WEBVTT - Franklin Templeton's Ed Perks on Fixed Income Investing 0:00:02.520 --> 0:00:09.480 Bloomberg Audio Studios, Podcasts, radio news. This is Master's in 0:00:09.520 --> 0:00:13.680 Business with Barry Ritholts on Bloomberg Radio on the. 0:00:13.720 --> 0:00:18.000 Latest Masters in Business podcast. My conversation with Ed Perks. 0:00:18.520 --> 0:00:21.760 He has been with Franklin Templeton since nineteen ninety two. 0:00:21.840 --> 0:00:25.640 He has all of these various titles. He's not only 0:00:25.760 --> 0:00:30.520 PM of their flagship Franklin Income Funds, but he's CEO 0:00:30.600 --> 0:00:34.479 of Franklin Income Investors, president of their Advisors Group, member 0:00:34.479 --> 0:00:38.440 of the Executive Committee. Not many people have been with 0:00:38.479 --> 0:00:42.159 the same firm their entire career right out of college. 0:00:42.800 --> 0:00:46.320 Ed Perks is one of them. Few people more knowledgeable 0:00:46.440 --> 0:00:51.360 about fixed income and non bond yield. I thought this 0:00:51.400 --> 0:00:55.400 conversation was fascinating, and I think you will also with 0:00:55.560 --> 0:01:00.040 no further ado, My conversation with Franklin Templeton's. 0:01:00.080 --> 0:01:11.679 At Perks At Perks, Welcome to Bloomberg. Thanks Barry, it's 0:01:11.680 --> 0:01:14.000 great to be with you. Well that's really quite an 0:01:14.000 --> 0:01:16.800 impressive CV. 0:01:17.120 --> 0:01:20.600 Before we get into the various assets you managed, let's 0:01:20.640 --> 0:01:25.840 start with your background economics and political science BA from Yale. 0:01:26.560 --> 0:01:30.080 That doesn't sound very much like a fixed income manager. 0:01:30.160 --> 0:01:32.559 What was the original career plan? 0:01:33.680 --> 0:01:38.040 Yeah, it certainly wasn't finance, And you know, at Yale, 0:01:38.280 --> 0:01:41.080 I really kind of, you know, certainly had had a 0:01:41.080 --> 0:01:45.600 broadcross section of studies. You know, like many of my classmates, 0:01:45.600 --> 0:01:47.640 I think if it wasn't med school, it was either 0:01:47.800 --> 0:01:50.920 law school or going into government. I think that's kind 0:01:50.960 --> 0:01:53.320 of some of what I was thinking during school. Really 0:01:53.320 --> 0:01:57.560 didn't didn't transition to trying to pursue a career in 0:01:57.560 --> 0:02:01.120 finance until actually after I graduated, and at that time 0:02:01.160 --> 0:02:05.360 I moved out west. I wanted to experience a different 0:02:05.400 --> 0:02:09.120 part of the country, and particularly in the early nineteen nineties, 0:02:09.560 --> 0:02:10.799 the San Francisco. 0:02:10.320 --> 0:02:12.760 Bay area had a pretty robust. 0:02:12.280 --> 0:02:17.040 Financial services community, and so I headed out after graduation 0:02:17.160 --> 0:02:19.560 without a job and was able to land at Franklin. 0:02:19.880 --> 0:02:22.760 Plus, you're done at one o'clock in the afternoon, that's 0:02:22.800 --> 0:02:24.040 the you do start a bit early. 0:02:24.120 --> 0:02:25.160 We started five thirty. 0:02:25.200 --> 0:02:27.800 It's very very five in the I remember walking into 0:02:27.840 --> 0:02:30.720 an office in San Francisco and at eight forty five 0:02:30.800 --> 0:02:34.280 there are pizza boxes around, and it's sort of, oh, 0:02:34.320 --> 0:02:37.680 that's right, we're on New York Wall Street time because 0:02:37.760 --> 0:02:40.360 the market is live. So let's talk a little bit 0:02:40.400 --> 0:02:43.079 about the nineteen nineties, you joined Franklin Templeton. 0:02:43.480 --> 0:02:45.600 Is this your first gig out of school. 0:02:45.360 --> 0:02:48.639 In nineteen ninety two. You've been at Franklin Templeton your 0:02:48.880 --> 0:02:49.600 entire career. 0:02:49.720 --> 0:02:52.359 Is that right? Yes, it is. That is pretty rare 0:02:52.400 --> 0:02:52.919 these days. 0:02:53.040 --> 0:02:57.520 Tell us about what attracted you to Franklin Templeton in 0:02:57.520 --> 0:03:01.560 the beginning and what's kept you there for geez, coming 0:03:01.639 --> 0:03:03.360 up on forty years, is that right? 0:03:03.800 --> 0:03:04.080 Yeah? 0:03:04.120 --> 0:03:07.200 Well, when I loaded the car up on Long Island, 0:03:07.240 --> 0:03:12.400 I drove a small Misbecie Mirage hatchback across country. No 0:03:12.480 --> 0:03:17.600 satellite radio, right, no air conditioning, no cell phones, so 0:03:17.639 --> 0:03:21.720 it was a different time. But got out to California 0:03:21.960 --> 0:03:25.200 really had the had the thought that I might experience 0:03:25.280 --> 0:03:26.760 the West Coast for a year and a half or 0:03:26.760 --> 0:03:29.080 two years and and make my way back to New 0:03:29.160 --> 0:03:30.120 York and and. 0:03:29.960 --> 0:03:34.200 Get get the real job, so to speak, you know. 0:03:34.240 --> 0:03:36.880 And I was really fortunate to land at at Franklin 0:03:36.960 --> 0:03:39.320 at a time of just tremendous growth, not just in 0:03:39.360 --> 0:03:42.840 the industry but for our firm overall. I actually joined 0:03:43.200 --> 0:03:48.280 the original Franklin Fonds prior to the Tilton merger. Yeah wow, 0:03:48.680 --> 0:03:51.480 So that, yeah, that certainly dates me and makes me, 0:03:51.520 --> 0:03:55.200 I guess a little og so, you know, I think 0:03:55.240 --> 0:03:58.320 what was really interesting? And I landed at first and 0:03:58.360 --> 0:04:01.280 took a role in marketing research. I knew very little 0:04:01.320 --> 0:04:05.040 about the industry structure and I wanted to learn and 0:04:05.080 --> 0:04:10.000 it gave me a great cross section of different investment strategies. 0:04:10.440 --> 0:04:14.400 I had taken, you know, a class at Yale Investment 0:04:14.440 --> 0:04:19.440 Analysis howt by you know, pretty legendary endowment manager David Swinson, 0:04:19.560 --> 0:04:23.520 of course, And I think at the time I maybe 0:04:23.839 --> 0:04:26.560 hoped that it was a bit more of a you know, 0:04:26.760 --> 0:04:29.480 a typical stocks for Jock's kind of class, and in 0:04:29.480 --> 0:04:33.560 fact it was not. But that did plant a little 0:04:33.600 --> 0:04:36.760 bit of the seed. And and you know, but I 0:04:36.839 --> 0:04:38.720 knew I had work to do to kind of prepare 0:04:38.760 --> 0:04:43.320 myself for a role ultimately in pursuing research. And after 0:04:43.360 --> 0:04:45.680 about a year and a half and taking one of 0:04:45.720 --> 0:04:48.200 the CFA exams, I was able to get that junior 0:04:48.320 --> 0:04:50.839 role as a research analyst in the Franklin Equity team. 0:04:51.240 --> 0:04:55.840 Nineteen nineties, San Francisco. The tech boom was just ramping 0:04:55.920 --> 0:04:59.760 up late eighties, early nineties. What was that experience like 0:04:59.760 --> 0:05:02.640 that to be the Roaring nineties had to be quite 0:05:02.640 --> 0:05:04.160 an experience in San Francisco. 0:05:04.600 --> 0:05:06.640 Yeah, I'd say it really kind of kicked in a 0:05:06.640 --> 0:05:09.080 gear more in the ninety six seven time period, and 0:05:09.120 --> 0:05:12.760 then certainly the IR Yes, and that was premature, but 0:05:12.839 --> 0:05:15.000 there was still plenty of time to go in it. 0:05:15.040 --> 0:05:18.279 But it was a very exciting time to be out there, 0:05:18.360 --> 0:05:20.440 not just in the tech community, but thinking about some 0:05:20.560 --> 0:05:25.000 of the regional investment banks, Montgomery Securities and Hamburton Quist 0:05:25.080 --> 0:05:28.080 and Stevens. You know, so you had a lot happening. 0:05:28.080 --> 0:05:30.960 The The economy as a whole, i'd say at that 0:05:31.120 --> 0:05:34.920 time was far more diversified than it is maybe today. 0:05:34.960 --> 0:05:39.120 Obviously technology is such a dominant player within the Northern California. 0:05:39.200 --> 0:05:41.640 Yeah, it's not that anything else got smaller. It's just 0:05:41.680 --> 0:05:45.720 that tech ballooned up so large and it dominates everything. Although, 0:05:45.720 --> 0:05:49.640 to be fair, I think finance has it hasn't grown 0:05:49.640 --> 0:05:53.760 as fast as tech, but it certainly expanded lock you know, 0:05:53.839 --> 0:05:59.120 fairly lockstep with technology. What's fascinating about your time your 0:05:59.160 --> 0:06:03.120 early days at frank On Templeton. You did credit, you 0:06:03.160 --> 0:06:08.240 did convertibles, you did equities. How important was that sort 0:06:08.279 --> 0:06:13.560 of cross asset experience to eventually becoming more of a specialist. 0:06:13.960 --> 0:06:15.600 Yeah, I think it was a key component of it. 0:06:15.680 --> 0:06:18.839 I really was drawn to early days. I was drawn 0:06:18.880 --> 0:06:22.560 to the different type of analysis that you would perform 0:06:22.640 --> 0:06:25.479 based upon the kind of company you were following, our 0:06:25.480 --> 0:06:29.240 industry you were following, and we did have a broad 0:06:29.279 --> 0:06:34.440 cross section of strategies managed at Franklin, So as an 0:06:34.440 --> 0:06:37.960 analyst following companies, you kind of always had something to 0:06:38.600 --> 0:06:41.559 pitch a given portfolio manager on and that was something 0:06:41.560 --> 0:06:44.720 that really attracted me. So whenever we had some movement 0:06:44.760 --> 0:06:48.119 in the group or growth adding resources in a certain 0:06:48.200 --> 0:06:51.080 area that was interesting, I kind of was inclined to 0:06:51.080 --> 0:06:53.000 put my hand up and that led to a lot 0:06:53.000 --> 0:06:56.400 of the progression of the career, ultimately moving out of 0:06:56.400 --> 0:07:00.240 the analyst role in nineteen ninety seven and taking on 0:07:00.320 --> 0:07:04.400 the duties of portfolio manager for that dedicated Franklin Convertible 0:07:04.440 --> 0:07:05.159 Security spund. 0:07:05.800 --> 0:07:10.160 So over all these different experiences and over time, how 0:07:10.160 --> 0:07:15.280 does that lead to the evolution of your philosophy as 0:07:15.320 --> 0:07:19.880 an investor? What beliefs did its strengthen and what beliefs 0:07:19.920 --> 0:07:24.160 did you learn to Yeah, this just isn't generating anything 0:07:24.280 --> 0:07:25.480 that's worthwhile anymore. 0:07:26.000 --> 0:07:29.880 Well, I think the first thing was really kind of 0:07:30.000 --> 0:07:33.680 understanding who you are as an investor. And I'm a 0:07:33.720 --> 0:07:37.080 pretty firm believer in this that over time I came 0:07:37.160 --> 0:07:40.080 to understand that I like a certain type of investing. 0:07:41.040 --> 0:07:45.480 I like buying things that trade a reasonable valuations that 0:07:46.640 --> 0:07:50.320 might not have an immediate catalyst, but something that you 0:07:50.320 --> 0:07:53.240 can look out over a longer period of time. By 0:07:53.280 --> 0:07:57.800 having that longer term investment horizon, income naturally became something 0:07:57.840 --> 0:08:01.760 you'd focus on in terms of just thinking about it 0:08:01.800 --> 0:08:03.880 from the standpoint of getting paid to wait while your 0:08:03.880 --> 0:08:06.600 investment kind of performs the way you think it has 0:08:06.600 --> 0:08:10.640 the potential to. So that's something that certainly started to 0:08:10.720 --> 0:08:13.520 resonate at the early part of my career, but I 0:08:13.520 --> 0:08:17.000 would say actually getting involved in convertible securities was a 0:08:17.040 --> 0:08:22.040 pretty significant defining moment for me in that you can 0:08:22.080 --> 0:08:25.040 pursue investing in convertibles, which are hybrids, which have fixed 0:08:25.040 --> 0:08:29.720 income characteristics and have an equity tie as well, and 0:08:29.960 --> 0:08:35.200 seek out investments that have the potential for positive asymmetry, 0:08:35.440 --> 0:08:39.320 so securities where with a given time horizon and a 0:08:39.320 --> 0:08:43.160 certain move in the underlying common stock, you'll do better 0:08:43.200 --> 0:08:46.240 on the upside than you will get hurt on the downside, 0:08:46.240 --> 0:08:48.160 and it was just something that really appealed to me, 0:08:48.200 --> 0:08:50.120 and I think is a core component of what we've 0:08:50.920 --> 0:08:53.880 done historically and tried to do in our multiset income strategies. 0:08:54.280 --> 0:08:55.480 Let me throw something out to you. 0:08:55.559 --> 0:08:58.559 I have noticed, as both a trader and an investor 0:08:59.280 --> 0:09:04.240 that the guys who started in fixed income seem to 0:09:04.360 --> 0:09:08.439 have a greater appreciation for risk management and for thinking 0:09:08.480 --> 0:09:12.480 about asymmetrical trades where your downside is x and your 0:09:12.559 --> 0:09:15.360 upside is three X or tan x or whatever. What 0:09:15.520 --> 0:09:19.520 is it about fixed income analysts and investors that makes 0:09:19.559 --> 0:09:22.480 them so hyper focused on risk management? 0:09:23.440 --> 0:09:26.480 Yeah, it's fundamentally you're just doing a different, different type 0:09:26.520 --> 0:09:28.800 of analysis. And I mean, one of the things that 0:09:28.840 --> 0:09:31.120 we found kind of most fascinating over the years is 0:09:31.960 --> 0:09:35.280 given we have an internal team of equity analysts and 0:09:35.320 --> 0:09:37.920 an internal team of credit analysts, that opportunity when you're 0:09:37.960 --> 0:09:42.560 meeting with company management and you'll sit down with both analysts, 0:09:42.640 --> 0:09:45.360 and companies typically come to investors thinking they're on an 0:09:45.400 --> 0:09:47.560 equity road show or a fixed income road show, right, 0:09:47.840 --> 0:09:50.000 and when you sit down and now you want to 0:09:50.000 --> 0:09:52.880 talk about it from both perspectives, that's some of the 0:09:52.880 --> 0:09:55.400 most interesting meetings we've had over the years with companies, 0:09:55.400 --> 0:09:57.800 they in fact have kind of different stories for those 0:09:57.800 --> 0:10:01.160 different investor groups. So I think it gives you that 0:10:01.600 --> 0:10:06.800 broader perspective of what the capital allocation decision making process 0:10:06.840 --> 0:10:09.400 looks like at a given company. And ultimately what we're 0:10:09.400 --> 0:10:12.559 doing is trying to figure out what money they will have, 0:10:12.640 --> 0:10:16.200 i e. What are margins, how are profits growing, and 0:10:16.240 --> 0:10:17.520 what they'll do with that capital. 0:10:17.800 --> 0:10:20.960 So in your present roles, you have the latitude to 0:10:21.160 --> 0:10:24.480 kind of go anywhere either in the cab structure or 0:10:24.520 --> 0:10:27.559 the allocation table or geographically. 0:10:28.160 --> 0:10:29.480 How does that affect how you. 0:10:29.360 --> 0:10:37.160 Think about what's interesting, what's attractive, Like it's almost overwhelming 0:10:37.640 --> 0:10:42.319 that sort of freedom to pretty much consider almost every 0:10:42.360 --> 0:10:43.040 asset class. 0:10:43.240 --> 0:10:46.640 Yeah, I would say that's actually kind of our ideal situation, 0:10:46.840 --> 0:10:49.040 and we are in that today. I think there was 0:10:49.080 --> 0:10:52.200 a lot of a long period of time post financial 0:10:52.200 --> 0:10:55.280 crisis two thousand and nine where almost the intent of 0:10:55.320 --> 0:10:59.400 the policy was to eliminate large sectors and the fixed 0:10:59.440 --> 0:11:01.280 income markets from being attractive to. 0:11:01.240 --> 0:11:03.000 Invest teams, right exactly. 0:11:03.080 --> 0:11:06.360 So you know, I really kind of viewed today and 0:11:07.000 --> 0:11:09.439 you know, the bond market being back was announced pretty 0:11:09.480 --> 0:11:12.640 loudly in twenty twenty two. So you know today the 0:11:12.640 --> 0:11:16.360 fact that we can look across you know, the swath 0:11:16.400 --> 0:11:20.000 of fixed income markets and find you know, interesting areas. 0:11:20.160 --> 0:11:23.480 You know, it may be more income focused, i e. 0:11:23.880 --> 0:11:27.440 If we're not expecting a significant downdraft and interest rates, 0:11:27.480 --> 0:11:30.520 the total return potential from fixed income might be more muted, 0:11:30.559 --> 0:11:34.280 but they can play a really interesting role in generating 0:11:34.280 --> 0:11:37.160 that kind of stable core total part of total return 0:11:37.200 --> 0:11:38.240 that we expect income to be. 0:11:38.520 --> 0:11:40.959 We're going to talk a lot about fixed income coming up, 0:11:41.120 --> 0:11:46.640 but your CIO of Income Investors, what's the biggest macro 0:11:46.880 --> 0:11:51.480 variable that the CIO of Franklin Templeton Income Investors looks 0:11:51.480 --> 0:11:52.240 at every morning? 0:11:52.520 --> 0:11:52.720 Yeah. 0:11:52.760 --> 0:11:55.319 I mean, we really think there's kind of two components 0:11:55.320 --> 0:11:57.760 to what we need to do, and you know one 0:11:57.800 --> 0:11:59.600 I would put in this more kind of where we 0:11:59.600 --> 0:12:00.520 can be proactive. 0:12:01.160 --> 0:12:01.560 It's the. 0:12:03.160 --> 0:12:05.760 Extent to which we think there's risk on the equity 0:12:05.760 --> 0:12:10.840 side of markets, credit risk in markets or macro or 0:12:10.880 --> 0:12:13.000 interest rate risk. Those are the three kind of big 0:12:13.720 --> 0:12:15.960 risk components that we actively try to think about. I 0:12:15.960 --> 0:12:18.959 would say that sets our kind of compass for how 0:12:19.000 --> 0:12:21.800 we want to allocate the assets and even though over 0:12:21.880 --> 0:12:23.600 long market cycles. 0:12:23.200 --> 0:12:25.120 We may be pretty equally split. 0:12:24.840 --> 0:12:28.600 Between fixed income and equity assets in our strategy at times, 0:12:28.640 --> 0:12:30.800 even in the last five years, that's been seventy five 0:12:30.920 --> 0:12:34.160 twenty five one way and then flipped the other way. 0:12:34.200 --> 0:12:37.800 So there is a tremendous amount of latitude. And then, 0:12:38.080 --> 0:12:40.240 you know, I think, on a day, more daily kind 0:12:40.280 --> 0:12:44.839 of basis, certainly something that we're experiencing in pretty good 0:12:44.840 --> 0:12:48.800 dose to start the year is those more reactive components 0:12:49.720 --> 0:12:52.320 of risk. And you know, we do think right now 0:12:52.840 --> 0:12:57.160 policy matters a lot, and it might be fiscal policy, 0:12:57.240 --> 0:13:04.040 monetary policygulatory policy, but we're reminded almost on a daily 0:13:04.080 --> 0:13:06.640 basis now that there's a lot of other factors foreign policy, 0:13:06.720 --> 0:13:10.679 geopolitical risk that certainly influenced markets. It doesn't mean we're 0:13:10.679 --> 0:13:13.160 going to make wholesale changes to the portfolio, but being 0:13:13.200 --> 0:13:17.040 able to engage and get our investment team focused on 0:13:17.320 --> 0:13:19.360 where opportunities might be is a big part of the 0:13:19.440 --> 0:13:20.000 day to day role. 0:13:20.440 --> 0:13:24.280 So let me ask that question. We're waiting for some 0:13:24.400 --> 0:13:27.600 major Supreme Court decisions in a whole variety of areas. 0:13:28.360 --> 0:13:31.040 There's the ongoing battle between the White House and the 0:13:31.080 --> 0:13:34.600 Federal reserve that that's been heating up lately. It's been 0:13:34.640 --> 0:13:38.760 sort of simmering for really a year. It seems every 0:13:38.800 --> 0:13:41.679 morning you wake up and there's some tweet or something 0:13:41.679 --> 0:13:45.720 else that are roiling the markets. Weight we're going to 0:13:45.760 --> 0:13:49.120 cap credit cards ten percent. Good luck getting a credit 0:13:49.120 --> 0:13:53.439 card if that happened. How do you interact with all 0:13:53.520 --> 0:13:58.200 this newsflow? Is it something you ignore? Is it noise 0:13:58.240 --> 0:14:02.000 that you have to sift through, or are you constantly 0:14:02.080 --> 0:14:06.000 hunting for what's really meaningful here that's not reflected in 0:14:06.040 --> 0:14:10.319 prices already? What could potentially move markets? If this seems 0:14:10.360 --> 0:14:11.600 to catch a little bit. 0:14:11.480 --> 0:14:15.720 Of fire, Yeah, I think the desire would be to 0:14:15.760 --> 0:14:18.200 tune out that noise, to largely ignore it. But the 0:14:18.240 --> 0:14:22.440 reality and markets those examples that you've given drove some 0:14:22.480 --> 0:14:25.240 pretty significant movements, even if just for a short period 0:14:25.280 --> 0:14:28.480 of time. You know, I would use the major banks, 0:14:28.520 --> 0:14:30.960 those that are more focused on issuing credit cards as 0:14:31.000 --> 0:14:35.760 an example yesterday in stock price activity last week, maybe 0:14:35.800 --> 0:14:38.600 some of the large defense contractors how they were impacted 0:14:38.600 --> 0:14:41.520 by some of the announcements. Those are some pretty significant 0:14:41.920 --> 0:14:43.640 swings that we do have to pay attention to and 0:14:43.680 --> 0:14:46.560 do have to think about whether or not, there's the opportunity. 0:14:46.560 --> 0:14:49.000 But I think if you can step back, think about 0:14:49.040 --> 0:14:51.880 it a little bit more rationally. Clearly, we want to 0:14:51.920 --> 0:14:55.320 engage and get the insights from our dedicated analysts on 0:14:55.440 --> 0:14:59.440 those specific situations. That's where some opportunities come in. And 0:15:00.120 --> 0:15:04.520 you know, I think whether it be an isolated, very specific, 0:15:04.600 --> 0:15:08.240 maybe more short term event, that's you know, one instance. 0:15:09.120 --> 0:15:11.200 But if we go back a year, you know. 0:15:11.160 --> 0:15:13.520 There was a two to three week period of tremendous 0:15:13.600 --> 0:15:17.880 volatility around a policy shift that really gave investors an 0:15:17.880 --> 0:15:21.920 opportunity around that tariff Day and Liberation Day. 0:15:21.960 --> 0:15:25.040 Here, it was a week of you know, turmoil and 0:15:25.080 --> 0:15:28.800 then on pause and off to the races we had, 0:15:29.240 --> 0:15:32.800 you know, the most recent DOJ referral with a federal reserve. 0:15:33.160 --> 0:15:35.280 I spoke to a buddy on a bond desk over 0:15:35.320 --> 0:15:41.760 the weekend when this happened, and I love the attitude of, well, 0:15:41.880 --> 0:15:44.560 look at the two year it doesn't care, So why 0:15:44.560 --> 0:15:45.200 should I care? 0:15:45.760 --> 0:15:46.920 Is that a little too glib? 0:15:46.960 --> 0:15:51.320 How do you look at how the market, especially fixed 0:15:51.320 --> 0:15:54.480 income market, reacts to the news flow. Is that really 0:15:54.520 --> 0:15:58.080 the ultimate determiner of what's noise and what's signal? 0:15:58.680 --> 0:16:00.520 Yeah, I think it's a good I might broaden it 0:16:00.560 --> 0:16:03.040 from the two year to say, let's look at the curve, okay, 0:16:03.600 --> 0:16:07.080 especially today, where I think there's probably more sensitivity around 0:16:07.240 --> 0:16:11.040 where longer term interistrates are are sitting and potentially could 0:16:11.080 --> 0:16:15.440 go you know, to me, anything that increases the confidence 0:16:15.520 --> 0:16:20.520 the raises the uncertainty level around the economy, I think 0:16:20.560 --> 0:16:22.720 are our challenges that you know, if we were to 0:16:22.760 --> 0:16:26.200 see the long end respond unfavorably too, would be quite 0:16:26.200 --> 0:16:27.280 problematic for markets. 0:16:27.320 --> 0:16:31.120 Coming up, we continue our conversation with Ed Perks, chief 0:16:31.160 --> 0:16:36.240 investment Officer of Franklin Income Investors and President of Franklin Advisors, 0:16:36.800 --> 0:16:40.080 discussing the broader fixed income environment. 0:16:40.560 --> 0:16:41.640 I'm Buried rid Holts. 0:16:41.640 --> 0:16:43.880 You're listening to Masters in Business. 0:16:43.920 --> 0:16:56.400 On Bloomberg Radio. I'm Barry Ridults. 0:16:56.440 --> 0:17:00.360 You're listening to Masters and Business on Bloomberg Radio. Extra 0:17:00.440 --> 0:17:04.040 special guests this week is Ed Perks. He is CIO 0:17:04.240 --> 0:17:09.040 for Franklin Templeton Income Investors. He is also has been 0:17:09.119 --> 0:17:14.320 PM of a number of their fixed income and hybrid funds, 0:17:14.359 --> 0:17:19.760 including their flagship Franklin Income Fund, which he became lead PM. 0:17:20.040 --> 0:17:21.800 I want to say two thousand and two, is that right? 0:17:22.000 --> 0:17:24.520 Join the PMT in two thousand and two and lead 0:17:24.520 --> 0:17:25.280 in two thousand and four. 0:17:25.400 --> 0:17:27.600 Two thousand and four, all right, not two, that's twenty 0:17:27.680 --> 0:17:31.360 plus years. So let's talk a little bit about what's 0:17:31.400 --> 0:17:34.600 going on in fixed income. A lot of cross currents. 0:17:34.680 --> 0:17:37.399 Here's what's happening with the Fed, Here's what's happening with 0:17:37.480 --> 0:17:42.240 the dollar overseas has become more attractive. Let me just 0:17:42.520 --> 0:17:44.639 right out of the box. Where are you seeing the 0:17:44.680 --> 0:17:51.800 most compelling risk adjusted income opportunities today? High yield, investment grade, 0:17:51.920 --> 0:17:54.560 diven inequities, And I know you could go anywhere. 0:17:54.600 --> 0:17:57.320 So what do you like these days? Yeah? 0:17:57.400 --> 0:17:59.440 You know, I would say in fixed income, we are 0:17:59.440 --> 0:18:02.960 really pretty diversified across the range. And for us that 0:18:03.119 --> 0:18:07.680 is US treasuries, it's agency mortgage backed securities, its investment 0:18:07.720 --> 0:18:11.439 grade corporate bonds and high yeld corporate bonds. And you know, 0:18:11.680 --> 0:18:14.760 we have different factors there, you know, one we do 0:18:14.840 --> 0:18:17.520 think the carrier, the income component of fixed income is 0:18:17.840 --> 0:18:21.120 quite attractive again today, and like I said before, it's 0:18:21.359 --> 0:18:23.560 been a while since you know that was the case, 0:18:23.680 --> 0:18:25.320 or there was a long period of time where that 0:18:25.440 --> 0:18:29.080 was certainly not not a function, not a benefit that 0:18:29.119 --> 0:18:34.080 investors in fixed income had spreads on the corporate side, 0:18:34.119 --> 0:18:36.159 do you know, concern us a little bit. But at 0:18:36.160 --> 0:18:39.520 the same time, you know, we have seen extended periods 0:18:39.520 --> 0:18:42.520 of time historically where spits spreads have stayed on the 0:18:42.600 --> 0:18:47.440 tighter side near historical lows. So you know, our view 0:18:47.520 --> 0:18:50.280 is that you want to be diversified, look a little 0:18:50.280 --> 0:18:53.080 bit more at idiosyncratic risks. So sometimes in our in 0:18:53.119 --> 0:18:55.399 our strategy, we do think the biggest lever that we 0:18:55.480 --> 0:19:00.199 have moving from one asset class to another is the 0:19:00.200 --> 0:19:03.360 most appropriate. We certainly had that in twenty twenty one, 0:19:03.440 --> 0:19:06.720 in twenty twenty three, today we think that lever is 0:19:06.760 --> 0:19:08.800 a little less important and it's a little bit more 0:19:08.840 --> 0:19:14.600 about relative value between sectors and or security selection idiosyncratic risks. 0:19:14.640 --> 0:19:17.840 So I think in the past year, moving out of 0:19:17.880 --> 0:19:20.480 some of the significant overweight that we had in investment 0:19:20.520 --> 0:19:24.000 grade corporate debt, for example, in favor of agency mortgages 0:19:24.000 --> 0:19:26.639 because spreads had really widened out with something that worked 0:19:26.640 --> 0:19:27.240 out well for us. 0:19:27.280 --> 0:19:28.440 In twenty twenty five. 0:19:28.359 --> 0:19:33.040 I noticed you didn't mention tips treasury inflation protected securities. 0:19:33.160 --> 0:19:36.840 Is that something that at the current level of inflation 0:19:36.920 --> 0:19:38.840 and the current yield there is that attractive. 0:19:39.000 --> 0:19:42.560 Yeah, it's not something that we're focused on today. I 0:19:42.560 --> 0:19:46.199 think to the extent that we see inflation continue, you know, 0:19:46.280 --> 0:19:49.240 to come down and settle in at a lower level, 0:19:49.280 --> 0:19:51.840 that tips may become something that we want in the portfolio, 0:19:51.960 --> 0:19:54.119 to the extent that then inflation could have surprised to 0:19:54.119 --> 0:19:54.680 the upside. 0:19:55.520 --> 0:19:58.560 And let's talk a little bit about those corporates you mentioned. 0:20:00.080 --> 0:20:04.080 Are we getting enough spread between investment grade and high 0:20:04.160 --> 0:20:07.879 yield corporates to make the juice worth the squeeze or 0:20:08.280 --> 0:20:12.119 because for a long time there's hardly any daylight between 0:20:12.200 --> 0:20:13.200 the yield and both. 0:20:13.880 --> 0:20:14.879 How do you look at that. 0:20:15.480 --> 0:20:20.760 Are corporates cheap or expensive high investment grade relative to 0:20:20.840 --> 0:20:21.359 high yield? 0:20:21.960 --> 0:20:27.000 Yeah, we do think moving up into the higher credit 0:20:27.080 --> 0:20:29.320 quality components of high yield is probably one of the 0:20:29.359 --> 0:20:32.320 more attractive areas. You know, we also like to so 0:20:32.320 --> 0:20:34.959 if you're looking at triple B double B spreads, we 0:20:35.040 --> 0:20:38.159 want to be in the higher quality credits to the 0:20:38.200 --> 0:20:40.720 extent that we're owning a broader section of high yield, 0:20:40.760 --> 0:20:41.960 which we do in our strategy. 0:20:42.080 --> 0:20:45.040 It's emphasis and more on the latter security selection. 0:20:45.119 --> 0:20:48.399 What is an individual company doing to be able to 0:20:48.440 --> 0:20:51.720 refance the debt to turn out their maturities, or ultimately 0:20:51.720 --> 0:20:54.040 to improve the overall credit quality. We do think grating 0:20:54.040 --> 0:20:57.359 agencies lag by a significant margin, and if you can 0:20:57.400 --> 0:21:00.399 get ahead of that and use your fundamental analysis, that 0:21:00.400 --> 0:21:03.000 that's an area within the fixed income markets we want 0:21:03.000 --> 0:21:03.399 to be focused. 0:21:03.480 --> 0:21:05.760 I'm trying to remember who I'm stealing this line from, 0:21:05.800 --> 0:21:09.600 but it's definitely not mine. Which is, there's so much 0:21:09.800 --> 0:21:13.280 variation in the B minus space that some of it 0:21:13.359 --> 0:21:16.680 is junk and some of it is ig and maybe 0:21:16.720 --> 0:21:21.000 some of it's in between, but the variance is enormous. 0:21:21.320 --> 0:21:23.520 Fair statement, Yeah, I think that is. 0:21:23.600 --> 0:21:26.840 And you know, certainly there are investors that play only 0:21:26.880 --> 0:21:29.480 in certain parts, and when you're flirting with that lower 0:21:29.800 --> 0:21:33.560 credit quality component B minus into triple C, that starts 0:21:33.600 --> 0:21:37.040 to change the dynamic of who the investor base potentially is. 0:21:38.200 --> 0:21:40.240 So you've been doing this for a long time. 0:21:40.800 --> 0:21:45.600 You've lived through the financial crisis, zerup, zero interest rate policy, 0:21:45.920 --> 0:21:52.080 quantitative easing, the most recent inflation shock and tightening cycle. 0:21:52.880 --> 0:21:58.080 For someone who has your authority to go anywhere, what 0:21:58.400 --> 0:22:01.960 of those types of environment and so the most challenging 0:22:02.119 --> 0:22:05.240 to manage an income portfolio through. 0:22:06.200 --> 0:22:08.439 Yeah, I mean, I think certainly the periods of extreme 0:22:08.520 --> 0:22:12.159 volatility are going to be challenging for any strategy, and 0:22:12.400 --> 0:22:15.159 and in my career the ones that i'll you know, 0:22:15.200 --> 0:22:17.960 go back to certainly when managing the convertible fund around 0:22:18.000 --> 0:22:21.640 the dot com crash and then in our income strategies 0:22:21.680 --> 0:22:25.600 both financial crisis. So you know, yeah, market's bottomed in 0:22:25.680 --> 0:22:28.560 March oh nine, but September of eight was pretty difficult 0:22:28.560 --> 0:22:31.160 for any investor, you know. To me, I think what's 0:22:31.200 --> 0:22:35.359 really defined our strategies and maybe become a little bit 0:22:35.400 --> 0:22:38.879