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Franklin Templeton's Ed Perks on Fixed Income Investing · Masters in Business

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Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. This is Master's in
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Speaker 1: Business with Barry Ritholts on Bloomberg Radio on the.
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Speaker 2: Latest Masters in Business podcast. My conversation with Ed Perks.
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Speaker 2: He has been with Franklin Templeton since nineteen ninety two.
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Speaker 2: He has all of these various titles. He's not only
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Speaker 2: PM of their flagship Franklin Income Funds, but he's CEO
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Speaker 2: of Franklin Income Investors, president of their Advisors Group, member
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Speaker 2: of the Executive Committee. Not many people have been with
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Speaker 2: the same firm their entire career right out of college.
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Speaker 2: Ed Perks is one of them. Few people more knowledgeable
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Speaker 2: about fixed income and non bond yield. I thought this
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Speaker 2: conversation was fascinating, and I think you will also with
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Speaker 2: no further ado, My conversation with Franklin Templeton's.
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Speaker 3: At Perks At Perks, Welcome to Bloomberg. Thanks Barry, it's
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Speaker 3: great to be with you. Well that's really quite an
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Speaker 3: impressive CV.
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Speaker 2: Before we get into the various assets you managed, let's
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Speaker 2: start with your background economics and political science BA from Yale.
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Speaker 2: That doesn't sound very much like a fixed income manager.
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Speaker 2: What was the original career plan?
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Speaker 4: Yeah, it certainly wasn't finance, And you know, at Yale,
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Speaker 4: I really kind of, you know, certainly had had a
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Speaker 4: broadcross section of studies. You know, like many of my classmates,
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Speaker 4: I think if it wasn't med school, it was either
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Speaker 4: law school or going into government. I think that's kind
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Speaker 4: of some of what I was thinking during school. Really
1:53
Speaker 4: didn't didn't transition to trying to pursue a career in
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Speaker 4: finance until actually after I graduated, and at that time
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Speaker 4: I moved out west. I wanted to experience a different
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Speaker 4: part of the country, and particularly in the early nineteen nineties,
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Speaker 4: the San Francisco.
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Speaker 3: Bay area had a pretty robust.
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Speaker 4: Financial services community, and so I headed out after graduation
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Speaker 4: without a job and was able to land at Franklin.
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Speaker 2: Plus, you're done at one o'clock in the afternoon, that's
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Speaker 2: the you do start a bit early.
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Speaker 3: We started five thirty.
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Speaker 2: It's very very five in the I remember walking into
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Speaker 2: an office in San Francisco and at eight forty five
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Speaker 2: there are pizza boxes around, and it's sort of, oh,
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Speaker 2: that's right, we're on New York Wall Street time because
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Speaker 2: the market is live. So let's talk a little bit
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Speaker 2: about the nineteen nineties, you joined Franklin Templeton.
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Speaker 3: Is this your first gig out of school.
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Speaker 2: In nineteen ninety two. You've been at Franklin Templeton your
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Speaker 2: entire career.
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Speaker 3: Is that right? Yes, it is. That is pretty rare
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Speaker 3: these days.
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Speaker 2: Tell us about what attracted you to Franklin Templeton in
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Speaker 2: the beginning and what's kept you there for geez, coming
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Speaker 2: up on forty years, is that right?
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Speaker 3: Yeah?
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Speaker 4: Well, when I loaded the car up on Long Island,
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Speaker 4: I drove a small Misbecie Mirage hatchback across country. No
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Speaker 4: satellite radio, right, no air conditioning, no cell phones, so
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Speaker 4: it was a different time. But got out to California
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Speaker 4: really had the had the thought that I might experience
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Speaker 4: the West Coast for a year and a half or
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Speaker 4: two years and and make my way back to New
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Speaker 4: York and and.
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Speaker 3: Get get the real job, so to speak, you know.
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Speaker 4: And I was really fortunate to land at at Franklin
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Speaker 4: at a time of just tremendous growth, not just in
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Speaker 4: the industry but for our firm overall. I actually joined
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Speaker 4: the original Franklin Fonds prior to the Tilton merger. Yeah wow,
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Speaker 4: So that, yeah, that certainly dates me and makes me,
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Speaker 4: I guess a little og so, you know, I think
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Speaker 4: what was really interesting? And I landed at first and
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Speaker 4: took a role in marketing research. I knew very little
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Speaker 4: about the industry structure and I wanted to learn and
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Speaker 4: it gave me a great cross section of different investment strategies.
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Speaker 4: I had taken, you know, a class at Yale Investment
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Speaker 4: Analysis howt by you know, pretty legendary endowment manager David Swinson,
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Speaker 4: of course, And I think at the time I maybe
4:23
Speaker 4: hoped that it was a bit more of a you know,
4:26
Speaker 4: a typical stocks for Jock's kind of class, and in
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Speaker 4: fact it was not. But that did plant a little
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Speaker 4: bit of the seed. And and you know, but I
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Speaker 4: knew I had work to do to kind of prepare
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Speaker 4: myself for a role ultimately in pursuing research. And after
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Speaker 4: about a year and a half and taking one of
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Speaker 4: the CFA exams, I was able to get that junior
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Speaker 4: role as a research analyst in the Franklin Equity team.
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Speaker 2: Nineteen nineties, San Francisco. The tech boom was just ramping
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Speaker 2: up late eighties, early nineties. What was that experience like
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Speaker 2: that to be the Roaring nineties had to be quite
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Speaker 2: an experience in San Francisco.
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Speaker 4: Yeah, I'd say it really kind of kicked in a
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Speaker 4: gear more in the ninety six seven time period, and
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Speaker 4: then certainly the IR Yes, and that was premature, but
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Speaker 4: there was still plenty of time to go in it.
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Speaker 4: But it was a very exciting time to be out there,
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Speaker 4: not just in the tech community, but thinking about some
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Speaker 4: of the regional investment banks, Montgomery Securities and Hamburton Quist
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Speaker 4: and Stevens. You know, so you had a lot happening.
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Speaker 4: The The economy as a whole, i'd say at that
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Speaker 4: time was far more diversified than it is maybe today.
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Speaker 4: Obviously technology is such a dominant player within the Northern California.
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Speaker 2: Yeah, it's not that anything else got smaller. It's just
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Speaker 2: that tech ballooned up so large and it dominates everything. Although,
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Speaker 2: to be fair, I think finance has it hasn't grown
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Speaker 2: as fast as tech, but it certainly expanded lock you know,
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Speaker 2: fairly lockstep with technology. What's fascinating about your time your
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Speaker 2: early days at frank On Templeton. You did credit, you
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Speaker 2: did convertibles, you did equities. How important was that sort
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Speaker 2: of cross asset experience to eventually becoming more of a specialist.
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Speaker 4: Yeah, I think it was a key component of it.
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Speaker 4: I really was drawn to early days. I was drawn
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Speaker 4: to the different type of analysis that you would perform
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Speaker 4: based upon the kind of company you were following, our
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Speaker 4: industry you were following, and we did have a broad
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Speaker 4: cross section of strategies managed at Franklin, So as an
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Speaker 4: analyst following companies, you kind of always had something to
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Speaker 4: pitch a given portfolio manager on and that was something
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Speaker 4: that really attracted me. So whenever we had some movement
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Speaker 4: in the group or growth adding resources in a certain
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Speaker 4: area that was interesting, I kind of was inclined to
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Speaker 4: put my hand up and that led to a lot
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Speaker 4: of the progression of the career, ultimately moving out of
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Speaker 4: the analyst role in nineteen ninety seven and taking on
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Speaker 4: the duties of portfolio manager for that dedicated Franklin Convertible
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Speaker 4: Security spund.
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Speaker 2: So over all these different experiences and over time, how
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Speaker 2: does that lead to the evolution of your philosophy as
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Speaker 2: an investor? What beliefs did its strengthen and what beliefs
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Speaker 2: did you learn to Yeah, this just isn't generating anything
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Speaker 2: that's worthwhile anymore.
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Speaker 4: Well, I think the first thing was really kind of
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Speaker 4: understanding who you are as an investor. And I'm a
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Speaker 4: pretty firm believer in this that over time I came
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Speaker 4: to understand that I like a certain type of investing.
7:41
Speaker 4: I like buying things that trade a reasonable valuations that
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Speaker 4: might not have an immediate catalyst, but something that you
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Speaker 4: can look out over a longer period of time. By
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Speaker 4: having that longer term investment horizon, income naturally became something
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Speaker 4: you'd focus on in terms of just thinking about it
8:01
Speaker 4: from the standpoint of getting paid to wait while your
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Speaker 4: investment kind of performs the way you think it has
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Speaker 4: the potential to. So that's something that certainly started to
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Speaker 4: resonate at the early part of my career, but I
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Speaker 4: would say actually getting involved in convertible securities was a
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Speaker 4: pretty significant defining moment for me in that you can
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Speaker 4: pursue investing in convertibles, which are hybrids, which have fixed
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Speaker 4: income characteristics and have an equity tie as well, and
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Speaker 4: seek out investments that have the potential for positive asymmetry,
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Speaker 4: so securities where with a given time horizon and a
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Speaker 4: certain move in the underlying common stock, you'll do better
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Speaker 4: on the upside than you will get hurt on the downside,
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Speaker 4: and it was just something that really appealed to me,
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Speaker 4: and I think is a core component of what we've
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Speaker 4: done historically and tried to do in our multiset income strategies.
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Speaker 3: Let me throw something out to you.
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Speaker 2: I have noticed, as both a trader and an investor
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Speaker 2: that the guys who started in fixed income seem to
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Speaker 2: have a greater appreciation for risk management and for thinking
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Speaker 2: about asymmetrical trades where your downside is x and your
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Speaker 2: upside is three X or tan x or whatever. What
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Speaker 2: is it about fixed income analysts and investors that makes
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Speaker 2: them so hyper focused on risk management?
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Speaker 4: Yeah, it's fundamentally you're just doing a different, different type
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Speaker 4: of analysis. And I mean, one of the things that
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Speaker 4: we found kind of most fascinating over the years is
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Speaker 4: given we have an internal team of equity analysts and
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Speaker 4: an internal team of credit analysts, that opportunity when you're
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Speaker 4: meeting with company management and you'll sit down with both analysts,
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Speaker 4: and companies typically come to investors thinking they're on an
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Speaker 4: equity road show or a fixed income road show, right,
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Speaker 4: and when you sit down and now you want to
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Speaker 4: talk about it from both perspectives, that's some of the
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Speaker 4: most interesting meetings we've had over the years with companies,
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Speaker 4: they in fact have kind of different stories for those
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Speaker 4: different investor groups. So I think it gives you that
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Speaker 4: broader perspective of what the capital allocation decision making process
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Speaker 4: looks like at a given company. And ultimately what we're
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Speaker 4: doing is trying to figure out what money they will have,
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Speaker 4: i e. What are margins, how are profits growing, and
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Speaker 4: what they'll do with that capital.
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Speaker 2: So in your present roles, you have the latitude to
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Speaker 2: kind of go anywhere either in the cab structure or
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Speaker 2: the allocation table or geographically.
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Speaker 3: How does that affect how you.
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Speaker 2: Think about what's interesting, what's attractive, Like it's almost overwhelming
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Speaker 2: that sort of freedom to pretty much consider almost every
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Speaker 2: asset class.
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Speaker 4: Yeah, I would say that's actually kind of our ideal situation,
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Speaker 4: and we are in that today. I think there was
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Speaker 4: a lot of a long period of time post financial
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Speaker 4: crisis two thousand and nine where almost the intent of
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Speaker 4: the policy was to eliminate large sectors and the fixed
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Speaker 4: income markets from being attractive to.
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Speaker 3: Invest teams, right exactly.
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Speaker 4: So you know, I really kind of viewed today and
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Speaker 4: you know, the bond market being back was announced pretty
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Speaker 4: loudly in twenty twenty two. So you know today the
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Speaker 4: fact that we can look across you know, the swath
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Speaker 4: of fixed income markets and find you know, interesting areas.
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Speaker 3: You know, it may be more income focused, i e.
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Speaker 4: If we're not expecting a significant downdraft and interest rates,
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Speaker 4: the total return potential from fixed income might be more muted,
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Speaker 4: but they can play a really interesting role in generating
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Speaker 4: that kind of stable core total part of total return
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Speaker 4: that we expect income to be.
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Speaker 2: We're going to talk a lot about fixed income coming up,
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Speaker 2: but your CIO of Income Investors, what's the biggest macro
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Speaker 2: variable that the CIO of Franklin Templeton Income Investors looks
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Speaker 2: at every morning?
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Speaker 3: Yeah.
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Speaker 4: I mean, we really think there's kind of two components
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Speaker 4: to what we need to do, and you know one
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Speaker 4: I would put in this more kind of where we
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Speaker 4: can be proactive.
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Speaker 3: It's the.
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Speaker 4: Extent to which we think there's risk on the equity
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Speaker 4: side of markets, credit risk in markets or macro or
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Speaker 4: interest rate risk. Those are the three kind of big
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Speaker 4: risk components that we actively try to think about. I
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Speaker 4: would say that sets our kind of compass for how
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Speaker 4: we want to allocate the assets and even though over
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Speaker 4: long market cycles.
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Speaker 3: We may be pretty equally split.
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Speaker 4: Between fixed income and equity assets in our strategy at times,
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Speaker 4: even in the last five years, that's been seventy five
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Speaker 4: twenty five one way and then flipped the other way.
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Speaker 4: So there is a tremendous amount of latitude. And then,
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Speaker 4: you know, I think, on a day, more daily kind
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Speaker 4: of basis, certainly something that we're experiencing in pretty good
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Speaker 4: dose to start the year is those more reactive components
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Speaker 4: of risk. And you know, we do think right now
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Speaker 4: policy matters a lot, and it might be fiscal policy,
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Speaker 4: monetary policygulatory policy, but we're reminded almost on a daily
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Speaker 4: basis now that there's a lot of other factors foreign policy,
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Speaker 4: geopolitical risk that certainly influenced markets. It doesn't mean we're
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Speaker 4: going to make wholesale changes to the portfolio, but being
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Speaker 4: able to engage and get our investment team focused on
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Speaker 4: where opportunities might be is a big part of the
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Speaker 4: day to day role.
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Speaker 2: So let me ask that question. We're waiting for some
13:24
Speaker 2: major Supreme Court decisions in a whole variety of areas.
13:28
Speaker 2: There's the ongoing battle between the White House and the
13:31
Speaker 2: Federal reserve that that's been heating up lately. It's been
13:34
Speaker 2: sort of simmering for really a year. It seems every
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Speaker 2: morning you wake up and there's some tweet or something
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Speaker 2: else that are roiling the markets. Weight we're going to
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Speaker 2: cap credit cards ten percent. Good luck getting a credit
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Speaker 2: card if that happened. How do you interact with all
13:53
Speaker 2: this newsflow? Is it something you ignore? Is it noise
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Speaker 2: that you have to sift through, or are you constantly
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Speaker 2: hunting for what's really meaningful here that's not reflected in
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Speaker 2: prices already? What could potentially move markets? If this seems
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Speaker 2: to catch a little bit.
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Speaker 4: Of fire, Yeah, I think the desire would be to
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Speaker 4: tune out that noise, to largely ignore it. But the
14:18
Speaker 4: reality and markets those examples that you've given drove some
14:22
Speaker 4: pretty significant movements, even if just for a short period
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Speaker 4: of time. You know, I would use the major banks,
14:28
Speaker 4: those that are more focused on issuing credit cards as
14:31
Speaker 4: an example yesterday in stock price activity last week, maybe
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Speaker 4: some of the large defense contractors how they were impacted
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Speaker 4: by some of the announcements. Those are some pretty significant
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Speaker 4: swings that we do have to pay attention to and
14:43
Speaker 4: do have to think about whether or not, there's the opportunity.
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Speaker 4: But I think if you can step back, think about
14:49
Speaker 4: it a little bit more rationally. Clearly, we want to
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Speaker 4: engage and get the insights from our dedicated analysts on
14:55
Speaker 4: those specific situations. That's where some opportunities come in. And
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Speaker 4: you know, I think whether it be an isolated, very specific,
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Speaker 4: maybe more short term event, that's you know, one instance.
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Speaker 3: But if we go back a year, you know.
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Speaker 4: There was a two to three week period of tremendous
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Speaker 4: volatility around a policy shift that really gave investors an
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Speaker 4: opportunity around that tariff Day and Liberation Day.
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Speaker 2: Here, it was a week of you know, turmoil and
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Speaker 2: then on pause and off to the races we had,
15:29
Speaker 2: you know, the most recent DOJ referral with a federal reserve.
15:33
Speaker 2: I spoke to a buddy on a bond desk over
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Speaker 2: the weekend when this happened, and I love the attitude of, well,
15:41
Speaker 2: look at the two year it doesn't care, So why
15:44
Speaker 2: should I care?
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Speaker 3: Is that a little too glib?
15:46
Speaker 2: How do you look at how the market, especially fixed
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Speaker 2: income market, reacts to the news flow. Is that really
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Speaker 2: the ultimate determiner of what's noise and what's signal?
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Speaker 4: Yeah, I think it's a good I might broaden it
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Speaker 4: from the two year to say, let's look at the curve, okay,
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Speaker 4: especially today, where I think there's probably more sensitivity around
16:07
Speaker 4: where longer term interistrates are are sitting and potentially could
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Speaker 4: go you know, to me, anything that increases the confidence
16:15
Speaker 4: the raises the uncertainty level around the economy, I think
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Speaker 4: are our challenges that you know, if we were to
16:22
Speaker 4: see the long end respond unfavorably too, would be quite
16:26
Speaker 4: problematic for markets.
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Speaker 2: Coming up, we continue our conversation with Ed Perks, chief
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Speaker 2: investment Officer of Franklin Income Investors and President of Franklin Advisors,
16:36
Speaker 2: discussing the broader fixed income environment.
16:40
Speaker 3: I'm Buried rid Holts.
16:41
Speaker 2: You're listening to Masters in Business.
16:43
Speaker 3: On Bloomberg Radio. I'm Barry Ridults.
16:56
Speaker 2: You're listening to Masters and Business on Bloomberg Radio. Extra
17:00
Speaker 2: special guests this week is Ed Perks. He is CIO
17:04
Speaker 2: for Franklin Templeton Income Investors. He is also has been
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Speaker 2: PM of a number of their fixed income and hybrid funds,
17:14
Speaker 2: including their flagship Franklin Income Fund, which he became lead PM.
17:20
Speaker 2: I want to say two thousand and two, is that right?
17:22
Speaker 4: Join the PMT in two thousand and two and lead
17:24
Speaker 4: in two thousand and four.
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Speaker 2: Two thousand and four, all right, not two, that's twenty
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Speaker 2: plus years. So let's talk a little bit about what's
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Speaker 2: going on in fixed income. A lot of cross currents.
17:34
Speaker 2: Here's what's happening with the Fed, Here's what's happening with
17:37
Speaker 2: the dollar overseas has become more attractive. Let me just
17:42
Speaker 2: right out of the box. Where are you seeing the
17:44
Speaker 2: most compelling risk adjusted income opportunities today? High yield, investment grade,
17:51
Speaker 2: diven inequities, And I know you could go anywhere.
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Speaker 3: So what do you like these days? Yeah?
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Speaker 4: You know, I would say in fixed income, we are
17:59
Speaker 4: really pretty diversified across the range. And for us that
18:03
Speaker 4: is US treasuries, it's agency mortgage backed securities, its investment
18:07
Speaker 4: grade corporate bonds and high yeld corporate bonds. And you know,
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Speaker 4: we have different factors there, you know, one we do
18:14
Speaker 4: think the carrier, the income component of fixed income is
18:17
Speaker 4: quite attractive again today, and like I said before, it's
18:21
Speaker 4: been a while since you know that was the case,
18:23
Speaker 4: or there was a long period of time where that
18:25
Speaker 4: was certainly not not a function, not a benefit that
18:29
Speaker 4: investors in fixed income had spreads on the corporate side,
18:34
Speaker 4: do you know, concern us a little bit. But at
18:36
Speaker 4: the same time, you know, we have seen extended periods
18:39
Speaker 4: of time historically where spits spreads have stayed on the
18:42
Speaker 4: tighter side near historical lows. So you know, our view
18:47
Speaker 4: is that you want to be diversified, look a little
18:50
Speaker 4: bit more at idiosyncratic risks. So sometimes in our in
18:53
Speaker 4: our strategy, we do think the biggest lever that we
18:55
Speaker 4: have moving from one asset class to another is the
19:00
Speaker 4: most appropriate. We certainly had that in twenty twenty one,
19:03
Speaker 4: in twenty twenty three, today we think that lever is
19:06
Speaker 4: a little less important and it's a little bit more
19:08
Speaker 4: about relative value between sectors and or security selection idiosyncratic risks.
19:14
Speaker 4: So I think in the past year, moving out of
19:17
Speaker 4: some of the significant overweight that we had in investment
19:20
Speaker 4: grade corporate debt, for example, in favor of agency mortgages
19:24
Speaker 4: because spreads had really widened out with something that worked
19:26
Speaker 4: out well for us.
19:27
Speaker 3: In twenty twenty five.
19:28
Speaker 2: I noticed you didn't mention tips treasury inflation protected securities.
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Speaker 2: Is that something that at the current level of inflation
19:36
Speaker 2: and the current yield there is that attractive.
19:39
Speaker 4: Yeah, it's not something that we're focused on today. I
19:42
Speaker 4: think to the extent that we see inflation continue, you know,
19:46
Speaker 4: to come down and settle in at a lower level,
19:49
Speaker 4: that tips may become something that we want in the portfolio,
19:51
Speaker 4: to the extent that then inflation could have surprised to
19:54
Speaker 4: the upside.
19:55
Speaker 2: And let's talk a little bit about those corporates you mentioned.
20:00
Speaker 2: Are we getting enough spread between investment grade and high
20:04
Speaker 2: yield corporates to make the juice worth the squeeze or
20:08
Speaker 2: because for a long time there's hardly any daylight between
20:12
Speaker 2: the yield and both.
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Speaker 3: How do you look at that.
20:15
Speaker 2: Are corporates cheap or expensive high investment grade relative to
20:20
Speaker 2: high yield?
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Speaker 4: Yeah, we do think moving up into the higher credit
20:27
Speaker 4: quality components of high yield is probably one of the
20:29
Speaker 4: more attractive areas. You know, we also like to so
20:32
Speaker 4: if you're looking at triple B double B spreads, we
20:35
Speaker 4: want to be in the higher quality credits to the
20:38
Speaker 4: extent that we're owning a broader section of high yield,
20:40
Speaker 4: which we do in our strategy.
20:42
Speaker 3: It's emphasis and more on the latter security selection.
20:45
Speaker 4: What is an individual company doing to be able to
20:48
Speaker 4: refance the debt to turn out their maturities, or ultimately
20:51
Speaker 4: to improve the overall credit quality. We do think grating
20:54
Speaker 4: agencies lag by a significant margin, and if you can
20:57
Speaker 4: get ahead of that and use your fundamental analysis, that
21:00
Speaker 4: that's an area within the fixed income markets we want
21:03
Speaker 4: to be focused.
21:03
Speaker 2: I'm trying to remember who I'm stealing this line from,
21:05
Speaker 2: but it's definitely not mine. Which is, there's so much
21:09
Speaker 2: variation in the B minus space that some of it
21:13
Speaker 2: is junk and some of it is ig and maybe
21:16
Speaker 2: some of it's in between, but the variance is enormous.
21:21
Speaker 3: Fair statement, Yeah, I think that is.
21:23
Speaker 4: And you know, certainly there are investors that play only
21:26
Speaker 4: in certain parts, and when you're flirting with that lower
21:29
Speaker 4: credit quality component B minus into triple C, that starts
21:33
Speaker 4: to change the dynamic of who the investor base potentially is.
21:38
Speaker 3: So you've been doing this for a long time.
21:40
Speaker 2: You've lived through the financial crisis, zerup, zero interest rate policy,
21:45
Speaker 2: quantitative easing, the most recent inflation shock and tightening cycle.
21:52
Speaker 2: For someone who has your authority to go anywhere, what
21:58
Speaker 2: of those types of environment and so the most challenging
22:02
Speaker 2: to manage an income portfolio through.
22:06
Speaker 4: Yeah, I mean, I think certainly the periods of extreme
22:08
Speaker 4: volatility are going to be challenging for any strategy, and
22:12
Speaker 4: and in my career the ones that i'll you know,
22:15
Speaker 4: go back to certainly when managing the convertible fund around
22:18
Speaker 4: the dot com crash and then in our income strategies
22:21
Speaker 4: both financial crisis. So you know, yeah, market's bottomed in
22:25
Speaker 4: March oh nine, but September of eight was pretty difficult
22:28
Speaker 4: for any investor, you know. To me, I think what's
22:31
Speaker 4: really defined our strategies and maybe become a little bit
22:35
Speaker 4: of a you know, the focal point of our approach
22:39
Speaker 4: is is to continually look forward. I mean, I think
22:42
Speaker 4: the the number of investors, even if we were to
22:45
Speaker 4: bring this more into the current you know time we
22:49
Speaker 4: spoke less than a year ago and twer volatility was
22:52
Speaker 4: impacting markets. I think a lot of investors have the
22:55
Speaker 4: tendency to, you know, to sit on their hands a
22:58
Speaker 4: bit when there's this kind of volatility playing out in markets.
23:01
Speaker 4: And maybe even even the worst case would be going
23:04
Speaker 4: to the sidelines, which we know a lot of investors
23:07
Speaker 4: did in September of eight or March of nine, and well.
23:10
Speaker 3: The first week of April of last year exactly.
23:13
Speaker 4: And that's where I think, because we have such a
23:15
Speaker 4: flexible mandate, our tension turns more to how can we
23:19
Speaker 4: optimize the positioning.
23:20
Speaker 3: Of the portfolio.
23:21
Speaker 4: We always have assets that are benefiting in some way,
23:24
Speaker 4: have some liquidity profile to them that lets us focus
23:28
Speaker 4: on being playing offense a little bit more during those
23:31
Speaker 4: periods of time, and I think that's something that has
23:34
Speaker 4: has always enabled us to kind of recharge the portfolio.
23:37
Speaker 4: Pretty firm believer in the price you pay matters concept,
23:41
Speaker 4: whether it's an income investment or something that's designed to
23:44
Speaker 4: create more capital appreciation. Uh, And that's something that you know,
23:49
Speaker 4: really has enabled us to kind of ultimately come out
23:54
Speaker 4: of periods of volatility and deliver for our investors, you know,
23:58
Speaker 4: even though there might have been some bumps along the way.
24:01
Speaker 2: So twenty twenty two was the first year that saw
24:06
Speaker 2: double digit losses in both stocks and bonds since forty
24:11
Speaker 2: years earlier in nineteen eighty one, which I recall was
24:14
Speaker 2: also a rate hiking environment, not quite as aggressive as
24:17
Speaker 2: what we saw in twenty twenty two. I've noticed people
24:21
Speaker 2: talking about anticipating that again and pretend preparing for it.
24:26
Speaker 3: Is that a little overly cautious.
24:28
Speaker 2: How often do we see stocks and bonds both down
24:33
Speaker 2: that significantly in the same years.
24:35
Speaker 3: Is that likely to happen anytime soon?
24:37
Speaker 4: Well, I think the backdrop was really set for that dynamic.
24:42
Speaker 4: And what I mean by that is where rates had
24:45
Speaker 4: declined to you didn't have the carried offset negative returns
24:49
Speaker 4: and fixed income, and the resetting of where rates should
24:53
Speaker 4: have been provided that the fuel to drive those kind
24:59
Speaker 4: of negative to return. So we really think we're in
25:01
Speaker 4: that certainly not in that position today. Never say, you know,
25:06
Speaker 4: can we don't expect that that can never happen again,
25:09
Speaker 4: but certainly not the backdrop that we're envisioning today. So
25:13
Speaker 4: just the rationale or why our bonds? Can bonds be
25:16
Speaker 4: a diversifier and a multi asset portfolio? You know, I
25:19
Speaker 4: think we would have argued, and if you look at
25:21
Speaker 4: our asset allocation in twenty twenty one, we did not
25:25
Speaker 4: believe so. And they certainly did not offer attractive income
25:28
Speaker 4: for investors.
25:30
Speaker 2: And that was good for twenty Prior to twenty years,
25:32
Speaker 2: they were not producing a whole lot of income. After
25:36
Speaker 2: twenty twenty two, yields were look, money markets were over
25:41
Speaker 2: five percent for a while. Now we're in a rate
25:44
Speaker 2: cutting cycle. How does that affect how you look at
25:49
Speaker 2: fixed income products? Are you looking to extend duration? Are
25:53
Speaker 2: you looking to extend credit quality? Is there now reinvestment
25:57
Speaker 2: risk if you're too short thinking about this.
26:00
Speaker 4: Yeah, we've made such a significant move into fixed income
26:04
Speaker 4: in twenty twenty two and twenty twenty three that you know,
26:09
Speaker 4: we do have that now. In the corporate space in particular,
26:11
Speaker 4: we have companies that are engaging the market refinancing, so
26:15
Speaker 4: some of the real prized kind of investments we were
26:17
Speaker 4: to make at the time, you know, we are now
26:19
Speaker 4: seeing some cash coming back into the portfolio. But the
26:22
Speaker 4: way we treat that is that just because a dollar
26:24
Speaker 4: comes out maybe a high yield bond is called away
26:27
Speaker 4: or matures, which they do in fact do at times,
26:31
Speaker 4: it doesn't mean that dollar goes back into the high
26:33
Speaker 4: yield bond market. For us, it's always going to be
26:35
Speaker 4: that next most attractive place that we're looking today, we
26:38
Speaker 4: might be looking you know, more specifically in structured equity
26:43
Speaker 4: or in convertible securities, where you know, we think outside
26:47
Speaker 4: of the very large megacap tech companies that have driven
26:51
Speaker 4: this market since twenty twenty three.
26:53
Speaker 3: That there's pretty reasonable valuation.
26:55
Speaker 4: So there's a lot of companies, whether it's utilities or industrials,
26:59
Speaker 4: that I think have a pretty interesting profile for the
27:02
Speaker 4: rest of the decade. So if we can pursue investments
27:05
Speaker 4: in their common stock, maybe there's a two to three
27:08
Speaker 4: percent dividend yield, but if we can access a convertible,
27:11
Speaker 4: we can blend that yield up to something that's more
27:13
Speaker 4: attractive for a strategy and yet still retain a pretty
27:16
Speaker 4: interesting profile.
27:17
Speaker 3: On the upside.
27:18
Speaker 2: My assumption is if something is being called away, it's
27:21
Speaker 2: that it was too generous and now they're refinancing at
27:25
Speaker 2: a more attractive rate. Let's talk a little bit about
27:28
Speaker 2: the Franklin Income Fund. You're only the third lead manager
27:34
Speaker 2: of this flagship fund. You followed Charles Johnson, who was
27:38
Speaker 2: fairly legendary in the fixed income world, and tell us
27:43
Speaker 2: a little bit about what it was like taking over
27:46
Speaker 2: as lead manager of that fund.
27:49
Speaker 4: Well, firstly, me mentioned I had a chance to sit
27:51
Speaker 4: down with Charlie last month, something I try to do
27:55
Speaker 4: on a regular basis as I can, and to still
27:58
Speaker 4: see and and meet with him and hear the stories
28:02
Speaker 4: of some of the history is something that I really
28:06
Speaker 4: really cherish and value doing.
28:09
Speaker 3: You know, I think from the standpoint of.
28:13
Speaker 4: The path that we've been on with Franklin Income, you know,
28:16
Speaker 4: joining in two thousand and two was it was a
28:19
Speaker 4: large strategy for Franklin at the time, it was, you know,
28:22
Speaker 4: around eight billion in assets under management. I think what
28:26
Speaker 4: really kind of maybe though defined the strategy was that
28:29
Speaker 4: period coming out of the financial crisis and you know,
28:34
Speaker 4: navigating our way and being able to engage the broad
28:37
Speaker 4: cross section of markets and perform very well for five
28:40
Speaker 4: year period really.
28:42
Speaker 3: Helped establish this.
28:43
Speaker 4: But at the same time, you know, we realized that
28:46
Speaker 4: investors financial advisors do like a range of different strategies
28:51
Speaker 4: or the ability to use different vehicles to deliver an
28:53
Speaker 4: investment strategy, and that was something where in twenty and
28:58
Speaker 4: twenty two we launched Franklin Income and SMA vehicle, and
29:01
Speaker 4: in twenty twenty three we launched Franklin Income strategy in
29:04
Speaker 4: an ETF.
29:05
Speaker 3: So it's been and to see.
29:11
Speaker 4: That strategy get adopted in different vehicles is something that
29:15
Speaker 4: was a big part of taking this strategy that's been
29:19
Speaker 4: so important for Franklin Templeton as a whole to a
29:22
Speaker 4: different type of investor.
29:23
Speaker 2: And for listeners who may not be familiar with the
29:26
Speaker 2: Franklin Income Fund. A couple of things really struck me
29:29
Speaker 2: about it. First, not too long ago, it's celebrated, it's
29:33
Speaker 2: seventy fifth anniversary. Ain't a whole lot of funds that
29:36
Speaker 2: have been running continuously for seventy five years since nineteen fifty.
29:41
Speaker 2: And then secondly, and this amazes me, uninterrupted monthly dividends
29:49
Speaker 2: dating back to the launch, which was I think nineteen
29:52
Speaker 2: forty eight, Is that right?
29:54
Speaker 3: That's unbelievable. It is a great it's really a great story.
29:57
Speaker 4: It was part of the original custodian funds for frank
30:00
Speaker 4: and the first four were you really the four asset
30:05
Speaker 4: classes at the time, a bond fund, a stock fund,
30:08
Speaker 4: a preferred fund, and a utility fund. And then the
30:10
Speaker 4: final series of custodian funds was the Income Fund, which
30:14
Speaker 4: was meant to look at those other four strategies for
30:18
Speaker 4: asset classes and find the most attractive income investments.
30:21
Speaker 2: So, sure, the four food groups, that's the core, and
30:25
Speaker 2: you create a whole meal out of that. So you
30:27
Speaker 2: mentioned agency mortgage backs, what else do you look at
30:32
Speaker 2: that are either asset backed or clos or any exotic
30:36
Speaker 2: other products that theoretically generate pretty good yield relative to
30:44
Speaker 2: the risk the investor assumes.
30:47
Speaker 4: Yeah, I mean, I think that agency mortgages tend to
30:50
Speaker 4: be our core component within that part of the fixed
30:53
Speaker 4: income markets. But we're always evaluating different opportunities asset backed
30:58
Speaker 4: oriented investments, and you know, right now we're pretty light.
31:02
Speaker 4: We do have a fair amount of corporate debt that
31:04
Speaker 4: is secure debt.
31:05
Speaker 2: So I recall coming out of the financial crisis, Double
31:11
Speaker 2: Line as an example, had a ton of mortgage backs,
31:15
Speaker 2: and it just seemed as everybody refinanced and refinanced their homes,
31:20
Speaker 2: the available paper just disappeared. I'm doing this off the
31:24
Speaker 2: top of my head, but it was something like ninety
31:25
Speaker 2: percent mortgages when it started. I ended up at like
31:28
Speaker 2: twenty five or thirty five percent mortgages. We've seen a
31:32
Speaker 2: significant slowdown in home sales. Yield has been higher than
31:39
Speaker 2: it's been for the past twenty years, so we haven't
31:42
Speaker 2: seeing a lot of refinancing or a lot of new issuance.
31:46
Speaker 3: Is there enough mortgage back paper out there? What's going
31:49
Speaker 3: on in that space?
31:50
Speaker 4: Yeah, And certainly it's been topical just the last week
31:54
Speaker 4: or so with you know, the.
31:56
Speaker 2: Fanny and Freddie he had two hundred billion a month
31:59
Speaker 2: or some while number.
32:00
Speaker 4: An additional two hundred billion, but even beyond that there
32:03
Speaker 4: could be an extension. So, you know, we did see
32:05
Speaker 4: the mortgage market react, right, We saw spreads kind of
32:07
Speaker 4: come down, and you know, ultimately bringing longer term rates
32:12
Speaker 4: down is going to be probably the biggest beneficiary in
32:14
Speaker 4: terms of activity within the housing market.
32:17
Speaker 3: But do we have to.
32:17
Speaker 2: Get down to five percent mortgage rates to see this
32:20
Speaker 2: really kick up?
32:21
Speaker 3: Or where are we now? Six change? Sixteenth quarter? Yeah?
32:25
Speaker 4: I mean I think certainly that needs to be the
32:28
Speaker 4: direction of travel, what that that specific number needs to
32:31
Speaker 4: be to get some activity.
32:32
Speaker 3: Probably there's some other factors as well.
32:34
Speaker 4: Certainly the overall healthy the economy and the labor market
32:37
Speaker 4: are going to be a major major component of being
32:40
Speaker 4: able to get some of that activity going in the
32:42
Speaker 4: housing market.
32:43
Speaker 3: How closely do you track macro economic news?
32:48
Speaker 2: Like if I had to describe the labor market today,
32:53
Speaker 2: I would say it's still solid, but not as strong
32:58
Speaker 2: as it was a year ago or even six months ago.
33:02
Speaker 2: Really since April we've seen it kind of soften up.
33:05
Speaker 2: We're not seeing big layoffs, do you. I always feel
33:09
Speaker 2: like a macro tourist when I visit that space, because
33:13
Speaker 2: it's not my charge to predict labor markets. How do
33:17
Speaker 2: you integrate looking at all these data points that seem,
33:20
Speaker 2: as you said earlier, so noisy, so hard to find
33:24
Speaker 2: the signal in there.
33:25
Speaker 4: Yeah, there's something like the labor market clearly has taken
33:28
Speaker 4: kind of a front seat.
33:30
Speaker 3: Right.
33:30
Speaker 4: We had the FED really focused on fighting inflation, and
33:33
Speaker 4: then as we saw the labor market weekning ultimately and
33:37
Speaker 4: encourage for the FED to begin a presumption of the
33:42
Speaker 4: interest rate cuts. Now, you know, I think there's a
33:44
Speaker 4: kind of a reluctance in the labor market on both sides. Right,
33:47
Speaker 4: there's a reluctance maybe at the corporate level to hires,
33:50
Speaker 4: a lot of uncertainty. Some of that was brought on
33:52
Speaker 4: by the onset of tariffs and just the uncertainty around
33:56
Speaker 4: where that was going to impact businesses. And then I
34:00
Speaker 4: think you can't ignore AI in the role that that's happening.
34:03
Speaker 4: So there's this reluctance maybe to hire in a reluctance
34:06
Speaker 4: to fire. So we're stuck with a little bit more
34:08
Speaker 4: stagnant component in the labor market.
34:11
Speaker 2: Really really interesting coming up, we continue our conversation with
34:14
Speaker 2: Ed Perks, CIO of Franklin Income Investors, talking about where
34:20
Speaker 2: he sees value in various equity markets. I'm Barry Ridults.
34:25
Speaker 2: You're listening to Masters in Business on Bloomberg Radio.
34:43
Speaker 3: I'm Barry Ridults.
34:44
Speaker 2: You're listening to Masters in Business on Bloomberg Radio. My
34:48
Speaker 2: extra special guest today is Ed Perks. He's chief investment
34:52
Speaker 2: officer at Franklin Templeton Income Investors as well as president
34:57
Speaker 2: of Franklin Advisors.
34:58
Speaker 3: He has managed several go.
35:00
Speaker 2: Anywhere as well as income funds for Franklin Templeton, including
35:05
Speaker 2: the flagship Franklin Income Fund, which can purchase pretty much
35:11
Speaker 2: anything at once that generates income.
35:14
Speaker 3: Le we were talking.
35:15
Speaker 2: Earlier about the fixed income portion, Let's talk about the
35:20
Speaker 2: equity portion. And I recall reading something you said as
35:25
Speaker 2: we were coming out of the pandemic about the dominance
35:29
Speaker 2: then of growth stocks over value. How has your views
35:35
Speaker 2: changed over the past five years of other than twenty
35:39
Speaker 2: twenty two double digit gains and equities.
35:43
Speaker 3: Yeah, I think you.
35:44
Speaker 4: Know, we've gone through this period since the pandemic with
35:47
Speaker 4: different cycles within the equity markets, and certainly there was
35:50
Speaker 4: a tilt immediately towards growth and value underperformed. I think
35:57
Speaker 4: it's shifted a bit, certainly in twenty three and four,
36:00
Speaker 4: a transitioned to more of a market caap dominance, and
36:03
Speaker 4: that certainly has proceeded. I think since the beginning of
36:07
Speaker 4: twenty twenty three, something like the S and P five.
36:09
Speaker 3: Hundred market cap has nearly.
36:11
Speaker 4: Double the performance of the S and P five hundred
36:14
Speaker 4: equal weight index. So, you know, we do think there's
36:17
Speaker 4: a lot of other things kind of under that initial layer.
36:20
Speaker 4: If you pull it back and look at the broader
36:24
Speaker 4: equity markets, that there's a lot of opportunity across industries
36:27
Speaker 4: where companies are benefiting from the expansion in the economy,
36:32
Speaker 4: that are benefiting from the secular dynamics that we see,
36:35
Speaker 4: whether it be in manufacturing investment or technology investment.
36:39
Speaker 2: Interesting, so we've also seen active equity management under fairly
36:45
Speaker 2: intense competitive pressure really for a good couple of decades.
36:50
Speaker 2: How does that change how you look at equity selection
36:55
Speaker 2: or asset allocation.
36:57
Speaker 4: Yeah, you know, I think you know, from a may
37:00
Speaker 4: a bigger picture, you know, the move towards more passive exposures,
37:06
Speaker 4: the flood of money into passive investments has maybe exacerbated
37:09
Speaker 4: some of these dynamics around, particularly the dispersion between the
37:16
Speaker 4: megacap stocks the market weighted indices and the average stock or.
37:20
Speaker 3: The equal weighted indocy.
37:22
Speaker 4: You know, I think for us it really becomes more
37:24
Speaker 4: about you know, security selection. There's still plenty of liquidity
37:28
Speaker 4: in those other stocks, and to the extent that we
37:30
Speaker 4: can turn over rocks that maybe other investors are not
37:33
Speaker 4: looking at that are not being influenced as much by
37:35
Speaker 4: the magnitude of flows coming into passive indicies is something
37:39
Speaker 4: that you know, is a big part of our overall allocation.
37:42
Speaker 3: But I would really go.
37:43
Speaker 4: Back to, you know, this kind of view that as
37:45
Speaker 4: an income investor, we can look for opportunities where we're
37:50
Speaker 4: not trying to identify the catalyst next quarter or two
37:53
Speaker 4: quarters from now. We're looking at investment with favorable fundamentals
37:57
Speaker 4: that we think over time can deliver for investors in
38:00
Speaker 4: that income component once again kind of a significant part
38:04
Speaker 4: of maybe the near term total return.
38:07
Speaker 2: So let's talk about those different asset classes that you're
38:11
Speaker 2: not looking for great quarter guys, you're looking for great
38:15
Speaker 2: decade convertibles, equity, bonds, credit. Do you play in the
38:22
Speaker 2: private space as well. How significant is that tell us
38:25
Speaker 2: about all these different multi asset options you have, and
38:29
Speaker 2: is there an overall core philosophy that sort of strings
38:33
Speaker 2: all of these together, keeps them all in one philosophical bucket.
38:38
Speaker 3: Yeah. I think one of the more interesting components, you.
38:40
Speaker 4: Know, our of our strategy is is taking a little
38:43
Speaker 4: bit more of a holistic approach for how we invest
38:46
Speaker 4: in a company. I mentioned before, you know, sitting down
38:49
Speaker 4: at times with company management teams when you're approaching it
38:52
Speaker 4: from both in equity and fixed income analysis standpoint. Well,
38:56
Speaker 4: looking across a capital structure, it's pretty common that you know,
39:00
Speaker 4: between a third or forty percent of the portfolio will
39:04
Speaker 4: be invested in companies where we own multiple parts of
39:06
Speaker 4: a company's capitals.
39:07
Speaker 2: Meaning their bonds, their equity, and their convers or some combination.
39:12
Speaker 4: Which it's It is somewhat common in a multi asset
39:16
Speaker 4: strategy to have kind of different components.
39:20
Speaker 2: And if you like the company, if you've done the
39:22
Speaker 2: research and its income not just capital appreciation, why not
39:27
Speaker 2: own everything. Do the valuations fluctuate within the same company
39:32
Speaker 2: from corporate to equity to convertible, Sometimes a part of
39:36
Speaker 2: their cap structure is more appealing than others.
39:38
Speaker 4: Absolutely, and that's something that we've really seen over the
39:40
Speaker 4: last five years, certainly when longer term rates were a
39:43
Speaker 4: lot lower, really across the board, there were companies where
39:46
Speaker 4: we saw equities trading in mid teens multiples with three
39:51
Speaker 4: percent dividend yields and the same benchmark longer term debt
39:55
Speaker 4: from those companies yielding one and a half to two percent.
39:57
Speaker 3: Didn't make any sense, right exactly?
39:59
Speaker 4: Well, at that time, we'd be very tilted to the
40:01
Speaker 4: common stock and using other things within the equity structured
40:05
Speaker 4: equity in particular. But fast forward two years, rate surge
40:08
Speaker 4: higher those same companies. The stocks many cases were at
40:11
Speaker 4: the same levels or same valuations, yet bonds had gone
40:15
Speaker 4: from yielding two percent to maybe yielding five to five
40:17
Speaker 4: and a half percent.
40:18
Speaker 2: I recall a couple of the big tech companies, and
40:21
Speaker 2: I want to include Microsoft and Apple in them in
40:25
Speaker 2: that list issued two percent long term bonds, and yet
40:31
Speaker 2: the yield was almost that and you had all the
40:34
Speaker 2: upside of the equity. Like, I don't know who is
40:37
Speaker 2: enthusiastic about that? How do you when you see a
40:41
Speaker 2: new issuance like that two percent? Why I won't care
40:44
Speaker 2: about two percent or is two percent attractive and a
40:47
Speaker 2: zero rate environment?
40:49
Speaker 3: Yeah, I think for us it's plays it.
40:51
Speaker 4: It's much harder to have that make sense in our
40:54
Speaker 4: strategy to play a role in the portfolio. But it's
40:57
Speaker 4: something that you know, the more that's out out there,
41:00
Speaker 4: we may not have participated in those new issues in
41:02
Speaker 4: twenty twenty or twenty twenty one, but come back in
41:05
Speaker 4: twenty twenty two when rates move and investment only they're attracted. Yeah.
41:09
Speaker 4: I don't think you know, many investors didn't expect that
41:11
Speaker 4: investment grade corporate bonds could drop twenty to twenty five points,
41:14
Speaker 4: and they did. So there's always a time for it,
41:16
Speaker 4: and the more of that that is issued in the
41:17
Speaker 4: market just gives us that opportunity down the line.
41:21
Speaker 2: Just because it's investment grade doesn't mean it's not subject
41:24
Speaker 2: to interest rate risk, Right. I think that's kind of
41:27
Speaker 2: you know, fixed income one on one.
41:29
Speaker 4: Yeah, that was part of the you know, like I
41:31
Speaker 4: said before, the very loud announcement that the bond market
41:35
Speaker 4: made around its returning to more normal functioning in twenty
41:38
Speaker 4: twenty two.
41:39
Speaker 3: So let's talk about the flip side of that real
41:44
Speaker 3: default risk.
41:45
Speaker 2: We haven't seen a whole lot of defaults other than
41:48
Speaker 2: a handful of very specific corporate.
41:52
Speaker 3: It is a big fraud case.
41:53
Speaker 2: Recently that company and all it's fixed income in the
41:56
Speaker 2: automotive sector crashed and burned. But for the most part,
42:02
Speaker 2: default rates have been fairly low. How do you look
42:06
Speaker 2: at that risk and is it a sort of top
42:10
Speaker 2: down macro approach or is it company by company, balance.
42:14
Speaker 3: Sheet line by balance sheet line.
42:16
Speaker 4: I think first from a top down standpoint. You know,
42:18
Speaker 4: we have had a nice tailent. We have had an
42:19
Speaker 4: economy that's been growing, We've had capital markets that have
42:22
Speaker 4: provided solutions to companies that need to get through. There's
42:25
Speaker 4: also been probably a fair amount of you know, restructurings
42:31
Speaker 4: along the way that in prior market cycles would have
42:36
Speaker 4: led to a higher default rate. So I think you
42:37
Speaker 4: have to make that adjustment as well. I think for
42:40
Speaker 4: us in our strategy, it's very much though about the
42:44
Speaker 4: fundamental analysis, the ideosyncratic risk and working we want to
42:48
Speaker 4: be in situations, particularly in lower credit quality companies, really
42:53
Speaker 4: understanding that that path that management has to ensure that
42:58
Speaker 4: the company moves to a more solid footing than that
43:00
Speaker 4: could be the debt maturity wall or access to capital
43:05
Speaker 4: and liquidity to ultimately deal with debt.
43:09
Speaker 3: As it comes to how do.
43:10
Speaker 2: You think about systemic risk relative to what the central
43:14
Speaker 2: Bank is doing and the Treasury depart is doing Treasury
43:19
Speaker 2: Department when we look at we had the financial crisis,
43:22
Speaker 2: we had the pandemic, we had the flash crash, we
43:26
Speaker 2: had that little hiccup with Silicon Valley Bank and some
43:29
Speaker 2: of the other.
43:31
Speaker 3: Banks that.
43:33
Speaker 2: In reality were contained as opposed to what we saw
43:37
Speaker 2: during the financial crisis. Do investors look at these institutions
43:44
Speaker 2: as providing a put providing a ready rescue plan or
43:52
Speaker 2: is it more less about specific companies and more about
43:56
Speaker 2: we're not going to let the system collapse.
43:59
Speaker 3: Yeah, that's a good quest.
44:00
Speaker 2: You know.
44:00
Speaker 4: I think we've been through a lot over the last
44:02
Speaker 4: twenty years, right, and one hundred.
44:04
Speaker 3: Years worth of stuff in a decade and a half. Yeah.
44:07
Speaker 4: I think if you look at some of the policy measures,
44:09
Speaker 4: maybe not you know, initially out of the gate following
44:12
Speaker 4: the financial crisis, but you know, the long tooth that
44:16
Speaker 4: some of those policies had and the distortion ultimately that
44:20
Speaker 4: was created in markets, I think there's a different view
44:22
Speaker 4: of maybe the appropriateness to some of the policy today,
44:25
Speaker 4: and then there certainly was at the time. You look, ultimately,
44:29
Speaker 4: the fear of systemic risks does create opportunity for us.
44:34
Speaker 4: I think being in a highly diversified strategy, not just
44:36
Speaker 4: from an asset class standpoint, but investing across the range
44:40
Speaker 4: of fixed income sectors and the range of sectors within
44:42
Speaker 4: the equity market certainly helps lend a bit of resilience
44:46
Speaker 4: to the strategy in the case where markets become a
44:49
Speaker 4: little bit more concerned about systemic risks. You know, I
44:54
Speaker 4: think one of the probably more interesting things that is
44:57
Speaker 4: happening today that I'm sure you've talked to their guess
45:00
Speaker 4: about is the private credits base, where we've just seen
45:02
Speaker 4: tremendous growth, tremendous amount of capital being committed there and
45:07
Speaker 4: ultimately needs to be deployed. And I think some of
45:10
Speaker 4: this doesn't have quite the same level of transparency that
45:13
Speaker 4: it would have had if it was in the public
45:16
Speaker 4: credit markets. So I think that's something that you know,
45:19
Speaker 4: we're certainly close to and both looking at potential opportunities
45:23
Speaker 4: because we can play in private assets within our Franklin
45:26
Speaker 4: income strategies. But you know, if there was something that
45:29
Speaker 4: you know, we would want to keep very much on
45:31
Speaker 4: the radar is what is happening in that space in
45:34
Speaker 4: terms of credit quality.
45:36
Speaker 2: The criticism that has come up about privates is that
45:40
Speaker 2: it's a form of volatility washing. You're not getting marks
45:44
Speaker 2: on the regular that are market based. It's all right,
45:48
Speaker 2: we think it's worth about this. Here's what the pars
45:52
Speaker 2: are worth. So let's sort of ballpark this. How do
45:57
Speaker 2: you think about that? Is that a fair criticism of
45:59
Speaker 2: that space? And you know, the main appeal seems to be, hey,
46:05
Speaker 2: it's non correlated, it's potentially better returns. How do you
46:09
Speaker 2: look at at the pitch from the private credit side.
46:14
Speaker 3: I think it's evolved in a healthy way.
46:16
Speaker 4: I think using volatility measures is somewhat debunked. I think,
46:21
Speaker 4: you know, leading with the sharp ratio when you're comparing
46:24
Speaker 4: public and private assets is not the not something investors
46:27
Speaker 4: should be focusing on, you know.
46:30
Speaker 3: I think the ultimately it has a meaningful place.
46:36
Speaker 4: The definition of public credit can be extraordinarily of private credit, sorry,
46:39
Speaker 4: it can be extraordinarily wide.
46:41
Speaker 3: And I think as that capital has.
46:43
Speaker 4: Come in, it has start to look at a lot
46:45
Speaker 4: of different places to to ultimately have its role in
46:49
Speaker 4: financial market. So we certainly think it's it's it's a
46:51
Speaker 4: viable asset. We just in any and really this goes
46:55
Speaker 4: kind of across any asset. When you see the kind
46:58
Speaker 4: of capital moving into a certain area, there's just a
47:02
Speaker 4: greater risk of maybe less disciplined things happening. And that's
47:06
Speaker 4: something that we think could become a little bit more
47:09
Speaker 4: parent here as we move forward.
47:11
Speaker 3: Really super interesting.
47:13
Speaker 2: So we've talked about various asset classes, We've talked about
47:18
Speaker 2: privates versus publics.
47:19
Speaker 3: What do you think the average income.
47:22
Speaker 2: Investor, yield investor doesn't understand about either the SMA they
47:28
Speaker 2: own or the mutual funder ETF they own. I know,
47:32
Speaker 2: fixed income is not quite as intuitive as equities. You
47:36
Speaker 2: must hear from a lot of different clients. What's out
47:40
Speaker 2: there amongst main street yield investors.
47:44
Speaker 4: I think one of the biggest things that we come
47:47
Speaker 4: across is there's just a natural view that if you're
47:52
Speaker 4: an income investor, you own a certain type of stock
47:56
Speaker 4: or have a certain type of equity exposure.
47:58
Speaker 3: And maybe that's rooted.
47:59
Speaker 4: In the concept of you know, like utility stocks, right
48:03
Speaker 4: bond like surrogates within the equity market, that's what you
48:06
Speaker 4: must invest in an as an income investor, and the
48:09
Speaker 4: reality is much broader than that. Even in the components,
48:13
Speaker 4: say of the SP five hundred, nearly forty percent not
48:17
Speaker 4: paying a dividend or paying a very low dividend, that's
48:20
Speaker 4: still something whether it's through convertible securities going back to
48:23
Speaker 4: that kind of earlier part of my career, or using
48:26
Speaker 4: structured equity where we can create a security that we
48:30
Speaker 4: can own for a year or two years that can
48:33
Speaker 4: replicate that kind of profile in our strategy. So that
48:35
Speaker 4: opens up the opportunity to own and we do in
48:38
Speaker 4: our strategy today convertible like instruments in Amazon, in Microsoft,
48:44
Speaker 4: in Meta. So we really have a much broader cross
48:46
Speaker 4: section in the equity markets to pursue investments.
48:49
Speaker 2: Huh really really interesting. Sticking with dividends, the S and
48:53
Speaker 2: P five hundred divining yield under two percent way back
48:58
Speaker 2: when it was three and a four percent. How do
49:02
Speaker 2: you look at dividend stocks as a whole, how attractive
49:06
Speaker 2: they are, the valuations there?
49:09
Speaker 3: How do you think.
49:10
Speaker 2: About that group as a source of yield.
49:14
Speaker 4: Yeah, I think it's a group that you want to consider.
49:17
Speaker 4: I think back to the just the profile we've had
49:20
Speaker 4: inequity markets the dominance of mostly non dividend paying stocks,
49:24
Speaker 4: the megacap tech companies in particular, and not to say
49:27
Speaker 4: that they can't continue to be decent investments, but there
49:31
Speaker 4: is that whole cohort that still focuses on dividends, not
49:35
Speaker 4: just dividends, but consistent growth of dividends. I mentioned Utility
49:41
Speaker 4: Company several times. One stock that we've actually held in
49:43
Speaker 4: the portfolio of the entire time that I've been in
49:46
Speaker 4: portfolio managers Southern Company and what probably very few people
49:50
Speaker 4: would expect if you go back to two thousand and two,
49:56
Speaker 4: since that time period, Southern Companies actually matched the return
49:59
Speaker 4: of the SPA five hundred.
50:01
Speaker 2: Really really interesting. We're seeing signs of the market broadening out.
50:07
Speaker 2: My favorite data point from twenty twenty five. Everybody talks
50:11
Speaker 2: about the concentration and the Magnificent seven outperforming. Only two
50:16
Speaker 2: of the mag seven beat the S and P five
50:18
Speaker 2: hundred last year. Amazing data point. How are you looking
50:22
Speaker 2: at the rest of the S and P five hundred?
50:24
Speaker 2: How are you looking at the value sector? Can we
50:28
Speaker 2: reasonably expect to see this broadening continue in the future.
50:33
Speaker 4: Yeah, we do think, you know, there is some interesting
50:36
Speaker 4: value in parts of the equity market, and maybe they
50:39
Speaker 4: are companies that have been a little bit out of
50:41
Speaker 4: the spotlight. You know, we do have a pretty good
50:46
Speaker 4: amount of sector diversification, so we're finding opportunities in these
50:49
Speaker 4: different areas. It'll be healthcare, it'll be industrials, energy utilities,
50:53
Speaker 4: even in materials.
50:54
Speaker 3: Some of these trends.
50:56
Speaker 4: Let's take globalization and really this move still evolving into
51:02
Speaker 4: maybe hemisphere controls and near shoring of supply chains, some
51:08
Speaker 4: things that came out of the pandemic. You know, all
51:10
Speaker 4: of that has pretty significant implications. So finding companies that
51:13
Speaker 4: have that a play on a select theme that you
51:17
Speaker 4: want to that you identify and want to play.
51:19
Speaker 3: We think there's a lot of that opportunity in the
51:21
Speaker 3: equity market.
51:22
Speaker 2: I've been mostly thinking about and talking about US equities.
51:27
Speaker 2: Last year was the first year where MSCI developed and
51:33
Speaker 2: even emerging market just wherever you looked overseas thumped the US,
51:37
Speaker 2: and the US was you know, up almost eighteen percent,
51:41
Speaker 2: nas deck up a little over twenty percent. How do
51:44
Speaker 2: you look at the rest of the world when it
51:46
Speaker 2: comes to either fixed income or equities.
51:49
Speaker 4: Yeah, you know, I certainly think that made a great
51:52
Speaker 4: storyline for twenty twenty five. Reason being, you know, we
51:57
Speaker 4: go back and look at twenty three and twenty four.
51:58
Speaker 4: Though US doc sent out performance so massively so.
52:01
Speaker 3: Over the past fifteen years or so, at.
52:03
Speaker 4: Some level, we do think it was primed for a
52:05
Speaker 4: little bit of a reallocation towards non US markets. And
52:09
Speaker 4: then you add on some of the policy dynamics around
52:12
Speaker 4: tariffs and.
52:13
Speaker 2: The dollar dropping almost ten percent.
52:15
Speaker 4: Exactly, and that really led to some of that reallocation.
52:18
Speaker 4: A lot of the outperformance of non US equity markets
52:21
Speaker 4: in twenty five did happen during that period of time.
52:23
Speaker 4: So if you were to take a look at more
52:25
Speaker 4: of the second half, a little bit more balance between
52:28
Speaker 4: the markets.
52:29
Speaker 2: And then our last question before we get to my
52:31
Speaker 2: favorite questions, I ask well, I'm like, guess what do
52:34
Speaker 2: you think investors and traders are not talking about thinking
52:38
Speaker 2: about that? Perhaps they should be in it and you
52:41
Speaker 2: could you go anywhere investor, So you go anywhere with this?
52:45
Speaker 3: What assets?
52:46
Speaker 2: Geography, policies, data points are getting overlooked but shouldn't.
52:53
Speaker 4: Yeah, I think we're going to keep coming back to
52:55
Speaker 4: right now, we really feel like policies paramount, So really
52:58
Speaker 4: focusing on policy will will ultimately take the market. Midterm
53:03
Speaker 4: elections are going to continue to be a very significant
53:06
Speaker 4: overhang in markets. Maybe one of the things that concerns
53:09
Speaker 4: me that investors are not talking about is if we
53:13
Speaker 4: were to think about the level of uncertainty that some
53:15
Speaker 4: of these dynamics naturally create, and how that right now
53:20
Speaker 4: really does not translate to the kind of expected volatility
53:24
Speaker 4: that might be there in markets. So just looking this
53:26
Speaker 4: morning at something like the victor in the VIX index,
53:30
Speaker 4: which a lot of investors will go to when they
53:31
Speaker 4: want to see applied volatility back to the levels it
53:35
Speaker 4: was at in February of twenty twenty five, So we
53:38
Speaker 4: did see a very very low, right low low, and
53:40
Speaker 4: that tends to be, you know, a point where you know,
53:43
Speaker 4: we want to be a little bit more cautious when
53:45
Speaker 4: naturally there is not a lot of volatility expected to
53:48
Speaker 4: be coming in markets. You know, for us, that means
53:51
Speaker 4: we can stay invested, we can focus on areas that
53:55
Speaker 4: deliver attractive income and really maintaining that nimbleness in the portfolio,
54:01
Speaker 4: in the strategy.
54:01
Speaker 2: That we have really really interesting ed Let's jump to
54:05
Speaker 2: my favorite questions that I ask all of my guests,
54:07
Speaker 2: starting with tell us about your mentors who helped shape
54:12
Speaker 2: your career.
54:14
Speaker 4: Yeah, i'd certainly first and foremost on that list is
54:17
Speaker 4: Charles Johnson joining Charlie in two thousand and two as
54:22
Speaker 4: a member of the Franklin Income portfolio management team and
54:25
Speaker 4: really being able to understand his approach to investing and
54:30
Speaker 4: hearing the tremendous experiences that he had over time. But
54:35
Speaker 4: I think more importantly him really enabling me to become
54:39
Speaker 4: a bit of the investor that I am today. And
54:44
Speaker 4: as we went through that transition and then went through
54:48
Speaker 4: difficult times, particularly the financial crisis, that awareness that, look,
54:53
Speaker 4: we're not going to get every situation right, we're not
54:55
Speaker 4: going to make every perfect investment, but really how you
55:00
Speaker 4: handle it and how you stay focused on the people
55:02
Speaker 4: that have entrusted their money to us is just paramount importance.
55:08
Speaker 4: And you know, one of the first things that Charlie
55:10
Speaker 4: asked me to do in two thousand and two was.
55:13
Speaker 3: A difficult time.
55:14
Speaker 4: Interest rates were coming down, there was a modest dividend
55:17
Speaker 4: cut for Franklin Income Fund, which is not a very
55:19
Speaker 4: common current certainly not something that we enjoy doing. And
55:24
Speaker 4: getting a handwritten letter from an investor or a woman in
55:27
Speaker 4: Tennessee that was a little concerned that her dividend check
55:30
Speaker 4: had gone down. And here he is the chairman and
55:33
Speaker 4: CEO of Franklin and portfolio manager still and he gave
55:37
Speaker 4: me that handwritten note from the investor and asked me
55:40
Speaker 4: to respond directly to really and that was.
55:42
Speaker 2: Just you write a letter or did you pick up
55:44
Speaker 2: the phone.
55:45
Speaker 4: No, we wrote a letter, and that was something I
55:48
Speaker 4: don't recall having the phone number. But we did write
55:51
Speaker 4: a letter and really kind of laid it out and
55:53
Speaker 4: tried to help her understand just the dynamic. But to me,
55:56
Speaker 4: that really resonated that, Wow, this is so important to him.
56:01
Speaker 4: This is really we need to stay connected to just
56:03
Speaker 4: the role we are playing in individuals lives. And I
56:07
Speaker 4: think that's something that I've really tried to not only
56:09
Speaker 4: carry on in my career, but certainly instill in the
56:12
Speaker 4: broader team that helps manage Franklin income.
56:15
Speaker 3: Easy to lose sight of that, right, So let's talk
56:17
Speaker 3: about books. What are some of your favorites? What are
56:20
Speaker 3: you reading right now?
56:22
Speaker 4: Wow, I'll start with maybe what I'm reading right now,
56:24
Speaker 4: And this is something I've always enjoyed, history and geography.
56:30
Speaker 3: The end of last year.
56:31
Speaker 4: I picked up a place called Yellowstone because I was
56:36
Speaker 4: planning a siblings trip to Yellowstone and it was just
56:38
Speaker 4: really fascinating the history. I'm now reading A Daunted Courage
56:42
Speaker 4: by Samuel Ambrose, which is more of the Lewis and
56:45
Speaker 4: Clark expedition. So maybe this summer I'll be out in
56:48
Speaker 4: Glacier or in the Bitterroot Mountains.
56:50
Speaker 3: On a trail somewhere.
56:51
Speaker 4: But I really enjoy, you know, reading, so I'm more
56:56
Speaker 4: of a nonfiction, you know, kind of guy. Occasionally I'll
57:00
Speaker 4: pick up something else. Probably my favorite of all time
57:03
Speaker 4: is the Hemingway classic from the Bell Tolls, where you
57:06
Speaker 4: know you're reading something that plays out over seventy two
57:11
Speaker 4: or so hours, and just something like that that really
57:14
Speaker 4: can let your mind kind of go and the imagination
57:17
Speaker 4: take hold. Is always something that I've enjoyed too. I
57:23
Speaker 4: did just pick up a new copy. I think it's
57:25
Speaker 4: probably something that as an American we should all read.
57:29
Speaker 4: And certainly Walter Isaacson is not somebody that needs a
57:34
Speaker 4: plug of any sort. He wrote more of a pamphlet
57:38
Speaker 4: called the Greatest Sentence Ever Written, and that's really thing
57:41
Speaker 4: that I think with America today.
57:43
Speaker 3: His books are giant.
57:45
Speaker 4: I think this is around fifty pages, so it's the
57:49
Speaker 4: greatest sentence ever written. And I haven't gone through it yet,
57:53
Speaker 4: but I've heard heard him speak about it, and it's
57:55
Speaker 4: just very inspiring. And like I said, it's something that
58:00
Speaker 4: second sentence of the Declaration Independence with America two fifty
58:03
Speaker 4: is maybe something that we should all step back and
58:06
Speaker 4: make sure we read this year.
58:08
Speaker 2: I have for Whom the Bell Tolls on my list,
58:12
Speaker 2: and I just read on vacation last month, The Sun
58:16
Speaker 2: also Rises, But nothing beats the Old Man in the Sea.
58:20
Speaker 3: That book just always speaks.
58:22
Speaker 2: To me, not just as a fisherman, but his prose
58:25
Speaker 2: is just so compact and tight.
58:28
Speaker 3: And powerful, really very impressive.
58:31
Speaker 2: You mentioned Yellowstone, so I have to ask, what are
58:34
Speaker 2: you streaming these days?
58:35
Speaker 3: What's keeping you entertained.
58:37
Speaker 4: I haven't started Landman two yet, but that's probably next.
58:41
Speaker 4: You know, I really kind of like to and maybe
58:45
Speaker 4: there is a sci fi element growing up my sci
58:48
Speaker 4: fi choice with probably something like Stargate SG one or
58:51
Speaker 4: something where you can really detach, and I think that's
58:54
Speaker 4: an important component. Let the mind rest and be transported
58:59
Speaker 4: a little bit.
59:01
Speaker 2: Let's jump to our final two questions. What sort of
59:06
Speaker 2: advice would you give to a recent college grad interested
59:10
Speaker 2: in a career in fixed income, portfolio management or just investing.
59:16
Speaker 4: In a way, it would be just that I see
59:19
Speaker 4: far too many college students, recent grads that think they've
59:24
Speaker 4: already decided what they want specializing early yes, or are
59:28
Speaker 4: having a definitive I need to find the job in
59:32
Speaker 4: this and I just reflect on my own path that.
59:37
Speaker 3: It evolves.
59:38
Speaker 4: Quickly, Get in a seat somewhere in an industry that
59:41
Speaker 4: you think is interesting, and see where it takes you,
59:43
Speaker 4: and don't be afraid to put your hand up when
59:45
Speaker 4: opportunities arise.
59:48
Speaker 3: It's you have plenty of time. You have nothing but time.
59:51
Speaker 2: Don't assume that first gig is where you're going to
59:53
Speaker 2: spend the next forty years of your career.
59:56
Speaker 3: Is that your advice?
59:57
Speaker 2: You know it can happen, It certainly can. And our
1:00:02
Speaker 2: final question, what do you know about the world of
1:00:04
Speaker 2: investing today? You wish you knew thirty plus years ago
1:00:09
Speaker 2: when you were first getting started.
1:00:11
Speaker 4: Oh, it's such a good question. I mean a lot
1:00:13
Speaker 4: of ways. You know, you almost wouldn't want things to
1:00:15
Speaker 4: be to be entirely different. You know, I was fortunate
1:00:19
Speaker 4: in that I found that role relatively early on. That
1:00:23
Speaker 4: really solidified the kind of investor I think I am.
1:00:26
Speaker 4: What is that inherent DNA that I have as an investor?
1:00:29
Speaker 4: So I think the sooner you can kind of tap
1:00:31
Speaker 4: into that and then explore ways to follow your investing
1:00:35
Speaker 4: based upon that.
1:00:36
Speaker 3: Don't try to be somebody that you're not.
1:00:38
Speaker 4: You know, and I have colleagues that manage pure growth
1:00:42
Speaker 4: funds that follow momentum strategies, and I think they do
1:00:45
Speaker 4: a phenomenal job. I also very much know that's not
1:00:47
Speaker 4: a job that I would have ever excelled at.
1:00:50
Speaker 2: What's the old joke at Will Street is an expensive
1:00:52
Speaker 2: place to figure out.
1:00:54
Speaker 3: Who you are?
1:00:55
Speaker 2: Absolutely, Ed, thank you so much for being so jenerfer
1:00:58
Speaker 2: with your time. This has been really quite fascinating.
1:01:01
Speaker 3: We have been speaking with Ed Perks. He's CIO of Franklin.
1:01:05
Speaker 2: Income Fund as well as member of the executive committee
1:01:08
Speaker 2: and PM for a number of different funds. If you
1:01:12
Speaker 2: enjoy this conversation, check out any of the six hundred
1:01:15
Speaker 2: we've done over the prior twelve years. You can find
1:01:18
Speaker 2: those at Bloomberg, iTunes, Spotify, YouTube.
1:01:23
Speaker 3: Wherever you get your favorite podcasts.
1:01:25
Speaker 2: At I would be remiss if I didn't thank our
1:01:28
Speaker 2: corrac team that helps put these conversations together each week,
1:01:32
Speaker 2: I'm Barry Ritolts. You've been listening to Bloomberg's Masters and
1:01:37
Speaker 2: Business