The professorial Indian-American-Australian citizen who ambles into the modest Sydney boardroom is nothing like the Wall Street caricature of the “bond bandit” that he is.

it is probably the biggest success in Australian funds management over the past decade.

In just seven years the affable 53-year-old has raised north of $8 billion to create one of the most formidable “absolute return” fixed-income businesses in the world.

While Palghat worries that Aussie housing is very expensive – “you could buy a home in Double Bay or all of Detroit” – and wants the banks to sell more loans off their balance sheets through securitisation, he judges Aussie credit spreads “fairly priced”. (These proxy the risk premium companies pay investors to raise money.)

He refuses to invest in the new-style “additional Tier 1 capital” hybrids that have proven so popular with retail punters, which convert into equities (or are written off) in stress scenarios: “You might as well own the shares instead of the hybrids.”

But he is a buyer of new-style “Tier 2” subordinated bank bonds, which he is “comfortable with” and can invest up to 10 per cent of Kapstream’s portfolio in. “The premium you get on Tier 2 subordinated bonds seems fair compensation for their risks relative to old-style subordinated debt.”

Palghat is critical of the distinction investors make between government bonds and other debt securities, the latter of which are known as “credit”. “Everything is ‘credit’,” he cautions. “Governments expose you to credit risk – sometimes more than individual companies. There is no such thing as a ‘risk-free’ interest rate.”

News source:  Financial Review

http://www.afr.com/f/free/blogs/christopher_joye/meet_the_aussie_bond_bandit_6wll6Anr7ILsqLXMMMx7eO