Mitchell Garfin, Co-Head of Leveraged Finance, BlackRock

His team navigates dispersion with recent focus on considering the implication of tariffs on different sectors. His team positioned for tariff-related volatility by reducing exposure to sectors like autos and consumer products. perceived as most exposed to trade risk policy. Conversely, Mitch saw better In tech and insurance sectors. Next, we discuss advancements in trading technology and the implications for liquidity. Here he argues that the And the growth in portfolio trade.

Is having a profound impact on risk transfer, reducing frictions and transaction costs. In the process, he should tools like ETFs and the CDX product to manage exposures. I hope you enjoy this episode of

But when I first started my career, I was in an account management role. It was more like an investment banking opportunity where we were preparing pitch books and trying to help the senior people raise money for the organization. It seems like we did a reasonably good job knowing that we were relatively small in 97 and where we are today with north of$11 trillion in total assets.

So that worked out reasonably well. In 2000, I transitioned to a research role focused on energy, utilities, basic materials, paper and packaging on the investment grade desk. And in 2005, I transitioned to more of a portfolio management role, both in investment grade to start and then later transitioning to high yield in 2007. And that as you might imagine, the transition of the energy crisis happened or the global financial crisis happened.

on some of the basket trading and algorithmic trading. And so I'd love to make that at least some part of our conversation. But really what I want to do is explore just risk with you and just how you think about finding opportunity and of course being careful of all the minefields that

are out there for us as investors. Maybe just to set the stage, we ended twenty twenty four with what I would just call maybe not the tightest spreads on record, but pretty darn tight. And, you know, the other thing was that credit volatility was extremely low. These spreads were not just low, but they were incredibly range bound.

for the bulk of 2024. And so maybe just start with the outlook as you guys saw it at the beginning of the year. Of course, a tremendous amount has happened in the last five months and even the last two days. But what was the outlook coming out of 2024 in terms of expectations from a corporate default standpoint and how you guys were positioned? And then we can run through the incredible vol of 2025.

And I think that goes back to really thinking about the overall construction of the high yield market. Not a lot of people focus on it, but there's been a tremendous evolution over time in terms of the overall credit quality of the high-yield market. So you go back 10 or 15 years ago, double B's were some 35% of the market. Today it's about 50%. Triple C's were 20% of the market. Today it's about 12%.

And so the point I'm making here is credit quality has significantly improved in the current environment relative to where we were historically. And I think that's supportive of tighter spreads, lower all-in yields for the asset class. A lot of these small and medium-sized leverage buyouts, they were financing themselves in the leveraged loan market or the private credit market.

And so more of what we had seen come to the high yield market is higher quality type paper, which I th ultimately think has been very supportive of the tight spreads that we saw at the end of 2024 and the beginning part of 2025. So really was a continuation in our view. The risk profile of our funds continued to have betas.

Right around one, slightly north of one, we can talk a little bit more of that as we get into the overall portfolio construction. For us, it was much more of a focus on where and how to allocate risk capital. Right. So across quality buckets, across the different industries where we believe fundamentals were more resilient, sectors that were going to be less impacted by potential tariffs.

But there's not really a lot of attention paid to changes in the VIX that are a function of changes in the composition of the S P. Which I think's interesting, right? Because the banks were dominant in oh five, oh six. Now it's extremely tech heavy. So those have a different ball profile. And so what you just talked about in terms of the upgrade of the credit quality.

I found really interesting and I'd love just to explore it with you a little bit more, this idea that it's a different index now than maybe 10 or 20 years ago. Can you just talk about maybe how that is materialized, what that's a function of. And then just as someone like myself who's just gonna go up on Bloomberg and hit up a time series of maybe CDX. IG or C D X H Y, how do I need to think about the composition of the index as changing?

For a private equity sponsor or an issuer that has recently done a transaction, if they're expecting to go out and sell an asset and improve their credit fundamentals, d-lever the balance sheet. They can materially alter the composition of their balance sheet by issuing leverage loans, given that you can reprice after a six month period of self-call protection.

So you have the flexibility to reprice the debt that you just issued effectively, whereas that's not the case in the high yield market. You also had many of these lower quality issuers move to the private credit market. So as you know, the demand for higher yields is robust and we've seen that play out in the private credit markets where a tremendous amount of capital has flowed to that space. And as issuers were looking to get deals done quickly.

with relatively few investors, they access the private credit markets to facilitate that transaction. So it was fairly simple. It happened over a long period of time, called ten to fifteen years, but really each and every year we saw more and more of that transition. And ultimately, that has led to a construction within high yield that is of better credit quality. The other part to the story is.

At different points in time over the last 15 years, and there's been more than a few periods of volatility and stress in financial markets. We've seen downgrades from the investment grade market to the high yield market. And that also increased the overall size of the double B market relative to lower quality cohorts.

base level of interest rates on record, right? Basically a zero percent policy rate. And I mean, I think tenure yields got down to fifty, seventy basis points. You're really outrageously low levels. And throughout 2020 and maybe into 2021 and perhaps even the next year as well, there was a lot of refinancing that occurred in the high yield market. And so The story was, well, there's still risk, but they've been able to term out this debt at very attractive levels.

Where do those trades stand? If you're the typical corporate that took advantage of that low yield environment that existed for a period of time, how long was that debt? And there's always the talk of the maturity wall. Probably too much talk of it. But I'd love to just kind of get an understanding of the debt that was refinanced in that period. What does that look like now? Is that coming due or what are the refi prices that corporates face at this point?

Today it's 35-40 percent of the market. And that really picked up speed during the COVID environment. Issuers were able to access financings at obviously lower all-in yields relative to an unsecured deal that they could have done.

And what we've seen over the last few years is many of those higher coupon type deals that got done, they have been refinanced as the seven non-call three or five non-call two deals that were done in COVID ultimately became callable and it was very accretive for many of these issuers to access the market and refinance, even though all in yield

Seemingly were higher than where they were, you know, five or ten years ago. These were still relatively attractive levels for many of these companies that were looking to refinance. You have to remember. The entire capital structure wasn't refinanced during COVID. Maybe you had one or two bond deals, a five hundred million dollar or billion dollar bond deal out of a five billion or ten billion dollar capital structure. So call it ten percent of initial capital structure.

To the extent they have a higher cost of capital for that sliver of the balance sheet doesn't necessarily have a massive impact on the overall credit quality or income statement of an issuer. So the takeaway here is A lot of what got done during that period were at fairly high coupons that has since been refinanced. If I look at near-term maturities, so thinking about the balance of 25 and the entirety of 26.

you're looking at relatively small amounts of debt that ultimately need to get refinanced, call it seventy-five billion or so for the balance of this year, put in perspective an active month for high yield supply. is thirty, thirty five billion. Now we haven't necessarily seen those levels, although it's picking up now.

over the last few months for the obvious reasons given the volatility. But, you know, I suspect over the next few months, to the extent we do have stability, we'll see a lot more of that get done later this year. Two thousand twenty six, the number goes up to 175 to 200 billion. may sound like a large number. I suspect that will be sub 100 billion by the time we turn the calendar 2026. And so I'm not too concerned at all about companies access to the capital markets.

We've seen periods where there's been stress where the markets shut down or closed for a bit, but as soon as things pick back up, you tend to see some of the higher quality issuers come back to market and that paves the way for some of the lower quality deals to get

even as you've migrated towards an overall higher credit quality. Just I'd love to learn a little bit about how you and your team think about navigating something where there's really not a lot of homogeneity. There's a lot of dispersion.

those sectors that you thought had a particular almost negative beta or positive beta, I guess the best word to say around tariff uncertainty, i.e., they'd be hurt by tariff uncertainty. You talked about autos consumer how did that manifest itself during the period where tariff uncertainty was at its highest and then I always call it the climb down day of April ninth when Trump basically said, you know, we're gonna

delay these things for 90 days. Market obviously ripped on that. Love to just understand how different sectors have behaved throughout this period and then how you guys have navigated from a portfolio standpoint.

And what we've observed over time is sectors like autos, retail, chemicals, building products, they tend to have more volatile cash flows. And that happened to coincide with a view around tariffs that these are the sectors I'm leaving out a few, but these are primarily the sectors that are going to be most impacted in a tariff related environment.

And so I think the portfolio was well set up going into April second as a result of our core focus on stable cash flow and the stability of that cash flow. throughout a period. With the tariff related news at the beginning of April, that initially led to a risk off period with very little dispersion across the board.

To some extent the tariff related sectors underperformed, but everything was ripped down, similar to what you saw across risk assets, whether it's high yield, investment grade, loans, equities, et cetera. And then over time we start to see much more in the way of differentiation, of dispersion, people realizing these are the sectors and issuers that are going to be more impacted.

versus the others that are going to be less impacted. So that second week is really where we really took advantage of the opportunity and the relative value.

as you said, you know, there was very little dispersion. I'm just wondering, just without tariffs, when you don't have the overhang of something that's so global and something that is implemented in a random fashion. From a portfolio construction standpoint, are there sectors that tend to be good in tandem with each other where there's a kind of a zigging and zagging in the S P as an example?

Tech and healthcare can go through periods of, this is on the equity side, can go through periods of almost negative correlation, which again is a great thing if you own both sectors at once. Does it work that way in credit where, you know, you kind of look at sectors and say, okay, these two are going to give me a little bit more balance because they don't exactly move together?

the correlation of our beta to return, the correlation of industry overweights and underweights to each other, which I think is exactly what you're talking about. And we have found, at least for some of the analysis that we've done more recently, There really is very little correlation between, let's say, technology, aerospace and defense, autos, retail, chemicals to one another.

Right now though some of those have a higher correlation to one another, but the overweights that we have to a technology or to aerospace and defense or two insurance brokers have generally been fairly low correlated. with the underweights that we have to retail, chemical, consumer oriented. And I think that makes sense just given the more simplicity of some of those sectors that were underweight versus the strong stable cash flow generators.

like software companies, like insurance brokers, like aerospace and defense companies. So it definitely is the case, maybe not to the same extent or magnitude that you're highlighting in the equity markets. But it's certainly the case within within the high yield market as well. And then just going back to your earlier point, when there are unique challenges like tariffs, and there's been many over the last ten, fifteen, twenty years, where we benefit is

We try to underwrite through a cycle. These are longer term views that we have in place that are not just one week, one month, one quarter. We tend to have overweights. at the sectoral level or at the issuer level that are longer term in nature, that are multiple quarters, three, four, six quarters, if not longer. The composition of risk that exists within those sectors is going to change much more rapidly.

And that's a function of of relative value. But we're trying to look through the near-term periods of volatility where markets are up, markets are down, and we think over time.

that are credit underwriting to certain sectors and to certain issuers will ultimately lead to outperformance. And this going back to your question around correlation, around The idea that we're an all-weather strategy, that our active returns and our returns relative to peers as compared to the total return of the high yield market is very lowly correlated.

And then this last recent period, right, uh maybe short lived. Trump kinda started on April second and perhaps put it to bed, at least temporarily, but the protracted part of it on April ninth.

So those are all very different. I would love to learn how you think about the base level of interest rates, right? So if credit and high yield credit is a spread product, you're spreading it to treasuries.

So, you know, we go back to twenty twenty-two and we have a definitive Fed tightening cycle. The back end is rising as well. We don't have a tightening cycle now. In fact, most of the discussion is around when the Fed's gonna start easing, but we do have the back end of the bond market getting a lot of analysis.

I would say most of it not really favorable. Folks are worried, as I said earlier about debt sustainability. How does that make its way into the process of underwriting? You know, you're spreading to an asset itself that feels riskier than it used to. How does that impact your thinking?

When you're talking about underwriting credit, we're thinking about the volatility of cash flows and what we're getting paid for those cash flows. And so I think it's important to understand what's going on at the macro level and how ultimately that's going to impact the rate market. But is there a sufficient amount of spread risk? liquidity premium and spread that we're getting above treasuries to compensate us for those risks.

And obviously the concern around rates today is real. There's uncertainty there. There's uncertainty for the forward path of inflation and how sticky or not that may be, and that obviously is going to have implications for rates in general and ultimately the path that the Fed pursues.

We need to look past that, right? We need to be cognizant of it, but we need to look past it and be thoughtful about the types of risks that we're underwriting in high yield that are more focused around credit risk. default risk, liquidity risk, as opposed to just interest rate risk. And so thinking about spreads, thinking about all in yields, there's a lot of different things going on there that are part of the analysis.

of the benchmark, I believe is down a fair amount. I'd just love to learn, number one, maybe give us a little bit of a how that happens, what's going on underneath the surface. And then it seems to me that your product would expose you less to the vagaries of the back end of the yield curve, just given that this has occurred.

We've really seen a shortening in the type of issuance that has gotten done in the high yield market. Now it's mostly seven non-call three and potentially five non-call two. So what's coming to market. has a significantly shorter maturity profile than what was the case ten or fifteen years ago. The overall construction of the market today has a lot more in the way of shorter dated maturities as things have rolled down the curve.

we're going to see that extend at some point down the road, but not significantly so, right? As near term maturities, as bonds become more callable, which there's a healthy amount out there right now. I would expect issuers and private equity sponsors to look to the high yield market to to push out some of those maturities. Like I mentioned earlier, not much in the way of near-term 2025 or 2026 maturities.

But many of the 2027 and in some cases the 2028 paper that's outstanding is currently callable. And I would expect when it's economic to do so, companies will be fairly proactive in looking to refinance that. The high yield market, however, and this is similar to what we were talking about a moment ago, there's just not a tremendous amount of interest rate risk in the high yield market, especially as compared to the investment grade market or other poor fixed income sector.

Double B's for sure have more interest rate risk and sensitivity to rates as compared to lower quality credits, single B's or triple C's. As you go down the quality spectrum, there's very little in the way of duration risk associated with much of the triple C market. Right. And as you might imagine, a bomb that's trading at 10, 15, 20 percent that's more stressed or distressed, movements in the rate market is going to have very little, if any, impact.

on the fundamentals or the pricing of that low quality stressed issuer. versus a high quality credit that trades at five percent, five and a half percent, as you see volatility in the rate market or Fed activity raising rates or cutting rates, that's going to have a bit more sensitivity.

liquidity shortfall that happened in a short period of time. But, you know, you have a big mismatch of buyers and sellers and the market clearing price is gonna move a lot. You'll recall, and I'm sure you guys had done a ton of work into the election. You know, there was A lot of movement and implied vols ahead of the election, especially in rates, you know, this view that

Trump presidency is going to be maybe pro-growth, but also higher interest rates. And so there was a lot of handicapping there. And then this last period, you know, VIX skyrocketed, spreads widened a lot. They've obviously come back. And you know, that's some version of anticipating something.

And then the last one is, and this is where I would love just to get your thoughts, is the realization of whether it's realized volatility and S P or in your market, realized defaults, which

still I think are on the pretty darn low side. They were low last year. It feels like they're gonna unless something changes dramatically, I don't know what that high yield default rate is going to be, but Talk to us about the environment for defaults and then what would it take for that default rate to materially move higher from your standpoint?

We're seeing fewer companies ultimately defaulting and filing for bankruptcy. What we're seeing more of are distress exchanges and liability management exercises. So just to give you an example. If an issuer has a near-term maturity, well at an early 2026 maturity, and the bond is trading at 60 cents in the dollar, it's highly unlikely that that issuer is going to pay you back par in six months.

So what will happen is the issuer, the sponsor, restructuring advisor, and the investors will get together and talk about a potential solution. And what we have seen, and they come in all different sizes, shapes, and colors, but the reality is effectively what the issuer is doing is saying, I'm not going to pay you par, but I'll take you out of the existing unsecured bonds.

I'll give you the equivalent of 70 cents on the dollar, but I'll swap you into a secured bond that has a new five year maturity. Trading at 60 cents on the dollar, but you had a par claim. They're giving you 70 cents, and now you have a 70 cent claim. Your 70 cents becomes par for your new secured instrument.

What's happening here is the issuer is buying time and optionality for the macro backdrop, for fundamentals, for cyclicals to change, to grow their way out of their over-levered balance sheet and over-levered capital structure. This is structurally different than what took place years ago. Right? So, in the example that I just gave, let's say there was a$500 million deal out of a$5 billion capital structure, so 10% of their capital structure.

And that's distress exchange or liability management exercise. Just that one bond is considered to be a default. The rest of the capital structure, the other$4.5 billion, is not. Previously, if a company could not pay their principal back on a bond, the capital structure defaulted. All$5 billion of debt were restructured. And that$5 billion would go into the default calculator. So it's a fundamental shift and change in how the market has

both treated lower quality and stress and distressed credit, but also how the default rate is calculated. I think it's artificially pressed down as a result of these distressed exchanges, which I think is an appropriate action from the issuer's perspective. It may not be what we're looking to accomplish in some of these transactions. It may be the best possible outcome today, but it definitely is a shift in investor behavior or issuer behavior, I should say.

On the credit side. Again, as an outsider, I would always read, and I kind of bought into it, that even one issuer had so many different types of instruments out there, whereas IBM has one stock. all the indentures were different and all these different nuances in language would make it really difficult to do anything like what seems to have made its way into the market in terms of electronic trading. Give us a little overview of

how those developments took place, was there some acceleration in the pace of change? And then again, as a super tanker managing quite a pool of assets. It seems to me that these developments in how risk is transferred are critical to folks like you in just trying to manage risk and modify what's in the portfolio.

Really competitive in some cases, best execution with very little in the way of bid ass spread being paid. So if I think back over the last month. with the volatility that we saw and the risk-off sentiment, a lot of model-based or momentum type investors, they were quick to sell high yield and come out of the market.

And so we as a large player saw our fair share of outflows. We've since seen much of that come back. But the way we dealt with some of those outflows were through the use of portfolio tree. And even on the days where there was the most stress and most pressure in high yield bonds, we were out there selling three or four hundred million of risk in the form of a portfolio trade with one or two counterparties. getting done fairly close to mid market when transacting.

The ease of execution is phenomenal. The ability to transfer risk quite timely. We can get that done. We can put that list out and within a half an hour or an hour move three to four hundred million of risk. The alternative to that. is having our our traders sort of going hand to hand combat and selling a million of this bond, five hundred thousand of that bond, one and a half million of another bond.

And that's time consuming. And ultimately your counterparties see that you're a seller of risk, right? They don't know how much. They don't know where it's going to end, but they're going to ultimately at some point factor that into their pricing as they show a TL. Here, it's relatively seamless, it's massively competitive, and results in tremendous execution.

So we've been a big believer in it. We've increasingly utilized it as we have inflows or outflows into the portfolio, or if we're looking to significantly transition the portfolio from a risk profile standpoint. Right, if we're trying to increase double B's and sell lower quality credit, we can do hand-to-hand combat or we can engage in a portfolio trade where we can get the majority of what we're trying to accomplish done in the half an hour or an hour period of time.

The other thing that is extremely relevant and we were at the forefront of as well is the use of liquid products. So the CDX index, ETFs, you mentioned, HYG, and others. as well as total return swaps. We are active users of these tools. These are our liquid products, traditionally thought as beta products. They all trade at premiums or discounts to their intrinsic value.

And we try to generate alpha through the use of these products in our portfolio. So if the ETF is trading at a discount or the CDX is trading at a discount, we're going to look to buy it. And if another product is trading at a premium, we're going to look to sell it.

Right, we like to have these tools in the portfolio as a liquidity tool. So just like I said, we engage in portfolio trading when we saw some outflows, we also use some of these liquid tools to quickly access the market, sell CDX or sell the ETF. with bid Spreads that are a penny or two. So really competitive execution during periods of stress or volatility. I would say as you think about our portfolio construction, our management style, engaging in these products and these tools.

That's central to how we allocate and manage our overall.

There are these almost mechanical index-like products that exist that didn't exist earlier. What sounds to me, and again, I think there's a corollary here to the equity space where there's just New entrants and new product. that are ramping up trading volumes and probably reducing frictions in the process. What's the ecosystem look like in terms of your ability to lay off risk or find new sources of how you're trying to source risk relative to where it was a decade ago.

So the ecosystem is that much bigger. You alluded to some optionality that has been created in some of these products. That is very much the case in the ETF world as well as the CDX world, where there are options on many of these products that allows investors to customize outcomes and trades to those outcomes. And so I think the evolution, much like the high yield market has changed over time, so have financial tools and instruments to take advantage of these changes in the industry.

And I guess my question is gonna be what keeps you up at night in that realm of the things that you're kind of worried about from a tail risk standpoint, obviously a credit investor, you're only getting back a hundred. You're clipping a coupon along the way. So you're sort of short of put in the Merton model framework. And so you're short vol. What are those sources of vol or uncertainty that you're wrestling with and on the lookout for?

get implemented or agreed upon and ultimately implemented and know that they are longer term in nature. So we don't have some of these near term hiccups like we've recently experienced. I think for businesses, for consumers, for investors.

to have confidence, we need to see that backdrop, that overhang, maybe not get completely resolved, but we need to be significantly further along in terms of the path forward. It's hard to imagine companies, businesses engaging in significant amounts of cap action.

when they don't have a clear understanding of what the world is going to look like three months, six months, twelve months at. So having more clarity around that is going to be a core part of our focus. Another part, and this was Alluded to in some of our conversation, but the Fed just making sure that monetary policy maintains the independence.

that we've witnessed for so long and making sure that they continue to have credibility, that we feel comfortable in what that forward looking view is, and that's going to be an independent, unbiased view, I think is really important to financial markets, not just for fixed income markets or high yield, but certainly for the equity markets as well.

high treasury rates plus some spread got you to a comfortable all in yield. And he was really making the point that the foreign buyer base, he mentioned Korea a couple times, was a big constituency in the credit market. And so I just was curious if you could reflect on the evolution of the buyer base. What does that look like? Are these folks that entities that'll kind of stick it out through a cycle or?

Are these actively managed traders that really think more tactically that you've got to convince to stay put, or are they more long term in nature?

The overwhelming majority of investors today are longer term in nature. We've seen more and more insurance companies get invested in high yields, focusing on the higher quality part of the market. A lot of private banks have increased their allocation over the better part of ten or fifteen years. It's been much stickier in allocation to high yield.

than what we witnessed 15 or 20 years ago. And I think that's a function of what I was describing earlier as the evolution of high yield and the composition of risk has changed so significantly, I think you're starting to see more of an appreciation for that.

Right. So a less volatile asset class than what was the case twenty five or thirty years ago when it was more of the junk bond high yield market, if you will. So greater stability in our market has resulted in more and more investors, pension funds, insurance companies. I'll call the private bank investor as more institutional retail. This has become an increasingly core part of their portfolio. You do tend to see the private banks be a little bit more active, maybe once a year.

once every other year modifying your allocation, but it feels much stickier than it did historically. The other point is there's a tremendous amount of capital, multi-asset type capital that we have here at BlackRock, but also that exists across other mutual fund complex and other asset managers.

And we are seeing more and more of those investors thinking about the asset class and allocating to the asset class, particularly during times of stress or volatility. So we think about what we saw a month ago. Yes, there was outflows. Yes, there was model-based pressure. We saw insurance companies buying double B's at yields 7 or 7.5%. We saw a few retention funds allocating more capital to the asset class.

some on balance sheet corporate cash investors. Some gave us money. Some were really considering allocating more capital to the asset class. And a lot of these multi-asset investors saw that the two hundred basis points of spread widening all in yields, you know, eight and a half percent, and viewed that as quite attractive relative to other parts of the market. One of the things that we observed during that period of time was

A real cheapening in high yield relative to investment grade. So we saw investors focus on that, in particular the double B part of the market relative to triple B. You look back on a three and five year basis, we were trading on the eighty fifth to ninetieth percentile over time for high yield versus investment grade or double B's versus triple B. So I think that was

a pretty interesting time that if you did have a longer term view allocating to the asset class was something that really worked out in the short term, but you're also going to benefit from the next six, twelve, eighteen months of relatively healthy all in yields. And that's I think one of the interesting parts as I look forward here.

An interesting stat. We're just inside of eight percent today, maybe closer to seven and a half. But one of the things that we've observed over the last twenty five years, there's been three hundred instances on a weekly basis. Where all in yields have been north of 8%. 85% of the time, that results in a forward 12-month return that is positive. with the median return being 14%. A similar stat is yields north of 7%, the starting point, there's been 600 or so instances where that's been the case.

The forward 12 month return, again, roughly 85% of the time is positive with the median return 10.5% or 11%.

So the point here is that all in yields carry income generation in the high yield asset class is really the story. Yes, there'll be periods of spread winding and periods of spread tightening, but if you can weather the storm And you can think 12 or 18 months out and you can hold and maintain your investment, I do believe that you'll see relatively compelling high single digits, if not low double digit type returns in the asset class.

One thing that we didn't talk about that maybe I'll throw in here is we are, and you alluded to it, we are much more micro-oriented. We are generally focused on our fundamental view at the sectoral level, the bottoms up analysis at the issuer level.

That's going to generate the majority of our alpha over time. And so you think about in any given year, about two-thirds throughout a cycle, two-thirds of our alpha generation is coming from that signal named credit underwrite and that bottoms up analysis. There are many other alpha streams as well. One would be our active beta positioning. So are we risk on or risk off relative to a benchmark?

our asset class relative value and most of the portfolios that we manage, which traditionally invested in high yield, but we'll understand the pricing of risk in our market relative to the investment grade market, relative to the leveraged loan market. One, to give us greater conviction in our view, and two, if there is an opportunity to look to the low market or look to the investment grade market for a small part of the portfolio, we may take advantage of that.

Another alpha tree would be industry relative value. We alluded to a couple of times, overweighting certain sectors and underweighting other sectors. positioning across credit quality, the current environment, really end of two thousand twenty four into this year, we were underway Del Bs focused on relative value, weren't seeing competitive or really attractive spreads or yields in that cohort of the market and favored the single B and the high quality part of the triple C market.

And then ultimately security selection. So not just at the issuer level, but as you alluded to, a difference between the bond market and the equity market, there's one stock. there are multiple layers of a capital structure, can be secured, unsecured. There are different maturities that exist and being thoughtful as to how and when we deploy capital at the front end of the curve.

or the back end of the curve to really maximize beta, maximize our spread duration in an issuer is critical to how we think about the market and how we ultimately construct portfolios. The final point I'll make here is that all of these different alpha streams They are very much uncorrelated with one another. And that's intentionally so. It's both intentional and as we look backwards.

to test it to see how we've done the correlations over a five year period of time on a weekly basis count is very much uncorrelated. And so ultimately that allows us to construct portfolios that are not market directional, that allows us to be really all weather and generate substantial active returns despite the market environment.

at a macro level, we generally don't take significant macro risk, right? As I alluded to earlier, the interest rate sensitivity as a function of the overall market, but more importantly as to what we do and how we manage risk. It's fairly narrow versus the benchmark. We're not looking to take significant macro risk. We're looking to take credit risk, issuer risk, sector risk, liquidity risk, and hopefully minimize default.