WEBVTT - Rockefeller’s Petrone on Active Muni Advantages 0:00:13.680 --> 0:00:16.840 Welcome to Inside Active, a podcast about active managers that 0:00:16.880 --> 0:00:19.639 goes beyond sound bites and headlines and looks deeper into 0:00:19.640 --> 0:00:24.400 their processes, challenges and philosophies and security selection. I'm David Cohne, 0:00:24.440 --> 0:00:27.520 I lead mutual fund and active Research at Bloomberg Intelligence. 0:00:27.960 --> 0:00:31.120 Today we're going to be discussing munis and the advantages 0:00:31.160 --> 0:00:36.600 that active management can provide. Little context. First, active municipal 0:00:36.720 --> 0:00:39.640 mutual funds actually took in over twenty four billion in 0:00:39.640 --> 0:00:42.480 inflows last year, and as we all know, mutual funds 0:00:42.520 --> 0:00:45.640 are the less preferable wrapper right now, so you definitely 0:00:45.680 --> 0:00:48.640 know this interest and active munifunds. And I will also 0:00:48.760 --> 0:00:51.920 say that active muni ETFs also took in nearly twenty 0:00:51.960 --> 0:00:55.320 two billion last year. And so for this discussion to 0:00:55.400 --> 0:00:59.880 discuss munis, we're happy to have Alex Patron on with us. 0:01:00.120 --> 0:01:03.240 Is managing director and head of fixed Income and head 0:01:03.240 --> 0:01:07.400 of distribution for the Americas for Rockefeller Asset Management. Alex, 0:01:07.440 --> 0:01:08.679 thank you for joining me today. 0:01:09.000 --> 0:01:10.840 David, thank you, it's great to be here. 0:01:11.120 --> 0:01:14.560 So you spent your career in fixed income across multiple 0:01:14.560 --> 0:01:19.039 market cycles. What do you think feels fundamentally different about 0:01:19.080 --> 0:01:21.760 today's environment compared with past periods. 0:01:22.120 --> 0:01:22.760 Well, I think you. 0:01:22.760 --> 0:01:26.200 Know a couple of features that make this cycle distincts. 0:01:26.440 --> 0:01:30.280 First of all, we've transitioned from this really long period 0:01:30.440 --> 0:01:34.240 of zero and negative policy rights to a world where 0:01:34.280 --> 0:01:38.120 the yield curve is steep, The municipal yield curve is 0:01:38.200 --> 0:01:43.160 tremendously steep, and there's really compelling opportunities for investors today 0:01:43.200 --> 0:01:47.240 within fixed income, and it resets in our view, both 0:01:47.319 --> 0:01:49.160 returns across the curve. 0:01:49.000 --> 0:01:51.240 And it improves fixed income's role. 0:01:51.680 --> 0:01:56.280 Both as income and a ballast within portfolios. And I 0:01:56.280 --> 0:02:01.639 would say secondly, the macroeconomic environment mint is unique today 0:02:01.640 --> 0:02:06.520 and dispersion is elevated. You've seen inflation moderating a bit 0:02:06.560 --> 0:02:09.720 from its peak, but it remains stickier in spots. You've 0:02:09.720 --> 0:02:14.560 seen growth that's remain and proven quite resilient. But there 0:02:14.639 --> 0:02:17.400 are going to be clear winners and losers, whether you 0:02:17.440 --> 0:02:20.079 look at the equity markets, the bond market, and very 0:02:20.120 --> 0:02:24.400 specifically within municipals. So for our view for investors, this 0:02:24.480 --> 0:02:27.760 really argues in the environment that we're in today, sell 0:02:27.800 --> 0:02:32.320 activity over beta and investors really will continue to benefit 0:02:32.880 --> 0:02:37.680 from active management where you are getting paid in many 0:02:37.720 --> 0:02:41.440 respects to do the bottom up credit research and identify 0:02:41.520 --> 0:02:46.440 opportunities where there might be idiosyncratic spread drivers or other 0:02:46.520 --> 0:02:48.680 factors that can really drive returns from here. 0:02:48.760 --> 0:02:51.560 So glad you mentioned that with active, because you know, 0:02:51.639 --> 0:02:54.440 Active obviously made a comeback, especially on the equity side 0:02:54.480 --> 0:02:56.680 the last couple of years. And you know, I think 0:02:56.760 --> 0:02:59.640 active was underwhelming to a lot of retail folks for 0:02:59.680 --> 0:03:01.639 a while. Well you know, they just they looked at 0:03:01.680 --> 0:03:05.240 index funds and the you know, very very cheap. You know, 0:03:05.280 --> 0:03:07.560 there seemed to be this kind of sentiment that passive 0:03:07.680 --> 0:03:10.520 was the way to go, even in fixed income. And 0:03:10.720 --> 0:03:13.160 you know, passive can look efficient on the surface, but 0:03:13.680 --> 0:03:16.360 where do you think the gaps really are with you know, 0:03:16.360 --> 0:03:19.480 where active management can add value, especially in fixed income. 0:03:21.280 --> 0:03:23.400 You know, David a great question, and you see it 0:03:23.480 --> 0:03:28.280 tremendously within the municipal market. More specifically, if you look 0:03:28.280 --> 0:03:30.200 at twenty twenty and eighty five, it was a really 0:03:30.240 --> 0:03:34.920 interesting year in which you saw investment grade municipal indicices 0:03:35.000 --> 0:03:38.880 outperform high yield municipal indices. Now, what makes that interesting 0:03:38.920 --> 0:03:43.120 and unique is in most environments, your fixed income or 0:03:43.160 --> 0:03:45.720 your income is a key part of your total return. 0:03:46.200 --> 0:03:49.240 If you look at the higher yield municipal indices, the 0:03:49.280 --> 0:03:51.280 yields were in the five and a half percent range 0:03:51.320 --> 0:03:55.120 tax exempt really compelling. If you look at high grades, 0:03:55.160 --> 0:03:57.440 the yields are closer at about four percent over the 0:03:57.480 --> 0:04:01.440 course of the year tax exempts. So inherent your setup 0:04:01.480 --> 0:04:04.960 should have been that the high yield media indicies outperform. 0:04:05.480 --> 0:04:08.680 But what we saw in twenty twenty five is there 0:04:08.760 --> 0:04:12.640 is a handful of issuers and sectors really tobaccos and 0:04:12.680 --> 0:04:16.160 then from an issue perspective, transportation and bright line that 0:04:16.240 --> 0:04:19.960 really drove down returns within the high yield market. For 0:04:20.080 --> 0:04:25.400 those investors that focus on passive indices. There's a structural 0:04:25.400 --> 0:04:29.359 inefficiency there. You might be over allocated to these areas 0:04:29.400 --> 0:04:32.640 just because they tend to be larger components of the 0:04:32.680 --> 0:04:37.760 benchmark that are issuance weighted, not necessarily quality or relative 0:04:37.880 --> 0:04:38.680 value weighted. 0:04:39.120 --> 0:04:41.680 You can you can dive in even further to that. 0:04:41.720 --> 0:04:47.160 David, and look at dispersion amongst managers, particularly in markets 0:04:47.520 --> 0:04:50.640 like the municipal market or the corporate bond market, where 0:04:50.680 --> 0:04:56.480 you have a tremendous amount of diversification opportunities that if 0:04:56.480 --> 0:04:59.359 you are active and avoiding some of the pitfalls of 0:04:59.440 --> 0:05:03.560 either bench are hugging or following the benchmark, you might 0:05:03.839 --> 0:05:06.840 see a material difference in what performance looked like over 0:05:06.839 --> 0:05:09.280 the course of twenty twenty five. And that's really apparent 0:05:09.720 --> 0:05:12.400 in some of these markets where there are inefficiencies, a 0:05:12.400 --> 0:05:16.720 lot of opportunities, and bottom up credit fundamentals really matter materially. 0:05:16.920 --> 0:05:19.800 I'm glad you brought that up, especially with dispersion and 0:05:20.200 --> 0:05:24.360 this credit dispersion and we have uncertainty with interest rates. 0:05:24.400 --> 0:05:26.520 How do you think that's really changing the calculus for 0:05:26.680 --> 0:05:28.040 active bond managers? 0:05:28.120 --> 0:05:31.400 You know right now in today's environment, you. 0:05:31.320 --> 0:05:34.000 Know, when you have the amount of interest rate volatility 0:05:34.040 --> 0:05:36.120 and uncertainty that we've had over the course of the 0:05:36.240 --> 0:05:39.960 last really several years now, it is really important to 0:05:40.080 --> 0:05:43.080 think through how can I build portfolios to be resilient 0:05:43.160 --> 0:05:46.400 against a range of outcomes, whether that outcome is rising 0:05:46.600 --> 0:05:51.360 or declining, rates, widening or tightening credit spreads. For active managers, 0:05:51.440 --> 0:05:55.760 it allows us to make decisions around liquidity risk management, 0:05:56.400 --> 0:06:00.720 understanding we are an environment where whether it be at 0:06:00.720 --> 0:06:05.320 times a tweet, a policy shift, a FED view that 0:06:05.400 --> 0:06:08.440 can drive rates. You want to have some dry powder 0:06:08.480 --> 0:06:12.280 and liquid to lean into the volatility as it exists. 0:06:12.920 --> 0:06:15.840 With the steep yield curve that I mentioned earlier, David, 0:06:15.960 --> 0:06:19.320 this is an opportunity where active management can really add 0:06:19.400 --> 0:06:25.000 value by exploiting relative value across yield curves, looking for 0:06:25.160 --> 0:06:29.280 opportunities that might arise from differing structures, whether that's thinking 0:06:29.360 --> 0:06:33.600 about hall features, coupon features, and the likes, and then 0:06:33.920 --> 0:06:37.839 so importantly really underwriting credit at the abboog or level, 0:06:37.920 --> 0:06:42.200 because you will have dispersion that continues to persist not 0:06:42.279 --> 0:06:45.520 just from rate volatility, but as credit evolves as we 0:06:45.600 --> 0:06:50.040 move through this cycle. Active managers can really dynamically adjust 0:06:50.120 --> 0:06:53.599 through some of these periods of elevated volatility. Think about 0:06:53.600 --> 0:06:57.800 how they maintain dry powder lean into different opportunities that 0:06:57.839 --> 0:06:58.640 arise through time. 0:06:59.040 --> 0:07:02.000 And so you're especially is muni bonds and you know, 0:07:02.080 --> 0:07:05.960 municipals don't always get the same attention as corporates or treasuries. 0:07:06.480 --> 0:07:08.400 You know, why do you think that's the case? 0:07:08.440 --> 0:07:10.640 And you know what makes it such a compelling asset 0:07:10.640 --> 0:07:12.520 class in this you know today. 0:07:14.240 --> 0:07:18.760 I think municipals have historically not gotten the same focus 0:07:18.760 --> 0:07:20.920 of corporates because when you look at our market is 0:07:21.160 --> 0:07:26.960 broadly speaking a retail focused or high net worth focus market. 0:07:27.680 --> 0:07:30.480 Why should municipals get a lot more attention today? From 0:07:30.480 --> 0:07:34.559 our perspective, there's several reasons, very straightforward for US tax 0:07:34.600 --> 0:07:39.600 paying investors, Municipals offer some of the most compelling relative 0:07:39.680 --> 0:07:44.960 value versus treasuries, versus agencies versus corporates. Today, the tax 0:07:45.000 --> 0:07:48.920 equivalent yields easily pick up anywhere between fifty one hundred 0:07:48.960 --> 0:07:51.440 and fifty basis points, or call it half of a 0:07:51.480 --> 0:07:54.760 percent to one and a half percent. When you take 0:07:54.800 --> 0:07:58.640 that a step further, I think historically investors have thought 0:07:58.720 --> 0:07:59.880 about municipals as. 0:07:59.800 --> 0:08:01.400 Being a key ballast. 0:08:02.200 --> 0:08:06.800 While we're past peak credit quality, likely within the broad markets, 0:08:07.240 --> 0:08:10.680 credit fundamentals for municipal issuers are overall quite resilient. 0:08:10.720 --> 0:08:13.400 Here what you've seen historically if you look. 0:08:13.240 --> 0:08:16.480 At Moody's Who's run a default study going back over 0:08:16.560 --> 0:08:21.160 thirty years, municipals have historically provided much better credit quality 0:08:21.200 --> 0:08:24.040 than that of the corporate market, both measured through very 0:08:24.080 --> 0:08:28.440 low incidents of defaults and higher overall recovery rates. So 0:08:28.480 --> 0:08:33.080 you have both elevated tax exempt income and yield relative 0:08:33.120 --> 0:08:35.720 to other asset classes, but then you also have a 0:08:35.720 --> 0:08:38.880 credit profile that tends to be quite resilient through various 0:08:38.880 --> 0:08:42.479 points of the economic cycle. What I would add with municipals, 0:08:42.520 --> 0:08:44.880 it's an incredibly inefficient market. 0:08:45.280 --> 0:08:47.199 It's one of the most diverse markets out there. 0:08:47.280 --> 0:08:51.720 Forty thousand plus active issuers, which really gets to that 0:08:51.800 --> 0:08:57.679 point that through identifying managers that can navigate through the sectors, 0:08:57.679 --> 0:09:03.800 the ABUCRUZ geographies and structure, you can really add alpha 0:09:03.960 --> 0:09:08.920 and outcomes for clients by finding bottom up relative value 0:09:08.920 --> 0:09:10.360 opportunities within the space. 0:09:11.120 --> 0:09:13.440 You know, why is it overlooked? I don't know, David. 0:09:13.760 --> 0:09:16.760 I've been staring at this market for twenty years, and 0:09:16.840 --> 0:09:20.559 I do think that increasingly you're seeing investors that are 0:09:20.600 --> 0:09:23.280 focused on ensuring that they are fully weighted in both 0:09:23.280 --> 0:09:26.040 the high grade and the opportunistic areas of the market. 0:09:26.240 --> 0:09:28.440 So, you know, as I mentioned at the beginning, you know, 0:09:28.679 --> 0:09:30.880 there was I think twenty four billion in inflows for 0:09:31.120 --> 0:09:33.280 just mutual funds, and you know, when you look at 0:09:33.280 --> 0:09:36.520 the passive side, very little and so you know, obviously 0:09:36.559 --> 0:09:39.720 this is an area where active can provide opportunities. And 0:09:40.120 --> 0:09:41.800 you know, we you know, we all know about the 0:09:41.800 --> 0:09:44.080 tax advantages and you kind of went into this a 0:09:44.080 --> 0:09:48.559 little bit talking about the structural characteristics, but it just 0:09:48.600 --> 0:09:51.559 seems like it's it's a big, big market for active managers. 0:09:52.320 --> 0:09:53.960 You know, what else would you say in terms of 0:09:54.000 --> 0:09:56.880 the structure that really kind of provides those opportunities. You know, 0:09:56.920 --> 0:10:00.520 you mentioned the credit dispersion and just you know so much, 0:10:01.320 --> 0:10:04.000 so many active are so many issuers out there, I 0:10:04.000 --> 0:10:06.320 should say, well. 0:10:06.240 --> 0:10:08.440 I think what's really interesting about our market as well 0:10:08.520 --> 0:10:11.079 is if you try to peel the onion back a 0:10:11.120 --> 0:10:13.840 little bit further and look at I mentioned that the 0:10:13.920 --> 0:10:16.520 number of issues forty thousand plus issuers, and you have 0:10:16.600 --> 0:10:19.320 a lot of the large global issues that people are 0:10:19.360 --> 0:10:22.920 quite familiar with that may issue anywhere between a billion 0:10:23.000 --> 0:10:26.040 to four or five billion in any given year. But 0:10:26.120 --> 0:10:27.959 if then you take a step back and you look 0:10:28.000 --> 0:10:31.400 across states and localities, there's a lot of very small 0:10:31.440 --> 0:10:35.160 issuers that might be looking for financing that's ten million, 0:10:35.240 --> 0:10:37.959 twenty million, thirty million, fifty million, and a lot of 0:10:38.040 --> 0:10:42.400 these smaller bespoke deals don't always get the focus that 0:10:42.440 --> 0:10:46.160 the large global issuers get. If you build a team 0:10:46.280 --> 0:10:49.040 and structure around creating what we like to do as 0:10:49.080 --> 0:10:51.840 a bit of a bar belled approach, as we're venturing 0:10:51.880 --> 0:10:53.439 into the opportunistic space. 0:10:53.960 --> 0:10:57.760 We have your high grade liquidity risk management. 0:10:57.880 --> 0:11:00.000 Think of that as your double A triple A issue, 0:11:00.400 --> 0:11:04.840 large global liquid names that are a ballast within the portfolio. 0:11:04.880 --> 0:11:10.240 But really leaning into some of these bespoke financing opportunities, 0:11:10.600 --> 0:11:13.480 we liken it a time almost to call it the 0:11:13.520 --> 0:11:17.800 private credits of the municipal market in acus a format 0:11:18.160 --> 0:11:22.600 where we can step in and look past benchmarks, look 0:11:22.760 --> 0:11:26.400 past the rating agencies, and look directly to partnering with 0:11:26.520 --> 0:11:30.480 issuers that might have unique financing needs that we are 0:11:30.640 --> 0:11:35.840 able to both underwrite the financials, work with the borrower 0:11:36.600 --> 0:11:41.440 structure the bond covenants for our investors, and also demand 0:11:41.640 --> 0:11:48.000 some level of additional excess yield versus comparable benchmark or 0:11:48.080 --> 0:11:52.480 rated names. And it really creates a lot of opportunities 0:11:53.000 --> 0:11:58.640 to lean into excess yield for investors in what otherwise 0:11:58.880 --> 0:12:01.840 tend to be overlooked. There is the market, and I 0:12:01.840 --> 0:12:04.199 think at times day of what makes it really interesting 0:12:04.720 --> 0:12:08.199 in munis in particular, you have some spots in our 0:12:08.240 --> 0:12:11.360 space that are non rated deals not rated by the 0:12:11.360 --> 0:12:15.600 agencies that I think generally as investors we think non 0:12:15.720 --> 0:12:18.000 rated might mean that these. 0:12:17.840 --> 0:12:19.440 Are sub investment grade. 0:12:19.480 --> 0:12:21.720 The reality means it's just an issue that's not rated 0:12:21.720 --> 0:12:23.400 because they didn't go through the process. 0:12:23.920 --> 0:12:27.560 They might come to me and my team and say, 0:12:28.080 --> 0:12:30.800 we're looking for financing. Can you underwrite the risk? 0:12:30.880 --> 0:12:33.080 If you have the experience and expertise to do that, 0:12:33.679 --> 0:12:37.720 you can really drive good outcomes for clients, primarily through 0:12:38.200 --> 0:12:42.000 targeting elevated yield in otherwise good credits. 0:12:42.240 --> 0:12:45.440 So if we dig a little deeper, what does doing 0:12:45.440 --> 0:12:48.480 the work really mean in municipal credit analysis? Can you 0:12:48.520 --> 0:12:50.120 kind of walk us through the process. 0:12:51.720 --> 0:12:54.600 Yeah, I think doing the work combines a whole host 0:12:54.640 --> 0:12:58.360 of things. It's looking at forensic financials right multi year 0:12:58.480 --> 0:13:04.160 trends and coverage, liquidity, any obligations that might exist on 0:13:04.200 --> 0:13:07.559 the pension or the OPEB side. It's looking at governance 0:13:07.600 --> 0:13:11.120 and management. So what is your budget discipline has been 0:13:11.280 --> 0:13:15.439 depending on the type of bond you have? Rate setting flexibility? 0:13:15.480 --> 0:13:19.880 What is your capital planning credibility through time? Looking for 0:13:20.000 --> 0:13:25.600 things like demand elasticity and demographics. What have enrollment trends 0:13:25.600 --> 0:13:28.960 been in higher education? What might the payer mix be 0:13:29.080 --> 0:13:34.000 in healthcare? For utilities and transport, what is the stability 0:13:34.559 --> 0:13:38.439 of your user base? When we're looking at call it sales, 0:13:38.520 --> 0:13:42.080 tax back bonds, what does the economic environment broadly and 0:13:42.120 --> 0:13:45.320 what does that look like in a specific region. We 0:13:45.440 --> 0:13:50.520 think a lot about security and structure, what's our seniority 0:13:50.679 --> 0:13:53.760 for leans as we think through additional bond tests and 0:13:53.920 --> 0:13:58.560 rate covenant reserve mechanics. And then we're always thinking about 0:13:58.600 --> 0:14:01.920 alternative data and different types of site checks, whether that's 0:14:02.000 --> 0:14:06.240 traffic counts, looking at hospital occupancy as it relates to 0:14:06.280 --> 0:14:10.960 healthcare system tuition, discounting as it relates to higher education, 0:14:12.040 --> 0:14:14.640 water usage, and key areas. So you could see, David, 0:14:14.720 --> 0:14:18.400 it is a wide expanse given just going back to 0:14:18.480 --> 0:14:21.400 the diversity of the medicimal market, and I think what 0:14:22.040 --> 0:14:25.960 you really can appreciate through this, it's the depth of 0:14:26.120 --> 0:14:30.320 thinking through that bottom up analysis, the depth of considering 0:14:30.480 --> 0:14:32.520 governance that allows. 0:14:32.160 --> 0:14:35.080 Us to really drive outcomes and results for investors. 0:14:35.320 --> 0:14:38.520 What about managing risk? Is that just kind of distinguishing 0:14:38.680 --> 0:14:41.280 between the stronger issuers versus the weaker ones. 0:14:43.400 --> 0:14:46.320 It's certainly a key part of it is understanding I 0:14:46.440 --> 0:14:49.640 view it both as where to lean into opportunities where 0:14:49.640 --> 0:14:54.040 we might find an issue that from our perspective, high 0:14:54.120 --> 0:14:58.320 quality issure, mispricedmand to the market at times. Risk management 0:14:58.520 --> 0:15:02.880 is leaning away from some of the hot spots that 0:15:03.000 --> 0:15:06.920 others may not recognize and ensuring that you aren't allocating 0:15:07.360 --> 0:15:09.880 to an issue that we might not believe in their 0:15:09.920 --> 0:15:13.400 credit fundamentals and we feel like they're pricing is too 0:15:13.440 --> 0:15:16.680 tight or spreads are too tight. It risk management for 0:15:16.800 --> 0:15:20.320 us is also liquidity risk management when you're managing through 0:15:20.320 --> 0:15:24.360 the market, whether it's because of the volatility that one 0:15:24.440 --> 0:15:27.360 might anticipate and wanting to ensure that you have some 0:15:27.480 --> 0:15:31.320 dry powder to lean into those periods of volatility that 0:15:31.440 --> 0:15:35.000 might be driven from spreads or rates, whether it is 0:15:35.120 --> 0:15:38.440 also looking through diversification. You heard that from me over 0:15:38.480 --> 0:15:41.880 and over. So when we think about sizing any one 0:15:41.960 --> 0:15:45.200 position across a portfolio, the municipal market, you can hear 0:15:45.240 --> 0:15:49.360 me over and over diversification, diversification. There's a tremendous opportunity 0:15:49.360 --> 0:15:58.600 for us to diversify across state sector. Issuer Alburger structures 0:15:59.040 --> 0:16:03.960 to really sure that as we're making investments, we're protecting clients. 0:16:04.200 --> 0:16:06.840 Risk management is at the heart of everything that we do. 0:16:07.120 --> 0:16:08.640 And so if we just think, you know, take a 0:16:08.640 --> 0:16:10.640 step back and think of you know, you kind of 0:16:10.640 --> 0:16:13.720 went through the whole credit research process. And we've talked 0:16:13.720 --> 0:16:16.520 about how the market is so large and you know 0:16:16.520 --> 0:16:20.840 it's fragmented. How does credit research look different with munis 0:16:20.960 --> 0:16:24.200 versus you know, other types, whether it's treasuries or corporates. 0:16:26.080 --> 0:16:29.600 Well, I think you know, it requires a lot more 0:16:30.480 --> 0:16:36.200 effort given the number of issues that we're trying to canvas. 0:16:36.240 --> 0:16:40.960 Certainly on a daily, weekly or quarterly basis. 0:16:41.560 --> 0:16:45.480 Price discovery in our market is imperfect as well, because 0:16:45.520 --> 0:16:49.560 as you have markets that expand, particularly in those areas 0:16:49.600 --> 0:16:51.960 where it's not a large global issuer, but some of 0:16:52.000 --> 0:16:55.440 these smaller issues, there might be a lot of off 0:16:55.480 --> 0:16:58.800 the run q SIPs or issuers that create some level 0:16:58.840 --> 0:17:03.200 of mispricing. Our view is really simple, if diligent research 0:17:03.400 --> 0:17:08.640 and proactive sourcing can deliver some level of alpha, then 0:17:08.680 --> 0:17:11.960 we want to be there. But that fragmentation of our 0:17:12.000 --> 0:17:16.440 market really amplifies from our view, the value of relationships. 0:17:17.240 --> 0:17:19.960 Technology has certainly enhanced a lot of what we do 0:17:20.080 --> 0:17:24.800 in in identifying opportunities in the market any given day, 0:17:25.240 --> 0:17:31.080 but relationships with dealers, relationships with issuers, access to markets 0:17:31.359 --> 0:17:35.720 become critically important for Expanse in terms of what we're 0:17:35.760 --> 0:17:37.760 able to see day in and day out, just given 0:17:37.880 --> 0:17:39.800 how diverse the market is today. 0:17:39.960 --> 0:17:42.159 So I'll get to technology in just a second, but 0:17:42.240 --> 0:17:44.200 I did want to ask you first, if we take 0:17:44.200 --> 0:17:46.480 another step back and just think about the muni bond 0:17:46.520 --> 0:17:49.440 market as a whole, how should investors kind of think 0:17:49.480 --> 0:17:52.879 about risk in the muni market, especially during periods of 0:17:52.960 --> 0:17:55.800 economic stress? Yeah? 0:17:55.840 --> 0:17:59.000 Well, the interesting thing there, David, is that in periods 0:17:59.040 --> 0:18:01.919 of economic stress us where we're heading into call it 0:18:01.960 --> 0:18:06.359 a broad slow down, which is not our base case today. 0:18:06.359 --> 0:18:09.119 I think we all see that growth continues to be 0:18:09.200 --> 0:18:13.080 quite resilient and positive from here, but we might all 0:18:13.320 --> 0:18:17.280 agree that we're past kind of peak credit fundamentals, both 0:18:17.320 --> 0:18:21.520 for corporate issues as well as municipal issues. But what's 0:18:21.600 --> 0:18:24.320 really interesting, particularly as it relates to some segments like 0:18:24.359 --> 0:18:27.840 general obligation debt for example, is we tend to see 0:18:27.840 --> 0:18:30.480 that in a period of the slowdown, municipality hold up 0:18:30.560 --> 0:18:33.480 quite well. What drives that? Well, if we break down 0:18:33.560 --> 0:18:37.639 general obligation debt very specifically, a lot of times tax 0:18:37.720 --> 0:18:41.720 revenues might be derived from things like property tax values, 0:18:42.240 --> 0:18:45.879 which is not about your market values, about your assessed value. 0:18:46.119 --> 0:18:48.080 And I don't know if you're a homeowner David, I 0:18:48.119 --> 0:18:48.720 certainly am. 0:18:48.880 --> 0:18:51.760 I find that in periods where property values are declining, 0:18:51.840 --> 0:18:54.679 my assessed value tends to say static. 0:18:55.119 --> 0:18:56.720 So the math behind that. 0:18:56.680 --> 0:19:00.720 Equation tends to be pretty advantageous for municipalities to continue 0:19:00.720 --> 0:19:04.119 to have stable revenues even in peers that you see 0:19:04.520 --> 0:19:08.080 a slowdown and declines in the broader macro environment. 0:19:08.400 --> 0:19:13.080 And that really speaks to my comments earlier on looking through. 0:19:13.119 --> 0:19:16.879 Historical time frames where the economy is sewing, and you 0:19:16.920 --> 0:19:22.120 saw municipal credit was quite resilient through those periods, stable 0:19:22.160 --> 0:19:24.400 revenues and the ability to continue. 0:19:24.080 --> 0:19:24.879 To pay debt service. 0:19:25.160 --> 0:19:28.240 What we also look towards is those where are we 0:19:28.800 --> 0:19:32.960 in the capital stack. As a debt holder, you tend 0:19:33.000 --> 0:19:37.440 to be a priority payment. If you're doing your active management, 0:19:37.600 --> 0:19:44.280 you can see how are the reserve funds and ratios 0:19:44.320 --> 0:19:47.719 evolving from here? What does my coverage look like? And 0:19:47.760 --> 0:19:49.960 we take a really active approach in that as well. 0:19:50.600 --> 0:19:53.440 While the reality as municipals tend to do quite well 0:19:53.440 --> 0:19:56.720 through periods of economic stress, our responsibility from a risk 0:19:56.760 --> 0:19:59.359 management perspective is to ensure that Zoe's the case. 0:20:00.160 --> 0:20:03.040 Certainly expect that that's going to be no different today. 0:20:03.720 --> 0:20:05.520 So I do want to get back to technology because 0:20:05.520 --> 0:20:07.639 I think you brought up an interesting point. I mean, 0:20:08.119 --> 0:20:11.000 I'm using technology even just to do fund and ETF 0:20:11.080 --> 0:20:14.080 research now. And so my question for you is, how 0:20:14.119 --> 0:20:17.480 has technology really change the way you fixed income teams 0:20:17.520 --> 0:20:21.480 approach credit research right now, especially in a market like Munie's. 0:20:23.320 --> 0:20:25.280 Yeah, David, that's a great question, and I would say 0:20:25.280 --> 0:20:30.200 it's not just credit research, but also visibility across the market. 0:20:30.320 --> 0:20:32.600 I think back to when I started in the market 0:20:33.000 --> 0:20:35.640 and we had moments where we're still kind of writing 0:20:35.680 --> 0:20:39.720 down buys and sells on paper. What a different world 0:20:39.760 --> 0:20:43.040 that we live in today. So technology, from my view, 0:20:43.080 --> 0:20:48.720 has really meaningfully increased the surface area, whether it's related 0:20:48.760 --> 0:20:53.480 to research, the amount of automated scraping of disclosures, some 0:20:53.640 --> 0:20:58.080 of the natural language processing we can use for transcripts. 0:20:57.720 --> 0:21:04.680 Local news really allows us to have broader visibility into 0:21:05.320 --> 0:21:10.040 what might impact unique credits, and it allows us to 0:21:10.160 --> 0:21:15.400 have even a farther reach in the initial screening from 0:21:15.480 --> 0:21:16.800 a credit perspective. 0:21:17.640 --> 0:21:21.879 On the execution side as well, it's astonishing the execution 0:21:22.040 --> 0:21:26.440 tools that have really helped improve liquidity across the entire 0:21:26.520 --> 0:21:31.120 expanse of the municipal market, it's allowed. You can see 0:21:31.160 --> 0:21:34.400 it certainly within the separately managed account space, which has 0:21:34.480 --> 0:21:38.960 evolved dramatically in the last fifteen years. You have far 0:21:39.000 --> 0:21:42.520 more investors today that access municipals not by buying and 0:21:42.560 --> 0:21:46.520 selling on their own and brokerage accounts, but leveraging managers 0:21:46.560 --> 0:21:49.320 for separately managed accounts. Why have we been able to 0:21:49.359 --> 0:21:53.600 do that so effectively? To customize down to the client level? 0:21:53.920 --> 0:21:56.880 Technology right is at the center of all of that, 0:21:57.240 --> 0:22:01.399 within the human oversight, because ultimately that bottom up credit 0:22:01.440 --> 0:22:04.480 research critically important across high grades and high yield, that 0:22:04.520 --> 0:22:07.400 will always be the case. And then of course stepping 0:22:07.400 --> 0:22:11.840 in and ensuring that portfolios are built in a fashion 0:22:12.240 --> 0:22:16.719 to take advantage of whether it's yield, curve, optimation, sector tilts, 0:22:16.720 --> 0:22:20.600 et cetera. That technology really is helping with both breadth 0:22:20.960 --> 0:22:24.879 and depth across research and portfolio management today. 0:22:25.080 --> 0:22:28.600 And I know people across every industry, not just finance industry, 0:22:28.600 --> 0:22:32.280 are worried about AI and you know, having their jobs 0:22:32.320 --> 0:22:35.000 taken away. And so my question for you is, you know, 0:22:35.040 --> 0:22:39.920 where does human judgment and experience still matter, especially in 0:22:40.040 --> 0:22:40.760 credit research? 0:22:41.320 --> 0:22:43.280 Where could that go into the future. 0:22:43.359 --> 0:22:47.359 It's it is it is a concern, and I'm happy 0:22:47.400 --> 0:22:50.600 to report, David, I think in the municipal market in particular, 0:22:50.720 --> 0:22:53.440 we will continue to keep our jobs, partly because of 0:22:53.920 --> 0:22:58.880 how diversified the market is. Technology is really wonderful coverage, 0:22:58.920 --> 0:23:03.920 speed path or pattern recognition, But when we think about judgments, 0:23:04.480 --> 0:23:12.359 assessing political will, management, credibility, the probability that legislation could 0:23:12.520 --> 0:23:19.240 shift and then change the dynamics around a sector or geography, 0:23:19.320 --> 0:23:20.919 I think a lot of that will continue to be 0:23:21.440 --> 0:23:26.280 human led. At this point, we really think about using 0:23:26.280 --> 0:23:29.879 technology to prioritize some of our inquiries and where we 0:23:29.920 --> 0:23:34.399 want to focus quantify some really high level risk, but 0:23:34.520 --> 0:23:37.359 we use experience to decide. 0:23:36.920 --> 0:23:38.960 When we're going to underwrite and when we're going to 0:23:38.960 --> 0:23:39.760 step aside. 0:23:40.000 --> 0:23:41.840 And we've done a lot of work, David, you can 0:23:41.880 --> 0:23:49.040 imagine our side to really query how can technology not 0:23:49.200 --> 0:23:53.000 just improve our judgment, but at times we've seen where 0:23:53.000 --> 0:23:55.600 it can be faulty, particularly as you get into some 0:23:55.680 --> 0:23:59.600 of the more bespoke areas of a market that are 0:24:00.160 --> 0:24:05.760 not just reliant on feasibility studies, but taking a feasibility 0:24:05.800 --> 0:24:08.960 study and using your own human judgment to say, is 0:24:09.000 --> 0:24:10.800 this going to move forward? 0:24:10.880 --> 0:24:14.720 As planned, well be something to watch. I say, well, 0:24:14.760 --> 0:24:16.879 thank you, Alex. This is a fun discussion. Thank you 0:24:16.960 --> 0:24:17.800 so much for joining me. 0:24:18.080 --> 0:24:20.680 Absolutely, David, I really appreciate it. I do believe we're 0:24:20.680 --> 0:24:23.200