It’s obvious, I think, but it’s worth saying that the fixed income market has a big problem. And that’s yield, right? This lack of yield. And this chart kind of says it all. Yields are at an all-time low or close there to, whereas duration on things that investors typically track to, the Agg index in this case, is at an all-time high, which is partly, if you know the duration formula, is partly due to lower yield.  The lower yields go, the more duration goes out. It’s kind of, like, it’s not a comfortable position to be in. And the main culprit, as was mentioned, is QESo, QE’s forced our client base to extend out the yield curve to get carry, to go down in credit, and to take illiquidity risk. Those have been the main sort of themes that you can kind of carve out.   

It’s a perilous thing to kind of wrap your fixed income exposure solely to an index that looks like this, like a lot of passive funds are in core, closet indexing type of managers. But if you need a case for active management, this is it. 

For us, the bottom line is, like, the thing that we deliver are differentiated portfolios.  And we do that because of our style, which is tilting towards credit through the cycle, we’re going to be focused on triple-B, you know, credits, mostly, across not just investment grade corporate markets but a lot of other things which we’ll show you. But and then dipping into the non-investment grade, the higher end of the non-investment grade side.  And, the approach is something that’s been going on for many, many years. Again, we’re not changing the fundamental philosophy. We’re just going back to those roots, and re-emphasizing and improving upon them from there.

There are a number of things that have caught my attention in this, you know, post-COVID world.  And maybe things were happening just slightly before that that weren’t really appreciated, as well, that have me thinking, you know, the risks to upside and yields is as high as I’ve seen.  There are aspects in the macroeconomic backdrop that could structurally start to lead to higher rates, okay? One of them is the Fed’s policy now with average inflation targeting, okay, which is a massive change. Now, I know they kind of slightly pivoted in June to seemingly move further away from that. But actually, they’re still, you know, applying that policy. And simply means that rather than being preemptive at raising rates to cut off an inflation potential, they’re going to let it run, okay? Now, nobody ever expected the pandemic and the challenges that are faced with that and it’s kind of still, you know, they’re still kind of feeling their way through it.  But I think that’s a big shift.  And it suggests that, putting QE aside that when they start to raise rates, they’re going to err to the side of being a little bit late relative to history, okay?  And that should, by itself, lead to a steeper yield curve and a higher terminal Fed funds rate, which means rates should be higher than they certainly are right now. 

It’s a well-worn path that the credit cycle follows.  Right now, we’re in the early stages of the expansion.  So, let’s call it, like, four o’clock on this wheel. And that’s generally a period when credit fundamentals are strong and they’re fine but dollar prices are high and yields are lower and spreads are lower. So, while there’s no major credit losses that you can foresee, and our models are suggesting that, as well, you’re not going to have a lot of upside. You’re going to earn your carry, basically.  But that’s a good thing. And a lot of people get shaken out of the credit markets too early at this phase.  And I’ll show you why we aren’t. We think you lean towards credit, still, in this market. And it might sound crazy because the yield that you get is pretty skinny. But what’s important is the spread you get over treasuries. 

At its essence, we’re a bottom-up bond picker.  So, I talk about top-down.  I say here’s a case of why be comfortable with credit?  That kind of just sets the backdrop of kind of the risk we want to take from a bottom-up perspective.  We take an equity-like approach to investing in the fixed income market.  So, when we’re investing credit, we’re thinking like an equity investor.  We want to know what the company’s worth. Our analysts are very good at that. 

we’ve spent some time thinking about, okay, these six areas are generally where we -- I call them tail winds, where we’re going to find value all the time, right?  And fallen angels, we were all over that last year.  Not every one of these, you know, is a primary focus through the cycle but there are times in each one.  Like, right now, the upgrade candidates, we’re buying bonds, that we think -- now we’re seeing with the economy improving and COVID dissipating, people getting back to work, there’s going to be a rating uptick and we’re going to capture that. 

We are credit-based managers at the end of the day.  When I think of building a portfolio, I think about it one bond at a time.