The Compound and Friends - Big Opportunities in Corporate Bonds With Dave Albrycht

Episode Date: March 26, 2024

On this special episode of The Compound and Friends taped live at Future Proof Retreat, Michael Batnick and Downtown Josh Brown are joined by Dave Albrycht, President and CIO of Newfleet Asset Management to discuss: the fixed income landscape, private credit, commercial real estate, and much more! Thanks to Rocket Money for sponsoring this episode! Visit https://rocketmoney.com/compound and cancel your unwanted subscriptions today! Sign up for The Compound newsletter and never miss out: https://www.thecompoundnews.com/subscribe Check out the latest in financial blogger fashion at The Compound shop: https://www.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 Josh Brown 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. 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. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Ladies and gentlemen, welcome to the Compound and Friends. Tonight's show is brought to you by Rocket Money. Rocket Money is a very cool app. If you haven't tried this yet, it's really, really easy. It basically finds and cancels your unwanted subscriptions. It monitors your spending and it helps you lower your bills. Rocket Money has over 5 million users. They say they've helped save their members an average of $720 a year, over $500 million in canceled subscriptions. So we're not talking about pocket change here. So you probably are paying for a lot of things that you don't really use. That's okay. Nothing wrong with that. How would you know? Where are you keeping track of this in an email? Give me a break. You know you're not. So this is what you want to do. Go to rocketmoney.com slash compound. That's rocketmoney.com slash compound. Find out where your cash is going each month and make some decisions. Cut some of

those expenses. Here comes the show. Thank you guys so much for listening. We'll talk to you soon. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Why? That's so bright. Okay. Can't see anybody. Hi, everybody. How was lunch?

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Got one. Got one. All right, guys, this is a live recording of our podcast, The Compound and Friends. For those of you who don't know me, I'm downtown Josh Brown. My co-host is Michael Batnick. We started this show in July of 2021. We had an empty office in Manhattan with a conference room that we assumed that nobody

would ever set foot in again. So we built the studio and we hired some really talented media people, audio, video, sound editors, etc. And we built the show and people showed up for it. So we kept going and we have had incredible guests. And for those of you who have come up to us in the last couple of days to tell us that you're listening or you're watching on YouTube, I just want to say thank you so much. Give yourselves a round of applause. And we really appreciate it. It's not a lot of great, it's not a lot of great advisor driven content about markets. Most advisor shows are about being an advisor. Most market shows are people that are traders. We're somewhere in the middle. It's a little bit of a weird lane,

but we really appreciate that you guys show up for it. We have a very special guest today, don't we, Mike? Sure do. Okay. Award winner. Award winning guest. And really somebody that I've been aware of for about 10 years. I guess I met you probably eight, 10 years ago. Yeah, it was probably about 10.

Dave Albright is the president and CIO of New Fleet Asset Management, an affiliated manager of Virtus Investment Partners. New Fleet specializes in fixed income and has over $14 billion in assets under management. Dave, you guys, the New Fleet crew, you guys manage eight mutual funds. You have four ETFs, two closed-end funds, two USITs, two variable insurance trust series, and 16 institutional strategies. How do you have time to do anything? It's a lot of fun. We have a great group of people. There's 39 people that work with us. 39 new fleeters. With an average tenure of 25 years. Okay. And Virtus operates a multi-boutique asset management business. And Virtus has publicly traded about $176 billion

in assets under management. Dave, I want to start by just giving the audience an overview of the corporate bond market, the taxable fixed income market where you manage money. And I believe we have a chart. Thank you, CeCe. Michael, walk us through what we're looking at on this chart. This is- You can look forward. It's also there. Okay. I click on my screen. This is US corporate bond issuance. And the corporate bond market was turned upside down in 2020 during the pandemic, like a lot of other markets were. What was interesting about that time is that companies took advantage of the open window and issued a ton of debt, really getting in through the following subsequent two or three years that was

for some companies very very difficult. Casinos, cruises and things like that that were in the epicenter of the shutdown. Now markets are back. The bond market is back. There's been a ton of corporate debt issuance. So the chart that you're looking at behind us breaks it down by corporates, munis, agency, ABS, all different areas of the market. From your perch, what is the health, what is the status of the bond market here in the spring of 2024? Bond market's very healthy. Issuance has been at record levels. If you look at corporate bond market, I believe last month was the fifth largest month in history of issuance. Even with rates,

you know, obviously have moved up pretty dramatically. People are still issuing bonds. High yield, back to issuing. The bank loan market is open again. Now with private capital, they're back to issuance. CLOs are buying again. Securitized hasn't seen this much issuance. Record issuance in asset-backed, commercial mortgage-backed securities, and also the non-agency market. So bond market's open. You're having more fun now than you were 18 months ago, I'm guessing. I had a lot of fun 18 months ago. But you said it's the fifth biggest what of corporate issuance?

Largest month of corporate issuance. Largest month. So what do you attribute that to? Because it's not like capital is any less expensive today than it was a year ago. Rates are high. So is it just an overwhelming amount of demand? What do you attribute this to? Well, there's overwhelming demand, number one, from foreign buyers. We're seeing that. But we're also seeing people have to refinance the debt that they have on their books. As debt runs off, you have to refinance it. So maybe it's not the level of rates. I'm sure the spread that these companies trade at versus Treasuries, which is, I don't know if it's historically low, but credit spreads are very narrow.

So is that perhaps part of the reason why? You're seeing right now credit spreads at about 88 basis points. That's probably the low that we've seen since 2020. But there is some opportunity. We love the BBB space. We think there's great value there. It's the most fundamental improvement of any sector in the bond market. Secondly, we like financials. When Silicon Valley Bank, that debacle happened, we went out and bought some of the regional banks, Citizens, First Trust,

we bought Truist, we bought Huntington Bank shares, all better capitalized companies. We also bought some of the G-SIB banks. Typically, if you look at the banks from a historical perspective, they trade tight to the corporate credit market. Right now, they're about 20 basis points wide. So that was a lot of our performance attribution from last year. And that's how we've maintained top decile performance this year. So Dave, I want to go back to opportunities in the market. But I think what we were trying to show you guys with this chart is the US corporate bond market, 54 trillion. And year to date, you've got $547 billion issued. That's 31% year over year growth. There is an active market. This is a slice of all of your clients' asset allocation.

And I wanted to bring Dave here so we could learn a little bit more about what the opportunity is at the present moment and why this remains an important part of all of our clients' asset allocation. But to do that, I want to go back. You first became a fixed income investor, you tell me 41 years ago? Is that right? Yeah. So about 41 years ago, I was working at the Phoenix companies, which was really well known for not only its equity department, but for its fixed income department. I was in the print shop. I was going to school full-time nights, three kids under the age of three. And I contacted the head administrative assistant of the CIO and asked her if I could come up and get an interview for an internship. She said, fine, come on up. So I went up, I saw

him. And the first thing he asked me is, where'd you get your MBA from? And I'm like, well, in the last semester of my undergraduate, he's like, how the heck did you get in my office? I said, I made an appointment. And he said, yeah, though, it's great. We only hire MBAs. And I said, here's my resume. I'll work for no money for the next six months if you give me an opportunity. What made you think that that was the thing that you should be doing? It gets better. This gets much better, Josh. Okay. So two weeks later, I got a call from Human Resources. We don't know how you did this or who you know, but you're hired. And what your job is going to be, this is pretty funny. They sat me down in the middle of the floor and there TWO WEEKS LATER I GOT A CALL FROM HUMAN RESOURCES, WE DON'T KNOW HOW YOU DID THIS OR WHO YOU KNOW BUT YOU'RE HIRED AND WHAT YOUR JOB IS GOING TO BE, THIS IS PRETTY FUNNY, THEY SAT

ME DOWN IN THE MIDDLE OF THE FLOOR AND THERE WAS A WALL FULL OF MOODY'S MANUALS. THEY SAID WE HAVE 2,500 UTILITY BONDS, YOU'RE GOING TO TELL US WHAT THE INTEREST PAYMENT AND SICKING FUND PAYMENT IS FOR EACH BOND, SHOULD TAKE YOU SIX MONTHS. WELL, HOLD ON, THIS GETS BETTER. THE LAST COURSE I TOOK IN UNDERGRADUATE WAS LOTUS 1, 2, 3, DOES EVERYBODY KNOW WHAT THAT IS? THE PRECURSOR TO EXCEL. hold on, this gets better. The last course I took in undergraduate was Lotus 1-2-3. Does everybody know what that is? The precursor to Excel. What I learned to do in that course is write macros. I wrote a macro which extracted all the information from the Booty's database. And in 24 hours, I gave them everything that they had requested. So the guy told me, okay,

Smarty, what you're going to do is you're going to be in an internship in corporate credit. You're going to go mortgage credit. You're going to do municipal credit're going to be in an internship in corporate credit. You're going to go mortgage credit. You're going to do municipal credit. So I had the best six-month internship that anybody could have. And at the end of it, this even gets better, Josh. At the end of it, they gave me a company that you're going to review this with management. And I said, OK, no problem. It's Missouri School Book Services, a seller and buyer of used college test books.

The margins were incredible. I had their computer. I knew what their write-ups were. We bought 10 million. A SELLER AND BUYER OF USED COLLEGE TESTS. THE MARGINS WERE INCREDIBLE. I HAD THEIR COMPUTER, I KNEW WHAT THE WRITE-UPS WERE. WE BOUGHT 10 MILLION. DID A GREAT PRESENTATION. I WAS LIKE, CONGRATULATIONS. I WENT BACK TO THE PRINT SHOP. TWO WEEKS LATER THERE WAS A JOB OPENING. THERE WAS 100 APPLICANTS. IT WAS DOWN TO ME AND TWO OTHER PEOPLE. IT WAS MYSELF, A WOMAN, AND ANOTHER GENTLEMAN. AT THE END OF THE INTERVIEWS THEY GAVE US A YELLOW ENVELOPE. THEY SAID PREPARE FOR THE WEEKEND. GENTLEMAN, YOU woman, and another gentleman. At the end of the interviews, they gave us a yellow envelope. They said, prepare for the weekend.

Gentlemen, you're going at 11. The woman's going at 12. Albright, you go at 1 o'clock. I went downstairs. I opened it up, and I called him back. I said, you must have made a mistake. It's Missouri School Book Services. I already did this.

He's like, then you should definitely kick some butt. To make a long story short, that's how I started investments. Long story, but a good one. Do you think they teed that up for you? They wanted you to get the gig? Got the gig. Well, here's even a better story, Joss. 17 months later, Missouri Schoolbook Services became Barnes & Noble, and we were taken out at a 17-point premium, the best performing bond in the past five years at the company. Let's hear it for Missouri Schoolbook. It's good to be lucky every once in a while. It's good to be lucky every once in a while.

So you not only have been in fixed income for 41 years, but you just shared this with me. You've been at the same firm for 41 years, which makes you the longest tenured what? Morningstar manager in multi-sector. Longest tenured multi-sector under Morningstar's, so pretty much every manager. Right. I started managing, I did private placements, I ran credit research, and in 1992, I took over the multi-sector accounts, which are all now 30-year-plus records. Okay. Okay. So that's pretty outstanding. So you must be happy with your work environment and the people that you work with. And that's, I think, from an investing perspective, that's a pretty good sign that that continuity and tenure, and it's also pretty rare. It is. I mean, the thing that's most important to investors, what I've gotten from feedback is they want consistency. You want proven and repeatable performance over a long period of time.

And you want to buy something that you're not surprised about. You buying it for a certain reason, like we're going to underperform if there's a flight to quality when spreads are stable we're going to outperform when spreads compact we're going to we're going to make a track we're going to outperform and that's people that's our expectations so people want you know what their expectations are and they want you to deliver that with consistency over long periods of time yeah with the bond market you want your money back right i'm going to loan you money you're going to pay me interest and then at the end of the maturity you're going to pay me my money back. You got some rankings we should probably roll through. Yeah. Go ahead. You take the Barron's ranking. Well, before we get to

that, I just wanted to talk about the differences between the equity and the bond market. So the Wilshire 5000 has, I don't know, 4,000, whatever, 100 stocks. I don't know how many Q-SIPs there are in the bond market, but it's exponentially larger. A lot of them don't trade. It's just a totally different beast. So how do you whittle down your universe of securities? Yeah, I would put it in this perspective. When I started in the market, the equity market was five times the size of the domestic fixed income market. There was four sectors.

There was treasuries, mortgages, corporates. And then you could also have, there was a small piece of munis. The market has grown to 14 significant sectors. It's now five times the size of the equity market. And the opportunity set has grown dramatically. So what do we do? We look at all 14 sectors of the bond market. We have a macro overview where we take a look at what's going on globally, you know right now

You know looking at what central banks are doing look at monetary policy look at fiscal policy Look at what's going on in the global markets to determine how we want to allocate sectors Then once we allocate sectors we then from the bottom up we look and build out the portfolio by issue selection. That's something that we've done now for 30 years. It's a process that's worked extremely well, but there's a lot of securities out there, and we typically horse trade sectors. It's not, people aren't in silos. We are all in one location, which works out really great, because the high-yield guy will walk into the bank loan guy's office and say, where should we be in Dell?

Should we be in the first lien bank loan? Should we be in the unsecured debt? And they'll talk about where the best value is in the capital stack. And during the pandemic, there were so many opportunities to buy secured high yield. You picked up not only a much better yield, but a much better total return prospect. So the results speak for themselves. You were ranked fourth in Barron's best-run families of 2023, fourth in mixed asset, third in taxable bond, fifth in the best families over five years, third over 10 years. What do you attribute the consistency to? What do you guys do that's different from everybody else? WE'RE HAVING THE SAME PROCESS THAT WORKS. EMPLOYING THAT PROCESS AND REALLY, YOU KNOW,

FIRST WITH THE SECTOR SELECTION GOING THROUGH AND REALLY FIGURING OUT WHAT SECTORS HAVE THE BEST VALUE. THEN WE GO THROUGH AND BUILD OUT THE ISSUE SELECTION BUT EMPLOYING DISCIPLINE RISK MANAGEMENT. PEOPLE ARE VERY COGNIZANT OF WHAT WE'RE TRYING TO DO, BE VERY WELL DIVERSIFIED, NO POSITIONS THAT ARE TOO BIG. THEN WE FILL ON TOP OF THAT WE HAVE SYSTEMS People are very cognizant of what we're trying to do, be very well diversified, no positions that are too big. And then we throw on top of that, we have systems that help us and also outside compliance. But really, you know, adhering to what we our process is probably the most critical. So I'm guessing that you're more bottom up focus investors. You're not necessarily making macro calls.

That's not true. I'd say two thirds of our attribution over the last 30 years has come from top down sector selection. And one third has come from bottom up AC selection. And we're not rate anticipators. ATTRIBUTION OVER THE LAST 30 YEARS HAS COME FROM TOP-DOWN SECTOR SELECTION AND ONE-THIRD HAS COME FROM BOTTOM-UP AC SELECTION AND WE'RE NOT RATE ANTICIPATORS. IF WE HAVE A SHORT-TERM FUND, TYPICALLY OUR DURATION WILL RUN BETWEEN TWO AND THREE. OUR INTERMEDIATE FUNDS ARE BETWEEN FOUR AND SEVEN. IMPLICIT IN A SECTOR BET MAY BE AN INTEREST RATE CALL. FOR EXAMPLE, ONE OF OUR LARGEST BETS LAST YEAR WAS LOANS. THAT HAD 13.6 billion of outflows because everybody was convinced that they were going to do six or seven rate increases. We were getting current coupons and single B's of almost 9%, double B's of almost 8%. And if the Fed stays higher for longer, we still love loans. Last year was up 13 and a half. This year it's up about two and a half.

So we think it's a good place to be. But that right there wouldn't say that we'd have shorter duration, overall duration, and rates have moved up. So I wanted to ask you in terms of the current shape of the yield curve, obviously with treasuries, it's inverted and it's been that way for, I don't know, for two years now. 23 months. What does the corporate bond curve look like? Corporate bonds, as far as, so if I'm a treasurer, especially on leveraged finance, I'll give you this probably a better example. If I'm in leveraged finance and I'm a treasurer, the first thing I would love to do is finance in the high yield market. Why? Because the curve's inverted. The further out I finance, the lower the rates are. So that's number one.

Number two, if I can't get financing in the high yield market, I'll go to the secured loan market. And then if I can't get any financing, I'll go to the secured loan market. And then if I can't get any financing, I'll go to the private capital market. You know, private capital has been a home run for liquidity. It's really taken down defaults and leveraged finance, both bank loans and high yields. And one of the best calls that I can get as a manager is we have a triple C loan company that's, you know, mid tier,-tier, probably can't get any financing. It's trading at 88. And also we get a call,

hey, private credit just took you out at par. I'm like, thank you very much. There you go. But private credit is a good thing. I have it in my personal account. Private credit's a good thing. It is. But when somebody tells me they're getting 14%

and they're taking no risk, I have an adjustable rate preferred stock that you can put in your money market portfolio. So based on my inbox, based on my inbox, it would appear that private credit is in a bubble. But you are much closer to the space, obviously, than we are. Could you talk about, I mean, you just mentioned it as a good thing. Talk about some of the things that are driving those dynamics in the market today. Sure. It provided an abundance of liquidity. It's $1.8RE. IT PROVIDED AN ABUNDANCE OF LIQUIDITY. IT'S $1.8 TRILLION. PRIVATE CREDIT AND PUBLIC CREDIT ARE NOT SUBSTITUTES. IF YOU WANT FULL LIQUIDITY AND BE ABLE TO

GET YOUR MONEY OUT, YOU WANT PUBLIC CREDIT. IF YOU'RE WILLING TO PUT A PORTION OF YOUR ASSETS INTO PRIVATE CREDIT, AND I WAS JOKING, THEY DO GREAT DUE DILIGENCE, THEY DO A REALLY GOOD JOB, BUT IT'S GOT TO A POINT WHERE IT'S BEEN VERY ABUNDANT. PRIVATE CREDIT HAS NOT BEEN THROUGH CYCL cycles. If you look, private credit's been around for maybe eight to nine years, and it's really bloomed. Give me four quarters of negative GDP, and I can guarantee you defaults will be twice that of the public market. However, right now, we don't think that's going to happen. We think either soft landing or no landing. Will they be twice that, though, in this environment where there's so much liquidity that people are looking for opportunities before the panic even starts? I think that there is a possibility. If we had

four negative quarters of GDP, liquidity would dry up. Okay. So you think eventually the enthusiasm for private credit funds would go away in that scenario? Yeah. I'm not saying they're a bad thing. I own it myself. But I just say that I would be, when you haven't been through a credit cycle, you haven't been through the global financial crisis. I mean, public credit, I'm pretty confident. I know what's going on there. We're up in quality. That's our bias right now in both high yield and loans, just due to the fact that you're not getting paid to take a lot of risk there. So I'd rather buy double Bs in loans where I'mING A 7.5% COUPON, SOME HIGH QUALITY NAMES THAT DON'T NEED FINANCING FOR FOUR YEARS.

HIGH YIELD MARKET A LITTLE DIFFERENT. THE HIGH YIELD MARKET IS THE HIGHEST CREDIT QUALITY IT'S EVER BEEN. YOU HAD $284 BILLION OF DOWNGRADES DURING THE GLOBAL FINANCIAL CRISIS, FORD, CRAFT HINES, OCCIDENTAL PETROLEUM. SO THE HIGH YIELD MARKET IS THE HIGHEST CREDIT QUALITY IT'S EVER BEEN, BUT YOU'RE ONLY GETTING 300 BASIS POINTS RIGHT NOW, WHICH IS A VERY, VERY TIGHT LEVEL. SO FOR ME, I'LL STAY IN DOUBLE B'S LIKE HILTON HOTELS FOR 7%. MAYBE TAKE A LITTLE RISK IN A 3B NAME LIKE HERTS AND GET 9%.

BUT I WANT TO KNOW THE CREDIT, I WANT FUNDAMENTAL ANALYSIS, AND I WANT TO MAKE SURE THAT THE MOST IMPORTANT THING OF LEVERAGE FINANCE RIGHT NOW, AVOIDING THE LOSERS. IT'S NOT PICKING THE WINNERS. I CAN GIVE YOU SOME EXAMPLES. make sure that the most important thing of leverage finance right now, avoiding the losers. It's not picking the winners. I can give you some examples. We didn't buy Michael Storrs. We didn't buy Carvana. We didn't buy Sabre. We didn't buy Triton Water. These are Cox Operating we didn't buy. These are companies that are down 20 to 30 points or bankrupt. It's avoiding the losers. And when credit spreads are tighter, it's much more important than picking the winners. It's avoiding the losers and when credit spreads are tighter is much more important than picking the winners to all bond to all Corporate bond managers think that way or is that a philosophy that is a new fleet philosophy right now It's a new fleet philosophy based on valuations, but it also says why especially in fixed income

You want active management over passive management? I don't want to own an index ETF that's buying every credit in the index, regardless of fundamental analysis, especially when credit spreads are where they are right now. So as you look at the corporate bond market, you just forget everything else. You look at credit spreads, you look at defaults, just through your prism, what is the state of corporate America in terms of its health? It's a good question. If I look at defaults, when I look at defaults, I look at leveraged finance. I'm not looking at investment-grade corporates. There's only been one default in the last seven years. It was fraud.

If you went back over 25 years, you had Adelphia, WorldCom, Enron. That was all fraud. If you're looking at investment-grade corporates, they usually get downgraded. They don't default. fraud. If you're looking at investment grade corporates, they usually get downgraded. They don't default. However, if you're looking at leveraged finance, high yield or bank loans, you have defaults. Now, as I told you, private credit has provided a lot of liquidity. Fourth quarter GDP was at 3.3%, which is solid. If you look at earnings, they've been better than anticipated. And defaults right now in leveraged finance, both high yield and bank loans are running at about half the historical average. So

it's actually been very, very good from a default perspective. When you think about the private credit, I'm not going to call it a bubble, the private credit boom, do you think that there are allocation decisions being made where people say, normally I would put this in public credit, but I actually, I'm attracted to private for this reason or that reason? Or do these two things not compete at all from an advisor or an allocator perspective? I'm not sure how they're selling it. I have it in my personal account as a separate allocation. I think private credit is good. I don't think we're going to have a hard landing. I think it's done well, but I do have an allocation. And then I have public credit.

They're two different animals. Right. So they're not really competing for the same dollar for the most part amongst allocators. Or maybe a portion of that dollar amount. But if you have 40% in, we'll say, 60-40 portfolio, and 40% is in fixed income, maybe you have a 2.5% to 3% allocation in private

credit. Okay. I guess in this environment, it's hard for you not to have a macro view on where interest rates would go given the shape of the curve. You could say, okay, I can get 40 basis points more with a one-year maturity, or I could get 30 basis points less, but I can lock it in for five years. So how do you think about just getting back to where rates are today versus where you think they might be one, three, five years from now? Yeah, well, I mean, if I have to look at interest rates, what's happened? The Fed's moved 11 times.

They've moved 525 basis points. They were very clear that they're fighting inflation. They're going to be data dependent, which we all know. The dot plot came out and told you they're going to raise rates three times this year. I'm sorry, cut rates. Don't scare the audience. There is a possibility they would raise, but I think that's highly unlikely. Yeah, so I'm looking at, I think there's value across the entire yield curve.

To people that say by duration because the rates may be cut, I think is a mistake. Why? I can get securitized assets right now, asset-backed securities that are two years and in yielding 7% that are single A, double A. I can get non-agency mortgage-backs instead of agencies that are three and a half years that are yielding almost 7%. And I can get new commercial real estate, triple A deals that are high quality, singleET, SINGLE BORROWER, LIKE A RULE, A MALL, INDUSTRIAL WAREHOUSE, DATA CENTER. IT'S NOT OFFICE BUILDINGS IN DOWNTOWN, WHATEVER CITY IT MAY BE. SINGLE ASSET, SINGLE BORROWER, LIKE ABLAZIO, WILLIS TOWER, GET THOSE AT 8%. IF THE FED STARTS CUTTING RATES, MOST OF

THAT PAPER IS ALREADY TRADING AT A DISCOUNT. I'm going to get a nice total return in the short part of the curve. And it matures simply about a third of those assets mature in a year, which I can reinvest out the curve. So I do like having duration in the portfolio. But if the Fed starts cutting rates, you're going to benefit first in the front part of the curve. And then long rates should start to normalize. You mentioned mortgages. The Fed obviously was a huge part of that market. Even towards the end, they were buying upwards of $20 billion of bonds a month. What has their removal from that part of the market done to mortgage bonds? because agencies got to a point that we hadn't seen in going back to the global financial crisis. AAA asset, you know, spread of about 200 over treasuries. You know, yields were somewhere about six and a half percent. But without the distress. Without distress. The non-agency market, if I look at the mortgage market, most people have a, you know, average mortgage is about three and

a half percent. So the built up equity in their, you know, houses, they're not selling their homes. BUILT UP EQUITY IN THEIR HOUSES. THEY'RE NOT SELLING THEIR HOMES. UNDERWRITING HAS BEEN VERY, VERY STRINGENT. AND THINK ABOUT WHAT'S HAPPENED WITH HOMES. THEY WERE BUILDING A MILLION HOUSES A YEAR IN 2007. FOLLOWING THE GLOBAL FINANCIAL CRISIS THEY WERE BUILDING 250,000 A YEAR. SO OVER THE LAST 12 YEARS THERE WERE 700,000 HOMES SHORT PER YEAR. SO THERE'S SO INSATIONABLE DEMAND. SO WE LOVE NON-AGENCY SINGLE FAMILIES. WE LOVE SINGLE FAMILY RENTALS. WE THINK THOSE homes short per year. So there's still insatiable demand. So we love non-agency single families. We love single family rentals. We think those make tremendous sense. You know, there's been insatiable demand, especially this year, and they've generated a positive total return. So we like the mortgage market. It's a great way to diversify. We do have a large bet.

You know, we're probably 10 to 14% in the short accounts, probably similar in the intermediate duration accounts. This spring, you won a Lipper Award for the Virtus New Fleet short duration high income fund. I want to ask you about short duration just as an investment theme. It's obviously been very popular, possibly up until a couple of months ago when people started pondering the start of the rate cut cycle. But really for, let's say 15 months, you were able to earn 5% plus risk-free on your cash. And obviously there's a ripple effect, you know, out to things like short duration, high income funds, et cetera. If you're an advisor right now, talking to a client who is saying, I'm so happy with my five and a quarter, I really don't want

to talk about anything else. What would be the counter argument to just staying the course with what's been going so well and arguably where like a trillion dollars of flows have gone to? How do you talk someone out of that? Or should you even bother? Should they stay where they are? There's a lot of money in short treasuries, a lot of money in money market. You're talking trillions of dollars. The biggest risk there is reinvestment risk. If the Fed starts cutting rates and rates start trending down, obviously, you're going to have to reinvest that at much lower rates. And why wouldn't you be dollar cost averaging into fixed income? I always say relative value has been restored to fixed income. Insurance companies and pension funds get excited when we see yields that we haven't seen going back to the global

financial crisis. Corporate bonds yielding 5.5%. Securitized, I had mentioned, yielding 6% to 8%. High yield yielding 8%. Bank loans yielding 9.5%. Emerging markets, the high yield emerging markets yielding 10%. These are yields, all in yields, we haven't seen since the global financial crisis. And they're all at discount dollar prices. So not only are they high yields, but there's room for capital appreciation as those bonds trade closer back to par. I always look at yield to worst and saying, if I've done a good job in bond selection and I'm up in quality, I'm not taking a lot of risk, and bonds mature at par, I should not only get the dividend, but I also get the total return when it returns to par. Dave, what's the right framework for somebody building a fixed income portfolio for a client?

Is it to target a yield and then look for the credits or the funds that will get you closest to that nominal yield? Or is it more of a risk-based approach and the yield being like a secondary component of what you're aiming for? What do you tell people who have to answer to clients for their fixed income allocation? It really depends on what their risk profile is and what they're willing to take and how much risk you're willing to take. Like, right now, you can be in a relatively high-quality, short-duration account, get a yield to worst of somewhere in the mid-sixes with a dollar price of 96. If you want to be a little more aggressive and opportunistic type multi-sector,

you're getting probably 7.5% with a $94 price. And if you're in a dedicated fund, high yields is probably trading right around 92, giving you about an 8% yield. And if you want to take a lot of risk or you're willing to take that risk in emerging markets, you're probably getting somewhere from 7% to 10% with a dollar price in the mid 80s.

If you would have told somebody six years ago that this was going to be the environment for fixed income, they would have been pretty excited. It's sort of funny, because I'll go to people and say, three years ago, corporate bonds were trading at 2% with securitized at 2%. High yield and bank loans were trading at 4%, and you were excited about fixed income. Now, you've more than doubled the spread, and you're like, oh, hold on a second. I'm not sure if I want to get invest there. Very typical investor behavior. But I'm always a dollar cost averager. And if you have all that money sitting on the sidelines,

reinvestment risk is your biggest risk. Typically over the past 10 years, cash and short treasuries have given you about 2.5% while fixed income has given you high single digits. So all I'm saying is dollar cost average, never be a market timer. If you own bonds, keep them. If you don't own them, I'd be dollar cost averaging in. Dave, over the last decade prior to where we are today, investors were lamenting the fact that there was no yield to be had. And I was telling our clients, we need higher rates. If we want to get income from our fixed income, the rates are going to have to rise. We're going to have to endure some pain. We're going to have to take a step back, take two steps forward.

Unfortunately, we took like 47 steps back. 2022 was a really rough year for a reason that we don't need to get into right now. But how did you navigate those dynamics? And how was it having those conversations with some of your investors? I mean, rates backed up pretty dramatically, right? The Fed was very aggressive. What was the return in your asset class for 2022?

I know treasuries were down 18 or 16%. Yeah, yeah. Corporate outperformed. Corporate did better, but I don't know what it was. I don't know what it was. It was down 16. Yeah. Multi-sector short though those funds returned. I believe they were down about five and a half percent

We were down about three we ended up in the top decile of the enemy duration They were down about you're a hero coming out of that It's it's it's never great to be a hero when you you know what you were a hero, but you were down three percent Yeah, sure But people don't like those people would take it though Nobody likes to lose money in bonds and typically the way your portfolio is structured is that your bonds is your ballast when your equities underperform. 2022 is one of those anomalies that I've only seen twice in my career where both bonds and stocks lost. And bonds lost big. It was,

you know, corporate bonds were down over 15% while equities were down over, you know, 20. That's an anomaly I only saw during the global financial crisis. But when you have anomalies and you have these crazy things that happen, that's typically when they're presented with the best opportunities. And we were. So 2024, obviously, we're far removed from that environment. What are the most common conversations you're having with end clients today? Yeah. I mean, everybody's in cash. everybody's in money market, everybody's in short treasuries, and it's getting them to... Guilty. I have it too. But getting the people to, you know,

start investing in the fixed income market. And, you know, I wanted people to invest there when dollar prices were in the low 90s. Now dollar prices have gradually creeped up and people are getting a little more excited, but because they want to see proof that, you know, you are going to get a positive total return after getting burned in 2022. But do you think that people are less concerned about the reinvestment risk? In other words, so I'm getting $5.25 of my cash. If the Fed lowers rates, like, fine. I'm thrilled with $4.75 or $4.50.

Yeah. I mean, it will go down a little quicker than that, depending on how aggressive they are. You know, we'll see if they do six rate cuts like the dot plot says, maybe by the end of next year. But if you wait too far, if you wait too long, then you're stuck. Yeah. I put it like this. I'm not going to tell you there's a lot of risk there. If you're comfortable with that position, I just think that it's a great time to be dollar cost averaging into fixed income based on where values are. What do you say to somebody who says, all right, Dave, I understand everything that you're saying, but historically, has it been a

great time to buy taxable fixed income right as the Fed is cutting rates? Don't they normally cut rates because things are softening and they feel some need to get looser? What does the asset class typically do on the precipice of a rate cut cycle? If they're cutting because we're going to a recession, obviously, you're exactly right. You want to be in quality assets. It's how you want to position. But you could do well in treasuries, agency mortgage backs, obviously, shorter duration assets. And then once the long part of the curve starts to come down, that's why I have plenty of

fuel for the fire. I have a lot of liquidity in the portfolios because I want to be able to redeploy, depending on what the scenario is. We're thinking right now, soft landing or no landing, due to the fact that you know, the economy is still strong unemployment is still low The Fed has told you in a in a election year. They're gonna cut rates three times the dot plot sort of agrees with that I think they can orchestrate a soft landing or they already have landed So, I don't know what your portfolio mandates are but given the fact that defaults are so low, that spreads are so tight, are you able to hold a larger cash position, get some yield there, and wait for opportunities? So we do, I mean, I do have cash. I do have treasuries,

which is atypical for us. Typically, we're invested in spread products, but we're a little more defensively postured. And I can give you a really good example. Coming into the pandemic, you know, we did nothing differently, I THINK, PERFECTLY. WE WERE UP IN CREDIT QUALITY. WE WERE UP, WE WERE VERY DEFENSIVELY POSTURED DUE TO THE FACT THAT WE WEREN'T GETTING PAID TO TAKE A LOT OF RISK. IN LOW INVESTMENT GRADE WE WERE DOUBLE D'S. WE DID HAVE CASH. ONCE THE PANDEMIC HIT IN MARCH AND SPREADS BLEW OUT, ON MARCH 23RD WE CLICKLY REALLOCATED hit in March and spreads blew out. On March 23rd, we quickly reallocated and bought high-yield loans. We bought emerging markets debt. We actually went out and bought Muniz as a crossover buyer.

And obviously, the cycle was very short because there was so much stimulus put into the economy. The cycle was only a 12-month cycle. But we had dramatically outperformed due to the fact that we were aggressive in what we do, which is value buyers and fixed income. I wanted to ask you about commercial real estate and maybe what makes the cycle so unique? Because if you would ask most people who were attuned to the history and you would have said to them two years ago or three years ago, okay, so we have this pandemic. We have less people showing up to work in an office. Maybe it gets a little bit better, never goes back to the way it was.

And now you've got interest rates up 500 plus basis points, overnight rates. What's that going to do to, for example, office buildings in Manhattan? So, of course, they're distressed. There are fire sales. But the asset class on the whole seems to be riding it out. Is it too early to say that? What is it about right now that makes this so unique? So commercial real estate, I used to have 20% allocated in my portfolio 10 years ago. I used to call it the rock of Gibraltar. No matter what happened, it always outperformed corporate bonds. About six years ago, I'm coming home from a business trip. And I stop at the mall.

I go into Nordstrom's. And I look at a shirt, and I go home and buy it on my computer. And I'm like, wait a second. There's a problem here with brick and mortar. Right now, only 10% of the malls are profitable. That's 900 malls. Only 10% of those are profitable. The best ones. That's a problem.

You have $120 billion maturity wall coming due, which is a problem. I think the one thing that's a little unique is that if I have an office building where WALL COMING DUE, WHICH IS A PROBLEM. I THINK THE ONE THING THAT'S A LITTLE UNIQUE IS THAT IF I HAVE AN OFFICE BUILDING WHERE EVERYBODY IS PAYING THEIR RENT AND, YOU KNOW, WHAT DO YOU CALL IT, THE VALUE OF THE BUILDING IS DOWN HALF, I'M NOT CALLING THE MORTGAGE. I'M GIVING THEM A ONE OR TWO YEAR EXTENSION. SO WHAT I CALL IT IS SURVIVE UNTIL 2025. IF I CAN EXTEND IT OUT A YEAR OR TWO, I'M GOING TO DO THAT. IF I CAN NOT CALL THE LOAN AND a sudden the property value goes back, I'm going to be very happy with that. So if we can avoid a recession, I think the commercial real estate market is going to make it. And right now I'm buying some of the new deals. The rating agencies don't want to get caught with what happened during the global financial crisis.

Something blows up and then they downgrade it after. Now they're downgrading ahead of time and they're also requiring a lot more credit enhancement. So I'm buying deals that are so safe, NOW THEY'RE DOWNGRADING AHEAD OF TIME AND REQUIRING A LOT MORE CREDIT ENHANCEMENT. I'M BUYING DEALS THAT ARE SO SAFE, TOP STACK, 8%, THREE YEAR TRANSACTIONS, WHICH ARE TRIPLE A, WHICH I THINK ARE TREMENDOUS VALUE. I'M ONLY ABOUT 3% ALLOCATION. I'M STARTING TO GET BACK INTO IT BUT I'M CAUTIOUS OF THE COMMERCIAL REAL ESTATE MARKET. ONE OF THE BIG RISKS, SILICON VALLEY BANK CAPTAIN, THE ASSET LIABILITY DEBACLE IS SORT market. It's one of the big risks. Silicon Valley Bank, Captain, the asset liability debacle is sort of behind us. It's the commercial real estate, which definitely is worrisome and you have to watch it closely. So I wanted to just end by asking you, what are some of the big things

that you've learned throughout your career, just about investing in general, dealing with many of your clients, of course, are professionals and institutions. But what are some things that you can share with this audience that have been meaningful that you've uncovered in 41 years investing professionally? It's being granular. Don't take too big of bets. You got to watch out for fraud. I mean, I lived through Enron, World Commodephia. Be diversified. That's very important. Be granular. So in our loans, our biggest exposure is a quarter percent. In high yield, we're taking half percent position. So no one name could blow us up due to something that they've done that we can't anticipate. Being diversified. Being diversified by sector. Having an allocation to treasuries. Having an

allocation across the board. And when you make a mistake, learn from the mistake. What happened? Were you in the wrong part of the capital structure? Did you invest in something for the wrong reasons? And then show how bonds quickly recover from a debacle. When we have a flight to quality and we'll underperform, we typically come back very quickly. So be aggressive.

Whenever you want us to sell bonds, that's what I'm typically in there buying. So be aggressive. Whenever you want to sell bonds, that's what I'm typically in there buying. Is there a mistake that you see managers and or regular investors making right now, even if it's not an egregious mistake, but maybe a misunderstanding about the environment? So anything that we should all be vigilant about? I just think taking too much risk. And, you know, like right now, we're up in quality and leverage finance just due to the fact that you're not getting paid to take triple C type risk. You're getting a nice coupon and double B high quality assets. That's pretty much, I would say that know the risks in your portfolio.

Do it actively. Do credit home, credit research. Avoid the losers is very critical. I think those are pretty sage words to live by. I want to thank you so much for coming here to Colorado and speaking with our audience. And of course, speaking with our podcast audience, we really appreciate it so much. How about a big round of applause for Dave Albright? And Dave, we can follow. I don't, I don't think you're publishing too many insights, but you are putting out some things on maybe a semi-regular basis for New Fleet.

What's the best way for people to learn more? Yes, we do a monthly outlook on all the sectors and then tell you what our macro outlook is and how we're positioning the portfolios and give you, do we like it? Are we cautious about it? Do we not like it? So it's a really good piece on fixed income. So we go to vertisinvestments.com and vertis.com or vertis.com. Okay. Once again, one more time for Dave. Thank you guys. Thank you guys so much for hanging with us. And we really appreciate it. For those of you listening out in

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