WEBVTT - Allspring’s Rilling on Sources of Bond Alpha 0:00:13.880 --> 0:00:17.360 Welcome to Inside Active, a podcast about active managers that 0:00:17.440 --> 0:00:20.599 goes beyond sound bites and headlines and looks deeper into 0:00:20.640 --> 0:00:25.720 their processes, challenges, and philosophies and security selection. I'm David Cohne, 0:00:25.760 --> 0:00:28.720 i lead mutual fund and active research at Bloomberg Intelligence. 0:00:29.000 --> 0:00:32.280 Today my cost is Sam Geyer, a corporate credit strategist 0:00:32.280 --> 0:00:36.280 for Bloomberg Intelligence. Sam, thank you for joining me today. 0:00:35.880 --> 0:00:37.400 Thanks for having me excited to be here. 0:00:38.200 --> 0:00:41.120 So last week you published a note on ratings changes. 0:00:41.640 --> 0:00:43.960 How did the tariff I guess we'll call it the 0:00:44.000 --> 0:00:47.440 drama in April affect ratings actions during the month. 0:00:47.880 --> 0:00:50.440 Yeah, I mean, you know, it'd be I think a 0:00:50.479 --> 0:00:53.280 little bit more interesting to say that they were overly 0:00:53.320 --> 0:00:56.240 pessimistic and a little bit more down grads. But really, 0:00:56.240 --> 0:00:58.240 over the past couple of quarters, Raiders have been I 0:00:58.240 --> 0:01:01.880 would say pretty and I think it kind of goes 0:01:01.880 --> 0:01:04.120 to show just their kind of wait and see approach 0:01:04.160 --> 0:01:07.440 that they're taking right now, given we haven't really seen 0:01:07.640 --> 0:01:11.800 tariff impacts, you know, flowing through to the macro picture 0:01:11.880 --> 0:01:14.320 as of yet. So right now they're a little bit 0:01:14.319 --> 0:01:18.760 more on the sidelines neutral overall, but we'll see over 0:01:18.800 --> 0:01:22.319 the next couple of quarters, if those those impacts start 0:01:22.319 --> 0:01:24.760 to feed through, and what that ultimately means for for 0:01:25.000 --> 0:01:26.800 potentially more downgrades down the road. 0:01:27.720 --> 0:01:28.200 Interesting. 0:01:28.600 --> 0:01:31.039 Well, let's bring on our guest to get her thoughts 0:01:31.080 --> 0:01:34.759 on the downgrades. I'd like to welcome Janet Rilling. Janet 0:01:34.800 --> 0:01:37.000 is head of the plus fixed Income team at all 0:01:37.000 --> 0:01:41.959 Spring Global Investments and a senior portfolio managing manager managing 0:01:42.000 --> 0:01:44.640 funds such as the Court Plus Bond Fund, which has 0:01:44.680 --> 0:01:47.400 a ticker of w I pi X and the Corp 0:01:47.400 --> 0:01:51.480 plus ETF which has a ticker of ap l U. Janet, 0:01:51.520 --> 0:01:52.720 thank you for joining us today. 0:01:52.800 --> 0:01:54.240 Thank you, it's a pleasure to be here. 0:01:54.480 --> 0:01:57.800 Well, i'd like to hear your thoughts on the downgrades. 0:01:57.840 --> 0:02:00.600 Do you are you seeing the same thing you know, 0:02:01.360 --> 0:02:03.280 the driving some of these downgrades. 0:02:03.360 --> 0:02:05.760 Yeah, I would agree with with Sam. It's a little 0:02:05.760 --> 0:02:08.480 too early to tell at this point. First of all, 0:02:08.480 --> 0:02:11.720 we're still determining what the framework will be for teariffs. 0:02:12.400 --> 0:02:15.520 Then there will be some time for companies to adjust, 0:02:15.840 --> 0:02:18.480 and then we'll see how that flows to the numbers. 0:02:18.480 --> 0:02:19.919 So I think it's a little bit of a wait 0:02:19.960 --> 0:02:21.160 and see on that front. 0:02:21.320 --> 0:02:24.560 Okay, Well, let's talk about the core plus funds. What 0:02:24.680 --> 0:02:27.400 is the investment process for managing these funds? You know, 0:02:27.480 --> 0:02:30.200 is there a starting point that you look at? 0:02:30.639 --> 0:02:33.600 Yeah, so, you know, we think we take an approach 0:02:33.639 --> 0:02:36.720 that's a little different than others in the core plus space. 0:02:37.160 --> 0:02:39.600 And the first thing that makes our approach different is 0:02:39.639 --> 0:02:42.080 we take a six month outlook when we think about 0:02:42.400 --> 0:02:44.679 where markets are going and then how we're going to 0:02:44.720 --> 0:02:47.600 position the portfolio. And we do that because we think 0:02:47.720 --> 0:02:50.200 a longer view, like a three to five year macroview, 0:02:50.600 --> 0:02:52.560 is a lot harder to get right. I mean, think 0:02:52.600 --> 0:02:56.200 about all the changes we've had just recently, pretty difficult 0:02:56.240 --> 0:02:58.960 to predict five years out. We also think that having 0:02:58.960 --> 0:03:01.480 a longer view, you tend to more anchored in a view, 0:03:01.800 --> 0:03:04.080 and you can miss some of those inflection points that 0:03:04.160 --> 0:03:07.760 inevitably happen in a market cycle. So we prefer to 0:03:07.800 --> 0:03:10.840 think about the world kind of two to three quarters 0:03:10.880 --> 0:03:13.840 forward and position that way. A second thing we do 0:03:13.880 --> 0:03:15.880 a bit differently is we take what we call a 0:03:15.960 --> 0:03:20.240 multiple lever approach, and essentially that means really building a 0:03:20.240 --> 0:03:24.320 well diversified portfolio. So we're looking at casting a wide 0:03:24.360 --> 0:03:27.320 net across a lot of sectors, not just in the 0:03:27.360 --> 0:03:30.040 plus space, you know, maybe being only in US high yield. 0:03:30.280 --> 0:03:33.000 We have six plus sectors that we use, and it 0:03:33.000 --> 0:03:35.600 also means dialing up levers up and down in the 0:03:35.600 --> 0:03:38.440 core pate of the portfolio. We think this allows us 0:03:38.480 --> 0:03:40.840 to better balance risk and then shift to where the 0:03:40.880 --> 0:03:44.920 relative value is. And then our third differentiator is taken 0:03:44.960 --> 0:03:49.040 an unbiased approach to managing the portfolio. We're looking to 0:03:49.200 --> 0:03:53.040 seek diversified sources of alpha, so again across the range 0:03:53.120 --> 0:03:56.040 of the fixed income sectors. We don't want to have 0:03:56.080 --> 0:03:59.760 structural bets in the portfolio, like always being overweight structure 0:04:00.600 --> 0:04:04.080 or only doing corporate credit. We want to move to 0:04:04.160 --> 0:04:07.840 where there's value in the market and not be environment dependent. 0:04:08.120 --> 0:04:10.880 So it's a more flexible and dynamic approach than you 0:04:10.960 --> 0:04:12.840 might see with some of the alternatives. 0:04:14.880 --> 0:04:18.039 Now you mentioned macro. I was just curious, you know, 0:04:18.120 --> 0:04:21.200 other macro factors that you consider there. 0:04:21.040 --> 0:04:25.560 Most certainly are Our investment process really has two key components. 0:04:25.640 --> 0:04:29.960 So the first is portfolio strategy, and that's more the macroside. 0:04:30.120 --> 0:04:32.839 The second piece is sector strategy and that's more the 0:04:32.839 --> 0:04:37.160 bottom up piece. So in the portfolio strategy piece, a 0:04:37.279 --> 0:04:41.600 key activity that we do is a macro analysis, and 0:04:41.640 --> 0:04:44.640 that's based on what we call our Big Six framework. 0:04:44.760 --> 0:04:48.640 So we've identified six macro factors that we focus on 0:04:48.640 --> 0:04:52.160 on a regular basis and assess them and help lay 0:04:52.400 --> 0:04:56.840 the foundation for the portfolio. So the Big six can 0:04:56.880 --> 0:05:04.000 prise growth, employment, inflation, monetary policy, fiscal dynamics, and then 0:05:04.040 --> 0:05:07.400 the international landscape. So at different points in the cycle, 0:05:07.920 --> 0:05:11.680 some of those factors weigh a little more heavily, but inevitably, 0:05:11.720 --> 0:05:15.440 throughout an economic cycle, each of those factors are quite important. 0:05:17.440 --> 0:05:19.000 So Jane and I want to kind of stick to 0:05:19.040 --> 0:05:22.279 that topic, getting to that volatility that we were just 0:05:22.360 --> 0:05:24.840 talking about. I'm curious if you could just walk us 0:05:24.839 --> 0:05:26.960 through how you're thinking about the market right now, and 0:05:27.560 --> 0:05:30.520 on top of that, you know, how you approach investing 0:05:30.600 --> 0:05:33.880 across those volatile markets. Is it, you know, a good 0:05:33.920 --> 0:05:39.200 time for you to identify some potential miss misvaluations there, 0:05:39.320 --> 0:05:43.000 or maybe a time where you become a little bit 0:05:43.000 --> 0:05:48.159 more you know, locked in on following your specific investment approach. 0:05:48.720 --> 0:05:52.040 So stepping back at the biggest level, we think now 0:05:52.120 --> 0:05:55.000 is an attractive time to be in fixed income, and 0:05:55.000 --> 0:05:57.240 that's simply because there's a lot of yield. If you 0:05:57.279 --> 0:06:00.720 look back historically, over the last couple of decades, we 0:06:00.839 --> 0:06:03.520 are on the higher end of all in yields for 0:06:04.000 --> 0:06:07.720 public global fixed income, so you know, at a high level, again, 0:06:07.760 --> 0:06:10.839 an allocation there makes sense, but then the trick is 0:06:10.880 --> 0:06:13.799 to determined what are the components where do you allocate? 0:06:14.240 --> 0:06:17.400 And while yields are high, when we look at credit spreads, 0:06:17.839 --> 0:06:22.240 those very quite a bit, and in particular, the corporate 0:06:22.279 --> 0:06:27.640 credit spreads are not particularly attractive compared to a historical perspective. 0:06:28.040 --> 0:06:32.400 Now certainly they have widened some or they've become a 0:06:32.440 --> 0:06:36.880 bit cheaper post all of the tariff news that's come out, 0:06:37.279 --> 0:06:40.640 but even with the movement we've seen posts tariffs, credit 0:06:40.720 --> 0:06:43.599 spreads are sort of middle of the range or even 0:06:43.839 --> 0:06:46.799 tighter than where they've been over the last twenty years. 0:06:47.440 --> 0:06:49.960 So for structuring the portfolio, we have more of a 0:06:50.040 --> 0:06:53.800 tilt to high quality income at the current time, so 0:06:53.920 --> 0:06:58.840 that's favoring sectors like structure Product. Structure product is very 0:06:58.920 --> 0:07:02.840 high quality, it's liquid, it's backed by a range of 0:07:02.880 --> 0:07:08.040 collateral types, and the different securities have a good strong 0:07:08.120 --> 0:07:11.960 cash flow profiles. We like getting that incremental yield from 0:07:12.000 --> 0:07:14.880 a higher quality part of the market rather than feeling 0:07:14.920 --> 0:07:18.160 like we have to go deep into the lower quality 0:07:18.240 --> 0:07:21.520 portion of the market. So again we're emphasizing that higher 0:07:21.640 --> 0:07:24.640 quality income. It's not to say we don't have allocations 0:07:24.680 --> 0:07:28.000 to the plus part of the portfolio. We do. We're 0:07:28.040 --> 0:07:32.160 just very diversified there and we're not real concentrated in 0:07:32.200 --> 0:07:37.040 any one particular part. So for example, us high yield there, 0:07:37.120 --> 0:07:41.040 we're you know, between three and four percent allocation. You know, 0:07:41.080 --> 0:07:43.240 we can go as high as twenty five percent, So 0:07:43.280 --> 0:07:45.680 that gives you a sense of you know, it's a 0:07:45.720 --> 0:07:48.920 lower than sort of average allocation to high yield. That 0:07:49.000 --> 0:07:51.960 gives us some dry powder if we do get more 0:07:52.000 --> 0:07:54.320 of a backup in credit spreads. 0:07:55.800 --> 0:07:58.440 So with that then too, you know, obviously you just 0:07:58.480 --> 0:08:00.760 said high yield a little bit lower in terms of 0:08:00.800 --> 0:08:01.440 the allocation. 0:08:02.200 --> 0:08:04.160 You know, what are kind of the drivers there? 0:08:04.160 --> 0:08:06.680 And I'm particularly curious around how you feel about just 0:08:06.760 --> 0:08:10.760 the broader fundamental picture right now. Are you seeing you know, 0:08:11.360 --> 0:08:14.680 worrying levels in terms of maybe leverage or some other 0:08:14.800 --> 0:08:18.080 ratios in terms of company balance sheet and overall health. 0:08:18.760 --> 0:08:21.120 So broadly speaking, and this is a comment on both 0:08:21.120 --> 0:08:25.240 investment grade credit and high yield. You know, it's generally 0:08:25.240 --> 0:08:28.360 pretty healthy. We came into twenty twenty five with pretty 0:08:28.360 --> 0:08:31.960 good fundamentals, and you know, the things we're looking at 0:08:32.000 --> 0:08:34.920 are those credit metrics that you highlight, you know, leverage 0:08:35.000 --> 0:08:39.760 levels within investment grade credit, it's around three point two times, 0:08:39.440 --> 0:08:43.160 that's not a worrying level, and looking at high yield. 0:08:43.280 --> 0:08:46.720 There are two The credit metrics really entered the year 0:08:46.760 --> 0:08:50.840 pretty stable and in a pretty good position. We saw 0:08:50.880 --> 0:08:54.240 the trailing twelve month default rate at just one point 0:08:54.320 --> 0:08:58.920 one percent, so that's that's pretty good and it shows 0:08:58.960 --> 0:09:03.000 we're starting from from a strong base. The issue is, well, 0:09:03.000 --> 0:09:06.360 there's two. One is that we're coming into a period 0:09:06.400 --> 0:09:10.520 with much higher volatility, and given everything going on with tariffs, 0:09:10.920 --> 0:09:15.160 the probability of a recession has grown. The beginning of 0:09:15.160 --> 0:09:18.720 the year, we would have assessed a recession probability quite low. 0:09:19.400 --> 0:09:22.120 We've now had to revise that up to something maybe 0:09:22.240 --> 0:09:25.240 more like forty to fifty percent because there's a lot 0:09:25.280 --> 0:09:28.640 of uncertainty in terms of how companies will be able 0:09:28.679 --> 0:09:32.960 to generate profits in this new regime. The second piece 0:09:33.080 --> 0:09:37.440 is valuations. So fundamentals can be great, but if that's 0:09:37.480 --> 0:09:40.120 really all reflected in the price and you're not getting 0:09:40.360 --> 0:09:44.160 much compensation, for taking credit risk, Well, that's a reason 0:09:44.200 --> 0:09:47.480 to be less constructive. And that's really the situation we 0:09:47.520 --> 0:09:49.920 found ourselves in at the beginning of twenty twenty five, 0:09:50.240 --> 0:09:53.880 which was a good fundamental picture, but valuations that really 0:09:53.880 --> 0:09:57.240 didn't give us any extra compensation in the event something 0:09:57.280 --> 0:10:00.680 went wrong, and we did get something what go wrong, 0:10:00.840 --> 0:10:04.200 which was the increased increase folatility due to tariffs, and 0:10:04.280 --> 0:10:08.160 so we are at least now seeing some adjustment to valuations. 0:10:09.120 --> 0:10:10.600 But that's where we sit today. 0:10:11.200 --> 0:10:16.040 Do you incorporate any type of you know, ESG research 0:10:16.200 --> 0:10:18.840 or you know, whether it's part of risk management or 0:10:18.880 --> 0:10:22.280 just part of the process. Is that part of some 0:10:22.320 --> 0:10:23.160 of your research. 0:10:23.559 --> 0:10:28.160 So at all Spring we do offer ESG type strategies 0:10:28.240 --> 0:10:32.719 and we also offer strategies that don't incorporate ESG overtly. 0:10:33.160 --> 0:10:36.920 So because of that product offering, we absolutely have a 0:10:36.960 --> 0:10:41.600 framework for analyzing ESG, and our research analysts as they 0:10:41.679 --> 0:10:45.880 evaluate each credit, they do apply an ESG framework and 0:10:46.040 --> 0:10:49.200 make an assessment in terms of the ESG risks. So 0:10:49.360 --> 0:10:52.800 for those portfolios that do have a mandate that's ESG related, 0:10:53.040 --> 0:10:56.520 we follow whatever the criteria is for that. For the 0:10:56.760 --> 0:10:59.920 other portfolios, and coreplus would fall in that other category 0:11:00.000 --> 0:11:03.720 where it is not an es G mandate. We look 0:11:03.760 --> 0:11:08.079 at ESG it's just like any other fundamental risk factor. 0:11:08.440 --> 0:11:12.000 You know, at times an ESG factor can rise to 0:11:12.040 --> 0:11:15.800 the point that it creates high risk or that it 0:11:15.880 --> 0:11:19.800 needs extra compensation in terms of valuation. So when there 0:11:19.840 --> 0:11:23.360 is an ESG factor that rises to that level, it 0:11:23.440 --> 0:11:27.079 is treated like any other risk or factor in analyzing 0:11:27.080 --> 0:11:30.480 a credit and it enters into the investment decision. 0:11:31.480 --> 0:11:33.880 So Jena and I want to get back to the 0:11:33.920 --> 0:11:38.600 corporate world specifically. I'm wondering, within you know, specific sectors, 0:11:38.640 --> 0:11:41.520 are there spots where you're pretty excited about right now, 0:11:41.600 --> 0:11:43.800 and maybe on the flip side of that, are there 0:11:43.840 --> 0:11:47.040 spots where a little bit more concern you know, obviously 0:11:47.200 --> 0:11:51.640 consumer sentiment and just overall uncertainty I think kind of 0:11:52.600 --> 0:11:56.680 you know, affects the consumer cyclical sector as an example. 0:11:56.720 --> 0:11:59.360 I'm wondering how you feel about different parts of the 0:11:59.400 --> 0:12:01.440 market when. 0:12:00.960 --> 0:12:04.320 We think about areas of risk in the market, particularly 0:12:04.400 --> 0:12:09.640 given the dynamics around tariffs. Our favorite place, particularly in 0:12:09.640 --> 0:12:14.240 investment great credit is the financials. They are kind of 0:12:14.440 --> 0:12:17.360 exposed to tariffs on more of a second order impact. 0:12:17.440 --> 0:12:19.679 I mean, they don't have direct tariffs that are going 0:12:19.720 --> 0:12:22.679 to be implemented on the business that they do. Their 0:12:22.720 --> 0:12:27.480 exposure would be more economically based given who they're lending to. 0:12:27.679 --> 0:12:31.079 If some of the corporations they're lending to start having problems, 0:12:31.320 --> 0:12:33.559 So given they're not kind of on that front lined, 0:12:33.960 --> 0:12:37.600 we do think from a range of outcomes or risks 0:12:37.880 --> 0:12:41.920 that they look more attractive. Further, the valuations compared to 0:12:42.200 --> 0:12:46.520 industrials does look more attractive to us. So within financials 0:12:46.520 --> 0:12:50.600 that includes banks, includes insurance companies, those are probably our 0:12:50.600 --> 0:12:55.280 two favored areas. Within high yield, we don't have so 0:12:55.360 --> 0:12:58.360 much of a tilt to a particular industry. We have 0:12:58.720 --> 0:13:02.400 rather chosen to be very diversified. In line with that 0:13:02.640 --> 0:13:06.800 up in quality tilt for income, we have skewed our 0:13:07.400 --> 0:13:11.600 high yield allocation more heavily to double bees, with the 0:13:11.640 --> 0:13:15.040 remainder being in single bees and not having exposure in 0:13:15.080 --> 0:13:19.440 triple cs. So more of a quality construction in terms 0:13:19.520 --> 0:13:23.320 of how we're implementing there. You know, when I think broadly, 0:13:23.440 --> 0:13:27.120 you know what are the most vulnerable areas related to tariffs? 0:13:27.240 --> 0:13:31.240 Of course you highlighted consumer. If the consumer stops spending, 0:13:31.280 --> 0:13:34.160 that's going to be an issue for the different consumer sectors. 0:13:34.800 --> 0:13:37.560 We'll say the metric we're following very closely for that 0:13:37.720 --> 0:13:41.599 is employment, because even with all this uncertainty, if a 0:13:41.640 --> 0:13:44.520 consumer has a job, I think there'll still be some 0:13:44.640 --> 0:13:47.880 support for consumer spending and up into this point. I mean, 0:13:47.880 --> 0:13:50.840 we did get an April jobs report that still showed 0:13:51.120 --> 0:13:54.280 job creation. One hundred and seventy seven thousand jobs were 0:13:54.280 --> 0:13:57.840 created in April. We'll see what we see in April 0:13:57.920 --> 0:14:00.880 in May. But nonetheless, you know that has been a 0:14:00.960 --> 0:14:05.880 solid support so far to the consumer. Other areas at risk, 0:14:06.120 --> 0:14:10.000 the auto sector really front and center. With the supply 0:14:10.120 --> 0:14:13.400 chain being so integrated globally, there's a lot for the 0:14:13.440 --> 0:14:17.600 auto companies to unwind, to not have the effects of tariffs. 0:14:17.840 --> 0:14:20.040 There has been some relief with some of the more 0:14:20.080 --> 0:14:24.520 recent announcements coming out of the administration, but that's absolutely 0:14:24.560 --> 0:14:28.120 a sector that is at highest risk. And then also 0:14:28.320 --> 0:14:31.320 considering the energy space, and that's more related to what 0:14:31.360 --> 0:14:35.440 we've seen in the price of oil. Oil has declined significantly, 0:14:36.400 --> 0:14:39.840 and that is partly due to the supply situation. There's 0:14:39.880 --> 0:14:44.360 been increased supply. Also it's likely related to more concerns 0:14:44.360 --> 0:14:48.880 about the economy so that will filter into energy company earnings, 0:14:48.960 --> 0:14:51.720 in particular the oil and gas producers. 0:14:52.400 --> 0:14:55.200 So I want to get back to the high yield 0:14:55.240 --> 0:14:58.480 side of things, specifically, you know, the fallen angels or 0:14:58.520 --> 0:15:01.520 potential fallen angels. You know, from what we've been seeing, 0:15:01.560 --> 0:15:04.080 it's been a pretty quiet couple of years in terms 0:15:04.080 --> 0:15:07.440 of actual fallen angels that have come through. But I'm 0:15:07.480 --> 0:15:09.520 wondering if that's something that you keep a close eye 0:15:09.600 --> 0:15:12.200 on in terms of maybe trying to get out ahead 0:15:12.200 --> 0:15:16.760 of some of these potential rating actions and capitalizing on 0:15:17.200 --> 0:15:19.160 some of the price movement that's involved there. 0:15:19.480 --> 0:15:22.440 We do pay close attention to what we think our 0:15:22.480 --> 0:15:26.760 candidates to become fallen angels. Our analysts have an ongoing 0:15:26.800 --> 0:15:30.280 list of what they think are potential fallen angels, which 0:15:30.360 --> 0:15:33.920 they refresh on a quarterly basis. We have noted that 0:15:33.960 --> 0:15:36.400 there's been a little bit of an increase in fallen 0:15:36.440 --> 0:15:39.360 angels at the start of the year. It's been a 0:15:39.400 --> 0:15:43.280 little more idiosyncratic, though I wouldn't say it was something 0:15:43.360 --> 0:15:46.200 happening in the economy per se that really drove it. 0:15:46.200 --> 0:15:50.960 It was sort of individual due to circumstances at particular companies. 0:15:51.400 --> 0:15:54.320 So I think the risk now with there being more 0:15:54.360 --> 0:15:58.200 of a macro shock going on, is that we have 0:15:58.800 --> 0:16:02.040 a higher level of companies and maybe higher correlation with 0:16:03.160 --> 0:16:07.120 industries where we're seeing more ratings pressure. So the expectation 0:16:07.280 --> 0:16:10.600 would be we may be sowing the seeds for a 0:16:10.600 --> 0:16:14.280 bit of a continued increase in fallen angels. Not predicting 0:16:14.480 --> 0:16:17.840 any type of dramatic change in the next six month 0:16:17.880 --> 0:16:22.000 again with our couple quarter forward looking outlook, but heightened 0:16:22.000 --> 0:16:25.760 awareness that there could be more credits headed for that 0:16:26.280 --> 0:16:29.600 fallen angel status. 0:16:30.120 --> 0:16:34.360 You talked about diversification before. Is there any process in 0:16:34.520 --> 0:16:41.000 determining portfolio positioning giving certain securities a larger weighting in 0:16:41.040 --> 0:16:41.720 the portfolio. 0:16:42.240 --> 0:16:44.920 Yeah, that really gets to the heart of portfolio construction. 0:16:45.080 --> 0:16:48.880 And you know, we start with the general parameters that 0:16:48.960 --> 0:16:51.200 will always have at least sixty five percent of the 0:16:51.200 --> 0:16:55.400 portfolio in the core sectors. That ensures that the core 0:16:55.480 --> 0:16:59.680 plus portfolio serves its purpose as a fixed income allocation. 0:17:00.360 --> 0:17:03.640 At sixty five percent, we think that it correlates well 0:17:03.680 --> 0:17:06.719 with the Bloomberg Aggregate Index, meaning that you get a 0:17:06.760 --> 0:17:10.240 return stream that is correlated with the fixed income market 0:17:10.600 --> 0:17:13.199 that allows up to thirty five percent that can be 0:17:13.240 --> 0:17:16.399 allocated to the plus sectors, and that piece allows you 0:17:16.520 --> 0:17:20.600 to generate greater alpha as compared to the benchmark, so 0:17:20.640 --> 0:17:24.720 that's the first place we start from there. We also 0:17:24.880 --> 0:17:28.760 put guardrails on each of the sectors, so we put 0:17:28.800 --> 0:17:31.760 a range around how much exposure we will take to 0:17:31.960 --> 0:17:35.560 the various subsectors. So within the core part of the portfolio, 0:17:35.800 --> 0:17:40.960 those subsectors are treasuries and government related securities, US securitized 0:17:41.320 --> 0:17:44.840 and US investment grade, and for those sectors will always 0:17:44.880 --> 0:17:49.160 be between ten and fifty percent market value in the portfolio, 0:17:49.400 --> 0:17:53.440 so that gives clear delineation on how large we would 0:17:53.440 --> 0:17:56.480 be in any one sector. For the plus sectors, again 0:17:56.520 --> 0:17:59.040 we can go up to thirty five percent, but each 0:17:59.080 --> 0:18:02.520 of the six sub sectors also have a maximum limit, 0:18:02.880 --> 0:18:05.280 So for example, US High yield, our max would be 0:18:05.320 --> 0:18:09.639 twenty five percent, for the other sectors European investment grade 0:18:09.760 --> 0:18:14.040 fifteen percent, European high Yield would be ten percent, and 0:18:14.080 --> 0:18:17.320 then emerging markets in global government bonds, those are two 0:18:17.320 --> 0:18:21.760 more sectors ten percent each. And then lastly currency will 0:18:21.760 --> 0:18:25.399 only go up to five percent net notional exposure there. 0:18:25.640 --> 0:18:29.479 So all those guardrails are designed to ensure that no 0:18:29.560 --> 0:18:33.800 one exposure overwhelms everything else, and I should probably start 0:18:33.840 --> 0:18:36.440 back at the top because I miss probably the most 0:18:36.480 --> 0:18:41.000 important exposures, which is duration. Duration is really a powerful 0:18:41.040 --> 0:18:44.240 lover in fixed income investing, and if you size that 0:18:44.400 --> 0:18:47.760 too large, it can overwhelm everything else. So we'll always 0:18:47.800 --> 0:18:50.240 stay within a range of plus or minus one year 0:18:50.440 --> 0:18:55.000 versus the Bloomberg aggregate index. In reality, we're generally within 0:18:55.000 --> 0:18:57.800 a quarter year. Most of our exposures will take will 0:18:57.800 --> 0:18:59.959 be about a quarter year. If it's very high, can 0:19:00.440 --> 0:19:03.439 we might get up to half a year, But in 0:19:03.480 --> 0:19:06.280 no circumstance would maybe above a year. 0:19:08.320 --> 0:19:08.359 No. 0:19:08.480 --> 0:19:11.440 I know just from looking at the website, at the 0:19:11.480 --> 0:19:14.960 perspectives that part of this is actually getting best ideas 0:19:15.000 --> 0:19:18.000 from your team. Is there a process of you know, 0:19:18.040 --> 0:19:19.800 how those ideas get filtered to you? 0:19:20.280 --> 0:19:23.159 There is, But we start with the notion that an 0:19:23.200 --> 0:19:25.280 idea can come from anyone on the team, and we 0:19:25.359 --> 0:19:30.000 want to source ideas from everyone, but the process begins 0:19:30.000 --> 0:19:33.520 with primary research. We feel very strongly that doing our 0:19:33.560 --> 0:19:36.320 own bottom up work is the best way to uncover 0:19:36.720 --> 0:19:41.200 good investment ideas. So we have a broad research platform. 0:19:41.400 --> 0:19:45.080 We have fifty analysts that work each day looking for 0:19:45.119 --> 0:19:49.240 those bottom up ideas they do the work analyzing credits. 0:19:49.560 --> 0:19:52.560 They look at the fundamental picture of the individual company, 0:19:53.200 --> 0:19:57.240 the technical picture, which includes like how much bondishuents are 0:19:57.280 --> 0:20:00.840 they going to have and how liquid are each securities, 0:20:01.280 --> 0:20:04.640 and then they overlay a relative value opinion where they're 0:20:04.680 --> 0:20:08.439 taking into account valuations, what yield is trading at, what 0:20:08.600 --> 0:20:13.520 credits spread. The analysts then put a relative value recommendation 0:20:13.760 --> 0:20:16.680 that's on a five point scale, so it ranges from 0:20:17.000 --> 0:20:20.320 strong overweight down to strong underweight, and so that's a 0:20:20.440 --> 0:20:23.880 very clear indication to the portfolio managers on what their 0:20:24.000 --> 0:20:28.000 view is on a particular credit. It's then the portfolio 0:20:28.080 --> 0:20:32.480 management team's responsibility to take those recommendations and determine the 0:20:32.520 --> 0:20:35.320 best fit in the portfolio. So we spend a lot 0:20:35.320 --> 0:20:37.480 of time working with them to make sure we understand 0:20:37.680 --> 0:20:40.960 the risk profile of the credits. But then we take 0:20:41.000 --> 0:20:43.560 that and think about how the individual credit reacts with 0:20:43.640 --> 0:20:47.439 the overall risk profile of the portfolio. So that's at 0:20:47.480 --> 0:20:50.520 the security level, but there's also a lot of idea 0:20:50.640 --> 0:20:53.800 generation at the sector level, and there we have a 0:20:53.840 --> 0:20:57.840 portfolio strategy framework where we have a weekly meeting and 0:20:58.320 --> 0:21:01.080 in that meeting we set the target for the high 0:21:01.200 --> 0:21:03.440 level exposures, So, you know, do we want to be 0:21:03.520 --> 0:21:07.359 overweight corporate credit versus structure product? What's our view on 0:21:07.400 --> 0:21:12.040 emerging markets there too? The portfolio managers do that foundational 0:21:12.200 --> 0:21:15.800 primary work on that, but we have a lot of 0:21:15.840 --> 0:21:19.320 collaboration and debate as a group in terms of setting 0:21:19.359 --> 0:21:21.600 those overall targets for the portfolio. 0:21:24.480 --> 0:21:26.879 Jane and I want to circle back again to the 0:21:27.359 --> 0:21:29.840 macro side of things. I think, you know, one of 0:21:29.880 --> 0:21:32.200 the narratives we've been seeing out there in terms of 0:21:32.480 --> 0:21:36.840 tariff impacts has been a potential stagflationary environment. I'm wondering 0:21:36.880 --> 0:21:39.199 if that's you know, a tail risk scenario that you're 0:21:39.760 --> 0:21:42.520 you know, seeing as potentially happening, And if it is, 0:21:43.359 --> 0:21:45.800 how do you prepare for something like that, or really 0:21:45.800 --> 0:21:49.000 any type of tail risk scenario that you may be expecting. 0:21:49.560 --> 0:21:52.360 So I do think you have to consider stay inflation 0:21:52.600 --> 0:21:55.120 as a possible outcome of all the things we see 0:21:55.160 --> 0:21:58.800 going on, right. I mean, if tariffs are put in 0:21:58.840 --> 0:22:02.960 place at these higher levels, they do risk igniting inflation 0:22:03.280 --> 0:22:06.160 because while the price increase may be a one time 0:22:06.320 --> 0:22:09.400 price increase, we know sometimes that can feed upon itself 0:22:09.600 --> 0:22:12.120 at the same point in time, the tariffs could lead 0:22:12.160 --> 0:22:15.760 to less economic activity, and that's just the classic definition 0:22:15.840 --> 0:22:18.600 of stake inflation, right. So I don't think we're out 0:22:18.600 --> 0:22:21.200 of the woods on either front, and we do consider 0:22:21.200 --> 0:22:25.560 it a risk. However, given our six month time frame, 0:22:25.640 --> 0:22:27.760 in terms of our outlook, we don't think it's going 0:22:27.840 --> 0:22:31.399 to become a risk that's going to materialize in the 0:22:31.400 --> 0:22:34.399 next couple quarters. So at the current time, we're not 0:22:34.520 --> 0:22:39.240 positioning for stakeflation, but it is part of our scenario 0:22:39.280 --> 0:22:42.040 analysis when we think about the paths that could be 0:22:42.040 --> 0:22:45.760 occurring over the next couple of years. In the scenario 0:22:45.880 --> 0:22:49.000 of stakeflation, you know, the problem with it is the 0:22:49.040 --> 0:22:51.720 FED is going to have limited tools to address it, 0:22:51.840 --> 0:22:55.520 right because I mean their dual mandate is employment and inflation, 0:22:56.000 --> 0:22:59.680 and stake inflation is likely. You know, the conflict of 0:23:00.080 --> 0:23:04.760 that dual mandate oftentimes, when the economy stagnates or slows, 0:23:04.960 --> 0:23:08.480 you have reduced employment. So they're going to be put 0:23:08.480 --> 0:23:12.200 in a difficult situation of which of the mandates to favor. 0:23:12.760 --> 0:23:17.440 We tend to think they'll focus more on inflation because inflation, 0:23:18.040 --> 0:23:20.600 you know, once it starts bearing its head, it can 0:23:20.680 --> 0:23:23.439 really spiral and there's not so much that can be 0:23:23.480 --> 0:23:27.199 done on the fiscal side for inflation, whereas on the 0:23:27.240 --> 0:23:30.440 economy there can be more support. On the fiscal side, 0:23:30.560 --> 0:23:34.440 you know, some of the policies could be retracted regarding tariffs, 0:23:34.480 --> 0:23:37.440