Speaker 1: Welcome to Inside Active, a podcast about active managers that
Speaker 1: goes beyond sound bites and headlines and looks deeper into
Speaker 1: their processes, challenges, and philosophies and security selection. I'm David Cohne,
Speaker 1: i lead mutual fund and active research at Bloomberg Intelligence.
Speaker 1: Today my co host is Sam Geier, a corporate credit
Speaker 1: strategist for Bloomberg Intelligence. Sam, thank you for joining me
Speaker 1: today on our actually it's our first fixed income Bucust episode.
Speaker 2: Thanks for having me excited to be here.
Speaker 1: So on Monday, you and Noel put out a research
Speaker 1: note on investment grade bonds, and you know, we know
Speaker 1: April was filled with volatility. What could be in store
Speaker 1: for the Bloomberg US Corporate Bond Index in the weeks ahead.
Speaker 2: Yeah, so, I mean, obviously, as you said, April pretty
Speaker 2: wild ride for most asset classes, but for investment grades specifically.
Speaker 2: You know, we saw spreads pushed to some of the
Speaker 2: widest levels we've seen over the past year before a
Speaker 2: little bit of moderation. But you know, in terms of
Speaker 2: over the next couple of months, in our eyes, we
Speaker 2: see spread staying pretty range bound, sticking right around that
Speaker 2: one hundred basis point mark. That we're at right now,
Speaker 2: but you know, the market has had a lot of
Speaker 2: time to kind of digest what's going on with tariffs
Speaker 2: and what that might mean. We're definitely wide from where
Speaker 2: we were, you know, beginning of the year, where spreads
Speaker 2: were around some of the titles levels we've seen over
Speaker 2: the history of the index. But you know, we've seen
Speaker 2: some improvement across a couple of different metrics. Issuance has
Speaker 2: spen pretty solid. ETF flows is another area that we've
Speaker 2: been seeing over the past you know week, We've seen
Speaker 2: a little bit of improvement there, but you know, looking
Speaker 2: kind of a little bit longer term over the remainder
Speaker 2: of the year, in our eyes, we think spreads could push,
Speaker 2: you know, wide from where we're at right now. We
Speaker 2: have an ordinarily squares model that we look at on
Speaker 2: our end for investment grade. We have two models there.
Speaker 2: Both are kind of pointing to the one forty five
Speaker 2: one sixty five basis point range, so indicating a little
Speaker 2: bit of a mispricing there. So we think spreads can
Speaker 2: definitely push wider from from where we're at right now.
Speaker 1: Right well, speaking of spreads and just bonds in general,
Speaker 1: i'd like to welcome our first bond portfolio manager. Yest
Speaker 1: On inside Active Visual Conduja is a managing director with
Speaker 1: Morgan Stanley Investment Management. He's head of the broad markets
Speaker 1: Fixed Income team and a portfolio manager for funds including
Speaker 1: the Eaton Vance Total Return Bond Fund, which has a
Speaker 1: ticker of ei b a X and the Eaton Vance
Speaker 1: Total Return Bond ETF, which has a ticker of the
Speaker 1: e V t R Vishal, thank you so much for
Speaker 1: joining us today.
Speaker 3: Thanks for having me on, David, so Vishel, what are.
Speaker 1: Your thoughts on you know what Sam just mentioned, you know,
Speaker 1: with April's volatility.
Speaker 3: Quite a bit of it, and there was there were
Speaker 3: very clear signs, I think end of the year last
Speaker 3: year that we will be entering into a volatile period
Speaker 3: this year. The pendulum swings on the economic outcomes are
Speaker 3: very dependent on two very dominant policies, the fiscal and
Speaker 3: the monetary policy, and both of them are effectuating change
Speaker 3: here as we speak. So yes, I think the volatility
Speaker 3: is going to be significantly high this year. We've already
Speaker 3: witnessed quite a bit of it, April being a primary
Speaker 3: month there. But I think one thing that was very
Speaker 3: clear from April was that bards delivered on their dual mandate,
Speaker 3: which was income, total return, especially the zero to ten
Speaker 3: year part, and then the negative correlation. Yes, we can
Speaker 3: speak about the different parts on the curve of how
Speaker 3: we behaved during the entire month of April, but overall,
Speaker 3: bonds did what they were supposed to do in client portfolios. Great.
Speaker 1: Now, if we talk about the total total return bond strategy,
Speaker 1: which you know I mentioned both the mutual fund and
Speaker 1: the ETF, what is the investment process you when you're
Speaker 1: managing this portfolio. How does that work the two funds?
Speaker 3: I think, David, very if you can take a big
Speaker 3: step back, I think we are trying to deliver on
Speaker 3: that dual mandate. We're trying to deliver to our clients
Speaker 3: that consistency of income and total return. And then we
Speaker 3: are also very cognizant of how clients are using fixed
Speaker 3: and come allocations in their overall acid allocation framework, if
Speaker 3: you will, so keeping that in mind, we want to
Speaker 3: make it very clear that these are primarily bond portfolios.
Speaker 3: We are not trying to deviate from that basic feature
Speaker 3: of bonds. Also, I think the other thing that is
Speaker 3: going to be very clear as you look through these
Speaker 3: that these are very transparent, long only bottom up focused.
Speaker 3: So you shouldn't expect these portfolios on five to six
Speaker 3: thousand CUSIPs that you would typically see in some of
Speaker 3: the passive portfolios out there, or the benchmarks as well,
Speaker 3: which probably have double the amount of those CUSIPs. Should
Speaker 3: be very focused on three to five hundred bonds bottom
Speaker 3: up selected, and that's where we think that the most
Speaker 3: consistent part of alpha comes within fixed income. Happy to
Speaker 3: elaborate more on that, but that's primarily primarily what we
Speaker 3: are trying to achieve in these two portfolios.
Speaker 2: So Vishell, I want to kind of dig in just
Speaker 2: in terms of what your due diligence process looks like.
Speaker 2: You know, is the objective more broadly kind of focused
Speaker 2: on being paid back for all the bonds that you
Speaker 2: invest in. Is it about beta exposure or does it
Speaker 2: kind of vary across the different asset classes that you
Speaker 2: work invaries.
Speaker 3: And varies by time period as well. But I think
Speaker 3: there are very the basic philosophy remains the same. There
Speaker 3: are three pillars of what we look at when we
Speaker 3: are trying to make an investment on any bond. It's
Speaker 3: the fundamentals we are digging through, whether it's a corporate
Speaker 3: balance sheet or a consumer balance sheet, or even a
Speaker 3: country or a municipality balance sheet that we are digging
Speaker 3: to invest in. So fundamentals are very important to dig
Speaker 3: in that step number one typically for US, technicals are
Speaker 3: the next one. Who are the buyers and sellers of
Speaker 3: this bond? And what is the economic or non economic
Speaker 3: incentive to be involved in that sector, asset class, or
Speaker 3: band specifically? And then valuations? What do valuations tell us
Speaker 3: in terms of how much is already priced in and
Speaker 3: how much is not? So those three sort of verticals
Speaker 3: help us decide or answer the question, is there a
Speaker 3: catalyst to be able to get that extra total return,
Speaker 3: extra income, extra spread compression from this particular investment in
Speaker 3: our portfolio versus what the benchmark owns or versus what
Speaker 3: the other alternatives are to invest in that part of
Speaker 3: the curve. I'll give you also one more piece there
Speaker 3: of information our mentality are investing or doing. Our due
Speaker 3: diligence on any investment is focused on what can we
Speaker 3: buy that today gives us better return for similar amount
Speaker 3: of risk as the benchmark or a passive allocation or
Speaker 3: in certain different times we also ask ourselves the question,
Speaker 3: which is what can we actually invest in that gives
Speaker 3: us similar amount of return but lower risk than what
Speaker 3: can typically a passive benchmark provide today. So that mentality
Speaker 3: of risk reward also governs what exactly goes out or
Speaker 3: goes in into the portfolio at any given point.
Speaker 1: Now you know there's both the mutual fund in the ETF.
Speaker 1: How different are they are they? You know, pretty much
Speaker 1: the same, just different rappers.
Speaker 3: The second statement actually answers the question, David, But I'll
Speaker 3: I'll give you a little bit more background on that
Speaker 3: of how we actually launch this in why the reasoning
Speaker 3: for having the two one I think the similarity is.
Speaker 3: Let's walk through those both of them are in the
Speaker 3: core plus sort of category, if you will. That's what
Speaker 3: we are trying to or striving to be consistently in
Speaker 3: that top quintile and consistently avoid the bottom half of
Speaker 3: that peer group, if you will. So we have done
Speaker 3: our analysis in terms of how much versus a typical
Speaker 3: benchmark do we need to consistently outperform by to be
Speaker 3: in that top quintile, and then how much underperformance do
Speaker 3: we need to avoid to avoid the bottom a half
Speaker 3: of the of the peer group. So that sort of
Speaker 3: versus the benchmark versus the peer group and what are
Speaker 3: we trying to achieve is very clear within the team
Speaker 3: at any human point. The differences now are very respect
Speaker 3: are very respectful to the vehicles or the rappers, as
Speaker 3: you mentioned. Even on that one, the mutual fund, the
Speaker 3: forty act can do a little bit more below investment gage,
Speaker 3: which is typically your spread risk sector that we allocate
Speaker 3: to at particular times within the economic pycho, we can
Speaker 3: do about thirty five percent below and Mustrom grade, so
Speaker 3: that truly brings in the best ideas from our high
Speaker 3: yal team into the portfolio when the time is right.
Speaker 3: In the specific bonds, the ETF can do twenty percent
Speaker 3: below in Mustrom grade in bond math terms. The other
Speaker 3: differences could be explained in a way where the tracking
Speaker 3: error allowance for the mutual fund is zero to four
Speaker 3: hundred basis points versus the tracking error allowance for ETF
Speaker 3: zero to two hundred. Even with those differences, the similarities
Speaker 3: of trying to achieve that top quintile we think mathematically
Speaker 3: is possible and is consistently possible to deliver on it.
Speaker 3: So we wanted to provide those two wrappers for clients
Speaker 3: who are now debating towards active ETFs in their allocations
Speaker 3: and be able to do that in a liquid fashion.
Speaker 3: And then respecting what we can deliver within our philosophy
Speaker 3: and process of total return franchise, and then within within
Speaker 3: that ETF rapper which is a lot more liquid versus
Speaker 3: the mutual fund.
Speaker 2: Shall I want to get back to kind of what
Speaker 2: we've what we were talking about earlier, just in terms of,
Speaker 2: you know, the current state of the market and the
Speaker 2: volatility that we've been seeing. You know, looking at the
Speaker 2: different asset classes that you're invested in in these in
Speaker 2: these funds, you know, treasuries, corporates, securitized as well. You know,
Speaker 2: out of those three kind of what does the relative
Speaker 2: value proposition look like? You know, are you seeing a
Speaker 2: little bit more advantage to one over the other, especially
Speaker 2: given the uncertainty that we might be seeing over the
Speaker 2: next couple of quarters.
Speaker 3: Yeah. Important and uh and a really good question, Sam.
Speaker 3: I think if we take a step back, those three
Speaker 3: sectors that you talked about, or you questioned me on,
Speaker 3: are the three big balance sheets that be as bond
Speaker 3: investors invest in, Right, we have a government balent sheet
Speaker 3: that we get to invest. There's a big corporate balance
Speaker 3: sheet that the invest, whether it's investment, great high yield
Speaker 3: bank loans, etc. Both US and global. And then there
Speaker 3: is a consumer balance sheet or secured balance sheet in
Speaker 3: the US. I think that is a very liquid way
Speaker 3: that you can invest in the securitized market. So those
Speaker 3: are our three big pillars of what the portfolio at
Speaker 3: any given point will be made of. I think right
Speaker 3: after twenty twenty, I think prior to the vaccine came
Speaker 3: coming out, investment grade corporates were dominating our spread, duration,
Speaker 3: attribution within the within the portfolio, secured was much less,
Speaker 3: and we were slowly with steadily reducing our government balan
Speaker 3: sheet exposure, which was a ballast of the portfolio. We
Speaker 3: traveled through twenty twenty one and twenty twenty one, especially
Speaker 3: with a lot more corporate balance sheets on the billow
Speaker 3: investment grade side, and then increased our secured allocation as
Speaker 3: well securitized credit again trying to access that consumer balance sheet,
Speaker 3: which was very strong during that time as well. Twenty
Speaker 3: twenty two, as we all know, we were hiding away
Speaker 3: from anything that behaves like a bond or anything that
Speaker 3: had a fixed rate bond feature because of what was
Speaker 3: happening with growth and inflation and the fact trying to
Speaker 3: catch up. So the quadrant was high growth, high inflation,
Speaker 3: which typically, as we've learned through CFA and other programs,
Speaker 3: is that's the time where correlations breakdown. So we were
Speaker 3: trying to get away, get more floating rate exposures, but
Speaker 3: still believing that the balance sheet on the corporate and
Speaker 3: consumer side were very strong. Now you travel through twenty
Speaker 3: twenty four, I think that's where we thought if you
Speaker 3: go back to that initial construct of fundamentals technical valuations,
Speaker 3: where valuations were getting to a point where they were
Speaker 3: not giving you any room for error on fundamentals and
Speaker 3: technicals deteriorating, that's where we moved away from corporate balance
Speaker 3: sheets and got it started to build up our balanced again,
Speaker 3: which was government balance sheets. So we were coming into
Speaker 3: twenty twenty five with the least amount of corporate exposure,
Speaker 3: least amount of credit overweight that we've ever had in
Speaker 3: the last five years, right, so the ballast was a
Speaker 3: lot more. Now the month of April goes back into
Speaker 3: technicals deteriorating, valuations adjusting, and future fundamentals at least potentially deteriorating.
Speaker 3: Given that we are going to be in a low
Speaker 3: growth environment, we can discuss whether it's going to be
Speaker 3: high or temporarily high inflation. At that point, that gives
Speaker 3: us a loosening of valuations, and we are slowly and
Speaker 3: steadily trying to go back into corporate balance sheets which
Speaker 3: are very strong, and then to now compensate us for
Speaker 3: at least fifty percent of recession coming through in the
Speaker 3: next twelve months. So that's how we sort of philosophically
Speaker 3: and a processwise think about which balance sheet to investment.
Speaker 3: Apart from all the hard work that are analysts, we
Speaker 3: have about one hundred and fifty analysts out of the
Speaker 3: two hundred and twenty five investors on the team, so
Speaker 3: very bottom up focused. That's where I think a lot
Speaker 3: of the hard work gets done in picking out the
Speaker 3: best ones to invest in. After that top down coom, I.
Speaker 1: Do want to ask a little bit on valuations. You know,
Speaker 1: are there value measures that you used to guide your decisions?
Speaker 3: So yes, I think we do have some proprietary models
Speaker 3: that we've created. I heard Sam in the beginning of
Speaker 3: the call as well talk a few of them. We
Speaker 3: do incorporate some of that as well within our analysis,
Speaker 3: but then a lot of the hard work is done
Speaker 3: by the analysts. We have very specific and focused specialties
Speaker 3: that we bring to the table. Yes, your typical IG analysts,
Speaker 3: high yeld analysts, but then we have high yield and
Speaker 3: bank loans, two different parts of the capital structure, looking
Speaker 3: at the similar balance sheets from a different perspective of
Speaker 3: what they want to get out. So and then we
Speaker 3: have global as well as US focused analysts that that
Speaker 3: typically so, for example, a bank analyst sitting here in
Speaker 3: the US will give you a very good relative value
Speaker 3: of what should we be getting paid for this table
Speaker 3: balance sheet in the next twelve months of lower growth
Speaker 3: and slightly higher inflation. Similarly, I think we have value
Speaker 3: measures that our European analysts will come out with for
Speaker 3: European franchise banks that we have an overweight today within
Speaker 3: our portfolios as well. So I think that bottom up
Speaker 3: relative value is the focus that we spend a lot
Speaker 3: of time and effort on that decides actually how our
Speaker 3: portfolios are positioned at any given point.
Speaker 2: I'm curious just in terms of you know, thinking about
Speaker 2: duration and also fixed versus floating. For the first part
Speaker 2: duration Obviously, you know, if you were in duration last year,
Speaker 2: you kind of got crushed this year. How are you
Speaker 2: kind of thinking about exposures there? Are you trying to time,
Speaker 2: you know, getting into the long grand of the curve?
Speaker 2: And then you know, obviously given rate cut expectations, how
Speaker 2: are you feeling about fixed versus floating exposures?
Speaker 3: Too great? The last the first ten months or nine months,
Speaker 3: I would say, of last year, we're fantastic. I think
Speaker 3: bonds were delivering, and then the market started to focus
Speaker 3: on the inauguration day and started to set up for it.
Speaker 3: After the one hundred basis points cud so, Yes, a
Speaker 3: little disappointing Q four that hopefully we've made up a
Speaker 3: little bit of that in the first four months here
Speaker 3: of the year, I think for US nominal GDP, and
Speaker 3: then they've the monetary policy reaction to it or reaction
Speaker 3: function to it is other dominant two pieces. Yes, we
Speaker 3: have good amount of propriety models. We have a eight
Speaker 3: member macro team or developed market macro team that only
Speaker 3: focuses on country level balance sheet in the ramifications and
Speaker 3: interest rates curve exposures as well as then FX quite
Speaker 3: a bit of interest in that one, as you can
Speaker 3: imagine at the moment. But breaking all of that work
Speaker 3: down today, how our we position. We are a lot
Speaker 3: more confident in our conviction level on the zero to
Speaker 3: seven year part of the curve. I would say that
Speaker 3: even that zero part is less conviction because we are
Speaker 3: still not very sure of when exactly would the FED
Speaker 3: actually come in. I know the two presidents that they've
Speaker 3: set the moment that they very clearly see from the
Speaker 3: data that their tool mandate is in danger of achieving.
Speaker 3: I think they'll come in an act, or financial stability
Speaker 3: is at risk, they'll come in an act. Those are
Speaker 3: the two presidents. We don't think that in the next
Speaker 3: two to three months those presidents are going to be
Speaker 3: met or either one of them. So maybe in the
Speaker 3: back half. But then as you get out from that
Speaker 3: zero to one year, but then try to get out
Speaker 3: into that three to five year mark, our conviction level
Speaker 3: is much higher that FED will be dubbish. And they
Speaker 3: have quite a bit in the toolkit to actually bring
Speaker 3: down and anchor down the front part of the yield curve.
Speaker 3: So that's where most of our exposures are. And then
Speaker 3: you bring in the macro work that our team is doing.
Speaker 3: Then if you try to travel out from seven to
Speaker 3: thirty year part of the curve, a conviction level reduces
Speaker 3: because then the variables of demand supply, the variables of
Speaker 3: not having a very credible and sustainable deficit reduction plan,
Speaker 3: and then what does that mean for term premium in
Speaker 3: the long end. Those are the variables that reduce our
Speaker 3: conviction level whether we'll be eking out or we'll whether
Speaker 3: we'll be able to eke out that dual mandate from
Speaker 3: the long end of the treasury curve. So that's how
Speaker 3: we are sort of going through our conviction level, traveling
Speaker 3: the key it duration parts of the curve, if you will,
Speaker 3: and then trying to make sure that we have the
Speaker 3: highest conviction in parts of the curve that we are
Speaker 3: the most expressed. In another way simplistic way to say this,
Speaker 3: we are in steepeners, overweight in the back in the
Speaker 3: front end, and significant underweights to the twenty and thirty
Speaker 3: year part of the curve at the moment.
Speaker 2: So I want to focus on a little bit here
Speaker 2: just on the corporate side of things. Specifically, I'm wondering
Speaker 2: about how you really focus on those non investment grade positions,
Speaker 2: you know, one area that we take a look at
Speaker 2: here in Bloomberg Intelligence quite a bit is obviously fallen
Speaker 2: angels rising stars being a pretty big area just in
Speaker 2: terms of inefficiency. Is that kind of the main focus
Speaker 2: there when you're getting into high yeld positions or is
Speaker 2: there a little bit more to it?
Speaker 3: Two things. The first part spot on sam. I think
Speaker 3: that part of the curve crossover fallen angels rising stars,
Speaker 3: how we want to define it, It's almost like a
Speaker 3: lost category or lost focus area for a lot of
Speaker 3: investors and asset managers as they have grown in size,
Speaker 3: so it becomes very difficult for them to focus on
Speaker 3: that part of the curve. So invest some great managers,
Speaker 3: for example, will never look at a foreign angel or
Speaker 3: potential for angel situation because then there'll be force sellers
Speaker 3: in that environment, or the other way around, where high
Speaker 3: yield investors are always very cognizant of rising stars because
Speaker 3: that eats away into that potential yield or a negative
Speaker 3: yield environment versus their benchmark or market capuit debt capated
Speaker 3: benchmark that they have to beat. On the high l side,
Speaker 3: that becomes a fantastic high sort of alpha or high
Speaker 3: information ratio region for us, given that we have an
Speaker 3: analyst on both sides, and total return strategies allow us
Speaker 3: to actually take out alpha from this from this inefficiency.
Speaker 3: So I think we can talk about some of the
Speaker 3: auto sector names today which are very clearly priced for
Speaker 3: angel situation and is getting shunned by some of the
Speaker 3: IG investors. That becomes a fantastic one for us. Again, Yes,
Speaker 3: we have to look at the fundamentals and valuations apart
Speaker 3: from just focused on the technicals of foreign angels and
Speaker 3: advising stars. The other big part, the second point that
Speaker 3: we also focus on SAM is sort of differentiated. And
Speaker 3: that's why some of our results if you look back
Speaker 3: on the total return strategy of more consistent upside capture,
Speaker 3: more consistent avoiding the downside capture or standards being lower,
Speaker 3: is that we pick our best ized ideas from high year.
Speaker 3: We don't follow a sleeve approach. What do I mean
Speaker 3: by that? Our high yeal team typically every year looks
Speaker 3: at or any typical year looks at about eight hundred
Speaker 3: two one thousand issuers and they dwindle it down to
Speaker 3: about three hundred approximately for their high yield only strategy,
Speaker 3: which is trying to beat a debt gap weighted benchmark.
Speaker 3: What we are trying to do for total return strategy
Speaker 3: is we've built a process where we say that we
Speaker 3: don't want all those three hundred names because all those
Speaker 3: three hundred names might not have a total return catalyst today.
Speaker 3: So give us the top fifty to seventy five names
Speaker 3: that have a total return catalyst, are liquid enough and
Speaker 3: are in that single be low single bee to dower
Speaker 3: b range that they are actually providing much more spread
Speaker 3: pickup and you'll pick up versus what I could do
Speaker 3: in the high yeal side. So if I can try
Speaker 3: to encapsulate some of the comments I made at the
Speaker 3: beginning of the call where best ideas, fundament technical valuations,
Speaker 3: and bottom up focus. This high yeer process then allows
Speaker 3: us to allocate to best ideas from a team that
Speaker 3: is already looking at best ideas for that high yeld strategy.
Speaker 3: So looking at the higher teams information ratio and sharp
Speaker 3: ratios over years, and then you allocate in a way
Speaker 3: that you're picking out the best of their best if
Speaker 3: you will, and allocating to the total return strategy that
Speaker 3: in itself for every toller that can gets invested for
Speaker 3: the total return strategy in high YEO is much more
Speaker 3: efficiently used very similar to what we do in investment
Speaker 3: grade corporates securitize assets and then when we investment in
Speaker 3: government balance sheets as well, so that mentality and process
Speaker 3: is scaled up in a way that it brings in
Speaker 3: those ideas into total return accordingly.
Speaker 1: So you mentioned you know you have different sectors in
Speaker 1: the portfolio. Do you have any process in place to
Speaker 1: keep the portfolio diversified or is it more about just
Speaker 1: finding the best opportunities.
Speaker 3: We have guidelines that keeps us diversified. We have guidelines
Speaker 3: of sector limits, guidelines on subsector limits that we that
Speaker 3: we keep up, issuer limits that we that we keep up.
Speaker 3: That is graded by when you know the issuer limits
Speaker 3: for below investment grade in out of index even within
Speaker 3: the investigate land securities also securitized being our top allocation
Speaker 3: at this point is kepped at half of the fund
Speaker 3: or fifty percent of the strategy can be in any
Speaker 3: given sector. I think all of these limitations part one
Speaker 3: is trying to make sure that we are at any
Speaker 3: given point diversified enough for the strategy that there our
Speaker 3: clients are trying to allocate to. Also, I think we
Speaker 3: are very cognizant that our clients have a lot of choices.
Speaker 3: They have great sector funds at any given point that
Speaker 3: they can allocate to. So we don't want to be
Speaker 3: that sector fund risk reward that a client is trying
Speaker 3: to get. So we will never be a high yeal fund,
Speaker 3: or a or an EM fund or a bank loan fund.
Speaker 3: I think that there are other fantastics str is that
Speaker 3: other parts of our franchise run, but I think this
Speaker 3: one is the best ideas both from a top down
Speaker 3: sector allocation as well as from a bottom up security
Speaker 3: selection at any given point. So yes, our guidelines track
Speaker 3: all of that, and we have extensive sort of second
Speaker 3: and third layer of risk teams as well that keeps
Speaker 3: us in our success zone, if you will, so that
Speaker 3: we are not steering anywhere close to our gutrails of
Speaker 3: risk as well as diversification on that board.
Speaker 1: And now, are you seeing any opportunities outside the US?
Speaker 3: Yes, I think, and it is just not since April second,
Speaker 3: just to be clear on that, I think we were
Speaker 3: steering our exposure, for example, on the corporate side, to
Speaker 3: be a little bit more overweight, to becoming financial heavy,
Speaker 3: not only because financials were doing really well from a
Speaker 3: tariffs and regulation perspective, but then financials were significantly outperforming
Speaker 3: non financials of fundamental balance sheet health. I know, Q
Speaker 3: one of twenty twenty three, we went through a regional
Speaker 3: banking scare here in the US, but at that same point,
Speaker 3: one of the big Jesent banks were actually getting upgraded
Speaker 3: in the second week after the crisis that we were
Speaker 3: going through in the beginning part of March of twenty
Speaker 3: twenty three. So I think a lot of the franchise
Speaker 3: banks have done a lot of hard work after the GFC,
Speaker 3: and regulations have played a big part as well. A
Speaker 3: lot of them are now high quality single A banks.
Speaker 3: But when you look at what we are getting paid
Speaker 3: in terms of spread levels here in the US versus
Speaker 3: what we could as a franchise banks in Europe, quite
Speaker 3: a bit more spread compression potential as well as starting
Speaker 3: yield that you could get to. So yes, some of
Speaker 3: that banking exposure that we had was in European financials.
Speaker 3: We could apply that same logic of cleaning up the
Speaker 3: balance sheet becoming a lot more debt holder friendly over
Speaker 3: the years after that twenty twenty twelve twenty thirteen crisis
Speaker 3: that that region went through. I think those banks are
Speaker 3: also very fundamentally strong and do provide that valuation pickup.
Speaker 3: So we were allocated to some of those sort of
Speaker 3: balance sheets in financial balance sheets in Europe during this time.
Speaker 2: I want to switch gears here a little bit, get
Speaker 2: into the electronic trading side of things, which you know
Speaker 2: obviously on the fixed income side lagging relative to equities.
Speaker 2: But I'm wondering how you all are thinking about adoption
Speaker 2: of electronic trading and what sort of impact that's going
Speaker 2: to have, you know, for the corporate bond markets as
Speaker 2: a whole, just in terms of liquidity and how you're
Speaker 2: going to be able to trade your portfolio.
Speaker 3: So I'm significantly forward if you had the same exact
Speaker 3: conversation probably even three years back, not even you don't
Speaker 3: have to go decade back. Decade back, yes, I mean
Speaker 3: we weren't talking about these concepts at all. Technology, the
Speaker 3: willingness of strategies to actually trade on these venues, both
Speaker 3: from the cell side and the buy side. So it
Speaker 3: required quite a bit of not only technology investment, but
Speaker 3: resources within the team and incentivizing those resources to get
Speaker 3: there as well. So I think all of those pieces
Speaker 3: had to be done correctly over the last three to
Speaker 3: five years, and that's what we've done. So quite a
Speaker 3: bit of our ETF trading today goes through portfolio channel.
Speaker 3: Quite a bit of our ETF today we are able
Speaker 3: to take about eighty percent seventy five to eighty percent
Speaker 3: of any creates and redeems in kind in our even
Speaker 3: man ETF. All of that is the byproduct of all
Speaker 3: the work that our traders, not only on the investment
Speaker 3: grate side, but even on the high yeld side that
Speaker 3: we've seen that have done over the years. We're bearing
Speaker 3: the fruits of that. And then yes, I think some
Speaker 3: of the counterparties on the other side have done a
Speaker 3: fantastic job of allocating resources and allocating resources in a
Speaker 3: way that helps their partners on the other side. So
Speaker 3: liquid is better, but ask exactly is decreasing in the
Speaker 3: secondary market and the pinpointed risk exposures that you can
Speaker 3: get in a basket level are also very sort of
Speaker 3: appealing to us as investors. Financials versus non financials, decompression trades,
Speaker 3: if you want to put up triple B versus double
Speaker 3: B on those sides, I think both those are also
Speaker 3: getting very liquidly done. So you can customize now to
Speaker 3: a level some of these portfolios and baskets so that
Speaker 3: you can sort of find junior risk exposures within portfolios
Speaker 3: in very liquidly.
Speaker 2: So as we're closing this conversation out I'm wondering. Obviously,
Speaker 2: as a fixed income investor, the big concern is about
Speaker 2: the downside. So I'm wondering, in your eyes, you know,
Speaker 2: what's the biggest area of concern, Maybe one or two
Speaker 2: things that you're looking out for through the rest of
Speaker 2: the year.
Speaker 3: I mean, deficit reduction plan deficits is definitely top of mind.
Speaker 3: Maybe I'm going to sound like a broken record. We
Speaker 3: did that in our outlook since October November last year,
Speaker 3: we've been pointing it out market is getting a lot
Speaker 3: more cognizance, deepening is becoming a lot more forceful, almost
Speaker 3: like a consensus straight at this point. That keeps us
Speaker 3: up quite a bit at this point. Profit margins is
Speaker 3: another one. I know, we did not hear anything about that.
Speaker 3: It was just about uncertainty that we heard in this
Speaker 3: earning earning season at this point, and I think that
Speaker 3: one is sort of your next step towards before you
Speaker 3: start seeing some demand destruction from a labor market perspective
Speaker 3: as well as from a consumer and GDP perspective on
Speaker 3: the back half of the year. So profit margins is
Speaker 3: another one. All that sort of that term will encapsulate
Speaker 3: sort of whether this inflation is temporary, whether balance sheets
Speaker 3: are able to pass down some of that inflation to
Speaker 3: consumers and small businesses on the other side, or are
Speaker 3: corporate margin is going to get start to get affected,
Speaker 3: which then is a precursor towards your labor market weakness
Speaker 3: coming through. So deficits and profit margins, those are the
Speaker 3: two spots that we have focused on.
Speaker 1: It's going to be interesting to watch this shall This
Speaker 1: was great. Thank you again for joining us.
Speaker 3: Thanks for having me on, David. Thanks Sam and Sam.
Speaker 1: Thank you for joining me as my coast today.
Speaker 2: Yeah, thanks for having me.
Speaker 1: This was great. Until our next episode. This is David
Speaker 1: Cone with Inside Active