WEBVTT - Dimensional Says Public Debt Has the Edge Over Private 0:00:17.720 --> 0:00:20.440 Hello, and welcome to the Credit Edge, a weekly markets podcast. 0:00:20.640 --> 0:00:23.759 My name is James Crombie. I'm a senior editor at Bloomberg. 0:00:23.440 --> 0:00:27.160 And I'm Jeannief Cooper, senior analyst at Bloomberg Intelligence. This week, 0:00:27.200 --> 0:00:30.760 we are very pleased to welcome Savina Risova, co Chief 0:00:30.760 --> 0:00:35.040 Investment Officer and Global head of Research at Dimensional Fund Advisors, 0:00:35.280 --> 0:00:38.920 at seven hundred and ninety billion investment firm. How are you, Savina, good? 0:00:39.000 --> 0:00:40.040 Thank you for inviting me. 0:00:40.320 --> 0:00:43.839 Savina joined Dimensional Fund Advisors as a research associate in 0:00:43.840 --> 0:00:46.240 two thousand and four, and just of our year ago 0:00:46.600 --> 0:00:49.680 she added the title of co Chief Investment Officer. You 0:00:49.760 --> 0:00:53.240 also obtained a PhD in finance from the University of Chicago. Last, 0:00:53.240 --> 0:00:56.440 but not least, Sabina was recognized as one of Barn's 0:00:56.520 --> 0:00:59.560 one hundred most Influential Women in US Finance for two 0:00:59.640 --> 0:01:00.280 years in. 0:01:00.680 --> 0:01:01.880 So we're going to get into all that, but just 0:01:01.920 --> 0:01:04.360 to set the scene before we do. Markets have rallied 0:01:04.360 --> 0:01:06.760 on high hopes of a broad ceasefire in the trade war, 0:01:07.040 --> 0:01:09.360 but there's still a lot of uncertainty out there, plus 0:01:09.360 --> 0:01:12.280 more volatility to come as the US moves on from 0:01:12.360 --> 0:01:16.679 tariffs to tax and immigration. Reform, headline risk is very high, 0:01:16.760 --> 0:01:19.920 yet credit markets project an air of complacency, with debt 0:01:19.959 --> 0:01:22.480 spreads back below where they were before the so called 0:01:22.520 --> 0:01:26.360 Liberation Day at the start of April. Keeping corporate debt 0:01:26.440 --> 0:01:28.640 risk premium very tight is the fact that there's way 0:01:28.680 --> 0:01:31.319 too much demand for a very limited net new supply 0:01:31.440 --> 0:01:34.160 of corporate bonds, and unless the M and A machine 0:01:34.200 --> 0:01:38.000 cranks back up, that supplied demand imbalance will probably continue. 0:01:38.280 --> 0:01:40.199 On top of that, the US has lost its Triple 0:01:40.240 --> 0:01:42.880 A credit rating, calling into question the idea of risk 0:01:42.959 --> 0:01:45.440 free rate and investors are now looking more at Europe 0:01:45.440 --> 0:01:48.200 and Asia as alternatives, but there are clear limitations when 0:01:48.240 --> 0:01:51.640 it comes to scale and liquidity there. So, Sabina, what's 0:01:51.680 --> 0:01:54.080 your take. I'm going to ask a really broad question 0:01:54.120 --> 0:01:55.720 because it's one that keeps coming up on this show. 0:01:55.720 --> 0:01:58.600 But is credit fairly valued at these levels? 0:01:59.000 --> 0:02:02.480 Well, the meension we don't pretend to have a crystal bow, 0:02:02.600 --> 0:02:07.000 James and know where prices are relative to fair value. 0:02:07.520 --> 0:02:11.400 We actually take priceses kind of given in public competitive 0:02:11.480 --> 0:02:15.520 capital markets. But what we can say is where the 0:02:15.560 --> 0:02:19.120 current credit spreads are relative to historical averages and medians, 0:02:19.480 --> 0:02:22.880 and these days, what you mentioned is absolutely correct. Credit 0:02:22.880 --> 0:02:26.680 spreads have are about eighty to ninety beps depending on 0:02:26.720 --> 0:02:30.679 whether you look at US or global markets below historical 0:02:30.760 --> 0:02:33.920 mediums of over one hundred, one hundred and ten basis points, 0:02:34.160 --> 0:02:39.480 So definitely narrower credit spreads and based on academic research 0:02:39.560 --> 0:02:44.480 underpinning our approach that suggests lower credit premiums expected in 0:02:44.520 --> 0:02:49.600 the future. As a result, our core strategies tend to 0:02:49.639 --> 0:02:53.920 not go to their maximum allowed credit allocation right now, 0:02:54.040 --> 0:02:58.920 and our credit strategies are not allocated to the maximum 0:02:59.040 --> 0:03:01.960 in what we call low work here single aay tripob 0:03:02.120 --> 0:03:03.399 bombs for example. 0:03:03.800 --> 0:03:06.080 So in terms of allocation, I mean, are you looking 0:03:06.560 --> 0:03:09.679 across the credit spectrum, do you have any views on 0:03:10.320 --> 0:03:14.080 higher quality names versus lower quality names given the environment. 0:03:14.560 --> 0:03:17.480 Absolutely, And it's probably worth kind of taking a step 0:03:17.480 --> 0:03:20.080 back and just telling people a little bit more about 0:03:20.120 --> 0:03:22.680 who they mention is and how we approach investing both 0:03:22.720 --> 0:03:25.880 in equities and fixed income, because I think it's pretty 0:03:25.960 --> 0:03:28.480 unique and different from a lot of guests you've had 0:03:29.000 --> 0:03:32.680 on the podcast. The Dimensional is a firm that was 0:03:32.720 --> 0:03:37.400 founded in nineteen eighty one to implement kind of rigorous 0:03:37.480 --> 0:03:42.760 research into robust investment solutions. One we would like to 0:03:42.760 --> 0:03:46.800 think about. It is sensible ideas, implement it thoughtfully and 0:03:46.960 --> 0:03:50.360 so and it comes to fixed income. You mentioned Gene 0:03:50.400 --> 0:03:55.119 Fama being one of the academics tightly connected to dimensional 0:03:55.600 --> 0:03:57.560 He did a lot of research in the seventies and 0:03:57.560 --> 0:04:01.600 eighties in terms of what drives expect bond returns. And 0:04:01.640 --> 0:04:05.360 if you think of the expected returnal defaulte free bond, 0:04:05.560 --> 0:04:08.920 like what my thing, the US bond still US government 0:04:08.920 --> 0:04:12.560 bands still consider it uh to your earlier point, UH, 0:04:12.920 --> 0:04:16.000 you can actually write it down as like three terms 0:04:16.360 --> 0:04:21.560 yield expected capital appreciation or depreciation depending on the shape 0:04:21.560 --> 0:04:24.159 of the curve, so roll down as some call it. 0:04:24.480 --> 0:04:27.880 And the third term is expected changes in the shape 0:04:27.880 --> 0:04:31.480 of the youth curve. And between now and when you 0:04:31.800 --> 0:04:35.360 expect to sell the bond. So the first two components 0:04:35.360 --> 0:04:39.680 of that decomposition, yield and roll down together our called 0:04:39.800 --> 0:04:44.680 forward rates. And there is a lot of empirical academic 0:04:44.720 --> 0:04:49.839 reaserch showing that forward rates do contain information about subsequent 0:04:50.040 --> 0:04:54.200 bond returns. So differences in forward rates across bonds contain 0:04:54.279 --> 0:04:58.880 information about differences in future bond returns. And you can 0:04:58.920 --> 0:05:02.839 apply the frame and tested and we have not only 0:05:02.920 --> 0:05:07.279 across duration spectrum, but also across credit quality spectrum and 0:05:07.400 --> 0:05:12.760 across currency of issue spectrum. So, for example, the differences 0:05:12.839 --> 0:05:17.320 in fields or forward rates between longer and shorter bonds 0:05:17.800 --> 0:05:21.800 tell you the term spread essentially contain information about the 0:05:21.839 --> 0:05:24.919 future term premium. The wider the term spread is generally 0:05:24.960 --> 0:05:28.839 the wider the subsequent future term premium is. Similarly for 0:05:28.960 --> 0:05:31.320 credit premium and credit spread. That's why I said like 0:05:31.680 --> 0:05:35.200 currently credit spreads are relatively narrower, which means we expect 0:05:35.400 --> 0:05:40.360 relatively narrower credit premiums less reward for holding credit. And 0:05:40.400 --> 0:05:45.279 then similarly you can apply it across different currencies around 0:05:45.320 --> 0:05:48.600 the world. For example, HATCH to USD looking at what's 0:05:48.640 --> 0:05:54.880 steep versus flatter, the steeper curves HASH to USD imply 0:05:55.120 --> 0:05:59.159 higher expected reward for going into those bonds and hedging 0:05:59.279 --> 0:06:04.600 back to USD right now. For example, the Japanese government 0:06:05.040 --> 0:06:09.160 bond curve is relatively steeper haah to USD compared to 0:06:09.560 --> 0:06:13.840 many other develop market currencies, so some of our strategies 0:06:13.880 --> 0:06:17.359 that are allowed to go global are allocating more to 0:06:17.480 --> 0:06:23.280 Japanese intermediate bonds. So in essence that the dimensional we 0:06:23.440 --> 0:06:26.320 look at forward rates the combination of field and roll 0:06:26.400 --> 0:06:31.320 down as the indication of where highest expected returns are 0:06:31.400 --> 0:06:35.200 and allocate on a daily basis based on differences in 0:06:35.240 --> 0:06:39.120 expected returns and those expected returns those forward rates can 0:06:39.200 --> 0:06:42.400 change any day across the credit, the duration and the 0:06:42.440 --> 0:06:45.240 currency of vision spectrum. So it is important to have 0:06:45.279 --> 0:06:50.200 a daily process where we consume information, compute those expect returns, 0:06:50.480 --> 0:06:53.120 and decide how to allocate new cash community or from 0:06:53.160 --> 0:06:56.359 coupons or from cash flows, and what to buy what 0:06:56.480 --> 0:06:59.120 to sell based on those expected return differences. 0:07:00.040 --> 0:07:03.080 Say, Savi, you have a sort of scientific approach to this, 0:07:03.880 --> 0:07:06.600 and you know, you talk about decades of rigorous theoretical 0:07:06.760 --> 0:07:10.080 empirical research. But as we've discussed, you know, the so 0:07:10.160 --> 0:07:14.480 called developed markets are becoming highly unpredictable as politics becomes 0:07:14.520 --> 0:07:16.880 such a big factor. You know, I would say that 0:07:16.920 --> 0:07:19.240 they're behaving a lot more like emerging markets than they 0:07:19.320 --> 0:07:21.800 used to. Who knows what social media posts will wake 0:07:21.880 --> 0:07:24.800 up to on any given day that will royal global markets. 0:07:25.360 --> 0:07:27.560 But how does that affect your approach? Do you need 0:07:27.640 --> 0:07:29.440 new models for that? Do you rip up the script 0:07:29.440 --> 0:07:32.240 and have to you know, really just improvise a lot 0:07:32.280 --> 0:07:33.080 more than you used. 0:07:32.960 --> 0:07:37.000 To not really exactly, because we are kind of grounded 0:07:37.080 --> 0:07:43.160 in evercreen principles of what drives expect the returns. All 0:07:43.200 --> 0:07:47.400 we need is latest market prices essentially to identify bonds 0:07:47.440 --> 0:07:50.440 with higher versus lower expect the returns. And that's why 0:07:50.480 --> 0:07:53.720 we are big advocates for price transparency and we're very 0:07:53.720 --> 0:07:57.200 happy to see trace that trade reporting and compliance engine 0:07:57.240 --> 0:07:59.960 arrived in the early two thousands bringing a lot of 0:08:00.160 --> 0:08:04.320 transparency to the corporate bond market in USD and now 0:08:04.480 --> 0:08:08.080 there's tracks for a non USD. So we have that 0:08:08.240 --> 0:08:10.560 and we use it on a daily basis in real 0:08:10.640 --> 0:08:14.760 time during the day to essential monitor prices as well 0:08:14.800 --> 0:08:20.800 as bidden as quotes across many different bonds to identify 0:08:21.320 --> 0:08:24.120 differences in expected returns. But what we also do with 0:08:24.440 --> 0:08:28.120 current market information as it changes all the time to 0:08:28.200 --> 0:08:31.560 your point right now very volatile markets, is also used 0:08:31.600 --> 0:08:35.479 current market information for the other two very important dimensions 0:08:35.480 --> 0:08:38.800 of investing. So one day mention is expected returns. The 0:08:38.840 --> 0:08:42.480 other two day mensions of investing in general are risks 0:08:42.640 --> 0:08:46.240 and costs, and we use current market information all the 0:08:46.320 --> 0:08:50.840 time to manage risks and control costs in our portfolio. 0:08:50.880 --> 0:08:54.160 Is because we believe that you can add value by 0:08:54.280 --> 0:08:58.400 systematically designing strategies to pursue higher expected returns, but you 0:08:58.440 --> 0:09:01.680 can also add value through talk for portfolio management and trading, 0:09:02.120 --> 0:09:05.800 how do you use current market information? In portfolio management, we, 0:09:05.920 --> 0:09:09.080 for example, track to your point within the day through 0:09:09.440 --> 0:09:13.920 and daily. The deer inventory trace gives us kind of 0:09:13.960 --> 0:09:16.960 information on net deer buys and sales throughout the day. 0:09:17.720 --> 0:09:22.160 We also get that information daily from similar information daily 0:09:22.200 --> 0:09:25.320 from Blueberg and inter the day from trade web and 0:09:25.400 --> 0:09:28.080 market access platforms that many of your listeners probably are 0:09:28.080 --> 0:09:32.959 familiar with, and this helps us identify bones where dealers 0:09:33.040 --> 0:09:36.720 might in augria have an inventory, accumulated inventory might be 0:09:36.720 --> 0:09:39.520 willing to sell to us at a favorable price, and 0:09:39.600 --> 0:09:44.360 similarly for sales, so der inventory is very important to 0:09:44.480 --> 0:09:49.360 monitor to get great execution. Also, we use market prices 0:09:49.400 --> 0:09:53.439 to monitor credit quality. To your point, in the last 0:09:53.440 --> 0:09:57.600 five years, most of the credit rating changes internal credit 0:09:57.720 --> 0:10:01.480 rating changes we've performed most have been driven by prices 0:10:01.559 --> 0:10:05.439 information in current market prices, not by credit rating agencies 0:10:05.600 --> 0:10:09.760 changing their ratings. So what we use there is not 0:10:09.880 --> 0:10:14.479 just prices of bonds, trading or quotes, but also CDs 0:10:14.480 --> 0:10:18.760 market prices. Even the equity prices of the issues of 0:10:18.840 --> 0:10:23.559 those bonds, so you can use current real time market 0:10:23.640 --> 0:10:26.720 information along with kind of the academic framework for what 0:10:26.840 --> 0:10:31.520 drives expected returns to continue to deliver robust investment solutions 0:10:31.600 --> 0:10:35.960 even in highly volatile times as we are experiencing this year. 0:10:36.760 --> 0:10:39.960 So in terms of your investment approach, I mean, I 0:10:39.960 --> 0:10:44.080 mean the two main investment approach being top down or 0:10:44.120 --> 0:10:47.160 bottoms up, and especially you know, looking at all these 0:10:47.240 --> 0:10:50.320 data that is available in terms of as you said, 0:10:50.320 --> 0:10:55.240 trade and ventory prices, how do you reconcile the two 0:10:55.520 --> 0:10:59.240 and how your investment process I'm sure incorporates you know, 0:10:59.240 --> 0:11:02.560 both of the top down view from rates to you know, 0:11:02.600 --> 0:11:05.880 sectors and then the bottom up this this bond is 0:11:05.920 --> 0:11:10.280 actually treading wide or cheap against another one, and that's the. 0:11:10.240 --> 0:11:13.440 Time to buy. Yeah, thank you for the question. It's 0:11:13.440 --> 0:11:16.240 a common question we get because people are in fixed 0:11:16.320 --> 0:11:19.680 income are generally used to two types of investing traditional 0:11:19.760 --> 0:11:21.880 passive and by the way, these are the biggest kind 0:11:21.880 --> 0:11:26.560 of ETFs and mutual funds out there. Indexed approach in 0:11:26.640 --> 0:11:30.760 fixed income with some sampling under the hood, or traditional 0:11:30.800 --> 0:11:35.559 active where you're typically either top down for making macroeconomic 0:11:35.600 --> 0:11:38.880 forecasts and then driving your investment or bottom up picking 0:11:38.920 --> 0:11:43.559 individual bonds based on research on specific sectors or currencies, 0:11:43.559 --> 0:11:48.480 et cetera. We are kind of combining the best of 0:11:48.559 --> 0:11:52.240 both worlds, traditional passive and traditional active in the sense 0:11:52.240 --> 0:11:55.520 that we have broad diversification in our strategies and relatively 0:11:55.559 --> 0:11:59.720 low turnover just like traditional passive, but we are taking 0:11:59.760 --> 0:12:04.439 from traditional active the daily flexible implementation in the pursuit 0:12:04.480 --> 0:12:07.280 of higher expected returns. How do we do it, though 0:12:07.360 --> 0:12:11.880 different from traditional active? Are we top down or bottom up? 0:12:12.480 --> 0:12:17.480 I would say we're both. Why because we start every 0:12:17.559 --> 0:12:21.199 day by looking at the overall spreads out there, turn spreads, 0:12:21.240 --> 0:12:25.440 credit spreads, and spreads across different field cares, heads to 0:12:25.640 --> 0:12:30.360 a local currency, and that kind of guys the overall 0:12:30.400 --> 0:12:33.960 positioning of a portfolio in terms of how much we 0:12:34.000 --> 0:12:38.560 want to okay to credit corporates versus governments or different 0:12:38.600 --> 0:12:41.400 types of currencies. Once we get do this kind of 0:12:41.440 --> 0:12:46.240 top down analysis based on current market information, then we 0:12:46.480 --> 0:12:48.880 try to kind of bottom up looking at what we hold, 0:12:49.080 --> 0:12:51.680 what we want to hold, which bonds within kind of 0:12:51.679 --> 0:12:54.439 the para. Now those parameters how much we want to 0:12:54.480 --> 0:12:58.199 okay to corporate today versus governments within corporates, Let's say, 0:12:58.200 --> 0:13:00.960 which are the bonds with highest expected returns, most attractive 0:13:00.960 --> 0:13:04.560 forward rates, And we start kind of identifying bonds that 0:13:04.600 --> 0:13:07.079 we would like to buy today based on that approach, 0:13:07.200 --> 0:13:10.640 very systematic, and then what we do is we go 0:13:10.880 --> 0:13:13.719 filter those bonds to a bunch of criteria including kind 0:13:13.720 --> 0:13:16.480 of how liquid those bonds are in the marketplace today, 0:13:16.720 --> 0:13:20.280 are we likely to get good prices for those bonds? 0:13:20.520 --> 0:13:23.319 And then once we kind of set on a group 0:13:23.360 --> 0:13:25.560 of bonds we'd like to buy, we pass this to 0:13:25.600 --> 0:13:28.920 the trading that so for from portfolio management to trading, 0:13:29.480 --> 0:13:33.439 where traders whould go to the marketplace and very flexibly 0:13:33.920 --> 0:13:38.679 seek to purchase some of those bonds without being particularly 0:13:38.760 --> 0:13:41.440 attached to an individual bond. And I think this is 0:13:42.200 --> 0:13:45.400 also a huge differentiator for the dimensional is that we 0:13:45.480 --> 0:13:49.920 are not chasing individual bonds picks of a portfolio manager, 0:13:50.080 --> 0:13:52.920 not at all, and that gives us the ability to 0:13:53.000 --> 0:13:55.880 have great execution. What do I mean by great execution? 0:13:56.360 --> 0:14:00.720 When we compare our corporate and agency trades versus the 0:14:00.800 --> 0:14:03.760 prior trade in the same issue or the next trait, 0:14:04.200 --> 0:14:07.240 on average, our trades are twenty basis points better on 0:14:07.280 --> 0:14:10.120 the buy side and five to ten basis points better 0:14:10.160 --> 0:14:13.679 on the sales side because we trede flexibly with patients 0:14:14.000 --> 0:14:17.520 with optionality out there, we have multiple bonds with similar 0:14:17.559 --> 0:14:20.840 expactor returns that we're interested in buying or selling today. 0:14:21.440 --> 0:14:24.800 Your approach seems take a lot of trust in what 0:14:24.840 --> 0:14:27.720 the market price is selling us in terms of transparency 0:14:27.720 --> 0:14:30.080 in terms of the liquidity. But as you know, you know, 0:14:30.280 --> 0:14:32.200 the further you get down the rating spectrum and the 0:14:32.200 --> 0:14:34.160 more you get into sort of exotic credit you know 0:14:34.160 --> 0:14:37.360 e merging markets, those markets get stuff wrong all the time. 0:14:37.440 --> 0:14:40.600 You know, the signals are just plain wrong. How do 0:14:40.640 --> 0:14:42.520 you protect yourself against that as an investor? 0:14:42.880 --> 0:14:48.040 Great question, James, Another great question. We have historically stuck 0:14:48.480 --> 0:14:51.840 to the parts of the market that benefit from a 0:14:51.840 --> 0:14:55.320 lot of price transparency. So, in terms of kind of history, 0:14:55.360 --> 0:15:00.720 Dimensional started in high quality corporate and government back in 0:15:00.800 --> 0:15:04.960 nineteen eighty three with its first fixed income strategy, and 0:15:05.000 --> 0:15:08.960 then later on expanded to develop market currencies, so applying 0:15:09.160 --> 0:15:12.720 our kind of variable maturity and variable currency approaches there. 0:15:13.080 --> 0:15:17.840 And then we started investing in full investment rate only 0:15:17.880 --> 0:15:21.120 in two thousand and nine, actually a few years after 0:15:21.280 --> 0:15:25.000 trades arrived and brought transparency to the corporate bond market, 0:15:26.200 --> 0:15:28.440 and then we started also kind of dipping our tools 0:15:28.440 --> 0:15:31.960 in double bees, but not going below that. To your point, 0:15:32.640 --> 0:15:35.360 once you go the low double bees into single bees 0:15:35.440 --> 0:15:40.080 and three POC's and below, one major concern is the 0:15:40.120 --> 0:15:44.640 default rates. The default rates increase meaningfully on average historically 0:15:44.680 --> 0:15:47.880 for single bees they are like three percent for trip 0:15:47.960 --> 0:15:51.400 o C and below twenty five plus percent. Those are 0:15:51.600 --> 0:15:55.640 we viewed those as not necessarily suitable investments for ETFs 0:15:55.640 --> 0:15:58.160 and mutual funds, which need to provide liquidity on a 0:15:58.240 --> 0:16:03.920 daily basis. Similarly, we've stuck through history to develop market currencies. 0:16:04.080 --> 0:16:07.240 We do not invest directly in emerging market currencies to 0:16:07.280 --> 0:16:10.560 a large degree because of price tre experiency, but also 0:16:11.800 --> 0:16:15.720 because of operational law and order consideration as well. 0:16:16.120 --> 0:16:18.760 I think there is an interesting point of you know, 0:16:18.840 --> 0:16:22.800 create risk transparency and maybe to switch gears a little 0:16:22.800 --> 0:16:26.400 bit and move into private credit. I mean, we've seen 0:16:26.440 --> 0:16:29.720 a huge expansion of private credit, but also a lot 0:16:29.720 --> 0:16:32.800 of comments and risks maybe out there, and some people 0:16:32.840 --> 0:16:36.920 have been saying there is maybe a risk of you know, 0:16:37.000 --> 0:16:40.280 ratings inflation, or risk of lack of transparency or very 0:16:40.280 --> 0:16:43.480 credit trade. I mean, how do you approach private credit 0:16:43.560 --> 0:16:45.560 as a nassage class within fix income. 0:16:46.160 --> 0:16:48.200 So as a manager, they mentioned it is in the 0:16:48.240 --> 0:16:52.200 public space public stocks and public bonds and a systematic approach. 0:16:52.880 --> 0:16:57.280 But we strive to be a very objective thought leader 0:16:57.320 --> 0:17:00.200 in the industry put a lot of papers out are 0:17:00.800 --> 0:17:04.200 the SIK to provide kind of a framework for how 0:17:04.240 --> 0:17:07.680 to think about different investment topics. And so a couple 0:17:07.720 --> 0:17:10.840 of years ago, with the growing interest in private and 0:17:10.920 --> 0:17:15.480 the growing i'd say push of private out there, we 0:17:15.640 --> 0:17:21.000 decided to actually buy data historical data from Burgess now 0:17:21.160 --> 0:17:27.240 MSCI on private fund performance and study private performance across 0:17:27.640 --> 0:17:31.000 four major asset classes, one of them being private credit. 0:17:31.359 --> 0:17:34.439 So we looked at historical performance of private credit from 0:17:34.520 --> 0:17:38.440 nineteen eighty to twenty twenty two, and what we found 0:17:38.520 --> 0:17:44.680 there for private credit was that depending on the average 0:17:44.800 --> 0:17:48.440 kind of historical ten year IRR is about ten percentage points, 0:17:48.480 --> 0:17:55.720 which sounds appealing, But when you compare to hyat public 0:17:55.800 --> 0:18:00.000 benchmarks like the Bloomberg Hi index, then what you see 0:18:00.080 --> 0:18:04.280 is that public market equivalent or direct out of measures 0:18:04.320 --> 0:18:08.280 comparing private to public performance are all kind of in 0:18:08.359 --> 0:18:12.320 favor of the high index. There is no outperformance relative 0:18:12.359 --> 0:18:16.840 to yield public bonds, which comes to tell you that 0:18:16.920 --> 0:18:22.080 private credit is, at least historically has been a way 0:18:22.200 --> 0:18:27.400 to get exposure to yield below investment grade credit. Does 0:18:27.480 --> 0:18:31.680 private credit provide additional diversification beyond what's available in the 0:18:31.720 --> 0:18:35.520 public market? Yes, absolutely. There are different bonds out there, 0:18:35.560 --> 0:18:39.200 generally different issuers going for the private route versus public, 0:18:39.320 --> 0:18:42.479 So there are some diversification benefits if you want to 0:18:42.520 --> 0:18:46.480 add private credit to your public exposure. But of course 0:18:46.560 --> 0:18:50.320 private comes with a lot of caveats and challenges, one 0:18:50.400 --> 0:18:54.880 of which you mentioned very important ones for US prices, 0:18:56.480 --> 0:19:00.800 frequent updates of prices, reliability of prices there it's not 0:19:00.960 --> 0:19:05.960 by accident, it's called private. Also, lack of adequate diversification 0:19:06.080 --> 0:19:10.879 because ultimately we cannot all own parts of all private companies, 0:19:11.280 --> 0:19:13.719 you cannot get the full diversification you get in public 0:19:13.760 --> 0:19:18.399 markets if you want to. And as a result, I think, well, 0:19:19.280 --> 0:19:22.960 it will be interesting to see how private interesting private 0:19:23.000 --> 0:19:27.800 credit develops, because there is kind of a an evergreen 0:19:27.880 --> 0:19:31.640 value proposition for private It is has its own economic 0:19:31.680 --> 0:19:36.000 function out there, but not everyone probably suited for an 0:19:36.040 --> 0:19:40.520 investment in private people who might have short term immediate 0:19:41.359 --> 0:19:44.800 liquidity needs, etc. Who cannot have a long horizon and 0:19:44.880 --> 0:19:46.840 a for not to touch that part of money for 0:19:47.000 --> 0:19:52.520 a long term might not be prepared for private investments 0:19:52.640 --> 0:19:57.200 or well suited for private investments. In terms of information available, 0:19:57.320 --> 0:20:01.040 definitely much less information available easily, and I think that's 0:20:01.359 --> 0:20:04.520 why even in the when you look at buyouts, another 0:20:05.560 --> 0:20:09.919 segment of the private market trades in the secondary market, 0:20:09.960 --> 0:20:13.960 which attempts to mimic a public market right in terms 0:20:13.960 --> 0:20:18.359 of getting some valuations for buyout stakes, et cetera, you 0:20:18.560 --> 0:20:23.000 typically see haircuts of like ten fifteen percent, which speaks 0:20:23.040 --> 0:20:26.360 to prices might not be as reliable they are as 0:20:26.400 --> 0:20:27.720 they are in public markets. 0:20:27.960 --> 0:20:30.159 We've had some guests recently talk about a two hundred 0:20:30.160 --> 0:20:34.479 basis points premium in private markets against public I'm assuming 0:20:34.520 --> 0:20:38.000 that mostly talking about loans there, but sounds like what 0:20:38.000 --> 0:20:40.680 you're saying is that there is no relative value in 0:20:41.080 --> 0:20:44.199 private and actually there's better risk just to return in 0:20:44.440 --> 0:20:47.719 hial bonds versus private debt. Is that is that correct? 0:20:48.280 --> 0:20:51.760 So it's very important what you compare private. 0:20:51.840 --> 0:20:52.000 Too. 0:20:53.240 --> 0:20:56.359 Many people might compare private to the Global or us 0:20:56.440 --> 0:21:00.280 ag I Investment Grade Index. There you would see our 0:21:00.440 --> 0:21:04.440 performance if you compare to Hyatt, you don't see our performance. Yes, 0:21:04.720 --> 0:21:08.040 and it's kind of similar. On the private equity side, 0:21:09.359 --> 0:21:11.760 many managers like to compare themselves to the S and 0:21:11.800 --> 0:21:14.880 P five hundred. In our opinion, that's not an adequate 0:21:14.920 --> 0:21:19.359 benchmark public benchmark. For private equity, you want to probably 0:21:19.359 --> 0:21:23.200 take a look at well designed small happiness is small growth, 0:21:23.200 --> 0:21:26.280 small value. And then the conclusion is very similar to 0:21:26.600 --> 0:21:29.399 what we discuss for private credit. So it really matters 0:21:29.440 --> 0:21:30.639 what you compare yourself to. 0:21:31.160 --> 0:21:33.919 And also you mentioned it, you know, it really depends 0:21:33.920 --> 0:21:36.359 on the kind of investors. Not suitable for everyone, but 0:21:36.880 --> 0:21:39.840 you know you're an ETF shop. There are ETFs now 0:21:39.880 --> 0:21:41.320 for private credit. What do you make of that? 0:21:42.000 --> 0:21:45.399 We shall see, let's put it that way. In terms 0:21:45.440 --> 0:21:51.760 of public bond ets, we see a lot of demand 0:21:51.800 --> 0:21:56.600 for those. Obviously the largest ones are index focused, but 0:21:56.800 --> 0:22:00.159 we now see growing demand for a kind of what 0:22:00.400 --> 0:22:04.880 the types of ETFs with delivery dimensional systematic active, both 0:22:04.920 --> 0:22:06.679 on the bond and on the equity side. We are 0:22:06.680 --> 0:22:12.320 actually the largest systematic active ETF manager out there with 0:22:13.320 --> 0:22:19.640 one hundred and seventeen plus a billion dollars in active ETFs. 0:22:20.080 --> 0:22:23.000 We have forty one ETFs right now, thirty one on 0:22:23.000 --> 0:22:26.440 the equity side, ten on the fixed income side, and 0:22:27.000 --> 0:22:29.120 of the ten I was looking, which are kind of 0:22:29.280 --> 0:22:32.399 all of them have positive flow netflows this year and 0:22:32.520 --> 0:22:37.040 last year broadly used and the most used ones are 0:22:37.480 --> 0:22:42.520 our US core fixed in committef along with global corporals 0:22:42.640 --> 0:22:47.800 ultra short. So kind of a variety of segments where 0:22:48.160 --> 0:22:53.680 people like to use a thoughtful, systematic yet active approach. 0:22:53.720 --> 0:22:57.160 And I think for for focusing on public corporate bond 0:22:57.280 --> 0:23:02.280 of public market bond markets, not just corporate government, corporate munis, 0:23:02.680 --> 0:23:07.040 even mortgage backed securities. I think the ETF rapper is 0:23:07.080 --> 0:23:10.200 a good wrapper, but of course even the ETF rapper 0:23:10.280 --> 0:23:14.280 has to be well implemented. I think this is something 0:23:14.320 --> 0:23:18.000 that I'm not sure your listeners have been aware of, 0:23:18.080 --> 0:23:21.879 but there are some papers in the academic literature that 0:23:22.040 --> 0:23:25.560 have looked at the baskets for fixed income ETFs in 0:23:25.600 --> 0:23:31.360 the last years and suggests that looking primarily at index 0:23:31.440 --> 0:23:35.760 of fixed income baskets that authorized participants, those that come 0:23:35.800 --> 0:23:38.240 to the ETF you sure to create and redeem baskets, 0:23:38.560 --> 0:23:44.560 create more shares of an EF essentially have been getting 0:23:44.560 --> 0:23:47.639 an advantage in terms of pricing of these or picking bonds, 0:23:47.680 --> 0:23:51.800 delivery which bonds to deliver some advantage over the issuer. 0:23:52.240 --> 0:23:55.639 So when we set off our active ETFs, we are 0:23:55.800 --> 0:24:00.440 very cautious to make sure that there's no all want 0:24:00.480 --> 0:24:05.040 taking advantage of us in in that space of activitfs 0:24:05.040 --> 0:24:07.720 where you have to kind of create baskets every day 0:24:07.720 --> 0:24:12.920 throughout the day, negotiate baskets with APS, and we developed 0:24:12.920 --> 0:24:15.920 a lot of infrastructure and criteria how to create our 0:24:16.000 --> 0:24:19.280 baskets and in a typical dimensional men are also a 0:24:19.280 --> 0:24:23.280 lot of infrastructure to track our execution of baskets over time. 0:24:23.680 --> 0:24:27.160 So when we compare the bonds that we eventually bought 0:24:27.200 --> 0:24:31.840 through a creation process from APS versus the bonds we 0:24:32.000 --> 0:24:34.560 discarded and the bonds that kind of we started with 0:24:35.000 --> 0:24:40.600 in the initial basket, we we don't find any underperformance, 0:24:40.680 --> 0:24:43.879 no evidence of underperformance of what we bought versus what 0:24:44.800 --> 0:24:47.720 we started with or what we discarded. Uh to the 0:24:47.800 --> 0:24:51.119 point that we don't see APS pushing prices up to 0:24:51.200 --> 0:24:56.560 deliver to acquire the securities we got, or to demonstrate 0:24:56.560 --> 0:25:00.920 any informational advantage. And I think going forward, people shure 0:25:01.040 --> 0:25:04.320 and hopefully will pay more attention to basket creation, because 0:25:04.359 --> 0:25:07.000 this is where you might be leaving money on the 0:25:07.040 --> 0:25:08.880 table if you're not careful enough. 0:25:09.480 --> 0:25:11.480 You're right. The ETFs in credit have just become so 0:25:11.640 --> 0:25:14.440 huge and so influential, not just for retail investors, also 0:25:14.440 --> 0:25:17.400 for institutional investors using them to trade. But I'm interested 0:25:17.440 --> 0:25:19.600 in in, you know, the active elements of that, because 0:25:19.600 --> 0:25:21.720 the passive guys just tracking the index sing to be 0:25:21.760 --> 0:25:24.040 doing just fine and they're probably very low cost. So 0:25:24.080 --> 0:25:26.600