Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm pim Fox.
Speaker 1: Along with my co host Lisa Abramowitz. Each day we
Speaker 1: bring you the most important, noteworthy, and useful interviews for
Speaker 1: you and your money, whether you're at the grocery store
Speaker 1: or the trading floor. Find the Bloomberg P M L
Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Well,
Speaker 1: I want to turn our attention now to the airline industry,
Speaker 1: and specifically to Hawaiian Airlines. The president and chief executive
Speaker 1: of Hawaiian Holdings joins us now, Mark Dunkley. Mark, always
Speaker 1: a pleasure to speak with you. UM. I want to
Speaker 1: set this stage back in July during the the earnings
Speaker 1: conference call, and I just want to parenthetically say, I
Speaker 1: know that you're going to be releasing your results next Thursday,
Speaker 1: so you're a priet period, so UM, you know you
Speaker 1: can kind of do the air quotes and we'll make
Speaker 1: believe we understand what you're saying. But on the conference
Speaker 1: call last quarter, you talked about things like the extra
Speaker 1: comfort seats UH, the new A three NEOs from air Bush,
Speaker 1: the relocation at the loss at the at L a X,
Speaker 1: also first route expansion, because of the new aircraft. Now
Speaker 1: I'm an invest not me, but i'm you know, an
Speaker 1: investor comes to the call next Thursday and says, yeah,
Speaker 1: but wait, the stock is down thirty this year. What
Speaker 1: is happening? How? What can you say given the quiet period,
Speaker 1: in order to at least make people not go bananas
Speaker 1: when they when they get on the call. Yeah, well,
Speaker 1: I think you know, when you look at our share
Speaker 1: price performance over last several years, we were this sort
Speaker 1: of bell of the industry. UM, seeing our stock appreciate. Uh.
Speaker 1: In the last couple of months, there have been too
Speaker 1: prominent announcements by competitors that they're going to add capacity
Speaker 1: in our market. And that's clearly weighing Southwest for example,
Speaker 1: Southwest has one and united with the other a couple
Speaker 1: of months ago. UM. I think the things to to
Speaker 1: look to though, are a couple of factors. One is
Speaker 1: that we continue to talk with great confidence about the
Speaker 1: superior superiority of our product. The fact that you know,
Speaker 1: for for what we do, which is uh, flying to
Speaker 1: Hawaiian selling, Hawaii's a destination around the world. Uh, nobody's
Speaker 1: got a better formula than we do. And we we
Speaker 1: frankly wouldn't trade places with with any of our competitors,
Speaker 1: and you know, we're sort of backing up that confidence
Speaker 1: as recently as a couple of days ago, we announced
Speaker 1: a quarterly dividend that we're going to pay um and that's,
Speaker 1: you know, very deliberately to to send a signal to
Speaker 1: say that, you know, at least looking into the long term,
Speaker 1: looking beyond what may happen with additional capacity coming in
Speaker 1: next year, looking to the long term. We're in the
Speaker 1: management team and the board of directors have great confidence
Speaker 1: in our franchise. Okay, So, and the dividend what the
Speaker 1: twelve centsers share, So that's like one in a quarter
Speaker 1: percent based on today's a stock price of thirty eight dollars.
Speaker 1: Can you maybe just describe to people the franchise that
Speaker 1: you have inter Island and how perhaps the revenue from
Speaker 1: that franchise almost offers a kind of annuity to the
Speaker 1: business that other airlines may not have. Uh yeah, we
Speaker 1: we we account for about eighty five of all the
Speaker 1: travel between the islands of the state of Hawaii. And
Speaker 1: for the for your listeners who may not be as
Speaker 1: familiar with Hawaii, is that certainly like to be Um,
Speaker 1: what I can say is it's a bigger business than
Speaker 1: than people perhaps have in mind. I mean, we we
Speaker 1: fly thirty two times a day in each direction between
Speaker 1: Honolulu and Maui. Just to give you a sense of
Speaker 1: the scale. We carry more passengers between Honolulu and can
Speaker 1: Louis than all airlines combined fly between Washington National U
Speaker 1: and LaGuardia Airports in New York. So it's a pretty
Speaker 1: big business. We have eighty five or thereabouts of that market.
Speaker 1: And it's a business that that sort of carries everyday
Speaker 1: life here, school groups, people going to see their the doctors,
Speaker 1: things like that. So it tends to have pretty low
Speaker 1: price elastics you've demand and pretty low income elastics. You've
Speaker 1: demat tell us a little bit about Japan Airlines alliances
Speaker 1: and the new routes from Haneda and Narita. Well, you know,
Speaker 1: you've followed our story for for a long time, and
Speaker 1: as your listeners may perhaps again not appreciate fully, Um,
Speaker 1: the bulk of our expansion over the last seven years,
Speaker 1: and we've could roupled in size during that period of time.
Speaker 1: That the bulk of that has come from expanding around
Speaker 1: the Pacific room most prominently to Japan. And three three
Speaker 1: or so weeks ago, we announced a relationship with Japan Airlines,
Speaker 1: which is one of the world's absolute best airlines and
Speaker 1: means a quality, quality company. Uh. And together we're going
Speaker 1: to in the first instance, be code sharing and um
Speaker 1: uh you know, doing those kinds of cooperative activities. But
Speaker 1: but we're also both committed to seeking to enter into
Speaker 1: a joint venture which we believe will it improve choices
Speaker 1: to customers and also make us better able to compete
Speaker 1: in the market and better for our company. If not
Speaker 1: that you get to choose between seven eight sevens and
Speaker 1: are NEOs. I know that that's been an issue, but
Speaker 1: the trend is what to have aircraft that are more economical,
Speaker 1: that can fly longer, such as even you know, the
Speaker 1: the new seven three seven Max. Right. Yeah, we're taking
Speaker 1: delivery in a couple of weeks time of our first
Speaker 1: A three twenty one near which is a narrow body
Speaker 1: UM in its class. It is the most fuel efficient
Speaker 1: narrow body best suited for the markets that we're going
Speaker 1: to fly with it, which is the small markets between
Speaker 1: the US West Post and Hawaii. Uh. It is it's
Speaker 1: a new breed of airplane and both Boeing and airbus
Speaker 1: have airplanes a fit in that category, this particular one
Speaker 1: for this particular mission. Uh, the near by airbus is
Speaker 1: head and shoulders the superior airplane for the route. So
Speaker 1: maybe just step back for a second and as someone
Speaker 1: that's a veteran in the industry, what does an aircraft
Speaker 1: like that and even the Boeing Max what does that
Speaker 1: Due to the sort of whole strategy of where you fly,
Speaker 1: how you fly, and how you allocate the fleet. We
Speaker 1: spent a lot of time on that on that very question.
Speaker 1: I mean, you know, costs are sort of everything in
Speaker 1: the airline business, and finding the right aircraft of the
Speaker 1: right roots and the right size is a paramount importance. Um.
Speaker 1: You know for for many airlines, uh, they're blending their needs.
Speaker 1: You know, they fly roots that are two hundred miles,
Speaker 1: five hundred miles, thousand and three thousand miles and they
Speaker 1: have to find aircraft that are sort of the ideal
Speaker 1: compromised for all of those routes. What's I think pretty
Speaker 1: unique about Hawaiian uh is that we have a very
Speaker 1: shorthaul business between the islands, just one or two hundred
Speaker 1: uticle miles. Then we have nothing until auticle miles where
Speaker 1: we have almost half of our business is between the
Speaker 1: US West Coast and Hawaii. UH, and then beyond that
Speaker 1: we go to eight to ten hour up to almost
Speaker 1: twelve flights. So we have these very specific needs, UM,
Speaker 1: and a lot of time and attention goes into choosing
Speaker 1: the aircraft that's right for the needs. And both air
Speaker 1: framers a bus and going make terrific airplanes, as do
Speaker 1: the engine manufacturers who power them. I want to thank
Speaker 1: you very much for spending time with us. Mark Dunkley
Speaker 1: is the president and the chief executive of Hawaiian Holdings
Speaker 1: that is the ut parent company of Hawaiian Airlines, and
Speaker 1: they will be releasing their results next Thursday. Our next
Speaker 1: guest is Rick Lazio. He is the senior vice president
Speaker 1: of Aliant Group. He's the former US representative from the
Speaker 1: York serving in Congress from to two thousand and one.
Speaker 1: Representative Lazio, thank you very much for being with us. UM.
Speaker 1: I wonder if you can just get your response to
Speaker 1: UH comments made earlier today on Bloomberg Television. Larry Summers,
Speaker 1: former Treasury Secretary, was speaking with David Weston and Alex Steel,
Speaker 1: and he said, I believe that when you put something
Speaker 1: forth called tax plan, it has to be described in
Speaker 1: a way where people can figure out what their taxes
Speaker 1: would be under it. You need some data, and he says,
Speaker 1: we're operating outside of those parameters. What's your response. My
Speaker 1: response is that the bill hasn't been drafted yet, and
Speaker 1: it will run through committee and those numbers will be
Speaker 1: provided by what's called the Joint Tax Committee in Congress,
Speaker 1: and UH Secretary Summons will have all the data that
Speaker 1: he'd like. I'm sure he's going to have an issue
Speaker 1: with with with the assumptions that are made, but they
Speaker 1: will be plenty of dat it before the bill is
Speaker 1: actually voted on and sent to the President's desk. Okay,
Speaker 1: so understanding that we're going to get more details representative
Speaker 1: Lawso so far the details that we have gotten have
Speaker 1: led to a number of different think tanks to say
Speaker 1: that it could potentially raise taxes on certain middle class
Speaker 1: workers in the United States, and it could potentially provide
Speaker 1: a boon to say hedge funds or independent contractors who
Speaker 1: could claim to be passed through entities. What's your response
Speaker 1: to that. My response to that, again is that we
Speaker 1: have to sort of look at wait for the details
Speaker 1: and see overall how this affects the general economy. The
Speaker 1: name I think the challenge here is how do you
Speaker 1: get growth rates back up to a consistent three cent rate?
Speaker 1: And that is where we've been in past expansions. We've
Speaker 1: been running at to to two since the beginning of
Speaker 1: this expansion, so it's it's suboptimal. The major culprit, and
Speaker 1: my sense of my belief, is a business investment that
Speaker 1: has been holding down both productivity and overall GDP growth,
Speaker 1: And the best way to get at that is to
Speaker 1: incentivize more business investment. And that's partly through things like
Speaker 1: the research and development tax credit and other business incentives,
Speaker 1: as as well as expensing equipment and um and factories
Speaker 1: and the kinds of things that we want businesses to
Speaker 1: invest in. It ultimately to hiring more people and paying
Speaker 1: their workers more more in salary. Understood, So this sort
Speaker 1: of virtuous cycle. But representative laws, how are we able
Speaker 1: to even uh negotiate or discuss a plan that, as
Speaker 1: you say, is missing so many details? And you know,
Speaker 1: is it unusual or unwise to not open it up
Speaker 1: and be more forthcoming during the negotiation phases because normally
Speaker 1: there are more details at this point in the process. Well,
Speaker 1: I think we can talk about what we know so far.
Speaker 1: We know that there is general consensus among Republicans in
Speaker 1: the House and the Senate to collapse rates from seven
Speaker 1: rates down to three and would probably will end up
Speaker 1: being four before all is said and done. We know
Speaker 1: that there is an effort to move towards an extra
Speaker 1: territorial tax system and try and repatriate two and a
Speaker 1: half or three trillion dollars of money that's trapped overseas.
Speaker 1: We know that there's general agreement on reducing the c
Speaker 1: corporate corporate tax rates, and we know that there's going
Speaker 1: to be a extraordinary effort to try and make sure
Speaker 1: that there is some rough parody with pass through entities
Speaker 1: and the small businesses that employ about half of all
Speaker 1: American workers will also see relief. So there are a
Speaker 1: number of very critical pillars to the reform that's being
Speaker 1: put forward that we do know a lot about. Do
Speaker 1: we know exactly what the languages know? Will have to
Speaker 1: wait until that bill is drafted, and it obviously won't
Speaker 1: be voted on until it's drafted. Do you believe it
Speaker 1: whatever bill is drafted and passed should be revenue neutral. Well,
Speaker 1: I believe that they that that Congress and the President
Speaker 1: need to be mindful and realistic about the budget deficite.
Speaker 1: I think that the size of the deficit is a
Speaker 1: threat to future growth, so that yes, that's a that's
Speaker 1: a that's what do I think it needs to be
Speaker 1: revenue neutral? I think they need to look at it
Speaker 1: in terms should we be all able to understand how
Speaker 1: it's going to be paid for? Yes? Of course. Okay,
Speaker 1: then do you believe that threatening sitting senators like the
Speaker 1: Democrat Joe Donnelly from Indiana who is on the committee, UH,
Speaker 1: that the president is going to work for his defeat
Speaker 1: unless he falls into line with the tax plan and
Speaker 1: he's been asking for information about what exactly this is
Speaker 1: going to do to the budget? Does that make any sense?
Speaker 1: I always think that you are better off in the
Speaker 1: long run appealing to somebody's better angels and to persuading
Speaker 1: through positive UH, data and arguments. So you know this
Speaker 1: part of the body politics these days, on both sides,
Speaker 1: they are, of course it is. Do I think it's
Speaker 1: what the way approach I would take. Now, it's not representative. Lazio,
Speaker 1: you represented New York and New York could potentially be
Speaker 1: the one of the bigger losers from this whole plan,
Speaker 1: since the local deductions would be eliminated. What's your view
Speaker 1: on that, Well, it's very difficult to get rates down,
Speaker 1: marginal rates down if you don't address deductions, and then
Speaker 1: one of the largest deductions of state local taxes about
Speaker 1: one point three trillion dollars in revenues revenue lost through that. UM,
Speaker 1: I think if you're from New York, or you're from California,
Speaker 1: from New Jersey, and by the way, those states are
Speaker 1: the are are major consumers of the state and local deduction,
Speaker 1: especially upper income people. I mean about about for example,
Speaker 1: of UM, the benefit for state income taxes and sales
Speaker 1: taxes float for people making over two hundred thousand dollars,
Speaker 1: So this is this would affect mostly upper income people
Speaker 1: in high tax states, and of course California, New York,
Speaker 1: New Jersey are are three of them. UM. If I'm
Speaker 1: in a town hall meeting and I'm talking to a constituent,
Speaker 1: I'm gonna be consistuents going to raise their hand and
Speaker 1: about my state and local taxes, I'd say, well, number one,
Speaker 1: let's see how you do overall. The standard deduction is
Speaker 1: proposed to be doubled um Right now, most Americans don't
Speaker 1: file itemized returns because they get a standard deduction. Even
Speaker 1: fewer Americans will will file itemized returns if the standard
Speaker 1: deduction is doubled to thousands. So it could potentially be
Speaker 1: lesson than people are expected, or it might affect the
Speaker 1: only the wealthiest people. Rick Lazio, I would love to
Speaker 1: continue the conversation. We have to. We have to run
Speaker 1: Rick Lazio as senior vice president for Alliant Group. He
Speaker 1: also was a former US Representative from New York, serving
Speaker 1: Congress from nWo one. Well, the hottest spot in credit
Speaker 1: markets this year is arguably emerging markets credit credit and
Speaker 1: the riskier the better. In fact, Aviva investors just came
Speaker 1: out and so that they view local currency emerging markets
Speaker 1: debt as safer than US treasuries. Here to weigh in
Speaker 1: on what we've been seeing in the emerging market spaces.
Speaker 1: Damian Sasaur fixing come strategist focused on developing markets for
Speaker 1: Bloomberg Intelligence, and he joins us here in our Bloomberg
Speaker 1: eleven three oh studios. Damien does it um Well, I
Speaker 1: don't think it scares me. Per se. I mean, I
Speaker 1: just think it speaks to the state of liquidity and
Speaker 1: developed markets right now and tight spreads, low yields broadly
Speaker 1: speaking across the whole of you know, fixed income. So
Speaker 1: I think there's a lot of cash out there and
Speaker 1: there aren't a lot of places to put it, and
Speaker 1: that's what's driving y AM here. Well, one of the
Speaker 1: places that people are putting it is in the e
Speaker 1: t F e m B. This is the I Shares
Speaker 1: Emerging Markets Debt Fund right this is uh the one
Speaker 1: that JP Morgan has put together, and the fund is
Speaker 1: up more than nine percent so far this year. But here,
Speaker 1: this is what I want you to explain if you
Speaker 1: can um Egypt, El Salvador, Argentina, Hungary, Uh, can you
Speaker 1: explain what it is about these other than the yield? Peru, Poland,
Speaker 1: I could go on Panama. You really, does anybody really
Speaker 1: believe that these are better credits? These are governments now,
Speaker 1: that these are better sovereign credits than the U. S. Treasury? Well, now,
Speaker 1: I mean, I think what you have to get when
Speaker 1: you're evaluating any sovereign issuers, you have to look at
Speaker 1: their current account, their balance sheet, their current account balances.
Speaker 1: You have to look at their external debt exposure, right,
Speaker 1: because when we get into times where, for example, in
Speaker 1: September twenty the Federal Reserve announced that, hey, they're not
Speaker 1: going to be data dependent any longer, they're gonna be hiking.
Speaker 1: And regardless, you know, you have to look at what
Speaker 1: that means for local currencies, and and that means if
Speaker 1: you have a lot of external debt exposure, i e.
Speaker 1: You're hungry and you've issued a lot of US dollar debt,
Speaker 1: you might be in for a little asset liability mismatch
Speaker 1: if things go south on you. And then there's effects reserves,
Speaker 1: there's real effective exchange rates. There's a lot of metrics
Speaker 1: you can look at when you're evaluating sovereign risk exposure,
Speaker 1: but by and large, that is um you know, that
Speaker 1: is basically what investors are looking at, and that's what
Speaker 1: driving returns. I'm struck by the flood of money into
Speaker 1: local currency emerging market step because you're talking about the
Speaker 1: currency exposure, and actually if you look at the flows
Speaker 1: into e m B, which is the US dollar Emerging
Speaker 1: market study t F versus e M l C, which
Speaker 1: is the local currency e M debt, it's the money
Speaker 1: has gone disproportionately to the local currency debt. And I'm
Speaker 1: wondering how much is this completely a wager on the
Speaker 1: dollar staying week and possibly weakening further. Oh, that's exactly
Speaker 1: what it is. I mean, currency attribution for local currency
Speaker 1: government debt from eroaching markets is roughly eight percent of
Speaker 1: the equation, right, So you're absolutely right, it's a play
Speaker 1: on currencies. But this is a more recent occurrence. I
Speaker 1: mean the flows into em into local em rates. Uh,
Speaker 1: that's really only been the last call it six months,
Speaker 1: But for the better part of the last two and
Speaker 1: a half years, you've been seeing flows into hard currency
Speaker 1: e M debt and it's been off the charts. So
Speaker 1: how much would the dollar have to strengthen to cause
Speaker 1: some serious pain? That's a that's a tricky question. I
Speaker 1: mean I can't really say. I know, our our friends
Speaker 1: over in bi economics have basically called for a stronger
Speaker 1: dollar over the better part of you know, well, really
Speaker 1: when the FED starts, you know, uh, you know, rolling off,
Speaker 1: you know, the excess, it's basically tapering, it's it's pulling
Speaker 1: back the balanty, etcetera. I think I think it would
Speaker 1: take quite a bit for you to see things start
Speaker 1: to go, but when they go, that can go in
Speaker 1: a hurry. I'm just looking at the difference in the
Speaker 1: yield between the funds that invest in the local currency
Speaker 1: debt and the hard currency debt of the same nations,
Speaker 1: and you're talking about a spread of anywhere from four
Speaker 1: and a half percent for the hard currency to getting
Speaker 1: maybe a little bit more five and a quarter percent
Speaker 1: for the local currency. UH funds, Is that really are
Speaker 1: you taking more risk when you come when you think
Speaker 1: about the reward? I mean, is seventy five basis points
Speaker 1: really that much in the overall scheme of things that
Speaker 1: you're gonna take that that risk not at all? And
Speaker 1: I think you have to be clear about who the
Speaker 1: constituents of those two industries are, right and eating hard currency,
Speaker 1: You've got a lot of those, you know, single beast
Speaker 1: sovereign names you had mentioned previously, kind of the Iraqs,
Speaker 1: the Turk Medasin, I mean, Kajikistan. I mean like, there's
Speaker 1: been a ton of single beast sovereigns that have come
Speaker 1: to marketing hard currency debt of the better part of
Speaker 1: the last few years. In local currency, UH investable local
Speaker 1: currency government debt from emerging markets there's only a handful.
Speaker 1: I would say, you know, twenty at the most, and
Speaker 1: you're really talking about the majors there. I'm wondering how
Speaker 1: much the investors who are pouring money into emerging markets
Speaker 1: right now are looking at these specific countries and their
Speaker 1: respective issues, and how much is coming in through broad
Speaker 1: market index funds. The reason why I ask is because
Speaker 1: it's sort of disingenuous for us to sort of lump
Speaker 1: a whole vast swath of countries together as just emerging
Speaker 1: markets and to view them completely unilaterally. I mean, do
Speaker 1: you feel like people are delineating between better credits and
Speaker 1: worst credits? No? I don't think they are at all.
Speaker 1: I think it's as you said, I think it's passive investment.
Speaker 1: I think it's UM. It's really just, you know, basically
Speaker 1: people saying I want to own it all. I want
Speaker 1: to own everything, and I want to own it in
Speaker 1: whatever incremental side it's coming to marketing. UM. I will say, though,
Speaker 1: just if you're looking at UMM, thank you the land
Speaker 1: of ETF right, Well, I mean you don't get the
Speaker 1: pick and shoes, right, I mean, you go into an
Speaker 1: e t F like this, you don't get to say, oh,
Speaker 1: I want rething, but debt from Uraguay. I just think
Speaker 1: the risk that you're you're mentioning is structural, right. I
Speaker 1: mean the fact that the underlying emerging market bonds, even
Speaker 1: the hardcorency US dollar bonds, the fact that an e
Speaker 1: t F is allowing you to provide daily liquidity in
Speaker 1: and out of those positions when those bonds don't really
Speaker 1: trade like that. That could be an area of concern
Speaker 1: going forward, just that structural liquidity mismatch, so to speak.
Speaker 1: And and so that is an area that I'm looking at.
Speaker 1: It's an area that my peers, I know, I've looked
Speaker 1: at very closely. But you know, we're not quite uh,
Speaker 1: we're not quite sure what to makeup at this point.
Speaker 1: And of course Chinese, the Chinese Congress meets next week,
Speaker 1: and I could also throw some potential opotatoes. And it's
Speaker 1: interesting how liquidity can dry up so quickly, uh, particularly
Speaker 1: in the debt that is maybe not universally traded. I
Speaker 1: have to watch this, and that's why we got Damian Sassar.
Speaker 1: He is are fixed income strategist for Bloomberg Intelligence. Late
Speaker 1: last night, the European Central Bank officials were said to
Speaker 1: be considering cutting their monthly bond buying, but at least
Speaker 1: half starting in January. This was reported by Bloomberg News,
Speaker 1: and the reaction to this is sort of surprising because
Speaker 1: you think, Okay, the e c B is tapering, it's stimulus.
Speaker 1: People would sell their bonds, their German government bonds? What
Speaker 1: do they do? They bought here to explain why and
Speaker 1: what this means about the great Central Bank unwind, going
Speaker 1: forward to Scott Kimball, portfolio manager of the b MO
Speaker 1: at tc H Core Plus Bond Fund, which trades under
Speaker 1: the ticker m c B i X, and he joins
Speaker 1: us here in our eleven three oh studio, Scott, I
Speaker 1: don't know. If this can't get people to sell their
Speaker 1: government bonds, what will Well? That's first of all, thank
Speaker 1: you for having me, and uh, just to chime in
Speaker 1: on what you were talking about there with the e
Speaker 1: c B. UH, you know Chairman grip Draggy coming out
Speaker 1: and talking about reducing the quantitative easing program. Uh, it
Speaker 1: comes with really two different lenses you have to look
Speaker 1: through it. One is the view of what that means
Speaker 1: inherently for the bond market, which is, UH, if people
Speaker 1: are holding onto German bunds, Spanish debt, Italian debt at
Speaker 1: and expecting that the ECB is going to come in
Speaker 1: and purchase those securities from them over the near term.
Speaker 1: Then they could be potentially disappointed in the fact that
Speaker 1: they've come out and said, well, we're going to continue buying,
Speaker 1: but not quite as much. What should, in theory put
Speaker 1: pressure on the spreads between those two move higher in
Speaker 1: rates to move higher accordingly, UH, what happened is that
Speaker 1: we saw investors come in and actually begin purchasing bonds
Speaker 1: again today very strongly at a faster pace, which we
Speaker 1: interpret as meaning that while the ECB is reducing the
Speaker 1: overall size of the program, UH, the investors are still
Speaker 1: betting that it's going to continue further on into the future,
Speaker 1: and that the e c B is rather just sort
Speaker 1: of keeping pace with what the FED and other central
Speaker 1: banks are doing, and that they're not taking away the
Speaker 1: punch bowl entirely. There's still a lot of reasons why
Speaker 1: liquidity needs to remain very high in these economies, but
Speaker 1: they're just taking some of the sugar out of it.
Speaker 1: We've seen a very strong recovery throughout certainly the US
Speaker 1: from our cycle Japan, we've seen the equity market over
Speaker 1: there come to life, and we're seeing that European data
Speaker 1: has been strong. So, uh, this is probably a fairly
Speaker 1: appropriate step from the ECB. But we don't anticipate that
Speaker 1: they're going to be exiting this bond buying program in
Speaker 1: the intermediate term, which is why we think you saw
Speaker 1: investors come in and sort of reassert their position. Hey, Scott,
Speaker 1: I'm just wondering maybe there's a third, a third possibility,
Speaker 1: and this could then we get into some talk about
Speaker 1: what's in the York portfolio. But um, all right, let's
Speaker 1: say that rates do rise. If they ever do rise
Speaker 1: in Europe, that's going to make the new bonds more expensive.
Speaker 1: And if you are an investor rather than a speculator,
Speaker 1: I mean, has anyone ever really gotten fired because you
Speaker 1: know they missed twenty five basis points or fifty basis
Speaker 1: points over a thirty year or twenty year period. I mean,
Speaker 1: you know, what are you gonna do? You're gonna go
Speaker 1: out and sell your whole insurance portfolio of government bonds
Speaker 1: because you know, oh, I could get twenty five basis
Speaker 1: points more. I think you bring up an important point,
Speaker 1: and that's really something that's kind of been in the
Speaker 1: heart of our positioning in the in the Core Plus Fund,
Speaker 1: which is that when you look at what's going on
Speaker 1: in the world and what these banks have engineered, it's
Speaker 1: a world where there is a wash with cash. Insurance
Speaker 1: companies in particular, you know, it's a very important name
Speaker 1: that you brought up, is the insurance industry. They have
Speaker 1: gigantic pools of cash and very long dated liabilities. There's
Speaker 1: a bigger risk to them misstepping on liability management side
Speaker 1: than missing twenty five or fifty basis points on interest rates.
Speaker 1: So we would be complete agreement with that. Okay, So
Speaker 1: then I want to want you to follow up on
Speaker 1: what's in the portfolio and how you construct your portfolio
Speaker 1: of the Core Plus Bond Fund, because one of the
Speaker 1: things that I've note when I look at it, you've
Speaker 1: got a lot of floating rate debt, absolutely, and that
Speaker 1: floating rate debt is a strectural opportunity for us to
Speaker 1: position Core Plus Fund and really any of our strategies
Speaker 1: to take advantage of different segments of the bond market.
Speaker 1: What we do is look for bottom up value across
Speaker 1: the entire spectrum of fixed income and say where are
Speaker 1: their structural and efficiencies. One inefficiency that we noticed that
Speaker 1: went back really about twelve d eighteen months was that
Speaker 1: libor and the FED funds rate, we're sort of behaving
Speaker 1: uh counterintuitively to what you'd anticipate from a rising FED.
Speaker 1: So that meant that floating rate notes were very cheap.
Speaker 1: You could buy uh interest rate. These are interest rate
Speaker 1: bond instruments just like any other corporate bond, and when
Speaker 1: rates rise, their coupon rises, so there are sensitivity to
Speaker 1: rates is not particularly strong, which we thought was very
Speaker 1: important for protecting the dollars we had invested on the
Speaker 1: front end. And we're talking about companies like Abbott Labs, eBay,
Speaker 1: Daimler Finance, IBM, Craft, Hiens, Activision, Blizzard. I mean, those
Speaker 1: are the kind of corporate names we're talking about with
Speaker 1: some of this floating rate there absolutely so when we
Speaker 1: use when we look at the core plus fund and
Speaker 1: decide where we want to take risk and how we
Speaker 1: want to budget risk, that is a pocket the floating
Speaker 1: rate notes, the front end, the shorter day and securities
Speaker 1: where we're looking for a lot of liquidity and we're
Speaker 1: not looking for credit headaches, So we use a lot
Speaker 1: of high quality companies whose equity prices have given their
Speaker 1: balance shee's a tremendous cushion. Is there anything that you're avoiding? Certainly.
Speaker 1: So when we look at where we are in the
Speaker 1: credit cycle, we keep hearing that referenced by constituents, investors, UH,
Speaker 1: fund managers, UH. The word credit cycle, the term credit
Speaker 1: cycle keeps getting used. Our opinion is that we're in
Speaker 1: the seventh inning stretch, UH and take me out to
Speaker 1: the ball game keeps playing on repeat, and that's exactly
Speaker 1: what central banks have engineered. So what we're looking at
Speaker 1: is trying to balance the idea that risk probably still
Speaker 1: does well for the next twelve months, but at the
Speaker 1: same time keeping the powder dry to take advantage of
Speaker 1: some opportunities that might be created. And that's say, for example,
Speaker 1: high yield bonds. Our allocation to high yield bonds as
Speaker 1: that's as that sector has outperformed, has been trimmed back
Speaker 1: with the anticipation that is, we're not getting paid as
Speaker 1: much to own it. Maybe we can raise some liquidity
Speaker 1: and an event there's a market disruption, we could jump
Speaker 1: in and buy some yields. What are you buying for yield? Then?
Speaker 1: Are you buying emerging markets. We're not buying emerging market debt.
Speaker 1: We've been focused primarily and moving a little further out
Speaker 1: the yield curve and investment grade where we're willing to
Speaker 1: take a little more duration. At this point, we think
Speaker 1: that interest rates have been pretty subdued, and then we
Speaker 1: look at the corporate bond market, we see dislocations occur
Speaker 1: that don't make a lot of sense. So one example
Speaker 1: I would give you is, you know, Amazon buys Whole
Speaker 1: Foods and the debt of Kroger Corporation sells off. We
Speaker 1: think that might be unjustified. We jump in and we
Speaker 1: lock in the yields at higher rates than they were
Speaker 1: over the day before. So it sounds like you're expecting
Speaker 1: a flatter yield curve. I think that it's consistent with
Speaker 1: the FED rhetoric and the FED action that the yield
Speaker 1: curve continues to flatten some. But we do think that
Speaker 1: the FED is very conscious of what the potential percursor
Speaker 1: could be if the yel curve were to invert. So
Speaker 1: we think that a flatter yel curve, but a very
Speaker 1: incremental FED As it flattens, and you're to date, the
Speaker 1: fund is up a little bit more than four percent,
Speaker 1: and you're getting one of like a two point nine
Speaker 1: to three the yield on the on the payoff. One
Speaker 1: of the things I want to ask about has to
Speaker 1: do with the way in which you construct your portfolio,
Speaker 1: because I noticed, you know you're buying in very specific lots.
Speaker 1: You know you're buying twenty thousand here, fifteen house and
Speaker 1: there is how do you organize? I mean, you're gonna
Speaker 1: buy the same amount of Fannie May paper as you
Speaker 1: would eBay floating rate paper. How do you or is
Speaker 1: it just inventory what's available? It really reflects what what
Speaker 1: where we want the overall risk and return profile of
Speaker 1: the fund to be. One thing you'll notice about the
Speaker 1: Core Plus Fund relative to perhaps others, is that we
Speaker 1: don't carry thousands of securities. We have two fifty individual
Speaker 1: line items. So we really have a thorough understanding of
Speaker 1: this bond adds value. There's a value proposition. We own
Speaker 1: the security, and we own it an amount that reconciles
Speaker 1: the way we expect the portfolio to perform in various scenarios.
Speaker 1: Your ability to do that gets heavily deluded if you
Speaker 1: have too many individual line items and just quickly give
Speaker 1: you ten seconds. Cash, you got about four and a
Speaker 1: half percent of cash going to just keep it there.
Speaker 1: Cash is really residual of what we do, and that
Speaker 1: reflects the fact that we do think, um, you know,
Speaker 1: there's a lot of opportunities we have of our fund invested,
Speaker 1: but we have a little bit there for those really
Speaker 1: unique opportunities to come along, all right, just as you
Speaker 1: said those floating right now about twelve to eighteen months ago.
Speaker 1: Thanks very much for being here. Scott Kimball, always a pleasure.
Speaker 1: Portfolio manager of the BEM t c H Core plus
Speaker 1: bond fund symbol m c BIX m c b i X.
Speaker 1: Thanks for listening to the Bloomberg P and L podcast.
Speaker 1: You can subscribe and listen to interviews at Apple Podcasts, SoundCloud,
Speaker 1: or whatever podcast platform you prefer. I'm pim Fox. I'm
Speaker 1: on Twitter at pim Fox. I'm on Twitter at Lisa Abramo.
Speaker 1: It's one before the podcast. You can always catch us
Speaker 1: worldwide on Bloomberg Radio.