Rob Almeida:

Welcome to the MFS Strategist Corner podcast. I'm your host, Rob Almeida.

Speaker 2:

The views expressed are those of the speaker and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as an offer of securities or investment advice. No forecast can be guaranteed. Past performance is no guarantee of future results.

Rob Almeida:

In today's episode, I speak with Pilar Gomez-Bravo, Director of Fixed Income in Europe and Global Fixed Income PM for MFS. We discuss her pathway to MFS, lessons learned, and how that helped formulate her views on proper portfolio construction and global fixed income portfolios.

Rob Almeida:

Pilar, how are you?

Pilar Gomez-Bravo:

I'm great. It's great to be back here in Boston.

Rob Almeida:

Yeah, very good. Well first time I've seen you physically in two, two and a half years I guess.

Pilar Gomez-Bravo:

Indeed. Yeah, I think it was February 2020 when I was last here.

Rob Almeida:

Wow.

Pilar Gomez-Bravo:

Coming into a board meeting and meeting the team. It's been virtual and now back.

Rob Almeida:

Now you're back.

Pilar Gomez-Bravo:

Yeah, back learning to ride the bike again.

Rob Almeida:

Right. Well, welcome to the program.

Pilar Gomez-Bravo:

Great. It's a pleasure to be here. Thanks for inviting me.

Rob Almeida:

So for the audience, share a little bit of your background, how you got interested in finance, investing, et cetera.

Pilar Gomez-Bravo:

Sure. So I actually didn't have a vocation. I didn't grow up thinking, "I'm going to be an asset manager or a portfolio manager." So I've always tried to keep my options open. And so when I started, I studied ... actually I did a degree in law and also a degree in economics to hedge my bets. And when I finished that, again without having too much clarity as to which path to go, I actually started management consulting. I started management consulting because I wanted to learn and I wanted to learn as broad of a basis of capabilities as I could, and I thought that was a great fertile ground for really having a great chance to look everywhere. Again, sort of keeping your doors open without knowing exactly where to go.

Pilar Gomez-Bravo:

But two years or two and a half years into it, I became disillusioned for two reasons. The first one is because I couldn't really see enough of an impact of what I was doing. I mean, I'd do a lot of work. You learn a lot of structure in management consulting and a lot of process, but at the end of the day these management teams weren't doing what I was thinking that they should be doing.

Rob Almeida:

Right.

Pilar Gomez-Bravo:

And so I had no way to really-

Rob Almeida:

Sounds like my kids.

Pilar Gomez-Bravo:

Yeah, exactly. It's like you can tell them and then they say, "Are you doing reverse psychology on me?" And so I sort of said, "Okay, well that's just not satisfying enough." You have views and you're portraying those views to your clients, but really you don't follow up, you don't see the impact of that. And the second reason was because, frankly after two and a half years, I felt that there was too much of a risk of ending up with a group of people that you don't like for six months in the middle of nowhere. And so for me, having the aspect of the people that I work with was very important and life is too short to spend time working with people who you don't feel are necessarily kind of people that you'd want to be working with. And so I decided to, like many people, do an MBA and so I went to MIT.

Rob Almeida:

Here in Boston.

Pilar Gomez-Bravo:

In Boston, yeah. Great. So I lived here for a couple years. After that, I ended up at Lehman Brothers basically. So I did move to finance through that, partially because obviously that was certainly a lot more dynamic than management consulting. It was appealing thinking, "Maybe if I'm the provider of capital, they'll listen to me more then." And you know what was so funny then, again, actually my identical twin sister worked at Lehman. So it was very confusing for about a year and a half, and then she kind of left. But when I went through the process of Lehman Brothers again thinking, "Okay. Well, it's a huge bank. Where do you go?"

Rob Almeida:

Right.

Pilar Gomez-Bravo:

I always thought I was going to go into equities. I thought, "Well, naturally I've been doing management consulting. I have views as to how companies should be run. I'll be an equity analyst." And I did rotate in equities, but the fixed income leadership said, "No, Pilar. We want you to rotate in fixed income." I think because I had very good math grades.

Rob Almeida:

And what year was that?

Pilar Gomez-Bravo:

So this is back in '97, '98, so quite a long time ago. And so I ended up rotating fixed income, and I fell in love with fixed income. Again, it's like you don't want to, but you do.

Rob Almeida:

Sure.

Pilar Gomez-Bravo:

And the reason for that, especially on the credit side, is because there were so many arbitrages. There were so many ways to make money. And I thought, "If I do into equities, I do my DCF, my cashflow analysis, and the share price is where it is." And I go, "You have to wait." Right?

Rob Almeida:

Yeah.

Pilar Gomez-Bravo:

But the world of fixed income is so rich in opportunities that I sort of said, "Okay, I'll do that." And then I thought, "Okay. Well, where do you go within that?" Right? And I thought, "Let's keep my doors open, be flexible, learn as much as I can." So I went to research, to credit research. I felt this for two reasons. One, because it allows me to talk to the largest number of people possible. So I can talk to trading and I can talk to sales. I can talk to the bankers and I could talk to the equity guys. Right? And so it was just maximizing the opportunity for me to learn and to work with people. Right? But the second key reason for me was because it allowed me to talk to clients. It was kind of natural that as a research person you would be sharing views with clients and learning as to what they need and what they want and how they think about the markets and what they're looking for.

Rob Almeida:

Yeah.

Pilar Gomez-Bravo:

And so that sort of took me through quite a number of years. I became Head of Research. 2006 came around, and if you remember then it was almost like last year where spreads are very tight.

Rob Almeida:

Yeah.

Pilar Gomez-Bravo:

There's not a lot of value.

Rob Almeida:

Complacency.

Pilar Gomez-Bravo:

There's complacency in the market. And I thought, "I want to put my money where my mouth is." Right? It's fine, but I want more. And so back then I thought, "What better place to be managing fixed income than have Lehman Brothers in front of asset management?" And two years later, it was not such a great thing.

Rob Almeida:

Right.

Pilar Gomez-Bravo:

And that was a huge learning experience for me because all of a sudden your life falls apart in terms of your professional life. Right? I had been at Lehman Brothers for many, many years.

Rob Almeida:

Something out of your control just-

Pilar Gomez-Bravo:

Completely out of my control. And then you start feeling ... you start doubting yourself. Clearly I didn't see, how could I not? And the reason why you start doubting was at that time, when I moved on to asset management, I was a banks analyst. I'm like, "How could I not see this coming?" Right? And sure you have your doubts and you have your things, but you're loyal. I'm a very loyal person. Right?

Rob Almeida:

Yeah.

Pilar Gomez-Bravo:

I felt like I could make a difference. And so the good thing is I lost everything, but I didn't lose my job. So I kept on being a portfolio manager, had responsibilities for clients and client's money, and had really, more than anything else, responsibility for my team. And we had built out the team. So one of the things that drew me to kind of finance and drew me to this business is being able to serve clients, but also grow and feel like you're adding value somehow. Right? Through-

Rob Almeida:

Yeah, providing solutions.

Pilar Gomez-Bravo:

Providing solution, and that requires a degree of entrepreneurial spirit. Right?

Rob Almeida:

Sure.

Pilar Gomez-Bravo:

Even though you're not in a startup, you feel like you need to get there. Right? And so when something like that happens, you have to go back to first principles. Right? I remember back in management consulting that the first managing director that I talked to said to me, "Pilar, never forget that you're here to serve. This is what we do. We're in service industry, we serve." Right? And so obviously, as hard as Lehman was, I was like, "Well, I have clients. I have people that are accountable for."

Rob Almeida:

Yeah, real people.

Pilar Gomez-Bravo:

People that are ... and that sort of kept me going for a while. Having lost everything, tough and there's lots of lessons learned from that as an investor. Actually the portfolios I was running were doing fine, but it didn't matter really.

Rob Almeida:

Right, no. Yeah, the foundation.

Pilar Gomez-Bravo:

Exactly. I decided to say ... well, my opportunity cost was very low, obviously.

Rob Almeida:

Yeah.

Pilar Gomez-Bravo:

And so I went in the world of hedge funds. So I spent a couple of years exploring hedge funds. The reason for that was not so much the hedge fund industry itself, but was the solutions that they were providing to clients. This resonates with clients. Right? So I was attracted to the strategies that they were managing and thinking, "Can I do better than that?" Right?

Rob Almeida:

Yeah.

Pilar Gomez-Bravo:

And so I sort of talked to a lot of people, I worked on a couple of small hedge funds because I wanted to have an impact. And I realized then, and you'll laugh because at MIT I studied with Nevin Chitkara, so he was in my class.

Rob Almeida:

Yeah.

Pilar Gomez-Bravo:

We remained friends for a long time, and he came over to my house at one of the round tables. He stopped by my house and I was sort of saying, "Ah, it's really tough Nevin because of this hedge fund thing." And I joked around and I said, "I think I'm too fiduciary for hedge funds." I'm like, "I just don't know. They are like cowboys and there's such a wild range of people."

Rob Almeida:

Right.

Pilar Gomez-Bravo:

Some good, some really kind of horrible.

Rob Almeida:

Yeah.

Pilar Gomez-Bravo:

And he's like, "You should talk to him MFS." And I was like, "MF-who?" Right? Because in Europe and fixed income not a lot of people at that time, which was 2012, knew MFS and fixed income. And so he said, "No, really. You should talk to them. I'll introduce you. I know Bill and management is looking to expand the platform."

Rob Almeida:

Bill Adams, our-

Pilar Gomez-Bravo:

Bill Adams, exactly.

Rob Almeida:

-Chief Fixed Income Officer.

Pilar Gomez-Bravo:

Exactly. He's looking to expand the platform and I think you'd be great. I think it'd be good fit. The reason why I mention Nevin is because with hindsight afterwards, we pride so much in our culture together to deliver value for clients that as I was going through the process with MFS and interviewing with people, and he kept in touch saying, "Do you need anything? Can I help? What are their values?" I suddenly realized that, why does a successful equity portfolio manager go out of his way to help fixed income? Where would that ever happen? It doesn't. Right? And he's going out of his way to help his fixed income colleagues. He doesn't need to do that. And I thought, "Well, maybe it is true, that they talk to each other. Maybe it is true that they collaborate." And it's those little signs really that win you over rather than what's on paper.

Rob Almeida:

Right.

Pilar Gomez-Bravo:

It's sort of like seeing it live, and I've never looked back basically.

Rob Almeida:

Yeah.

Pilar Gomez-Bravo:

But a lot of it was really kind of having flexibility, being able to adapt to new opportunities, moving from being an analyst and a manager to actually being a portfolio manager and sort of thinking about what solutions you can provide to clients, whether they're your own traditional domain or are there other areas that you can poach ideas from that can add value to sort of the client experience.

Rob Almeida:

So I want to come back to those formative years in just a moment, but I want to take the advantage of something that you hit on in the importance of culture and collaboration. Give me your honest views. The way I think about investing oftentimes, and maybe we saw this with Enron as an illustration, it's the things you can't see that crush you or it's things that you can't count. What's that Einstein quote? "Not everything that can be counted counts, and not everything ... Right? So being able to, I guess, check your thesis and talk to others, maybe talk a little bit about the importance of that as an investor.

Pilar Gomez-Bravo:

Yeah. I mean I think that that's what attracted me to investments at the end, is sort of you need to create a holistic view of an investment proposition. Right? And for that, you need to check opinions from a lot of different areas. Right? And I mean I think that ... I can tell you from working elsewhere that a lot of people say they collaborate and they don't. Right? And for me, that just means digging deeper into a thesis that allows you to sort of check it from different perspectives.

Rob Almeida:

Right.

Pilar Gomez-Bravo:

So the equity guy is going to have a very different perspective on the cashflow generation and the important material factors that affect the stock than the equity guy and the guy who does hospitals and munis if you're looking at a healthcare company or than the guy that's looking at regulation in the sector. Right? So it really kind of helps frame two things. One is what your base outcome could be, but really what the tail risks are.

Rob Almeida:

Yeah.

Pilar Gomez-Bravo:

And so for fixed income, it's really difficult not to draw on the expertise elsewhere when you have all to lose and little to gain.

Rob Almeida:

Right.

Pilar Gomez-Bravo:

So it's even more important than the other way around. So I appreciate that equities actually still rely a lot on the discussions with fixed income, but for fixed income you need to really have that comprehensive view of your base outcome and your tail risk. So you're talking obviously with the equity guys about sort of an equity stock, and I've had conversations for example in our company with Equity PM and an analyst, and they said, "Pilar, we just came back and we talked to this company and they want to blow up the balance sheet." I had some bonds and I'm like, "Well, I'm not going to keep the bonds."

Rob Almeida:

Right.

Pilar Gomez-Bravo:

And so I'm not going to be hanging around. You can only do that if you have somebody that comes around and sort of says, "Hey." So that's the value of the collaboration, and that struck me so much here. It's that people actually call you and tell you, "Hey, by the way." So it's not just you having to be proactive and saying, "Hey, can you help me?" It's people help you. Right? The muni guys, I'll talk to the muni guys and they'll say, "Hey, Pilar. I think this is going to be a great idea. This is our highest conviction views in our muni portfolios." I'm like, "Well, I can use that."

Rob Almeida:

Right. Right.

Pilar Gomez-Bravo:

And I'm like, "Where does that happen?" And so that collaboration just feeds helping each other out to make better investment decisions. You need that to thrive, especially in fixed income because of the tail risks and the capital loss that you could experience if you don't do that.

Rob Almeida:

Yeah. So let's go back to those years, whether pre-Lehman or post-Lehman or let's go forward 10, 20 years into the future. I don't know, you're teaching a class at MIT or you're mentoring a younger person. What are the, I don't know, one or two things that really stuck out to you that maybe you didn't know then that if you could go back to '06 Pilar and tell her? I don't know, something that was just really formative for you.

Pilar Gomez-Bravo:

Yeah. So I was a teaching assistant at MIT.

Rob Almeida:

Okay.

Pilar Gomez-Bravo:

So leaving that aside, if I go forward and I am, I mean I think a lot of it as you grow with experience, it's just taking a step back and really kind of drawing the big picture. The reason why I mention that is because ultimately we build risk. Right?

Rob Almeida:

Yep.

Pilar Gomez-Bravo:

And you do that through idea generation so you need to get those ideas into portfolio, but there's many ways in getting ideas into the portfolio. Right? So I think a lot of it is sort of take a step back and assess. Don't trade for the sake of trading. Don't do something for the sake that you feel like you need to do something, but really take a step back and assess the whole landscape. What I find a lot of the times is that there are little fires everywhere, and it's those little fires everywhere that give you a heads up of risks that you might not be aware of.

Rob Almeida:

Yeah, signals.

Pilar Gomez-Bravo:

Signals, right? And they're not the sort of economic signals that you would sort of see, a model or whatever it is. But with experience, it's like the mosaic theory. You start putting things together.

Rob Almeida:

Pattern recognition.

Pilar Gomez-Bravo:

Pattern recognition, and that's what can help you think about framing how much risk you want to have and what type of risk you want to have in whatever mandate you're managing for whatever client. Right?

Rob Almeida:

Yeah.

Pilar Gomez-Bravo:

And that only comes through experience. The other thing I would sort of say, like I do, is don't be afraid to fail. Because you're not going to be perfect, you're not going to call everything right. So what's important when you fail? It's that when you fail, you have a net below you. As in make sure you protect the portfolios, and that gives you the freedom to get things wrong. Right? Because whether you're an analyst or a portfolio manager, "Hey, you're doing 60% of the time right. You're going to get it right." And not all levers that you're pulling in the portfolios are always going to all be working at the same time. Right? So that diversification, that consciousness of conviction is really important. So what I would teach people is you need to have conviction. Right? With conviction comes action. If you don't have conviction, you need to get enough information to have conviction because then you can't really take smart risk.

Rob Almeida:

Right.

Pilar Gomez-Bravo:

And we get paid to take risk, so what we don't get paid is not to do anything and sit and be inactive. But we get paid to take smart risks, so how do you take smart risk is kind of what I would say. You need to find your own way to then go, whether you're an analyst or portfolio manager, and say, "No, I have conviction on this outcome. I'm willing to have this amount of risk attached to that outcome." And how do you then protect it? Is it through position sizing?

Rob Almeida:

Yeah.

Pilar Gomez-Bravo:

Is it through diversification? Is it through hedging? Right? And you're using a toolkit that allows you to do that.

Rob Almeida:

Yeah. It's knowing all the ranges of outcomes and then managing to that, just like you described.

Pilar Gomez-Bravo:

Exactly.

Rob Almeida:

So maybe jumping off of that. So we're recording this today on June 16th, the Federal Reserve hiked interest rates yesterday to 75-basis points. Not a surprise if your frame of reference is last Friday. It's a very big surprise if your frame of reference is a year ago when the narrative was transitory. Swiss National Bank hiked interest rates 50-basis points this morning. So when you think about pattern recognition, how you've constructed risk, how you view the world today, what are things that keep you awake at night and maybe what are things that excite you and everything in between?

Pilar Gomez-Bravo:

So I always get excited as an active manager by dislocation, because that's kind of where an active manager can come in and sort of identify value. Right? But what scares me is ... well, two things. One is that the current period is one that not many people have lived through before. And that has its own challenges not just because you don't know what macroeconomically is going to happen, but also because the players and the actors in the markets, you don't know how they're going to react either. Right? And so when I think about pattern recognition, what keeps me up at night is these little fires everywhere. It's sort of seeing crypto blow up.

Rob Almeida:

They're everywhere. Right?

Pilar Gomez-Bravo:

It's these ... suddenly kind of you realize that this is not gold basically, or seeing hedge funds that have to close down.

Rob Almeida:

Yeah.

Pilar Gomez-Bravo:

Or seeing stocks that get severely punished for a slight miss in earnings. Right? And central banks that feel like they're losing the narrative. Right? That makes me nervous.

Rob Almeida:

Yeah.

Pilar Gomez-Bravo:

And it makes me nervous not so much because, "Hey, you were a long term investor. I know that the bonds that I own are going to deliver, that they're going to get paid basically." It's sort of managing the risk around it and the uncertainty and making sure that the clients understand your investment process enough to know that they're going to be okay basically.

Rob Almeida:

Yeah.

Pilar Gomez-Bravo:

And so what I see today is a pattern of extreme uncertainty. So what do you do in periods of extreme uncertainty? You diversify effectively. You need to have diversification-

Rob Almeida:

Yeah.

Pilar Gomez-Bravo:

-and you need to sort of then decide, with a very strict process, what catalyst you want to see to dial up or dial down risk or buy a certain name or buy a certain opportunity, and that's kind of what we're doing now. In fact, I was talking to a client this morning actually who said, "Okay. The Fed just did what they did yesterday. What discussions did you have with the fixed income portfolio management team? What did you guys talk about?" Right? And that's the essence, people know that something like that happens and we're getting together and saying, "Okay. What are the expectations that we're going to have?" And it's not just with them, but also with again, equity teams. How are you seeing earnings coming through the next ... with you? And so I think that is kind of what we need to keep in mind.

Pilar Gomez-Bravo:

I'm really worried about liquidity because it's always easy, as a fixed income person that has credit exposure, to be worried about liquidity. And I think people always underestimate the value of liquidity because they say, "Well, pension funds don't need liquidity." Well, I'm sorry. But-

Rob Almeida:

Yes, they do.

Pilar Gomez-Bravo:

-I think they do. And if the stock market drops 30%, I'm sure they'd like to buy the stock market. If you don't have something to sell, you're not going to be able to buy the stock market 30% down. So liquidity worries me. But what worries me the most, and I look at these little fires everywhere, is complacency and its crowded trades.

Rob Almeida:

Right.

Pilar Gomez-Bravo:

And so in a way, whether ... and I know rates a lot of the times with momentum or not, we talk about that. But for me, it's where are the crowded trades and where is the leverage? So it's going back to the 101 of the financial crisis.

Rob Almeida:

Yeah.

Pilar Gomez-Bravo:

It's who owns the risk and how crowded is it, and that's where we need to avoid being there as attractive as it may seem.

Rob Almeida:

Yeah.

Pilar Gomez-Bravo:

It's just have that sort of wherewithal to sort of say, "Okay. Well, I'm still worried about that." And so my worry is capitulation and sort of the dislocations that you see as a result of the rhetoric from central banks and the fact that we've never seen this inflation before in 40 years.

Rob Almeida:

So along those lines of complacency, crowded trades, tell me if this is too simple of a view. When you think back to ... going back to your comment on pattern recognition and past bubbles, you can almost just look at who were Wall Street's favorite clients and find perhaps complacency and excess and overinvestment in bubbles and risk. So in the '90s obviously it was dotcom companies through IPOs, et cetera. We know what happened with TMT stocks. Then it was home loan origination and Americans buying homes that they couldn't afford, et cetera, that manifested into banks. And both those were complex, but I don't want to say singular.

Rob Almeida:

It was in technology, media, and telecom in the '90s. It was in financial leverage in banks in the 2000s. Post GFC, and speaking of complexity, it was financial leverage across non-financial corporations. And that, I think, for the average investor is perhaps less tangible or hard to see. Maybe that drove some of the complacency. So as a portfolio manager in global ag strategies, not that we can get into too specifics about what you're doing, but where do you see the active risk at the aggregate level? Are you going up in credit? Are you going down in credit? Are you less worried about duration because the bond market maybe has derisked that? Are you still worried? Maybe walk us through a little bit of that.

Pilar Gomez-Bravo:

Yeah. I mean I have a privilege in managing global fixed income because I kind of can go anywhere.

Rob Almeida:

Yep.

Pilar Gomez-Bravo:

So that's a privilege that not many have, and I appreciate the latitude that our clients give us in that choice. And so there's two things, so there's the individual opportunities within the asset classes. So the two things that you need to decide when you're managing global fixed income is ... or the three things is how much capital do you want to allocate to the different markets and how much risk do you want to take within those markets. Right? So those are two different decisions that we talk to the team about, and separate to that is how do you think about duration and do you think that we're going to live in a correlated world or uncorrelated world with regards to how rates behave relative to risky assets? Right?

Pilar Gomez-Bravo:

So with those parameters, you kind of come up with a picture over the next 6 to 12 months and long term. The frameworks, the macro frameworks that we evolve. So where we are right now is that we don't feel like you need to be as max underweight duration, certainly as we were at the start of the year where 10-year was at 1.5%. Yeah. So we're now at 3.5%. So we are looking at which markets have already gone down the path of hikes where maybe we could sort of anticipate some stability, I guess.

Rob Almeida:

Some of those risks have been discounted.

Pilar Gomez-Bravo:

Exactly. They've already been discounted where we can start dipping our toes and sort of adding, and there are certain markets globally where we're looking for ... where we are overweight or we're taking more long positions in that, and there's some curves that help more than outright duration positions.

Rob Almeida:

Yeah.

Pilar Gomez-Bravo:

And there are some markets where you want to take the effects risk and some that you don't want to. Right? So we still think, obviously in this context, that it serves you well to have some dollar exposure. Not so much because of valuation, whether it's fair value or not, it's just it's a good hedge basically.

Rob Almeida:

Right.

Pilar Gomez-Bravo:

So if you're worried about uncertainty, as long as you're not completely over your skis again, it's not something bad to have at this point in time. Because either the Fed is going to overdo it and your dollar is going to do better than everybody else or you're going to be in a severe risk off and the dollar is going to do better than everybody else. So that's one context on rates. We are sort of, again, looking for areas where maybe to trim our underweight duration position. But still it's hard not to be underweight because frankly the banks have just started hiking the major developed markets. Right? So normally rule number 101 on investing in duration is that you try to pick the penultimate hike to start being overweight, and we're nowhere near that. So we are playing more with relative value across countries and we're playing more with curves. The risky asset side is more complicated. I think it's harder to find-

Rob Almeida:

I was going to say, how do you balance that?

Pilar Gomez-Bravo:

And so I think there we're really not ready yet to jump. And I think it's a big difference in mentality that through the global financial crisis, we were all taught to buy the dip. And for quite some time now we've been trying to sell the rally, we don't have enough rallies to sell. So we're still in that context of upgrading the quality of the portfolio and the multi-sector portfolio. So what things are we doing? We've obviously been reducing high yield exposure, we still think that's quite expensive in general.

Rob Almeida:

We had Mike Skatrud in here a few weeks ago and he was saying the same thing.

Pilar Gomez-Bravo:

Yeah, and it's highly correlated with equities. And frankly, I have a view that I think that there could be still more downside in general if the Fed continues to be as aggressive as it is.

Rob Almeida:

Yeah.

Pilar Gomez-Bravo:

And so in that context, that area is one we've been taking some risk out or finding more creative ways. And I won't go into the detail of delivering convexity in that market without having to suffer the downside as much.

Rob Almeida:

In convexity, your upside is greater than your downside.

Pilar Gomez-Bravo:

Exactly. The upside is greater than the downside, and we're doing that through some derivatives that we have that give us that much more attractive risk return profile and liquidity within high yield. Right? And then on the other parts of the credit markets as a whole, again we've been reducing some exposure to hard currency emerging markets. It's still high beta.

Rob Almeida:

Yeah.

Pilar Gomez-Bravo:

It still has its own challenges. But we have been finding some value in local EM markets. And within the rest of the credit exposure, we've been trying to upgrade the quality. So buying more munis, buying a little bit more mortgages where we were very underweight. Right? And then hold and sort of see kind of what else the market brings. It's difficult to, again, reduce significantly risk because evaluations on where they are. But frankly we still, and in fact again another client yesterday was asking me, "Well, are you adding risk? Why are you adding risk?" It seems like every time that the yield goes up by 50-basis points or spreads or equities are down, it's like, "Oh, you're adding risk." And no, we're not is the answer. We're still holding back. We're finding more idiosyncratic value to the extent that we can actually execute it, which is another big question.

Rob Almeida:

Right, to your liquidity comment earlier.

Pilar Gomez-Bravo:

Exactly. But to the extent that we find that, then there's a lot more opportunities. And so we're relying a lot more on the analysts to sort of uncover these gems for us, and being able then to manage the top down risk to allow us to uncover these gems. And so whether some munis or in corporates, Euro versus dollar exposures, that we tried to optimize for given kind of our aversion to add a lot of correlated equity risk effectively.

Rob Almeida:

Yeah. So I think the listener is going to view this as a loaded question, but it isn't. So given what you're framing, we've got central bank tightening clearly into economic slow down and we can argue and debate the magnitude of it. Recession, soft landing, hard landing, what have you. But either way, growth is slowing and central banks are tightening monetary policy, which is different than anything we've experienced in our lifetime. Right?

Rob Almeida:

When you think about the value proposition of someone like yourself, so really I'm talking about active versus passive, when there's an abundance of something yield, return, ROI, et cetera, then the scarcity value or lack of value for security selection falls. And that's what we've had for the last 12, 13 years. What you're describing is an environment of the opposite, where return gets harder to source, harder to come by. You mentioned earlier, "Buy the dip," and that was a central bank buy the dip dynamic and all that's reversing. So doesn't this set the stage, even though it's going to be a lower return world or should be a lower return, doesn't this set the stage up for quality active management? Particularly in fixed income.

Pilar Gomez-Bravo:

Well, definitely. I mean, that's why my eyes glitter like gold. And I'll give you another example. So one of the things that we talk to clients about is when should you pay for active? What does active bring you? And I remember talking to a consultant who told me, "When I want to award money to a certain asset class, the first thing I look at is who the managers are in that asset class and I look at their performance in different volatility environments. Because if they're not generating alpha in any particular environment of volatility, then they're not really active. Right?"

Rob Almeida:

Yeah.

Pilar Gomez-Bravo:

And so I thought, "Wow, that's quite an interesting thing." That if they don't see that differentiation of active managers in periods of volatility, then they may just go passive, which is such a shame. Right? And so one of the things that we keep stressing to clients is the value of active is shown through the dynamism of exposures and the protecting portfolios for the downside in periods like this to give you the upside. Right? So you want to ... as an active manager, the value is not, "Hey, you're going to be more protected," which you are. Because that research organization, the soldiers on the field, are not just looking for upside opportunities. They're protecting you from capital loss. Right?

Rob Almeida:

Right.

Pilar Gomez-Bravo:

This is kind of where we are now.

Rob Almeida:

Permanent capital loss.

Pilar Gomez-Bravo:

Exactly. And so you want to have that sort of defense line, but on top of that the beauty of it is that you are agile enough to take advantage of those opportunities so that 12 months ahead, your access returns are much higher. Right? And so we show our clients slides in our pitch books that show the performance of global fixed income strategies that I manage in different periods of VIX volatility.

Rob Almeida:

Yeah.

Pilar Gomez-Bravo:

And it's eye-opening. It's like, "Okay. I see the value of active. I see that draw down risk." Because we show them sharp ratios and we show them what we're good at is sort of making sure that you're getting a consistent experience throughout a cycle. Right?

Rob Almeida:

Yeah.

Pilar Gomez-Bravo:

And we're going to get you consistent out performance. We're not going to shoot the lights off, but we're not going to drop the ball either. But we're doing that consistently through time, but also being able to take advantage of these periods of dislocations that will protect your draw down risk for 12 months forward still or three years later or whatever period is obviously. Longer term, you're going to get the benefit of active. Right? And that's very powerful, and I find that now it resonates more because people realize that it's not a beta game anymore.

Rob Almeida:

Right.

Pilar Gomez-Bravo:

And you need that insight to be able to provide value from a bottoms up perspective and that security selection matters. Right? And that is striking and resonates a lot with fixed income clients, especially in multi-sector clients, because they're not used to having alpha from security selection.

Rob Almeida:

Right.

Pilar Gomez-Bravo:

They're used to having alpha from beta.

Rob Almeida:

Trading beta, yeah.

Pilar Gomez-Bravo:

And that now is a powerful message to be able to go out to our clients with.

Rob Almeida:

Yeah. Well, and bringing it back full circle, talking about your early year learning experiences with providing solutions and it just strikes me looking out over the next five to 10 years, that's going to be the demand. Right? It's solutions in a return of not just avoidance of permanent capital loss, which is first and foremost, but then also providing above average return against some other costless index.

Pilar Gomez-Bravo:

Yeah, exactly. You just have to sort of ... you understand your client. Right? And it's like, "Well, what type of return are you seeking?"

Rob Almeida:

Right. What do need?

Pilar Gomez-Bravo:

What do you need and how much risk are you allowing me to take to give you that? Right? And the two have to go hand in hand because sometimes you just have unreasonable expectations of what the market will give you based on our active process. Right?

Rob Almeida:

Yeah.

Pilar Gomez-Bravo:

And there's things that we are not. Right? We're not short term tactical traders. Right?

Rob Almeida:

Yeah.

Pilar Gomez-Bravo:

And so that's not what we're going to give you. And so in that context, you have an honest discussion with your clients. It's like, "Okay. Well what is it that you're looking for? What solutions can we give you that will give you?" What I do, Rob, at the end of the day, and I say this all the time, is I deliver the collective wisdom of our platform in a nice, tight, risk-managed package. And so I need to understand where those boundaries are and what you want to use as a benchmark if you want to benchmark it all. But that gives me ability for me to deliver the value of the organization to you-

Rob Almeida:

Yeah, yeah.

Pilar Gomez-Bravo:

-within our sort of active long term framework. And that discussion is hugely satisfying, it's hugely enriching because that's kind of what we're here for. Right?

Rob Almeida:

Yeah, purpose.

Pilar Gomez-Bravo:

Yeah.

Rob Almeida:

Right. So I've held you here for a long time. Thank you. But I cannot let you go without talking about ESG. So we had Mahesh in here recently who you know and work with very well, talk a little bit about high level because we've got a mixed audience, diverse audience base. Everyone thinks about ESG a little bit differently, maybe level set for us. Talk about the importance of it, why it matters from your view.

Pilar Gomez-Bravo:

Yeah. I mean, huge topic. I mean, I go back again to basics. There is no single path to the truth, but there is one true path for us as active investors. And it's simple, we do our own homework. I think it's irrational to expect somebody who looks at management teams or credit quality of issuers doing their homework on a balance sheet, on a management team, on sort of a country macroeconomic and not expect them to do the same on these other hugely critical sustainability factors. Right? So why would we ever, ever consider outsourcing that? We don't outsource any other parts of our homework. So we're an active manager, we do our own homework, and part of that homework is being able to assess the materiality of these factors for whatever type of investment we're doing. Whether it's equities or fixed income, but obviously in fixed income you have additional aspects to consider like duration and maturity profiles. What is material? Are you getting paid for those risks? And can you find ... again, I think what what I struggle with is the context of ESG is only a risk.

Rob Almeida:

Right.

Pilar Gomez-Bravo:

Sure, it is a risk. Right? But what about the opportunity? I mean, the companies ... we thrive in picking BBs that are going to be upgraded to BBB, right? That's what we need to do as active investors. It's not just understanding the ESG risk, the sustainability risks of the investments that we've made, but also the potential. That's the value of active, it's finding the potential of a company or an issue or a country that is making strong strides in changing the E, the S, or the G that is material to them as an investment proposition. Right? And so we do our own homework and we will always, always fight for clients to allow us to do our own homework.

Pilar Gomez-Bravo:

Now it doesn't mean that clients don't have different paths to the truth, but I think we have a very clearly identified path that is an active path that is true to who we are as MFS. We don't outsource. We do our own homework. We do our own homework, we do it diligently. We talk across the board and we factor and assess the impact of ESG like we do some of these other factors, and sometimes it'll weigh a lot more than the financial metric and sometimes it won't. But we do our own homework, and that's who we are as active managers. So that is our path to the truth.

Pilar Gomez-Bravo:

ESG will always be there. It always has been there. It just doesn't have to be called ESG. Right?

Rob Almeida:

Right.

Pilar Gomez-Bravo:

And I think I'll leave you, and this has got me into trouble before. So you were talking about cycles and kind of how you see 2001 and how you can identify through pattern recognition what the next bubble is going to be. Right? So at Lehman Brothers, I found a way to figure out with hindsight what the next bubble was going to be, and that was by determining where the associate intake was going. So the associates were rotating around and there were periods, like in '97, where everybody wanted to do EM and then Russia blows up.

Rob Almeida:

Right.

Pilar Gomez-Bravo:

And then in 2000, all the associates wanted to do Telco, equities Telco, and then boom. And then in 2004, 2005 structure credit was the best thing ever. All of the associates wanted to go there, and guess where all the associates want to go now?

Rob Almeida:

Right, right, right. So it is like an arb.

Pilar Gomez-Bravo:

Exactly. And so of course ... yeah, they all want to do ESG and sustainability, which is very logical and stuff like that.

Rob Almeida:

For the right reasons hopefully.

Pilar Gomez-Bravo:

For the right reasons. But again, you need to take a step back and sort of assess what are the bubble components of that and what are the true nature of what really you're trying to achieve with a sustainable investment. Right?

Rob Almeida:

Well, it goes back to your comment earlier about complacency and crowded.

Pilar Gomez-Bravo:

Exactly. So you just need to understand the importance of sustainability, which is hugely critical, and whether you're getting paid for that risk or you find something that is a potential opportunity set.

Rob Almeida:

Yeah.

Pilar Gomez-Bravo:

Because ultimately it's very easy, for example, in climate to decarbonize portfolios. It's not so easy to decarbonize the world.

Rob Almeida:

Right.

Pilar Gomez-Bravo:

And I know if a company who succumbed to the ESG pressure and sold their business, which was polluting, to an Indian private owner. That doesn't help.

Rob Almeida:

Yeah, you're not decarbonizing the real economy at that point. You're just decarbonizing the portfolio.

Pilar Gomez-Bravo:

Yeah, but their ESG scores went up.

Rob Almeida:

Sure.

Pilar Gomez-Bravo:

Yeah. And shareholders, I'm sure some of them were very happy. That's not what we aim to achieve.

Rob Almeida:

Right.

Pilar Gomez-Bravo:

So it'll be difficult, but I think we're definitely convinced that we're doing the right thing for our clients in how we incorporate ESG always consistently into our process, both the risk and the opportunities, rather than getting swayed by names and exclusion lists and data providers and optics. At MFS, we do our own homework and we're always going to do our own homework and it's going to incorporate sustainability always because that's what we do as long-term active investors.

Rob Almeida:

Yeah. Well that's why I try to emphasize with clients, and with our own distribution unit too as we try to market your portfolio and others, and we talk about duration and the Fed. It's global research platform, it's people working together, doing their own homework to come up with the right outcomes for clients. That's what's important. Pilar, thank you so much. I really enjoyed this.

Pilar Gomez-Bravo:

Thank you so much, Rob, for having me.

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