accessible.
"The business before the GFC was very different. Generally, in fixed-income trading, margins offered by bonds were very small. It was mostly a professional market (banks, larger institutions) with some middle-market participants, but that was the general makeup of the client base and business.
The GFC was a major change in markets generally, specifically fixed income. And post GFC, it completely changed our world from a small player to a major player in our niche. From the back end of 2008 for the next 4-5 years – we experienced massive growth from investors' changing preferences. A lot of Aussies started looking at fixed income as a flight to safety; people were looking for alternatives, and there were some very good alternatives in fixed income."
"The main thing we did at this time was introduce our custody service; we broke bonds down into much smaller parcel sizes. In fact, by far, the biggest thing in FIIG's existence was bringing over-the-counter bonds to individuals in sizes less than $500k."
Around 2% of Australia's bond market is now directly held by personal investors and this segment is growing fast. FIIG's vision is to see at least 10% of corporate bonds held directly in the hands of personal investors.
Lincoln also emphasised that our Research offering (launched in 2007) came off the back of the need to provide everyday investors with relevant information and education to be able to make informed decisions – at the heart of what FIIG does is to ensure that the asset class is well understood, and this was the catalyst for setting up an in-house research department.
"The breadth of clients and investment options has improved dramatically, and the needle has really moved with our client's understanding of fixed income investing. The education piece has been a big part of our mission, and that was to ensure that the asset class was well understood. We should be proud of how much we have educated the client base over the journey – but outside of the base, there is still a lot of work to do."
Another key milestone for both Jim and Lincoln was the introduction of the Debt Origination Business - Debt Capital Markets (DCM) in 2012.
"Ultimately, this came as an evolution post-GFC when the broader market started chasing higher yields and introducing new deals to investors. We also turned to the US to expand our high-yield offering, and that opened opportunities to make us relevant with trading desks in New York and London," said Lincoln.
How has the industry changed since the company's founding, and how has the company adapted to those changes?
Jim: "As the business grew and in particular with the addition of providing small parcel trading to investors, FIIG experienced a lack of supply, so that's the core reason why we started originating bonds as a way to create more supply. What's really pleasing is that what's developed over the past 5-10 years, predominately the last 5, is a very significant participation from issuers and a very deep corporate bond market with lots of issuance and lots of choices available – this is what we want to see.
Technology has changed things also, in particular with the delivery of products and services, enabling access and the provision of information to clients more directly and easily. We have built systems to cater for literally millions of transactions and to deliver the service in a better way."
What do you see the outlook is like for FIIG and Fixed Income?
Jim: "I think we're going to continue to see lots of great opportunities. It's likely going to mean that yields remain elevated compared to recent history, and there could be more volatility than what we've seen, which is going to provide opportunities to capture target yields."
What's Next for FIIG?
Jim: "It's great to acknowledge our anniversary; not a lot of businesses get to 25 years, but FIIG has always been very agile and active. We are not resting on our laurels. We know that we have a good brand and formula, but we need to keep changing and innovating to provide our clients with good returns and good products.
We're finally in this position with Funds Management to leverage our brand and expertise, which is a really interesting path for us to be competing with the big international names who provide our services but doing it in an Australian way."
In October this year, the FIIG Australian Bond Fund was launched, and with bond yields higher than they have been at any time in the last ten years in Australia, this was an opportune time:
"With the higher rates, the entry point into fixed income is as good now as we've seen in a long time, and that doesn't look like it's going away anytime soon," said Lincoln.
"For me, I think the scope for growth is uncapped. We have just ventured further into the active management business; the intermediary sector is relatively untapped. There are many more clients to get into bonds, with Australians still highly under-invested in fixed income versus the rest of the world. We've come a long way, however.
I look forward to the next 5, 10, 15, 20 years and the potential that we can see on the horizon. It's been a pleasure to be a part of this journey."
Thank you to everyone who continues to read this publication! And a massive thank you to all of our clients; these 25 years have been possible because of you.