WEBVTT - Morgan Stanley’s Khanduja on Bond Risk Reward 0:00:13.960 --> 0:00:17.279 Welcome to Inside Active, a podcast about active managers that 0:00:17.320 --> 0:00:20.040 goes beyond sound bites and headlines and looks deeper into 0:00:20.079 --> 0:00:25.040 their processes, challenges, and philosophies and security selection. I'm David Cohne, 0:00:25.040 --> 0:00:28.000 i lead mutual fund and active research at Bloomberg Intelligence. 0:00:28.240 --> 0:00:31.200 Today my co host is Sam Geier, a corporate credit 0:00:31.240 --> 0:00:34.559 strategist for Bloomberg Intelligence. Sam, thank you for joining me 0:00:34.600 --> 0:00:38.080 today on our actually it's our first fixed income Bucust episode. 0:00:38.120 --> 0:00:39.600 Thanks for having me excited to be here. 0:00:40.560 --> 0:00:43.400 So on Monday, you and Noel put out a research 0:00:43.479 --> 0:00:46.120 note on investment grade bonds, and you know, we know 0:00:46.240 --> 0:00:49.280 April was filled with volatility. What could be in store 0:00:49.320 --> 0:00:52.400 for the Bloomberg US Corporate Bond Index in the weeks ahead. 0:00:53.120 --> 0:00:56.800 Yeah, so, I mean, obviously, as you said, April pretty 0:00:56.800 --> 0:01:01.960 wild ride for most asset classes, but for investment grades specifically. 0:01:01.960 --> 0:01:04.399 You know, we saw spreads pushed to some of the 0:01:04.400 --> 0:01:07.560 widest levels we've seen over the past year before a 0:01:07.560 --> 0:01:10.200 little bit of moderation. But you know, in terms of 0:01:10.319 --> 0:01:12.319 over the next couple of months, in our eyes, we 0:01:12.360 --> 0:01:16.760 see spread staying pretty range bound, sticking right around that 0:01:16.840 --> 0:01:19.280 one hundred basis point mark. That we're at right now, 0:01:19.360 --> 0:01:21.560 but you know, the market has had a lot of 0:01:21.560 --> 0:01:24.560 time to kind of digest what's going on with tariffs 0:01:24.640 --> 0:01:28.200 and what that might mean. We're definitely wide from where 0:01:28.240 --> 0:01:30.880 we were, you know, beginning of the year, where spreads 0:01:30.880 --> 0:01:33.280 were around some of the titles levels we've seen over 0:01:33.319 --> 0:01:36.959 the history of the index. But you know, we've seen 0:01:36.959 --> 0:01:40.000 some improvement across a couple of different metrics. Issuance has 0:01:40.000 --> 0:01:44.080 spen pretty solid. ETF flows is another area that we've 0:01:44.080 --> 0:01:47.000 been seeing over the past you know week, We've seen 0:01:47.040 --> 0:01:51.440 a little bit of improvement there, but you know, looking 0:01:51.840 --> 0:01:55.080 kind of a little bit longer term over the remainder 0:01:55.120 --> 0:01:57.960 of the year, in our eyes, we think spreads could push, 0:01:58.240 --> 0:02:01.200 you know, wide from where we're at right now. We 0:02:01.280 --> 0:02:04.120 have an ordinarily squares model that we look at on 0:02:04.120 --> 0:02:07.440 our end for investment grade. We have two models there. 0:02:07.480 --> 0:02:09.840 Both are kind of pointing to the one forty five 0:02:10.240 --> 0:02:13.640 one sixty five basis point range, so indicating a little 0:02:13.639 --> 0:02:15.560 bit of a mispricing there. So we think spreads can 0:02:15.600 --> 0:02:17.760 definitely push wider from from where we're at right now. 0:02:18.560 --> 0:02:21.880 Right well, speaking of spreads and just bonds in general, 0:02:21.919 --> 0:02:25.440 i'd like to welcome our first bond portfolio manager. Yest 0:02:25.560 --> 0:02:31.160 On inside Active Visual Conduja is a managing director with 0:02:31.240 --> 0:02:34.919 Morgan Stanley Investment Management. He's head of the broad markets 0:02:34.919 --> 0:02:39.079 Fixed Income team and a portfolio manager for funds including 0:02:39.160 --> 0:02:42.200 the Eaton Vance Total Return Bond Fund, which has a 0:02:42.240 --> 0:02:44.600 ticker of ei b a X and the Eaton Vance 0:02:44.639 --> 0:02:47.360 Total Return Bond ETF, which has a ticker of the 0:02:47.520 --> 0:02:49.799 e V t R Vishal, thank you so much for 0:02:49.880 --> 0:02:50.640 joining us today. 0:02:51.240 --> 0:02:55.080 Thanks for having me on, David, so Vishel, what are. 0:02:55.000 --> 0:02:57.320 Your thoughts on you know what Sam just mentioned, you know, 0:02:57.360 --> 0:03:01.200 with April's volatility. 0:03:00.960 --> 0:03:04.200 Quite a bit of it, and there was there were 0:03:04.360 --> 0:03:07.400 very clear signs, I think end of the year last 0:03:07.480 --> 0:03:10.320 year that we will be entering into a volatile period 0:03:10.320 --> 0:03:15.520 this year. The pendulum swings on the economic outcomes are 0:03:15.639 --> 0:03:22.079 very dependent on two very dominant policies, the fiscal and 0:03:22.120 --> 0:03:25.239 the monetary policy, and both of them are effectuating change 0:03:26.000 --> 0:03:29.480 here as we speak. So yes, I think the volatility 0:03:29.520 --> 0:03:32.880 is going to be significantly high this year. We've already 0:03:32.880 --> 0:03:35.200 witnessed quite a bit of it, April being a primary 0:03:35.200 --> 0:03:37.680 month there. But I think one thing that was very 0:03:37.680 --> 0:03:42.880 clear from April was that bards delivered on their dual mandate, 0:03:42.960 --> 0:03:46.160 which was income, total return, especially the zero to ten 0:03:46.240 --> 0:03:49.320 year part, and then the negative correlation. Yes, we can 0:03:49.360 --> 0:03:53.320 speak about the different parts on the curve of how 0:03:53.400 --> 0:03:55.960 we behaved during the entire month of April, but overall, 0:03:57.040 --> 0:04:02.360 bonds did what they were supposed to do in client portfolios. Great. 0:04:02.720 --> 0:04:06.120 Now, if we talk about the total total return bond strategy, 0:04:06.160 --> 0:04:07.760 which you know I mentioned both the mutual fund and 0:04:07.800 --> 0:04:11.840 the ETF, what is the investment process you when you're 0:04:11.880 --> 0:04:15.240 managing this portfolio. How does that work the two funds? 0:04:16.000 --> 0:04:19.240 I think, David, very if you can take a big 0:04:19.560 --> 0:04:23.360 step back, I think we are trying to deliver on 0:04:23.400 --> 0:04:26.680 that dual mandate. We're trying to deliver to our clients 0:04:26.880 --> 0:04:30.200 that consistency of income and total return. And then we 0:04:30.279 --> 0:04:33.679 are also very cognizant of how clients are using fixed 0:04:33.720 --> 0:04:38.000 and come allocations in their overall acid allocation framework, if 0:04:38.040 --> 0:04:41.039 you will, so keeping that in mind, we want to 0:04:41.120 --> 0:04:45.400 make it very clear that these are primarily bond portfolios. 0:04:45.400 --> 0:04:48.880 We are not trying to deviate from that basic feature 0:04:48.920 --> 0:04:52.080 of bonds. Also, I think the other thing that is 0:04:52.320 --> 0:04:54.080 going to be very clear as you look through these 0:04:54.240 --> 0:04:58.279 that these are very transparent, long only bottom up focused. 0:04:58.360 --> 0:05:02.360 So you shouldn't expect these portfolios on five to six 0:05:02.400 --> 0:05:05.039 thousand CUSIPs that you would typically see in some of 0:05:05.080 --> 0:05:08.040 the passive portfolios out there, or the benchmarks as well, 0:05:08.080 --> 0:05:11.120 which probably have double the amount of those CUSIPs. Should 0:05:11.120 --> 0:05:14.159 be very focused on three to five hundred bonds bottom 0:05:14.240 --> 0:05:16.600 up selected, and that's where we think that the most 0:05:16.640 --> 0:05:20.160 consistent part of alpha comes within fixed income. Happy to 0:05:20.200 --> 0:05:23.520 elaborate more on that, but that's primarily primarily what we 0:05:23.560 --> 0:05:25.280 are trying to achieve in these two portfolios. 0:05:25.800 --> 0:05:27.760 So Vishell, I want to kind of dig in just 0:05:27.800 --> 0:05:30.920 in terms of what your due diligence process looks like. 0:05:31.320 --> 0:05:35.159 You know, is the objective more broadly kind of focused 0:05:35.200 --> 0:05:37.400 on being paid back for all the bonds that you 0:05:37.480 --> 0:05:40.400 invest in. Is it about beta exposure or does it 0:05:40.440 --> 0:05:42.599 kind of vary across the different asset classes that you 0:05:42.640 --> 0:05:47.799 work invaries. 0:05:45.520 --> 0:05:48.080 And varies by time period as well. But I think 0:05:48.080 --> 0:05:52.080 there are very the basic philosophy remains the same. There 0:05:52.080 --> 0:05:54.680 are three pillars of what we look at when we 0:05:54.720 --> 0:05:57.800 are trying to make an investment on any bond. It's 0:05:57.839 --> 0:06:01.280 the fundamentals we are digging through, whether it's a corporate 0:06:01.279 --> 0:06:03.400 balance sheet or a consumer balance sheet, or even a 0:06:03.440 --> 0:06:06.239 country or a municipality balance sheet that we are digging 0:06:06.279 --> 0:06:09.680 to invest in. So fundamentals are very important to dig 0:06:09.720 --> 0:06:13.800 in that step number one typically for US, technicals are 0:06:13.839 --> 0:06:16.760 the next one. Who are the buyers and sellers of 0:06:16.800 --> 0:06:19.600 this bond? And what is the economic or non economic 0:06:19.680 --> 0:06:23.240 incentive to be involved in that sector, asset class, or 0:06:23.279 --> 0:06:27.280 band specifically? And then valuations? What do valuations tell us 0:06:27.320 --> 0:06:30.159 in terms of how much is already priced in and 0:06:30.200 --> 0:06:34.040 how much is not? So those three sort of verticals 0:06:34.320 --> 0:06:37.600 help us decide or answer the question, is there a 0:06:37.640 --> 0:06:42.400 catalyst to be able to get that extra total return, 0:06:42.640 --> 0:06:47.400 extra income, extra spread compression from this particular investment in 0:06:47.480 --> 0:06:51.480 our portfolio versus what the benchmark owns or versus what 0:06:51.520 --> 0:06:54.760 the other alternatives are to invest in that part of 0:06:54.800 --> 0:06:57.400 the curve. I'll give you also one more piece there 0:06:57.560 --> 0:07:02.159 of information our mentality are investing or doing. Our due 0:07:02.160 --> 0:07:06.200 diligence on any investment is focused on what can we 0:07:06.240 --> 0:07:11.000 buy that today gives us better return for similar amount 0:07:11.040 --> 0:07:15.400 of risk as the benchmark or a passive allocation or 0:07:15.440 --> 0:07:18.360 in certain different times we also ask ourselves the question, 0:07:18.840 --> 0:07:22.120 which is what can we actually invest in that gives 0:07:22.200 --> 0:07:26.560 us similar amount of return but lower risk than what 0:07:27.440 --> 0:07:31.040 can typically a passive benchmark provide today. So that mentality 0:07:31.080 --> 0:07:35.200 of risk reward also governs what exactly goes out or 0:07:35.240 --> 0:07:37.880 goes in into the portfolio at any given point. 0:07:39.240 --> 0:07:42.120 Now you know there's both the mutual fund in the ETF. 0:07:42.720 --> 0:07:44.960 How different are they are they? You know, pretty much 0:07:45.000 --> 0:07:46.400 the same, just different rappers. 0:07:48.120 --> 0:07:51.440 The second statement actually answers the question, David, But I'll 0:07:51.560 --> 0:07:53.360 I'll give you a little bit more background on that 0:07:53.440 --> 0:07:57.160 of how we actually launch this in why the reasoning 0:07:57.560 --> 0:08:01.600 for having the two one I think the similarity is. 0:08:01.640 --> 0:08:05.040 Let's walk through those both of them are in the 0:08:05.080 --> 0:08:08.560 core plus sort of category, if you will. That's what 0:08:08.600 --> 0:08:12.520 we are trying to or striving to be consistently in 0:08:12.560 --> 0:08:16.800 that top quintile and consistently avoid the bottom half of 0:08:16.840 --> 0:08:20.960 that peer group, if you will. So we have done 0:08:20.960 --> 0:08:23.680 our analysis in terms of how much versus a typical 0:08:23.760 --> 0:08:27.760 benchmark do we need to consistently outperform by to be 0:08:27.840 --> 0:08:31.440 in that top quintile, and then how much underperformance do 0:08:31.480 --> 0:08:33.480 we need to avoid to avoid the bottom a half 0:08:33.520 --> 0:08:36.520 of the of the peer group. So that sort of 0:08:36.880 --> 0:08:39.360 versus the benchmark versus the peer group and what are 0:08:39.400 --> 0:08:42.520 we trying to achieve is very clear within the team 0:08:43.000 --> 0:08:46.960 at any human point. The differences now are very respect 0:08:47.040 --> 0:08:49.880 are very respectful to the vehicles or the rappers, as 0:08:49.920 --> 0:08:52.360 you mentioned. Even on that one, the mutual fund, the 0:08:52.400 --> 0:08:58.760 forty act can do a little bit more below investment gage, 0:08:58.760 --> 0:09:02.800 which is typically your spread risk sector that we allocate 0:09:02.880 --> 0:09:06.760 to at particular times within the economic pycho, we can 0:09:06.760 --> 0:09:08.960 do about thirty five percent below and Mustrom grade, so 0:09:09.000 --> 0:09:12.160 that truly brings in the best ideas from our high 0:09:12.200 --> 0:09:15.360 yal team into the portfolio when the time is right. 0:09:15.720 --> 0:09:19.360 In the specific bonds, the ETF can do twenty percent 0:09:19.400 --> 0:09:24.520 below in Mustrom grade in bond math terms. The other 0:09:24.559 --> 0:09:28.160 differences could be explained in a way where the tracking 0:09:28.240 --> 0:09:31.440 error allowance for the mutual fund is zero to four 0:09:31.559 --> 0:09:35.440 hundred basis points versus the tracking error allowance for ETF 0:09:35.600 --> 0:09:40.400 zero to two hundred. Even with those differences, the similarities 0:09:40.440 --> 0:09:43.840 of trying to achieve that top quintile we think mathematically 0:09:43.920 --> 0:09:47.280 is possible and is consistently possible to deliver on it. 0:09:47.320 --> 0:09:49.880 So we wanted to provide those two wrappers for clients 0:09:49.880 --> 0:09:54.559 who are now debating towards active ETFs in their allocations 0:09:54.600 --> 0:09:56.679 and be able to do that in a liquid fashion. 0:09:57.120 --> 0:10:00.800 And then respecting what we can deliver within our philosophy 0:10:00.840 --> 0:10:04.280 and process of total return franchise, and then within within 0:10:04.320 --> 0:10:06.680 that ETF rapper which is a lot more liquid versus 0:10:06.720 --> 0:10:07.360 the mutual fund. 0:10:08.520 --> 0:10:10.880 Shall I want to get back to kind of what 0:10:11.120 --> 0:10:14.320 we've what we were talking about earlier, just in terms of, 0:10:14.520 --> 0:10:16.599 you know, the current state of the market and the 0:10:16.679 --> 0:10:20.079 volatility that we've been seeing. You know, looking at the 0:10:20.320 --> 0:10:22.600 different asset classes that you're invested in in these in 0:10:22.640 --> 0:10:27.280 these funds, you know, treasuries, corporates, securitized as well. You know, 0:10:27.320 --> 0:10:29.840 out of those three kind of what does the relative 0:10:29.880 --> 0:10:33.080 value proposition look like? You know, are you seeing a 0:10:33.080 --> 0:10:36.000 little bit more advantage to one over the other, especially 0:10:36.040 --> 0:10:38.680 given the uncertainty that we might be seeing over the 0:10:38.720 --> 0:10:40.120 next couple of quarters. 0:10:40.800 --> 0:10:45.559 Yeah. Important and uh and a really good question, Sam. 0:10:46.000 --> 0:10:48.680 I think if we take a step back, those three 0:10:49.080 --> 0:10:51.800 sectors that you talked about, or you questioned me on, 0:10:52.640 --> 0:10:54.800 are the three big balance sheets that be as bond 0:10:54.800 --> 0:10:57.720 investors invest in, Right, we have a government balent sheet 0:10:57.720 --> 0:11:00.760 that we get to invest. There's a big corporate balance 0:11:00.800 --> 0:11:03.160 sheet that the invest, whether it's investment, great high yield 0:11:03.160 --> 0:11:06.839 bank loans, etc. Both US and global. And then there 0:11:06.880 --> 0:11:09.680 is a consumer balance sheet or secured balance sheet in 0:11:09.720 --> 0:11:12.800 the US. I think that is a very liquid way 0:11:12.800 --> 0:11:15.000 that you can invest in the securitized market. So those 0:11:15.040 --> 0:11:18.640 are our three big pillars of what the portfolio at 0:11:18.679 --> 0:11:21.240 any given point will be made of. I think right 0:11:21.400 --> 0:11:24.559 after twenty twenty, I think prior to the vaccine came 0:11:24.679 --> 0:11:28.120 coming out, investment grade corporates were dominating our spread, duration, 0:11:28.320 --> 0:11:31.840 attribution within the within the portfolio, secured was much less, 0:11:31.840 --> 0:11:34.960 and we were slowly with steadily reducing our government balan 0:11:35.040 --> 0:11:38.320 sheet exposure, which was a ballast of the portfolio. We 0:11:38.400 --> 0:11:42.120 traveled through twenty twenty one and twenty twenty one, especially 0:11:42.480 --> 0:11:44.960 with a lot more corporate balance sheets on the billow 0:11:45.000 --> 0:11:49.559 investment grade side, and then increased our secured allocation as 0:11:49.559 --> 0:11:53.160 well securitized credit again trying to access that consumer balance sheet, 0:11:53.160 --> 0:11:57.000 which was very strong during that time as well. Twenty 0:11:57.040 --> 0:11:59.320 twenty two, as we all know, we were hiding away 0:11:59.360 --> 0:12:02.320 from anything that behaves like a bond or anything that 0:12:02.360 --> 0:12:05.680 had a fixed rate bond feature because of what was 0:12:05.720 --> 0:12:08.440 happening with growth and inflation and the fact trying to 0:12:08.440 --> 0:12:10.920 catch up. So the quadrant was high growth, high inflation, 0:12:11.320 --> 0:12:17.040 which typically, as we've learned through CFA and other programs, 0:12:17.120 --> 0:12:19.880 is that's the time where correlations breakdown. So we were 0:12:19.880 --> 0:12:24.120 trying to get away, get more floating rate exposures, but 0:12:24.280 --> 0:12:26.320 still believing that the balance sheet on the corporate and 0:12:26.320 --> 0:12:30.520 consumer side were very strong. Now you travel through twenty 0:12:30.559 --> 0:12:33.480 twenty four, I think that's where we thought if you 0:12:33.559 --> 0:12:37.200 go back to that initial construct of fundamentals technical valuations, 0:12:37.600 --> 0:12:40.960 where valuations were getting to a point where they were 0:12:41.080 --> 0:12:44.280 not giving you any room for error on fundamentals and 0:12:44.320 --> 0:12:48.800 technicals deteriorating, that's where we moved away from corporate balance 0:12:48.840 --> 0:12:52.120 sheets and got it started to build up our balanced again, 0:12:52.160 --> 0:12:55.400 which was government balance sheets. So we were coming into 0:12:55.400 --> 0:13:00.199 twenty twenty five with the least amount of corporate exposure, 0:13:01.040 --> 0:13:03.520 least amount of credit overweight that we've ever had in 0:13:03.559 --> 0:13:06.280 the last five years, right, so the ballast was a 0:13:06.320 --> 0:13:09.839 lot more. Now the month of April goes back into 0:13:09.920 --> 0:13:16.880 technicals deteriorating, valuations adjusting, and future fundamentals at least potentially deteriorating. 0:13:16.920 --> 0:13:18.160 Given that we are going to be in a low 0:13:18.200 --> 0:13:20.880 growth environment, we can discuss whether it's going to be 0:13:20.960 --> 0:13:24.600 high or temporarily high inflation. At that point, that gives 0:13:24.679 --> 0:13:27.080 us a loosening of valuations, and we are slowly and 0:13:27.080 --> 0:13:31.200 steadily trying to go back into corporate balance sheets which 0:13:31.200 --> 0:13:35.240 are very strong, and then to now compensate us for 0:13:35.400 --> 0:13:39.160 at least fifty percent of recession coming through in the 0:13:39.200 --> 0:13:42.120 next twelve months. So that's how we sort of philosophically 0:13:42.160 --> 0:13:45.160 and a processwise think about which balance sheet to investment. 0:13:45.320 --> 0:13:47.839 Apart from all the hard work that are analysts, we 0:13:47.880 --> 0:13:49.959 have about one hundred and fifty analysts out of the 0:13:50.000 --> 0:13:52.280 two hundred and twenty five investors on the team, so 0:13:52.480 --> 0:13:55.480 very bottom up focused. That's where I think a lot 0:13:55.480 --> 0:13:57.640 of the hard work gets done in picking out the 0:13:57.679 --> 0:14:01.480 best ones to invest in. After that top down coom, I. 0:14:01.440 --> 0:14:04.560 Do want to ask a little bit on valuations. You know, 0:14:04.760 --> 0:14:08.000 are there value measures that you used to guide your decisions? 0:14:09.040 --> 0:14:11.720 So yes, I think we do have some proprietary models 0:14:11.760 --> 0:14:15.000 that we've created. I heard Sam in the beginning of 0:14:15.000 --> 0:14:17.360 the call as well talk a few of them. We 0:14:17.440 --> 0:14:22.280 do incorporate some of that as well within our analysis, 0:14:22.600 --> 0:14:26.000 but then a lot of the hard work is done 0:14:26.000 --> 0:14:31.640 by the analysts. We have very specific and focused specialties 0:14:31.640 --> 0:14:35.280 that we bring to the table. Yes, your typical IG analysts, 0:14:35.360 --> 0:14:37.840 high yeld analysts, but then we have high yield and 0:14:37.880 --> 0:14:40.520 bank loans, two different parts of the capital structure, looking 0:14:40.560 --> 0:14:44.920 at the similar balance sheets from a different perspective of 0:14:44.960 --> 0:14:47.480 what they want to get out. So and then we 0:14:47.520 --> 0:14:51.080 have global as well as US focused analysts that that 0:14:52.000 --> 0:14:55.480 typically so, for example, a bank analyst sitting here in 0:14:55.520 --> 0:14:58.160 the US will give you a very good relative value 0:14:58.160 --> 0:15:00.760 of what should we be getting paid for this table 0:15:00.840 --> 0:15:03.160 balance sheet in the next twelve months of lower growth 0:15:03.360 --> 0:15:06.680 and slightly higher inflation. Similarly, I think we have value 0:15:06.720 --> 0:15:10.120 measures that our European analysts will come out with for 0:15:10.280 --> 0:15:13.600 European franchise banks that we have an overweight today within 0:15:13.680 --> 0:15:16.160 our portfolios as well. So I think that bottom up 0:15:16.640 --> 0:15:20.080 relative value is the focus that we spend a lot 0:15:20.080 --> 0:15:23.720 of time and effort on that decides actually how our 0:15:23.760 --> 0:15:26.520 portfolios are positioned at any given point. 0:15:27.920 --> 0:15:31.040 I'm curious just in terms of you know, thinking about 0:15:31.240 --> 0:15:34.640 duration and also fixed versus floating. For the first part 0:15:34.720 --> 0:15:38.080 duration Obviously, you know, if you were in duration last year, 0:15:38.160 --> 0:15:41.320 you kind of got crushed this year. How are you 0:15:41.400 --> 0:15:44.920 kind of thinking about exposures there? Are you trying to time, 0:15:45.080 --> 0:15:47.880 you know, getting into the long grand of the curve? 0:15:48.400 --> 0:15:52.640 And then you know, obviously given rate cut expectations, how 0:15:52.640 --> 0:15:55.000 are you feeling about fixed versus floating exposures? 0:15:55.000 --> 0:16:01.280 Too great? The last the first ten months or nine months, 0:16:01.320 --> 0:16:03.800 I would say, of last year, we're fantastic. I think 0:16:03.840 --> 0:16:07.440 bonds were delivering, and then the market started to focus 0:16:07.440 --> 0:16:09.440 on the inauguration day and started to set up for it. 0:16:09.800 --> 0:16:12.000 After the one hundred basis points cud so, Yes, a 0:16:12.000 --> 0:16:15.280 little disappointing Q four that hopefully we've made up a 0:16:15.320 --> 0:16:18.680 little bit of that in the first four months here 0:16:19.600 --> 0:16:24.200 of the year, I think for US nominal GDP, and 0:16:24.280 --> 0:16:27.200 then they've the monetary policy reaction to it or reaction 0:16:27.320 --> 0:16:30.800 function to it is other dominant two pieces. Yes, we 0:16:30.920 --> 0:16:34.640 have good amount of propriety models. We have a eight 0:16:34.720 --> 0:16:38.120 member macro team or developed market macro team that only 0:16:38.160 --> 0:16:43.920 focuses on country level balance sheet in the ramifications and 0:16:44.240 --> 0:16:48.400 interest rates curve exposures as well as then FX quite 0:16:48.440 --> 0:16:50.600 a bit of interest in that one, as you can 0:16:50.640 --> 0:16:54.400 imagine at the moment. But breaking all of that work 0:16:54.480 --> 0:16:58.000 down today, how our we position. We are a lot 0:16:58.080 --> 0:17:01.200 more confident in our conviction level on the zero to 0:17:01.280 --> 0:17:03.960 seven year part of the curve. I would say that 0:17:03.960 --> 0:17:07.040 even that zero part is less conviction because we are 0:17:07.080 --> 0:17:11.120 still not very sure of when exactly would the FED 0:17:11.200 --> 0:17:13.480 actually come in. I know the two presidents that they've 0:17:13.480 --> 0:17:17.440 set the moment that they very clearly see from the 0:17:17.520 --> 0:17:21.000 data that their tool mandate is in danger of achieving. 0:17:21.000 --> 0:17:23.920 I think they'll come in an act, or financial stability 0:17:24.000 --> 0:17:25.520 is at risk, they'll come in an act. Those are 0:17:25.560 --> 0:17:27.840 the two presidents. We don't think that in the next 0:17:27.880 --> 0:17:29.760 two to three months those presidents are going to be 0:17:29.760 --> 0:17:31.960 met or either one of them. So maybe in the 0:17:32.000 --> 0:17:34.920 back half. But then as you get out from that 0:17:35.480 --> 0:17:37.359 zero to one year, but then try to get out 0:17:37.440 --> 0:17:40.920 into that three to five year mark, our conviction level 0:17:40.960 --> 0:17:43.520 is much higher that FED will be dubbish. And they 0:17:43.520 --> 0:17:45.880 have quite a bit in the toolkit to actually bring 0:17:45.960 --> 0:17:49.040 down and anchor down the front part of the yield curve. 0:17:49.119 --> 0:17:52.080 So that's where most of our exposures are. And then 0:17:52.240 --> 0:17:54.280 you bring in the macro work that our team is doing. 0:17:55.080 --> 0:17:57.600 Then if you try to travel out from seven to 0:17:57.640 --> 0:18:00.919 thirty year part of the curve, a conviction level reduces 0:18:01.000 --> 0:18:06.239 because then the variables of demand supply, the variables of 0:18:07.560 --> 0:18:11.440 not having a very credible and sustainable deficit reduction plan, 0:18:11.920 --> 0:18:14.560 and then what does that mean for term premium in 0:18:14.600 --> 0:18:17.439 the long end. Those are the variables that reduce our 0:18:17.440 --> 0:18:20.640 conviction level whether we'll be eking out or we'll whether 0:18:20.680 --> 0:18:22.800 we'll be able to eke out that dual mandate from 0:18:22.840 --> 0:18:25.240 the long end of the treasury curve. So that's how 0:18:25.280 --> 0:18:28.360 we are sort of going through our conviction level, traveling 0:18:28.359 --> 0:18:31.120 the key it duration parts of the curve, if you will, 0:18:31.400 --> 0:18:33.199 and then trying to make sure that we have the 0:18:33.280 --> 0:18:36.000 highest conviction in parts of the curve that we are 0:18:36.080 --> 0:18:39.439 the most expressed. In another way simplistic way to say this, 0:18:39.560 --> 0:18:42.040 we are in steepeners, overweight in the back in the 0:18:42.040 --> 0:18:45.080 front end, and significant underweights to the twenty and thirty 0:18:45.160 --> 0:18:46.560 year part of the curve at the moment. 0:18:47.680 --> 0:18:49.919 So I want to focus on a little bit here 0:18:49.960 --> 0:18:53.840 just on the corporate side of things. Specifically, I'm wondering 0:18:53.880 --> 0:18:58.439 about how you really focus on those non investment grade positions, 0:18:58.520 --> 0:19:00.800 you know, one area that we take a look at 0:19:00.840 --> 0:19:03.399 here in Bloomberg Intelligence quite a bit is obviously fallen 0:19:03.440 --> 0:19:07.040 angels rising stars being a pretty big area just in 0:19:07.119 --> 0:19:10.480 terms of inefficiency. Is that kind of the main focus 0:19:10.560 --> 0:19:12.480 there when you're getting into high yeld positions or is 0:19:12.520 --> 0:19:14.000 there a little bit more to it? 0:19:15.480 --> 0:19:18.440 Two things. The first part spot on sam. I think 0:19:18.520 --> 0:19:21.879 that part of the curve crossover fallen angels rising stars, 0:19:21.920 --> 0:19:25.919 how we want to define it, It's almost like a 0:19:26.040 --> 0:19:30.439 lost category or lost focus area for a lot of 0:19:30.440 --> 0:19:33.640 investors and asset managers as they have grown in size, 0:19:34.000 --> 0:19:36.399 so it becomes very difficult for them to focus on 0:19:36.480 --> 0:19:39.680 that part of the curve. So invest some great managers, 0:19:39.720 --> 0:19:42.760 for example, will never look at a foreign angel or 0:19:42.760 --> 0:19:47.240 potential for angel situation because then there'll be force sellers 0:19:47.240 --> 0:19:50.120 in that environment, or the other way around, where high 0:19:50.200 --> 0:19:54.119 yield investors are always very cognizant of rising stars because 0:19:54.160 --> 0:19:57.119 that eats away into that potential yield or a negative 0:19:57.200 --> 0:20:02.480 yield environment versus their benchmark or market capuit debt capated 0:20:02.520 --> 0:20:04.520 benchmark that they have to beat. On the high l side, 0:20:04.880 --> 0:20:10.000 that becomes a fantastic high sort of alpha or high 0:20:10.080 --> 0:20:13.639 information ratio region for us, given that we have an 0:20:13.640 --> 0:20:17.520 analyst on both sides, and total return strategies allow us 0:20:17.600 --> 0:20:21.639 to actually take out alpha from this from this inefficiency. 0:20:21.720 --> 0:20:24.720 So I think we can talk about some of the 0:20:24.720 --> 0:20:29.400 auto sector names today which are very clearly priced for 0:20:29.200 --> 0:20:33.320 angel situation and is getting shunned by some of the 0:20:33.359 --> 0:20:37.240 IG investors. That becomes a fantastic one for us. Again, Yes, 0:20:37.280 --> 0:20:40.280 we have to look at the fundamentals and valuations apart 0:20:40.280 --> 0:20:43.639 from just focused on the technicals of foreign angels and 0:20:43.640 --> 0:20:46.560 advising stars. The other big part, the second point that 0:20:46.560 --> 0:20:50.040 we also focus on SAM is sort of differentiated. And 0:20:50.080 --> 0:20:52.160 that's why some of our results if you look back 0:20:52.480 --> 0:20:56.840 on the total return strategy of more consistent upside capture, 0:20:57.280 --> 0:21:00.919 more consistent avoiding the downside capture or standards being lower, 0:21:01.400 --> 0:21:03.960 is that we pick our best ized ideas from high year. 0:21:04.119 --> 0:21:06.440 We don't follow a sleeve approach. What do I mean 0:21:06.440 --> 0:21:09.840 by that? Our high yeal team typically every year looks 0:21:09.840 --> 0:21:12.560 at or any typical year looks at about eight hundred 0:21:12.560 --> 0:21:15.600 two one thousand issuers and they dwindle it down to 0:21:15.600 --> 0:21:19.600 about three hundred approximately for their high yield only strategy, 0:21:19.680 --> 0:21:22.320 which is trying to beat a debt gap weighted benchmark. 0:21:23.160 --> 0:21:26.080 What we are trying to do for total return strategy 0:21:26.280 --> 0:21:29.399 is we've built a process where we say that we 0:21:29.480 --> 0:21:32.400 don't want all those three hundred names because all those 0:21:32.400 --> 0:21:35.800 three hundred names might not have a total return catalyst today. 0:21:36.680 --> 0:21:39.760 So give us the top fifty to seventy five names 0:21:40.280 --> 0:21:43.960 that have a total return catalyst, are liquid enough and 0:21:44.080 --> 0:21:46.200 are in that single be low single bee to dower 0:21:46.280 --> 0:21:49.679 b range that they are actually providing much more spread 0:21:49.680 --> 0:21:52.199 pickup and you'll pick up versus what I could do 0:21:52.240 --> 0:21:55.080 in the high yeal side. So if I can try 0:21:55.080 --> 0:21:57.119 to encapsulate some of the comments I made at the 0:21:57.119 --> 0:22:01.400 beginning of the call where best ideas, fundament technical valuations, 0:22:01.600 --> 0:22:05.440 and bottom up focus. This high yeer process then allows 0:22:05.520 --> 0:22:08.040 us to allocate to best ideas from a team that 0:22:08.160 --> 0:22:10.800 is already looking at best ideas for that high yeld strategy. 0:22:11.400 --> 0:22:14.400 So looking at the higher teams information ratio and sharp 0:22:14.480 --> 0:22:18.000 ratios over years, and then you allocate in a way 0:22:18.000 --> 0:22:20.440 that you're picking out the best of their best if 0:22:20.440 --> 0:22:23.119 you will, and allocating to the total return strategy that 0:22:23.600 --> 0:22:27.000 in itself for every toller that can gets invested for 0:22:27.000 --> 0:22:29.800 the total return strategy in high YEO is much more 0:22:29.840 --> 0:22:33.560 efficiently used very similar to what we do in investment 0:22:33.560 --> 0:22:37.119 grade corporates securitize assets and then when we investment in 0:22:37.160 --> 0:22:39.760