Peter Wehle:

Hello, my name's Pete Wehle, and I'm joined today with James Camp, Managing Director of Income Investing at Eagle Asset Management.

Peter Wehle:

So, James, thanks for joining us today.

James Camp:

Good morning, Pete.

Peter Wehle:

Morning.

Peter Wehle:

How has your approach to income investing changed over the years?

James Camp:

Well, Pete, really after the 2008 financial crisis, we've seen unprecedented central bank intervention and rate cuts around the world. We've had a period of ultra low interest rates for over a decade now which has only accelerated in the current environment. We've also seen a comfort level of corporations around the globe and especially in the United States using the debt markets oftentimes to ingratiate shareholders in the form of higher dividends, in the form of buying back stock. So the relationship within a corporate capital structure between debt and equity has been modified in the post-financial crisis period and in fact, in the current environment.

James Camp:

And so what we like to do is, first and foremost, find great companies find great balance sheets, and find great businesses and then take a look at the capital structure and try to optimize income production within the various classes of securities offered: debt, preferred stock, common stock.

Peter Wehle:

A lot has been said about the 60/40 portfolio, just setting it and rebalancing back to 60/40 and the depth of that style.

Peter Wehle:

What are your thoughts?

James Camp:

60/40 is an evergreen and tried-and-true way to do asset allocation and diversification. We certainly don't think that that is a "dead model," but we think you can modify it, and we can be tactical around those baselines. Just a year ago, we had some of the most generous corporate bond spreads that we've ever had because of the pandemic and the draw down and the liquidity challenges. That provided a great opportunity to increase corporate bond allocation.

James Camp:

Similarly, just a couple of years ago, we had a 3% plus 10-year Treasury. So even in this ultra low rate environment with corporate bond spreads very tight at the current moment, those relationships change.

James Camp:

At the same time, we've seen record amounts of corporate indebtedness. We've seen corporations becoming very comfortable with using their balance sheet to pay higher and higher income streams to other parts of the ownership structure within that company. And in fact, we've seen the market migrate to primarily a triple-B or one notch above high yield in terms of the corporate bond space. So the relationship between debt and equity needs to be managed in that asset allocation modifications, from time to time, proved very productive from both a risk management standpoint and a return standpoint.

Peter Wehle:

Thank you.

Peter Wehle:

How do you look at bonds relative to other income producing components of a company's capital structure today?

James Camp:

Well, first and foremost, we take a look at all the visible float, all the indebtedness that is out there every single month. We run through our models and through our analyst team what we would call approved credits. That means their leverage ratios, their earnings, and their capital structure are credit worthy.

James Camp:

Remember that I mentioned primarily now the investment grade universe is triple-B. Within that triple-B space, there is wild disparity between credit worthiness and leverage. We know this.

James Camp:

We then compare the all-in yield of that particular security to other parts of the capital structure within the same company. And when there is a more generous, sufficiently more generous part of the capital structure, be it a preferred share or a common share, we may opt for that particular asset.

James Camp:

All of this presupposes that our work and our modeling and our outlook is positive for the equity market. In other words, we won't simply buy a more generous yield if we have a more cautious outlook on the equity market.

Peter Wehle:

James, why and how should investors incorporate multi-asset solutions into their portfolios?

James Camp:

Well, Pete, we think in the current environment, low interest rates beget a conversation about where you can go to generate income. There are many different options within the debt market. What we think is more optimal is to find great companies, to look at stable balance sheets, good debt coverage, and compare and contrast different parts of the capital structure within those companies. It is interesting that in a low rate environment, we often have the opportunity to participate alongside the equity holders with even more generous income than we would in the debt market.

James Camp:

So the idea of flexible income generation is, first and foremost, pick great companies, solid balance sheets, good businesses, compare and contrast different parts of that capital structure. And when bonds are appropriate, use the bonds for income and income stability. When the equity markets seem to be in good health and the income generation is more generous, opt and lean towards that side of the balance sheet. Simply stated, set it and forget it or simply buy and hold is going to be challenged in the current environment, in the environment that we see going forward.

Peter Wehle:

Thank you, James.

Peter Wehle:

If you have additional questions or like information on multi-asset solutions at Eagle, please reach out to your local representative or eagleasset.com

Disclosures

Risks associated with Fixed Income Investing:

Historically, bonds have indeed provided less volatility and less risk of loss of capital than has equity investing. However, there are many factors that may affect the risk and return profile of a fixed-income portfolio. The two most prominent factors are interest-rate movements and the creditworthiness of the bond issuer. Bonds issued by the U.S. government have significantly less risk of default than those issued by corporations and municipalities. However, the overall return on government bonds tends to be less than these other types of fixed-income securities. Investors should pay careful attention to the types of fixed-income securities that comprise their portfolio, and remember that, as with all investments, there is the risk of the loss of capital.

Investment grade refers to fixed-income securities rated BBB or better by Standard & Poor’s or Baa or better by Moody’s.

Investments in high-yield bonds and convertible securities may be subject to greater risks than other fixed-income investments. The lower rating of high-yield bonds (less than investment grade) reflects a greater possibility that the financial condition of the issuer or adverse changes in general economic conditions may impair the ability of the issuer to pay income and principal. Periods of rising interest rates or economic downturns may cause highly leveraged issuers to experience financial stress, and thus markets for their securities may become more volatile. Moreover, to the extent that no established secondary market exists, there may be thin trading of high-yield bonds, which increases the potential for volatility.

Not FDIC insured. No bank guarantee. May lose value.

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