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: Over the past decade, passive investing has become the default
Speaker 1: approach across much of the investment world. Button fixed income,
Speaker 1: the conversation is a bit more nuanced. Bond markets are
Speaker 1: structured differently, behave differently, and present a very different set
Speaker 1: of challenges for investors trying to balance risk, return, liquidity
Speaker 1: and diversification, especially in today's environment of higher rates and
Speaker 1: greater macro uncertainty. So today I wanted to explore the
Speaker 1: broader debate around active versus passive investing in bonds, how
Speaker 1: bond markets actually function beneath the surface, and what investors
Speaker 1: may be overlooking when they think about fixed income allocations.
Speaker 1: Joining me to discuss that is Noah Why, Senior portfolio
Speaker 1: manager and head of Global macro Strategy for the plus
Speaker 1: fixed Income team at all Spring Global Investments.
Speaker 2: No.
Speaker 1: I thank you for joining me.
Speaker 2: Thanks for having me, David.
Speaker 1: So you've previously written about the benefits of active management
Speaker 1: in bonds and argue that bonds are fundamentally different from
Speaker 1: equities when it comes to indexing. What do you think
Speaker 1: most investors misunderstand about passive bond investing.
Speaker 2: I think the biggest thing comes down to benchmark construction.
Speaker 2: I think people inherently think about the equity world when
Speaker 2: they think about in investing, and so a lot of
Speaker 2: times they apply that framework to the fixed income universe
Speaker 2: as well, but it is it is a lot different.
Speaker 1: So if you had to make the simplest possible case
Speaker 1: for why active management matters more in bonds than in stocks,
Speaker 1: what would your elevator pitch be.
Speaker 2: Well, I think it really comes down to cost benefit.
Speaker 2: The equity world, as we know, active has been gaining
Speaker 2: share for many, many years, and and there's reasons for that.
Speaker 2: The benchmarks are very difficult to beat. You think about equity,
Speaker 2: benchmark construction is driven by the market cap of the
Speaker 2: underlying securities in that benchmark, and so the more successful
Speaker 2: companies and certainly the meg seven obviously getting you know,
Speaker 2: a lot of attention today. Higher sales growth, better margins,
Speaker 2: get better multiples, and they become bigger parts of the benchmark.
Speaker 2: That makes those benchmarks more challenging to beat because the
Speaker 2: better companies get to be bigger. In the fixed income world,
Speaker 2: it's entirely different. Bonds are generally speaking issued at par
Speaker 2: and they mature at par. So how do benchmarks get
Speaker 2: constructed in the fixed income universe. It is ultimately based
Speaker 2: on the total amount of debt that gets issued, and
Speaker 2: so within the fixed income world, you have a challenge
Speaker 2: where investors aren't always exposed to the best opportunities. Instead,
Speaker 2: it's oftentimes the worst companies or the countries that need
Speaker 2: to borrow the most that are running the biggest deficits,
Speaker 2: the companies that need to borrow because maybe they're not
Speaker 2: generating as much cash flow as they need to run
Speaker 2: their operations. So that's really the first part is that
Speaker 2: you are, as a fixed income investor oftentimes exposed to
Speaker 2: less attractive investment opportunities. But it's not just that benefit piece,
Speaker 2: it is the cost piece as well. The cost of
Speaker 2: active management and fixed income is just very, very low,
Speaker 2: So we'd argue there's a bigger benefit to active management,
Speaker 2: there's also a lower cost to be able to get
Speaker 2: that benefit.
Speaker 1: So I want to go back to your first point
Speaker 1: you're saying that bond indexes reward the biggest barrows, not
Speaker 1: necessarily the best opportunities. Why do you think that hasn't
Speaker 1: gotten more attention by investors.
Speaker 2: I think it comes back to, you know, investors really
Speaker 2: focusing on really where is the risk, where is the volatility?
Speaker 2: What ultimately oftentimes drives you know, the outcomes in the
Speaker 2: long run, And the reality is that the equity markets
Speaker 2: generate over the very long run, you know, much higher
Speaker 2: returns and a lot more volatility. So I think it
Speaker 2: really takes the lion's share of the focus and attention
Speaker 2: from investors, uh, you know, to to the point that
Speaker 2: you know, I think that they apply their lessons and
Speaker 2: what they've learned in the equity side of markets, and
Speaker 2: they apply it to the fixed income side without thinking
Speaker 2: about where are their differences and why why do those matter? Okay?
Speaker 1: And you know, in your research you've described kind of
Speaker 1: a fundament mismatch between borrows and lenders. How does that
Speaker 1: conflict create opportunities for active managers?
Speaker 2: Yeah, you kind of think about, right, what is it
Speaker 2: that borrowers are looking for? Borrowers are looking to be
Speaker 2: able to lock in their financing for as long as
Speaker 2: possible at the lowest interest cost possible. Right, what do
Speaker 2: investors want? Right? What do lenders in this market want?
Speaker 2: They want more optionality. They don't want to lock in
Speaker 2: for thirty years or fifty years or sometimes one hundred
Speaker 2: years a set interest rate. They want flexibility, They want
Speaker 2: shorter maturities that allow them to make more decisions over
Speaker 2: over time, and they want to be able to generate
Speaker 2: higher income and higher yield. So really, at the heart
Speaker 2: of the market construction, you have this divergence in interests
Speaker 2: between borrowers and lenders. And again, this is why the
Speaker 2: benchmark construction is so important because ultimately it is the
Speaker 2: issuance that drive the overall exposures for those passive types
Speaker 2: of indicies.
Speaker 1: So, if issuers are extending maturities aggressively when rates are low,
Speaker 1: do passive investors unknowingly absorb risks that active managers can avoid.
Speaker 2: I think that is the case, right when you kind
Speaker 2: of look back and it's not, you know, just within
Speaker 2: the overall interest rate exposure of an investors you can
Speaker 2: look at you know, overall you know, sector exposures or
Speaker 2: individual issuers. You see this time in time again where
Speaker 2: investors are often times exposed to kind of the worst
Speaker 2: risk at oftentimes the worst time. And it's not you know,
Speaker 2: you don't blame the borrowers, right, They're doing what is
Speaker 2: economically in their interest. After the global financial crisis, interest
Speaker 2: rates were pushed down to zero by central banks globally.
Speaker 2: And so what did borrowers do. They did exactly what
Speaker 2: central banks wanted them to do. They borrowed more, and
Speaker 2: they borrowed for longer periods of time. Well, the other
Speaker 2: end of that exposure is investors, right, and so the
Speaker 2: other end of that transactions investors that had more and
Speaker 2: more interest rate risk as interest rates went lower and lower.
Speaker 2: And if you look at something like the time period
Speaker 2: from two thousand and eight until twenty twenty two, this
Speaker 2: is that period when interest rates were incredibly incredibly low duration,
Speaker 2: that measure of interest rate exposure for investors went higher
Speaker 2: quartergraph re quarter year after year until it hit a
Speaker 2: cyclical high in twenty twenty two, which was the same
Speaker 2: time that we had the worst bear market in fixed
Speaker 2: income in nearly fifty years. And so I think there
Speaker 2: were a lot of investors that thought, I have an
Speaker 2: exposure to the let's say Bloomberg aggregate index, right, the
Speaker 2: standard largest pass to benchmark that that investors have out
Speaker 2: there in the US without realizing that very gradually, over
Speaker 2: a ten to fifteen year period of time, their interest
Speaker 2: rate exposure actually increased by roughly fifty percent. And they
Speaker 2: had that maximum exposure again when interest rates were incredibly
Speaker 2: low hand, right before interest rates moved higher and suffered
Speaker 2: a lot of you know, capital loss as a result.
Speaker 1: So there's something else I wanted to talk to you about.
Speaker 1: You know. You know, I think a lot of investors
Speaker 1: think that active management simply means just kicking on more risk.
Speaker 1: And you know, that might be the case for some
Speaker 1: equity managers or strategies, I should say, you know, but
Speaker 1: I think your research shows that when it comes to
Speaker 1: fixed income, active actually delivers better risk adjusted returns. And
Speaker 1: so you know what separates you know, you know, active
Speaker 1: risk taking for versus just out reckless yield chasing.
Speaker 2: Yeah, so there certainly are different, many different strategies and
Speaker 2: in many different active approaches, and that's true in the
Speaker 2: fixed income world as well. But I do think this
Speaker 2: again comes down to some of the nuances of a
Speaker 2: benchmark construction in the fixed income universe. There there are
Speaker 2: a number of rules that I think are in place
Speaker 2: more because of the kind of status quo. It's way
Speaker 2: things have been done for a long time as opposed
Speaker 2: to the way things should be done. If you even
Speaker 2: look at the US fixed income market somewhere around you know,
Speaker 2: call it, you know, fifty eight maybe sixty trillion dollars
Speaker 2: in total fixed income assets, roughly half of those, just
Speaker 2: under half, are actually in the benchmark. So you are immediately,
Speaker 2: immediately not even looking at roughly half of the fixed
Speaker 2: income assets that are available to you as as an investor.
Speaker 2: Some of those maybe you know, higher risk types of security.
Speaker 2: Some of them may be the lower risk types of securities,
Speaker 2: but you know, at the end of the day, it
Speaker 2: means less diversification. So even with the same amount of risk,
Speaker 2: but utilizing a broader universe of options, you can create
Speaker 2: a much more diverse portfolio utilizing some of these non
Speaker 2: Bloomberg aggregate index types of securities. And that's not even
Speaker 2: getting into the global opportunity set. The Bloomberg egg is
Speaker 2: is just under twenty percent of the total global fixed
Speaker 2: income universe. So I kind of think about this. Let's
Speaker 2: say you're building a sports team, right and you know,
Speaker 2: even if you just look at the US and you say, okay,
Speaker 2: fifty percent of the securities are in the benchmark and
Speaker 2: fifty percent are not. It would be like being a
Speaker 2: general manager for a sports franchise and you make a
Speaker 2: draft pick and then you flip a coin, and then
Speaker 2: after the coin flips, if it's head, you get to
Speaker 2: keep the player. If it's tails, you don't get to
Speaker 2: keep the player. Right, are you going to have a
Speaker 2: better team or a worse team if you will only
Speaker 2: get about half of the overall opportunity set or that
Speaker 2: the universe to be able to choose from. So I
Speaker 2: think there is a big issue here and it can
Speaker 2: lead to you know, more risk through less diversification because
Speaker 2: it's such a smaller subset of the total universe.
Speaker 1: So I think it also brings up an interesting point
Speaker 1: with just the sheer number of securities. And so you know,
Speaker 1: with equities there's a few thousand, you know, at least
Speaker 1: on the US and you know before we can get
Speaker 1: to global, but you know, with the global bond market,
Speaker 1: what is there a million securities? Something like that you
Speaker 1: kind of walk us through how that creates inefficiencies that
Speaker 1: allow active managers to kind of like you touched upon
Speaker 1: it a little bit, you know, talking about how the
Speaker 1: index only carries part of it, but you know, kind
Speaker 1: of walk us through how that creates these inefficiencies for
Speaker 1: active managers to exploit.
Speaker 2: Certainly, I think a lot of this comes down to complexity,
Speaker 2: and oftentimes complexity can lead to opportunity. It can lead
Speaker 2: to missed pricings. And yeah, you know, at the index level,
Speaker 2: you're right, there's just an enormous amount of securities. But
Speaker 2: you can even break this down to let's say one issuer,
Speaker 2: use something like you know, JP Morgan. JP Morgan is
Speaker 2: a massive fixed income issuer, one of the largest constituents
Speaker 2: and in most of the US fixed income you know,
Speaker 2: investment grade types of benchmarks. Generally speaking, they have kind
Speaker 2: of one equity, right, they have one ticker. You have
Speaker 2: a lot of people sell side and buy side analysts,
Speaker 2: individual investors that are looking at that company, analyzing it,
Speaker 2: trying to figure out what's the right price and if
Speaker 2: it's mispriced, to take advantage of that mispricing. But it's
Speaker 2: really one security. On the fixed income side, they issue
Speaker 2: thousands of securities and that's just one individual company. But
Speaker 2: they also issue all sorts of different terms in those securities.
Speaker 2: Some are more senior, some are more subordinated, Some have
Speaker 2: call options and put options that impact they're pricing. They
Speaker 2: have different maturities, they have different coupons, they may have
Speaker 2: different indentures that are governing what happens in different types
Speaker 2: of scenarios. That just leads to an enormous amount of complexity,
Speaker 2: and therefore there are many fewer investors that have the
Speaker 2: resources to be able to analyze all of those differences,
Speaker 2: which then ultimately leads to mispricing. But it's not just
Speaker 2: those individual issuers too. You can look at additional markets
Speaker 2: that don't even exist in the equity world, things like
Speaker 2: the securitized space, whether it's mortgages, they're asset backed securities,
Speaker 2: or collateralized loan obligations. There's a wide variety of securitized
Speaker 2: types of exposures that simply don't have a counterpart. Same
Speaker 2: thing with municipal bonds. An incredible amount of issuers within
Speaker 2: the municipal market very small, across different states and localities,
Speaker 2: in different types of revenue streams. So there's a lot
Speaker 2: of complexity, but ultimately it means fewer individual investors analyzing
Speaker 2: that complexity, which then leads to different types of inefficiencies
Speaker 2: and opportunities for active management.
Speaker 1: Well, how important would you say flexibility is today just
Speaker 1: in today's bond market? I guess, like, in other words,
Speaker 1: how valuable is it to have a manager who can
Speaker 1: shorten duration, or avoid certain sectors or lean into dislocations
Speaker 1: when markets change quickly?
Speaker 2: I think it is important today. I think all the
Speaker 2: things that we've been talking about are not unique to
Speaker 2: this specific environment. But these are structural types of inefficiencies
Speaker 2: that have existed for a very long time, that have
Speaker 2: a lot of academic literature supporting them, that also we
Speaker 2: think are likely to continue to exist in the future
Speaker 2: and including in the present as well. We talked about
Speaker 2: the overall kind of duration or the interest rate exposure,
Speaker 2: and how investors had the most exposure at the wrong
Speaker 2: time there. We've seen that in other areas. You can
Speaker 2: kind of think about the shale boom. In the kind
Speaker 2: of post global financial crisis period, investors may be reaching
Speaker 2: for a little bit of yield investing and lending on
Speaker 2: easier terms to energy companies than we had a big
Speaker 2: energy cycle in twenty fifteen. In twenty sixteen that wiped
Speaker 2: out a lot of capital. As active managers, Again, you're
Speaker 2: not just tracking those exposures and getting more of the
Speaker 2: exposure after all of the lending is done. You can
Speaker 2: really dispassionately look at that and say, are you getting
Speaker 2: compensated for those risks given the underlying fundamentals and dynamics
Speaker 2: that are that are in place at that time. So
Speaker 2: when we look today, you know, there's a couple of
Speaker 2: things that we look at. Ye know, one is is
Speaker 2: what's happening within AI. We do expect that to fundamentally
Speaker 2: alter a lot of business models. There's a lot of focus,
Speaker 2: and we think for good reason on software companies. That's
Speaker 2: been an area that's grown dramatically in the last couple
Speaker 2: of decades. I think investors on the fixed income side
Speaker 2: really need to think about, you know, where do they
Speaker 2: have that exposure, whether it's in private markets or the
Speaker 2: syndicated loan market or in public fixed inc in markets,
Speaker 2: is it the proper exposure given how much that has
Speaker 2: grown over the last couple of decades. Conversely, we've seen
Speaker 2: interest rates increase increase pretty dramatically. Given events that are
Speaker 2: occurring in the Middle East, this may be a time
Speaker 2: that investors want to be able to lock in higher
Speaker 2: yields rather than what we saw previously when yields were
Speaker 2: incredibly low and they were taking more interest rate risk.
Speaker 2: We've actually seen duration, so that interest rate exposure, the
Speaker 2: risk that investors had, it's come down significantly from twenty
Speaker 2: twenty two. The cost of borrowing has gone higher. What
Speaker 2: are borrowers doing. They're borrowing for a shorter time period now,
Speaker 2: so this may be a time that investors want to
Speaker 2: move the other direction. So we do see a lot
Speaker 2: of opportunities. We think the value in that flexibility is
Speaker 2: high today has ever been.
Speaker 1: Also want to ask about central bank intervention and the
Speaker 1: potential for distorting markets. You know, if we think about
Speaker 1: mortgage back security during COVID, does passing investing become more
Speaker 1: dangerous when markets are being heavily influenced by the central banks?
Speaker 2: It absolutely does. And this is another component that is
Speaker 2: I think much more pronounced in the fixed income investing world,
Speaker 2: and that is the prevalence of non economic buyers. Right
Speaker 2: there is a spectrum. Some are kind of less economic
Speaker 2: than others. But on the one end you have things
Speaker 2: like central banks, something like the Bank of Japan, the
Speaker 2: Bank of Japan owns roughly fifty percent of the total
Speaker 2: outstanding debt of the Government of Japan. They are not
Speaker 2: buying that debt because they're trying to hit return bogies.
Speaker 2: They're trying to manage their economy, and you see this
Speaker 2: from kind of treasury departments in central governments in different
Speaker 2: places that may be managing to a specific currency target
Speaker 2: or currency pag These are not economic decision. But there
Speaker 2: are also incredibly large and influential institutional buyers in the
Speaker 2: fixed income market that are maybe partially economic. You can
Speaker 2: think of insurance companies or commercial banks. They may be
Speaker 2: having to buy certain types of securities for regulatory reasons.
Speaker 2: They may be kind of looking and trying to make
Speaker 2: a partially economic decision, but they might be constrained by
Speaker 2: a rating or a maturity, or a particular type of
Speaker 2: industry or that type of thing, and therefore they might
Speaker 2: be limited in what they would actually do did they
Speaker 2: not have to hit those kind of regulatory targets, which
Speaker 2: can lead to mispricing as well. So I think that
Speaker 2: is a really big factor, especially when you look at
Speaker 2: how large some of these buyers are in a fixed
Speaker 2: income market, and you really don't see anything comparable on
Speaker 2: the equity side.
Speaker 1: You mentioned earlier, you know, one of the benefits of
Speaker 1: active bond investing is lower cost. But I just kind
Speaker 1: of want to you know, when we think of low cost,
Speaker 1: it's you know, index investing, and you know like that,
Speaker 1: I think the before active kind of had a rebound recently,
Speaker 1: you know, index investing was kind of the big thing
Speaker 1: that all you know, a lot of retail investors really into.
Speaker 1: But is there a hitting cost passive bond investing, you
Speaker 1: know for investors?
Speaker 2: Yeah, I think it there there is, you know, and
Speaker 2: it's really opportunity cost, right, And I think you brought
Speaker 2: it up earlier, and I think it's you know, you
Speaker 2: really hit the nail on the head. I mean, there
Speaker 2: it is not just about higher returns and taking more risk,
Speaker 2: but is actually those risk adjusted returns and it is
Speaker 2: the cost of a lack of diversification. And so when
Speaker 2: you look at the overall return stream, and this is
Speaker 2: where there's been a lot of research across a broad
Speaker 2: array of different types of fixed income strategies, but the
Speaker 2: median active manager tends to outperform their benchmarks over the
Speaker 2: long running. See that over and over again, and that's
Speaker 2: even true if you adjust for beta, look at something
Speaker 2: like Jensen's elf or you know something that says, okay,
Speaker 2: maybe this manager is structurally overweight a riskier part of
Speaker 2: the market. Are you getting compensated for that? And it
Speaker 2: still holds up the vast majority of time and a
Speaker 2: lot of different active parts of fixed income, And so
Speaker 2: I think in vetters really do need to think about
Speaker 2: that that opportunity cost. What is the opportunity cost of
Speaker 2: maybe being more exposed to, you know, the prices that
Speaker 2: can be driven by non economic actors. What is the
Speaker 2: opportunity cost of not being able to invest in more
Speaker 2: attractive risk adjusted return opportunities that are outside of the
Speaker 2: benchmark due to you know, some kind of archaic type
Speaker 2: of benchmark rule that that hasn't been updated in decades.
Speaker 2: I think all of those different types of things need
Speaker 2: to be taken into account for the cost of passive
Speaker 2: investing when you're comparing it to active investors that have
Speaker 2: more more flexibility to be able to take advantage of
Speaker 2: those limitations.
Speaker 1: So your research also showed that passive core bond strategies
Speaker 1: ab underperform the Bloomberg ag after fees, you know, over
Speaker 1: was it five year rolling periods since since O eight,
Speaker 1: and you know, I think it kind of goes back to,
Speaker 1: you know, the whole fees issue. I mean, why do
Speaker 1: you think the whole fee fees are everything now have
Speaker 1: kind of remained so dominant today.
Speaker 2: I mean, ultimately, I think it is kind of the
Speaker 2: bird in the hand instead of the two in the
Speaker 2: bush type of idea. Investors know exactly what the fee is.
Speaker 2: It's explicit, it's stated. And this comes back to, I
Speaker 2: think kind of a shortcut from some very valuable lessons
Speaker 2: that investors have learned over many, many decades around the
Speaker 2: cost of active management and certain types of equity strategies
Speaker 2: where maybe they weren't getting that value and the in
Speaker 2: the cost was higher, and so they've applied many of
Speaker 2: those lessons to the fixed income universe, where we don't
Speaker 2: think it applies. Again, both on the benefit and the
Speaker 2: cost side. The fees and the fixed income side are
Speaker 2: are much much lower, but the value being delivered is
Speaker 2: significantly higher because there are all of these structural inefficiencies
Speaker 2: and opportunities for active managers to add value on the
Speaker 2: fixed income side. So I do think that is that
Speaker 2: the big issue is it is is simple, and it
Speaker 2: is kind of a heuristic that that investors that have
Speaker 2: learned from many years on the equity side of investing.
Speaker 1: So if someone owned a passive aggregate bond fund today,
Speaker 1: what exposures at risk? You know, would you tell them
Speaker 1: that they might not really fully appreciate.
Speaker 2: So it definitely depends on kind of which type of
Speaker 2: multi sector. But if you're looking at US kind of
Speaker 2: of US types of investment grade, we do think that
Speaker 2: there is actually very good value in things like mortgages
Speaker 2: in the securitized space. So you can compare that to
Speaker 2: let's say two thousand and eight, when investors were the
Speaker 2: most exposed to the US housing market, again right before
Speaker 2: the global financial crisis. During the Global financial crisis, they
Speaker 2: had the largest exposure at arguably the worst possible time. Again,
Speaker 2: we don't think that was an accident. I think that
Speaker 2: was the result of the issuance patterns that we were
Speaker 2: seeing back then. Today there is very little issuance. The
Speaker 2: housing market has slowed down significantly, but we think that
Speaker 2: the fundamentals are much much stronger, and if anything, investors
Speaker 2: may be under exposed to that type of market. So
Speaker 2: I think is a potential risk of not having kind
Speaker 2: of enough exposure to some of the more attractive parts
Speaker 2: of the market. We talked a little bit about interest rates. Again,
Speaker 2: we've seen raps move higher as a result of what's
Speaker 2: happening in the Middle East. When we look out kind
Speaker 2: of six months, you know, we would anticipate that that
Speaker 2: becomes less of a focus for investors. We think investors
Speaker 2: will you know, six months from now, really be focusing
Speaker 2: more on what does AI mean for the economy and
Speaker 2: what does that mean for inflation. We see that as
Speaker 2: a strong disinflationary force. We would argue that means you
Speaker 2: want to take advantage of the yields that are on
Speaker 2: offer today. So I think investors not fully appreciating maybe
Speaker 2: the headlines in what that may mean for future returns
Speaker 2: in the fixed income space. Those are a couple of
Speaker 2: opportunities things that we think really investors are not not
Speaker 2: fully appreciating in the current market environment.
Speaker 1: Okay, so I have a couple of questions, but you know,
Speaker 1: first I just want to ask you about the future
Speaker 1: before we kind of get into you know, where where
Speaker 1: you're currently positioning. But where do you think active bond
Speaker 1: managers can add the most value over the next decade,
Speaker 1: So you know, going out ten years is a security
Speaker 1: selection in sector rotation, duration management or something else.
Speaker 2: Yeah, our view, and we talk about this is really
Speaker 2: a differentiating factor in the active space is to really
Speaker 2: use what we talk about as a multiple levers type
Speaker 2: of approach. Again, there are so many different reasons and
Speaker 2: different types of opportunities in different cycles that create these
Speaker 2: types of opportunities. We would like to be able to
Speaker 2: utilize all of them to again not just look for
Speaker 2: higher return but also to properly risk managed portfolios through
Speaker 2: the cycle. So we think there are opportunities in duration,
Speaker 2: in curve, cross sectors, geographies. Security selection has been a
Speaker 2: calling card for our firm for a very very long time.
Speaker 2: We have had very very good results and there's always
Speaker 2: securities that are going to outperform other securities regardless of
Speaker 2: what type of cycle you're in. So we really do
Speaker 2: think that it's this this kind of multiple levers approach
Speaker 2: and how you build all the active decisions in a
Speaker 2: really diversified way that ultimately will not just create stronger returns,
Speaker 2: but again more more efficient risk adjusted returns to the
Speaker 2: cycle and over the long run.
Speaker 1: Okay, and if we kind of talk you know more
Speaker 1: short term, you know, your head of global macro, and
Speaker 1: so just love to get you know, get where you
Speaker 1: know the firm and you're thinking, you know, wise is
Speaker 1: over the next few months. I know you mentioned, you know,
Speaker 1: the war in the Middle East and AI are some
Speaker 1: of the things I've heard in the conversation, and so
Speaker 1: I just I'd love to kind of get a little
Speaker 1: bit of an overview of you know, what you're thinking
Speaker 1: about over the next few months in terms of where
Speaker 1: you're positioning. Yeah.
Speaker 2: Absolutely, so, we've we're looking at the fake think of marketplace.
Speaker 2: We do think that the focus on really what's happening
Speaker 2: in the Middle East and the implications for for longer
Speaker 2: term inflation risk and ultimately monetary pot is a bit overdone.
Speaker 2: We're seeing the market price in an expectation of the
Speaker 2: Fed actually hiking rather than cutting. We don't think that
Speaker 2: is correct. We still think that the next move, even
Speaker 2: if it is getting pushed out into next year, is
Speaker 2: more likely to be a cut rather than a hike.
Speaker 2: And this does come back to our view that the
Speaker 2: issues in the Middle East will become less of a
Speaker 2: focus for investors in a couple of quarters, and that
Speaker 2: AI is going to be a positive supply shock that
Speaker 2: ultimately reduces costs for the economy and ultimately prices inflation
Speaker 2: and allows the FED to resume reducing interest rates. So
Speaker 2: that is one big factor. The other factor I think
Speaker 2: is interesting is really the global opportunities set. We talked
Speaker 2: about how the US HAG is only about one fifth
Speaker 2: of the total fixed income marketplace. That the opportunities that globally,
Speaker 2: whether that's in developed markets or in emerging markets outside
Speaker 2: of the US, continues to expand. So all of these
Speaker 2: issues that we've talked about, those issues are just becoming
Speaker 2: bigger and bigger over time. Because in the nineteen eighties
Speaker 2: and the nineteen nineties, the global public fixed income marketplace
Speaker 2: was predominantly a US market. A lot of the opportunities
Speaker 2: outside of the US we're not as developed, a lot
Speaker 2: of that lending was done on bank balance sheets. It
Speaker 2: is becoming more of a public fixed income marketplace, which
Speaker 2: means there are more opportunities outside of the US, and
Speaker 2: we have seen a lot of these non US fixed
Speaker 2: income markets underperform as a result of their dependence on
Speaker 2: on energy and what's happening with Iran today. So we
Speaker 2: see the global fixed income universe not only you know,
Speaker 2: structure uh more more attractive, but also from a shorter
Speaker 2: cyclical standpoint, providing better better value, better yield, and better
Speaker 2: risk adjusted returns as well.
Speaker 1: So I've got just one more question I think kind
Speaker 1: of sums everything up, you know. Obviously, I think a
Speaker 1: lot of investors kind of focus on the equity markets
Speaker 1: and not as much as the bond markets, or at
Speaker 1: least when we're talking about retail investors.
Speaker 2: And so.
Speaker 1: I guess my question is what would surprise you know,
Speaker 1: retail equity investors most if they looked, how you know,
Speaker 1: if they really look closely at how bond markets actually function.
Speaker 2: I think that they would be uh surprised at the
Speaker 2: value that is available in the active fixed income uh marketplace,
Speaker 2: even from a im median manager. I don't think you know, investors,
Speaker 2: you know, maybe oftentimes you know, trying to catch the
Speaker 2: hot hand, find the you know, the top desktop performer
Speaker 2: in some given given year, but simply alec aiding a
Speaker 2: portion to the active fixed income marketplace, getting a median manager,
Speaker 2: I think they would be surprised at the type of
Speaker 2: a value that can be generated by making that decision. Again,
Speaker 2: there is a lot of focus on the equi world
Speaker 2: because the returns can be so significantly higher and the
Speaker 2: volatility can be the higher. But on the fixed income side,
Speaker 2: really look at that, it's kind of the low hanging
Speaker 2: fruit that investors should spend more time focusing on what
Speaker 2: is really, in our view, an easier investment decision, which
Speaker 2: is being able to generate possibly twenty five or maybe
Speaker 2: fifty basis points of access returns for relatively low risk
Speaker 2: active types of strategies compared to the cost, which is
Speaker 2: oftentimes a fraction of that potential return as opposed to
Speaker 2: chasing you know, multiple percentage points the potential upside, but
Speaker 2: with the potent downside, and with much higher costs as well.
Speaker 2: So we do view that as is something that investors
Speaker 2: would be surprised at the type of a bargain they
Speaker 2: can get in the active fixed income world today.
Speaker 1: Great, well, unfortunately we need to end here, but I
Speaker 1: really enjoy this. Noah, thanks again for joining me.
Speaker 2: Thank you, David enjoyed it.
Speaker 1: I also want to thank our listeners. If you liked
Speaker 1: the episode, please share, subscribe, and leave a review. And
Speaker 1: if you'd like to see more of our research on
Speaker 1: the terminal, go to BI Fund go for fund and
Speaker 1: active research until our next episode. This is David Cone
Speaker 1: with inside Active