WEBVTT - VanEck’s Rodilosso & Sokol on Mitigating CLO Risk 0:00:14.200 --> 0:00:17.200 Welcome to Inside Active, a podcast about active managers that 0:00:17.239 --> 0:00:19.840 goes beyond sound bites and headlines and looks deeper into 0:00:19.920 --> 0:00:24.720 their processes, challenges, and philosophies and security selection. I'm David Cohne, 0:00:24.800 --> 0:00:27.639 i lead mutual fund and active Research at Bloomberg Intelligence. 0:00:27.880 --> 0:00:31.960 Today my coast is Rehdel Bachmann, Chief structured finance strategist 0:00:31.960 --> 0:00:34.640 at Bloomberg Intelligence RADDA. Thank you for joining me as 0:00:34.680 --> 0:00:35.400 my coast today. 0:00:35.479 --> 0:00:36.400 Oh, it's my pleasure. 0:00:37.560 --> 0:00:40.240 So since our discussion today is going to be on CLOS, 0:00:40.360 --> 0:00:42.239 I did want to ask about a note you put 0:00:42.280 --> 0:00:46.839 out recently about USCLO structural performance. Can you give our 0:00:46.920 --> 0:00:50.160 listeners a brief overview of how current fiscal policy could 0:00:50.200 --> 0:00:52.239 affect CLO returns? 0:00:53.080 --> 0:00:55.560 Yes, So that was something I wanted to alert CLO 0:00:55.640 --> 0:00:58.120 investors too, because it's something it's a kind of risk 0:00:58.160 --> 0:01:00.480 that they might not be used to. In the West. 0:01:00.560 --> 0:01:03.560 Have been used to central banks running orthodox monetary policies, 0:01:03.560 --> 0:01:06.480 which means that they're very much focused on price stability. 0:01:06.640 --> 0:01:08.360 They may have other objectives as well, but price to 0:01:08.400 --> 0:01:10.959 bility is certainly a key one, and as a result 0:01:11.000 --> 0:01:14.720 of that, what we expect to happen when inflation goes 0:01:14.760 --> 0:01:17.800 up is that policy rates also go up, and vice versa. 0:01:18.360 --> 0:01:23.520 So our presumption tends to be that foreign nodes, including 0:01:24.160 --> 0:01:28.560 ef ends, including clos are effectively sort of inflation hedged. 0:01:29.040 --> 0:01:32.120 When inflation goes up, yes, the principle becomes less valuable 0:01:32.120 --> 0:01:36.320 in real terms, but as policy goes up, floating rates 0:01:36.360 --> 0:01:38.280 go up, and as a result, coupons go up, and 0:01:38.280 --> 0:01:41.120 then the higher couponts compensate for the loss of the 0:01:41.240 --> 0:01:44.160 real value in the principle. So that's how we used 0:01:44.319 --> 0:01:46.520 to think about it. Of course, if you're an emerging 0:01:46.560 --> 0:01:50.000 markets investor, then you're used to different types of monetary policies, 0:01:50.080 --> 0:01:55.600 especially physically dominated monetary policies. These are situations where the 0:01:55.640 --> 0:01:59.400 government is really dictating monetary monetary policy, usually with a 0:01:59.480 --> 0:02:03.280 view to enabling the funding of the state. And so 0:02:03.320 --> 0:02:08.280 what happens under these regimes often is that inflation is higher, 0:02:08.560 --> 0:02:11.560 but despite that, interest rates are lower than there would 0:02:11.560 --> 0:02:14.400 be under orthodox minetary policy, and all of a sudden, 0:02:14.440 --> 0:02:17.680 when that happens, and when you're under that regime, then 0:02:17.720 --> 0:02:20.400 the clos are no longer effective for inflation headed because 0:02:20.400 --> 0:02:23.560 what happens is that inflation goes up the floating rates 0:02:23.560 --> 0:02:25.320 don't go up, so the coupons don't go up, and 0:02:25.360 --> 0:02:27.680 as a result of that, you don't get compensated for 0:02:27.760 --> 0:02:30.520 the loss in the real value of the principle. And 0:02:30.639 --> 0:02:32.359 of course, currently we have the situation in the US 0:02:32.360 --> 0:02:36.280 where there's a wankling over ultimately what the monetary policy 0:02:36.320 --> 0:02:40.240 should be. The FED, at least so far, seems to 0:02:40.280 --> 0:02:43.639 be more leaning towards the orthodox minetary policy to some extent, 0:02:44.240 --> 0:02:47.359 and of course the administration would like to have a 0:02:47.720 --> 0:02:51.080 monetary policy that's more focused on funding the state, lower 0:02:51.120 --> 0:02:55.200 interest rates and higher inflation. And so this is going 0:02:55.280 --> 0:02:57.040 to change, especially if we do end up in a 0:02:57.120 --> 0:02:59.800 situation where we have a fully physically dominated monetary policy 0:02:59.800 --> 0:03:01.600 in the US. Yes, that's going to change the risk 0:03:01.639 --> 0:03:05.080 return trade for clos, and then there's a discussion about 0:03:05.080 --> 0:03:08.079 how exactly that would affect clos. The collateral performance will 0:03:08.080 --> 0:03:10.679 will be good because the borrowers in the colateral pull 0:03:10.680 --> 0:03:13.640 on the same situation as the state. They benefit from 0:03:13.639 --> 0:03:15.800 an erosion of the real value of the principle that 0:03:15.840 --> 0:03:18.760 they owe, and they benefit from having to pay low 0:03:18.840 --> 0:03:22.040 interest rates because the loans are also floaters. And of 0:03:22.040 --> 0:03:24.240 course from a structural perspective, the CELO wouldn't be much 0:03:24.240 --> 0:03:27.959 impact it because the structure itself doesn't have interested exposure 0:03:28.520 --> 0:03:31.200 because both the liabilities and the assets of floaters. But 0:03:31.240 --> 0:03:34.239 for the COLO investors, the brisk returns of period of 0:03:34.480 --> 0:03:37.880 are very different under fiscal dominance than they are on 0:03:37.960 --> 0:03:39.320 the orthodox minitary policy. 0:03:40.040 --> 0:03:40.200 Yeah. 0:03:40.280 --> 0:03:43.760 Interesting, Well, I'm sure our guests today could also provide 0:03:43.760 --> 0:03:46.720 some color into that. So out further ado, I'd like 0:03:46.800 --> 0:03:50.480 to welcome friend Rodoloso and Bill so calls Inside Active. 0:03:50.840 --> 0:03:54.000 Bill is director of product Management at VNAC, and Fran 0:03:54.200 --> 0:03:57.960 is head of Fixed Income ETF portfolio Management at VNACK 0:03:58.040 --> 0:04:01.520 and a portfolio manager on the VNAC CLO ETF and 0:04:01.720 --> 0:04:04.480 the AA B B c l O ETF ticker c 0:04:04.720 --> 0:04:07.600 l O I in c l O B. Brandon, Bill, 0:04:07.640 --> 0:04:09.040 thank you so much for joining us today. 0:04:10.120 --> 0:04:13.520 It's great to be here. Thanks David, thanks for having us. 0:04:13.600 --> 0:04:16.840 To get started. I'll go first to you. Bill. Can 0:04:16.880 --> 0:04:19.679 you walk us through the main investment thesis for CLO 0:04:19.880 --> 0:04:20.920 I in cl O B. 0:04:21.520 --> 0:04:22.239 Yeah, of course. 0:04:22.320 --> 0:04:25.320 So, you know, I think for both funds the thesis 0:04:25.720 --> 0:04:30.080 is really that CLOS can help build a stronger bond portfolio. 0:04:30.880 --> 0:04:33.680 And that all investors should have access to clos and 0:04:33.920 --> 0:04:37.520 of course that wasn't really the case until we started 0:04:37.520 --> 0:04:41.600 seeing these ETFs launch, But so that that's one aspect 0:04:41.640 --> 0:04:43.320 of the other is that, you know, we believe you 0:04:43.360 --> 0:04:46.680 can achieve better outcomes by not constraining yourself to a 0:04:46.760 --> 0:04:50.600 single rating category, and that you really do need to 0:04:50.640 --> 0:04:53.600 take an active approach in this market. So as far 0:04:53.680 --> 0:04:57.440 as you know, the constraining yourself to a single rating category, 0:04:57.800 --> 0:05:01.679 you know, if you look at the the COLO market 0:05:02.400 --> 0:05:06.080 today and historically it's been dominated by institutional investors and 0:05:06.839 --> 0:05:10.280 they do tend to focus on single ratings. So banks 0:05:10.440 --> 0:05:14.480 are the biggest investors in clos and certainly the biggest 0:05:14.520 --> 0:05:17.760 in triple a's, and you're not really going to see 0:05:17.760 --> 0:05:19.800 them going to mezzanine tranches. And the reason is that 0:05:19.839 --> 0:05:24.440 they're highly regulated, they have regulatory capital constraints, and really 0:05:24.480 --> 0:05:28.120 only triple as makes sense for them. But when when 0:05:28.160 --> 0:05:30.360 we were thinking about launching our funds, you know, we 0:05:30.440 --> 0:05:34.160 took the approach that you know, most investors don't have 0:05:34.320 --> 0:05:37.760 these constraints and you can get more income and find 0:05:37.800 --> 0:05:40.360 additional opportunities if you can take advantage of the whole 0:05:40.440 --> 0:05:44.760 capital structure. So both of our ETFs are based on 0:05:44.839 --> 0:05:47.239 this idea that you know, if you can invest broadly 0:05:48.440 --> 0:05:51.720 and take advantage of that capital structure that the CLO has. 0:05:52.480 --> 0:05:54.920 You can you can have better outcomes. 0:05:54.960 --> 0:05:59.520 And uh col I focuses on investment grade tranches and 0:05:59.600 --> 0:06:04.800 we think that it's a useful strategy within a broader 0:06:05.080 --> 0:06:08.880 core bond portfolio, and we also offer COLOB which focuses 0:06:08.920 --> 0:06:11.760 on mezzanine tranches, so primarily double A to double B. 0:06:13.080 --> 0:06:16.640 So it's, you know, it's a higher returning potential but 0:06:16.720 --> 0:06:19.920 also higher risk strategy that we think can be a 0:06:20.000 --> 0:06:21.320 good compliment a high yield. 0:06:22.520 --> 0:06:25.680 So you mentioned, you know, it's typically institutional investors that 0:06:25.720 --> 0:06:28.760 have had access to these Who's the target investor for 0:06:28.880 --> 0:06:31.400 these to ETFs? Is it you know everyone or are 0:06:31.440 --> 0:06:34.960 you kind of looking to get more of retail investors involved. 0:06:36.560 --> 0:06:39.679 Well, you know, I'd say there's not necessarily one type 0:06:39.720 --> 0:06:43.880 of target investor necessarily, and I think that's one great 0:06:43.880 --> 0:06:46.920 thing about the ETF is that all types of investors 0:06:47.040 --> 0:06:49.840 can can buy it and have the same exposure at 0:06:49.839 --> 0:06:50.480 the same cost. 0:06:52.360 --> 0:06:52.520 You know. 0:06:52.839 --> 0:06:57.040 That being said, in our funds, we've primarily seen interests 0:06:57.080 --> 0:07:00.800 and aum come from the wealth channel, so this is 0:07:01.120 --> 0:07:05.520 this is r as SO registered investment advisors and also 0:07:05.600 --> 0:07:08.240 advisors that you know, broker dealers, including some of the 0:07:08.279 --> 0:07:13.400 big wirehouses that you know that everyone knows. And these 0:07:13.480 --> 0:07:17.520 of course are investors who haven't really had access to 0:07:17.640 --> 0:07:21.280 celos before these etf started launching, certainly not in a 0:07:21.360 --> 0:07:24.520 liquid vehicle. So so for many of these investors it's 0:07:25.920 --> 0:07:29.040 the first time they're they're learning about celos and and 0:07:29.240 --> 0:07:32.880 have the opportunity to add them into their portfolio. UH. 0:07:33.560 --> 0:07:37.200 We have also seen a pretty sizable interest from institutional 0:07:37.280 --> 0:07:42.239 investors as well in RTF and primarily that's the insurance market, 0:07:42.320 --> 0:07:46.880 so insurance general accounts, and unlike the wealth channel, you know, 0:07:47.000 --> 0:07:50.240 for many of these insurance companies, celos are not new. 0:07:50.720 --> 0:07:53.640 These are insurance companies in general are big investors in 0:07:53.720 --> 0:07:59.520 celos and and often they they may have invested directly 0:07:59.640 --> 0:08:04.160 with COLO tranch manager, but with ETFs, you know, in 0:08:04.520 --> 0:08:09.480 smaller portfolios or with smaller insurance companies, you know, an 0:08:09.560 --> 0:08:13.880 allocation to a separate account with a CLO tranch manager. 0:08:14.600 --> 0:08:18.240 UH maybe was too large for some of these smaller portfolios. 0:08:19.480 --> 0:08:22.480 So the ETFs are are great to get that exposure. 0:08:23.720 --> 0:08:27.840 I think we're also seeing the ETFp used as part 0:08:28.000 --> 0:08:31.960 of a broader COLO allocation. So sometimes these general accounts 0:08:31.960 --> 0:08:36.040 are buying clos directly or or maybe through a separate account, 0:08:36.440 --> 0:08:39.800 but they're using the ETF alongside those holdings as a 0:08:40.200 --> 0:08:43.000 liquidity sleeve. So so it's a way to optimize liquidity. 0:08:43.720 --> 0:08:43.960 Yeah. 0:08:44.640 --> 0:08:46.640 Now my next question could be for either one of you, 0:08:47.760 --> 0:08:50.959 how do you define the market opportunity for CLO tranches today? 0:08:53.240 --> 0:08:56.319 They'll do I'm gonna lead off. I'll say say this, 0:08:56.920 --> 0:09:00.480 there's a relative value opportunity to begin with. So if 0:09:00.520 --> 0:09:05.040 you compare the higher rated tranches versus other forms of abs, 0:09:06.640 --> 0:09:09.959 you know, the CLO tranches are going to offer a 0:09:10.080 --> 0:09:13.920 more attractive spread than almost all the other alternatives, and 0:09:14.040 --> 0:09:19.719 certainly versus investment grade corporates at any step along the 0:09:19.800 --> 0:09:25.120 rating scale, a meaningful pickup in yield. So just in 0:09:25.280 --> 0:09:29.120 general from an allocation perspective, of course, with the floating 0:09:29.160 --> 0:09:32.319 rate nature, you can add yield and reduce duration in 0:09:32.400 --> 0:09:36.360 your portfolio, you know, thereby reducing one form of risk. 0:09:37.160 --> 0:09:39.800 So we think with you know, investment grade clos, there's 0:09:39.840 --> 0:09:44.920 this opportunity to really add some kind of permanent allocation 0:09:46.520 --> 0:09:51.000 to enhance overall, you know, your sharp ratio basically, you know, 0:09:51.240 --> 0:09:54.760 in terms of today sort of bottom up opportunities or 0:09:54.840 --> 0:09:56.319 relative value within. 0:09:57.800 --> 0:09:58.880 The CLO market. 0:10:00.120 --> 0:10:03.959 Certainly, spreads have compressed in every corner of the credit 0:10:04.160 --> 0:10:08.360 market in general. And although COLO spreads are wide on 0:10:08.480 --> 0:10:13.240 a relative versus other asset classes, it's not a time 0:10:13.400 --> 0:10:15.880 we believe, Nor by the way we work with the 0:10:15.960 --> 0:10:19.840 subadvisor on these funds, Pine Bridge, who's got very deep 0:10:19.920 --> 0:10:23.439 experience in this space, we're both in agreement this is 0:10:23.520 --> 0:10:27.360 not a time to go too far down the credit 0:10:27.440 --> 0:10:31.319 spectrum in order to add yield, So a more conservative 0:10:31.360 --> 0:10:37.439 approach is warranted. But there are plenty of bottom up opportunities. 0:10:37.559 --> 0:10:41.400 You can still find value in the secondary market and 0:10:41.440 --> 0:10:44.839 some of the lower rated tranches, more so in the 0:10:44.880 --> 0:10:47.679 primary market, where the spreads are still slightly more attractive 0:10:47.960 --> 0:10:52.280 in the higher rated tranches. But that type of positioning 0:10:52.400 --> 0:10:58.240 right now should still provide an attractive yield to investors 0:10:58.360 --> 0:11:00.880 versus most other alternatives in the income space. 0:11:01.840 --> 0:11:02.040 Yeah. 0:11:02.520 --> 0:11:04.840 And since you know, our our focus of the podcast 0:11:04.920 --> 0:11:08.640 is active management, and Bill alluded to it earlier, you know, 0:11:08.760 --> 0:11:11.599 I just want to ask, especially for our listeners. You know, 0:11:11.640 --> 0:11:14.680 why is active management required for this type of investment? 0:11:15.040 --> 0:11:17.040 You know, I think there's a few ways to answer that, 0:11:17.160 --> 0:11:20.319 so so on. You really can't invest passively. I mean, 0:11:20.400 --> 0:11:23.120 this is not a market where you can track an index, right, 0:11:23.160 --> 0:11:25.959 I mean, just the way these dealers trade and the 0:11:25.960 --> 0:11:29.599 way they're issued, it would be very difficult to have 0:11:30.000 --> 0:11:32.480 a true passive product. But you know, I think we 0:11:32.880 --> 0:11:35.920 we view it beyond that and really in terms of 0:11:36.000 --> 0:11:39.360 the value that active management can provide in this asset class. 0:11:39.400 --> 0:11:43.120 So it's really from two ways. I mean, one is 0:11:43.160 --> 0:11:45.800 from a top down perspective, you know, in terms of 0:11:46.360 --> 0:11:49.160 deciding how to position the portfolio. From a from a 0:11:49.240 --> 0:11:55.040 risk perspective, so ratings, allocations or spread duration exposure, right, 0:11:56.160 --> 0:11:58.400 you know, you you really do need to take a 0:11:58.559 --> 0:12:02.400 macro view and and look at the current market and 0:12:02.760 --> 0:12:06.400 your outlook and know when to maybe add risk, but 0:12:06.559 --> 0:12:09.319 also when to d risk. And and I think also 0:12:09.679 --> 0:12:14.520 becau understanding how different trenches are impacted by you know, 0:12:14.600 --> 0:12:16.719 by the different types of investors in this market, I 0:12:16.760 --> 0:12:19.840 think is also important. And you you you do need 0:12:19.880 --> 0:12:24.000 an understand a deep understanding of the CLO market. And 0:12:24.080 --> 0:12:27.080 I think it's actually quite unique from that perspective. Uh 0:12:27.160 --> 0:12:29.520 So that's the top down part, but also from a 0:12:29.520 --> 0:12:33.200 bottom up perspective, you know, you can't just invest based 0:12:33.240 --> 0:12:37.920 on a rating. When you look at manager, vintage, underlying portfolio, 0:12:38.360 --> 0:12:41.640 I mean, all of these will will impact the performance 0:12:41.760 --> 0:12:46.480 of a clo and your d dispersion in performance even 0:12:46.600 --> 0:12:48.640 among celos within the same rating category. 0:12:48.760 --> 0:12:51.760 So security selection can also be very additive. 0:12:52.840 --> 0:12:54.800 Yeah, so I wanted to come back to what the 0:12:54.920 --> 0:12:58.400 Bible was talking about before regarding the investor base. So 0:12:58.520 --> 0:13:01.920 we have the sort of the wealth clients, and we 0:13:02.000 --> 0:13:04.839 have the insurance companies, and as you're pointing out, the 0:13:04.840 --> 0:13:08.199 insurance companies already familiar with clos, so maybe from that 0:13:08.280 --> 0:13:11.199 perspective they a bit less interesting here. But I think 0:13:11.280 --> 0:13:16.440 the wealth clients might be quite interesting here because clearly 0:13:16.800 --> 0:13:20.200 c ETFs have grown quite a bit, especially in the US. 0:13:20.400 --> 0:13:22.640 They're starting to grow in Europe as well. And as 0:13:22.720 --> 0:13:24.719 they grow and they become a larger part of the 0:13:24.800 --> 0:13:27.840 investor base for clos, they will start to influence how 0:13:27.920 --> 0:13:32.800 clos themselves are trading, and that means that all investors 0:13:32.840 --> 0:13:35.679 in clos will have an interest in understanding how c 0:13:36.160 --> 0:13:40.280 ETFs will influence the market and how these assets are 0:13:40.320 --> 0:13:43.640 being traded, how their price, how liquid they are, how 0:13:44.320 --> 0:13:47.360 stable the liquidy is as well, And so I was 0:13:47.440 --> 0:13:50.760 wondering what is sort of the nature of these wealth investors. 0:13:50.920 --> 0:13:55.520 Are they providing sticky money or is it more flighty money? 0:13:56.160 --> 0:13:58.800 How exactly do you think they will start to affect 0:13:59.240 --> 0:14:03.520 how etfclos will invest in the market, and that intourn 0:14:03.559 --> 0:14:04.920 will affect the COLO market. 0:14:05.400 --> 0:14:09.880 We are seeing stickier allocations at the start here, and 0:14:10.200 --> 0:14:13.959 one it's been a long call it sales cycle into 0:14:14.200 --> 0:14:18.240 allocations from the wealth channel, because these guys and ladies 0:14:18.400 --> 0:14:21.920 do their homework. They are not going to jump into 0:14:21.960 --> 0:14:25.160 this asset clash just because it's now got about forty 0:14:25.520 --> 0:14:27.200 billion in ETF flows. 0:14:28.200 --> 0:14:31.600 So there's a lot of education up front. Number one. 0:14:31.720 --> 0:14:36.520 Number two, the premise, particularly with the investment grade COLO allocations, 0:14:36.840 --> 0:14:40.040 is that these do belong as part of a core 0:14:40.200 --> 0:14:44.680 fix income allocation. They hadn't for most people in the 0:14:44.760 --> 0:14:48.800 West channel because there was no access. So it's our 0:14:48.960 --> 0:14:55.520 belief that in that channel people have bought in to 0:14:55.680 --> 0:14:59.680 that concept. And there's plenty of history through lots of 0:14:59.760 --> 0:15:03.080 market cycles. Remember, clos have been around since the nineteen nineties, 0:15:03.160 --> 0:15:07.160 so there's lots of data and history to back up 0:15:07.200 --> 0:15:09.920 the notion of sort of a core allocation. All that 0:15:10.080 --> 0:15:15.000 being said, since colo ETFs have come into existence, although 0:15:15.200 --> 0:15:18.200 we have seen pockets of volatility, we have not seen 0:15:18.440 --> 0:15:21.520 a truly dramatic turn in a credit cycle. So there 0:15:21.560 --> 0:15:25.680 will be some testing of you know, supply demand for 0:15:27.040 --> 0:15:30.640 these vehicles, you know, when we really do and we 0:15:30.760 --> 0:15:33.360 know it will happen at some point when it's difficult 0:15:33.440 --> 0:15:37.280 to say. We think the performance of the asset class 0:15:37.640 --> 0:15:41.040 through a more dramatic turn into credit cycle will again 0:15:41.720 --> 0:15:45.680 the asset class will again I prove itself. But there probably, 0:15:45.840 --> 0:15:50.480 you know, will be maybe some less committed investors who decide, 0:15:51.440 --> 0:15:53.920 you know, perhaps at the wrong time, but you know, 0:15:53.960 --> 0:15:57.440 we maybe that this isn't for them, So we'll see 0:15:57.480 --> 0:15:59.240 how that goes. I just wanted to point out that 0:15:59.440 --> 0:16:01.240 that hasn't fully occurred yet. 0:16:01.440 --> 0:16:03.960 If we get into the portfolio management aspect just a 0:16:04.040 --> 0:16:08.200 little bit, how do you evaluate the underlying collateral? You 0:16:08.240 --> 0:16:09.480 know what metrics attract. 0:16:09.680 --> 0:16:12.040 There's there's a lot of metrics that are tracked and 0:16:12.360 --> 0:16:17.120 certainly you know, pine Bridge as a colo issuer themselves 0:16:17.240 --> 0:16:22.040 as having a very very large leveraged finance group with 0:16:22.360 --> 0:16:27.080 lots of individual credit analysts. You know, they have systems 0:16:27.120 --> 0:16:31.800 built to do a very granular view of each clo, 0:16:32.920 --> 0:16:37.280 which means looking at the loan level to assess risks 0:16:37.320 --> 0:16:41.440 and then of course stress testing, uh, you know, with 0:16:41.720 --> 0:16:47.520 sector disruptions, overall market disruptions, and they are monitoring making 0:16:47.600 --> 0:16:51.000 sure there are already a lot of restrictions on clos 0:16:51.040 --> 0:16:54.320 in order for these tranches to earn their ratings, so 0:16:54.720 --> 0:16:59.000 enforced levels of diversification. A typical COLO these days is 0:16:59.040 --> 0:17:01.320 going to have three to four hunds loans if not 0:17:01.640 --> 0:17:03.280 more in the portfolio. 0:17:03.440 --> 0:17:04.440 You're not going to see. 0:17:06.440 --> 0:17:11.119 Individual issuers being representing more than one or two percent 0:17:11.160 --> 0:17:14.320 of these portfolios, so they're already highly diversified. They have 0:17:14.440 --> 0:17:19.920 to meet all sorts of coverage tests as well, but 0:17:20.200 --> 0:17:22.640 you'll see a very very granular look. And I should 0:17:22.720 --> 0:17:26.240 mention also, and Bill already did that the manager selection 0:17:26.440 --> 0:17:28.159 is extremely important. I think there are more than one 0:17:28.280 --> 0:17:31.880 hundred and fifty COLO managers in the US market alone 0:17:32.240 --> 0:17:36.680 right now, and they are not all equally experienced or 0:17:37.760 --> 0:17:44.920 equally capable, So that manager selection understanding the team, the experience, 0:17:44.960 --> 0:17:49.080 the level of analysis they're doing, how they manage the portfolio. 0:17:49.400 --> 0:17:54.480 Key critical component of colos in general is that they 0:17:54.640 --> 0:17:58.840 themselves the collateral pools are actively managed. So those COLO 0:17:58.960 --> 0:18:03.040 managers is not just important how they initially construct the CLO, 0:18:03.160 --> 0:18:05.280 but how they manage it over time and whether or 0:18:05.280 --> 0:18:08.880 not they act in the best interest of the debt 0:18:08.920 --> 0:18:12.560 holders in various circumstances. So a lot of inputs, I 0:18:12.600 --> 0:18:14.680 guess is a short answer to that question. 0:18:15.840 --> 0:18:18.720 So just a follow up, how do you decide between 0:18:18.760 --> 0:18:23.800 investing in new issuance versus secondary market trongest. 0:18:24.720 --> 0:18:29.960 Yeah, there's a relative value sort of question there. Typically 0:18:30.040 --> 0:18:34.840 you would expect to in most environments to gain some 0:18:35.000 --> 0:18:39.520 additional spread by going into the new issue market, but 0:18:40.240 --> 0:18:43.560 there can be even when that is the case, and 0:18:43.680 --> 0:18:45.760 currently that is the case where the new issue market 0:18:45.840 --> 0:18:50.000 is the relative value or the excess spread is narrowed 0:18:50.400 --> 0:18:53.040 even in October with a little bit of volatility earlier 0:18:53.080 --> 0:18:57.440 in the month, to where the primary market is not 0:18:58.119 --> 0:19:03.119 absolutely the more active space to be, but still a 0:19:03.240 --> 0:19:05.320 little bit of value there. But there are so many 0:19:05.400 --> 0:19:09.720 other factors. For instance, pine Bridge, right now, we talked 0:19:09.720 --> 0:19:14.679 about being conservatively positioned in this portfolio, when they are 0:19:14.800 --> 0:19:19.560 looking for lower rated tranches or doing a bottom up 0:19:19.560 --> 0:19:21.760 look to see if there's some value out there in 0:19:21.880 --> 0:19:26.120 the market. Given the overall positioning, there's not a desire 0:19:26.160 --> 0:19:30.840 to add long duration in the triple B part of 0:19:31.000 --> 0:19:36.399 the portfolio right now, because that additional sensitivity to credit 0:19:36.520 --> 0:19:40.160 spread movements, or that additional spread duration in those lower 0:19:40.240 --> 0:19:43.600 rated tranches would lead to greater sensitivity should there be 0:19:43.640 --> 0:19:46.320 a backup and spread. So it's in the secondary market 0:19:46.720 --> 0:19:49.840 well seasoned tranches where you might be able to find 0:19:49.880 --> 0:19:53.800 some attractively priced deals that also have a shorter duration, 0:19:54.160 --> 0:19:56.400 so you're not as sensitive even when you're going down 0:19:56.840 --> 0:19:59.399 the credit spectrum to gain some additional yield. 0:20:00.160 --> 0:20:03.040 Sticking with the secondary market, I was actually wondering, I mean, 0:20:03.080 --> 0:20:06.480 we've had quite a bit of tariff turmal a few 0:20:06.520 --> 0:20:08.560 months ago now, quite a few months ago now, but 0:20:08.640 --> 0:20:11.000 I thought this was actually an interesting sort of test case, 0:20:11.640 --> 0:20:15.000 and I'm just wondering, how do you think, as the 0:20:15.080 --> 0:20:19.480 CELO investor, tariffs will affect the performance of the CEOs, 0:20:20.000 --> 0:20:24.320 and how do you think your ETF investors think the 0:20:25.480 --> 0:20:27.800 tariffs will affect the clos. It says there are difference 0:20:27.880 --> 0:20:30.320 or are you sort of on the same page on this. 0:20:33.880 --> 0:20:36.640 I think there are as many opinions as there are 0:20:36.720 --> 0:20:44.160 investors at this point because it's such a rapidly changing environment. 0:20:44.640 --> 0:20:48.600 I think the generally accepted wisdom is really though, that 0:20:49.359 --> 0:20:52.399 there is a level of uncertainty, and there is a 0:20:52.560 --> 0:20:59.159 level of call it your credit, negative impact or impingement 0:20:59.240 --> 0:21:04.440 on profitable in certain sectors. Who's paying How that all 0:21:04.560 --> 0:21:10.200 plays out is still in I think most investors' minds 0:21:10.520 --> 0:21:16.720 a bit to be determined. So the initial impact the 0:21:16.800 --> 0:21:21.000 tariff tantrum that did create some interesting opportunities in the 0:21:21.080 --> 0:21:26.040 market and was a small test, but really what we've 0:21:26.080 --> 0:21:30.359 seen since then is more of a discounting of the 0:21:30.520 --> 0:21:35.040 impact of tariffs because you know, there's certainly we think 0:21:35.080 --> 0:21:38.240 there will be greater impact, and it will happen over time, 0:21:38.320 --> 0:21:41.679 and some of it's been postponed by front loading inventories 0:21:41.800 --> 0:21:45.480 or other measures, and simply you know, policies changing on 0:21:45.560 --> 0:21:51.040 the fly and suspensions. But you know, generally speaking, it 0:21:51.200 --> 0:21:54.760 will impact the market overall, should probably at some point 0:21:54.920 --> 0:21:58.960 lead to wider spreads in some sectors. But I don't 0:21:58.960 --> 0:22:01.920 think there's any conception answers and where that is, and 0:22:02.440 --> 0:22:06.320 I think both investors and COLO managers and COLO trench 0:22:06.440 --> 0:22:11.840 managers all all parties you'll share some form of those opinions, 0:22:11.960 --> 0:22:14.320 or most of most parties in all three cohorts. 0:22:15.080 --> 0:22:17.080 Yeah, And I'm actually thinking maybe we are sort of 0:22:17.119 --> 0:22:20.080 in a similar situation with the topic that we started 0:22:20.119 --> 0:22:22.280 out with, which is what is going to happen to 0:22:22.440 --> 0:22:25.760 interest rates and inflation? And we're to monetor policy in 0:22:25.800 --> 0:22:29.640 the US more generally going forward, and I could imagine 0:22:29.680 --> 0:22:34.040 that currently it's not quite clear how things will ultimately 0:22:34.119 --> 0:22:37.000 pan out. Will the years really have a completely fiscally 0:22:37.040 --> 0:22:39.680 dominated monetary policy, will it be somewhere in the middle, 0:22:39.760 --> 0:22:43.639 will it go back to orthodox monetary policy? Do you 0:22:43.920 --> 0:22:47.320 do you sense that there's a consensus amongst dicilar investors 0:22:48.240 --> 0:22:51.880 or the ETF investors. Maybe not? And if there isn't, 0:22:51.960 --> 0:22:53.760 is it something that people are nervous about or is 0:22:53.800 --> 0:22:55.320 there not other're not too worried about it. 0:22:56.320 --> 0:23:00.160 There is in my mind, and they'll please disagree. As 0:23:00.200 --> 0:23:04.160 you talk to a lot of other people as well, 0:23:05.080 --> 0:23:09.480 there is no consensus. I think there's a perceived risk 0:23:10.359 --> 0:23:13.159 of too much easing. Of course, there are people out 0:23:13.200 --> 0:23:16.359 there who still argue that the FED has moved too slowly. 0:23:16.720 --> 0:23:21.200 Is my personal opinion that to this point, with or 0:23:21.240 --> 0:23:27.520 without the perceived interference from executive members of that branch, 0:23:27.920 --> 0:23:31.880 the FED is probably where they would have been right 0:23:32.000 --> 0:23:34.880 now without all the noise. So the question is more 0:23:34.880 --> 0:23:37.879 about twenty twenty six. We think if left to their 0:23:37.880 --> 0:23:41.960 own devices, the prospects for cuts in twenty twenty six 0:23:42.040 --> 0:23:44.600 at this point, based on what we know, would probably 0:23:44.640 --> 0:23:48.120 be pretty slim. So anyway, I think there's a level 0:23:48.119 --> 0:23:51.080 of concern if I think if it were really priced in, 0:23:51.800 --> 0:23:56.240 you would see some different market conditions, including a much 0:23:56.359 --> 0:24:00.639 steeper yield curve. And we're just you know, although you 0:24:00.720 --> 0:24:03.320 could say the curve is normalized, it's still not even 0:24:03.480 --> 0:24:07.280 steep from historical point of view. It's sixty basis points 0:24:07.400 --> 0:24:09.800 or so, say between two year and ten year treasuries 0:24:10.359 --> 0:24:14.200 inside of long term average. And by the way, with 0:24:15.359 --> 0:24:17.240 you agree with so much of what you're saying about 0:24:17.280 --> 0:24:21.120 the risk to you know, physical dominance, a less independent 0:24:21.680 --> 0:24:27.040 central bank, and you know, potential stagflation. One thing I 0:24:27.080 --> 0:24:31.960 would say again, you know, highly rated clos would suffer 0:24:32.040 --> 0:24:36.000 from lower coupons in that environment, not benefit you know 0:24:36.720 --> 0:24:40.399 from you know, the short rates that should be rising, 0:24:41.000 --> 0:24:44.200 and you know, everyone every corner of the income market 0:24:44.240 --> 0:24:48.680 that would probably suffer from a negative real rate point 0:24:48.720 --> 0:24:51.879