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Fiduciary's Andersen: Attractive Time for US High Yield (Audio) · Bloomberg Intelligence

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  Speaker 1: This is a Bloomberg Business Flash from Bloomberg World Headquarters.
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  Speaker 1: I'm Charlie Pellot. We do have thirteen minutes to go
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  Speaker 1: I'm Charlie Pellott and a Bloomberg Business Flash. You're listening
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  Speaker 1: to Taking Stock with Kathleen Hayes and Pimp Box on
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  Speaker 1: Bloomberg Radio what to do with your money. Well, one
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  Speaker 1: thing to do is to ask Peter Anderson. He is
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  Speaker 1: the chief investment officer and vice president of Fiduciary Trust,
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  Speaker 1: based in Boston, home to Bloomberg twelve hundred. Peter Anderson,
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  Speaker 1: thank you very much for being with me. You're welcome.
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  Speaker 1: Tell us about the cycle. I keep hearing about this
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  Speaker 1: whole thing. We're in a cycle or out of a cycle,
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  Speaker 1: or in this market that market? Can you explain what's
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  Speaker 1: really going on? Well, him, you know, normally you can't.
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  Speaker 1: That is a very simple answer, but this time around,
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  Speaker 1: it's quite complicated. And I think it's because we've had
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  Speaker 1: these shocks to the system, uh, namely the Brexit situation
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  Speaker 1: and these repeated terrorist attacks in Europe. So really it's
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  Speaker 1: very hard. I think you've hit hit on the main issue,
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  Speaker 1: which is where exactly are we in a cycle or
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  Speaker 1: are we even in a cycle right now? And it
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  Speaker 1: seems extremely difficult to figure that out this August, and
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  Speaker 1: I think it has a lot of people very frustrated
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  Speaker 1: because they don't have a real clear roadmap or a
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  Speaker 1: compass to navigate through that. Okay, so maybe you can
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  Speaker 1: help us navigate this because let's say we suspend our
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  Speaker 1: desire to understand whether there's a cycle that's moving up
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  Speaker 1: or down. There's still stocks, there's still companies that people
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  Speaker 1: can follow and get excited about. Or is that like
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  Speaker 1: last century thinking? Well, very timely. I don't do not
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  Speaker 1: think it's last century thinking. And in fact, um, I
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  Speaker 1: know you and I have talked in the past about
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  Speaker 1: quant managers in technical analysis and how that seems to
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  Speaker 1: be a central stage right now. But there are certain
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  Speaker 1: areas that you can certainly play from a macro perspective.
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  Speaker 1: So let me just give you an example. So, say
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  Speaker 1: we're looking at Europe and okay, and we just can't
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  Speaker 1: figure out what's going on, which is really the common
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  Speaker 1: sense response. I mean, nobody really knows how this is
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  Speaker 1: going to play out. I was very surprised that the
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  Speaker 1: UK market rebounded so strongly after Brexit, and I do
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  Speaker 1: think that's a head fake. So let's assume that we're
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  Speaker 1: not going to be looking over at the UK, and
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  Speaker 1: let's look at the good old US of A. I
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  Speaker 1: think there's plenty of opportunities. Look, let's just talk a
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  Speaker 1: little bit about MidCap US MidCap stocks, or even US
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  Speaker 1: small cap stocks. It makes intuitive sense right, because these
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  Speaker 1: companies have most of their business concentrated in the US.
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  Speaker 1: They're small enough that they probably a lot of them
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  Speaker 1: do not have subsidiaries overseas. So if you're a strong UH,
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  Speaker 1: if you have a strong opinion on the US consumer,
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  Speaker 1: that would be a logical way to play out this
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  Speaker 1: absence of a cycle, if you will. So, if you're
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  Speaker 1: looking at those small and MidCap stocks, what are the
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  Speaker 1: characteristics of the companies that you want own, Well, some
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  Speaker 1: characteristics are first that they are small enough that they
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  Speaker 1: have the majority of their business based in the US,
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  Speaker 1: because you want to be a little bit insular right now,
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  Speaker 1: given that there is uncertainty overseas. UH. The other thing
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  Speaker 1: is they have to have strong balance sheets, the usual
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  Speaker 1: things that you would expect from a strong company. UH.
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  Speaker 1: And in sectors for instance, it is I think most
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  Speaker 1: people will agree with me that it is now a
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  Speaker 1: consumer lead, slow but steady recovery. UH. This is not
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  Speaker 1: This is what I would call almost a growthless recovery.
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  Speaker 1: But it certainly isn't a jobless recovery. We've seen that
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  Speaker 1: last Friday. So play into the consumer durables and consumer
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  Speaker 1: discretionary small and MidCap mutual funds, funds that focus on
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  Speaker 1: that area, or et F for example. Well, I was
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  Speaker 1: just looking at the Russell A two thousand index, which
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  Speaker 1: is composed of the smallest two thousand companies in the
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  Speaker 1: Russell three thousand. Right year to date, the Russell two
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  Speaker 1: thousand is up seven and three quarters of a percent.
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  Speaker 1: That's better than the S and P five which is
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  Speaker 1: just up six and a half percent. That's right, Yes,
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  Speaker 1: So does that exemplify the kinds of companies that you
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  Speaker 1: would be looking for. Yes, it does, and you are
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  Speaker 1: right in the mid caps also have done very well.
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  Speaker 1: Uh to say anywhere from say five to seven percent.
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  Speaker 1: Seven percent is probably a little bit on the high side,
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  Speaker 1: but you can find um strategies that would give you
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  Speaker 1: that return. That's exactly what I'm talking about. And it's
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  Speaker 1: not a bad place to be, right because the alternatives
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  Speaker 1: are pretty hard to convince yourself that you can have
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  Speaker 1: a solid thesis as to why you would be investing
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  Speaker 1: in the UK right now. Another area that I think
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  Speaker 1: is people tend to think is more risky, but from
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  Speaker 1: a common sense perspective, if you're looking for income and
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  Speaker 1: you have the stomach to um to to tolerate this
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  Speaker 1: kind of risk as US high yield. You know, I
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  Speaker 1: played in US high yield for a long time in
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  Speaker 1: my career, and right now is a very very attractive time.
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  Speaker 1: Not to load the boat up on that, of course,
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  Speaker 1: but have a diverse, wigh portfolio. But the default rate
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  Speaker 1: on US hi yield bonds, if you carve out the
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  Speaker 1: energy segment, it's very, very low, and I think that
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  Speaker 1: that also plays into our theme of the recovering, continuously
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  Speaker 1: recovering US consumer UH companies. Small high yield companies tend
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  Speaker 1: to be smaller companies, just like the small cap equity companies,
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  Speaker 1: and it's a nice compliment. As far as this search
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  Speaker 1: for yield goes, when did it become fashionable to hunt
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  Speaker 1: for yield in the stock market. I understand the whole
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  Speaker 1: relative issue of you know, treasuries and corporate bonds or
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  Speaker 1: just high yield as you describe, But as I think
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  Speaker 1: back over the course of a couple of decades, you
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  Speaker 1: wanted to buy a stock of a company that you
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  Speaker 1: thought was going to go gangbusters, that was well managed,
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  Speaker 1: had a market penetration of moat around it. To a
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  Speaker 1: certain extent, you weren't questioning really whether they were going
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  Speaker 1: to give you a dividend. You wanted to invest in
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  Speaker 1: the growth of the company. That's right, and uh, you know,
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  Speaker 1: some people have fallen astray from that. I couldn't agree
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  Speaker 1: more with your your comment there a narrative. I do
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  Speaker 1: think that people have kind of lost their way in
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  Speaker 1: the sense that income producing instruments tend to be fixed income,
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  Speaker 1: and if you're looking for high dividend stocks, sometimes you
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  Speaker 1: can be led astray because the balance sheet, etcetera. Uh,
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  Speaker 1: could be stressed for that company to continue paying its dividend.
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  Speaker 1: And some, as you know, have policies where they wanted
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  Speaker 1: to increase the dividend every year. And that's kind of
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  Speaker 1: the dividend tail wagging the dog, if you know what
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  Speaker 1: I mean, because you want to buy first a company
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  Speaker 1: of stock, it is well grounded, has excellent fundamentals, and
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  Speaker 1: oh yes, by the way, it pays an attractive dividend,
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  Speaker 1: not the opposite. Model portfolios tell us a little bit
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  Speaker 1: about how that whole world has changed because it used
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  Speaker 1: to be split, and it also used to change as
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  Speaker 1: the investor got older. Model portfolios. You know that also
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  Speaker 1: ties into this rather ironic title of modern portfolio theory.
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  Speaker 1: But you know that's been around since the nineteen fifties
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  Speaker 1: and we really haven't changed, UH the formalism by which
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  Speaker 1: we invest with diversification and UH an ideal outlook on
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  Speaker 1: the way the stocks move are related to each other.
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  Speaker 1: I do think that that has taken a little bit
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  Speaker 1: of a second UH stage now to a more formal
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  Speaker 1: way of looking at things where you say to yourself, well,
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  Speaker 1: these correlations might not be exactly historically correct going forward,
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  Speaker 1: and we need to tweak this a little, especially if
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  Speaker 1: you have a shock to the system. So right now,
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  Speaker 1: people still if you distill everything, most portfolios are sixty
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  Speaker 1: UH and it depends on what you're calling fixed income
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  Speaker 1: now and what you're calling equities. But one of the
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  Speaker 1: things that can lead people astray is if they think
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  Speaker 1: their portfolio is and fixed income. But if you take
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  Speaker 1: a peek under the hood, tim and see what kind
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  Speaker 1: of assets are, say in UH fixed income mutual fund,
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  Speaker 1: for example, you have to be very careful to realize
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  Speaker 1: that fixed income should be risk mitigating, we call it,
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  Speaker 1: and it should be high quality and not fund that
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  Speaker 1: has junk bonds in it, for instance, because then that
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  Speaker 1: takes on a different tone and it's not risk mitigating,
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  Speaker 1: it's actually return generating. So there is a formalism now
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  Speaker 1: that's kind of taking over the usual sixty UH terminology,
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  Speaker 1: and it's getting a little bit more subtle and irige
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  Speaker 1: people to really take a closer look at what their
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  Speaker 1: funds are invested in to get a sense of where
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  Speaker 1: the risk actually lies. Peter, our investors scared to take profits?
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  Speaker 1: M I think UH, investors are just scared of a
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  Speaker 1: lot of things right now, and that is probably if
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  Speaker 1: you ask me, you know, among the top three, if
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  Speaker 1: that's one of them, I'm not sure it would be.
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  Speaker 1: I think it's more that they're frightened to make decisions,
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  Speaker 1: and it might come out as uh, you know, the
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  Speaker 1: appearance that they're they're not taking profits. But I do
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  Speaker 1: think it has more to do with this unique time
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  Speaker 1: we're in and the indecision that a lot of people
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  Speaker 1: have to live through. Thanks very much. Peter Anderson is
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  Speaker 1: the chief investment officer also vice president of Fiduciary Trust
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  Speaker 1: based in Boston. You're listening to take king Stock will
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  Speaker 1: take you through to the clothes on Wall Street. I'm
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  Speaker 1: Pim Fox and this is Bloombergh