Welcome to Inside Active, a podcast about active managers that goes beyond sound bites and headlines and looks deeper into their processes, challenges, and philosophies and security selection. I'm David Cohne, i lead mutual fund and active research at Bloomberg Intelligence. Today my cost is Sam Geyer, a corporate credit strategist for Bloomberg Intelligence. Sam, thank you for joining me today.
Thanks for having me excited to be here.
So last week you published a note on ratings changes. How did the tariff I guess we'll call it the drama in April affect ratings actions during the month.
Yeah, I mean, you know, it'd be I think a little bit more interesting to say that they were overly pessimistic and a little bit more down grads. But really, over the past couple of quarters, Raiders have been I would say pretty and I think it kind of goes to show just their kind of wait and see approach that they're taking right now, given we haven't really seen tariff impacts, you know, flowing through to the macro picture
as of yet. So right now they're a little bit more on the sidelines neutral overall, but we'll see over the next couple of quarters, if those those impacts start to feed through, and what that ultimately means for for potentially more downgrades down the road.
Interesting.
Well, let's bring on our guest to get her thoughts on the downgrades. I'd like to welcome Janet Rilling. Janet is head of the plus fixed Income team at all Spring Global Investments and a senior portfolio managing manager managing funds such as the Court Plus Bond Fund, which has a ticker of w I pi X and the Corp plus ETF which has a ticker of ap l U. Janet, thank you for joining us today.
Thank you, it's a pleasure to be here.
Well, i'd like to hear your thoughts on the downgrades. Do you are you seeing the same thing you know, the driving some of these downgrades.
Yeah, I would agree with with Sam. It's a little too early to tell at this point. First of all, we're still determining what the framework will be for teariffs. Then there will be some time for companies to adjust, and then we'll see how that flows to the numbers. So I think it's a little bit of a wait and see on that front.
Okay, Well, let's talk about the core plus funds. What is the investment process for managing these funds? You know, is there a starting point that you look at?
Yeah, so, you know, we think we take an approach that's a little different than others in the core plus space. And the first thing that makes our approach different is we take a six month outlook when we think about where markets are going and then how we're going to position the portfolio. And we do that because we think a longer view, like a three to five year macroview, is a lot harder to get right. I mean, think about all the changes we've had just recently, pretty difficult
to predict five years out. We also think that having a longer view, you tend to more anchored in a view, and you can miss some of those inflection points that inevitably happen in a market cycle. So we prefer to think about the world kind of two to three quarters forward and position that way. A second thing we do a bit differently is we take what we call a multiple lever approach, and essentially that means really building a
well diversified portfolio. So we're looking at casting a wide net across a lot of sectors, not just in the plus space, you know, maybe being only in US high yield. We have six plus sectors that we use, and it also means dialing up levers up and down in the core pate of the portfolio. We think this allows us to better balance risk and then shift to where the relative value is. And then our third differentiator is taken
an unbiased approach to managing the portfolio. We're looking to seek diversified sources of alpha, so again across the range of the fixed income sectors. We don't want to have structural bets in the portfolio, like always being overweight structure or only doing corporate credit. We want to move to where there's value in the market and not be environment dependent. So it's a more flexible and dynamic approach than you might see with some of the alternatives.
Now you mentioned macro. I was just curious, you know, other macro factors that you consider there.
Most certainly are Our investment process really has two key components. So the first is portfolio strategy, and that's more the macroside. The second piece is sector strategy and that's more the bottom up piece. So in the portfolio strategy piece, a key activity that we do is a macro analysis, and that's based on what we call our Big Six framework. So we've identified six macro factors that we focus on on a regular basis and assess them and help lay
the foundation for the portfolio. So the Big six can prise growth, employment, inflation, monetary policy, fiscal dynamics, and then the international landscape. So at different points in the cycle, some of those factors weigh a little more heavily, but inevitably, throughout an economic cycle, each of those factors are quite important.
So Jane and I want to kind of stick to that topic, getting to that volatility that we were just talking about. I'm curious if you could just walk us through how you're thinking about the market right now, and on top of that, you know, how you approach investing
across those volatile markets. Is it, you know, a good time for you to identify some potential miss misvaluations there, or maybe a time where you become a little bit more you know, locked in on following your specific investment approach.
So stepping back at the biggest level, we think now is an attractive time to be in fixed income, and that's simply because there's a lot of yield. If you look back historically, over the last couple of decades, we are on the higher end of all in yields for public global fixed income, so you know, at a high level, again, an allocation there makes sense, but then the trick is to determined what are the components where do you allocate?
And while yields are high, when we look at credit spreads, those very quite a bit, and in particular, the corporate credit spreads are not particularly attractive compared to a historical perspective. Now certainly they have widened some or they've become a bit cheaper post all of the tariff news that's come out, but even with the movement we've seen posts tariffs, credit spreads are sort of middle of the range or even tighter than where they've been over the last twenty years.
So for structuring the portfolio, we have more of a tilt to high quality income at the current time, so that's favoring sectors like structure Product. Structure product is very high quality, it's liquid, it's backed by a range of collateral types, and the different securities have a good strong cash flow profiles. We like getting that incremental yield from a higher quality part of the market rather than feeling like we have to go deep into the lower quality
portion of the market. So again we're emphasizing that higher quality income. It's not to say we don't have allocations to the plus part of the portfolio. We do. We're just very diversified there and we're not real concentrated in any one particular part. So for example, us high yield there, we're you know, between three and four percent allocation. You know, we can go as high as twenty five percent, So that gives you a sense of you know, it's a
lower than sort of average allocation to high yield. That gives us some dry powder if we do get more of a backup in credit spreads.
So with that then too, you know, obviously you just said high yield a little bit lower in terms of the allocation.
You know, what are kind of the drivers there?
And I'm particularly curious around how you feel about just the broader fundamental picture right now. Are you seeing you know, worrying levels in terms of maybe leverage or some other ratios in terms of company balance sheet and overall health.
So broadly speaking, and this is a comment on both investment grade credit and high yield. You know, it's generally pretty healthy. We came into twenty twenty five with pretty good fundamentals, and you know, the things we're looking at are those credit metrics that you highlight, you know, leverage levels within investment grade credit, it's around three point two times, that's not a worrying level, and looking at high yield. There are two The credit metrics really entered the year
pretty stable and in a pretty good position. We saw the trailing twelve month default rate at just one point one percent, so that's that's pretty good and it shows we're starting from from a strong base. The issue is, well, there's two. One is that we're coming into a period with much higher volatility, and given everything going on with tariffs, the probability of a recession has grown. The beginning of the year, we would have assessed a recession probability quite low.
We've now had to revise that up to something maybe more like forty to fifty percent because there's a lot of uncertainty in terms of how companies will be able to generate profits in this new regime. The second piece is valuations. So fundamentals can be great, but if that's really all reflected in the price and you're not getting much compensation, for taking credit risk, Well, that's a reason
to be less constructive. And that's really the situation we found ourselves in at the beginning of twenty twenty five, which was a good fundamental picture, but valuations that really didn't give us any extra compensation in the event something went wrong, and we did get something what go wrong, which was the increased increase folatility due to tariffs, and so we are at least now seeing some adjustment to valuations. But that's where we sit today.
Do you incorporate any type of you know, ESG research or you know, whether it's part of risk management or just part of the process. Is that part of some of your research.
So at all Spring we do offer ESG type strategies and we also offer strategies that don't incorporate ESG overtly. So because of that product offering, we absolutely have a framework for analyzing ESG, and our research analysts as they evaluate each credit, they do apply an ESG framework and make an assessment in terms of the ESG risks. So for those portfolios that do have a mandate that's ESG related,
we follow whatever the criteria is for that. For the other portfolios, and coreplus would fall in that other category where it is not an es G mandate. We look at ESG it's just like any other fundamental risk factor. You know, at times an ESG factor can rise to the point that it creates high risk or that it
needs extra compensation in terms of valuation. So when there is an ESG factor that rises to that level, it is treated like any other risk or factor in analyzing a credit and it enters into the investment decision.
So Jena and I want to get back to the corporate world specifically. I'm wondering, within you know, specific sectors, are there spots where you're pretty excited about right now, and maybe on the flip side of that, are there spots where a little bit more concern you know, obviously consumer sentiment and just overall uncertainty I think kind of you know, affects the consumer cyclical sector as an example. I'm wondering how you feel about different parts of the market when.
We think about areas of risk in the market, particularly given the dynamics around tariffs. Our favorite place, particularly in investment great credit is the financials. They are kind of exposed to tariffs on more of a second order impact. I mean, they don't have direct tariffs that are going to be implemented on the business that they do. Their exposure would be more economically based given who they're lending to.
If some of the corporations they're lending to start having problems, So given they're not kind of on that front lined, we do think from a range of outcomes or risks that they look more attractive. Further, the valuations compared to industrials does look more attractive to us. So within financials that includes banks, includes insurance companies, those are probably our two favored areas. Within high yield, we don't have so much of a tilt to a particular industry. We have
rather chosen to be very diversified. In line with that up in quality tilt for income, we have skewed our high yield allocation more heavily to double bees, with the remainder being in single bees and not having exposure in triple cs. So more of a quality construction in terms of how we're implementing there. You know, when I think broadly, you know what are the most vulnerable areas related to tariffs?
Of course you highlighted consumer. If the consumer stops spending, that's going to be an issue for the different consumer sectors. We'll say the metric we're following very closely for that is employment, because even with all this uncertainty, if a consumer has a job, I think there'll still be some support for consumer spending and up into this point. I mean, we did get an April jobs report that still showed job creation. One hundred and seventy seven thousand jobs were
created in April. We'll see what we see in April in May. But nonetheless, you know that has been a solid support so far to the consumer. Other areas at risk, the auto sector really front and center. With the supply chain being so integrated globally, there's a lot for the auto companies to unwind, to not have the effects of tariffs. There has been some relief with some of the more recent announcements coming out of the administration, but that's absolutely
a sector that is at highest risk. And then also considering the energy space, and that's more related to what we've seen in the price of oil. Oil has declined significantly, and that is partly due to the supply situation. There's been increased supply. Also it's likely related to more concerns about the economy so that will filter into energy company earnings, in particular the oil and gas producers.
So I want to get back to the high yield side of things, specifically, you know, the fallen angels or potential fallen angels. You know, from what we've been seeing, it's been a pretty quiet couple of years in terms of actual fallen angels that have come through. But I'm wondering if that's something that you keep a close eye on in terms of maybe trying to get out ahead of some of these potential rating actions and capitalizing on some of the price movement that's involved there.
We do pay close attention to what we think our candidates to become fallen angels. Our analysts have an ongoing list of what they think are potential fallen angels, which they refresh on a quarterly basis. We have noted that there's been a little bit of an increase in fallen angels at the start of the year. It's been a little more idiosyncratic, though I wouldn't say it was something happening in the economy per se that really drove it.
It was sort of individual due to circumstances at particular companies. So I think the risk now with there being more of a macro shock going on, is that we have a higher level of companies and maybe higher correlation with industries where we're seeing more ratings pressure. So the expectation would be we may be sowing the seeds for a
bit of a continued increase in fallen angels. Not predicting any type of dramatic change in the next six month again with our couple quarter forward looking outlook, but heightened awareness that there could be more credits headed for that fallen angel status.
You talked about diversification before. Is there any process in determining portfolio positioning giving certain securities a larger weighting in the portfolio.
Yeah, that really gets to the heart of portfolio construction. And you know, we start with the general parameters that will always have at least sixty five percent of the portfolio in the core sectors. That ensures that the core plus portfolio serves its purpose as a fixed income allocation.
At sixty five percent, we think that it correlates well with the Bloomberg Aggregate Index, meaning that you get a return stream that is correlated with the fixed income market that allows up to thirty five percent that can be allocated to the plus sectors, and that piece allows you to generate greater alpha as compared to the benchmark, so that's the first place we start from there. We also put guardrails on each of the sectors, so we put a range around how much exposure we will take to
the various subsectors. So within the core part of the portfolio, those subsectors are treasuries and government related securities, US securitized and US investment grade, and for those sectors will always be between ten and fifty percent market value in the portfolio, so that gives clear delineation on how large we would
be in any one sector. For the plus sectors, again we can go up to thirty five percent, but each of the six sub sectors also have a maximum limit, So for example, US High yield, our max would be twenty five percent, for the other sectors European investment grade fifteen percent, European high Yield would be ten percent, and then emerging markets in global government bonds, those are two
more sectors ten percent each. And then lastly currency will only go up to five percent net notional exposure there. So all those guardrails are designed to ensure that no one exposure overwhelms everything else, and I should probably start back at the top because I miss probably the most important exposures, which is duration. Duration is really a powerful lover in fixed income investing, and if you size that
too large, it can overwhelm everything else. So we'll always stay within a range of plus or minus one year versus the Bloomberg aggregate index. In reality, we're generally within a quarter year. Most of our exposures will take will be about a quarter year. If it's very high, can we might get up to half a year, But in no circumstance would maybe above a year.
No.
I know just from looking at the website, at the perspectives that part of this is actually getting best ideas from your team. Is there a process of you know, how those ideas get filtered to you?
There is, But we start with the notion that an idea can come from anyone on the team, and we want to source ideas from everyone, but the process begins with primary research. We feel very strongly that doing our own bottom up work is the best way to uncover good investment ideas. So we have a broad research platform. We have fifty analysts that work each day looking for those bottom up ideas they do the work analyzing credits.
They look at the fundamental picture of the individual company, the technical picture, which includes like how much bondishuents are they going to have and how liquid are each securities, and then they overlay a relative value opinion where they're taking into account valuations, what yield is trading at, what
credits spread. The analysts then put a relative value recommendation that's on a five point scale, so it ranges from strong overweight down to strong underweight, and so that's a very clear indication to the portfolio managers on what their view is on a particular credit. It's then the portfolio management team's responsibility to take those recommendations and determine the best fit in the portfolio. So we spend a lot of time working with them to make sure we understand
the risk profile of the credits. But then we take that and think about how the individual credit reacts with the overall risk profile of the portfolio. So that's at the security level, but there's also a lot of idea generation at the sector level, and there we have a portfolio strategy framework where we have a weekly meeting and in that meeting we set the target for the high level exposures, So, you know, do we want to be overweight corporate credit versus structure product? What's our view on
emerging markets there too? The portfolio managers do that foundational primary work on that, but we have a lot of collaboration and debate as a group in terms of setting those overall targets for the portfolio.
Jane and I want to circle back again to the macro side of things. I think, you know, one of the narratives we've been seeing out there in terms of tariff impacts has been a potential stagflationary environment. I'm wondering if that's you know, a tail risk scenario that you're you know, seeing as potentially happening, And if it is, how do you prepare for something like that, or really any type of tail risk scenario that you may be expecting.
So I do think you have to consider stay inflation as a possible outcome of all the things we see going on, right. I mean, if tariffs are put in place at these higher levels, they do risk igniting inflation because while the price increase may be a one time price increase, we know sometimes that can feed upon itself at the same point in time, the tariffs could lead to less economic activity, and that's just the classic definition
of stake inflation, right. So I don't think we're out of the woods on either front, and we do consider it a risk. However, given our six month time frame, in terms of our outlook, we don't think it's going to become a risk that's going to materialize in the next couple quarters. So at the current time, we're not positioning for stakeflation, but it is part of our scenario analysis when we think about the paths that could be
occurring over the next couple of years. In the scenario of stakeflation, you know, the problem with it is the FED is going to have limited tools to address it, right because I mean their dual mandate is employment and inflation, and stake inflation is likely. You know, the conflict of that dual mandate oftentimes, when the economy stagnates or slows, you have reduced employment. So they're going to be put in a difficult situation of which of the mandates to favor.
We tend to think they'll focus more on inflation because inflation, you know, once it starts bearing its head, it can really spiral and there's not so much that can be done on the fiscal side for inflation, whereas on the economy there can be more support. On the fiscal side, you know, some of the policies could be retracted regarding tariffs, there could be some stimulus measures that could be put in place by Congress. So that's what we would look
for in terms of developments. But in terms of structuring the portfolio, well that's where it gets really tricky, right. You know, fixed income in general doesn't like inflation, and so if you're in a more inflationary environment that can be problematic. We would look to adjust our duration exposure. In that environment, you'd look to reduce your duration so you wouldn't have as much sensitivity to arise in interest rates.
And then in terms of some of our industry exposures, one technique is to shift more to commodities things like oil and gas, gold, agricultural type related companies. Those could end up having a little bit better financial results and some of the other more sensitive sectors. You know, you could also look for companies that benefit from a consumer
trading down because of the economic slowdown. Things like a Target or Walmart might do better than some of the higher end retailers, things where there's less variability and demand could also be favorite sectors, things like utilities, So those would be things we'd be thinking about emphasizing a portfolio if stake inflation became a base case scenario for us.
So we talked about, you know what you would do in that situation. If we look at an individual security by security, what would lead you to sell a security.
There are a couple things that lead us to sell a security. The first is if it hits its valuation target, and so by that I mean we oftentimes put a spread level that we think means either it's at fair value or it's trading to rich to what we think the fundamentals really support. Also in terms of yields, when we think about a duration trade, we'll set fair value and then also levels that we think make the duration
trade look no longer attractive. So when we hit those targets, that would be a signal to us that we would sell a security or reduce the position. A second reason would be if the thesis change. So I'd love to say that we get everything right in terms of our views, but that is not the case. It's pretty hard to get everything right. So we're very sensitive to changes in
dynamic that no longer support our thesis. And when we sense that our thesis is not playing out, we have quick and honest conversations about do we need to exit the position. There are instances where it might make sense to let things play out, because perhaps it's just taking more time for this thesis to unfold. But when the information changes and it's no longer supporting the reason we purchase the security, it's time to move on. And I guess I said a couple, But let's say three reasons
we might sell. The third would be maybe just a more compelling idea has arisen and we're looking for a way to fund it. And even though we may still like a security or an exposure in the portfolio, we don't like it as much as the newer idea. So that would be the third reason that we would sell something.
So I want to pivot a little bit here as we close out the conversation to the world of systematic I'm wondering, how do you see potential adoption of full systematic strategies. I know it's obviously a little bit of a smaller part of the market right now compared to something like equities, but wondering how you think about that in terms of potential impacts to liquidity portfolio trading, and then how all Spring specifically is incorporating that new technology into your investment process.
Systematic is a very interesting area, and we do have a team that focuses on systematic fixed income and we over the years have partnered with them on various things. So they've found some value in the fundamental work that we do. For example, they'll use our research recommendations in their systematic investing processes to do security selection. They'll apply the systematic tools they have to the securities that our
analysts favor. As an example for us on the fundamental side, we've used some of the work they've done in terms of evaluating currencies. There's an example they bring together a lot of factors, they look at it, how they've responded over time, and their models help recommend a tilt for certain currencies. At the end of the day, I do believe human judgment is still important in investment decision making.
I look at systematic as a way to leverage what we're doing every day, maybe take out some of the biases that sometimes can creep in with human judgment. When a systematic approach suggests something different than what we're thinking about, it's a challenge, right, It's another voice at the table, and I think that's a good way to use it. To your point about tools that can be incorporated, we're
definitely leveraging those tools as they've evolved. Portfolio trading, I think has been a really important development in our industry. It allows us as portfolio managers to access a wide range of liquidity quickly. So we can now take a slice of a portfolio, package it up in a portfolio trade, send it out and transact rather quickly with a wide range of names. And further within that portfolio trade, there's
a whole range of liquidity. Right, Some of those securities are much more liquid than others, but someone on the other side of the trade is willing to take the package because they get that diversified exposure liquidity. So portfolio trading, I do think has added to liquidity in the marketplace because it doesn't require each security to stand on its own in order for it to trade.
Thank you, Janet, this is a great discussion, and thank you again for joining us.
Thank you it's been a pleasure talking with.
You and Sam. Thank you again for joining me as my co host.
Yeah. Thanks, This is a great conversation.
Until our next episode. This is David Cone with Inside Active.
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