Fiduciary's Andersen: Attractive Time for US High Yield (Audio)

West Texas Intermediate down three point one percent, now dropping a dollar thirty three forty one forty four on w t I Gold up six sixty the ounce the thirteen forty eight to gain there of five tenths of one percent. The ten year up twelve thirty seconds, the yield one point five percent. Equities lower across the board has P five hundred index falling seven to seventy three, a dropped there of four tenths of one percent down, Industrials down fifty two, a drop of three tenths of one percent.

Nasdak is down twenty two, a drop of point five percent. I'm Charlie Pellott and a Bloomberg Business Flash. You're listening to Taking Stock with Kathleen Hayes and Pimp Box on Bloomberg Radio what to do with your money. Well, one thing to do is to ask Peter Anderson. He is the chief investment officer and vice president of Fiduciary Trust, based in Boston, home to Bloomberg twelve hundred. Peter Anderson, thank you very much for being with me. You're welcome.

Tell us about the cycle. I keep hearing about this whole thing. We're in a cycle or out of a cycle, or in this market that market? Can you explain what's really going on? Well, him, you know, normally you can't. That is a very simple answer, but this time around, it's quite complicated. And I think it's because we've had these shocks to the system, uh, namely the Brexit situation and these repeated terrorist attacks in Europe. So really it's

very hard. I think you've hit hit on the main issue, which is where exactly are we in a cycle or are we even in a cycle right now? And it seems extremely difficult to figure that out this August, and I think it has a lot of people very frustrated because they don't have a real clear roadmap or a compass to navigate through that. Okay, so maybe you can help us navigate this because let's say we suspend our desire to understand whether there's a cycle that's moving up

or down. There's still stocks, there's still companies that people can follow and get excited about. Or is that like last century thinking? Well, very timely. I don't do not think it's last century thinking. And in fact, um, I know you and I have talked in the past about quant managers in technical analysis and how that seems to be a central stage right now. But there are certain areas that you can certainly play from a macro perspective.

So let me just give you an example. So, say we're looking at Europe and okay, and we just can't figure out what's going on, which is really the common sense response. I mean, nobody really knows how this is going to play out. I was very surprised that the UK market rebounded so strongly after Brexit, and I do think that's a head fake. So let's assume that we're not going to be looking over at the UK, and let's look at the good old US of A. I

think there's plenty of opportunities. Look, let's just talk a little bit about MidCap US MidCap stocks, or even US small cap stocks. It makes intuitive sense right, because these companies have most of their business concentrated in the US. They're small enough that they probably a lot of them do not have subsidiaries overseas. So if you're a strong UH, if you have a strong opinion on the US consumer, that would be a logical way to play out this

absence of a cycle, if you will. So, if you're looking at those small and MidCap stocks, what are the characteristics of the companies that you want own, Well, some characteristics are first that they are small enough that they have the majority of their business based in the US, because you want to be a little bit insular right now, given that there is uncertainty overseas. UH. The other thing is they have to have strong balance sheets, the usual

things that you would expect from a strong company. UH. And in sectors for instance, it is I think most people will agree with me that it is now a consumer lead, slow but steady recovery. UH. This is not This is what I would call almost a growthless recovery. But it certainly isn't a jobless recovery. We've seen that last Friday. So play into the consumer durables and consumer discretionary small and MidCap mutual funds, funds that focus on

that area, or et F for example. Well, I was just looking at the Russell A two thousand index, which is composed of the smallest two thousand companies in the Russell three thousand. Right year to date, the Russell two thousand is up seven and three quarters of a percent. That's better than the S and P five which is just up six and a half percent. That's right, Yes, So does that exemplify the kinds of companies that you

would be looking for. Yes, it does, and you are right in the mid caps also have done very well. Uh to say anywhere from say five to seven percent. Seven percent is probably a little bit on the high side, but you can find um strategies that would give you that return. That's exactly what I'm talking about. And it's not a bad place to be, right because the alternatives are pretty hard to convince yourself that you can have a solid thesis as to why you would be investing

in the UK right now. Another area that I think is people tend to think is more risky, but from a common sense perspective, if you're looking for income and you have the stomach to um to to tolerate this kind of risk as US high yield. You know, I played in US high yield for a long time in my career, and right now is a very very attractive time. Not to load the boat up on that, of course,

but have a diverse, wigh portfolio. But the default rate on US hi yield bonds, if you carve out the energy segment, it's very, very low, and I think that that also plays into our theme of the recovering, continuously recovering US consumer UH companies. Small high yield companies tend to be smaller companies, just like the small cap equity companies, and it's a nice compliment. As far as this search for yield goes, when did it become fashionable to hunt

for yield in the stock market. I understand the whole relative issue of you know, treasuries and corporate bonds or just high yield as you describe, But as I think back over the course of a couple of decades, you wanted to buy a stock of a company that you thought was going to go gangbusters, that was well managed, had a market penetration of moat around it. To a certain extent, you weren't questioning really whether they were going to give you a dividend. You wanted to invest in

the growth of the company. That's right, and uh, you know, some people have fallen astray from that. I couldn't agree more with your your comment there a narrative. I do think that people have kind of lost their way in the sense that income producing instruments tend to be fixed income, and if you're looking for high dividend stocks, sometimes you can be led astray because the balance sheet, etcetera. Uh, could be stressed for that company to continue paying its dividend.

And some, as you know, have policies where they wanted to increase the dividend every year. And that's kind of the dividend tail wagging the dog, if you know what I mean, because you want to buy first a company of stock, it is well grounded, has excellent fundamentals, and oh yes, by the way, it pays an attractive dividend, not the opposite. Model portfolios tell us a little bit about how that whole world has changed because it used to be split, and it also used to change as

the investor got older. Model portfolios. You know that also ties into this rather ironic title of modern portfolio theory. But you know that's been around since the nineteen fifties and we really haven't changed, UH the formalism by which we invest with diversification and UH an ideal outlook on the way the stocks move are related to each other.

I do think that that has taken a little bit of a second UH stage now to a more formal way of looking at things where you say to yourself, well, these correlations might not be exactly historically correct going forward, and we need to tweak this a little, especially if you have a shock to the system. So right now, people still if you distill everything, most portfolios are sixty UH and it depends on what you're calling fixed income

now and what you're calling equities. But one of the things that can lead people astray is if they think

their portfolio is and fixed income. But if you take a peek under the hood, tim and see what kind of assets are, say in UH fixed income mutual fund, for example, you have to be very careful to realize that fixed income should be risk mitigating, we call it, and it should be high quality and not fund that has junk bonds in it, for instance, because then that takes on a different tone and it's not risk mitigating,

it's actually return generating. So there is a formalism now that's kind of taking over the usual sixty UH terminology, and it's getting a little bit more subtle and irige people to really take a closer look at what their funds are invested in to get a sense of where the risk actually lies. Peter, our investors scared to take profits?

M I think UH, investors are just scared of a lot of things right now, and that is probably if you ask me, you know, among the top three, if that's one of them, I'm not sure it would be. I think it's more that they're frightened to make decisions, and it might come out as uh, you know, the appearance that they're they're not taking profits. But I do think it has more to do with this unique time we're in and the indecision that a lot of people

have to live through. Thanks very much. Peter Anderson is the chief investment officer also vice president of Fiduciary Trust based in Boston. You're listening to take king Stock will take you through to the clothes on Wall Street. I'm Pim Fox and this is Bloombergh