Animal Spirits Podcast - Talk Your Book: Investing for Income

Starting point is 00:00:00 Today's Animal Spirits Talk Your Book is brought to you by Franklin Templeton. Go to franklin templeton.com to learn more about the Franklin Income Focus ETF. It's INCM. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben 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 Ridholt's wealth management may maintain positions in the securities discussed in this podcast. Welcome to Animal Spirits with Michael and Ben.

Starting point is 00:00:44 Michael, I've got a great survey here for the Employee Benefit Research Institute, EBRI, and they asked retiree intentions for spending down their assets in retirement. And 44% of the people said they're going to spend it on 11% said spend down all. of their assets. Around a third said they're going to spend down a significant portion of their assets. And the other 56% said in some form they want to preserve assets. Like spend down a little but just a small portion. Spend down none or grow your assets. So 56% of retirees would like to either preserve or grow their assets while 44% would like to spend them down. And this, this jives, I think, with everything that we've been talking about, how people have a hard time

Starting point is 00:01:25 going from savor to spender and people want to protect their wealth and pass it down or whatever the big worries are. But this kind of thing makes sense. And those retired investors are going to, they're going to need to be serviced. Like, they're going to want to have the like income type products for them. Right. That's good. They're going to be, it's, it's the easiest sale of any investment strategy that there is. Fair or not fair? Well, that's, there's a reason why the annuity marketplaces in the trillions of dollars. People love income. Yes. It's just the regularity of it or maybe it's just because people are used to getting paid from their job. So much so that again, trillions of dollars was handed over to insurance companies to say, here, pay me back

Starting point is 00:02:13 my money. It is kind of funny when you think about it that way. Take my money and then pay me back with it. That's essentially what an annuity is, though, in a lot of ways, a little bit of growth. So we talked to Franklin Templeton today about their multi-asset income fund, which is essentially stocks, bonds, and then hybrid-type securities notes, structured notes, or preferred shares or convertibles. Interesting strategy, and they paid out on a monthly basis. And our talk about retirement and the number of people retiring, it bodes well for a strategy like this, that investors are going to be clamoring for this type of regular income.

Starting point is 00:02:48 If it's not steady and it's not the same every month, just, having that regular income stream, I think a lot of retirees are going to be, are going to want a strategy like this. So we spoke with Josh Greco today, who is a portfolio manager for Franklin income investors about the Franklin Income Focus ETF. So we're going to talk about that today, a little about the Fed, a little about inflation, and then income for investors. So here's our talk with Josh. We're joined today by Josh Greco. Josh is a senior VP and senior institutional portfolio manager for Franklin Income Investors. Josh, welcome into the show. Thanks for having a pleasure to be here.

Starting point is 00:03:24 I was going to start, and I will start with the markets reaction, specifically the bond markets reaction to the CPI print from the January report. But before we get to that, what is Franklin Income Investors? Yeah. So Franklin Income Investors is one of the specialized investment managers under the Franklin Templeton umbrella. And it's a particularly important SIM, as we call them. S-I-M, as it is the division and portfolio management team that's responsible for managing

Starting point is 00:03:58 the flagship strategy of Franklin Templeton, which is the Franklin Income Fund. It's one of the founding funds of our firm. It is the fund with a 75-year track record of generating income and growth and actually just passed our 75th anniversary last August in 2023. And at Franklin Income Investors in total runs a little over $80 billion of, of AUM that's focused on income and growth mandates. A 75-year track record. That's not something you hear every day. We do a lot of these shows.

Starting point is 00:04:29 We don't have too many 75-year track records. Yeah, it's something that's remarkable about our firm, something we're extremely proud to talk about and something that really highlights the consistency and efficacy of our strategy through all market environments. So what is the focus in the income investors is income across all securities, stocks, bonds, otherwise? Yep, correct.

Starting point is 00:04:51 It's a multi-asset income approach, which kind of at a high level just means the allocation across stocks, bonds, and hybrid-type investments to create the outcome of income while seeking capital appreciation for our investors. Hybrid would be like convertibles, something like that. Yep. Preferred securities, convertibles, as well as I think we'll get into a little later, but things like equity-linked notes and structured notes. Over the last decade, prior to the post-COVIDs, prior to the post-COVIDs,

Starting point is 00:05:21 environment where we finally got inflation and I just say finally got inflation as if anybody was rooting for that. We finally got higher interest rates. Let's just put it that way. So in from from 2008 really when they took rates to zero all the way through the end of the 2010s, there was no income to be had, at least in the bond market. And it was it was not a great time that you heard the entire decade that the Fed is punishing savers. And so a lot of people were hiding out. in like bond proxies, whether that was like Colgate stock or consumer staple stocks, I guess, more broadly speaking. So I'd be curious how you all were managing the environment of the 2010s where there was

Starting point is 00:06:06 very little income to be had in the fixed income market. Yeah. And Michael, that whole, that whole market environment, that ZERP, that zero interest rate policy environment just also was accompanied by negative real rates. So there was a lot of what I'll call anomalous rate environments that were. we're taking place. And, you know, it really put a priority on how important being flexible and dynamic is if you're trying to generate a more consistent outcome of income and growth for clients. And, you know, there were plenty of times where, you know, over 40% of the S&P 500 actually

Starting point is 00:06:38 out yielded a 10-year treasury in that decade you're referencing. And so you really need it to be dynamic. And at the right times, reward, you know, inequity with a higher dividend profile then perhaps an investment-grade bond from the same company and employing hybrid securities and things that in general, I think financial advisors are under-allocated to for a variety of reasons are how we're able to create a more consistent level of income with that capital appreciation profile for our client. So, yeah, I mean, you touched on it, flexibility, dynamism.

Starting point is 00:07:09 That was everything over that decade, and we think it's going to be really important here going forward to. Did you feel uncomfortable at all in that environment that you were pushed out in the risk curve? or do you take it more as, listen, the market is what it is, and I have to allocate accordingly? Because were there times where you wish you could have just taken it easy and gone more conservative, but you had to take some risk to get to yield? Just to piggyback on that, Josh, you just mentioned that some of the equity had higher yields than the bonds from the same company.

Starting point is 00:07:38 I mean, that is bizarre a land. Yeah, it was bizarre land. And Michael, just to jump on that and Ben are right back to you. But, you know, that was an anomaly that also played out over the. the last three years. I mean, what happened to rates post-COVID with really such a really rally in bonds as 2020 and 2021 got going here, you know, if you were to look at just examples across the pharmaceutical sector, the utility sector, the energy sector, in many instances in 2021, we found higher absolute dividends and a better total return prospect from the equity in

Starting point is 00:08:15 those companies relative to the investment grade bonds that they issued. And then that dynamic completely reversed. And later in 2022, after what was a very substantial repricing and a rise and a rapid rise in yields, we were able to rotate out of some of those equities, which, by the way, were some of the outperforming sectors in 2022 into those bonds, which now had a very different price and yield profile. And that dynamism is what's rewarded our investors in years like 2022 and is really core to our strategy is executing this multi-acet income in a direct security lens. So you have the three legs of the stool, I guess, which is bonds, stocks, and then you said like hybrid securities. Do you have any guardrails in terms of we want to have a certain

Starting point is 00:09:02 percentage in each and we kind of will go up to a range? Or do you look at the overall market and say, no, in 2021 or early 2021, bonds are really unattractive. Yields are too low. We want to be elsewhere. How do you navigate that? Yeah. And so, yeah, so the first part of that, the same tools, you know, we and oftentimes, like to advisors, the fact that we sit on the same side of the desk as they do. You know, we're trying to create an absolute wealth outcome of income and growth. That's something you all probably try to do for at least one of your clients. I've yet to sit down with an advisor who doesn't have at least someone in their book looking for income and growth in that order as part of their...

Starting point is 00:09:41 Income is one of the easiest sales pitches, I feel like, to clients. Well, yeah, and it got easier when people started to contribute to money market funds and CDs in this particular environment and felt how good it was to get that sort of regular cash flow. I mean, the prior decade, you weren't monetizing some of these exponential gains until you made the decision to sell. So there was a lot of paper profit, not that much real profit until you made the tax, often tax decision to sell and recognize those gains.

Starting point is 00:10:10 and money market funds yielding 5% have completely flipped that investor behavior. It's created this, you know, this risk reward cycle where they feel good about that monthly cash flow. And in their parlance, you know, if it's making dollars for them, it often makes sense. And that's made a really nice kind of adjustment in consumer behavior to prioritize income. To your point, it's been one very important. It's been something that's incredibly well received. And it's something that we think people have a better appreciation for now, kind of post,

Starting point is 00:10:39 post-pandemic than they did before with the rate environment where it is. So just getting to the portfolio, is it like 60, 30, 10, or could you be 90% stocks or or 90% bonds if the situation calls for it? Like talk about how the portfolio can evolve over time. Yeah. And so in general, where you'll see us with respect to broad kind of equity and fixed income allocations is really around the 7525 or 2575. We believe in being a diversified multi-asset profit.

Starting point is 00:11:09 We believe that's right for a number of reasons, most importantly risk management. But you'll see us really capping out with that 75% equity at the high end, 25% equity at the low end. But really, we are across all of our strategies a 50-50 benchmark product. So anytime you see us taking an expression towards bonds or towards equity, that's an expression of our PM team that we think the incoming growth prospects are more attractive in one asset class relative to the other. How do you balance out the desire for higher yield with the need to protect investors and shield them from some risk as well? Yeah, Ben, that's often one of the hardest things to do. But, you know, being diversified is something that really certainly helps

Starting point is 00:11:55 with that, you know, making sure your bets and allocations are measured. But it, you know, the last three years created a really difficult dynamic where, you know, I talked about that, post-2020 market environment where, you know, we had to make the decision that while a lot of, you know, people were advocating for a lot of risk economically, you know, the risk for us was really interest rate risk in buying bonds with yield to worst and, you know, 2% in the IG corporate space. And picking up those pennies in front of the steamroller, what could potentially be rising rates, you know, with that duration profile didn't make a lot of sense to us. So was our view in that balance you're referring to, Ben, that the equity for the absolute income profile,

Starting point is 00:12:36 and the total return prospects in certain sectors made a lot more sense to us than getting into bonds at that particular time. But that's something we're constantly evaluating. It's why our mandates have the universe of investable securities that they do is because there are so many times we're making that tradeoff is the most important thing we do for our clients.

Starting point is 00:12:55 So we're in an interesting environment where we finally have income from our fixed income, which is obviously what you want to say. The path to get there was no fun. 2022 sucked. But we're now on the other side of the mountain. So you've got ultra short rates giving you a lot, right? Five to five and a quarter on fed funds.

Starting point is 00:13:20 The two years at four, six. So not a lot of volatility on the short end, higher rates. And then the longer you go out, the less income you're able to derive. How do you think about the, the shape of the yield curve today, and I'd be curious if an event like yesterday where CPI comes in a little bit warmer than expected, rates break out of the range that they've been in, does a day like yesterday change your overall thesis, or do you need to see more? I know that was a really sloppy question, but answer however you'd like.

Starting point is 00:13:57 No, yeah, we'll dive right in. So that CPI report was a bit hot, you know, just as many listeners of this podcast probably know, you know, it's PCE that the Fed is really looking at. with respect to what will change their view of direction, you know, if you annualize the last called three months of PCE, particularly core PCE, you're going to see it right around that 2% mark. So, you know, I know we're back in the window of FedSpeak. So you're seeing some of the speakers really say that what happened yesterday isn't changing the trajectory. They're certainly not waiving the mission accomplished flag, but much of their next step will be built around the

Starting point is 00:14:31 confidence that there is some anchoring. And I feel like that's really, where a lot of people feel yesterday's print while hot really didn't change the overall trajectory, which was towards lower inflation, which was towards progress of the Fed's agenda with that kind of dual mandate that they regularly pursue. But, you know, Michael, you're spot on to think about the yield curve relative to a short end and a long end because they're very different dynamics. Not only for the inversion that we've, you know, been pretty persistent with here, but also that, you know, at the short end, you know, it feels pretty safe to say that the last hike of this cycle was July of 2023. And so, you know, we're aging kind of well past that. And,

Starting point is 00:15:12 you know, most of the expectations for that short end are going to be flat to lower. Now, the markets have some very, what I'll call, very aggressive bets for what happens at that short end. You know, we can certainly have that discussion. But it's really not the discussion around easing. It's the discussion around normalizing. And that's something I really want people to kind of take away here is that, you know, trying to get back to a more normal yield curve shape, normal interest rate environment. And just on the back end of the curve, we certainly think that it will be lower. We do think that there are a few reasons for this. Number one, we do believe there will be some economic deceleration year over the course of 2024. And two, that we're still

Starting point is 00:15:53 seeing really strong appetite for longer bonds. If you're looking at the market and you're looking at any of the recent treasury auctions, I mean, what happened on the 7th of February, we brought the largest 10-year treasury auction ever to market. It was 42 billion. dollars of 10-year. And it was issued at 411 and it was stopped through at 409. So this was the first time a 10-year auction didn't tail. By that, I mean yield drifting higher to entice buyers and that it actually stopped through. So super strong performance with record supply at the 10-year level for people desiring and demanding longer bond exposure out of a view that that rate will be attractive in the future year. So that's been a worry for people. It's like who's going to buy

Starting point is 00:16:32 all these bonds to fulfill our debt? And it sounds like it's not a problem right now. So far, you know, Ben, knock on wood, so far, not a problem at all, but that was the concern, right? This much supply who's showing up to buy it, and they took it down in size. Interesting. How do you think about duration in the portfolio? Do you have also a duration target? Because that's been one of the interesting challenges of the last couple of years as well, is how do you handle something like duration, especially for the last 18 months or so, you've been paid to not take any duration risk at all. And now we're finally having to think about that. Yeah, duration was everything in the bond market, Ben.

Starting point is 00:17:06 And 2022, you needed to stay super short until the back end of the year and get super long. And that's absolutely one of the things we look at at the portfolio level is where our duration is. And we've been very comfortable being a bit longer than our benchmark for duration here. You know, we had a really nice rally into the year end, which allowed us to take a little bit off the table. But in general, we view duration as something you want to own right now in this particular environment, 2024, relative to something in like a 2020.

Starting point is 00:17:36 which we were super short. You know, I talked about, you know, our preference for kind of equity over fixed income in that 2021 period. And then even as we got into 2022, you know, you don't want to fight the Fed when the Fed's fighting inflation. We felt comfortable in that posture and staying short was the way we protected ourselves to own bonds, but not participate in full interest rate risk like a lot of the market. So just more of the reinvestment risk.

Starting point is 00:17:58 The market's not going to wait for the Fed to cut. Maybe that's ready what's happening now. So how do you think about the competing? rates of, okay, this is great. I could take no volatility. I could clip these coupons versus I can get less with more volatility, but I might not be able, I'm not going to be able to get this 5% forever on the short end. Yeah. And that reinvestment risk isn't something people had to really care a lot about. You know, there wasn't enough at the short end in the previous cycle for people to pile in and worry about that kind of lower, lower take

Starting point is 00:18:36 But, you know, we feel that you could probably be getting something closer to 4% at the end of 2024 if it was to really play out with the Fed cuts at that short end. And that's where we think people are maybe missing the chance to secure higher income for longer periods of time, for longer maturities right now. And by time they realize they need it, by time those cuts start happening, that's already going to be priced in the market, as you kind of mentioned here. It's a discounting mechanism at an absolute full force. And, you know, that's quick to pull forward those expectations and potentially limit people from getting a return. And, you know, you also saw people who didn't want

Starting point is 00:19:20 to be invested in longer bonds really miss out on some pretty serious returns at the end of 2023. You know, what do they say? I guess life comes at you fast. Well, so do returns in markets like this that are so macro heavy. You know, you had a really strong rally in bonds at the end of last year that if you were in a money market or a CD, you certainly missed out on the eight and a half percent that the ad clocked in the last two months of 2023. And even more of that on the equity market. And by the way, our ETF, INCM participated with an 11 percent rally over those two months. So it's really important to stay invested, particularly for people with Horizon and risk tolerance to really not stack that short end for a number of reasons we just kind of kicked around

Starting point is 00:20:05 here. On the stock side of things, I think there's probably more, but two main ways people look at dividends. One is just they target a yield and they want to go for the highest yielding securities. Other people are more interested in dividend growth. And I want to buy the consistent dividend growers that have been growing their dividends for 25, 30 years, whatever it is, and count on that growth and maybe beating inflation. How do you guys think about the dividend side of things? Yeah, that's the balance. Should I pay or should I grow now? As always, the thing that companies have to debate with respect to their dividend payout. And it's a balance for us, you know, because we have the tools to not only invest in equity, but fixed income and use

Starting point is 00:20:40 those hybrid securities, you know, we're able to take a lot of low or no generating income generating areas of the equity market, use these notes to create income streams off of them. So we don't just have to pile into, you know, the heaviest sectors for dividend in the equity market, which is going to be the usual suspects. We can actually spread that out a little more, balance the income and growth potential in certain names, use tools like hybrid securities to increase our income profile and use bonds to balance the diversification and risk. So a number of ways to do it. But to answer the question clearly, because of our toolkit, we don't have to just stack in to the highest yielding or the fastest growing. We can balance all of that with our view on the names.

Starting point is 00:21:23 Are you targeting a certain area of income for investors? Generally high current income. So that's going to be a, you know, a pretty robust level over what would be a 10-year treasury at certain points in time. You know, right now the portfolio is yielded in a bit north of five and a half. And why that's important, especially with the INCM ETF, is that that pays monthly. So, you know, we're trying to walk that $6 trillion of cash on the sidelines back into the market. And I talked about the behavioral dynamic of appreciating the cash flow and the monthly reward for investment that income can create. And we're using that as a catalyst here to not forego that income, not forego that feeling of reward, but put your money into risk assets with a longer

Starting point is 00:22:11 term investment horizon, not only get the income, but the capital appreciation potential that our strategy has created over time. How do you benchmark a strategy like this? Like, what do you guys use as your benchmark? Benchmarking multi-asset bent is always a dark art. So our ETF, INCM is going to be benchmark 50% S&P 500, 50% ag. In other multi-asset mandates, it can be a bit more nuanced. Think of half the portfolio in something like an MSCI high dividend yield equity index, and then half of the portfolio split, you know, 25% investment grade bond, 25% high yield as we have that flexibility. So, you know, we want to pick a benchmark that certainly represents what our capability set is, but we're oftentimes taking.

Starting point is 00:22:56 and expressing allocation bets away from that benchmark to do what's right for income and growth. So it's certainly something that can get you in some category, some category snafus with some of the rating and categorizing companies across the industry. But it's something that when we're creating the outcome of income, that's our first priority. We'll give you a benchmark that we think represents our toolkit second. I'd be curious to hear your take on the $6.5 trillion you mentioned in money market funds, not to mention however much, however many trillions are in CDs, do you think those are going to be quick to go into, come back into the market? Because I'm not so sure that they will be.

Starting point is 00:23:38 This has been a big argument we've been having, by the way. I think the money is going to come back. It's starting in bonds, then maybe we just talks. Michael thinks it's going to be stickier. Well, you know what, Ben? Hold on, Ben. We should define our terms because, I mean, yeah, some money will come back. but where do you think, so if that's six and a half trillion dollars now, where do you think it ends

Starting point is 00:23:56 the year? I don't know. I think if we got, you know, a trillion dollars in over the next couple years, that would be a pretty, that'd be market moving, right? I don't know. Josh, what are your thoughts? Certainly. And I think it has a lot to do with the velocity of what happens at the short end. If we were having the same discussion, you know, mid last year with, or call it towards the third quarter of last year, with six cuts on the table, you know, with the market expecting six cuts for the Fed, I think you might see a bit more of a dramatic rush into the market if that was to start playing out and that playbook was intact. But right now, you're seeing really

Starting point is 00:24:32 no urgency for the Fed to cut. You're seeing, I think, about three cuts priced over the course of 2024. And if that plays out, obviously, data dependent, that for me will determine the speed. Because if that reinvestment risk is something every advisor is discussing with their clients overhauled the next, you know, six months here, I think you'll see the velocity of money return. If it's like, yeah, hey, we didn't have the expected cuts. You're still getting five. You feel like moving in now? The answer might be no. And that's going to really slow things down. But another thing is even if we settle out at, say, 4%. I don't know, 4% on cash still seems pretty attractive. Yeah, it's not five and a quarter, but it's not bad.

Starting point is 00:25:13 Yeah, 4% on cash is okay. But if you were to not only factor in the coupon on higher quality, investment-grade bonds now. But what that move, let's say it was parallel across the curve, would translate to longer-duration bonds. I mean, you're talking about double-digit total return in longer bonds relative to that 4% at the short end. And so that's what we're really trying to emphasize with clients is that there's a lot of great recognition of how important income is and the mechanics are there for kind of shorter-term reward. But don't forego that total return potential that you get with higher-quality bonds that we can own in the strategy. It probably depends on how big the FOMO is.

Starting point is 00:25:50 I'm curious on the hybrid securities. I had my very first job in this industry. My boss was a huge fan of convertibles, and he would always put 5 to 10% of client portfolios in convertibles, and he'd always show them the chart. I'm sure you've seen it before, where it has kind of the floor, and it shows the pricing of convertibles.

Starting point is 00:26:06 And his whole thing was these are just so overlooked by so many people that no one really pays attention to this space, that if you can find a manager that understands how they work and the pricing behind them, in their nature of having part equity, part fixed income. How do you think about pricing those in and how those fit into your opportunities set? Ben, I should schedule a catch-up for you at Ed Perks,

Starting point is 00:26:27 our chief investment officer and lead PM on our strategies because one of his first roles as a portfolio manager was running the convertible securities fund here at Franklin Templeton. So certainly versed in that space. When it comes to convertibles and preferred, it's not really something we're owning a lot of an INCM right now. It's something we've owned in more size and in different market environments, not so recently. But for the sake of kind of what we're doing in INCM right now, the focus is really on the equity

Starting point is 00:26:58 index link notes, which happy to just kind of give a minute overview on it if you want and just kind of look at return profile looks like, all right, let's do it. So right, equity index link notes, and for the sake of relevance, we'll keep this pretty tight here. It's something we own about 14% of an INCM right now. But these are notes. They're issued by investment banks. And the way we build ours are to create the economic return profile of a covered call on an underlying reference equity or underlying equity index. It's just with slightly different mechanics. So I'll just kind of repeat that again because it was a mouthful. But, you know, think about the economic return experience of a covered call just with

Starting point is 00:27:39 different mechanics, you know, where you're getting a portion of the first part of an upside plus the income stream off of that underlying that can be enhanced through doing it in a note. So they've been a phenomenal tool for us. You know, we've been using equity link notes in our strategies for over two decades. And they're most important because we can actually broaden our opportunity set for income and growth by using them. And I kind of alluded to that earlier, but I give you some pretty tangible examples here. You know, in INCM, we're doing our equity index link notes right now on the SMP 500. And so you're looking at S&P 500 that has a yield somewhere around 1.5% while we are structuring equity index link note exposure on the S&P 500, that actually

Starting point is 00:28:28 pays us 7%. And so we're getting income off of a lower yielding equity exposure, plus getting some upside participation should that rally. And for us, you know, that ability to create income and growth from lower income areas of the market while enhancing our diversification is something we're certainly proud of. And just the last thing on that, it's so important that these are actively managed. This is not sort of a systemic or systematic role program in which we're re-upping exposure every 30 days. This is something that the PM team is doing dynamic. When implied volatility on the SMP 500 increases, your income potential goes up. It's at those times where we're engaging in these equity index like notes to secure the

Starting point is 00:29:17 income and capital appreciation profile over longer periods of time. If VAL is really low, we'll keep our exposure short so that that can roll off and we can be opportunistic when VAL rises again. So just wanted to make sure I got that in there. Big advantage for us is to actively manage with discreet. where we're engaging in these equity index length notes because we think that's the right thing to do. Are any of these notes, do they have downside protection as well? Are you more worried about just getting the option income? Yep. So full downside are typically the way we write them. So we'll

Starting point is 00:29:47 own the downside on that. You do have the coupon on the note to offset that. And then there is upside participation. But yeah, Ben, we're not hedging that downside or creating a zero floor or anything like that. And so the premium comes from selling options and there's more juice when there's is a little bit of volatility. Exactly right. Michael's kind of thinking through that black shoals option pricing model. If the implied volatility is higher, you stand to recognize higher levels if it was an option and you were selling it would be premium. But because we're doing this in a structured note, it's actually coupon that we receive. So that's exactly the right way to think about it. Higher levels of implied volatility will translate to higher income levels on these notes.

Starting point is 00:30:31 I'd be curious to maybe a corollary to that. I'd be curious to hear about your exposure to corporate and maybe higher yielding bonds because the recession that everybody promised did not come to fruition, at least not yet, and the spreads on these bonds have been training really remarkably tight to Treasury. So what's your, how do you guys think about that situation? Yeah, with respect to pricing right now, you're spot on to talk about kind of where the spreads have come. And we've certainly been a bit more, I'll call it idiosyncratic, where we're engaging with companies. It's a very issue our company specific right now. Conversely, so much of the heavy lifting in our portfolio when we rotated from an equity overweight to a fixed income

Starting point is 00:31:13 overweight was in that 2022 period. And the environment was, I don't want to call it the opposite of today. But if you're looking at corporate spreads today at 95, you were looking at them north of 150 at that particular time. So you have to be opportunistic with this. It's why we think active management is so important in the multi-acet income space because, yeah, you want to make sure you're engaging in direct security and particularly individual bonds when the valuation's right. Well, the valuation piece is interesting. So you all sent us, your team sent us this list of yields and it shows the different yields by sector and stocks and bonds and all these things. Then it has a risk-adjusted part of it. How do you think about the risk-adjusted portion of the

Starting point is 00:31:53 yields? How do you all do that? Yeah, it's extremely important what we do because if people were to just seek yield, you know, there are, their yield is not free. It's complicated. for time and risk. And if you're not risk adjusting that, you're going to miss what I call episodes in different asset classes. Think of episodes in MLPs or different areas of the market, that if you're not risk adjusting this and you're just looking at the yield, you are potentially setting yourself up to be over-risk and overwhelmed by market performance. And we don't want that to happen to our investors. So we want to make sure we're constantly risk-adjusting it. And that does a nice job of making things like a treasury bond at 10-year north of 4% become more attractive

Starting point is 00:32:37 when you risk adjust that. So that's something that, you know, certainly we like to talk through and it's why, you know, our strategies at the flagship level have been around for 75 years. And we've navigated environments that really have had a keen focus on risk and we're still here to talk about. Are there other areas of the bond market where you all invest that we didn't talk about? Well, you know, three legs of that stool are going to be the the Treasury market, the investment-grade corporate market and the high-yield corporate market. Those are the three areas where we're spending a lot of our time. And we use each of them in different weights at different times over the life of our strategy.

Starting point is 00:33:17 And that's part of our value prop for our investors is that there's a lot going on here under the hood. And being a multi-asset investor is a full-time job. And for advisors running books of business and managing clients, there's a lot that happens particularly in this macro-heavy of an environment that you've got to be at your screen to recognize the income and growth potential. And that's, you know, what we do. And looking at, you know, I NCM right now, if you were to look at our high yield corporate exposure, it's right around 20% investment-grade corporate bonds right around 29%. And then Treasury is at around 11%. And that's,

Starting point is 00:33:51 you know, that Treasury has come up a little bit since what I'll call mid last year, just in our way to kind of get that longer duration profile and take advantage of what we see or a bit higher yields here. What do you hear from advisors about how they're using this product? So many ways to do it, Michael. And if you were to think back to 75 years ago when we launched the Franklin income fund, the flagship, which was this multi-asset capability set that is here today in INCM, you know, this was the OG model. I mean, this was an asset allocation model before asset allocation models were a thing. And so this was really built in a way where you can own it outright as your sole income and growth portfolio tool for clients. You know, we're owning, you know, almost the

Starting point is 00:34:35 entire equity market and the entire credit spectrum from high yield right up through IG and treasuries. And so certainly can stand by itself. I see that plenty. Now, this is offered in the ETF vehicle through INCM. So this certainly can be the core of an income model. You know, putting this somewhere between 30 to 50% of the income model is certainly palatable. And I say that, not, you know, finger in the air here. Franklin Templeton has an investment solutions group who builds asset allocation models, delivers them to partner firms and broker-dealer platforms. And that's how they use our multi-acid income strategies, 30 to 50%. And lastly, as a satellite, you know, we're in a particular environment now where we think income will be a more important component for total

Starting point is 00:35:15 return. So if you have that 6040 portfolio and you wanted to make it a 50, 30, 20, that 20 absolutely goes into something like INCM. We increase the incomes contribution towards total return and we help manage that risk through that stock bond decision, which we know has been incredibly perilous over the last call three years here. So three ways to own it by itself, part of an income model, part of a total return model. And Ben, I know your love for the 6040. So we can kick that around to. I assume this has to be a popular strategy with retirees as well because you're paying out that monthly income. And they love to, because Michael and I have talked about this. A lot of people hate, hate, hate, spending down their principle and they want to just live off of income. So I imagine

Starting point is 00:35:57 that this is a popular product with them. Yeah, it's so important for, you know, just the fact that we have delivered high levels of consistent income and growth. The fact that the income stream is monthly and the fact that it's a non-guaranteed product. And I know a lot of people who don't feel comfortable wrapping their solutions up in insurance contracts over specific periods of time. And the fact that something like this is daily liquid at the fund level, intraday liquid at the ETF level, while showing up with income every 30 days is just something that makes people feel really good. And also like why we use such a dynamic set of securities is because income is often an absolute requirement for our clients. You know, paying certain bills,

Starting point is 00:36:38 whether it be living expenses or auto expenses. These are not relative asks. These are absolute asks. And the income needs to show up to help them, you know, either recreate that paycheck or maintain quality of life. And so, you know, this is something we believe we need that toolkit for and something we've been able to do for seven decades.

Starting point is 00:36:57 Josh, if people want to learn more about the product, where do we send them? Yeah, well, as a $1.5 trillion asset manager, you know, our website is rich with insights from portfolio. management teams and specifically references to what Franklin Income investors can offer in a product lens. So head over to www. franklin templeton.com and you can see a full list of insights from the firm, from our team, in different ways to interact with our product set. That was the biggest not to brag we've ever had, isn't it? 1.5 trillion. Well, it's been a lot of a lot of move of parts lately, Ben. I'll just give her a commercial

Starting point is 00:37:32 for what the new Franklin Templeton looks like. You know, certainly our CEO, Jenny Johnson, has been out there and speaking on a number of areas of what I'll call market innovation, whether it's the tokenization or digital assets or her ability to pursue alternative investment firms. That's something that would become a hallmark of what we're doing here at Franklin Templeton. But Franklin Templeton acquired Legg Mason in 2020, which a lot of people overlooked because that was peak COVID. Most of us were doing meetings from slippers in basement offices. And there wasn't a Franklin Templeton representative in your office telling you about what's happening in this merger, our acquisition of Leg Mason by Franklin Templeton.

Starting point is 00:38:11 And then we just closed the Putnam investment acquisition as well. Again, not something I find too many people know about, but that closed just for the start of the year here. And so, you know, we've bolted on tremendous brands. We've bolted on tremendous capabilities in different asset classes. And certainly the Franklin Templeton that stands in front of it today is the $1.5 trillion asset manager, as every asset class or vehicle that investors could desire, And that's how we want to position ourselves, is one of your preferred partners who can't offer you something for everybody.

Starting point is 00:38:43 I'll be honest. I didn't know what the Legamason thing. That's all. That's crazy. Yeah, I get that a lot, Ben. So I do a lot of client-facing meetings, obviously, for the team. And I can't tell you when I do that, especially had a conference or in front of room, eyebrows go up. People write it down because that Leg Mason family had some great brands under the hood that people didn't realize they're part of the Franklin Templeton family now.

Starting point is 00:39:06 All right. Thanks, Josh. We appreciate the time. Thank you guys. Okay, thanks to Josh. Remember, check out Franklin Templeton.com to learn more about the strategy and Franklin Income Investors. Send us an email, Animal Spirits at thecompoundNews.com. Finally got it.

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Animal Spirits Podcast - Talk Your Book: Investing for Income

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