Latest / Masters in Business / Fixed Income Credit Analyst to Bond Manager With Loomis Sayles

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Fixed Income Credit Analyst to Bond Manager With Loomis Sayles · Masters in Business

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  Speaker 1: Bloomberg Audio Studios, podcasts, radio news. This is Master's in
• 0:11
  Speaker 1: Business with Barry red Holds on Bloomberg Radio.
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  Speaker 2: This week on the podcast, I have an extra spatial guest.
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  Speaker 2: If you are at all interested in fixed income, how
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  Speaker 2: you assess bonds, how you evaluate the economy, the market,
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  Speaker 2: what the Fed's gonna do, what clients want, how to
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  Speaker 2: assess risk in credit markets, Well, then you're going to
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  Speaker 2: really enjoy this conversation. Matt Egan has spent his entire
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  Speaker 2: career in fixed income, from credit analysts to portfolio manager.
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  Speaker 2: Now he's the head of the discretion team at Loomis Sales,
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  Speaker 2: which manages well over three hundred and thirty five billion
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  Speaker 2: dollars in client assets. He's really seen every aspect of
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  Speaker 2: the fixed income side more than just a bond manager,
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  Speaker 2: but someone who has really covered it, from credit analyst
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  Speaker 2: to research analysts, to fixed income member to full unconstrained
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  Speaker 2: bond manager and now running this discretionary team. His group
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  Speaker 2: has about seventy five billion that they're responsible for. I
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  Speaker 2: don't know what else to say other than there are
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  Speaker 2: a few people in the world that understand running a
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  Speaker 2: fixed income portfolio on behalf of institutional for retail clients
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  Speaker 2: as well as Matt Egan does. I thought this conversation
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  Speaker 2: was fascinating and I think you will also with no
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  Speaker 2: further ado, Loomis Sales.
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  Speaker 1: Matt Egan, thanks for having me Berry.
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  Speaker 2: Well, well, thanks for coming. Let's talk a little bit
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  Speaker 2: about your background. You get a bachelor's from Northeastern and
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  Speaker 2: an NBA from Boston University. Was finance always the career plan?
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  Speaker 1: It was not. I started northeasterners an electrical engineering. Oh
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  Speaker 1: that's a major. And the good thing about Northeastern University
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  Speaker 1: that they've tremendously great quad education program. That saved my
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  Speaker 1: life because it made me understand it did not want
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  Speaker 1: to be a double or an engineering in my profession.
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  Speaker 1: And the key was I started after one year. I
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  Speaker 1: kind of gutted through one year of engineering classes. It
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  Speaker 1: wasn't really that interested, but I gutted through it, and
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  Speaker 1: I started interviewing for the first internships and I started,
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  Speaker 1: you know, I had a number of them. I realized
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  Speaker 1: I am not like these people and this is not
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  Speaker 1: what I want to do, and so I transferred to
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  Speaker 1: the business.
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  Speaker 2: School after it. It's so funny you say that I
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  Speaker 2: started out math and physics, And in high school I
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  Speaker 2: was a rock star in math and physics. And you
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  Speaker 2: get to college and suddenly it's like, oh, I'm okay
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  Speaker 2: at this, but those guys are great, and you quickly realize, hey,
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  Speaker 2: this is way above my pig. I need to figure
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  Speaker 2: out what I need to do. So Northeastern and Boston.
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  Speaker 2: Were you a Boston kid?
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  Speaker 1: Boston kid? Well, I grew up outside in a relatively
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  Speaker 1: small city, and of course moved to the city to
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  Speaker 1: go to school and just fell in love with Boston
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  Speaker 1: and stayed ever since.
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  Speaker 2: Right, Oh, that's interesting, And is that where you are today?
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  Speaker 2: You're not New York, You're boss. I'm in Boston, right,
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  Speaker 2: And there's a giant set of finance farms in Boston.
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  Speaker 2: That must be fun there.
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  Speaker 1: Yeah, there was a lot to choose from you as
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  Speaker 1: a you know, newly minted financed major coming out of school.
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  Speaker 1: There were a lot of things to do. This profession
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  Speaker 1: wasn't necessarily my first choice coming out of undergrad, but
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  Speaker 1: there were plenty of other things to do in the
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  Speaker 1: field too. It's a broad field, to say the least.
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  Speaker 2: So you start out credit analyst at Century Back Bank
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  Speaker 2: and Trust prior to getting an MBA. What was it
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  Speaker 2: like being a credit analyst in the nineteen eighties.
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  Speaker 1: Yeah, I gravitated to I had to envision myself as
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  Speaker 1: a commercial banker. You know. Back when I graduated and
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  Speaker 1: I had done an internship at Bank of Boston, one
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  Speaker 1: of the first things I did was spread financial statements.
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  Speaker 1: This in the old days before really there were spreadsheets there,
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  Speaker 1: and we would take fortune five hundred annual reports or
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  Speaker 1: ten queues and put them into a spreadsheet give them
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  Speaker 1: to the commercial armorms. That was when I first started
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  Speaker 1: getting involved with looking at company. So when I fancy
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  Speaker 1: myself as a loan officer, there were great programs in
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  Speaker 1: that field. There was a super regional banking industry in Boston. However,
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  Speaker 1: when I graduated, there was a really kind of a
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  Speaker 1: nasty correction in the market. What year nineteen eighty nine,
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  Speaker 1: and you remember, there's a pretty nasty recession, believe it
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  Speaker 1: or not, Massachusetts U employment was over ten percent back then. Wow,
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  Speaker 1: which is hard to believe because mass always had relatively
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  Speaker 1: low But there was a real estate crisis back then.
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  Speaker 2: We were just talking about this over the weekends. You know,
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  Speaker 2: the problem with the financial crisis, models were Supposedly many
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  Speaker 2: failed to contemplate real estate prices going down. But I
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  Speaker 2: remember coming out of grad school in the late eighties
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  Speaker 2: and friends who had purchased co ops in New York
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  Speaker 2: City in like eighty seven, eighty eight, eighty nine. You
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  Speaker 2: didn't get back to break even until like the late nineties.
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  Speaker 2: There was a major dip. It might have been worse
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  Speaker 2: in some areas than others, but nationally, real estate foundered in.
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  Speaker 1: The ninth right, New England was crushed. There was a
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  Speaker 1: big glut of condos. You know, you'd walk it bride
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  Speaker 1: by certain you know, you'd be on the highway you
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  Speaker 1: go by, say a one hundred unit condo building there
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  Speaker 1: was one light on right. You know. It also hit
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  Speaker 1: hard in Texas too, which was you know, after the
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  Speaker 1: oil bus the sea through buildings, right, that was the
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  Speaker 1: origination to see through buildings. And it was a great
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  Speaker 1: learning experience for me. But first of all, when I
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  Speaker 1: was in the you know, looking for jobs, you had
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  Speaker 1: to go to the placement office back then, And as
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  Speaker 1: I was looking at jobs, I remember looking at a
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  Speaker 1: g finance job and as I was looking at as
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  Speaker 1: somebody pulled it down in front of me. It's not
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  Speaker 1: available anymore. That's where the economy was at that point.
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  Speaker 1: And so but I I knew a fella, this guy,
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  Speaker 1: George Duncan, who was a friend of my dad's. He
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  Speaker 1: he was a president of a small bank, enterprise bank
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  Speaker 1: up in Lowell. He didn't have a job for me,
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  Speaker 1: but he got me in touch with Century Bank and Trust.
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  Speaker 1: I had an interview there, became credit analyst. I was
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  Speaker 1: thankful I had an opportunity at that point. So I
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  Speaker 1: did that first, and that was a good learning experience. Again,
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  Speaker 1: you know what I witnessed then, as you know that
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  Speaker 1: real estate bubble kind of burst, is those same loan
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  Speaker 1: officers with their underwriting loans that was helping them. Do
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  Speaker 1: they became landlords?
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  Speaker 2: Oh?
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  Speaker 1: No, that was the thing, you know, because they were
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  Speaker 1: you know, they were taking on some losses and they
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  Speaker 1: would have to go and then show the buildings.
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  Speaker 2: You know, they would take over the.
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  Speaker 1: Yeah, I mean that thing did fine. We were fine,
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  Speaker 1: but you know, that was it was an experience.
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  Speaker 2: So essentially they go from underwriters to default managers to
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  Speaker 2: suddenly we're real estate portfolio.
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  Speaker 1: Right. It's like working with the borrower, right, you know
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  Speaker 1: that whole that concept. But but I didn't stay there
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  Speaker 1: a lot that long. I learned how commercial banking worked,
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  Speaker 1: but I had an opportunity after that to move over
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  Speaker 1: back to Bank Boston, which is where I was interested
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  Speaker 1: in at the time.
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  Speaker 2: So, so, how did you end up as a senior
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  Speaker 2: fixed income analyst at Liberty Mutual Insurance.
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  Speaker 1: It was funny that same fellow, George Duncan, when I
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  Speaker 1: talked to him, he said, go go check out this bank.
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  Speaker 1: He said, you know, whatever you do, you're gonna need
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  Speaker 1: to go back for a graduate career. You go get
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  Speaker 1: your MBA and make sure your company pays for it.
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  Speaker 1: And the guy ran Centry Bank and Trust was an
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  Speaker 1: older fella, guy Sloan. He was a family owned bank.
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  Speaker 1: And I asked him, mister Sloan, will you will you
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  Speaker 1: pay for my MBA? He said absolutely not. He said
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  Speaker 1: you're going to get it and you're going to move on.
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  Speaker 1: And I said, all right, you know, And actually so
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  Speaker 1: that's why I went to Back of Possum. From there
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  Speaker 1: I started. I enrolled in Boston University, and that's when
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  Speaker 1: I started meeting people that were actually in the investment business.
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  Speaker 1: And I met a really good friend of mine at
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  Speaker 1: that time. We went through our entire career together, NBA career,
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  Speaker 1: and he said, why don't you come over to Liberty
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  Speaker 1: Mutual and applied for a job in the investment apartment,
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  Speaker 1: and so I did that and I started working there,
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  Speaker 1: and that was to me, really my first sort of
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  Speaker 1: entry into you know, investing.
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  Speaker 2: So I'm assuming a Liberty mutual, what you're investing is
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  Speaker 2: the firm's own capital from the insurance, right.
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  Speaker 1: It's the pot of money that it's the insurance money.
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  Speaker 2: And what was that experience, like, how did that affect
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  Speaker 2: how you approach fixed income today?
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  Speaker 1: To me, it was sort of the boot camp for
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  Speaker 1: fixed income investing. So we were pretty lean group of
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  Speaker 1: individuals by nature. Most of us were research people and
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  Speaker 1: we were giving corporate insurance. Companies do a lot of
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  Speaker 1: corporate investing, so we've had our own sectors. I took
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  Speaker 1: on the banking sector, which was interesting. I had a
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  Speaker 1: number of other things as well. But we also traded
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  Speaker 1: for our sector. So we had an empty trading room
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  Speaker 1: and the tartphones were in there. If you wanted to trade,
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  Speaker 1: you say, hey, fellas were you know, I'm going to
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  Speaker 1: go do some bank trades, you know, come on in
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  Speaker 1: and we'd call Wall Street and we you know, we'd
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  Speaker 1: do the trades right there and when we're done, we
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  Speaker 1: would go back to our research. And also dabbled in
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  Speaker 1: a little portfolio management. At the time, I ran a
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  Speaker 1: Mexican peso denominated portfolio believe it or not. So it
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  Speaker 1: was a really great boot camp, and you know, I
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  Speaker 1: had a really interesting manager there who was really disciplined people.
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  Speaker 1: In terms of research, it was deep dive research. We
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  Speaker 1: did a really good job.
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  Speaker 2: Huh. Really interesting. So, from Century Bank to Liberty Mutual,
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  Speaker 2: the rest of your career has been primarily on the
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  Speaker 2: fixed income side. Was that happenstance? By design? What led
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  Speaker 2: to that outcome?
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  Speaker 1: You know, I think it just was a natural fit
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  Speaker 1: for me, you know, with the training as a as
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  Speaker 1: a commercial bank analyst, and then it just really kind
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  Speaker 1: of fascinated me more. And so I think, you know,
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  Speaker 1: my skill set when I was, you know, approaching employers,
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  Speaker 1: it just naturally gravitated towards the fixed income area. And
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  Speaker 1: for me, surprising to say, it's a little bit more
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  Speaker 1: exciting than stocks, and the stocks are interesting, but there's
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  Speaker 1: so many different facets to fixed income. It's become highly
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  Speaker 1: much more specialized. But I'm fortunate. I span a lot
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  Speaker 1: of different areas, you know, my career, which has been.
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  Speaker 2: So let's talk about that. So not only a head
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  Speaker 2: of the full discretionary team, and we'll get to exactly
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  Speaker 2: what that means in a bit, but you run ten
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  Speaker 2: different mutual funds and ten institutional strategies. I assume there's
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  Speaker 2: a lot of overlap, and it covers the spectrum of
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  Speaker 2: fixed income from treasuries here to high you'el there, and everything.
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  Speaker 1: In between, everything in between globally, So we're kind of
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  Speaker 1: an eclectic group, you know, in terms of investment style.
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  Speaker 1: It sounds like there's a lot of strategies that we do,
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  Speaker 1: and that's true, but really there's the same common investment
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  Speaker 1: engine underneath it, and that's really what we're focused on.
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  Speaker 1: I spend most of my time on that. And what
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  Speaker 1: does that mean. It means the frameworks and the investment
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  Speaker 1: processes that we put in place provide through that provide
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  Speaker 1: the raw materials for investing. That's views on rates, you know,
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  Speaker 1: where you want your duration to be, et cetera, Views
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  Speaker 1: on the value in certain sectors, views on individual securities,
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  Speaker 1: you know. So that's the raw material that we get
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  Speaker 1: and then we can mix and match that to our
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  Speaker 1: various portfolios, most of our portfolios. Really it's a spectrum,
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  Speaker 1: just to kind of think about it. And it's a
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  Speaker 1: spectrum for I would say lower risk to a higher
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  Speaker 1: degree of risk. That's usually but not always defined by
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  Speaker 1: the quality that you can invest in. So as you
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  Speaker 1: go down more non investment great for example.
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  Speaker 2: Huh So I like the idea of this engine as
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  Speaker 2: the underlying driver of all these different strategies. It's not
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  Speaker 2: that there are ten completely novel approaches and ten different funds.
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  Speaker 2: It's really the core and you're just playing with how
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  Speaker 2: much returns you want and how much risk you have
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  Speaker 2: to take to get that, what sort of duration you're
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  Speaker 2: looking at, what sort of geographies. But the underlying engine
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  Speaker 2: is the same across all these different portfolios.
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  Speaker 1: That's right, that's right. And you know we can expand
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  Speaker 1: that risk depending on the client. And so when you
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  Speaker 1: look across our least risky RAN, we run a really
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  Speaker 1: great core plus product. It's a bit more out there
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  Speaker 1: than the typical court plus that you'll see, you know,
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  Speaker 1: other words got cor plus meaning treasury treasure corporates, you know,
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  Speaker 1: but we don't do for example, we don't do a
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  Speaker 1: lot of agency. We don't know agency works back securities.
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  Speaker 1: We definitely tilt into corporates. That's our you know, our
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  Speaker 1: bread and butter. What Loomis is known for our research.
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  Speaker 1: Uh and so that'll have you know, the least amount
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  Speaker 1: of risk, let's say, relative to say a multisector bond
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  Speaker 1: fund style portfolio or strategic income that's going to tilt down.
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  Speaker 1: But when you look across those, you'll see commonalities in
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  Speaker 1: terms of interest rate, positioning, names, exposures from a top
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  Speaker 1: down and a bottom up perspective.
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  Speaker 2: So you are now the head of the discretion team.
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  Speaker 2: Tell us what that means. Certain funds have discretion, others don't.
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  Speaker 2: I think the average lay person is not familiar with
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  Speaker 2: discretion in that context.
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  Speaker 1: You know, the business sometimes does a poor job of
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  Speaker 1: labeling things, and this is not no different, you know.
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  Speaker 1: And the way I kind of describe it is that,
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  Speaker 1: you know, a more constrained approach is typically something wrapped
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  Speaker 1: around it index, you know, And a lot of our
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  Speaker 1: competitors in the core plus space are like this. They
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  Speaker 1: take a benchmark. In that case, the Agrid index is
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  Speaker 1: bi bar the most common one used, and they'll have
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  Speaker 1: a very low tracking, or that they'll just ebb and
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  Speaker 1: flow with pretty much the beta that's you know, assigned
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  Speaker 1: to that with maybe generating a little bit of excess
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  Speaker 1: return for the good managers that are there. You know,
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  Speaker 1: when you start to get into something that has full discretion,
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  Speaker 1: the client says, Okay, let's sort of go or lean
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  Speaker 1: into your opportunity set where your skills are. Let's allow
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  Speaker 1: you to do more and have a wider degree of
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  Speaker 1: risk and off benchmarkting sector. And that's where that full
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  Speaker 1: discretion notion. So when you think of core plus, it's
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  Speaker 1: those plus sectors, non investment grade, you know, emerging markets,
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  Speaker 1: things like that that somebody was looking to you to
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  Speaker 1: have discretion. But full discretion doesn't mean you don't have
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  Speaker 1: any limits, right you still we all have constraints, right,
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  Speaker 1: there's always constraints.
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  Speaker 2: So the phrase I always hear is it's an unconstrained fund.
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  Speaker 2: What's the difference between constraints and discretion or or they
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  Speaker 2: just really the same terms to me?
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  Speaker 1: They can be used interchangeably. I think the nomenclature typically,
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  Speaker 1: you know when I started and multisector for example, has changed.
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  Speaker 1: We run the bond fund, which is kind of a
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  Speaker 1: go anywhere strategy or strategy come. Those used to be
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  Speaker 1: called multisector even before they were medium grade or something
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  Speaker 1: like that.
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  Speaker 2: See today when I think of multisector, I think of corporates, treasuries,
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  Speaker 2: high yield equities, and private including private credit. All that
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  Speaker 2: seems to be multi sector unconstrained.
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  Speaker 1: Yeah, it's this is where the nomenclature changes over time.
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  Speaker 1: I've known and it causes some confusion. And then you
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  Speaker 1: know what emerged too, and I launched one of these
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  Speaker 1: over ten years ago. Is that unconstrained or non traditional space.
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  Speaker 1: That was the you know, what's the difference between unconstrained
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  Speaker 1: and multisector. Well, there's not really that much difference. The
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  Speaker 1: young constraint typically does not have a benchmark. That was
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  Speaker 1: one aspect of it. So so does.
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  Speaker 2: That mean it's an absolute return fund? Yes, so, and
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  Speaker 2: then we'll care about relative performance and what's.
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  Speaker 1: The difference between absolute return and total return? In some ways,
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  Speaker 1: because like the bond fund we're looking, I don't really
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  Speaker 1: manage on a tracking your I don't like managing on
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  Speaker 1: a relative return. Let's say, you know, like it's like, oh,
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  Speaker 1: mister client, you know, we outperformed your index was down
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  Speaker 1: ten percent and we were only down nine That's not
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  Speaker 1: really a great outcome, right, Right. We're looking to make money,
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  Speaker 1: and that's absolute return or total return, whatever you want
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  Speaker 1: to call it.
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  Speaker 2: That's what we see. We talk about jargon and confusing labels.
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  Speaker 2: To me, total return on the equity side is equity
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  Speaker 2: plus dividends. As on the bond side, it means something else.
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  Speaker 1: Income, right, income and principal return.
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  Speaker 2: That's right. So you've spent more than twenty seven years
• 15:15
  Speaker 2: at Loomis Sales and Company. That's rather unusual these days.
• 15:20
  Speaker 2: What has kept you around so long? What's it like
• 15:23
  Speaker 2: growing with the firm that that's been in business? You're
• 15:27
  Speaker 2: coming up on one hundred years.
• 15:29
  Speaker 1: Sometimes you're you know, you're you're looking and doing your
• 15:32
  Speaker 1: job and you wake up, you know, you look up
• 15:34
  Speaker 1: and you go, wow, I've been here this long. It's
• 15:36
  Speaker 1: been fun. I've enjoyed it. You know. When I first
• 15:38
  Speaker 1: came to Loomis, you know, I encountered this guy named
• 15:40
  Speaker 1: Dan Fuss, and I was to me, it was like
• 15:43
  Speaker 1: a duck to water. I just took to his style.
• 15:46
  Speaker 1: I can't imagine doing investing any of the way. It
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  Speaker 1: just suited me to.
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  Speaker 2: Attend and he is a little bit of a legend
• 15:50
  Speaker 2: this and he.
• 15:51
  Speaker 1: Is a he is a legend.
• 15:52
  Speaker 2: Yeah, he's been around a while. And how long have
• 15:56
  Speaker 2: you did you work with him?
• 15:57
  Speaker 1: Well, the funny story, when I first came to Loomis interviewed,
• 16:00
  Speaker 1: there was a sort of an arms race for research
• 16:03
  Speaker 1: analysts on the street on the by side. At that
• 16:05
  Speaker 1: point in time, Wall Street had tons of research analysts,
• 16:09
  Speaker 1: but the by side was really ramping up. And I
• 16:11
  Speaker 1: had a lot of opportunities to interview and one of
• 16:14
  Speaker 1: them was at Looma Sales and I got the job
• 16:16
  Speaker 1: and a fella helped me, This guy, Dan Holland at
• 16:19
  Speaker 1: Golden Sacks was instrumental helping me and took at the job.
• 16:22
  Speaker 1: And I'm like, well, there's this guy Dan Fuss there
• 16:24
  Speaker 1: and I know I don't really know him that well,
• 16:26
  Speaker 1: but he's sixty five, let's say. At the time, he said,
• 16:29
  Speaker 1: I don't know, you know, it seems like he's really
• 16:30
  Speaker 1: a key marque part of that firm. Maybe there's a
• 16:33
  Speaker 1: risk there. And Dan told me was great advice, He said,
• 16:36
  Speaker 1: Matt five years as an eternity, take the job. So
• 16:40
  Speaker 1: many eternities later, because Dan worked is still working. He's
• 16:43
  Speaker 1: ninety really yeah, he could still comes out here.
• 16:45
  Speaker 2: Bless him.
• 16:46
  Speaker 1: He stopped managing money a while ago. But never did
• 16:49
  Speaker 1: I expect what was to come, and nor did I
• 16:53
  Speaker 1: expect that I would become a successor for him. That
• 16:56
  Speaker 1: was the entry point. And I'll tell you a story.
• 16:58
  Speaker 1: But when I first came, there was not seven ninety eight, Okay,
• 17:01
  Speaker 1: the Asian crisis was just getting going. Remember the tie
• 17:04
  Speaker 1: Bot the value it went down like fifty percent, and
• 17:07
  Speaker 1: you know LTCM was going to hit Russia default and
• 17:10
  Speaker 1: so it was you know, bonds were coming out, and
• 17:14
  Speaker 1: back then there was the the Brady bond market was
• 17:16
  Speaker 1: still big. Brazilian Sea bond was the most liquid bond
• 17:19
  Speaker 1: in the universe. The market was going down, and I
• 17:22
  Speaker 1: witnessed Dan with a big smile on his face in
• 17:25
  Speaker 1: the trading room in the morning meetings. I'd go there
• 17:27
  Speaker 1: and he would be snapping up all these bargains. Our
• 17:31
  Speaker 1: portfolios went from you know, close to zero in the
• 17:34
  Speaker 1: Asian market to reaching like we were talking about constraints,
• 17:37
  Speaker 1: reaching the limits that we could do by specified by
• 17:41
  Speaker 1: the guidelines at thirty thirty five percent, right, And so
• 17:45
  Speaker 1: that was a huge lesson for me, first of all,
• 17:48
  Speaker 1: I said, this is where I want to be. What
• 17:50
  Speaker 1: he was doing there was providing liquidity to illoquin markets.
• 17:53
  Speaker 1: Now I participated in some of that as a research
• 17:55
  Speaker 1: analyst by looking at companies like Total Access Communications, a
• 17:58
  Speaker 1: tie wireless comme, PLD, Philippine long Distance Telecom. It's like
• 18:03
  Speaker 1: AT and TuS.
• 18:04
  Speaker 2: And all these companies have fixed income.
• 18:06
  Speaker 1: They had fixed income, and they're trading wavelessens in the
• 18:09
  Speaker 1: dollar sense of dollar. In the case of Total Access Communication,
• 18:12
  Speaker 1: bought the stock at eleven cents, went to five.
• 18:15
  Speaker 2: You know, it's a five cents or five dollars dollars.
• 18:18
  Speaker 2: That's a good rate.
• 18:19
  Speaker 1: Yeah, I should have specified that. So these were you know,
• 18:21
  Speaker 1: like in my formative stages like as a as a
• 18:24
  Speaker 1: research channelst and becoming you know, not just a research
• 18:28
  Speaker 1: chanalyst in making calls or you know, sort of opining
• 18:31
  Speaker 1: on the credit quality or the opportunities and risks of
• 18:34
  Speaker 1: a particular credit. It's really becoming an investor. And that's
• 18:37
  Speaker 1: that's sort of what they end taught me.
• 18:39
  Speaker 2: I love the expression providing liquidity to ill liquid markets,
• 18:43
  Speaker 2: which usually means picking up things at fractions of their
• 18:48
  Speaker 2: actual value. The same phrase was during the financial crisis
• 18:51
  Speaker 2: when people talked about toxic assets, and my answer was always,
• 18:55
  Speaker 2: there's no such thing as a toxic asset. It is
• 18:58
  Speaker 2: only a toxic price. At the right price, everything has value.
• 19:03
  Speaker 1: Without a doubt, and it introduced me to sort of
• 19:05
  Speaker 1: that concept of margin and safety. A lot of people
• 19:07
  Speaker 1: talk about it, but with bonds it's really interesting, particularly
• 19:09
  Speaker 1: the corporate bonds. As the dollar prices come down, your
• 19:14
  Speaker 1: risk goes down because there's a recovery. In the worst
• 19:16
  Speaker 1: case scenario, you end up you know, owning the company basically, right.
• 19:20
  Speaker 1: So the recovery value, and sometimes those recovery values are
• 19:23
  Speaker 1: the trading value you could come close to or if
• 19:25
  Speaker 1: not below, the actual recovery value in those situations. So
• 19:28
  Speaker 1: because like a quant person would come in and say, oh,
• 19:31
  Speaker 1: your value at risk is going bonkers right now, you know,
• 19:33
  Speaker 1: of all, if your portfolio is nine percent and you're backwards,
• 19:37
  Speaker 1: it's like, no, no, this is the time you want
• 19:39
  Speaker 1: to go. And in fact, at that point the returns
• 19:41
  Speaker 1: are skewed in your favor. Before looking returns, huh.
• 19:44
  Speaker 2: Really fascinating. So let's talk a little bit about the
• 19:47
  Speaker 2: team you work with. Your head of the full discretion team.
• 19:50
  Speaker 2: What does the team do, how are they working with
• 19:52
  Speaker 2: various funds and strategies, and how do they work with client?
• 19:55
  Speaker 1: Right, So we're managing roughly about seventy four billion dollars
• 19:58
  Speaker 1: and fixing come portfolio. We have four main product categories.
• 20:02
  Speaker 1: That talked about our Core plus offering, which is our
• 20:05
  Speaker 1: largest over twenty eight billion dollars, and then it goes
• 20:08
  Speaker 1: into sort of multisector, and then after that you're into
• 20:11
  Speaker 1: the high yield. We do all our dedicated high land
• 20:13
  Speaker 1: BANKO and investing as well. Like I said, we're pretty eclectic.
• 20:16
  Speaker 1: We tend to not look like our benchmarks. We have
• 20:19
  Speaker 1: a lot of discretion to go outside, and we're you know,
• 20:21
  Speaker 1: really interested in just generating the best total returns we
• 20:24
  Speaker 1: can from a very wide opportunity set.
• 20:28
  Speaker 2: Really really interesting. You talk a bit about various strategies
• 20:32
  Speaker 2: across all the funds. I want to dive into these
• 20:36
  Speaker 2: and get a handle on what they mean. So I
• 20:39
  Speaker 2: often see the phrase research driven, bottom up approach. I
• 20:43
  Speaker 2: assume that means we're not making big macro calls. We're
• 20:46
  Speaker 2: looking at quality, we're looking at duration, we're looking at risk.
• 20:49
  Speaker 1: Right, I mean it's hard to get away from macro
• 20:51
  Speaker 1: calls altogether. Fixing come portfolio for example, duration is a
• 20:54
  Speaker 1: big call you got to but you know a lot
• 20:56
  Speaker 1: of our alpha are so called total access. Sort of
• 20:58
  Speaker 1: return is driven buy our bottom up security selection and
• 21:02
  Speaker 1: that comes through really excellent research. When you look at
• 21:05
  Speaker 1: our process, we do think about a macro. We are
• 21:09
  Speaker 1: credit cycle investors. As I said before, we lean into
• 21:12
  Speaker 1: the credit markets. Where we're going to make our money
• 21:14
  Speaker 1: is tilting into risk. So for us, you know, most
• 21:18
  Speaker 1: of our intermediate quality is going to be triple B
• 21:20
  Speaker 1: average quality of our portfolios.
• 21:23
  Speaker 2: So that's a little below of investment.
• 21:25
  Speaker 1: Yeah, and we think that it really makes sense to
• 21:27
  Speaker 1: tilt in through the cycle. Okay, to get that spread premium,
• 21:32
  Speaker 1: you get compensated for it as an investor. You know,
• 21:35
  Speaker 1: maybe it's only one hundred or two hundred basis points,
• 21:37
  Speaker 1: but compound that over five years you got more than
• 21:40
  Speaker 1: double the money. It's significant. Yes, The key is to
• 21:43
  Speaker 1: not to avoid permanent losses, and that's where you know
• 21:47
  Speaker 1: the individual security selection comes out. We tend to be
• 21:50
  Speaker 1: concentrated in those so we when we find something we like,
• 21:53
  Speaker 1: we'll buy it relatively big size, not as big as
• 21:56
  Speaker 1: they say a forty You know, you look at the stocks,
• 21:58
  Speaker 1: you might say something like a thirty five star portfolio.
• 22:00
  Speaker 1: You can't do that in the fixed income. You got
• 22:02
  Speaker 1: to diversify more. But that's what we seek to do.
• 22:06
  Speaker 2: Opportunistic we'll get to value driven That is so interesting
• 22:10
  Speaker 2: on the fixed income side and so different than what
• 22:14
  Speaker 2: people mean when they say value inequity. What are you
• 22:17
  Speaker 2: getting paid for the risk you assume and fixed income?
• 22:20
  Speaker 2: Like if we look currently, especially with an inverted yield curve,
• 22:25
  Speaker 2: you're not getting paid a lot for very long duration,
• 22:29
  Speaker 2: but there's some risk with very short duration that hey,
• 22:33
  Speaker 2: if the Fed decides to eventually one of these days
• 22:37
  Speaker 2: cut rates, well, your short term duration now you have
• 22:41
  Speaker 2: reinvestment risk. How do you think of value relative to
• 22:44
  Speaker 2: fixed income?
• 22:45
  Speaker 1: You bringing up a point. There are a lot of
• 22:47
  Speaker 1: different types of risk premium and fixed income more so
• 22:50
  Speaker 1: than there are just in the stock market. And that's
• 22:52
  Speaker 1: interesting because you can build really interesting portfolios that have
• 22:56
  Speaker 1: different risk factors that co vary very well together, not
• 23:00
  Speaker 1: perfectly correlated. So that's diversification. So let's just focus on
• 23:04
  Speaker 1: the interest rate risk premium that you're talking about. You
• 23:06
  Speaker 1: bring up a good point here, So first, and I've
• 23:09
  Speaker 1: learned a lot of this from Dan, But you think
• 23:11
  Speaker 1: about this. Let's take a big, big step back about
• 23:14
  Speaker 1: interest rates. You know, we all know for a long
• 23:16
  Speaker 1: time your concept of reinvestment rate risk and principle risk
• 23:22
  Speaker 1: are the key big picture risks that you take in
• 23:25
  Speaker 1: fixed income for many decades. You know, after the poll
• 23:29
  Speaker 1: Vocar slayed inflation, right, your biggest risk. People really didn't
• 23:33
  Speaker 1: understand this, but your biggest rist of reinvestment rate risks.
• 23:36
  Speaker 2: Right, especially when you're in a thirty year market where
• 23:38
  Speaker 2: rates continue to fall. I remember my father in law
• 23:42
  Speaker 2: saying to me back in like two thousand, he had
• 23:46
  Speaker 2: a bunch of NYC GEO bonds that were fifteen percent
• 23:50
  Speaker 2: when New York City was in trouble, and he's like,
• 23:53
  Speaker 2: what can I do with this? I'm like, ah, we
• 23:54
  Speaker 2: get six and a half seven on a treasury. He's
• 23:56
  Speaker 2: like seven percent. That's why would I want seven percent
• 24:00
  Speaker 2: going lower? We'll talk in a few years it will
• 24:01
  Speaker 2: be five percent, no, can't be yes?
• 24:04
  Speaker 1: Yes, yes, So rates start came down more and more
• 24:07
  Speaker 1: more than people are expecting over time. You know, it's
• 24:09
  Speaker 1: interesting Dan used to run a ten year duration in
• 24:13
  Speaker 1: his portfolio. That's for people to know, that's very difficult
• 24:15
  Speaker 1: to do. You have to buy basically thirty years zeros
• 24:18
  Speaker 1: right to kind of get you out there, and he
• 24:20
  Speaker 1: was doing that in the Canadians bond market zero. So
• 24:22
  Speaker 1: it was very interesting. People ask them, well, well, you
• 24:25
  Speaker 1: don't manage duration just sort of artifact of your PORTFOLI.
• 24:27
  Speaker 1: He's like, no, no, no, I want to maximize that because
• 24:30
  Speaker 1: I want to capture this yield for as long as possible.
• 24:35
  Speaker 1: Don't worry about the cycles. You're going to have lower
• 24:37
  Speaker 1: lows and lower highs. And that persisted until about two
• 24:40
  Speaker 1: thousand and three. Remember the conundrum, the bond conundrum. Right
• 24:44
  Speaker 1: rates started getting really lower. It was kind of back then,
• 24:46
  Speaker 1: even approaching the lower bound.
• 24:48
  Speaker 2: That whole excess savings nonsense we heard from at least
• 24:51
  Speaker 2: I thought it was nonsense. Fixed income people might have a.
• 24:54
  Speaker 1: Right and so then now you had to get to
• 24:57
  Speaker 1: a point where you start, okay, now you have to
• 24:59
  Speaker 1: start considering the principal risk. Now, it took a long
• 25:02
  Speaker 1: time before principal risks has become a problem, but even
• 25:07
  Speaker 1: I would say even before the pandemic, there were signs
• 25:09
  Speaker 1: that you need to start flipping your calculus as a
• 25:13
  Speaker 1: fixed incoming vector investor on a secular.
• 25:15
  Speaker 2: Basis another word saying, hey, we've been at zero for
• 25:19
  Speaker 2: a long time. Eventually rates are going to go up,
• 25:23
  Speaker 2: and I would rather be sooner than later, because if
• 25:27
  Speaker 2: I wait too long, especially with long duration, rising rates
• 25:32
  Speaker 2: in long duration fixed income leads to capital laws.
• 25:36
  Speaker 1: In twenty twenty to ten years fifty basis points, we
• 25:39
  Speaker 1: ran a very low duration there, and you would say, well,
• 25:41
  Speaker 1: it wasn't a big risk because you're at the zero
• 25:43
  Speaker 1: lower bound. What are the chances they're going to go lower.
• 25:45
  Speaker 2: And you weren't getting paid for it.
• 25:46
  Speaker 1: And you weren't getting paid for it. Now that seems
• 25:48
  Speaker 1: like any decision now, but it not necessarily at the
• 25:52
  Speaker 1: time because people weren't sure. But that was a really
• 25:55
  Speaker 1: good call for us. And before you used to be
• 25:57
  Speaker 1: able to ride the like Dan did the tenure you
• 25:58
  Speaker 1: could just stay long. You can not stay short right
• 26:01
  Speaker 1: in this market and expect to do well over the
• 26:04
  Speaker 1: long run. You've got to manage through the FED cycle.
• 26:06
  Speaker 1: So I like to think about it as a FED cycle.
• 26:09
  Speaker 1: I think we're, you know, obviously coming to a cutting
• 26:11
  Speaker 1: cycle soon. Your risk now on reinvestment rate risk is
• 26:15
  Speaker 1: in the short end, and I think it's time to
• 26:17
  Speaker 1: kind of move out into the intermedia of the part of.
• 26:19
  Speaker 2: The cur I totally agree. We've sort of taken the
• 26:23
  Speaker 2: same approach internally. Let's go over the rest of your
• 26:28
  Speaker 2: core principles for the for the key strategies we briefly
• 26:31
  Speaker 2: mentioned multi asset. Does that include equities? That does that
• 26:34
  Speaker 2: include private credit? How multi is multi asset?
• 26:38
  Speaker 1: Multi asset does include for certain portfolios, you know, the
• 26:41
  Speaker 1: more risky portfolios, we can start putting in stocks, our
• 26:44
  Speaker 1: most risky strategic income. We can do up to thirty
• 26:48
  Speaker 1: five percent stocks in that portfolio. Then you go into
• 26:52
  Speaker 1: something called global allocation, which I manage the bonds leave
• 26:55
  Speaker 1: but with a couple of great equity managers and a
• 26:58
  Speaker 1: great global manager. On the fixed income side, that is
• 27:00
  Speaker 1: typically like seventy percent stocks. So we do bottom up
• 27:04
  Speaker 1: stock selection as well.
• 27:05
  Speaker 2: So in your multi asset, where you're looking at the equities,
• 27:10
  Speaker 2: is it a particular type of equities? Are you looking
• 27:12
  Speaker 2: at diven m payers, are you looking at convertibles? What
• 27:15
  Speaker 2: sort of equities complement the fixed income side and the
• 27:19
  Speaker 2: multi asid.
• 27:19
  Speaker 1: Yeah, you bring a good point. Equity premium can be
• 27:23
  Speaker 1: gotten from not just stocks but also from converts. Yeah, right,
• 27:26
  Speaker 1: So we do that across all our portfolios. Right, even
• 27:29
  Speaker 1: once that don't necessarily allow us to buy outright stocks,
• 27:32
  Speaker 1: we can buy convertible bonds, and we've made hay in
• 27:35
  Speaker 1: that market because it's I think it's less efficient.
• 27:38
  Speaker 2: So it's a challenging space because if done right, you
• 27:42
  Speaker 2: get the best of both worlds. Yes, and have done poorly,
• 27:45
  Speaker 2: it's the worst of both worlds. Hey, low yield, but
• 27:47
  Speaker 2: at least as principal risk that wants that.
• 27:50
  Speaker 1: Well, it's the only kind of bond that's a growth
• 27:52
  Speaker 1: bond too. So if you're right, you're really right. And
• 27:55
  Speaker 1: we've had some really great winters like cornering over the years.
• 27:58
  Speaker 2: Well if the underlying if the if the paying company
• 28:01
  Speaker 2: has some positive corporate event, well obviously the convertibles do
• 28:07
  Speaker 2: really well, and some of them have you know, the
• 28:09
  Speaker 2: terms that say, hey, well this is going to convert
• 28:11
  Speaker 2: at this low price. When the price is up here,
• 28:13
  Speaker 2: it's a win win other than having to pay the taxes.
• 28:16
  Speaker 1: Right, So we do that and we're very good at that,
• 28:19
  Speaker 1: always have been. And on the stock side, you know
• 28:21
  Speaker 1: we are we're fixed income investors our investors expect us
• 28:25
  Speaker 1: to generate yield, so that pushes us into the dibbinit
• 28:27
  Speaker 1: paying stocks. For the most part, I would say from
• 28:30
  Speaker 1: a bottom up perspective, you know, our research group does
• 28:33
  Speaker 1: a tremendous job at uncovering value. What I asked my
• 28:37
  Speaker 1: nis to do is really understand what the assets of
• 28:39
  Speaker 1: a company are worth. Okay, this is our fixed income analysts.
• 28:42
  Speaker 2: You know.
• 28:42
  Speaker 1: This is typically you know, you think of equity.
• 28:44
  Speaker 2: Meaning an event of a default. What do we end
• 28:46
  Speaker 2: up with as what is? Yeah?
• 28:48
  Speaker 1: But what is the value? Because then I can look
• 28:49
  Speaker 1: at the cap structure and I can say how well
• 28:52
  Speaker 1: is that debt cover But and then I can look
• 28:53
  Speaker 1: at have a view on the stock too. So oftentimes
• 28:57
  Speaker 1: where we see the best value is that in the
• 28:59
  Speaker 1: equity market. Is it is when a company is going
• 29:01
  Speaker 1: from say, you know, a low quality but is all
• 29:05
  Speaker 1: of a sudden moving up rapidly from a credit fundamental
• 29:08
  Speaker 1: perspective that starts to accrue eventually to the stock. It
• 29:13
  Speaker 1: sort of goes from sort of worry about the leverage too, Oh,
• 29:15
  Speaker 1: we're not worried about it. The risk premium starts to
• 29:18
  Speaker 1: come down stock and it starts.
• 29:19
  Speaker 2: To so when you're doing your fixed income corporate analysis
• 29:23
  Speaker 2: of bonds, you can also identify mispricing on the equity side. Absolutely, yes,
• 29:28
  Speaker 2: we see you know all the time that that explains
• 29:31
  Speaker 2: this sort of pet thesis I've had for many, many years.
• 29:35
  Speaker 2: A lot of my favorite equity analysts began as bond
• 29:40
  Speaker 2: analysts or are bond analysts with opinions on equities, and
• 29:44
  Speaker 2: it's very different than the equity side, perhaps because of
• 29:48
  Speaker 2: that exact reason. They're really in the minutia of cap table,
• 29:53
  Speaker 2: the corporate structure, what the priorities are, and that really
• 29:57
  Speaker 2: seems to provide a lot of insight into what does
• 29:59
  Speaker 2: this compon been really worth going forward?
• 30:02
  Speaker 1: I agree, we see it all the time.
• 30:04
  Speaker 2: So let's talk a little bit about your clients. Loomis
• 30:07
  Speaker 2: sales manages well over three hundred billion dollars three hundred
• 30:11
  Speaker 2: and thirty three hundred and forty billion dollars. Who are
• 30:13
  Speaker 2: your clients? I know they're primarily institutional and they're spread
• 30:17
  Speaker 2: out over twenty countries, is it US, Europe? Asia? Who
• 30:21
  Speaker 2: and where are your clients?
• 30:23
  Speaker 1: But most of our asset bases in North America, as
• 30:25
  Speaker 1: you would expect being a US manager. But we've expanded
• 30:28
  Speaker 1: both in Europe. Asia, I think is the biggest pot
• 30:31
  Speaker 1: of money outside of the United States, so we're pretty
• 30:35
  Speaker 1: much everywhere. We have offices now in Singapore for Loomis
• 30:37
  Speaker 1: offices in Singapore and in London, and that's something that's
• 30:41
  Speaker 1: grown as I've grown over there. It's been fun to
• 30:44
  Speaker 1: kind of expand internationally. My client base. Half of it
• 30:48
  Speaker 1: is retail. You know, we're either doing our own funds
• 30:50
  Speaker 1: or subadvising on that half. And you know, so we're
• 30:54
  Speaker 1: dealing mainly with the big wirehouses like the Merrill Lynches
• 30:56
  Speaker 1: of the world, et cetera. You know, the fas are
• 30:59
  Speaker 1: investing in the funds. That's for the most part. Oria's
• 31:01
  Speaker 1: two places like that. And then on the institutional side
• 31:04
  Speaker 1: we do of course all private pensions, somber wealth funds,
• 31:08
  Speaker 1: public pensions, tapped, Hartley plans, insurance, all of that.
• 31:13
  Speaker 2: Huh. Really interesting how often you get to London or Singapore.
• 31:17
  Speaker 1: I go to Asia. My wife's from Sydney. I was
• 31:20
  Speaker 1: just in Sydney a couple of weeks ago. Interesting contrast
• 31:22
  Speaker 1: between the US and Sydney right now.
• 31:24
  Speaker 2: But why is that?
• 31:26
  Speaker 1: Well, this goes back to the FED and the transmission
• 31:29
  Speaker 1: of policy here in the United States, we've bet what's
• 31:31
  Speaker 1: the the average mortgage now is like a three handle.
• 31:33
  Speaker 2: Yeah, So like if you look at the pool of
• 31:37
  Speaker 2: mortgages five percent below, it's like sixty five seventy percent
• 31:40
  Speaker 2: of yes, well outstanding, whereas most of the rest of
• 31:43
  Speaker 2: the world is variable, not fixed mortgages.
• 31:45
  Speaker 1: That's just it. So that transmission is muted on the
• 31:49
  Speaker 1: upside for when they're raising rates for the FED. On
• 31:51
  Speaker 1: the downside, refine it refined. Every penis some mortgage once
• 31:55
  Speaker 1: a long time ago before I made one coupon payment.
• 31:58
  Speaker 1: But that so there's a sort of asymmetry now. When
• 32:00
  Speaker 1: I was over in Sydney visiting family and doing some business,
• 32:03
  Speaker 1: you talk to people there, their mortgage bills is hitting
• 32:07
  Speaker 1: their pocketbuts right away a little bit of a lab
• 32:09
  Speaker 1: but it's killing them right now. And you know, inflation
• 32:12
  Speaker 1: is tough there. The same themes here are there, but
• 32:15
  Speaker 1: you can start to see it more there is.
• 32:18
  Speaker 2: That why we've seen who's cut rates over the past
• 32:21
  Speaker 2: few weeks. The Bank of Canada, Canada, Bank of Australia
• 32:24
  Speaker 2: right cb RBA has not done that. They have not yet.
• 32:28
  Speaker 1: Yeah, and they're even talking about raising because inflation is
• 32:30
  Speaker 1: still a problem there. Now. The difference there is I
• 32:32
  Speaker 1: got way more immigration, right, and it's a growing population.
• 32:35
  Speaker 1: You talk to a developer there, they have the same
• 32:37
  Speaker 1: housing problem. Not they just can't and you can't find
• 32:40
  Speaker 1: skilled labors to do the job. So that's that's where
• 32:44
  Speaker 1: the similarities are.
• 32:45
  Speaker 2: It's still a robust economy that's doing pretty well.
• 32:47
  Speaker 1: It's a robust economy. Yeah, so in Australia has always
• 32:50
  Speaker 1: been like that because that growth.
• 32:52
  Speaker 2: Plus they have China. They're a giant supplier to China
• 32:54
  Speaker 2: for commodities everything else. I would love to go to Australia.
• 32:58
  Speaker 2: I am just so intimidated by that flight. It's on
• 33:01
  Speaker 2: a flight, it's like eighteen twenty hours something crazy.
• 33:04
  Speaker 1: You bring a good book with you.
• 33:05
  Speaker 2: You've got to bring a couple of books, a couple
• 33:07
  Speaker 2: of movies, and some sleeping pills and you're halfway there, right.
• 33:11
  Speaker 2: It's it's really tough, all right. So across your career
• 33:14
  Speaker 2: at Loomis, for twenty seven years, you have gone from
• 33:17
  Speaker 2: analysts to portfolio manager to head of the full discretionary team.
• 33:24
  Speaker 2: Tell us what that transition was like and how are
• 33:28
  Speaker 2: you able to relate with some of the younger analysts
• 33:31
  Speaker 2: in the firm. Considering you started out where they.
• 33:33
  Speaker 1: Did, I kind of got lucky and that there was
• 33:35
  Speaker 1: an opening as a portfolio manager. And you know, I
• 33:38
  Speaker 1: had spent only three years in the research group. I
• 33:40
  Speaker 1: was sort of snake bitten as an analyst. Anything I
• 33:42
  Speaker 1: touched as an industry seemed to blow up. But when
• 33:44
  Speaker 1: I came to Loomis, I was covering oil and gas
• 33:47
  Speaker 1: when oil went to five dollars a barrel, right, or
• 33:49
  Speaker 1: ten dollars something like that, and then I also pa.
• 33:51
  Speaker 2: Dollars a barrel, I want to say, late nineties.
• 33:54
  Speaker 1: Something like that was yeah, with late nineties and on
• 33:57
  Speaker 1: the cover of the Economists that said five dollars with
• 33:59
  Speaker 1: a I'm like that.
• 34:00
  Speaker 2: And that was low. So it's so funny you say
• 34:03
  Speaker 2: that I sat in on a meeting I won't mention
• 34:06
  Speaker 2: the firm and listen to the market strategist slash managing
• 34:11
  Speaker 2: partner scream about two and three dollars oil, and I
• 34:15
  Speaker 2: leaned over the guy next to him, I'm like, you
• 34:17
  Speaker 2: will never see in the lower print of oil in
• 34:19
  Speaker 2: our lifetime, literally read the same nonsense that this guy
• 34:23
  Speaker 2: was spewing in Barns that week, and I'm like, gee,
• 34:26
  Speaker 2: this sounds kind of like the opposite of what you
• 34:28
  Speaker 2: get at the tops and equity markets. That's it. Oil
• 34:32
  Speaker 2: is bottomed, and that was fair enough.
• 34:34
  Speaker 1: It was, yeah, and so we made some good money.
• 34:36
  Speaker 1: We made tons of money of chutspeak energy back then
• 34:38
  Speaker 1: and the Asian crisis. Have made a lot of money
• 34:40
  Speaker 1: with Dan in the trading desk. At that time. I
• 34:43
  Speaker 1: also covered wireless telecoms, so that entered into a you know.
• 34:47
  Speaker 1: So anyways, I had a lot of swings there that
• 34:49
  Speaker 1: went really well, and I was asked to manage money
• 34:51
  Speaker 1: with Dan and I didn't expect it at that time,
• 34:54
  Speaker 1: but it just happened, and so I fell into that.
• 34:57
  Speaker 1: Back then, it was a lot different. You ate what
• 34:59
  Speaker 1: you killed. What I mean by that is you were
• 35:01
  Speaker 1: loosely affiliated as a portfolio manager. You know. I basically
• 35:04
  Speaker 1: would hang my name up on a shingles, say Maddie
• 35:06
  Speaker 1: and portfolio manager, and a client would hire me right,
• 35:09
  Speaker 1: not necessarily Loomis, and we were loosely affiliated around like
• 35:12
  Speaker 1: the Dan Fuss style, and I love the Dan Fust style.
• 35:15
  Speaker 1: So I was investing like that. But my first opportunity
• 35:18
  Speaker 1: as a as a portfolio manager, you know, you had
• 35:20
  Speaker 1: to go where other people didn't want to go. The
• 35:22
  Speaker 1: other senior managers didn't want to go. So an opportunity
• 35:25
  Speaker 1: came up in the middle of January to go to Helsinki,
• 35:27
  Speaker 1: Finland for a highyield opportunity, and.
• 35:29
  Speaker 2: I raised me in the middle of January.
• 35:30
  Speaker 1: In the middle of January, which is quite interesting, is
• 35:32
  Speaker 1: very cold and very dark and very dark, and I
• 35:35
  Speaker 1: went there and I got it. It was like two
• 35:36
  Speaker 1: or three hundred million dollar mandate for high yield, so
• 35:39
  Speaker 1: that was great. At the same time, we started institutionalizing
• 35:42
  Speaker 1: as a business because Loomis was really created as an
• 35:45
  Speaker 1: investment counselor back in the day. The manager did bonds
• 35:49
  Speaker 1: and stocks and worked directly with that client one on one,
• 35:53
  Speaker 1: and we needed to institutionalize. When I first started Loomis,
• 35:55
  Speaker 1: we were eighty billion in AUM and we were growing
• 35:58
  Speaker 1: right so now we're almost three under fifty billions, so
• 36:01
  Speaker 1: it's been a lot of growth, and that's one of
• 36:02
  Speaker 1: the reasons. Growth creates opportunities right for people, So we
• 36:06
  Speaker 1: need institutionalize. We hired a new CEO, Cio came in
• 36:10
  Speaker 1: to help us do that, and we created teams and
• 36:13
  Speaker 1: that's when we started to create the team that you
• 36:16
  Speaker 1: know Dan was on. I was on Elaine Stokes. Everybody's
• 36:19
  Speaker 1: retired except for me, off that original team, you know.
• 36:21
  Speaker 1: From there, I started creating that product team that you
• 36:24
  Speaker 1: see over twenty people today. We institutionalized the products, the
• 36:29
  Speaker 1: product offerings, which really makes you think about how do
• 36:32
  Speaker 1: you explicitly state what the objectives are?
• 36:36
  Speaker 2: Right?
• 36:36
  Speaker 1: And then we institutionalized the framework. And I think behind
• 36:40
  Speaker 1: every great shop, equity bonds, whatever, behind every great manager
• 36:45
  Speaker 1: is a great framework, a repeatable framework.
• 36:48
  Speaker 2: That's the hardest thing we did developing the process that
• 36:51
  Speaker 2: you can do over and over again.
• 36:53
  Speaker 1: We had the foundation, we had it up in our brains.
• 36:56
  Speaker 1: The idea was to put it on paper and write
• 36:59
  Speaker 1: it out, and that took a long time. And then,
• 37:02
  Speaker 1: of course succession for Dan was a huge part of
• 37:04
  Speaker 1: my microphone.
• 37:05
  Speaker 2: So let's let's talk a little bit about what you
• 37:08
  Speaker 2: described as the Dan Fuss approach. I love the concept
• 37:14
  Speaker 2: of opportunistic investing, So a few questions. Let me just
• 37:19
  Speaker 2: start with explain what is the Dan Fuss approach?
• 37:23
  Speaker 1: Before I answer that question, let me just describe, you know,
• 37:25
  Speaker 1: a situation when I became a portfolio manager. I was
• 37:28
  Speaker 1: a credit guy, you know, I was a credit research
• 37:29
  Speaker 1: channels and I really liked hy yield investing. And you know,
• 37:33
  Speaker 1: Dan was covering all these markets and it looked really daunting.
• 37:35
  Speaker 1: I mean when I say everything, everything around the globe.
• 37:38
  Speaker 1: He was reading, you know, uh Asian papers, he was
• 37:41
  Speaker 1: covering Canadian bond markets and all the Ozzie bond markets,
• 37:44
  Speaker 1: et cetera. I said, hmm, maybe I can just do hi,
• 37:47
  Speaker 1: I said, Dan, you know, I think I just want
• 37:49
  Speaker 1: to focus on our Higeld portfolios. What do you think
• 37:51
  Speaker 1: about that? And Dan said, You're not going to get
• 37:53
  Speaker 1: away with that too easy. You're not gonna get away
• 37:56
  Speaker 1: with that. So you are. You are going to be
• 37:59
  Speaker 1: a better investor. Trust me, You're gonna be a better
• 38:01
  Speaker 1: vestor if you can cast a wire net. So that's
• 38:03
  Speaker 1: one of the first things, cast a wye net. Okay,
• 38:06
  Speaker 1: So I said, all right, how does he do that?
• 38:08
  Speaker 1: So what I started observing him and what people know
• 38:12
  Speaker 1: Dan very well. Most of the times when this to
• 38:14
  Speaker 1: this day, he still does this. He stands up in
• 38:16
  Speaker 1: his office and there's a sort of a table that
• 38:19
  Speaker 1: he's at and he charts things by hand. He charts, commodities,
• 38:25
  Speaker 1: bond prices, stock, all of these market information. So I
• 38:29
  Speaker 1: asked him to show me this and it was done
• 38:31
  Speaker 1: on green Ledger paper, you know, the old Green County paper.
• 38:34
  Speaker 1: And he started flipping this thing open and it just
• 38:37
  Speaker 1: flipped page after page after page. He used to have
• 38:40
  Speaker 1: a he has a slide ruler that he says he
• 38:43
  Speaker 1: used to scratch his back and also to do straight lines.
• 38:47
  Speaker 1: And I said, wow, right, I said, why do you
• 38:50
  Speaker 1: do this? He said, I learned through the end of
• 38:54
  Speaker 1: a pencil, okay. And what it does is it allows
• 38:57
  Speaker 1: you to connect disparate spots and connect points that seem
• 39:02
  Speaker 1: unconnected and then you see that they are connected, right,
• 39:06
  Speaker 1: And that's where how you learn as an investor. So
• 39:09
  Speaker 1: I started doing that. I did it through spreadsheets. It's
• 39:11
  Speaker 1: different than just looking at a chart. You pull up
• 39:14
  Speaker 1: a bloom chart, you look at it right, doesn't stay
• 39:16
  Speaker 1: with you as well. Another way method is actually either
• 39:19
  Speaker 1: writing it out or putting it into a spreadsheet and
• 39:21
  Speaker 1: looking at the data over time and tracking it economic data,
• 39:26
  Speaker 1: GDP data, employment data, bond prices, auction. I have auction,
• 39:31
  Speaker 1: you know, data going back on a spreadsheet, back to
• 39:34
  Speaker 1: the two thousand, So that helped me become a multisector investor.
• 39:39
  Speaker 2: Huh, really intriguing. I took the technical analyst course in
• 39:43
  Speaker 2: the nineties with Ralph Akmpora, and I had not only
• 39:47
  Speaker 2: heard something very similar from him to what you're describing
• 39:51
  Speaker 2: with Dan, but a number of traders and fund managers
• 39:56
  Speaker 2: and technicians all had said, I like the expression learning
• 40:00
  Speaker 2: from the end of a pencil. Looking at a chart
• 40:03
  Speaker 2: is not the same as drawing a chart. You end
• 40:06
  Speaker 2: up feeling something viscerally that you can't get just by
• 40:10
  Speaker 2: visually viewing it, especially when you're doing it every day
• 40:14
  Speaker 2: with a whole run of different assets. What you begin
• 40:17
  Speaker 2: to feel is a real rhythm, a real intuition as
• 40:21
  Speaker 2: to what's going on. It may look random, and often is,
• 40:26
  Speaker 2: but when you're doing it manually, day by day, you
• 40:28
  Speaker 2: kind of get a sense of what's happening.
• 40:29
  Speaker 1: Yeah. In fact, as it's your intuition that everybody talks about,
• 40:32
  Speaker 1: you start to build this kind of intuition about the
• 40:34
  Speaker 1: market and these funny feelings that something's going on, you know,
• 40:38
  Speaker 1: on the surface, and then you know, I would like
• 40:40
  Speaker 1: to listen to that, and you start sort of on
• 40:42
  Speaker 1: peeling that and it leads you to start to focus
• 40:44
  Speaker 1: on areas that maybe other people aren't focusing on.
• 40:46
  Speaker 2: That that's the art, not the science. When I think
• 40:50
  Speaker 2: of opportunistic investing on the equity side, it's very much,
• 40:55
  Speaker 2: you know, buying when there's blood in the streets. Taking
• 40:58
  Speaker 2: the opposite side of panic. It's a little harder tops
• 41:02
  Speaker 2: than bottoms. Bottoms are very visible tops or this long,
• 41:05
  Speaker 2: slow process, but it's really visceral and emotional and people
• 41:10
  Speaker 2: are panicking and I'll make a little liquidity over here.
• 41:13
  Speaker 2: What you described in terms of opportunistic investing on the
• 41:17
  Speaker 2: fixed income side seems somewhat qualitatively different. What is opportunistic
• 41:24
  Speaker 2: investing on the bond side.
• 41:26
  Speaker 1: I think it's it's similar. I mean, like I said,
• 41:27
  Speaker 1: we provide liquidity to illocan markets, so we're looking for
• 41:30
  Speaker 1: dislocations in the market and that because of greed and fear,
• 41:34
  Speaker 1: you know, or different differences in timing of horizons of investments.
• 41:41
  Speaker 1: You know, for the street is very short, you know,
• 41:42
  Speaker 1: we can be longer. I think you know the temperament
• 41:45
  Speaker 1: for my style, I think you have to really enjoy volatility.
• 41:50
  Speaker 1: I noticed that, well, I'm smiling when the market is
• 41:53
  Speaker 1: down and I think that's an important kind of trait
• 41:55
  Speaker 1: to have. I get antsy and kind of more grouchy. Unfortunately,
• 41:59
  Speaker 1: a lot of the times you're in these markets where
• 42:01
  Speaker 1: they're just kind of going sideways and there's not a
• 42:03
  Speaker 1: lot of bad right, that makes me grouchy. I try
• 42:06
  Speaker 1: not to bring that home.
• 42:06
  Speaker 2: But nauci or is it just boring?
• 42:08
  Speaker 1: It's boring, which makes you a little bit irritable, you know,
• 42:11
  Speaker 1: And I think, you know, I really enjoy I probably
• 42:14
  Speaker 1: would have been a good er doctor.
• 42:16
  Speaker 2: I like it.
• 42:17
  Speaker 1: You know, in twenty twenty, you know, we're in the
• 42:18
  Speaker 1: pandemic right right, and that's going on, and you can
• 42:22
  Speaker 1: buy McDonald's at seventy cents of the dollar. I love
• 42:25
  Speaker 1: that kind of market.
• 42:27
  Speaker 2: That's hilarious. That's I remember in the middle of even
• 42:31
  Speaker 2: the early months of eight and after being kind of
• 42:34
  Speaker 2: a goat for a year saying warning, hey, it's coming.
• 42:37
  Speaker 2: I don't know exactly when it's going to start, but
• 42:39
  Speaker 2: you could see this can't last. In eight I used
• 42:43
  Speaker 2: to play free Falling by Tom Petty on the computer
• 42:46
  Speaker 2: and one of the older senior people said, listen, I
• 42:50
  Speaker 2: understand what you went through, and you're finally getting a
• 42:54
  Speaker 2: little come up in for everybody who doubted the analysis.
• 42:58
  Speaker 2: But people are getting fired blood in the streets. You
• 43:01
  Speaker 2: got to take it down, right, so that like smile
• 43:04
  Speaker 2: is like okay, you got to kind of exactly got
• 43:06
  Speaker 2: to kind of keep it on the inside. But when
• 43:08
  Speaker 2: I was younger and dumber, I didn't realize that. Now
• 43:11
  Speaker 2: I'm older and dumber, and I kind of figured some
• 43:13
  Speaker 2: of that out. So let's talk about the state of
• 43:16
  Speaker 2: the bond market. You and I kind of began around
• 43:19
  Speaker 2: the same time, around mid nineties. We were the beneficiary
• 43:23
  Speaker 2: of Paul Volker's breaking the back of inflation. For anybody
• 43:29
  Speaker 2: who has been working in markets for most of the past,
• 43:33
  Speaker 2: you know, forty years, rates primarily trended downwards. How does
• 43:39
  Speaker 2: that impact how you think about fixed income? Sure, there
• 43:43
  Speaker 2: have been occasional spasms upwards, and we'll talk about the
• 43:46
  Speaker 2: twenty twenties next, But what does that framework do to
• 43:50
  Speaker 2: how you were running a bond portfolio in a multi
• 43:54
  Speaker 2: decade long bond bull market.
• 43:57
  Speaker 1: Right, Well, you know, of course went into the Q years,
• 44:00
  Speaker 1: and you know you had to look at like real
• 44:02
  Speaker 1: What QUI does is it pulls real rates into the
• 44:05
  Speaker 1: negative market and the Fed basically sells set tells you
• 44:07
  Speaker 1: do something else, go by risk. Right, during those periods,
• 44:10
  Speaker 1: we just had to follow what the Fed was doing,
• 44:12
  Speaker 1: you know, and if they were providing liquidity in the market,
• 44:15
  Speaker 1: you could feel pretty comfortable taking risk.
• 44:17
  Speaker 2: And that's literally the past twenty years. You got to
• 44:19
  Speaker 2: go back to the two thousand and one recession and
• 44:23
  Speaker 2: then September eleventh, we were pretty close to zero for decades.
• 44:27
  Speaker 1: Yeah, so we know the bond market really changed during
• 44:29
  Speaker 1: that and you remember, you know, you used to earn
• 44:31
  Speaker 1: you know, you think about the Yeld curve around the
• 44:33
  Speaker 1: classical thinking thought processes, what the FED doing, what the
• 44:36
  Speaker 1: economy is doing. During those Q years, you just worried
• 44:39
  Speaker 1: about what the balance sheet of the FED look like,
• 44:40
  Speaker 1: is it expanding or contracting? And that pretty much told
• 44:43
  Speaker 1: you what to do. Really, I think que now is
• 44:46
  Speaker 1: sort of in the rear view mirror for now. I
• 44:48
  Speaker 1: don't think it's going to come back. I think we're
• 44:50
  Speaker 1: in a different type of market where people who have
• 44:54
  Speaker 1: not witnessed an era where inflation is driving more decisions.
• 44:58
  Speaker 1: I think you really should look, you know, at longer history.
• 45:01
  Speaker 1: I was telling some of the younger people, like, do
• 45:03
  Speaker 1: not try to expect to extrapolate what's going to happen
• 45:08
  Speaker 1: based on recent I mean I'm talking like decade or
• 45:11
  Speaker 1: two type of bond markets.
• 45:13
  Speaker 2: Mean, reversion doesn't mean going back to zero, it means
• 45:15
  Speaker 2: it goes to five percent, right.
• 45:17
  Speaker 1: So I think that you know, it kind of goes
• 45:19
  Speaker 1: back to that concept we were talking about reinvestment rate
• 45:22
  Speaker 1: risk and principal risk. Now going forward, your biggest concern
• 45:25
  Speaker 1: or your challenge, and it's manageable, is how do you
• 45:29
  Speaker 1: preserve principle while getting to a higher level yield. So
• 45:32
  Speaker 1: you think of today's market, it used to be we
• 45:34
  Speaker 1: were walking down a steep staircase. It was going down, down, down.
• 45:38
  Speaker 1: Now you're looking at steps going up before you.
• 45:41
  Speaker 2: I believe is that the new trend.
• 45:43
  Speaker 1: I believe it is. I think we can talk about
• 45:46
  Speaker 1: that there's a structural feature to this market that's going
• 45:49
  Speaker 1: to keep it higher for longer, let's call at least
• 45:51
  Speaker 1: over the next decade or so. And then there's a
• 45:53
  Speaker 1: cyclical component, which we can talk about in a moment.
• 45:55
  Speaker 1: But the structural components are there are tailwinds to in
• 46:00
  Speaker 1: and the biggest driver is a fiscal deficit.
• 46:03
  Speaker 2: I was going to ask about that we've had this
• 46:06
  Speaker 2: giant regime change that during those twenty years, the prime
• 46:10
  Speaker 2: driver was monetary policy. Now it feels like, not only
• 46:14
  Speaker 2: do we have a massive fiscal stimulus first with the
• 46:18
  Speaker 2: tax cuts under Trump and then kars Act one and two,
• 46:21
  Speaker 2: which were giant fiscal stimulus, but now you have Karz
• 46:25
  Speaker 2: Act three plus all of these ten year long the
• 46:28
  Speaker 2: Infrastructure Bill, the Semiconductive Bill, the Inflation Reduction Bill, whatever
• 46:32
  Speaker 2: the name of the bill was, that added a whole
• 46:35
  Speaker 2: bunch of money to the veterans' hospitals. And those are
• 46:38
  Speaker 2: all ten year ongoing fiscal stimulus. Is that what you
• 46:43
  Speaker 2: mean when you talk about.
• 46:44
  Speaker 1: I started this actually really predates the when I started
• 46:48
  Speaker 1: thinking about this. Like for example, you know, I was
• 46:50
  Speaker 1: always asking me during those Q years what fundamentally needs
• 46:53
  Speaker 1: to change for us to start thinking differently about structurally
• 46:58
  Speaker 1: where rates are going, because we were starting to see
• 47:00
  Speaker 1: labor market conditions tight. Remember around eighteen nineteen, the FED
• 47:04
  Speaker 1: was starting to you know, it started going the other way.
• 47:07
  Speaker 2: Q four eighteen was a major draw down in the
• 47:09
  Speaker 2: equity market almost twenty percent.
• 47:10
  Speaker 1: Yeah, so you could see wages were just starting to
• 47:13
  Speaker 1: lift up. And now all of that was hidden by
• 47:15
  Speaker 1: the pandemic after that. But there's a tightening in the
• 47:17
  Speaker 1: labor force underneath all of this, and that's the demographics.
• 47:21
  Speaker 1: I was reading The Great Demographic Reversal at that time
• 47:24
  Speaker 1: by good Heart at All. It was talking about the
• 47:26
  Speaker 1: aging of the population. People used to think aging the
• 47:29
  Speaker 1: population is deflationary. Well, he put a different spin on it,
• 47:32
  Speaker 1: and it kind of got me thinking. And the big
• 47:34
  Speaker 1: thing there is, globally in the industrialized world, this is true.
• 47:37
  Speaker 2: Wait, the aging of the population is deflationary or is
• 47:41
  Speaker 2: this not so? The traditional discussion is people get older,
• 47:46
  Speaker 2: they stop consuming as much as they do when they're younger.
• 47:49
  Speaker 2: They already own their house, the mortgage paid off, they
• 47:51
  Speaker 2: own their cars, they'll drive them forever, and that's somewhat deflationary.
• 47:56
  Speaker 2: What's the counter, Well, he talks about it's really about
• 47:59
  Speaker 2: the working population. And if you looked at the big
• 48:02
  Speaker 2: event that we had was the ascension of China to
• 48:05
  Speaker 2: the World Trade Organization around two thousand and one or
• 48:07
  Speaker 2: something like that, they brought eight hundred million people to
• 48:09
  Speaker 2: the working age population. So our wages in the developed
• 48:12
  Speaker 2: world were crushed on a you know, on a real basis.
• 48:15
  Speaker 2: So there was sort of stagnation in there, and their
• 48:18
  Speaker 2: wages grew in the emerging markets, they became richer. Now
• 48:22
  Speaker 2: we all know the story now that China's you know,
• 48:25
  Speaker 2: population is rolling over now globally in the industrialized world,
• 48:29
  Speaker 2: the working age population is kind of stagnant, and that's
• 48:33
  Speaker 2: the tightness there you're seeing there. The people who spend
• 48:36
  Speaker 2: are the young folks and the older folks in the
• 48:40
  Speaker 2: middle of the way working age populations where the saving
• 48:43
  Speaker 2: takes place. So as you age, you actually spend your wealth.
• 48:47
  Speaker 2: And so that's what's going on.
• 48:48
  Speaker 1: I think, you know, a lot of people will push
• 48:50
  Speaker 1: against that theory, and I understand a lot of that,
• 48:52
  Speaker 1: but I look at it anecdotally. What did we see.
• 48:55
  Speaker 1: We saw, you know, some unionization efforts happening in this
• 48:58
  Speaker 1: country for the first time, small but an Amazon and
• 49:01
  Speaker 1: so on. And we can feel it, you know, in
• 49:04
  Speaker 1: our spending it wages, you know, having necessarily kept up
• 49:07
  Speaker 1: with this boost and inflation, but they're continuing. So that
• 49:10
  Speaker 1: was one aspect of it. The other thing was going on,
• 49:12
  Speaker 1: and Trump was you know, really started more or less
• 49:15
  Speaker 1: a trade war with China. Trade had been sort of
• 49:20
  Speaker 1: you had the Chimerica, you know, you all understood that
• 49:23
  Speaker 1: it worked well for both parties. Now we're in a
• 49:25
  Speaker 1: situation where it's not working well. There's tensions there, securities
• 49:29
  Speaker 1: concerns are rising, have risen. So now you have near shoring,
• 49:34
  Speaker 1: you have chips war things like that. You have this
• 49:38
  Speaker 1: fence spending going up. So all of these things are
• 49:41
  Speaker 1: adding to that inflation. And then on top of that
• 49:44
  Speaker 1: you have electrification through climate change and other factors evs,
• 49:47
  Speaker 1: all of that stuff.
• 49:47
  Speaker 2: Well, what's the impact of electrification, which I saw a
• 49:51
  Speaker 2: chart this morning that just showed China's electrification has just
• 49:55
  Speaker 2: blown everybody else away. They are moving towards full electrification
• 50:01
  Speaker 2: faster than anybody else by in order of magnitude.
• 50:04
  Speaker 1: Right, they're winning sort of in the battery in the
• 50:06
  Speaker 1: V space. We know, we know that they're leapfrogging in
• 50:08
  Speaker 1: certain areas where they can just sort of jump technologies,
• 50:11
  Speaker 1: if you will. That happens a lot in the emerging market.
• 50:13
  Speaker 1: So the electrification, though, you know, in the United States
• 50:15
  Speaker 1: and the developed world, it's all about the grid and
• 50:17
  Speaker 1: how you know, we've got to get our grid able
• 50:19
  Speaker 1: to handle all these evs, all the electrification that's going
• 50:23
  Speaker 1: to take place. And that's going to require just a
• 50:26
  Speaker 1: massive amount of investment and also stranded assets down the road.
• 50:31
  Speaker 1: So all you add all of these factors, I think
• 50:33
  Speaker 1: structurally there are tailwinds to inflation. Now what I think
• 50:37
  Speaker 1: that means, what the consequences of that are is that
• 50:40
  Speaker 1: inflation will be unstable and so you'll have syckicality inflation.
• 50:46
  Speaker 1: Think of it as like the saw tooth where the
• 50:47
  Speaker 1: teeth become you know, steeper. You probably remember this. You
• 50:51
  Speaker 1: have more variability in the economic cycle. Because what inflation
• 50:55
  Speaker 1: does is it adds uncertainty to consumers spending. It adds
• 50:59
  Speaker 1: uncertainty planning for businesses, and so you get these fits
• 51:02
  Speaker 1: and starts. It's a more compacted business cycle. It makes
• 51:06
  Speaker 1: it difficult or trickier for the FED to deal with.
• 51:09
  Speaker 1: So I think that's what we're going to see.
• 51:10
  Speaker 2: This last cycle was.
• 51:12
  Speaker 1: Really weird, you know, and I think we're going to
• 51:14
  Speaker 1: see more of these types of cycles, and so I
• 51:16
  Speaker 1: just think you need to have that in your brain
• 51:17
  Speaker 1: about how this market's going to behave and you know,
• 51:21
  Speaker 1: we can talk about the cyclical component of that today
• 51:24
  Speaker 1: and how you play it in the near term.
• 51:26
  Speaker 2: The big counter to higher for longer. That I keep
• 51:29
  Speaker 2: hearing is, you know, the things that are bringing rates
• 51:33
  Speaker 2: down hasn't been higher interest rates because of the lack
• 51:36
  Speaker 2: of pass through in the housing market. Although it is
• 51:39
  Speaker 2: impacting the bottom half of the economic stratas credit spending,
• 51:42
  Speaker 2: it'squesting them more. But wherever we look, we see these
• 51:46
  Speaker 2: structural shortages. So you mentioned how tight the labor market is.
• 51:51
  Speaker 2: A lot of that is a reduction in legal immigration,
• 51:56
  Speaker 2: not just under Biden and under Trump, but going back
• 51:59
  Speaker 2: about fifteen years that kind of post nine to eleven,
• 52:02
  Speaker 2: we tightened our rules. Some people have said the entire
• 52:07
  Speaker 2: jobs growth over the past few years has been primarily immigration.
• 52:12
  Speaker 2: Giant shortage in housing in the United States, mostly because
• 52:16
  Speaker 2: since the financial crisis, we pivoted to multifamily homes and
• 52:21
  Speaker 2: didn't build enough homes to keep up with population growth,
• 52:24
  Speaker 2: and suddenly there's a giant surge even things like cars
• 52:27
  Speaker 2: and a shortage of semiconductors, and how long it took
• 52:31
  Speaker 2: to get all that back online. We haven't had enough
• 52:34
  Speaker 2: automobiles out there. That's what's elevated prices. So that's a
• 52:38
  Speaker 2: long winded way to say, how much can the FED
• 52:42
  Speaker 2: influence this current cycle of inflation when it's driven in
• 52:47
  Speaker 2: part by so many things that are responsive to policies
• 52:51
  Speaker 2: outside of the Federal Reserve.
• 52:52
  Speaker 1: Yeah, and I think that's been their number one problem here.
• 52:55
  Speaker 1: And there's been supply side issues. I know you've talked
• 52:57
  Speaker 1: before about the housing market. Raise rates and then people
• 53:00
  Speaker 1: stop building new homes, and how does that unpacked the
• 53:03
  Speaker 1: supply of housing?
• 53:04
  Speaker 2: It's counter you know, right, counteract raising rates makes inflation higher.
• 53:09
  Speaker 1: It's a weird situation. I think all of that is true.
• 53:13
  Speaker 1: I do not know for sure that we're structurally on
• 53:16
  Speaker 1: a higher for longer type of scenario, higher highs and
• 53:18
  Speaker 1: higher lows. That that is the way I think you
• 53:21
  Speaker 1: should bet right now, based upon what I see other
• 53:23
  Speaker 1: factors that I think are gonna you know, particularly on
• 53:25
  Speaker 1: the democraphic side. What about AI, right, how does that
• 53:28
  Speaker 1: affect you know, productivity, the productivity mirror.
• 53:32
  Speaker 2: I mean outside of the AI companies, the rest of
• 53:34
  Speaker 2: the marketplace.
• 53:35
  Speaker 1: The rest of that, you know, just uh, how does
• 53:37
  Speaker 1: it affect wages? How does it affect productivity? Can you
• 53:40
  Speaker 1: actually have rising wages and rising productivity and growth without
• 53:43
  Speaker 1: you know, wage inflation, Because if you don't have wage inflation,
• 53:46
  Speaker 1: it's tough to get kind of like a more of
• 53:48
  Speaker 1: a sort of spiral of if not a structural right,
• 53:51
  Speaker 1: it's not structural. So if you if you start those
• 53:54
  Speaker 1: things start to fall away, you kind of have to say, oh,
• 53:56
  Speaker 1: maybe we're back to a two percent. I think it's
• 53:59
  Speaker 1: it's not. I'm not talking about a reverse. I saw
• 54:01
  Speaker 1: the seventies as a young you know, a young person.
• 54:04
  Speaker 1: I know what that's. I'm not suggesting it it's going
• 54:06
  Speaker 1: to be like that, but I just think that what's
• 54:09
  Speaker 1: important for a bond investment to understand is that inflation,
• 54:12
  Speaker 1: which was stuck below structurally blow too, is going to
• 54:14
  Speaker 1: be above two to some level. How much I don't know,
• 54:18
  Speaker 1: but I think it's going to spend more of his
• 54:20
  Speaker 1: time above there. Higher for longer, in my mind means
• 54:23
  Speaker 1: higher real rates and higher inflation premiums for the uncertainty
• 54:29
  Speaker 1: of that inflation. So what does that mean? I think,
• 54:32
  Speaker 1: for example, like on tenure today, like long term, you know,
• 54:35
  Speaker 1: maybe fair value in the ten you're somewhere on four
• 54:37
  Speaker 1: and a half percent.
• 54:38
  Speaker 2: So that would suggest now is the time to start
• 54:43
  Speaker 2: lengthening duration if you haven't already.
• 54:45
  Speaker 1: Yes, and with a caveat that, I think there's going
• 54:47
  Speaker 1: to be a shallow rate cutting cycle. I think they
• 54:50
  Speaker 1: start at sometime at the end of this year be
• 54:52
  Speaker 1: my expectation. I think the economy cyclically is losing momentum.
• 54:55
  Speaker 2: You're seeing it on the consumer spending side starting to
• 54:58
  Speaker 2: drift flow.
• 54:58
  Speaker 1: And retail sales the while there's a lot of problems
• 55:02
  Speaker 1: with the job data that I you know, can't even
• 55:04
  Speaker 1: want to go into. It's hard to trust that data.
• 55:06
  Speaker 1: But when you look at claims data. But even when
• 55:09
  Speaker 1: you start digging into the job data, you know, you
• 55:11
  Speaker 1: look at permanent job losers rising, you see you know,
• 55:16
  Speaker 1: part time overtaking sort of full time. So on the
• 55:19
  Speaker 1: you know it's I'm not this is not a big correction.
• 55:22
  Speaker 1: Let's face it. Unployment is really low. But on the margin,
• 55:25
  Speaker 1: you know you're going to see that acceleration.
• 55:27
  Speaker 2: It's a robust economy. But cracks are starting to show
• 55:30
  Speaker 2: in the foundation.
• 55:31
  Speaker 1: And you know, like you always see, like people are
• 55:33
  Speaker 1: not going to know you're let's say you go into
• 55:35
  Speaker 1: a recession. I don't think it's going to be a
• 55:36
  Speaker 1: full blown recession. Those numbers are revised. Like I always
• 55:41
  Speaker 1: it's funny to me that we spend so much time.
• 55:43
  Speaker 1: But you know, job Report Friday comes out and everybody
• 55:45
  Speaker 1: trades all over the number, the most important number though,
• 55:47
  Speaker 1: and a year later all those numbers are revised in
• 55:50
  Speaker 1: a big, big way. Yes, and you'll often see, oh,
• 55:53
  Speaker 1: we actually were losing jobs in that period of time.
• 55:57
  Speaker 1: You know, I don't know if that's going to happen.
• 55:58
  Speaker 1: It can go both way. It can revise to the
• 56:01
  Speaker 1: upside too, But I do sense my senses that it,
• 56:05
  Speaker 1: you know, looking at the tea leaves out there that
• 56:07
  Speaker 1: were decelerated.
• 56:08
  Speaker 2: If that's the case, then I have to ask you
• 56:11
  Speaker 2: to put on your FED chairman hat and say, what
• 56:14
  Speaker 2: are we waiting for?
• 56:15
  Speaker 1: I think that the FED has been job owning rates
• 56:19
  Speaker 1: as they Yeah, they've been job owning. So remember they
• 56:22
  Speaker 1: last November time frame they did the Dubbes pivot. I
• 56:26
  Speaker 1: think they did that to get ahead of the election cycle.
• 56:28
  Speaker 1: I know people say, well, FED doesn't respond to elections.
• 56:32
  Speaker 1: I talked to a prominent FED chairman and says, you know,
• 56:34
  Speaker 1: in a week moment said, you know, you kind of
• 56:36
  Speaker 1: have to take that into consideration. I do think they're
• 56:38
  Speaker 1: political animals at the end of the day to a
• 56:40
  Speaker 1: certain degree.
• 56:41
  Speaker 2: Although they have raised in previews what they need to do.
• 56:45
  Speaker 2: They've done rate changes in prior election years, but this election.
• 56:49
  Speaker 1: Is a big one, right, and so I think they
• 56:52
  Speaker 1: just wanted to be out of the way and then
• 56:54
  Speaker 1: they could be in position to job own the rates
• 56:56
  Speaker 1: because they knew they had done a yeoman's work already
• 56:59
  Speaker 1: to reduce the spike in inflation to get down to
• 57:02
  Speaker 1: that beginning of the last mile, so class mile, that's
• 57:05
  Speaker 1: been more difficult than it expected. We were thinking that
• 57:08
  Speaker 1: as well. We faded that bond rally in the fourth
• 57:12
  Speaker 1: quarter the curve. I think it's a shallow rate cycle.
• 57:15
  Speaker 1: Most of the ray cuts are going to come from
• 57:17
  Speaker 1: the front end of the market. Remember the FED controls
• 57:20
  Speaker 1: the front end of the market out to the two year,
• 57:23
  Speaker 1: maybe even a little bit in the five year.
• 57:25
  Speaker 2: After that, it's all the Bunne.
• 57:27
  Speaker 1: It's all the pond market, particularly thirty year, it's in
• 57:29
  Speaker 1: its own it's its own beast. It runs to supply
• 57:31
  Speaker 1: and demand. I don't want to get stuck long the
• 57:34
  Speaker 1: long end, especially going to this election uncertainty. So I
• 57:39
  Speaker 1: think you don't want to get that reinvestment rate risk
• 57:41
  Speaker 1: on a T bill and you know, watch that five
• 57:44
  Speaker 1: percent go down with four to three percent handle. In
• 57:47
  Speaker 1: short order, you want to move out in that five
• 57:49
  Speaker 1: seven year part of the curve. That's the best risk reward.
• 57:52
  Speaker 2: I think the belly of the curve in the middle
• 57:54
  Speaker 2: of the duration. So let me throw one more question
• 57:57
  Speaker 2: at you and then we'll get to our favorites. The
• 58:00
  Speaker 2: curve ball question is tell us what Boston Scores is.
• 58:05
  Speaker 2: What do you do working with kids and team environments
• 58:08
  Speaker 2: to help build character.
• 58:10
  Speaker 1: It's an interesting organization I've been involved in for a
• 58:12
  Speaker 1: while now. And what Boston Scores does. It's the largest
• 58:15
  Speaker 1: K through twelve after school program for Boston Public school
• 58:19
  Speaker 1: so they partner with Boston Public schools. They're known for
• 58:22
  Speaker 1: their soccer program, so they provide free soccer programs after
• 58:27
  Speaker 1: school for children to get involved a number of days
• 58:30
  Speaker 1: of weeks. And they also in addition that provide other
• 58:32
  Speaker 1: Richmond like poetry, and they actually have an entrepreneurial type class,
• 58:36
  Speaker 1: which I find interesting. So this is a terrific way
• 58:40
  Speaker 1: to get these kids together working as groups. It's about mind, body,
• 58:44
  Speaker 1: and spirit really and they learn how they can solve
• 58:48
  Speaker 1: problems in their community, get them prepared for potentially going
• 58:52
  Speaker 1: into to college. You know, as they come towards their
• 58:55
  Speaker 1: twelve year So it's terrific. I've seen the outcome for kids,
• 58:59
  Speaker 1: and they have so much confidence. Some of these kids
• 59:02
  Speaker 1: that are coming out. I look at him from where,
• 59:04
  Speaker 1: you know, when I was graduating at that time. It's
• 59:06
  Speaker 1: just amazing what these kids in this program.
• 59:09
  Speaker 2: Does for the Boston school sounds really interesting. All right,
• 59:12
  Speaker 2: our favorite questions, and we're going to turn this into
• 59:14
  Speaker 2: a speed round. Tell us what's keeping you entertained these days?
• 59:18
  Speaker 2: What are you watching or listening to?
• 59:20
  Speaker 1: I'm watching Three Body Problem on loved It. Yeah, so
• 59:24
  Speaker 1: I read the book a while ago. Somebody I was
• 59:26
  Speaker 1: reading New York Times, like, what is this book? You know?
• 59:27
  Speaker 2: There's such a love to get through?
• 59:30
  Speaker 1: It was. I read all three of them. Actually there
• 59:32
  Speaker 1: was a fourth one written by a fan. Finish it
• 59:35
  Speaker 1: interesting to read if you want to continue that saga.
• 59:37
  Speaker 1: But you know that that's on Amazon and Netflix. There's
• 59:40
  Speaker 1: there's a Chinese version on Amazon.
• 59:42
  Speaker 2: Oh really, yeeah, I get that one. Did you see
• 59:45
  Speaker 2: did You? Subtitled did You?
• 59:47
  Speaker 1: I started that one and I flipped to the Netflix
• 59:49
  Speaker 1: one because it's faster moving. I think that's a hard
• 59:51
  Speaker 1: book to translate.
• 59:53
  Speaker 2: I picked it up and tried to read it a
• 59:55
  Speaker 2: few times and just got It's like, it's like the
• 59:57
  Speaker 2: first ninety two pages of nineteen eighty four is a tough, tough,
• 1:00:02
  Speaker 2: tough slug. But I was I was down with COVID
• 1:00:05
  Speaker 2: in March and just binged it and it was I
• 1:00:08
  Speaker 2: thought it was fabulous.
• 1:00:09
  Speaker 1: Yeah, typically don't read a lot of sci fi. But
• 1:00:11
  Speaker 1: I read that and somebody said, if you like that,
• 1:00:13
  Speaker 1: read Isaac as them off and I was a read foundation.
• 1:00:16
  Speaker 1: It's an old you know classic.
• 1:00:18
  Speaker 2: You know, once you go down that rabbit hole, there's
• 1:00:21
  Speaker 2: no coming back. You should be you should be aware
• 1:00:23
  Speaker 2: what else? What are the other ones you're watching?
• 1:00:24
  Speaker 1: So I have more I have a bigger group of
• 1:00:27
  Speaker 1: portfolio managers now, we went from forward to about eight,
• 1:00:31
  Speaker 1: like managing different kinds of portfolios. And what I'm most
• 1:00:33
  Speaker 1: interested in is behavior biases now because you get more
• 1:00:35
  Speaker 1: people in the you know, in this in making decisions,
• 1:00:39
  Speaker 1: it's important for a strategy have consistency and temperament and
• 1:00:42
  Speaker 1: all that. The problem is you get eight people, they
• 1:00:44
  Speaker 1: don't all have the same temperament. So I want people
• 1:00:47
  Speaker 1: to really understand what their bias is. So the greatest
• 1:00:49
  Speaker 1: guy to go do is is a comment on thinking
• 1:00:52
  Speaker 1: fast and slow, right, or all those behavioral biases. I
• 1:00:54
  Speaker 1: read that again, thinking fast and slow, and you know,
• 1:00:58
  Speaker 1: the fast part reminds me is that that's the intuitive
• 1:01:00
  Speaker 1: side of investing right, And we were talking a little
• 1:01:04
  Speaker 1: bit about that. That's really important. I want to you know,
• 1:01:06
  Speaker 1: foster that, but that can lead to a lot of
• 1:01:08
  Speaker 1: behavioral biases. And the slow part, which is more difficult
• 1:01:12
  Speaker 1: to slow down and really think about. That's sort of
• 1:01:14
  Speaker 1: the checks. So you know, you have your investment thesis,
• 1:01:17
  Speaker 1: you're like, go, We're ready to go. You want to
• 1:01:19
  Speaker 1: keep checking it on those.
• 1:01:20
  Speaker 2: Any other books you want to mention as long as.
• 1:01:22
  Speaker 1: We're I think going into the elections, I've been reading
• 1:01:25
  Speaker 1: a lot. I've done a lot of reading on China
• 1:01:28
  Speaker 1: over the years. Cultural Revolution from now to now is
• 1:01:33
  Speaker 1: a great want to understand what's going on in China.
• 1:01:36
  Speaker 1: I think our Eastern civilization history was never that good
• 1:01:40
  Speaker 1: for a lot of people in the United States, so
• 1:01:42
  Speaker 1: revisiting that and what I'm reading now is called economic
• 1:01:45
  Speaker 1: Independence in War by Copeland I think his name is Copeman.
• 1:01:49
  Speaker 1: Interesting talking about even though you have trade that's very interdependent,
• 1:01:53
  Speaker 1: that doesn't mean there won't be conflict. And it's about
• 1:01:55
  Speaker 1: trade expectations. This is really key. It's key going up
• 1:01:59
  Speaker 1: to the election because we're talking about big tariffs on
• 1:02:02
  Speaker 1: both sides of the aisle.
• 1:02:03
  Speaker 2: Right, and that's a tax on consumers.
• 1:02:05
  Speaker 1: That's a tax on consumers. It's I think it's that's inflationary,
• 1:02:08
  Speaker 1: by the way, and we have to be careful how
• 1:02:11
  Speaker 1: we as a nation respond to these challenges. You know,
• 1:02:14
  Speaker 1: it's going to be a rivalry, right, but expectations and
• 1:02:18
  Speaker 1: you know if people think one is au serping the
• 1:02:21
  Speaker 1: other or boxing people out, that's going to lead to
• 1:02:24
  Speaker 1: possibility conflict.
• 1:02:25
  Speaker 2: You know you mentioned China. The other book that's next
• 1:02:27
  Speaker 2: up in my cueue is Chip Wars. People keep telling
• 1:02:30
  Speaker 2: me I have to read that, you read it.
• 1:02:32
  Speaker 1: I have not, but I want to read it yet.
• 1:02:33
  Speaker 2: All right, Next question, who are your mentors who helped
• 1:02:37
  Speaker 2: shape your career?
• 1:02:38
  Speaker 1: Yeah, so there's so many. I mean I remember that
• 1:02:41
  Speaker 1: there was an old guy, old banker Don Lang at
• 1:02:43
  Speaker 1: Central Bank of Trust. He taught me how commercial lending works.
• 1:02:47
  Speaker 1: You know, he's basically, somebody puts a deposit in, we
• 1:02:49
  Speaker 1: lend the back their money and we make this amount
• 1:02:51
  Speaker 1: of money. You went through the math and I'm like, wow,
• 1:02:52
  Speaker 1: that's a great return. You lend people their own money.
• 1:02:56
  Speaker 1: But he also said to me, Matt, because as I
• 1:02:58
  Speaker 1: was leaving, he said, Matt, whatever you do, stay close
• 1:02:59
  Speaker 1: to the revenues. It was a good advice career wise.
• 1:03:03
  Speaker 1: Career wise, yeah, no matter what you do. I think
• 1:03:05
  Speaker 1: that's that's something I always tell, you know, graduating students. Obviously,
• 1:03:09
  Speaker 1: Dan Fuss has been an amazing you know, he's a
• 1:03:12
  Speaker 1: non traditional mentor, but he really, you know, taught me
• 1:03:14
  Speaker 1: how to invest. He also taught me this is a
• 1:03:16
  Speaker 1: people business, our clients. Really understanding your clients. He was
• 1:03:20
  Speaker 1: very close to his clients. But it's also about people
• 1:03:23
  Speaker 1: in your work in the organization. There's a lot of
• 1:03:25
  Speaker 1: stress of investing. We don't try to create that at work.
• 1:03:28
  Speaker 1: And that was an important lesson I learned from him.
• 1:03:32
  Speaker 1: And I would say, you know, I don't think he
• 1:03:34
  Speaker 1: would know he's a mentor, but Howard Marx is just
• 1:03:36
  Speaker 1: fantastic thinker. I read all of his stuff. He's got
• 1:03:40
  Speaker 1: the I would say total force on the most wrote
• 1:03:44
  Speaker 1: on liquidity, which was amazing. I think people should read that.
• 1:03:47
  Speaker 2: What was the name of that it's one of the
• 1:03:49
  Speaker 2: letters he wrote about liquidity. I'll dig that up and
• 1:03:52
  Speaker 2: link to it and the book. The most important thing
• 1:03:55
  Speaker 2: was really super seminal. Dan Fuss has all these affors
• 1:04:00
  Speaker 2: and rules. Did anybody ever put that together? Says there
• 1:04:03
  Speaker 2: ever been something like that?
• 1:04:04
  Speaker 1: Essentially you did. It was our investment framework, right. I'd
• 1:04:07
  Speaker 1: like to think we made it better because Dan was
• 1:04:10
  Speaker 1: one person, and you know we've extended that into other
• 1:04:13
  Speaker 1: markets like securitized bank loans, but it's the same underlying principles.
• 1:04:18
  Speaker 2: I would love to see his quotes in like Top
• 1:04:22
  Speaker 2: ten or Top twenty list. I know, in prepping for this,
• 1:04:26
  Speaker 2: I keep coming across him in various articles and stuff
• 1:04:29
  Speaker 2: being quoted. I thought it was really some fascinating stuff.
• 1:04:32
  Speaker 2: Our last two questions, what advice would you give to
• 1:04:35
  Speaker 2: a recent college grad interested in a career in fixed
• 1:04:39
  Speaker 2: income or investing?
• 1:04:41
  Speaker 1: One thing I would. I'd say, as soon as you
• 1:04:43
  Speaker 1: can figure out what type of investor you are, understand
• 1:04:45
  Speaker 1: what your temperament is. And that sounds easy, but it's
• 1:04:48
  Speaker 1: really you really got to think about this, and you
• 1:04:51
  Speaker 1: know describes you know where you might fit the best
• 1:04:54
  Speaker 1: as you and I think that's important. You really got
• 1:04:56
  Speaker 1: to gel with what you're doing. I also think I
• 1:05:00
  Speaker 1: wish I knew this, you know, coming into the to
• 1:05:02
  Speaker 1: the market is really don't wait, even if you don't
• 1:05:06
  Speaker 1: know what you're doing, just pretend you're in the business
• 1:05:08
  Speaker 1: and you're trying to invest and make money. Start reading
• 1:05:11
  Speaker 1: things and you know, you know all the jargon and
• 1:05:14
  Speaker 1: all the shows that go in, start reading it. If
• 1:05:16
  Speaker 1: you don't understand something, go figure out what it is,
• 1:05:19
  Speaker 1: and that will just you know, keep you going to
• 1:05:21
  Speaker 1: the the next thing and the next. Before you know,
• 1:05:23
  Speaker 1: you'll get it.
• 1:05:24
  Speaker 2: And our final question, what do you know about the
• 1:05:26
  Speaker 2: world of investing today? You wish you knew thirty five
• 1:05:29
  Speaker 2: years or so ago when you were first getting started.
• 1:05:32
  Speaker 1: Well, I think I was sort of this view. I
• 1:05:36
  Speaker 1: was a pure fundamental person. I thought, you know, there
• 1:05:38
  Speaker 1: was this hard fast number that you get and you
• 1:05:40
  Speaker 1: could transact on pretty much all the ideas that you
• 1:05:43
  Speaker 1: would get. And what I realized is that there are
• 1:05:46
  Speaker 1: a lot of other things that move prices in the market,
• 1:05:49
  Speaker 1: including technicals, and you know, things can say cheap for
• 1:05:52
  Speaker 1: a lot longer, and you really have to understand what
• 1:05:55
  Speaker 1: the other side of the argument is and understand what's
• 1:05:58
  Speaker 1: being priced in. So you might have this great idea,
• 1:06:02
  Speaker 1: but if it's already priced into the market, it ain't
• 1:06:04
  Speaker 1: worth anything. So you really have to understand that and
• 1:06:08
  Speaker 1: see where your edge is and understand why that edge
• 1:06:12
  Speaker 1: is pertinent.
• 1:06:13
  Speaker 2: Huh, really fascinating, Matt. Thank you for being so generous
• 1:06:17
  Speaker 2: with your time. We have been speaking with Matt Egan,
• 1:06:20
  Speaker 2: portfolio manager and head of the Full Discretion team at
• 1:06:24
  Speaker 2: Loomis Sales. If you enjoy this conversation, well, be sure
• 1:06:28
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• 1:06:32
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• 1:06:36
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• 1:06:41
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• 1:07:03
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• 1:07:08
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• 1:07:12
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• 1:07:16
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• 1:07:19
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• 1:07:24
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