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How to Identify Winning Opportunities in a Bond Picker's Market · Views from 6,230

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  Ryan Nauman Market Strategist Zephyr: Welcome everyone to Zephyr's Adjusted for Risk podcast from the shores of Lake Tahoe.
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  Ryan Nauman Market Strategist Zephyr: I am Ryan Nauman, the market strategist here at Zephyr.
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  Ryan Nauman Market Strategist Zephyr: Fixed income has come under a lot of fire recently as a lot of strategists have become very bearish on bonds, and there are reasons to be bearish.
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  Ryan Nauman Market Strategist Zephyr: There's inflation, a new Fed chair, elevated interest rates, and maybe even the biggest elephant in the room is the health of private credit.
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  Ryan Nauman Market Strategist Zephyr: I have on the perfect guest to shed some light on these topics and what it all means for financial advisors as they build investment portfolios.
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  Ryan Nauman Market Strategist Zephyr: first, this episode is sponsored by the award-winning Zephyr, which helps investment professionals make more informed investment decisions on behalf of their clients.
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  Ryan Nauman Market Strategist Zephyr: All right, enough from me.
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  Ryan Nauman Market Strategist Zephyr: I've already talked enough.
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  Ryan Nauman Market Strategist Zephyr: Let's go ahead and bring on the star of the show.
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  Ryan Nauman Market Strategist Zephyr: I am honored and very excited to welcome Jim Jessup.
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  Ryan Nauman Market Strategist Zephyr: Jim is the income strategist at Virtus ETF Solutions.
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  Ryan Nauman Market Strategist Zephyr: Jim, thank you so much for coming on the show.
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  Ryan Nauman Market Strategist Zephyr: It's an honor to have you on.
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  Ryan Nauman Market Strategist Zephyr: Really excited about this conversation.
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  Ryan Nauman Market Strategist Zephyr: We had a great prep call last week.
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  Ryan Nauman Market Strategist Zephyr: Lot of fun.
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  Ryan Nauman Market Strategist Zephyr: I'm sure this conversation's gonna be a lot of fun.
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  Ryan Nauman Market Strategist Zephyr: Can you please tell us a little bit more about yourself and Virtus ETF Solutions?
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  James Jessup Income Strategist Virtus ETF Solutions: Sure.
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  James Jessup Income Strategist Virtus ETF Solutions: And first off, thanks for having me on, Ryan.
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  James Jessup Income Strategist Virtus ETF Solutions: I appreciate it.
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  James Jessup Income Strategist Virtus ETF Solutions: And yes, it was great to catch up and get to know you a little bit in front of this in front of this opportunity.
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  James Jessup Income Strategist Virtus ETF Solutions: So Virdis ETF Solutions, we are part of Virdis Investment Partners, publicly traded company.
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  James Jessup Income Strategist Virtus ETF Solutions: Assets under management north of 150 billion, and the ETF business, as has been the case in the industry has grown significantly over the last couple of years.
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  James Jessup Income Strategist Virtus ETF Solutions: I've had the good fortune of being with Virdis for 15 years now.
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  James Jessup Income Strategist Virtus ETF Solutions: Most of that was actually not spent in the ETF group.
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  James Jessup Income Strategist Virtus ETF Solutions: I moved over here into this opportunity about three and a half years ago.
• 2:15
  James Jessup Income Strategist Virtus ETF Solutions: Prior to that, I was actually mostly in oversight and product development.
• 2:19
  James Jessup Income Strategist Virtus ETF Solutions: I moved over to here.
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  James Jessup Income Strategist Virtus ETF Solutions: One of our tenants at Virdis is we really do wanna meet our clients where they are, and what I mean by that is to be agnostic, really around how they access our managers.
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  James Jessup Income Strategist Virtus ETF Solutions: We have a wonderful mutual fund business, but as I think we all know, the ETF business, the SMA business is coming along quickly.
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  James Jessup Income Strategist Virtus ETF Solutions: Part of my responsibilities moving over here was to bring some of our managers who've had great success on the mutual fund side, make them available on the ETF side, and as well as get to make some other innovative
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  James Jessup Income Strategist Virtus ETF Solutions: and creative things.
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  James Jessup Income Strategist Virtus ETF Solutions: The ETF industry is a part of the market that continuously is innovating.
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  James Jessup Income Strategist Virtus ETF Solutions: Good, bad, or indifferent sometimes but we do get an opportunity to try to do some other things as well.
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  James Jessup Income Strategist Virtus ETF Solutions: So my responsibilities include product development.
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  James Jessup Income Strategist Virtus ETF Solutions: I no longer have any oversight responsibilities.
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  James Jessup Income Strategist Virtus ETF Solutions: I get to go out in the field a little bit, and occasionally I get to do things like this.
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  James Jessup Income Strategist Virtus ETF Solutions: So it's a fun role.
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  James Jessup Income Strategist Virtus ETF Solutions: I'm fortunate to have it.
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  Ryan: Jim, that's fantastic, and I'm really glad you brought that up.
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  Ryan: Before we get into the fixed income talk, let's talk a little bit about ETFs.
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  Ryan: It's exploding.
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  Ryan: That...
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  Ryan: What is it, Jim?
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  Ryan: There's more ETFs out there than there are public equities, publicly traded equities.
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  Ryan: The issuance of active ETFs, it's huge.
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  Ryan: And then, like you said, all this innovation, whether you like it or not, I'm on the fence, there's some of these new products I don't...
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  Ryan: can't understand them.
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  Ryan: How does a financial advisor sit in front of their clients and try to explain to them?
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  Ryan: Anyways, how does Vertus and yourself keep up with all these hot trends and new innovation within the ETF space?
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  Ryan: Keep up with it all, but also shift through the noise and find out, okay, what products really power do we like, but also kinda stay on cutting edge?
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  James Jessup: Yeah, it's-- You have to walk the line.
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  James Jessup: As you're doing product development, of course, you think about viability from a financial standpoint.
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  James Jessup: Is this, I like to think of portfolios or sectors as levers.
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  James Jessup: Is this a lever that an allocator or an advisor would actually need to pull or want to pull or be beneficial?
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  James Jessup: Yes, if you spend your mornings going through filings of new ETFs you'll find some innovative and exciting things.
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  James Jessup: But when you think about it from our standpoint, yes, we wanna make sure things are commercially viable, but also, we wanna make sure we're bringing forth something that we actually think we have an opportunity to add alpha in,
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  James Jessup: something where we have a manager who is genuinely good at it.
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  James Jessup: So yes, of course, you have to be aware of flows, and if there's a space that is garnering a tremendous amount of interest, that's great.
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  James Jessup: But let's also take a look and say, "Do we have a manager who actually does something well here and in a manner that's maybe not as widely available that we can actually bring some benefit to the market and
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  James Jessup: some benefit to the shareholder?"
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  James Jessup: So that's really a core tenet.
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  James Jessup: I think a lot of and friends who are in similar places, I think you have to think about, what is my manager exceptional at, and how do I deliver that?
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  James Jessup: And sometimes, I'll give a specific example, sometimes you have a manager who's really strong in an area like, say, multi-sector fixed income, which is a, an example for us.
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  James Jessup: And you look and you say, "Wow, they really..."
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  James Jessup: If you break that down into pieces, they do a couple of things really well.
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  James Jessup: One of them for us was securitized.
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  James Jessup: So we're like, okay, it makes sense to bring forth a broadly diversified securitized product that, that's a place that a lot of allocators don't have an easy way to get exposure to.
• 5:37
  James Jessup: So now all of a sudden, in a single place, you can get not just mortgages, but you can get everything else, whether it's subprime auto debt, credit card, franchise receivables, et cetera, et cetera.
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  James Jessup: And so those are-- philosophically, that's what you always wanna do.
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  James Jessup: Now, the point in the exercise of course, is to be commercially viable, but you don't wanna necessarily just chase a hot dot, especially if you're not equipped in that product lineup.
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  Ryan: Yeah, and I love, like you said y- expand on what you're really good at versus just what did Wayne Gretzky say?
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  Ryan: Go to where the puck is going, right?
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  Ryan: But also, not just doing it just to do it and, a gap that you're really good at, I think is important.
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  Ryan: Because like you said, there's a lot of noise out there.
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  Ryan: You could be going down every rabbit hole out there with the ETF space,
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  James Jessup: and the reality of it is that's, that can quickly turn into a fool's errand in that, oh, everyone is launching X.
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  James Jessup: All right I'm gonna go...
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  James Jessup: by the time you bring it to market and the time you get some marketing behind it and some sales support, we may well have moved on to the next thing.
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  James Jessup: Whereas if you focus on durable, sustainable things, again, I don't think, particularly in my corner of the world, the debt markets, they're gonna be around.
• 6:46
  James Jessup: If not, we're all in trouble.
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  James Jessup: So you can build things that hopefully have a five, 10, 15-year opportunity
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  Ryan: Yeah, and real quickly, last question here too, Jim.
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  Ryan: There's a lot of new, like you said, new ETF companies, new ETF products coming up.
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  Ryan: easy to launch a new product when markets keep hitting new highs.
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  Ryan: They're resilient.
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  Ryan: We've had this great run.
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  Ryan: you feel a little bit concerned that maybe some of these players might this, the space might shrink a little bit if we have a pullback, maybe an extended,
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  James Jessup: that there's...
• 7:22
  James Jessup: Yeah I think maybe.
• 7:23
  James Jessup: There, there will be some.
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  James Jessup: I'm not gonna pick on any of my peers, but, you have some ETFs that are extremely specific to an extremely specific event, and some of those, will those go by the wayside?
• 7:35
  James Jessup: Probably.
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  James Jessup: That's the nature of things.
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  James Jessup: And to be fair, having spent as much time as I have in product development, a lot of things don't work.
• 7:42
  James Jessup: We m- we make a lot of meals no one eats.
• 7:44
  James Jessup: That's the nature of launching products is some things are going to go away.
• 7:47
  James Jessup: Now, from an ETF issuer consolidation standpoint, I think that's a bigger question, and I'm gonna give you a very firm I don't know.
• 7:55
  James Jessup: From a standpoint of I think the ETF growth continues, but will there continue to be cons- some consolidation in the industry?
• 8:01
  James Jessup: Probably.
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  James Jessup: But that's one of the great things about ETFs is that if you can innovate and you can deliver real value, chances are you're gonna survive.
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  James Jessup: Chances are you're gonna be able to continue to operate in those space.
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  James Jessup: Now, will there be some tickers that go away?
• 8:14
  James Jessup: Sure.
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  James Jessup: Absolutely
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  Ryan: For sure.
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  Ryan: Great.
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  Ryan: Thank you for that insight.
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  Ryan: Wanted to pick your brain on that real quick, Jim.
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  Ryan: So now let's switch to fixed income.
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  Ryan: Income, y- your specialty, you're an expert in this space.
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  Ryan: So let's just what's your state of the market?
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  Ryan: We've got a new Fed chair, like I said, we've got current mar- macro uncertainty.
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  Ryan: We got this ballooning federal debt.
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  Ryan: A lot of noise out there.
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  Ryan: What's your take on the current fixed income market?
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  James Jessup: Yeah it's an interesting moment, right?
• 8:47
  James Jessup: We have a brand-new Fed chair.
• 8:49
  James Jessup: We have a Fed chair who is probably going to feel more political pressure than their predecessors, so he's going to have a little bit d- more dynamic of a relationship in all likelihood than some of his predecessors.
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  James Jessup: But when you look at the market itself and you pull back there is absolutely a tremendous amount of noise, global uncertainty.
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  James Jessup: The Strait of Hormuz is open, closed.
• 9:10
  James Jessup: It may open and close two more times while we're recording this.
• 9:13
  James Jessup: But with all of that said you can listen to all that noise and you can think about that, but then if you pull back and you actually look at the state of the market, there's some things to be
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  James Jessup: encouraged about.
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  James Jessup: One of them is when you look at average price, and now I'm gonna make a general statement.
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  James Jessup: Can you go find things on either side of the, of two standard deviation of what I'm gonna say?
• 9:32
  James Jessup: Sure.
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  James Jessup: But generally speaking, the market's around par, maybe a little bit of a discount.
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  James Jessup: Market's hanging around 98, 99, the bigger parts of the market that most retail advisors are gonna be focused on, whether that's IG, high yield, bank loans.
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  James Jessup: Even international, which is becoming a bigger and bigger part of of a retail market's place.
• 9:50
  James Jessup: So if we think about it from that standpoint, that looks pretty normal, and we'll talk a little bit more about defaults, I think, later in this conversation.
• 9:59
  James Jessup: But when you look at default rates, those have returned.
• 10:01
  James Jessup: They're below historical averages from the global financial crisis on, but they're in line.
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  James Jessup: So okay, so that feels pretty normal, too.
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  James Jessup: And then when we look at issuance and subscription, and you can pick the asset class on domestic debt New issues are oversubscribed.
• 10:17
  James Jessup: Whether it's whether it's in securitized, whether it's an IG issuance, you're seeing, seeing double subscription, triple, quadruple subscription on new issuance is not unusual.
• 10:27
  James Jessup: So if you think about it from a fundamental standpoint, that means there's real demand for debt.
• 10:32
  James Jessup: There's real demand for income-generating instruments.
• 10:35
  James Jessup: So that's a positive.
• 10:36
  James Jessup: And to talk a little bit about the new Fed Chair Warsh he's interesting in that we now have two Fed chairs in a row who are not PhDs in economics, they're lawyers.
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  James Jessup: So if you think about the responsibility of that role I find it very c- interesting that they're b- that are now two in a row are legal scholars, Harvard-trained.
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  James Jessup: Warsh is also immensely qualified.
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  James Jessup: He's already been in the committee once, so six to 11, and he resigned on principle.
• 11:04
  James Jessup: He resigned over the purchase of treasuries in 2011, in the 200, I think it was $200 billion purchase of treasuries, and he thought that was a bridge too far.
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  James Jessup: And he's an insider.
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  James Jessup: He comes from Morgan Stanley as a deal-maker in MMA, which means he's going to have a...
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  James Jessup: Hopefully, he's going to have a very positive and, access and information trade within Wall Street.
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  James Jessup: So all those things are encouraging.
• 11:27
  James Jessup: Now, with all of that said, I think a lo- a lot of us market participants are hoping that the Fed remains independent.
• 11:36
  Ryan: Yeah
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  James Jessup: you don't have to go that far back in history.
• 11:39
  James Jessup: If you go back to '71 under Nixon, his Fed chair was not necessarily thought of as the most independent person in front of the '72 election cycle.
• 11:49
  James Jessup: So we sometimes take for granted that the Fed has been so independent for so long but that's not a rule.
• 11:55
  James Jessup: And so hopefully we do see that continuation 'cause them being a honest broker independent of any kind of political exercise, the market has done tremendously over the last 30 years, obviously with some pain points.
• 12:07
  James Jessup: We do hope to see that kind of continue.
• 12:09
  James Jessup: Certainly, some of the political choices have been unconventional for some seats.
• 12:14
  James Jessup: That's not the case here.
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  James Jessup: This is someone who's eminently qualified to do the job and hopefully does it as well as his predecessors.
• 12:22
  Ryan: I agree, Jim.
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  Ryan: And, there might be a little differences in Warsh might vi- you know, he can be...
• 12:30
  Ryan: He doesn't want inflation, but he doesn't also like the inflated balance sheet, right?
• 12:34
  Ryan: That might
• 12:35
  James Jessup: Yeah
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  Ryan: what the White House wants, and stuff like that, 'cause those are gonna raise interest rates.
• 12:41
  Ryan: So some things there.
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  Ryan: But do you think also the power of the chairperson's kind of been diluted a little bit really?
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  Ryan: Obviously what they say is very powerful for markets and their statements, they've got a committee, right?
• 12:56
  Ryan: That committee, the FOMC, they've got a lot of sway in this too.
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  Ryan: So do you think over the years, they've kinda diluted some of this power outside of those statements?
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  James Jessup: I think that's fair, and I also think it's interesting that Powell is staying on, which is unusual.
• 13:13
  James Jessup: As a, y- of course he has the right to do that as a chair, he can, his term can put him there.
• 13:18
  James Jessup: But you brought up an, you brought up an interesting point in that one of the things that was talked about most in the media is how Warsh is gonna communicate.
• 13:25
  James Jessup: Not even necessarily what he's going to do, but how are, how is he gonna communicate?
• 13:30
  James Jessup: Al- Alan Greenspan passed away yesterday at a, at 100.
• 13:33
  James Jessup: We should all be so lucky.
• 13:34
  James Jessup: But those of us who were around when he was Fed chair, it was a very different time.
• 13:39
  James Jessup: If you remember poor Maria Bartiromo on the front yard, and he would come out and the big bag it was a rate, and the small bag it was a cut.
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  James Jessup: We really didn't know what was going to happen going into meetings.
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  James Jessup: And the, I think the market has benefited from how transparent the Fed has gotten over the years, and the thought is Warsh gonna continue that?
• 13:57
  James Jessup: Are we still going to get a dot plot?
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  James Jessup: Are we are the press conferences...
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  James Jessup: I read one thing where, the press conferences are going to be shorter and maybe not as transparent.
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  James Jessup: Time will tell.
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  James Jessup: People can...
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  James Jessup: It's like any time an e- elected official or some, someone goes into a new chair and they're gonna change the world, and then they get in the chair and they realize there's a lot of institutional baggage that comes
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  James Jessup: with it.
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  James Jessup: So I think we'll see.
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  James Jessup: But it bears watching, and the other thing is for those of us that watch the Fed futures on the Bloomberg terminal, we're now at, for the 7/29 meeting a likelihood of 35, 36% for a rate hike there, which
• 14:30
  James Jessup: means one in three market participants thinks that's gonna happen.
• 14:33
  James Jessup: And those charts have been absolutely all over the place.
• 14:37
  James Jessup: If you chart those over...
• 14:38
  James Jessup: It's fun.
• 14:39
  James Jessup: If you chart them over three to six months, it's, we're going, we're, d- you know and you feel like those things are written in pen, but they're not, they're written in pencil.
• 14:45
  James Jessup: They're gonna be, we're absolutely going into a rising rate environment, and two months later something happens and we have great certainty that it's a declining rate environment.
• 14:54
  Ryan: Yep.
• 14:54
  Ryan: Yeah, what are we gonna do if they get rid of the dot plots?
• 14:58
  Ryan: That graph?
• 14:59
  Ryan: What are we
• 15:00
  James Jessup: I,
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  Ryan: with our time?
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  James Jessup: I think we're going to I think we're all gonna be collectively reading Fed minutes even closer at that point.
• 15:06
  James Jessup: I think that's gonna that's what we're gonna be reduced to.
• 15:08
  Ryan: I can't wait.
• 15:09
  Ryan: I can't
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  James Jessup: Yeah.
• 15:10
  James Jessup: Yeah.
• 15:11
  James Jessup: So
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  Ryan: you brought up default rates.
• 15:14
  Ryan: So let's touch on that real quick.
• 15:16
  Ryan: So many companies borrowed, maybe refinanced, during the...
• 15:21
  Ryan: after the great financial crisis when interest rates were zero, money was free.
• 15:27
  Ryan: Now we've got this, debt wall coming up, higher interest rates.
• 15:32
  Ryan: Has that impacted...
• 15:33
  Ryan: You said default rate still remains somewhat lower than average.
• 15:38
  Ryan: Do you think that'll change or, do you think this higher for longer interest rates have put much stress on companies and what's the impact on defaults?
• 15:47
  James Jessup: Yeah, it's...
• 15:48
  James Jessup: Default rates are an interesting one because you think a you think if defaults are rising, that may be a sign of trouble, right?
• 15:53
  James Jessup: It just in intrinsically you think, "Oh, okay we're seeing more defaults, that means companies are starting to run on a rope.
• 15:58
  James Jessup: They can't refinance."
• 16:00
  James Jessup: Like a lot of things, I think you have to also look at this as a post-COVID world.
• 16:06
  James Jessup: So if we go back to COVID, not that any of us want to but if you go back to the COVID era and think about it, we, in a way, def- we outlawed defaults, right?
• 16:14
  James Jessup: We printed so much money, everyone got money.
• 16:17
  James Jessup: Default rates went to essentially zero because everyone was getting, whether it was a PPE loan or I...
• 16:24
  James Jessup: I've put a lot of those acronyms out of my head like the rest of us c- 'cause of PTSD of Co- the COVID era.
• 16:29
  James Jessup: But essentially default rates went essentially to zero, right?
• 16:33
  James Jessup: That's not a normal marketplace.
• 16:34
  James Jessup: That's not capitalism.
• 16:35
  James Jessup: If you are a bad company, if you're a legacy company, if you're over-leveraged, you should default, right?
• 16:40
  James Jessup: We've worked through a lot of that now, and to put some numbers around that, historical default rates, and I'm gonna use US bank loans and high yield, they're histo- historically, post global financial crisis, they sit right at 3%.
• 16:51
  James Jessup: It's like 2.9 for high yield, 3.2 for loans, so call it 3.
• 16:55
  James Jessup: We're at about 2% in high yield and 2.6 for loans.
• 16:59
  James Jessup: So could those climb to historical averages if you're a believer in reversion of the mean?
• 17:04
  James Jessup: Sure.
• 17:05
  James Jessup: Could they go on the other side of that?
• 17:07
  James Jessup: Sure.
• 17:07
  James Jessup: Because if you think about it, historical averages, you're going to go up or down.
• 17:11
  James Jessup: Now, do we think there's a massive, the, I g- I, again, I'm fortunate I get to sit with our CIOs.
• 17:17
  James Jessup: Do they see a massive default wall coming?
• 17:19
  James Jessup: No.
• 17:20
  James Jessup: Do, may we see some move up towards historical averages?
• 17:25
  James Jessup: Sure.
• 17:26
  James Jessup: And that's, I think that's the street's collective as well.
• 17:28
  James Jessup: I think that's how people are thinking about things, is that the default rates where they are, it feels a lot more normal.
• 17:35
  James Jessup: It feels very strange if you're sitting and you're doing high yield and nothing's going wrong from a default standpoint.
• 17:40
  James Jessup: To be back at those historical averages to what I was referencing earlier, bonds sitting around par, default rates sitting around historical averages.
• 17:48
  James Jessup: Tremendous amount of noise, but there's some things in the market that do feel normal.
• 17:53
  Ryan: Yeah, it's interesting too, and just, and we'll talk about this, but we've all this uncertainty and all this noise in markets, but we haven't seen like much volatility in yields.
• 18:03
  Ryan: Especially, the spreads have remained relatively tight and then, high yield yields, it's not like they're fluctuating and showing is- you know, distress.
• 18:14
  Ryan: Like you said, with defaults, you're not really seeing the distress there either with the increase in defaults.
• 18:19
  Ryan: So do you think, earnings good?
• 18:23
  Ryan: So do you think maybe that's why we're in a market fixed income isn't showing signs of distress?
• 18:29
  James Jessup: Yeah, the term that I've the term that I like that I've heard a number of our credit folks use is this is a bond picker's market, which is interesting from a standpoint of it's not, "Hey, we've gotta avoid
• 18:41
  James Jessup: this massive default wall," or, "We've got to avoid X, Y, Z sector because they're gonna be going through, the Amazon effect," or whatever it is, and it's gonna be devastating to this one corner of the market.
• 18:52
  James Jessup: Now, those things they don't have the courtesy to let us know when they're gonna happen, so it may well be right around the corner.
• 18:57
  James Jessup: But generally speaking, when you look at the bond market, it comes down to, it comes down to credit anal- an- analysis, being in the right place, avoiding the defaults but also finding things that, you feel maybe a little
• 19:10
  James Jessup: bit better about than the rating agencies do
• 19:14
  Ryan: I'm glad you brought that up.
• 19:15
  Ryan: I'm a firm believer, there are spaces in the equity side that you can get away with being passive, large core maybe.
• 19:22
  Ryan: Fixed income, believer that you need to take an active approach because, like you said, bond pickers, especially in this market a lot of opportunities, even though people are bearish, I think there are a lot of opportunities.
• 19:37
  Ryan: of those places that, some people might take a...
• 19:40
  Ryan: find opportunities in is private credit.
• 19:43
  Ryan: There's so much concern about it.
• 19:46
  Ryan: lot of headline risk, I think, there.
• 19:49
  Ryan: It's one of those most polarizing topics in fixed income is private credit.
• 19:53
  Ryan: Do you think-- is this a systematic issue with private credit?
• 19:56
  Ryan: Or is it like you just said, there's gonna be pockets of distress, there's gonna be pockets where, maybe this isn't, there aren't very many opportunities.
• 20:07
  Ryan: I-is it systematic or, are we making too much out of it?
• 20:11
  James Jessup: Yeah I'm gonna jump back to one comment you made earlier, and I would say the market would agree with you from a standpoint of active and fixed income.
• 20:18
  James Jessup: If you look at ETF issuance in fix- active fixed income over the last couple of years, it has moved up meaningfully.
• 20:25
  James Jessup: Still a very small percentage of the market, but that kind of continues to increase.
• 20:29
  James Jessup: And I think part of that is fixed income benchmarks when you think about them, when you think about an equity benchmark.
• 20:33
  James Jessup: If I'm a mid-cap benchmark, it means I define between here and here, right?
• 20:37
  James Jessup: This is my market capitalization, and every year, whatever it is, if I got bigger, I go here, if I get smaller, I go there.
• 20:42
  James Jessup: If you look at our kind of most commonly followed index in the aggregate, the, it represents who went to the window so if you look at that pre '07, it was much more corporates, whereas now it's much more
• 20:55
  James Jessup: government debt-focused because that's who's been going to the window, that's who's been issuing debt.
• 21:00
  James Jessup: So I think even just rudimentary at its most basic, that's a good argument for active fixed income, 'cause you don't necessarily always wanna be loaning money to the people who are asking to be...
• 21:10
  James Jessup: have money loaned to them nonstop.
• 21:13
  James Jessup: So going on to private credit, I would agree with a lot of your sentiment from a standpoint of there is some headline risk.
• 21:20
  James Jessup: There are some things that can...
• 21:21
  James Jessup: that probably will go wrong.
• 21:23
  James Jessup: I think that's inevitable in an asset class or a sector that grows this quickly.
• 21:28
  James Jessup: But what I would also say is this: it's gotten very large, and it also depends who's measuring, right?
• 21:34
  James Jessup: So the Moody's number is around 2 trillion.
• 21:36
  James Jessup: Apollo thinks about addressable market, and it's like 40 trillion, which again, these numbers start to feel not real.
• 21:42
  James Jessup: You start to, you start to feel like you're talking, Dr.
• 21:44
  James Jessup: Evil numbers that they get so big.
• 21:45
  James Jessup: But when you have numbers that large, the...
• 21:49
  James Jessup: of course, there will be parts of it that go wrong.
• 21:51
  James Jessup: But I think private credit now has to be thought of and talked about.
• 21:56
  James Jessup: You've got to go a little bit deeper from a standpoint of what kind of private credit issuer are you talking about, right?
• 22:02
  James Jessup: Saying private credit is starting to feel like saying bonds.
• 22:05
  James Jessup: "Hey, what's the bond market doing?"
• 22:06
  James Jessup: What's happening with my EM debt manager couldn't be more different than what's happening with two-year Treasuries in some cases.
• 22:12
  James Jessup: I think you could start to say that about private credit.
• 22:14
  James Jessup: If you're doing private credit, that is...
• 22:16
  James Jessup: I think a private credit manager that is doing, based on, hard assets that are, office space in some, office space in Florida or those sorts of things, versus private credit of a currently non-profitable tech company that is, a
• 22:31
  James Jessup: hope and a dream.
• 22:32
  James Jessup: Those are two very different people that I'm loaning money to.
• 22:35
  James Jessup: Now, to be fair, there's a place for both.
• 22:37
  James Jessup: It's just I always think that particularly in fixed income, because it's thought of as the ballast against equities, it comes down to really defining what expected risk is and really being very clear to the allocator or to the
• 22:51
  James Jessup: financial advisor, "This is what you can expect.
• 22:54
  James Jessup: This is where it will go wrong."
• 22:55
  James Jessup: Because everything goes wrong at some point.
• 22:58
  James Jessup: If someone says, "This always works," we both know that means run.
• 23:01
  James Jessup: So I think that's, I think that's the thing with private credit is it's an interesting space because it's gotten so big so quick.
• 23:09
  James Jessup: But I think if you start talking about will it go wrong, you've got to start diving into the parts.
• 23:14
  James Jessup: The other thing I will say, and I don't think private credit gets credit for this, is...
• 23:20
  James Jessup: That was not intentional.
• 23:21
  James Jessup: Private credit doesn't get credit for being a liquidity provider.
• 23:25
  James Jessup: They are a meaningful market participant now.
• 23:28
  James Jessup: They will take bank loan issuers private, and they will all of a sudden take a deal out at par.
• 23:34
  James Jessup: That's a phone call that most loan managers like getting.
• 23:37
  James Jessup: "Hey, you're at 96, 97.
• 23:39
  James Jessup: We're taking you out."
• 23:40
  James Jessup: You're going to get par and now, yeah, you got reinvestment risk.
• 23:43
  James Jessup: But generally speaking, that's not a bad thing.
• 23:46
  James Jessup: L- a loan manager is generally pretty happy to pick up three points on a single issuance instantly.
• 23:50
  James Jessup: And it's also, last point I'll make on this it also gives corporations an opportunity to access funds two different ways.
• 24:01
  James Jessup: And there are times where private credit will be appropriate if they need something quickly or all of the things that go along with that, or maybe that the access to the other markets, it's just gonna be too cumbersome
• 24:09
  James Jessup: from them that they can go to this other place.
• 24:12
  James Jessup: So it is growing fast, but I do think there's a place for it
• 24:17
  Ryan: Yeah, Jim I completely agree.
• 24:19
  Ryan: And I'm glad you brought that up, the important role that they play just in the financial markets in general.
• 24:26
  Ryan: During-- After financial crisis, it wasn't for private credit, where would we be?
• 24:32
  Ryan: A lot of corporations, they wouldn't have been able to access credit.
• 24:35
  Ryan: They wouldn't have been able to access money because banks stopped, lending to these companies.
• 24:41
  Ryan: So they do.
• 24:42
  Ryan: I'm really glad you brought that up of the important role that they play.
• 24:46
  Ryan: And interesting, right now on equity side, we've had this huge run up and now private credit, investors, we often forget about risk, right?
• 24:57
  Ryan: When we're-- You know, everything's going shooting to the moon, everything's going...
• 25:01
  Ryan: We don't need to worry about risk.
• 25:03
  Ryan: Do you think that's a problem here too?
• 25:05
  Ryan: We ignore risks sometimes, and we're seeing the importance of illiquidity or liquidity
• 25:12
  James Jessup: Yeah.
• 25:13
  Ryan: everything's
• 25:13
  James Jessup: Yeah.
• 25:14
  James Jessup: Yeah, I would say this.
• 25:15
  James Jessup: I spend my time in the fixed income market.
• 25:18
  James Jessup: I really I don't really do anything do very little with equities.
• 25:22
  James Jessup: I would say from spending time in the field and I, have some teams that I talk to regularly, I think on the fixed income side, people actually got a pretty good handle on things.
• 25:31
  James Jessup: I think the biggest problem that they're facing, and I know we're gonna talk about cash here in a little bit, but I think a lot...
• 25:37
  James Jessup: The biggest thing people are facing is how to deploy, how to get back into the marketplace, because when cash is sitting at five, that's pretty great, right?
• 25:46
  James Jessup: But when that first number is a three now I start thinking about, de- deterioration of buying power because of inflation and, that's a bad trade, right?
• 25:55
  James Jessup: My inflation is rising and my compensation for having cash sitting in money markets is going the other way.
• 26:01
  James Jessup: Suddenly that starts to erode on buying power and total returns, and suddenly the credit markets get a little bit more interesting.
• 26:07
  James Jessup: But I have found it, I have found it that on the fixed income side I don't run into very many, fortunately, that I would consider reckless.
• 26:16
  James Jessup: People generally have a good understanding of kind of what they're allocating to, and I will...
• 26:21
  James Jessup: I would like to think we as a firm do a good job explaining, 'cause we do have some stuff that's more aggressive than our peers.
• 26:27
  James Jessup: That's a big part of our business, and we always wanna be really transparent on that, that, that income can...
• 26:33
  James Jessup: Y- yield can be thought of as an, a lot of things, part of total return.
• 26:37
  James Jessup: I think you can also hold yield out as a measurement of risk.
• 26:40
  James Jessup: If you tell me something has a yield of 8 or 9 or 10% and money markets are yielding 4, okay, so if I'm getting double the risk-free rate, there has to be some risk associated with that.
• 26:51
  James Jessup: That's just how the world works.
• 26:54
  Ryan: I, I'm glad you brought that up too about being transparent.
• 26:56
  Ryan: I think m- part of this issue with private credit is, maybe there's no transparency there.
• 27:01
  Ryan: People don't really understand the risks.
• 27:03
  Ryan: So I'm glad that what you guys are doing at Virtus is you're being, open, upfront to know the risks, so then you're not getting that phone call, "What's happening here?"
• 27:14
  James Jessup: Yeah.
• 27:15
  James Jessup: Yeah.
• 27:15
  James Jessup: I think it's-- and I think that in an age where information is essentially free, right?
• 27:20
  James Jessup: We have, your free stock app on your phone is probably better data than was available to a financial advisor in the '90s in their office, right?
• 27:28
  James Jessup: So if information is essentially free, then it comes down to communication, transparency understanding what the portfolio is and being as transparent as possible to give an understanding of why something was done or why something is being held.
• 27:41
  James Jessup: I think that's where-- I think that's the responsibility of the industry now to the advisory community 'cause an advisor can...
• 27:49
  James Jessup: They can know everything that's in the portfolio instantly, and they can probably, using their favorite AI tool or agent, as long as their compliance group has approved it, of course, they can determine whatever they would like out of
• 28:00
  James Jessup: that portfolio.
• 28:01
  James Jessup: The responsibility of the people working with it is to give the thought process why and what's behind it and what to expect in a type of environment.
• 28:11
  Ryan: That's a perfect segue.
• 28:12
  Ryan: I wanted to talk to you about AI and technology.
• 28:16
  Ryan: had a huge AI issuance, hyperscalers, you name it.
• 28:22
  Ryan: All these companies are investing in AI infrastructure.
• 28:27
  Ryan: A huge surge in debt issuances because of the investment in AI.
• 28:32
  Ryan: How does this surge rank in, on a historical perspective?
• 28:36
  Ryan: And any thoughts there on the AI debt issuance?
• 28:41
  James Jessup: Yeah, the pr- I'm gonna focus this on in-investment grade because I think the numbers are interesting and compelling.
• 28:49
  James Jessup: 2024, and we did a one-pager on this that's out there, so if anyone wants to see the chart.
• 28:53
  James Jessup: Cap ex spending has gone up exponentially.
• 28:56
  James Jessup: But what's interesting is the Cap ex has gone up, but then the debt issuance went right behind it.
• 29:01
  James Jessup: So for a long time, this was done off of cash, off of balance sheets, and then it became debt issuance.
• 29:06
  James Jessup: Addressable market in IG in 2024 for investment grade was about two percent hyperscalers.
• 29:12
  James Jessup: 2025, it was seven.
• 29:12
  James Jessup: This year it'll be more than that.
• 29:14
  James Jessup: So it's conceivable that it ends up being 10% of the IG marketplace, which is an awfully big number.
• 29:22
  James Jessup: And when you think about it from that standpoint, if you're gonna equate it historically the one that I heard on AI that, that stuck with me was this is the advent of us building highways in the '50s or
• 29:35
  James Jessup: building out the railroads.
• 29:36
  James Jessup: That's the s-scale that it starts to feel at, that it's just this absolutely massive part and important part of the marketplace that if you're going to be a manager, you're going to be participating in.
• 29:46
  James Jessup: It's at that point you start have to be thoughtful about where you are in terms of issuance, which ones that you hold, and all of those things.
• 29:53
  James Jessup: But it's massive.
• 29:53
  James Jessup: It's a massive part of the marketplace, and I've had our IG manager comment that his market doesn't really open for a month or a quarter until a hyperscaler does some sort of issuance.
• 30:03
  James Jessup: So it is a huge part of the market, and that's likely to continue.
• 30:07
  James Jessup: Where can our audience get more information about Virtus ETF solution?
• 30:12
  James Jessup: Sure.
• 30:12
  James Jessup: So virtus.com will be the easiest place.
• 30:15
  James Jessup: Then within there, they can click into the ETF portion.