Speaker 1: Welcome to Inside Active, a podcast about active managers that
Speaker 1: goes beyond sound bites and headlines and looks deeper into
Speaker 1: their processes, challenges, and philosophies and security selection. I'm David Cohne,
Speaker 1: i lead mutual fund and active research at Bloomberg Intelligence.
Speaker 1: Today my cost is Sam Geyer, a corporate credit strategist
Speaker 1: for Bloomberg Intelligence. Sam, thank you for joining me today.
Speaker 2: Thanks for having me excited to be here.
Speaker 1: So last week you published a note on ratings changes.
Speaker 1: How did the tariff I guess we'll call it the
Speaker 1: drama in April affect ratings actions during the month.
Speaker 3: Yeah, I mean, you know, it'd be I think a
Speaker 3: little bit more interesting to say that they were overly
Speaker 3: pessimistic and a little bit more down grads. But really,
Speaker 3: over the past couple of quarters, Raiders have been I
Speaker 3: would say pretty and I think it kind of goes
Speaker 3: to show just their kind of wait and see approach
Speaker 3: that they're taking right now, given we haven't really seen
Speaker 3: tariff impacts, you know, flowing through to the macro picture
Speaker 3: as of yet. So right now they're a little bit
Speaker 3: more on the sidelines neutral overall, but we'll see over
Speaker 3: the next couple of quarters, if those those impacts start
Speaker 3: to feed through, and what that ultimately means for for
Speaker 3: potentially more downgrades down the road.
Speaker 2: Interesting.
Speaker 1: Well, let's bring on our guest to get her thoughts
Speaker 1: on the downgrades. I'd like to welcome Janet Rilling. Janet
Speaker 1: is head of the plus fixed Income team at all
Speaker 1: Spring Global Investments and a senior portfolio managing manager managing
Speaker 1: funds such as the Court Plus Bond Fund, which has
Speaker 1: a ticker of w I pi X and the Corp
Speaker 1: plus ETF which has a ticker of ap l U. Janet,
Speaker 1: thank you for joining us today.
Speaker 4: Thank you, it's a pleasure to be here.
Speaker 1: Well, i'd like to hear your thoughts on the downgrades.
Speaker 1: Do you are you seeing the same thing you know,
Speaker 1: the driving some of these downgrades.
Speaker 4: Yeah, I would agree with with Sam. It's a little
Speaker 4: too early to tell at this point. First of all,
Speaker 4: we're still determining what the framework will be for teariffs.
Speaker 4: Then there will be some time for companies to adjust,
Speaker 4: and then we'll see how that flows to the numbers.
Speaker 4: So I think it's a little bit of a wait
Speaker 4: and see on that front.
Speaker 1: Okay, Well, let's talk about the core plus funds. What
Speaker 1: is the investment process for managing these funds? You know,
Speaker 1: is there a starting point that you look at?
Speaker 4: Yeah, so, you know, we think we take an approach
Speaker 4: that's a little different than others in the core plus space.
Speaker 4: And the first thing that makes our approach different is
Speaker 4: we take a six month outlook when we think about
Speaker 4: where markets are going and then how we're going to
Speaker 4: position the portfolio. And we do that because we think
Speaker 4: a longer view, like a three to five year macroview,
Speaker 4: is a lot harder to get right. I mean, think
Speaker 4: about all the changes we've had just recently, pretty difficult
Speaker 4: to predict five years out. We also think that having
Speaker 4: a longer view, you tend to more anchored in a view,
Speaker 4: and you can miss some of those inflection points that
Speaker 4: inevitably happen in a market cycle. So we prefer to
Speaker 4: think about the world kind of two to three quarters
Speaker 4: forward and position that way. A second thing we do
Speaker 4: a bit differently is we take what we call a
Speaker 4: multiple lever approach, and essentially that means really building a
Speaker 4: well diversified portfolio. So we're looking at casting a wide
Speaker 4: net across a lot of sectors, not just in the
Speaker 4: plus space, you know, maybe being only in US high yield.
Speaker 4: We have six plus sectors that we use, and it
Speaker 4: also means dialing up levers up and down in the
Speaker 4: core pate of the portfolio. We think this allows us
Speaker 4: to better balance risk and then shift to where the
Speaker 4: relative value is. And then our third differentiator is taken
Speaker 4: an unbiased approach to managing the portfolio. We're looking to
Speaker 4: seek diversified sources of alpha, so again across the range
Speaker 4: of the fixed income sectors. We don't want to have
Speaker 4: structural bets in the portfolio, like always being overweight structure
Speaker 4: or only doing corporate credit. We want to move to
Speaker 4: where there's value in the market and not be environment dependent.
Speaker 4: So it's a more flexible and dynamic approach than you
Speaker 4: might see with some of the alternatives.
Speaker 1: Now you mentioned macro. I was just curious, you know,
Speaker 1: other macro factors that you consider there.
Speaker 4: Most certainly are Our investment process really has two key components.
Speaker 4: So the first is portfolio strategy, and that's more the macroside.
Speaker 4: The second piece is sector strategy and that's more the
Speaker 4: bottom up piece. So in the portfolio strategy piece, a
Speaker 4: key activity that we do is a macro analysis, and
Speaker 4: that's based on what we call our Big Six framework.
Speaker 4: So we've identified six macro factors that we focus on
Speaker 4: on a regular basis and assess them and help lay
Speaker 4: the foundation for the portfolio. So the Big six can
Speaker 4: prise growth, employment, inflation, monetary policy, fiscal dynamics, and then
Speaker 4: the international landscape. So at different points in the cycle,
Speaker 4: some of those factors weigh a little more heavily, but inevitably,
Speaker 4: throughout an economic cycle, each of those factors are quite important.
Speaker 3: So Jane and I want to kind of stick to
Speaker 3: that topic, getting to that volatility that we were just
Speaker 3: talking about. I'm curious if you could just walk us
Speaker 3: through how you're thinking about the market right now, and
Speaker 3: on top of that, you know, how you approach investing
Speaker 3: across those volatile markets. Is it, you know, a good
Speaker 3: time for you to identify some potential miss misvaluations there,
Speaker 3: or maybe a time where you become a little bit
Speaker 3: more you know, locked in on following your specific investment approach.
Speaker 4: So stepping back at the biggest level, we think now
Speaker 4: is an attractive time to be in fixed income, and
Speaker 4: that's simply because there's a lot of yield. If you
Speaker 4: look back historically, over the last couple of decades, we
Speaker 4: are on the higher end of all in yields for
Speaker 4: public global fixed income, so you know, at a high level, again,
Speaker 4: an allocation there makes sense, but then the trick is
Speaker 4: to determined what are the components where do you allocate?
Speaker 4: And while yields are high, when we look at credit spreads,
Speaker 4: those very quite a bit, and in particular, the corporate
Speaker 4: credit spreads are not particularly attractive compared to a historical perspective.
Speaker 4: Now certainly they have widened some or they've become a
Speaker 4: bit cheaper post all of the tariff news that's come out,
Speaker 4: but even with the movement we've seen posts tariffs, credit
Speaker 4: spreads are sort of middle of the range or even
Speaker 4: tighter than where they've been over the last twenty years.
Speaker 4: So for structuring the portfolio, we have more of a
Speaker 4: tilt to high quality income at the current time, so
Speaker 4: that's favoring sectors like structure Product. Structure product is very
Speaker 4: high quality, it's liquid, it's backed by a range of
Speaker 4: collateral types, and the different securities have a good strong
Speaker 4: cash flow profiles. We like getting that incremental yield from
Speaker 4: a higher quality part of the market rather than feeling
Speaker 4: like we have to go deep into the lower quality
Speaker 4: portion of the market. So again we're emphasizing that higher
Speaker 4: quality income. It's not to say we don't have allocations
Speaker 4: to the plus part of the portfolio. We do. We're
Speaker 4: just very diversified there and we're not real concentrated in
Speaker 4: any one particular part. So for example, us high yield there,
Speaker 4: we're you know, between three and four percent allocation. You know,
Speaker 4: we can go as high as twenty five percent, So
Speaker 4: that gives you a sense of you know, it's a
Speaker 4: lower than sort of average allocation to high yield. That
Speaker 4: gives us some dry powder if we do get more
Speaker 4: of a backup in credit spreads.
Speaker 3: So with that then too, you know, obviously you just
Speaker 3: said high yield a little bit lower in terms of
Speaker 3: the allocation.
Speaker 2: You know, what are kind of the drivers there?
Speaker 3: And I'm particularly curious around how you feel about just
Speaker 3: the broader fundamental picture right now. Are you seeing you know,
Speaker 3: worrying levels in terms of maybe leverage or some other
Speaker 3: ratios in terms of company balance sheet and overall health.
Speaker 4: So broadly speaking, and this is a comment on both
Speaker 4: investment grade credit and high yield. You know, it's generally
Speaker 4: pretty healthy. We came into twenty twenty five with pretty
Speaker 4: good fundamentals, and you know, the things we're looking at
Speaker 4: are those credit metrics that you highlight, you know, leverage
Speaker 4: levels within investment grade credit, it's around three point two times,
Speaker 4: that's not a worrying level, and looking at high yield.
Speaker 4: There are two The credit metrics really entered the year
Speaker 4: pretty stable and in a pretty good position. We saw
Speaker 4: the trailing twelve month default rate at just one point
Speaker 4: one percent, so that's that's pretty good and it shows
Speaker 4: we're starting from from a strong base. The issue is, well,
Speaker 4: there's two. One is that we're coming into a period
Speaker 4: with much higher volatility, and given everything going on with tariffs,
Speaker 4: the probability of a recession has grown. The beginning of
Speaker 4: the year, we would have assessed a recession probability quite low.
Speaker 4: We've now had to revise that up to something maybe
Speaker 4: more like forty to fifty percent because there's a lot
Speaker 4: of uncertainty in terms of how companies will be able
Speaker 4: to generate profits in this new regime. The second piece
Speaker 4: is valuations. So fundamentals can be great, but if that's
Speaker 4: really all reflected in the price and you're not getting
Speaker 4: much compensation, for taking credit risk, Well, that's a reason
Speaker 4: to be less constructive. And that's really the situation we
Speaker 4: found ourselves in at the beginning of twenty twenty five,
Speaker 4: which was a good fundamental picture, but valuations that really
Speaker 4: didn't give us any extra compensation in the event something
Speaker 4: went wrong, and we did get something what go wrong,
Speaker 4: which was the increased increase folatility due to tariffs, and
Speaker 4: so we are at least now seeing some adjustment to valuations.
Speaker 4: But that's where we sit today.
Speaker 1: Do you incorporate any type of you know, ESG research
Speaker 1: or you know, whether it's part of risk management or
Speaker 1: just part of the process. Is that part of some
Speaker 1: of your research.
Speaker 4: So at all Spring we do offer ESG type strategies
Speaker 4: and we also offer strategies that don't incorporate ESG overtly.
Speaker 4: So because of that product offering, we absolutely have a
Speaker 4: framework for analyzing ESG, and our research analysts as they
Speaker 4: evaluate each credit, they do apply an ESG framework and
Speaker 4: make an assessment in terms of the ESG risks. So
Speaker 4: for those portfolios that do have a mandate that's ESG related,
Speaker 4: we follow whatever the criteria is for that. For the
Speaker 4: other portfolios, and coreplus would fall in that other category
Speaker 4: where it is not an es G mandate. We look
Speaker 4: at ESG it's just like any other fundamental risk factor.
Speaker 4: You know, at times an ESG factor can rise to
Speaker 4: the point that it creates high risk or that it
Speaker 4: needs extra compensation in terms of valuation. So when there
Speaker 4: is an ESG factor that rises to that level, it
Speaker 4: is treated like any other risk or factor in analyzing
Speaker 4: a credit and it enters into the investment decision.
Speaker 3: So Jena and I want to get back to the
Speaker 3: corporate world specifically. I'm wondering, within you know, specific sectors,
Speaker 3: are there spots where you're pretty excited about right now,
Speaker 3: and maybe on the flip side of that, are there
Speaker 3: spots where a little bit more concern you know, obviously
Speaker 3: consumer sentiment and just overall uncertainty I think kind of
Speaker 3: you know, affects the consumer cyclical sector as an example.
Speaker 3: I'm wondering how you feel about different parts of the
Speaker 3: market when.
Speaker 4: We think about areas of risk in the market, particularly
Speaker 4: given the dynamics around tariffs. Our favorite place, particularly in
Speaker 4: investment great credit is the financials. They are kind of
Speaker 4: exposed to tariffs on more of a second order impact.
Speaker 4: I mean, they don't have direct tariffs that are going
Speaker 4: to be implemented on the business that they do. Their
Speaker 4: exposure would be more economically based given who they're lending to.
Speaker 4: If some of the corporations they're lending to start having problems,
Speaker 4: So given they're not kind of on that front lined,
Speaker 4: we do think from a range of outcomes or risks
Speaker 4: that they look more attractive. Further, the valuations compared to
Speaker 4: industrials does look more attractive to us. So within financials
Speaker 4: that includes banks, includes insurance companies, those are probably our
Speaker 4: two favored areas. Within high yield, we don't have so
Speaker 4: much of a tilt to a particular industry. We have
Speaker 4: rather chosen to be very diversified. In line with that
Speaker 4: up in quality tilt for income, we have skewed our
Speaker 4: high yield allocation more heavily to double bees, with the
Speaker 4: remainder being in single bees and not having exposure in
Speaker 4: triple cs. So more of a quality construction in terms
Speaker 4: of how we're implementing there. You know, when I think broadly,
Speaker 4: you know what are the most vulnerable areas related to tariffs?
Speaker 4: Of course you highlighted consumer. If the consumer stops spending,
Speaker 4: that's going to be an issue for the different consumer sectors.
Speaker 4: We'll say the metric we're following very closely for that
Speaker 4: is employment, because even with all this uncertainty, if a
Speaker 4: consumer has a job, I think there'll still be some
Speaker 4: support for consumer spending and up into this point. I mean,
Speaker 4: we did get an April jobs report that still showed
Speaker 4: job creation. One hundred and seventy seven thousand jobs were
Speaker 4: created in April. We'll see what we see in April
Speaker 4: in May. But nonetheless, you know that has been a
Speaker 4: solid support so far to the consumer. Other areas at risk,
Speaker 4: the auto sector really front and center. With the supply
Speaker 4: chain being so integrated globally, there's a lot for the
Speaker 4: auto companies to unwind, to not have the effects of tariffs.
Speaker 4: There has been some relief with some of the more
Speaker 4: recent announcements coming out of the administration, but that's absolutely
Speaker 4: a sector that is at highest risk. And then also
Speaker 4: considering the energy space, and that's more related to what
Speaker 4: we've seen in the price of oil. Oil has declined significantly,
Speaker 4: and that is partly due to the supply situation. There's
Speaker 4: been increased supply. Also it's likely related to more concerns
Speaker 4: about the economy so that will filter into energy company earnings,
Speaker 4: in particular the oil and gas producers.
Speaker 3: So I want to get back to the high yield
Speaker 3: side of things, specifically, you know, the fallen angels or
Speaker 3: potential fallen angels. You know, from what we've been seeing,
Speaker 3: it's been a pretty quiet couple of years in terms
Speaker 3: of actual fallen angels that have come through. But I'm
Speaker 3: wondering if that's something that you keep a close eye
Speaker 3: on in terms of maybe trying to get out ahead
Speaker 3: of some of these potential rating actions and capitalizing on
Speaker 3: some of the price movement that's involved there.
Speaker 4: We do pay close attention to what we think our
Speaker 4: candidates to become fallen angels. Our analysts have an ongoing
Speaker 4: list of what they think are potential fallen angels, which
Speaker 4: they refresh on a quarterly basis. We have noted that
Speaker 4: there's been a little bit of an increase in fallen
Speaker 4: angels at the start of the year. It's been a
Speaker 4: little more idiosyncratic, though I wouldn't say it was something
Speaker 4: happening in the economy per se that really drove it.
Speaker 4: It was sort of individual due to circumstances at particular companies.
Speaker 4: So I think the risk now with there being more
Speaker 4: of a macro shock going on, is that we have
Speaker 4: a higher level of companies and maybe higher correlation with
Speaker 4: industries where we're seeing more ratings pressure. So the expectation
Speaker 4: would be we may be sowing the seeds for a
Speaker 4: bit of a continued increase in fallen angels. Not predicting
Speaker 4: any type of dramatic change in the next six month
Speaker 4: again with our couple quarter forward looking outlook, but heightened
Speaker 4: awareness that there could be more credits headed for that
Speaker 4: fallen angel status.
Speaker 1: You talked about diversification before. Is there any process in
Speaker 1: determining portfolio positioning giving certain securities a larger weighting in
Speaker 1: the portfolio.
Speaker 4: Yeah, that really gets to the heart of portfolio construction.
Speaker 4: And you know, we start with the general parameters that
Speaker 4: will always have at least sixty five percent of the
Speaker 4: portfolio in the core sectors. That ensures that the core
Speaker 4: plus portfolio serves its purpose as a fixed income allocation.
Speaker 4: At sixty five percent, we think that it correlates well
Speaker 4: with the Bloomberg Aggregate Index, meaning that you get a
Speaker 4: return stream that is correlated with the fixed income market
Speaker 4: that allows up to thirty five percent that can be
Speaker 4: allocated to the plus sectors, and that piece allows you
Speaker 4: to generate greater alpha as compared to the benchmark, so
Speaker 4: that's the first place we start from there. We also
Speaker 4: put guardrails on each of the sectors, so we put
Speaker 4: a range around how much exposure we will take to
Speaker 4: the various subsectors. So within the core part of the portfolio,
Speaker 4: those subsectors are treasuries and government related securities, US securitized
Speaker 4: and US investment grade, and for those sectors will always
Speaker 4: be between ten and fifty percent market value in the portfolio,
Speaker 4: so that gives clear delineation on how large we would
Speaker 4: be in any one sector. For the plus sectors, again
Speaker 4: we can go up to thirty five percent, but each
Speaker 4: of the six sub sectors also have a maximum limit,
Speaker 4: So for example, US High yield, our max would be
Speaker 4: twenty five percent, for the other sectors European investment grade
Speaker 4: fifteen percent, European high Yield would be ten percent, and
Speaker 4: then emerging markets in global government bonds, those are two
Speaker 4: more sectors ten percent each. And then lastly currency will
Speaker 4: only go up to five percent net notional exposure there.
Speaker 4: So all those guardrails are designed to ensure that no
Speaker 4: one exposure overwhelms everything else, and I should probably start
Speaker 4: back at the top because I miss probably the most
Speaker 4: important exposures, which is duration. Duration is really a powerful
Speaker 4: lover in fixed income investing, and if you size that
Speaker 4: too large, it can overwhelm everything else. So we'll always
Speaker 4: stay within a range of plus or minus one year
Speaker 4: versus the Bloomberg aggregate index. In reality, we're generally within
Speaker 4: a quarter year. Most of our exposures will take will
Speaker 4: be about a quarter year. If it's very high, can
Speaker 4: we might get up to half a year, But in
Speaker 4: no circumstance would maybe above a year.
Speaker 2: No.
Speaker 1: I know just from looking at the website, at the
Speaker 1: perspectives that part of this is actually getting best ideas
Speaker 1: from your team. Is there a process of you know,
Speaker 1: how those ideas get filtered to you?
Speaker 4: There is, But we start with the notion that an
Speaker 4: idea can come from anyone on the team, and we
Speaker 4: want to source ideas from everyone, but the process begins
Speaker 4: with primary research. We feel very strongly that doing our
Speaker 4: own bottom up work is the best way to uncover
Speaker 4: good investment ideas. So we have a broad research platform.
Speaker 4: We have fifty analysts that work each day looking for
Speaker 4: those bottom up ideas they do the work analyzing credits.
Speaker 4: They look at the fundamental picture of the individual company,
Speaker 4: the technical picture, which includes like how much bondishuents are
Speaker 4: they going to have and how liquid are each securities,
Speaker 4: and then they overlay a relative value opinion where they're
Speaker 4: taking into account valuations, what yield is trading at, what
Speaker 4: credits spread. The analysts then put a relative value recommendation
Speaker 4: that's on a five point scale, so it ranges from
Speaker 4: strong overweight down to strong underweight, and so that's a
Speaker 4: very clear indication to the portfolio managers on what their
Speaker 4: view is on a particular credit. It's then the portfolio
Speaker 4: management team's responsibility to take those recommendations and determine the
Speaker 4: best fit in the portfolio. So we spend a lot
Speaker 4: of time working with them to make sure we understand
Speaker 4: the risk profile of the credits. But then we take
Speaker 4: that and think about how the individual credit reacts with
Speaker 4: the overall risk profile of the portfolio. So that's at
Speaker 4: the security level, but there's also a lot of idea
Speaker 4: generation at the sector level, and there we have a
Speaker 4: portfolio strategy framework where we have a weekly meeting and
Speaker 4: in that meeting we set the target for the high
Speaker 4: level exposures, So, you know, do we want to be
Speaker 4: overweight corporate credit versus structure product? What's our view on
Speaker 4: emerging markets there too? The portfolio managers do that foundational
Speaker 4: primary work on that, but we have a lot of
Speaker 4: collaboration and debate as a group in terms of setting
Speaker 4: those overall targets for the portfolio.
Speaker 3: Jane and I want to circle back again to the
Speaker 3: macro side of things. I think, you know, one of
Speaker 3: the narratives we've been seeing out there in terms of
Speaker 3: tariff impacts has been a potential stagflationary environment. I'm wondering
Speaker 3: if that's you know, a tail risk scenario that you're
Speaker 3: you know, seeing as potentially happening, And if it is,
Speaker 3: how do you prepare for something like that, or really
Speaker 3: any type of tail risk scenario that you may be expecting.
Speaker 4: So I do think you have to consider stay inflation
Speaker 4: as a possible outcome of all the things we see
Speaker 4: going on, right. I mean, if tariffs are put in
Speaker 4: place at these higher levels, they do risk igniting inflation
Speaker 4: because while the price increase may be a one time
Speaker 4: price increase, we know sometimes that can feed upon itself
Speaker 4: at the same point in time, the tariffs could lead
Speaker 4: to less economic activity, and that's just the classic definition
Speaker 4: of stake inflation, right. So I don't think we're out
Speaker 4: of the woods on either front, and we do consider
Speaker 4: it a risk. However, given our six month time frame,
Speaker 4: in terms of our outlook, we don't think it's going
Speaker 4: to become a risk that's going to materialize in the
Speaker 4: next couple quarters. So at the current time, we're not
Speaker 4: positioning for stakeflation, but it is part of our scenario
Speaker 4: analysis when we think about the paths that could be
Speaker 4: occurring over the next couple of years. In the scenario
Speaker 4: of stakeflation, you know, the problem with it is the
Speaker 4: FED is going to have limited tools to address it,
Speaker 4: right because I mean their dual mandate is employment and inflation,
Speaker 4: and stake inflation is likely. You know, the conflict of
Speaker 4: that dual mandate oftentimes, when the economy stagnates or slows,
Speaker 4: you have reduced employment. So they're going to be put
Speaker 4: in a difficult situation of which of the mandates to favor.
Speaker 4: We tend to think they'll focus more on inflation because inflation,
Speaker 4: you know, once it starts bearing its head, it can
Speaker 4: really spiral and there's not so much that can be
Speaker 4: done on the fiscal side for inflation, whereas on the
Speaker 4: economy there can be more support. On the fiscal side,
Speaker 4: you know, some of the policies could be retracted regarding tariffs,
Speaker 4: there could be some stimulus measures that could be put
Speaker 4: in place by Congress. So that's what we would look
Speaker 4: for in terms of developments. But in terms of structuring
Speaker 4: the portfolio, well that's where it gets really tricky, right.
Speaker 4: You know, fixed income in general doesn't like inflation, and
Speaker 4: so if you're in a more inflationary environment that can
Speaker 4: be problematic. We would look to adjust our duration exposure.
Speaker 4: In that environment, you'd look to reduce your duration so
Speaker 4: you wouldn't have as much sensitivity to arise in interest rates.
Speaker 4: And then in terms of some of our industry exposures,
Speaker 4: one technique is to shift more to commodities things like
Speaker 4: oil and gas, gold, agricultural type related companies. Those could
Speaker 4: end up having a little bit better financial results and
Speaker 4: some of the other more sensitive sectors. You know, you
Speaker 4: could also look for companies that benefit from a consumer
Speaker 4: trading down because of the economic slowdown. Things like a
Speaker 4: Target or Walmart might do better than some of the
Speaker 4: higher end retailers, things where there's less variability and demand
Speaker 4: could also be favorite sectors, things like utilities, So those
Speaker 4: would be things we'd be thinking about emphasizing a portfolio
Speaker 4: if stake inflation became a base case scenario for us.
Speaker 1: So we talked about, you know what you would do
Speaker 1: in that situation. If we look at an individual security
Speaker 1: by security, what would lead you to sell a security.
Speaker 4: There are a couple things that lead us to sell
Speaker 4: a security. The first is if it hits its valuation target,
Speaker 4: and so by that I mean we oftentimes put a
Speaker 4: spread level that we think means either it's at fair
Speaker 4: value or it's trading to rich to what we think
Speaker 4: the fundamentals really support. Also in terms of yields, when
Speaker 4: we think about a duration trade, we'll set fair value
Speaker 4: and then also levels that we think make the duration
Speaker 4: trade look no longer attractive. So when we hit those targets,
Speaker 4: that would be a signal to us that we would
Speaker 4: sell a security or reduce the position. A second reason
Speaker 4: would be if the thesis change. So I'd love to
Speaker 4: say that we get everything right in terms of our views,
Speaker 4: but that is not the case. It's pretty hard to
Speaker 4: get everything right. So we're very sensitive to changes in
Speaker 4: dynamic that no longer support our thesis. And when we
Speaker 4: sense that our thesis is not playing out, we have
Speaker 4: quick and honest conversations about do we need to exit
Speaker 4: the position. There are instances where it might make sense
Speaker 4: to let things play out, because perhaps it's just taking
Speaker 4: more time for this thesis to unfold. But when the
Speaker 4: information changes and it's no longer supporting the reason we
Speaker 4: purchase the security, it's time to move on. And I
Speaker 4: guess I said a couple, But let's say three reasons
Speaker 4: we might sell. The third would be maybe just a
Speaker 4: more compelling idea has arisen and we're looking for a
Speaker 4: way to fund it. And even though we may still
Speaker 4: like a security or an exposure in the portfolio, we
Speaker 4: don't like it as much as the newer idea. So
Speaker 4: that would be the third reason that we would sell something.
Speaker 3: So I want to pivot a little bit here as
Speaker 3: we close out the conversation to the world of systematic
Speaker 3: I'm wondering, how do you see potential adoption of full
Speaker 3: systematic strategies. I know it's obviously a little bit of
Speaker 3: a smaller part of the market right now compared to
Speaker 3: something like equities, but wondering how you think about that
Speaker 3: in terms of potential impacts to liquidity portfolio trading, and
Speaker 3: then how all Spring specifically is incorporating that new technology
Speaker 3: into your investment process.
Speaker 4: Systematic is a very interesting area, and we do have
Speaker 4: a team that focuses on systematic fixed income and we
Speaker 4: over the years have partnered with them on various things.
Speaker 4: So they've found some value in the fundamental work that
Speaker 4: we do. For example, they'll use our research recommendations in
Speaker 4: their systematic investing processes to do security selection. They'll apply
Speaker 4: the systematic tools they have to the securities that our
Speaker 4: analysts favor. As an example for us on the fundamental side,
Speaker 4: we've used some of the work they've done in terms
Speaker 4: of evaluating currencies. There's an example they bring together a
Speaker 4: lot of factors, they look at it, how they've responded
Speaker 4: over time, and their models help recommend a tilt for
Speaker 4: certain currencies. At the end of the day, I do
Speaker 4: believe human judgment is still important in investment decision making.
Speaker 4: I look at systematic as a way to leverage what
Speaker 4: we're doing every day, maybe take out some of the
Speaker 4: biases that sometimes can creep in with human judgment. When
Speaker 4: a systematic approach suggests something different than what we're thinking about,
Speaker 4: it's a challenge, right, It's another voice at the table,
Speaker 4: and I think that's a good way to use it.
Speaker 4: To your point about tools that can be incorporated, we're
Speaker 4: definitely leveraging those tools as they've evolved. Portfolio trading, I
Speaker 4: think has been a really important development in our industry.
Speaker 4: It allows us as portfolio managers to access a wide
Speaker 4: range of liquidity quickly. So we can now take a
Speaker 4: slice of a portfolio, package it up in a portfolio trade,
Speaker 4: send it out and transact rather quickly with a wide
Speaker 4: range of names. And further within that portfolio trade, there's
Speaker 4: a whole range of liquidity. Right, Some of those securities
Speaker 4: are much more liquid than others, but someone on the
Speaker 4: other side of the trade is willing to take the
Speaker 4: package because they get that diversified exposure liquidity. So portfolio trading,
Speaker 4: I do think has added to liquidity in the marketplace
Speaker 4: because it doesn't require each security to stand on its
Speaker 4: own in order for it to trade.
Speaker 1: Thank you, Janet, this is a great discussion, and thank
Speaker 1: you again for joining us.
Speaker 4: Thank you it's been a pleasure talking with.
Speaker 1: You and Sam. Thank you again for joining me as
Speaker 1: my co host.
Speaker 2: Yeah. Thanks, This is a great conversation.
Speaker 1: Until our next episode. This is David Cone with Inside Active.
Speaker 2: The Old Town
Speaker 4: Suite