Bloomberg Audio Studios, Podcasts, radio news. This is Master's in Business with Barry Ritholts on Bloomberg Radio on the.
Latest Masters in Business podcast. My conversation with Ed Perks. He has been with Franklin Templeton since nineteen ninety two. He has all of these various titles. He's not only PM of their flagship Franklin Income Funds, but he's CEO of Franklin Income Investors, president of their Advisors Group, member of the Executive Committee. Not many people have been with the same firm their entire career right out of college. Ed Perks is one of them. Few people more knowledgeable
about fixed income and non bond yield. I thought this conversation was fascinating, and I think you will also with no further ado, My conversation with Franklin Templeton's.
At Perks At Perks, Welcome to Bloomberg. Thanks Barry, it's great to be with you. Well that's really quite an impressive CV.
Before we get into the various assets you managed, let's start with your background economics and political science BA from Yale. That doesn't sound very much like a fixed income manager. What was the original career plan?
Yeah, it certainly wasn't finance, And you know, at Yale, I really kind of, you know, certainly had had a broadcross section of studies. You know, like many of my classmates, I think if it wasn't med school, it was either law school or going into government. I think that's kind of some of what I was thinking during school. Really didn't didn't transition to trying to pursue a career in finance until actually after I graduated, and at that time
I moved out west. I wanted to experience a different part of the country, and particularly in the early nineteen nineties, the San Francisco.
Bay area had a pretty robust.
Financial services community, and so I headed out after graduation without a job and was able to land at Franklin.
Plus, you're done at one o'clock in the afternoon, that's the you do start a bit early.
We started five thirty.
It's very very five in the I remember walking into an office in San Francisco and at eight forty five there are pizza boxes around, and it's sort of, oh, that's right, we're on New York Wall Street time because the market is live. So let's talk a little bit about the nineteen nineties, you joined Franklin Templeton.
Is this your first gig out of school.
In nineteen ninety two. You've been at Franklin Templeton your entire career.
Is that right? Yes, it is. That is pretty rare these days.
Tell us about what attracted you to Franklin Templeton in the beginning and what's kept you there for geez, coming up on forty years, is that right?
Yeah?
Well, when I loaded the car up on Long Island, I drove a small Misbecie Mirage hatchback across country. No satellite radio, right, no air conditioning, no cell phones, so it was a different time. But got out to California really had the had the thought that I might experience the West Coast for a year and a half or two years and and make my way back to New York and and.
Get get the real job, so to speak, you know.
And I was really fortunate to land at at Franklin at a time of just tremendous growth, not just in the industry but for our firm overall. I actually joined the original Franklin Fonds prior to the Tilton merger. Yeah wow, So that, yeah, that certainly dates me and makes me, I guess a little og so, you know, I think what was really interesting? And I landed at first and
took a role in marketing research. I knew very little about the industry structure and I wanted to learn and it gave me a great cross section of different investment strategies. I had taken, you know, a class at Yale Investment Analysis howt by you know, pretty legendary endowment manager David Swinson, of course, And I think at the time I maybe hoped that it was a bit more of a you know, a typical stocks for Jock's kind of class, and in fact it was not. But that did plant a little
bit of the seed. And and you know, but I knew I had work to do to kind of prepare myself for a role ultimately in pursuing research. And after about a year and a half and taking one of the CFA exams, I was able to get that junior role as a research analyst in the Franklin Equity team.
Nineteen nineties, San Francisco. The tech boom was just ramping up late eighties, early nineties. What was that experience like that to be the Roaring nineties had to be quite an experience in San Francisco.
Yeah, I'd say it really kind of kicked in a gear more in the ninety six seven time period, and then certainly the IR Yes, and that was premature, but there was still plenty of time to go in it. But it was a very exciting time to be out there, not just in the tech community, but thinking about some of the regional investment banks, Montgomery Securities and Hamburton Quist and Stevens. You know, so you had a lot happening.
The The economy as a whole, i'd say at that time was far more diversified than it is maybe today. Obviously technology is such a dominant player within the Northern California.
Yeah, it's not that anything else got smaller. It's just that tech ballooned up so large and it dominates everything. Although, to be fair, I think finance has it hasn't grown as fast as tech, but it certainly expanded lock you know, fairly lockstep with technology. What's fascinating about your time your early days at frank On Templeton. You did credit, you did convertibles, you did equities. How important was that sort of cross asset experience to eventually becoming more of a specialist.
Yeah, I think it was a key component of it. I really was drawn to early days. I was drawn to the different type of analysis that you would perform based upon the kind of company you were following, our industry you were following, and we did have a broad cross section of strategies managed at Franklin, So as an analyst following companies, you kind of always had something to pitch a given portfolio manager on and that was something
that really attracted me. So whenever we had some movement in the group or growth adding resources in a certain area that was interesting, I kind of was inclined to put my hand up and that led to a lot of the progression of the career, ultimately moving out of the analyst role in nineteen ninety seven and taking on the duties of portfolio manager for that dedicated Franklin Convertible Security spund.
So over all these different experiences and over time, how does that lead to the evolution of your philosophy as an investor? What beliefs did its strengthen and what beliefs did you learn to Yeah, this just isn't generating anything that's worthwhile anymore.
Well, I think the first thing was really kind of understanding who you are as an investor. And I'm a pretty firm believer in this that over time I came to understand that I like a certain type of investing. I like buying things that trade a reasonable valuations that might not have an immediate catalyst, but something that you
can look out over a longer period of time. By having that longer term investment horizon, income naturally became something you'd focus on in terms of just thinking about it from the standpoint of getting paid to wait while your investment kind of performs the way you think it has
the potential to. So that's something that certainly started to resonate at the early part of my career, but I would say actually getting involved in convertible securities was a pretty significant defining moment for me in that you can pursue investing in convertibles, which are hybrids, which have fixed income characteristics and have an equity tie as well, and seek out investments that have the potential for positive asymmetry, so securities where with a given time horizon and a
certain move in the underlying common stock, you'll do better on the upside than you will get hurt on the downside, and it was just something that really appealed to me, and I think is a core component of what we've done historically and tried to do in our multiset income strategies.
Let me throw something out to you.
I have noticed, as both a trader and an investor that the guys who started in fixed income seem to have a greater appreciation for risk management and for thinking about asymmetrical trades where your downside is x and your upside is three X or tan x or whatever. What is it about fixed income analysts and investors that makes them so hyper focused on risk management?
Yeah, it's fundamentally you're just doing a different, different type
of analysis. And I mean, one of the things that we found kind of most fascinating over the years is given we have an internal team of equity analysts and an internal team of credit analysts, that opportunity when you're meeting with company management and you'll sit down with both analysts, and companies typically come to investors thinking they're on an equity road show or a fixed income road show, right, and when you sit down and now you want to
talk about it from both perspectives, that's some of the most interesting meetings we've had over the years with companies, they in fact have kind of different stories for those different investor groups. So I think it gives you that broader perspective of what the capital allocation decision making process
looks like at a given company. And ultimately what we're doing is trying to figure out what money they will have, i e. What are margins, how are profits growing, and what they'll do with that capital.
So in your present roles, you have the latitude to kind of go anywhere either in the cab structure or the allocation table or geographically.
How does that affect how you.
Think about what's interesting, what's attractive, Like it's almost overwhelming that sort of freedom to pretty much consider almost every asset class.
Yeah, I would say that's actually kind of our ideal situation, and we are in that today. I think there was a lot of a long period of time post financial crisis two thousand and nine where almost the intent of the policy was to eliminate large sectors and the fixed income markets from being attractive to.
Invest teams, right exactly.
So you know, I really kind of viewed today and you know, the bond market being back was announced pretty loudly in twenty twenty two. So you know today the fact that we can look across you know, the swath of fixed income markets and find you know, interesting areas.
You know, it may be more income focused, i e.
If we're not expecting a significant downdraft and interest rates, the total return potential from fixed income might be more muted, but they can play a really interesting role in generating that kind of stable core total part of total return that we expect income to be.
We're going to talk a lot about fixed income coming up, but your CIO of Income Investors, what's the biggest macro variable that the CIO of Franklin Templeton Income Investors looks at every morning?
Yeah.
I mean, we really think there's kind of two components to what we need to do, and you know one I would put in this more kind of where we can be proactive.
It's the.
Extent to which we think there's risk on the equity side of markets, credit risk in markets or macro or interest rate risk. Those are the three kind of big risk components that we actively try to think about. I would say that sets our kind of compass for how we want to allocate the assets and even though over long market cycles.
We may be pretty equally split.
Between fixed income and equity assets in our strategy at times, even in the last five years, that's been seventy five twenty five one way and then flipped the other way. So there is a tremendous amount of latitude. And then, you know, I think, on a day, more daily kind of basis, certainly something that we're experiencing in pretty good dose to start the year is those more reactive components
of risk. And you know, we do think right now policy matters a lot, and it might be fiscal policy, monetary policygulatory policy, but we're reminded almost on a daily basis now that there's a lot of other factors foreign policy, geopolitical risk that certainly influenced markets. It doesn't mean we're going to make wholesale changes to the portfolio, but being able to engage and get our investment team focused on where opportunities might be is a big part of the day to day role.
So let me ask that question. We're waiting for some major Supreme Court decisions in a whole variety of areas. There's the ongoing battle between the White House and the Federal reserve that that's been heating up lately. It's been sort of simmering for really a year. It seems every morning you wake up and there's some tweet or something else that are roiling the markets. Weight we're going to cap credit cards ten percent. Good luck getting a credit
card if that happened. How do you interact with all this newsflow? Is it something you ignore? Is it noise that you have to sift through, or are you constantly hunting for what's really meaningful here that's not reflected in prices already? What could potentially move markets? If this seems to catch a little bit.
Of fire, Yeah, I think the desire would be to tune out that noise, to largely ignore it. But the reality and markets those examples that you've given drove some pretty significant movements, even if just for a short period of time. You know, I would use the major banks, those that are more focused on issuing credit cards as an example yesterday in stock price activity last week, maybe some of the large defense contractors how they were impacted
by some of the announcements. Those are some pretty significant swings that we do have to pay attention to and do have to think about whether or not, there's the opportunity. But I think if you can step back, think about it a little bit more rationally. Clearly, we want to engage and get the insights from our dedicated analysts on
those specific situations. That's where some opportunities come in. And you know, I think whether it be an isolated, very specific, maybe more short term event, that's you know, one instance.
But if we go back a year, you know.
There was a two to three week period of tremendous volatility around a policy shift that really gave investors an opportunity around that tariff Day and Liberation Day.
Here, it was a week of you know, turmoil and then on pause and off to the races we had, you know, the most recent DOJ referral with a federal reserve. I spoke to a buddy on a bond desk over the weekend when this happened, and I love the attitude of, well, look at the two year it doesn't care, So why should I care?
Is that a little too glib?
How do you look at how the market, especially fixed income market, reacts to the news flow. Is that really the ultimate determiner of what's noise and what's signal?
Yeah, I think it's a good I might broaden it from the two year to say, let's look at the curve, okay, especially today, where I think there's probably more sensitivity around where longer term interistrates are are sitting and potentially could go you know, to me, anything that increases the confidence the raises the uncertainty level around the economy, I think are our challenges that you know, if we were to see the long end respond unfavorably too, would be quite problematic for markets.
Coming up, we continue our conversation with Ed Perks, chief investment Officer of Franklin Income Investors and President of Franklin Advisors, discussing the broader fixed income environment.
I'm Buried rid Holts.
You're listening to Masters in Business.
On Bloomberg Radio. I'm Barry Ridults.
You're listening to Masters and Business on Bloomberg Radio. Extra special guests this week is Ed Perks. He is CIO for Franklin Templeton Income Investors. He is also has been PM of a number of their fixed income and hybrid funds, including their flagship Franklin Income Fund, which he became lead PM. I want to say two thousand and two, is that right?
Join the PMT in two thousand and two and lead in two thousand and four.
Two thousand and four, all right, not two, that's twenty plus years. So let's talk a little bit about what's going on in fixed income. A lot of cross currents. Here's what's happening with the Fed, Here's what's happening with the dollar overseas has become more attractive. Let me just right out of the box. Where are you seeing the most compelling risk adjusted income opportunities today? High yield, investment grade, diven inequities, And I know you could go anywhere.
So what do you like these days? Yeah?
You know, I would say in fixed income, we are really pretty diversified across the range. And for us that is US treasuries, it's agency mortgage backed securities, its investment
grade corporate bonds and high yeld corporate bonds. And you know, we have different factors there, you know, one we do think the carrier, the income component of fixed income is quite attractive again today, and like I said before, it's been a while since you know that was the case, or there was a long period of time where that was certainly not not a function, not a benefit that investors in fixed income had spreads on the corporate side,
do you know, concern us a little bit. But at the same time, you know, we have seen extended periods of time historically where spits spreads have stayed on the tighter side near historical lows. So you know, our view is that you want to be diversified, look a little bit more at idiosyncratic risks. So sometimes in our in our strategy, we do think the biggest lever that we have moving from one asset class to another is the
most appropriate. We certainly had that in twenty twenty one, in twenty twenty three, today we think that lever is a little less important and it's a little bit more about relative value between sectors and or security selection idiosyncratic risks. So I think in the past year, moving out of some of the significant overweight that we had in investment grade corporate debt, for example, in favor of agency mortgages because spreads had really widened out with something that worked out well for us.
In twenty twenty five.
I noticed you didn't mention tips treasury inflation protected securities. Is that something that at the current level of inflation and the current yield there is that attractive.
Yeah, it's not something that we're focused on today. I think to the extent that we see inflation continue, you know, to come down and settle in at a lower level, that tips may become something that we want in the portfolio, to the extent that then inflation could have surprised to the upside.
And let's talk a little bit about those corporates you mentioned. Are we getting enough spread between investment grade and high yield corporates to make the juice worth the squeeze or because for a long time there's hardly any daylight between the yield and both.
How do you look at that.
Are corporates cheap or expensive high investment grade relative to high yield?
Yeah, we do think moving up into the higher credit quality components of high yield is probably one of the more attractive areas. You know, we also like to so if you're looking at triple B double B spreads, we want to be in the higher quality credits to the extent that we're owning a broader section of high yield, which we do in our strategy.
It's emphasis and more on the latter security selection.
What is an individual company doing to be able to refance the debt to turn out their maturities, or ultimately to improve the overall credit quality. We do think grating agencies lag by a significant margin, and if you can get ahead of that and use your fundamental analysis, that that's an area within the fixed income markets we want to be focused.
I'm trying to remember who I'm stealing this line from, but it's definitely not mine. Which is, there's so much variation in the B minus space that some of it is junk and some of it is ig and maybe some of it's in between, but the variance is enormous.
Fair statement, Yeah, I think that is.
And you know, certainly there are investors that play only in certain parts, and when you're flirting with that lower credit quality component B minus into triple C, that starts to change the dynamic of who the investor base potentially is.
So you've been doing this for a long time.
You've lived through the financial crisis, zerup, zero interest rate policy, quantitative easing, the most recent inflation shock and tightening cycle. For someone who has your authority to go anywhere, what of those types of environment and so the most challenging to manage an income portfolio through.
Yeah, I mean, I think certainly the periods of extreme volatility are going to be challenging for any strategy, and and in my career the ones that i'll you know, go back to certainly when managing the convertible fund around the dot com crash and then in our income strategies both financial crisis. So you know, yeah, market's bottomed in March oh nine, but September of eight was pretty difficult
for any investor, you know. To me, I think what's really defined our strategies and maybe become a little bit of a you know, the focal point of our approach is is to continually look forward. I mean, I think the the number of investors, even if we were to bring this more into the current you know time we spoke less than a year ago and twer volatility was
impacting markets. I think a lot of investors have the tendency to, you know, to sit on their hands a bit when there's this kind of volatility playing out in markets. And maybe even even the worst case would be going to the sidelines, which we know a lot of investors did in September of eight or March of nine, and well.
The first week of April of last year exactly.
And that's where I think, because we have such a flexible mandate, our tension turns more to how can we optimize the positioning.
Of the portfolio.
We always have assets that are benefiting in some way, have some liquidity profile to them that lets us focus on being playing offense a little bit more during those periods of time, and I think that's something that has has always enabled us to kind of recharge the portfolio. Pretty firm believer in the price you pay matters concept, whether it's an income investment or something that's designed to
create more capital appreciation. Uh, And that's something that you know, really has enabled us to kind of ultimately come out of periods of volatility and deliver for our investors, you know, even though there might have been some bumps along the way.
So twenty twenty two was the first year that saw double digit losses in both stocks and bonds since forty years earlier in nineteen eighty one, which I recall was also a rate hiking environment, not quite as aggressive as what we saw in twenty twenty two. I've noticed people talking about anticipating that again and pretend preparing for it.
Is that a little overly cautious.
How often do we see stocks and bonds both down that significantly in the same years.
Is that likely to happen anytime soon?
Well, I think the backdrop was really set for that dynamic. And what I mean by that is where rates had declined to you didn't have the carried offset negative returns and fixed income, and the resetting of where rates should have been provided that the fuel to drive those kind of negative to return. So we really think we're in that certainly not in that position today. Never say, you know, can we don't expect that that can never happen again,
but certainly not the backdrop that we're envisioning today. So just the rationale or why our bonds? Can bonds be a diversifier and a multi asset portfolio? You know, I think we would have argued, and if you look at our asset allocation in twenty twenty one, we did not believe so. And they certainly did not offer attractive income for investors.
And that was good for twenty Prior to twenty years, they were not producing a whole lot of income. After twenty twenty two, yields were look, money markets were over five percent for a while. Now we're in a rate cutting cycle. How does that affect how you look at fixed income products? Are you looking to extend duration? Are you looking to extend credit quality? Is there now reinvestment risk if you're too short thinking about this.
Yeah, we've made such a significant move into fixed income in twenty twenty two and twenty twenty three that you know, we do have that now. In the corporate space in particular, we have companies that are engaging the market refinancing, so some of the real prized kind of investments we were to make at the time, you know, we are now
seeing some cash coming back into the portfolio. But the way we treat that is that just because a dollar comes out maybe a high yield bond is called away or matures, which they do in fact do at times, it doesn't mean that dollar goes back into the high
yield bond market. For us, it's always going to be that next most attractive place that we're looking today, we might be looking you know, more specifically in structured equity or in convertible securities, where you know, we think outside of the very large megacap tech companies that have driven this market since twenty twenty three.
That there's pretty reasonable valuation.
So there's a lot of companies, whether it's utilities or industrials, that I think have a pretty interesting profile for the rest of the decade. So if we can pursue investments in their common stock, maybe there's a two to three percent dividend yield, but if we can access a convertible, we can blend that yield up to something that's more attractive for a strategy and yet still retain a pretty interesting profile.
On the upside.
My assumption is if something is being called away, it's that it was too generous and now they're refinancing at a more attractive rate. Let's talk a little bit about the Franklin Income Fund. You're only the third lead manager of this flagship fund. You followed Charles Johnson, who was fairly legendary in the fixed income world, and tell us a little bit about what it was like taking over as lead manager of that fund.
Well, firstly, me mentioned I had a chance to sit down with Charlie last month, something I try to do on a regular basis as I can, and to still see and and meet with him and hear the stories of some of the history is something that I really really cherish and value doing.
You know, I think from the standpoint of.
The path that we've been on with Franklin Income, you know, joining in two thousand and two was it was a large strategy for Franklin at the time, it was, you know, around eight billion in assets under management. I think what really kind of maybe though defined the strategy was that period coming out of the financial crisis and you know, navigating our way and being able to engage the broad cross section of markets and perform very well for five year period really.
Helped establish this.
But at the same time, you know, we realized that investors financial advisors do like a range of different strategies or the ability to use different vehicles to deliver an investment strategy, and that was something where in twenty and twenty two we launched Franklin Income and SMA vehicle, and in twenty twenty three we launched Franklin Income strategy in an ETF.
So it's been and to see.
That strategy get adopted in different vehicles is something that was a big part of taking this strategy that's been so important for Franklin Templeton as a whole to a different type of investor.
And for listeners who may not be familiar with the Franklin Income Fund. A couple of things really struck me about it. First, not too long ago, it's celebrated, it's seventy fifth anniversary. Ain't a whole lot of funds that have been running continuously for seventy five years since nineteen fifty. And then secondly, and this amazes me, uninterrupted monthly dividends dating back to the launch, which was I think nineteen forty eight, Is that right?
That's unbelievable. It is a great it's really a great story.
It was part of the original custodian funds for frank and the first four were you really the four asset classes at the time, a bond fund, a stock fund, a preferred fund, and a utility fund. And then the final series of custodian funds was the Income Fund, which was meant to look at those other four strategies for asset classes and find the most attractive income investments.
So, sure, the four food groups, that's the core, and you create a whole meal out of that. So you mentioned agency mortgage backs, what else do you look at that are either asset backed or clos or any exotic other products that theoretically generate pretty good yield relative to the risk the investor assumes.
Yeah, I mean, I think that agency mortgages tend to be our core component within that part of the fixed income markets. But we're always evaluating different opportunities asset backed oriented investments, and you know, right now we're pretty light. We do have a fair amount of corporate debt that is secure debt.
So I recall coming out of the financial crisis, Double Line as an example, had a ton of mortgage backs, and it just seemed as everybody refinanced and refinanced their homes, the available paper just disappeared. I'm doing this off the top of my head, but it was something like ninety percent mortgages when it started. I ended up at like twenty five or thirty five percent mortgages. We've seen a
significant slowdown in home sales. Yield has been higher than it's been for the past twenty years, so we haven't seeing a lot of refinancing or a lot of new issuance.
Is there enough mortgage back paper out there? What's going on in that space?
Yeah, And certainly it's been topical just the last week or so with you know, the.
Fanny and Freddie he had two hundred billion a month or some while number.
An additional two hundred billion, but even beyond that there could be an extension. So, you know, we did see the mortgage market react, right, We saw spreads kind of come down, and you know, ultimately bringing longer term rates down is going to be probably the biggest beneficiary in terms of activity within the housing market.
But do we have to.
Get down to five percent mortgage rates to see this really kick up?
Or where are we now? Six change? Sixteenth quarter? Yeah?
I mean I think certainly that needs to be the direction of travel, what that that specific number needs to be to get some activity.
Probably there's some other factors as well.
Certainly the overall healthy the economy and the labor market are going to be a major major component of being able to get some of that activity going in the housing market.
How closely do you track macro economic news?
Like if I had to describe the labor market today, I would say it's still solid, but not as strong as it was a year ago or even six months ago. Really since April we've seen it kind of soften up. We're not seeing big layoffs, do you. I always feel like a macro tourist when I visit that space, because it's not my charge to predict labor markets. How do you integrate looking at all these data points that seem, as you said earlier, so noisy, so hard to find the signal in there.
Yeah, there's something like the labor market clearly has taken kind of a front seat.
Right.
We had the FED really focused on fighting inflation, and then as we saw the labor market weekning ultimately and encourage for the FED to begin a presumption of the interest rate cuts. Now, you know, I think there's a kind of a reluctance in the labor market on both sides. Right, there's a reluctance maybe at the corporate level to hires, a lot of uncertainty. Some of that was brought on by the onset of tariffs and just the uncertainty around
where that was going to impact businesses. And then I think you can't ignore AI in the role that that's happening. So there's this reluctance maybe to hire in a reluctance to fire. So we're stuck with a little bit more stagnant component in the labor market.
Really really interesting coming up, we continue our conversation with Ed Perks, CIO of Franklin Income Investors, talking about where he sees value in various equity markets. I'm Barry Ridults. You're listening to Masters in Business on Bloomberg Radio.
I'm Barry Ridults.
You're listening to Masters in Business on Bloomberg Radio. My extra special guest today is Ed Perks. He's chief investment officer at Franklin Templeton Income Investors as well as president of Franklin Advisors.
He has managed several go.
Anywhere as well as income funds for Franklin Templeton, including the flagship Franklin Income Fund, which can purchase pretty much anything at once that generates income.
Le we were talking.
Earlier about the fixed income portion, Let's talk about the equity portion. And I recall reading something you said as we were coming out of the pandemic about the dominance then of growth stocks over value. How has your views changed over the past five years of other than twenty twenty two double digit gains and equities.
Yeah, I think you.
Know, we've gone through this period since the pandemic with different cycles within the equity markets, and certainly there was a tilt immediately towards growth and value underperformed. I think it's shifted a bit, certainly in twenty three and four, a transitioned to more of a market caap dominance, and that certainly has proceeded. I think since the beginning of twenty twenty three, something like the S and P five.
Hundred market cap has nearly.
Double the performance of the S and P five hundred equal weight index. So, you know, we do think there's a lot of other things kind of under that initial layer. If you pull it back and look at the broader equity markets, that there's a lot of opportunity across industries where companies are benefiting from the expansion in the economy, that are benefiting from the secular dynamics that we see, whether it be in manufacturing investment or technology investment.
Interesting, so we've also seen active equity management under fairly intense competitive pressure really for a good couple of decades. How does that change how you look at equity selection or asset allocation.
Yeah, you know, I think you know, from a may a bigger picture, you know, the move towards more passive exposures, the flood of money into passive investments has maybe exacerbated some of these dynamics around, particularly the dispersion between the megacap stocks the market weighted indices and the average stock or.
The equal weighted indocy.
You know, I think for us it really becomes more about you know, security selection. There's still plenty of liquidity in those other stocks, and to the extent that we can turn over rocks that maybe other investors are not looking at that are not being influenced as much by the magnitude of flows coming into passive indicies is something that you know, is a big part of our overall allocation.
But I would really go.
Back to, you know, this kind of view that as an income investor, we can look for opportunities where we're not trying to identify the catalyst next quarter or two quarters from now. We're looking at investment with favorable fundamentals that we think over time can deliver for investors in that income component once again kind of a significant part of maybe the near term total return.
So let's talk about those different asset classes that you're not looking for great quarter guys, you're looking for great decade convertibles, equity, bonds, credit. Do you play in the private space as well. How significant is that tell us about all these different multi asset options you have, and is there an overall core philosophy that sort of strings all of these together, keeps them all in one philosophical bucket.
Yeah. I think one of the more interesting components, you.
Know, our of our strategy is is taking a little bit more of a holistic approach for how we invest in a company. I mentioned before, you know, sitting down at times with company management teams when you're approaching it from both in equity and fixed income analysis standpoint. Well, looking across a capital structure, it's pretty common that you know, between a third or forty percent of the portfolio will be invested in companies where we own multiple parts of a company's capitals.
Meaning their bonds, their equity, and their convers or some combination.
Which it's It is somewhat common in a multi asset strategy to have kind of different components.
And if you like the company, if you've done the research and its income not just capital appreciation, why not own everything. Do the valuations fluctuate within the same company from corporate to equity to convertible, Sometimes a part of their cap structure is more appealing than others.
Absolutely, and that's something that we've really seen over the last five years, certainly when longer term rates were a lot lower, really across the board, there were companies where we saw equities trading in mid teens multiples with three percent dividend yields and the same benchmark longer term debt from those companies yielding one and a half to two percent.
Didn't make any sense, right exactly?
Well, at that time, we'd be very tilted to the common stock and using other things within the equity structured equity in particular. But fast forward two years, rate surge higher those same companies. The stocks many cases were at the same levels or same valuations, yet bonds had gone from yielding two percent to maybe yielding five to five and a half percent.
I recall a couple of the big tech companies, and I want to include Microsoft and Apple in them in that list issued two percent long term bonds, and yet the yield was almost that and you had all the upside of the equity. Like, I don't know who is enthusiastic about that? How do you when you see a new issuance like that two percent? Why I won't care about two percent or is two percent attractive and a zero rate environment?
Yeah, I think for us it's plays it.
It's much harder to have that make sense in our strategy to play a role in the portfolio. But it's something that you know, the more that's out out there, we may not have participated in those new issues in twenty twenty or twenty twenty one, but come back in twenty twenty two when rates move and investment only they're attracted. Yeah. I don't think you know, many investors didn't expect that investment grade corporate bonds could drop twenty to twenty five points,
and they did. So there's always a time for it, and the more of that that is issued in the market just gives us that opportunity down the line.
Just because it's investment grade doesn't mean it's not subject to interest rate risk, Right. I think that's kind of you know, fixed income one on one.
Yeah, that was part of the you know, like I said before, the very loud announcement that the bond market made around its returning to more normal functioning in twenty twenty two.
So let's talk about the flip side of that real default risk.
We haven't seen a whole lot of defaults other than a handful of very specific corporate.
It is a big fraud case.
Recently that company and all it's fixed income in the automotive sector crashed and burned. But for the most part, default rates have been fairly low. How do you look at that risk and is it a sort of top down macro approach or is it company by company, balance.
Sheet line by balance sheet line.
I think first from a top down standpoint. You know, we have had a nice tailent. We have had an economy that's been growing, We've had capital markets that have provided solutions to companies that need to get through. There's also been probably a fair amount of you know, restructurings along the way that in prior market cycles would have led to a higher default rate. So I think you
have to make that adjustment as well. I think for us in our strategy, it's very much though about the fundamental analysis, the ideosyncratic risk and working we want to be in situations, particularly in lower credit quality companies, really understanding that that path that management has to ensure that the company moves to a more solid footing than that could be the debt maturity wall or access to capital and liquidity to ultimately deal with debt.
As it comes to how do.
You think about systemic risk relative to what the central Bank is doing and the Treasury depart is doing Treasury Department when we look at we had the financial crisis, we had the pandemic, we had the flash crash, we had that little hiccup with Silicon Valley Bank and some of the other.
Banks that.
In reality were contained as opposed to what we saw during the financial crisis. Do investors look at these institutions as providing a put providing a ready rescue plan or is it more less about specific companies and more about we're not going to let the system collapse.
Yeah, that's a good quest.
You know.
I think we've been through a lot over the last twenty years, right, and one hundred.
Years worth of stuff in a decade and a half. Yeah.
I think if you look at some of the policy measures, maybe not you know, initially out of the gate following the financial crisis, but you know, the long tooth that some of those policies had and the distortion ultimately that was created in markets, I think there's a different view of maybe the appropriateness to some of the policy today, and then there certainly was at the time. You look, ultimately, the fear of systemic risks does create opportunity for us.
I think being in a highly diversified strategy, not just from an asset class standpoint, but investing across the range of fixed income sectors and the range of sectors within the equity market certainly helps lend a bit of resilience to the strategy in the case where markets become a
little bit more concerned about systemic risks. You know, I think one of the probably more interesting things that is happening today that I'm sure you've talked to their guess about is the private credits base, where we've just seen tremendous growth, tremendous amount of capital being committed there and ultimately needs to be deployed. And I think some of this doesn't have quite the same level of transparency that it would have had if it was in the public
credit markets. So I think that's something that you know, we're certainly close to and both looking at potential opportunities because we can play in private assets within our Franklin income strategies. But you know, if there was something that you know, we would want to keep very much on the radar is what is happening in that space in terms of credit quality.
The criticism that has come up about privates is that it's a form of volatility washing. You're not getting marks on the regular that are market based. It's all right, we think it's worth about this. Here's what the pars are worth. So let's sort of ballpark this. How do you think about that? Is that a fair criticism of that space? And you know, the main appeal seems to be, hey, it's non correlated, it's potentially better returns. How do you look at at the pitch from the private credit side.
I think it's evolved in a healthy way.
I think using volatility measures is somewhat debunked. I think, you know, leading with the sharp ratio when you're comparing public and private assets is not the not something investors should be focusing on, you know.
I think the ultimately it has a meaningful place.
The definition of public credit can be extraordinarily of private credit, sorry, it can be extraordinarily wide.
And I think as that capital has.
Come in, it has start to look at a lot of different places to to ultimately have its role in financial market. So we certainly think it's it's it's a viable asset. We just in any and really this goes kind of across any asset. When you see the kind of capital moving into a certain area, there's just a greater risk of maybe less disciplined things happening. And that's something that we think could become a little bit more parent here as we move forward.
Really super interesting.
So we've talked about various asset classes, We've talked about privates versus publics.
What do you think the average income.
Investor, yield investor doesn't understand about either the SMA they own or the mutual funder ETF they own. I know, fixed income is not quite as intuitive as equities. You must hear from a lot of different clients. What's out there amongst main street yield investors.
I think one of the biggest things that we come across is there's just a natural view that if you're an income investor, you own a certain type of stock or have a certain type of equity exposure.
And maybe that's rooted.
In the concept of you know, like utility stocks, right bond like surrogates within the equity market, that's what you must invest in an as an income investor, and the
reality is much broader than that. Even in the components, say of the SP five hundred, nearly forty percent not paying a dividend or paying a very low dividend, that's still something whether it's through convertible securities going back to that kind of earlier part of my career, or using structured equity where we can create a security that we can own for a year or two years that can
replicate that kind of profile in our strategy. So that opens up the opportunity to own and we do in our strategy today convertible like instruments in Amazon, in Microsoft, in Meta. So we really have a much broader cross section in the equity markets to pursue investments.
Huh really really interesting. Sticking with dividends, the S and P five hundred divining yield under two percent way back when it was three and a four percent. How do you look at dividend stocks as a whole, how attractive they are, the valuations there?
How do you think.
About that group as a source of yield.
Yeah, I think it's a group that you want to consider. I think back to the just the profile we've had inequity markets the dominance of mostly non dividend paying stocks, the megacap tech companies in particular, and not to say that they can't continue to be decent investments, but there is that whole cohort that still focuses on dividends, not just dividends, but consistent growth of dividends. I mentioned Utility
Company several times. One stock that we've actually held in the portfolio of the entire time that I've been in portfolio managers Southern Company and what probably very few people would expect if you go back to two thousand and two, since that time period, Southern Companies actually matched the return of the SPA five hundred.
Really really interesting. We're seeing signs of the market broadening out. My favorite data point from twenty twenty five. Everybody talks about the concentration and the Magnificent seven outperforming. Only two of the mag seven beat the S and P five hundred last year. Amazing data point. How are you looking at the rest of the S and P five hundred? How are you looking at the value sector? Can we reasonably expect to see this broadening continue in the future.
Yeah, we do think, you know, there is some interesting value in parts of the equity market, and maybe they are companies that have been a little bit out of the spotlight. You know, we do have a pretty good amount of sector diversification, so we're finding opportunities in these different areas. It'll be healthcare, it'll be industrials, energy utilities, even in materials.
Some of these trends.
Let's take globalization and really this move still evolving into maybe hemisphere controls and near shoring of supply chains, some things that came out of the pandemic. You know, all of that has pretty significant implications. So finding companies that have that a play on a select theme that you want to that you identify and want to play.
We think there's a lot of that opportunity in the equity market.
I've been mostly thinking about and talking about US equities. Last year was the first year where MSCI developed and even emerging market just wherever you looked overseas thumped the US, and the US was you know, up almost eighteen percent, nas deck up a little over twenty percent. How do you look at the rest of the world when it comes to either fixed income or equities.
Yeah, you know, I certainly think that made a great storyline for twenty twenty five. Reason being, you know, we go back and look at twenty three and twenty four. Though US doc sent out performance so massively so.
Over the past fifteen years or so, at.
Some level, we do think it was primed for a little bit of a reallocation towards non US markets. And then you add on some of the policy dynamics around tariffs and.
The dollar dropping almost ten percent.
Exactly, and that really led to some of that reallocation. A lot of the outperformance of non US equity markets in twenty five did happen during that period of time. So if you were to take a look at more of the second half, a little bit more balance between the markets.
And then our last question before we get to my favorite questions, I ask well, I'm like, guess what do you think investors and traders are not talking about thinking about that? Perhaps they should be in it and you could you go anywhere investor, So you go anywhere with this?
What assets?
Geography, policies, data points are getting overlooked but shouldn't.
Yeah, I think we're going to keep coming back to right now, we really feel like policies paramount, So really focusing on policy will will ultimately take the market. Midterm elections are going to continue to be a very significant
overhang in markets. Maybe one of the things that concerns me that investors are not talking about is if we were to think about the level of uncertainty that some of these dynamics naturally create, and how that right now really does not translate to the kind of expected volatility
that might be there in markets. So just looking this morning at something like the victor in the VIX index, which a lot of investors will go to when they want to see applied volatility back to the levels it was at in February of twenty twenty five, So we did see a very very low, right low low, and that tends to be, you know, a point where you know, we want to be a little bit more cautious when naturally there is not a lot of volatility expected to
be coming in markets. You know, for us, that means we can stay invested, we can focus on areas that deliver attractive income and really maintaining that nimbleness in the portfolio, in the strategy.
That we have really really interesting ed Let's jump to my favorite questions that I ask all of my guests, starting with tell us about your mentors who helped shape your career.
Yeah, i'd certainly first and foremost on that list is Charles Johnson joining Charlie in two thousand and two as a member of the Franklin Income portfolio management team and really being able to understand his approach to investing and hearing the tremendous experiences that he had over time. But I think more importantly him really enabling me to become
a bit of the investor that I am today. And as we went through that transition and then went through difficult times, particularly the financial crisis, that awareness that, look, we're not going to get every situation right, we're not going to make every perfect investment, but really how you handle it and how you stay focused on the people that have entrusted their money to us is just paramount importance.
And you know, one of the first things that Charlie asked me to do in two thousand and two was.
A difficult time.
Interest rates were coming down, there was a modest dividend cut for Franklin Income Fund, which is not a very common current certainly not something that we enjoy doing. And getting a handwritten letter from an investor or a woman in Tennessee that was a little concerned that her dividend check had gone down. And here he is the chairman and CEO of Franklin and portfolio manager still and he gave me that handwritten note from the investor and asked me to respond directly to really and that was.
Just you write a letter or did you pick up the phone.
No, we wrote a letter, and that was something I don't recall having the phone number. But we did write a letter and really kind of laid it out and tried to help her understand just the dynamic. But to me, that really resonated that, Wow, this is so important to him. This is really we need to stay connected to just
the role we are playing in individuals lives. And I think that's something that I've really tried to not only carry on in my career, but certainly instill in the broader team that helps manage Franklin income.
Easy to lose sight of that, right, So let's talk about books. What are some of your favorites? What are you reading right now?
Wow, I'll start with maybe what I'm reading right now, And this is something I've always enjoyed, history and geography.
The end of last year.
I picked up a place called Yellowstone because I was planning a siblings trip to Yellowstone and it was just really fascinating the history. I'm now reading A Daunted Courage by Samuel Ambrose, which is more of the Lewis and Clark expedition. So maybe this summer I'll be out in Glacier or in the Bitterroot Mountains.
On a trail somewhere.
But I really enjoy, you know, reading, so I'm more of a nonfiction, you know, kind of guy. Occasionally I'll pick up something else. Probably my favorite of all time is the Hemingway classic from the Bell Tolls, where you know you're reading something that plays out over seventy two or so hours, and just something like that that really can let your mind kind of go and the imagination take hold. Is always something that I've enjoyed too. I
did just pick up a new copy. I think it's probably something that as an American we should all read. And certainly Walter Isaacson is not somebody that needs a plug of any sort. He wrote more of a pamphlet called the Greatest Sentence Ever Written, and that's really thing that I think with America today.
His books are giant.
I think this is around fifty pages, so it's the greatest sentence ever written. And I haven't gone through it yet, but I've heard heard him speak about it, and it's just very inspiring. And like I said, it's something that second sentence of the Declaration Independence with America two fifty is maybe something that we should all step back and make sure we read this year.
I have for Whom the Bell Tolls on my list, and I just read on vacation last month, The Sun also Rises, But nothing beats the Old Man in the Sea.
That book just always speaks.
To me, not just as a fisherman, but his prose is just so compact and tight.
And powerful, really very impressive.
You mentioned Yellowstone, so I have to ask, what are you streaming these days?
What's keeping you entertained.
I haven't started Landman two yet, but that's probably next. You know, I really kind of like to and maybe there is a sci fi element growing up my sci fi choice with probably something like Stargate SG one or something where you can really detach, and I think that's an important component. Let the mind rest and be transported a little bit.
Let's jump to our final two questions. What sort of advice would you give to a recent college grad interested in a career in fixed income, portfolio management or just investing.
In a way, it would be just that I see far too many college students, recent grads that think they've already decided what they want specializing early yes, or are having a definitive I need to find the job in this and I just reflect on my own path that.
It evolves.
Quickly, Get in a seat somewhere in an industry that you think is interesting, and see where it takes you, and don't be afraid to put your hand up when opportunities arise.
It's you have plenty of time. You have nothing but time.
Don't assume that first gig is where you're going to spend the next forty years of your career.
Is that your advice?
You know it can happen, It certainly can. And our final question, what do you know about the world of investing today? You wish you knew thirty plus years ago when you were first getting started.
Oh, it's such a good question. I mean a lot of ways. You know, you almost wouldn't want things to be to be entirely different. You know, I was fortunate in that I found that role relatively early on. That really solidified the kind of investor I think I am. What is that inherent DNA that I have as an investor? So I think the sooner you can kind of tap into that and then explore ways to follow your investing based upon that.
Don't try to be somebody that you're not.
You know, and I have colleagues that manage pure growth funds that follow momentum strategies, and I think they do a phenomenal job. I also very much know that's not a job that I would have ever excelled at.
What's the old joke at Will Street is an expensive place to figure out.
Who you are?
Absolutely, Ed, thank you so much for being so jenerfer with your time. This has been really quite fascinating.
We have been speaking with Ed Perks. He's CIO of Franklin.
Income Fund as well as member of the executive committee and PM for a number of different funds. If you enjoy this conversation, check out any of the six hundred we've done over the prior twelve years. You can find those at Bloomberg, iTunes, Spotify, YouTube.
Wherever you get your favorite podcasts.
At I would be remiss if I didn't thank our corrac team that helps put these conversations together each week, I'm Barry Ritolts. You've been listening to Bloomberg's Masters and Business