Animal Spirits Podcast - Talk Your Book: Income and Momentum

Episode Date: April 6, 2026

On this episode of Animal Spirits: Talk Your Book, ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Michael Batnick⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Ben Carlson⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ have two guests. First up is Bill Mann from Motley Fool Asset Management to talk about the momentum factor. Next is Kevin Lynyak from Morgan Stanley to discuss preferred securities. Find complete show notes on our blogs... Ben Carlson’s ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠A Wealth of Common Sense⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Michael Batnick’s ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Irrelevant Investor⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Feel free to shoot us an email at ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠[e-mail]⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ with any feedback, questions, recommendations, or ideas for future topics of conversation. Check out the latest in financial blogger fashion at The Compound shop: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://idontshop.com⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Ben Carlson are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. See our disclosures here: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://ritholtzwealth.com/podcast-youtube-disclosures/⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ The Compound Media, Incorporated, an affiliate of ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Ritholtz Wealth Management⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://ritholtzwealth.com/advertising-disclaimers⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits is brought to you by the Motley Fool asset management. Go to Fooletoffs.com to learn more about the Motley Fool Momentum Factory ETF, ticker MFMO. Today's show is also brought to you, got a two-for-one here, by Morgan Stanley Eaton Vance. Go to eatenvance.com to learn more about the new Eatonvance, Preferred Securities Income ETF. That's ticker EVPF. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Riddholz wealth management.

This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Riddholt's wealth management may maintain positions in the securities discussed in this podcast. Welcome to Animal Spirits with Michael and Ben. On today's talk of your book, Michael, we have a two for one. we're diversifying for people. That's right, Ben. It's two for Tuesday. First, we talked to Bill Mann,

who's been a regular on the show. He's the chief investment strategist and model fuel asset management to talk about their momentum ETF, which is, as you mentioned on the show, probably one of the most underlooked factors of all in terms of flows. I don't think it's the most underrated,

but it's the most under-allocated to it. Yes, yes, I will say that. Like, everybody knows it's a thing, but relatively nobody puts money there. Yes. And it's funny, because they do with like individual stocks, but not at like the systematic level. Yes, I agree. Quantitatively, value is way more, obviously. And then that's the first half of the show. In the second half of the show, we talked to Kevin Lineack, who is the managing director at Morgan Stanley. Morgan Stanley partnered with Eden Vance to list a new preferred securities fund. Eat in advance preferred secures income, ETF, EFP. It's actually, it's more than a partnership then. Morgan Stanley owns Eden Van. Okay. They partnered with them by owning them.

How is that? And Kevin, listen, Kevin is a pro. Did you call him a straight shooter? He's a straight shooter. He's a great guy in my book because he said he read one of my actual books. So Kevin's good with me. And he schooled us in the world of preferred securities, which I think are not understood by a lot of people.

I love the fact that he led with the taxable nature of these preferred securities. Yeah, that was, I don't think I knew that. I'm not sure I did either. But so another interesting talk on fixing Kevin credit. All right, let's call it what it is. I had no idea. Yeah. Well, listen, we're not, I don't think many people are experts in preferred securities, right?

It's kind of an unknown area with you see a high yield and you go, wait, how do these work? What's a risk? And so we get into all that with Kevin, talk about private credit, all this other stuff. So first up is Bill Mann from the Motley Fool. Bill, welcome back. Great to see you guys. Great to be on. All right.

We are talking, great to see you too. We are talking momentum today. And I think it's really interesting. I think there's a logical explanation for this. But they're making this up for every $1 that's invested in momentum strategies, momentum ETFs, there's got to be $20, $40 invested in value. And they are two sides of the same coin. I think. Value was the, I guess, one of the first factors that came mainstream. Let's buy a dollar

for 80 cents. It's a very clean story. Let's buy low. Let's sell high. It's intuitive. Everybody wants a bargain. Momentum is maybe not as, yeah, that's how you're supposed to invest. No, you're supposed to buy high and sell higher. No, I thought you're supposed to buy low and sell high. Okay. But in this environment, in this new structural regime that we're in with the retail trader and the 24-7 trading and the speed and the copying, it just seems so obvious that momentum should be given more consideration from investors than value. And yet, that's not the case. What are your thoughts? Value seems like it's the good child, the good son, and the momentum kind of feels like the goth kid who, you know, who makes mainly good decisions. in Joe, but it's a little bit counterculture.

We think of momentum, I should say, as a way of cheating off the market's paper. I love that. Our experience that the Motley Fool suggests strongly to us that there are people and there are entities that are good at security selection, that they can generate alpha that way. But in a world where market participants outsource so much of their research to AI, I think it'll be even more so the case that cheating off the market's paper is going to help. Because there's really three primary ways that good security analysts leak alpha, the first of which is by underreacting to the market.

The second is overreacting. And the third, which is maybe the most damaging is overacting too late. The way that we think about momentum is a way of we or our sister company, The Motley Fool's coming up with securities based on their tried and true criteria. And then we're allowing the market to tell us what's working right now. And you are exactly right. that is not necessarily a, you know, something that's completely counter to value. It's very much aligned with value.

I look what you said there because it is like, momentum is like the ultimate behavioral factor. It's the overreactions and the underreactions, like one compounds on top of the other. How much do you think it matters in terms of how you calculate momentum? Because there's a lot of different quants who have ideas about how you should look at it, what the look back period should be, how you change it. Do you think that it matters that much or do you think it matters more like, well, you have to have good reasoning behind it and you have to have some rules in place, but it's just can you follow those rules?

Like, how much does your process think it matters, like how you define momentum? Yeah, for us, it's entirely rules-based in terms of, in terms of allowing the factor to speak for itself and defining momentum. And we look back monthly, but recalculate quarterly. So we don't put our finger on the scale. One of the smartest people I've ever worked with was a guy named Don Kruger, who used to work with us in Motley Full Asset Management. And he always said that the market.

The market traded on a 1.7 derivative to fundamentals. And I always thought that was like a weirdly specific way to think about it. But, you know, if you think about what's happening in the market now, there aren't much in the way of qualitative factors that suggest the dispersion that we're seeing in the market. And so we're allowing the momentum that, you know, factor that we've predefined to help us determine how to play the market at this point. We don't make any decisions on top of letting that factor do its work for us. Wait, what is the 1.7 times unpacked that.

I wasn't really clear on what that meant. I like it, but what does it mean? That's right. It sounds sciencey. I wrote a paper this last month, and it was called The Greatest Day. And it was talking about, for example, media stocks. And there was a day in the market in which all of the newspaper companies had their best day ever. and sometime not necessarily aligned, but not necessarily separate from that, it became pretty clear

that they were in what seems like a terminal decline. And what Don's thesis was, was that those two events aren't necessarily linked with each other directly, but they do inform one another. And so you're not necessarily trading on the first derivative. Like, the best day ever for the stock isn't necessarily the best day ever for the business or for the sector, but they do have, you know, they do have an alignment with each other that is at least somewhat predictable. So I'm curious how, because I think one of the reasons Michael said that more people are, value makes more sense to people is because they, they think that momentum aligns

with performance chasing. And people are told that performance chasing is bad. You shouldn't do this. Yes. You should do it just systematically. How you define the idea of momentum and explain it why it's actually good to chase performance versus the way other people do. Most people do it on, listen, I look at the best, the fund of the best one, three, and five your returns. I'm going to put my money to that. And then it goes on to perform. Like, how do you explain the difference between that?

Because again, I think part of the reason there aren't many people allocating momentum is because they just don't understand how it works in practice. Well, yeah. And I love the way that you put that because it almost feeds to what we think is our worst basic instinct when it comes to investing, is that is that are we performing? performance chasing. And you go back to your basic finance classes and they will tell you that one of the worst things that you can do is to performance chase. If you are a fundamental based investor, you know, obviously value is a very, very clear story how you go about investing. What a momentum factor

is suggesting is that you are letting some of that control go in terms of what you believe the market ought to do, and you're signing on to what the market is doing. You know, so in some ways, it's just the reality that at some point, different sectors are going to work, and you don't necessarily get those signals. The market, you're allowing the market to define it for you. And so in some ways, it is letting go of a little bit of control. I mean, you're setting up a different set of rules, and you're telling the market, yes, go chase a little bit of momentum.

go chase the companies, the stocks that are doing well. But I think in some ways we think of that as being the most highly valued stocks at all times. And in some cases, like for example, now some of the sectors that have worked this year are not the ones that you would say from a momentum basis are the ones that you would necessarily think. Okay. So I'm glad you mentioned that because some people, to your point, associate momentum with either performance chasing or maybe like junkie stocks, for example, can have a lot of momentum. And when it goes, it goes.

So you want to make sure that in your process, there is some sort of quality screen so that you're not buying this piece of junk business that just happens to have momentum. Maybe it got meaned and whatever. And of course, I'm not even talking about like screening out the price volatility because a company that's flat and then up 40%. My measure is up 40%. Obviously, it's not momentum.

And that's an, you know, exogenous sort of an impact. But anyway, the underlying point is you want to make sure that you own decent companies. How do you do that? So that's the Motley Fool way. So that's how we base our, you know, we base Motley Full momentum ETF based on the Molly Fool research, which is screening out for, you know, for high quality companies. That's the top of the funnel. And so the momentum that we are finding with, you know, within our universe is based upon the

companies that they, the publishing company and our 50 analysts over there have already pre-clear. We very much view quality as being high free cash flow companies, companies that have exhibited long-term growth, asset light capital compounders, a fairly stringent set of companies that allows us to own the companies that are the highest quality companies and then using that universe to put a momentum factor on top of it. Because you're exactly right. I think in some ways when you think about momentum, you're just talking about licking your finger and holding it in the air and saying what's working now, I'm going to do that. And what we've found over time with lower quality companies is that that signal turns off and off and on much quicker than it does with companies that, you know,

have a long-term history of generating positive free cash flow and growing. So how long do you hope to let these things run for? What's your ideal holding period for your momentum strategy? Forever? I mean, it would be great if it's forever. We would allow a company to, you know, to run for a long time. So we could talk about the largest company by market cap. Now, excuse me, not by market cap. Our largest holding within MFMO, for example, is lamb research, which, you know, it's the largest weighting based on the fact that, you know, we have a, we have a position size ceiling upon recalculation of about 4.8%. This company is now over 6% because it's done very well since we went through the last formulation. I would be more than happy to hold lamb research in perpetuity. You know, the second

largest holding is Walmart, and that's a company that the Motley Fool recommended almost two decades ago. So we are very, very happy to, you know, for companies that, you know, demonstrate long-term free cash flow generation, you know, to be within the portfolio for a really, long time. And so it is, MFMO is, is our highest turnover ETF, you know, and, and, you know, obviously it's, it's only been out. We, we launched it in early December of 2025. So I don't want to be too prescriptive about the characteristics of it just yet from a, you know, but it should have a little bit of a higher turnover than, say, a straight value ETF would. In terms of the composition of the portfolio. You mentioned Lamb and Walmart that we're recording March 25th,

two biggest holdings. It does seem like it's living in the mega-capped land. Is that, is that the pond that it's swimming in? Yeah, it will probably mainly be within mega-cap. It is 100 of the largest companies by market cap that we're looking at, you know, is the basic universe. Yeah, they should, generally speaking, be larger companies as as those two are. So you mentioned a little higher turnover. How much of the portfolio is turning over every time you guys rebalance? The portfolio is now four months old, so we're just coming up on our second rebalance. Again, we're recording in late March. In early April, we will have our next reconstitution, but we're targeting it to be about 50% per year.

So, you know, you can derive from that on a quarterly basis. And again, you know, that's how we've set the model to start with. But in a period of time in which you have a real dislocation in the market, and let's look at reality right now. You know, you've had oil prices go through the roof. You know, we, you know, we, we have had a software industry that seems currently uninvestable. Even six months ago, it was amongst the highest flying. So, uh, in times of, of market dislocation, I think you can expect that the turnover would be somewhat higher. What happens in a complete washout? Like, what would this portfolio have looked like in February 2009 when momentum,

is only going negative when there's no stocks that are working. Are you looking at, because you have to own something, would you be looking at like relative momentum? Like, are you going to be owning like Coca-Cola? What would that look like? That's exactly what it would tend to look like. It would look at, I'm going to try and define a term here, the least negative momentum.

For us, we view those periods of time as, you know, as fundamental driven analysts and a fundamental driven shop as, you know, as opportunities, although they don't necessarily. feel like it at the time. If there is nothing working in the market, as our momentum portfolio is long only. So we have to hold something. And so we would be looking at the least negative momentum, if you will, if you're looking at a period like in February of 2025, in which everybody was running away as quickly as they could. I'm curious how, are there any sector constraints on the portfolio? Because obviously momentum, I think one of the interesting things about it is that it's kind of a

chameleon strategy. Like you said, there's sectors that work at sometimes. They don't work other times. If risk is off, maybe it's these boring sectors and risk is on it's these high flying sectors. Do you kind of let it be free and open or do you have some sort of like constraints on there? We don't have industry constraints. We do have position sizing constraints. So on a security level basis, we would have some constraints on. But if it is all, you know, in a theoretical market, If the only thing that's working is a single industry, you would see us very heavily weighted towards that industry. And happily so.

But, you know, we would not be as heavily weighted as a pure momentum strategy that doesn't have position size and constraints. But at a 4.8% position size maximum at rebalance, it does, in fact, limit the overall concentration in a specific industry, but somewhat organically so rather than prescriptively. All right. We're talking to Bill Mann from Motley Fool. The ticker is MF, M.O. Bill, as always, great seeing you. Thank you for your time today. I appreciate it. Great to see you guys. Okay, thanks to Bill. Remember, check out Fooletts.com to learn more. And now, in the second part of our talk of your book, here is our talk with Kaeliniak from

Morgan Stanley. Kevin, welcome to the show. Thank you, guys. Thanks for having me. So the world of fixed income through the lens of a wealth manager was tricky. Talking pre-COVID times,

there was a lot of duration, not a lot of income, and it was just like not the most awesome thing to talk about with clients. And we all remember what happened in 2022 with the inflation and the rate hikes and the tenure going from 1% or even below up to 5%.

and all sorts of tumult and volatility and then opportunity. And so as we look at the fixed income landscape today, or more specifically where people are generating income, one area that you don't hear a lot about it anymore that we're going to be talking about today is the preferred stock vehicle. So what is it about preferred stocks that you guys thought was so excited that you had to launch an ETF to deliver to investors? Yeah, it's the income part of it, Michael. But yeah, I mean, going back to those times, there was a

very little income in fixed income. We used to call the government risk-free rate, the rate-free risk. And I think for you guys, in diversified portfolios, it was really difficult to see, you know, where fixed income fit in because there was just rates were so low for so long. I mean, part of that was, you know, post-financial crisis, very low inflation, the Fed policy, QE 1 through 4. I mean, all of it really kind of kept a lid on rates. And even for high quality investors or investors that didn't want to take a lot of risk, the problem is you couldn't see a lot of income. I think a lot of folks at that point had gone into preferred securities to find income, but also tax-advantaged income. The coupons or dividends in preferred securities,

yeah, they pay qualified dividend income, which means you're getting taxed at that capital gains rate instead of the ordinary income rate. And that's a big difference. I think it juices up your yield. But even going back post as we went into COVID, we went back into that really zero lower bound again on rates. And I think for a lot of financial advisors who are doing managed money, you think back 2020, 2012, I don't know what you guys charge, maybe 2%, 3%, I'm just kidding, but you can charge like 1%, 50 basis points on a portfolio. You know, if you had munis out to 10 years or or invest in great corporates, they yielded below 1%. So it was really, you know, after fees,

didn't really make a lot of sense, even for folks that really wanted safe portfolios, being in fixed income or high quality fixed income. So we saw a lot of people go into preferreds around that point. And at that time, we saw a lot of preferreds getting issued around 4% or so, which, you know, brought a lot of risk as we went as rates backed up in 2020 and 2023.

So there's a lot of people who probably just don't understand understand how prefers work. They think, ah, it's a little equity, it's a little debt. How do you explain them to people in terms of their risk reward profile? Yeah, I think they're a hybrid of each. They're really trade like fixed income. And I see where they fit into a portfolio would be kind of in your income, fixed income area. They're certainly not as safe as munities and treasuries and investment grade corporates, but a lot of them are rated investment grade, actually. And I think of them as similar yielding to double B high yield, but probably with less risk. Now, there's a little bit of interest rate risk, but we're able to kind of manage that out.

And I think one of the unique interest rate components to the preferred securities market is the retail part of the market is perpetual and kind of fixed for life, meaning that if they issue a preferred right now, rent 6%, it'd probably be callable in five years. But it would still be perpetual. Some of the ones that were issued at 4%. They were callable after five years, which has now come up. But they're trading between 70, 80 cents of the dollar. I think a lot of those securities will never see par again. But the institutional part of the market, which is a real growing part of the market,

and I think the opportunity in the preferred space, especially where we're invested in EVPF, they have this unique fixed income yield basically interest rate component that you don't see in other parts of fixed income. And what is that? They're issued as a fixed rate security, but they're either called after five years, typically after five years, or they float. And they reset off the five year treasury, sometimes quarterly, sometimes every five years. But it's actually a fixed-floating rate security. It keeps your duration lower. And really kind of what else is like that in an advisor's portfolio that has that kind of inflation insurance or floating rate type of insurance. And so these, we really only find them kind of in these, institutional market or they're much more prevalent in the institutional preferred market, I think they become very popular in financial portfolio financial advisors portfolios who understand this part of the market. And it's unique part of the market. I think it's growing in popularity.

Why would a company decide to issue preferred stock as opposed to traditional plain vanilla equity or bonds? I think it's a great question. And there's a couple different reasons for that. but they're essentially priced in between both. The investment-grade corporate market yields a little over 5% right now. Preferrence kind of trade between six and six and a half right now, let's call that. Cost of equity, you know, you guys are the smart guys running CAPM and everything else,

but that's probably north to 10%, right? So it's more expensive than investment-grate debt, but it's less expensive, much less expensive than equities. For a financial institution, like a bank, you know, they post dot frank in 2010. We got a whole new set of kind of financial rules and the preferreds, I think, kind of fall under a lot of that stuff. A financial institution can issue up to one and a half percent of the risk-weighted assets

in preferred securities and have them count as equity for the regulators. And that's a big thing. So, you know, the financials go all to go through annual stress tests for the biggest banks. And their issue prefers, because it's a lot of cheap. cheaper than issue equity. So there's kind of the arbitrage in that. And if you were able, if you had to go through another thing like we went in the financial crisis and God willing, we never will, is that, you know, there are areas where preferreds would actually help recapitalize the bank and probably would get wound down with the equity. And we've seen this with a few

of the kind of regional bank, you know, kind of wind downs since then. Why else would a company issue them? A lot of corporations are starting to issue Preferds. And I think the issue, here is the rating agencies give them equity credit out to 10 years. And Moody's kind of changed the rule on this just a few years ago. Why is that important? Well, you say like a sector like the utility sector right now. They've got huge cap-ex needs, right? They're able to issue preferreds and have a certain sliver that count as equity so that they're able to kind of lever up and do a little bit of cap-ex. But they're issuing a sliver of this stuff in the preferred world because between six and six and a half percent, it's a lot cheaper than equity. All right. And so we're seeing them

issue a lot more of these. They probably will call them after 10 years, at least that's kind of our expectation. Why? Because they will no longer count as equity. So they'll just be kind of expensive debt at that point. But with the call features on these securities, it keeps the duration lower. And portfolio managers are able to kind of model that out versus other kind of fixed income risks that they have. So there's a little bit of an equity arbitrage, regulatory arbitrage, of why they issue this stuff. And that's brought opportunities to the market. Last year, we saw 25 billion of utilities issued in the market. Would you like to buy an investment-grade utility north of 6 percent? You know, we think that's really attractive. And some of these are now in bond

indices for core and core plus. So we're seeing some of the traditional fixed income managers start buying some of these preferred hybrid securities from the utility space. So I have this theory that people in finance and the market people only have the ability to concentrate on one story at a time, right? This is a general theory. But in fixed income... There's a lot of stories going on right now. I don't know.

It's a hard thing, yeah. True. But in fixed income, it risks, how about? We only focus on one risk at a time. But in fixed income, that risk right now is private credit. Everyone's talking about it. And it seemed like a couple of years ago, private credit kind of boxed everything out in terms of interest from advisors and the wealth management channel too.

So it's interesting to see both sides. of that, right? It's the only thing people can talk about because the yields are so great, and it's floating rate and all this stuff, and now people are talking about the risks. What do you think the private credit impact has been on the rest of the income landscape in terms of just, you know, interest from people and then flows? Has it impacted the rest of fixed income land at all or not quite yet? Absolutely. I mean, I speak to financial advisors all the time, and, you know, there were folks like me or go around the branches and try to discuss our solutions. It was very popular to run into this whole private credit crowd, the BDCs over the last few years. In fact, I was probably

marketing against them, you know, for the last three or four years, just saying, you know, we're a little bit different. And that if you get six, six and a half percent in preferred, you've got something, especially in an ETF, you've got something that's liquid, transparent, and public. And you know, but there were better returns to be had, double-digit returns we had in the private court world. So we saw a lot of advisors really kind of running income strategies as a barbell, a lot of higher quality munies and investment grade and then taking their yields, where they either gone into bank loans or, you know, other kind of yieldier products in the past and going into private credit. And I think it was, it's a real, you know, it was a real popular area.

Probably north of these, north of 10% of these BDCs are kind of retail money. So I think with some of the larger financial advisor teams who do privates, private credit became real kind of interesting allocation for them. But we've seen this many times before in the past. You know, I've been doing this 30 plus years. You know, when you offer equity like returns in fixed income, you're always taking risk. And I think what you're trying to do there is you're trying to harvest the illiquidity premium. I think advisors right now are a little bit worried about private credit. are also trying to get out, and they're realizing, you know, there's a reason for this illiquidity

premium. There's the gates are up. There's outflows are north of kind of 5%. Now, we think the gates here make sense. I mean, I find myself almost like defending private credits to some folks down more than, and I was marketing against them for years, but I think maybe some of the risks are either not well known or kind of maybe over-concerned. I think of people starting to say, this reminds me of 2008 and CDO squared. That's a little overdone in my view. I'm so glad you said that. I tend to agree. I think that there is legitimate smoke, right? Like, I don't think the outflows are completely media panic driven. I think there are genuine reasons why assets are leaving. And they started to leave, as you mentioned, the floating rate nature of some of these

vehicles. They started to leave not just last month. Like the attractiveness of these BDCs, and you started in the publicly traded ones, they peaked a year ago because as we were entering a rate-cutting cycle. It was plainly obvious that the rates were going to come down. And then you mix in the software fears on top of it, which is the 25% of some of these portfolios, there's legitimate reasons to be concerned. But this idea that there is systemic risk, I think, is a bit hyperbolic. And I'd be curious to hear your take specifically. And I know, understand we're talking to a Morgan Stanley employee. The model of the banks lending to these alternative asset managers who are then, lending to these companies as opposed to the banks going street to it, is there any concern that

the banks are exposed to some of these loans going bad? Yeah, look, I absolutely agree with your take that you had there. And the banks are clearly exposed here in that we do lend to non-bank financial institutions, but it's much safer than lending to them directly. I mean, you'd have to have a complete Armageddon model before you had any type of risk. I have a good friend who's a portfolio manager. one of the large private credit firms. And, you know, they're looking to kind of spin off maturities and capital that gives them probably 8% a quarter.

All right. And so, you know, that's why the gates are set up around 5%. So they want to pay that organically. They also have bank loans and high yield bonds in there and a little bit of cash to help assuage some of those outflows as well. If they were had, if they couldn't solve all of that stuff, there's backstop facilities set up with the banks that would help with any, any, you know, kind of real outflows. I do think the SaaS situation with software is serious.

Then again, we work with a lot of folks here from our tech team. I mean, they're very excited about everything going on with Claude Co-work and OpenClaught and all that kind of space. And I remember when it kind of rolled out of like a month and a half ago, they were so excited. You know, I probably should have shorted all the SaaS stocks at that time. But, you know, it's you're not going to replace everything right now. You're not going to replace your CRM. You're not going to place your cybersecurity. software, it's just not going to happen. So, I mean, I think it's probably more of an equity issue

than there's a debt issue. But even, you know, I think when you have too much debt concentrated in one certain area, it's completely risky. So some of these BDCs that have 25% risk in one sector in software, I think, I guess I've leverage. And yeah, and there's there's leverage on, yeah, and you're levering up recurring revenue. And I think, you know, the risk that we have with AI here is people are really guessing that recurring revenue. I do think that's risky. Is it systemic? No, doesn't strike me that way at all. It kind of reminds me of commercial real estate back in 23 that hit the regional banks. And we're involved in that space as well. What we would do there is just really kind of shun the regional banks that have very heavy CRA exposure in their portfolios.

Some of them have problems. Yes, was it systemic? No, it wasn't. A few of them had, you know, issues that we saw with kind of Silicon Valley Bank. But I think those were a little more idiosyncratic. It was an issue that needed to get worked through in the banking system that it did. I view this kind of somewhere more analogous than that we're all looking at the risk and probably re-rating where we see some of the risks. And software is definitely one of them. Now, you brought up, too, that there were risks some of it ahead of time. And yeah, I think rates going lower was one of them because these are floating rate assets. We have cut rates 175 basis points. And, and And the reason that a lot of this asset class has grown so much over the last 10 years is because the banks kind of stepped back from this.

And Dodd-Frank, the legislation that we got post-financial crisis, you know, we decided that the regulatory environment made it really expensive for the banks to be lending. So a lot of this lending kind of went out of the banking system and into the shadow banking system. And a lot of these private credit firms set themselves up. And there are different parts of private credit. I'm not going to get in all the nuance there. It's not just, you know, one large leverage lending area. I mean, there are asset-based lending in a lot of other areas. But I think for the overall system and for our overall advisors and clients, it's important to know you would rather this lending to be going on in an unlevered solution owned by the private credit folks than I think in a 10 to 12 times levered bank. And that's where it was going on before 2010. And by the way, we were more levered than 10 to 12 times. times pre financial crisis. And that was a different issue.

So I think a lot of traditional fixed income investors felt kind of betrayed by the 2022 bear market. Like, hey, I didn't sign up for this. I wasn't planning on getting smoked. You like an aggregate bond fund lost 18% or something, piquot trough. I think one of the cool things about the market now, the in ETFs these days open up with that. There's so many different income products you can invest in. You have preferred securities you're talking about. You can do CLOs and asset back securities and there's income oriented products with options. And there's just a lot more fixed income opportunities, right? Bank loans and floating rate debt. And I think a lot of those traditional bond investors have realized or should have realized, I probably need

to diversify my sources of income more. So I'm just curious how you help people think through those decisions because there are just a lot more products and strategies to consider these days. Yeah, I think advisors have a lot in their place when they're thinking about asset allocation. there is no free lunch in investing, but diversification gives you the closest thing to it. And it allows you to kind of build a portfolio, get you closer to the efficient frontier. And I think, as I said, the interest rate component here is really kind of unique to the preferred market. But I think there's a lot of decent income solutions. But if you're getting, you know, a decent amount of income in the high single digits, you're taking risk.

And look, I even say you're taking risk in the corporate, I mean, in the corporate bond market or even the treasury market. You know, we have 39 trillion of debt outstanding right now. We're at 100% debt to GDP. You know, the debt and deficit issue in this country kind of continues. And I would say the one, you know, we called a horseshoe politically where both sides get together closer to the link in the horseshoe. And that is both parties don't really seem to care about deficits right now. So there's, I would say there's risk in all parts of the capital markets and in all parts of the fixed income market. And I think diversify some of that and to go into some of those asset classes that you mentioned makes a lot of sense to me. Kevin, for people that want to learn more about Eden Vance's EF, EV, PF, where do we send them to?

You can go out of the Eat in Vance website, and we've got a case for preferred security, kind of primer that just kind of takes you about, walks you through the overall market structure and our overall solution. And it's interesting, Michael, that there's probably around 40 billion of preferred ETFs outstanding. About half of them are passive. And I really do think there's a great opportunity inactive here. And you've probably had a gazillion PMs that have come on here and told you why active makes a lot of sense. I would just say, you know, there's a lot of people wonder why fixed income portfolio managers are more intelligent than equity portfolio managers. And I think it's because we create indices that are. easy enough to beat, where the equity guys have a lot harder time.

I'm just kidding. Jump over those six-inch hurdles, not six-foot hurdles, right? Exactly, exactly. Or a 6% hurdle. Active here makes a sense because you can diversify away from some of these different indices and allows you to access different parts of the market or take a different interest rate bet that you can if you just go off the passive index. A bunch of these solutions only own the 25 part of the market,

and they don't have that interest rate structure that I mentioned, the fixed-the-floating rate reset structure. 90% of our portfolio is set up that way. We do think there are some interesting retail opportunities in the 25-par market that portfolio managers who only access have limited opportunities to buy. So we do have part of our portfolio there, but it's a small. It's 10% right now. So we think in the corporate hybrid market, the utility story that I was telling you,

we think there's some attractive new issue opportunities there. And in the global part of the market, anything issued outside of the U.S. is considered a contingent convertible security, also known as Cocos, also known as AT1. And Basel III regulation kind of covers the rest of the world. The U.S. has decided to kind of go, we're good with what we had after Dodd-Frank, and we said, you know, we're going to keep the structure here. But there's decent opportunities outside of the U.S. We have the right to own up to 30 percent of them in our portfolio there. It's a little bit lower than that right now, but we think that's a real opportunity. All right, Kevin. Well, Don. Appreciate the time.

Thank you for doing this. Thanks a lot, guys. Thank you to Kevin. Remember, check out eat invance.com. Learn more. And then email us, animals, peters, at the compound news.com.