May 27, 2025 • 30 mins
After a turbulent couple of months with significant spread widening and subsequent tightening, corporate bonds may remain under threat through year-end. In this episode of Inside Active, Bloomberg Intelligence’s mutual fund and active management analyst David Cohne and corporate credit strategist Sam Geier talk with Vishal Khanduja, head of Morgan Stanley’s broad markets fixed income team and portfolio manager for Eaton Vance’s Total Return Bond Fund (EIBAX) and the Total Return Bond ETF (EVTR). They discuss the team’s three pillars for bond selection, their focus on maximizing return for benchmark-level risk, how inefficiencies of fallen angels and rising stars can boost performance and how bottom-up relative value analysis drives portfolio positioning. The podcast was recorded on May 7.
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Speaker 1 (00:13):
Welcome to Inside Active, a podcast about active managers that
goes beyond sound bites and headlines and looks deeper into
their processes, challenges, and philosophies and security selection. I'm David Cohne,
i lead mutual fund and active research at Bloomberg Intelligence.
Today my co host is Sam Geier, a corporate credit
strategist for Bloomberg Intelligence. Sam, thank you for joining me
(00:34):
today on our actually it's our first fixed income Bucust episode.
Speaker 2 (00:38):
Thanks for having me excited to be here.
Speaker 1 (00:40):
So on Monday, you and Noel put out a research
note on investment grade bonds, and you know, we know
April was filled with volatility. What could be in store
for the Bloomberg US Corporate Bond Index in the weeks ahead.
Speaker 2 (00:53):
Yeah, so, I mean, obviously, as you said, April pretty
wild ride for most asset classes, but for investment grades specifically.
You know, we saw spreads pushed to some of the
widest levels we've seen over the past year before a
little bit of moderation. But you know, in terms of
over the next couple of months, in our eyes, we
see spread staying pretty range bound, sticking right around that
(01:16):
one hundred basis point mark. That we're at right now,
but you know, the market has had a lot of
time to kind of digest what's going on with tariffs
and what that might mean. We're definitely wide from where
we were, you know, beginning of the year, where spreads
were around some of the titles levels we've seen over
the history of the index. But you know, we've seen
(01:36):
some improvement across a couple of different metrics. Issuance has
spen pretty solid. ETF flows is another area that we've
been seeing over the past you know week, We've seen
a little bit of improvement there, but you know, looking
kind of a little bit longer term over the remainder
of the year, in our eyes, we think spreads could push,
(01:58):
you know, wide from where we're at right now. We
have an ordinarily squares model that we look at on
our end for investment grade. We have two models there.
Both are kind of pointing to the one forty five
one sixty five basis point range, so indicating a little
bit of a mispricing there. So we think spreads can
definitely push wider from from where we're at right now.
Speaker 1 (02:18):
Right well, speaking of spreads and just bonds in general,
i'd like to welcome our first bond portfolio manager. Yest
On inside Active Visual Conduja is a managing director with
Morgan Stanley Investment Management. He's head of the broad markets
Fixed Income team and a portfolio manager for funds including
(02:39):
the Eaton Vance Total Return Bond Fund, which has a
ticker of ei b a X and the Eaton Vance
Total Return Bond ETF, which has a ticker of the
e V t R Vishal, thank you so much for
joining us today.
Speaker 3 (02:51):
Thanks for having me on, David, so Vishel, what are.
Speaker 1 (02:55):
Your thoughts on you know what Sam just mentioned, you know,
with April's volatility.
Speaker 3 (03:00):
Quite a bit of it, and there was there were
very clear signs, I think end of the year last
year that we will be entering into a volatile period
this year. The pendulum swings on the economic outcomes are
very dependent on two very dominant policies, the fiscal and
(03:22):
the monetary policy, and both of them are effectuating change
here as we speak. So yes, I think the volatility
is going to be significantly high this year. We've already
witnessed quite a bit of it, April being a primary
month there. But I think one thing that was very
clear from April was that bards delivered on their dual mandate,
(03:42):
which was income, total return, especially the zero to ten
year part, and then the negative correlation. Yes, we can
speak about the different parts on the curve of how
we behaved during the entire month of April, but overall,
bonds did what they were supposed to do in client portfolios. Great.
Speaker 1 (04:02):
Now, if we talk about the total total return bond strategy,
which you know I mentioned both the mutual fund and
the ETF, what is the investment process you when you're
managing this portfolio. How does that work the two funds?
Speaker 3 (04:16):
I think, David, very if you can take a big
step back, I think we are trying to deliver on
that dual mandate. We're trying to deliver to our clients
that consistency of income and total return. And then we
are also very cognizant of how clients are using fixed
and come allocations in their overall acid allocation framework, if
(04:38):
you will, so keeping that in mind, we want to
make it very clear that these are primarily bond portfolios.
We are not trying to deviate from that basic feature
of bonds. Also, I think the other thing that is
going to be very clear as you look through these
that these are very transparent, long only bottom up focused.
(04:58):
So you shouldn't expect these portfolios on five to six
thousand CUSIPs that you would typically see in some of
the passive portfolios out there, or the benchmarks as well,
which probably have double the amount of those CUSIPs. Should
be very focused on three to five hundred bonds bottom
up selected, and that's where we think that the most
consistent part of alpha comes within fixed income. Happy to
(05:20):
elaborate more on that, but that's primarily primarily what we
are trying to achieve in these two portfolios.
Speaker 2 (05:25):
So Vishell, I want to kind of dig in just
in terms of what your due diligence process looks like.
You know, is the objective more broadly kind of focused
on being paid back for all the bonds that you
invest in. Is it about beta exposure or does it
kind of vary across the different asset classes that you
work invaries.
Speaker 3 (05:45):
And varies by time period as well. But I think
there are very the basic philosophy remains the same. There
are three pillars of what we look at when we
are trying to make an investment on any bond. It's
the fundamentals we are digging through, whether it's a corporate
balance sheet or a consumer balance sheet, or even a
country or a municipality balance sheet that we are digging
(06:06):
to invest in. So fundamentals are very important to dig
in that step number one typically for US, technicals are
the next one. Who are the buyers and sellers of
this bond? And what is the economic or non economic
incentive to be involved in that sector, asset class, or
band specifically? And then valuations? What do valuations tell us
(06:27):
in terms of how much is already priced in and
how much is not? So those three sort of verticals
help us decide or answer the question, is there a
catalyst to be able to get that extra total return,
extra income, extra spread compression from this particular investment in
(06:47):
our portfolio versus what the benchmark owns or versus what
the other alternatives are to invest in that part of
the curve. I'll give you also one more piece there
of information our mentality are investing or doing. Our due
diligence on any investment is focused on what can we
buy that today gives us better return for similar amount
(07:11):
of risk as the benchmark or a passive allocation or
in certain different times we also ask ourselves the question,
which is what can we actually invest in that gives
us similar amount of return but lower risk than what
can typically a passive benchmark provide today. So that mentality
(07:31):
of risk reward also governs what exactly goes out or
goes in into the portfolio at any given point.
Speaker 1 (07:39):
Now you know there's both the mutual fund in the ETF.
How different are they are they? You know, pretty much
the same, just different rappers.
Speaker 3 (07:48):
The second statement actually answers the question, David, But I'll
I'll give you a little bit more background on that
of how we actually launch this in why the reasoning
for having the two one I think the similarity is.
Let's walk through those both of them are in the
core plus sort of category, if you will. That's what
(08:08):
we are trying to or striving to be consistently in
that top quintile and consistently avoid the bottom half of
that peer group, if you will. So we have done
our analysis in terms of how much versus a typical
benchmark do we need to consistently outperform by to be
in that top quintile, and then how much underperformance do
(08:31):
we need to avoid to avoid the bottom a half
of the of the peer group. So that sort of
versus the benchmark versus the peer group and what are
we trying to achieve is very clear within the team
at any human point. The differences now are very respect
are very respectful to the vehicles or the rappers, as
you mentioned. Even on that one, the mutual fund, the
(08:52):
forty act can do a little bit more below investment gage,
which is typically your spread risk sector that we allocate
to at particular times within the economic pycho, we can
do about thirty five percent below and Mustrom grade, so
that truly brings in the best ideas from our high
yal team into the portfolio when the time is right.
(09:15):
In the specific bonds, the ETF can do twenty percent
below in Mustrom grade in bond math terms. The other
differences could be explained in a way where the tracking
error allowance for the mutual fund is zero to four
hundred basis points versus the tracking error allowance for ETF
zero to two hundred. Even with those differences, the similarities
(09:40):
of trying to achieve that top quintile we think mathematically
is possible and is consistently possible to deliver on it.
So we wanted to provide those two wrappers for clients
who are now debating towards active ETFs in their allocations
and be able to do that in a liquid fashion.
And then respecting what we can deliver within our philosophy
(10:00):
and process of total return franchise, and then within within
that ETF rapper which is a lot more liquid versus
the mutual fund.
Speaker 2 (10:08):
Shall I want to get back to kind of what
we've what we were talking about earlier, just in terms of,
you know, the current state of the market and the
volatility that we've been seeing. You know, looking at the
different asset classes that you're invested in in these in
these funds, you know, treasuries, corporates, securitized as well. You know,
out of those three kind of what does the relative
(10:29):
value proposition look like? You know, are you seeing a
little bit more advantage to one over the other, especially
given the uncertainty that we might be seeing over the
next couple of quarters.
Speaker 3 (10:40):
Yeah. Important and uh and a really good question, Sam.
I think if we take a step back, those three
sectors that you talked about, or you questioned me on,
are the three big balance sheets that be as bond
investors invest in, Right, we have a government balent sheet
that we get to invest. There's a big corporate balance
sheet that the invest, whether it's investment, great high yield
(11:03):
bank loans, etc. Both US and global. And then there
is a consumer balance sheet or secured balance sheet in
the US. I think that is a very liquid way
that you can invest in the securitized market. So those
are our three big pillars of what the portfolio at
any given point will be made of. I think right
after twenty twenty, I think prior to the vaccine came
(11:24):
coming out, investment grade corporates were dominating our spread, duration,
attribution within the within the portfolio, secured was much less,
and we were slowly with steadily reducing our government balan
sheet exposure, which was a ballast of the portfolio. We
traveled through twenty twenty one and twenty twenty one, especially
with a lot more corporate balance sheets on the billow
(11:45):
investment grade side, and then increased our secured allocation as
well securitized credit again trying to access that consumer balance sheet,
which was very strong during that time as well. Twenty
twenty two, as we all know, we were hiding away
from anything that behaves like a bond or anything that
had a fixed rate bond feature because of what was
(12:05):
happening with growth and inflation and the fact trying to
catch up. So the quadrant was high growth, high inflation,
which typically, as we've learned through CFA and other programs,
is that's the time where correlations breakdown. So we were
trying to get away, get more floating rate exposures, but
still believing that the balance sheet on the corporate and
(12:26):
consumer side were very strong. Now you travel through twenty
twenty four, I think that's where we thought if you
go back to that initial construct of fundamentals technical valuations,
where valuations were getting to a point where they were
not giving you any room for error on fundamentals and
technicals deteriorating, that's where we moved away from corporate balance
(12:48):
sheets and got it started to build up our balanced again,
which was government balance sheets. So we were coming into
twenty twenty five with the least amount of corporate exposure,
least amount of credit overweight that we've ever had in
the last five years, right, so the ballast was a
lot more. Now the month of April goes back into
(13:09):
technicals deteriorating, valuations adjusting, and future fundamentals at least potentially deteriorating.
Given that we are going to be in a low
growth environment, we can discuss whether it's going to be
high or temporarily high inflation. At that point, that gives
us a loosening of valuations, and we are slowly and
steadily trying to go back into corporate balance sheets which
(13:31):
are very strong, and then to now compensate us for
at least fifty percent of recession coming through in the
next twelve months. So that's how we sort of philosophically
and a processwise think about which balance sheet to investment.
Apart from all the hard work that are analysts, we
have about one hundred and fifty analysts out of the
two hundred and twenty five investors on the team, so
(13:52):
very bottom up focused. That's where I think a lot
of the hard work gets done in picking out the
best ones to invest in. After that top down coom, I.
Speaker 1 (14:01):
Do want to ask a little bit on valuations. You know,
are there value measures that you used to guide your decisions?
Speaker 3 (14:09):
So yes, I think we do have some proprietary models
that we've created. I heard Sam in the beginning of
the call as well talk a few of them. We
do incorporate some of that as well within our analysis,
but then a lot of the hard work is done
by the analysts. We have very specific and focused specialties
(14:31):
that we bring to the table. Yes, your typical IG analysts,
high yeld analysts, but then we have high yield and
bank loans, two different parts of the capital structure, looking
at the similar balance sheets from a different perspective of
what they want to get out. So and then we
have global as well as US focused analysts that that
(14:52):
typically so, for example, a bank analyst sitting here in
the US will give you a very good relative value
of what should we be getting paid for this table
balance sheet in the next twelve months of lower growth
and slightly higher inflation. Similarly, I think we have value
measures that our European analysts will come out with for
European franchise banks that we have an overweight today within
(15:13):
our portfolios as well. So I think that bottom up
relative value is the focus that we spend a lot
of time and effort on that decides actually how our
portfolios are positioned at any given point.
Speaker 2 (15:27):
I'm curious just in terms of you know, thinking about
duration and also fixed versus floating. For the first part
duration Obviously, you know, if you were in duration last year,
you kind of got crushed this year. How are you
kind of thinking about exposures there? Are you trying to time,
you know, getting into the long grand of the curve?
(15:48):
And then you know, obviously given rate cut expectations, how
are you feeling about fixed versus floating exposures?
Speaker 3 (15:55):
Too great? The last the first ten months or nine months,
I would say, of last year, we're fantastic. I think
bonds were delivering, and then the market started to focus
on the inauguration day and started to set up for it.
After the one hundred basis points cud so, Yes, a
little disappointing Q four that hopefully we've made up a
(16:15):
little bit of that in the first four months here
of the year, I think for US nominal GDP, and
then they've the monetary policy reaction to it or reaction
function to it is other dominant two pieces. Yes, we
have good amount of propriety models. We have a eight
member macro team or developed market macro team that only
(16:38):
focuses on country level balance sheet in the ramifications and
interest rates curve exposures as well as then FX quite
a bit of interest in that one, as you can
imagine at the moment. But breaking all of that work
down today, how our we position. We are a lot
more confident in our conviction level on the zero to
(17:01):
seven year part of the curve. I would say that
even that zero part is less conviction because we are
still not very sure of when exactly would the FED
actually come in. I know the two presidents that they've
set the moment that they very clearly see from the
data that their tool mandate is in danger of achieving.
I think they'll come in an act, or financial stability
(17:24):
is at risk, they'll come in an act. Those are
the two presidents. We don't think that in the next
two to three months those presidents are going to be
met or either one of them. So maybe in the
back half. But then as you get out from that
zero to one year, but then try to get out
into that three to five year mark, our conviction level
is much higher that FED will be dubbish. And they
have quite a bit in the toolkit to actually bring
(17:45):
down and anchor down the front part of the yield curve.
So that's where most of our exposures are. And then
you bring in the macro work that our team is doing.
Then if you try to travel out from seven to
thirty year part of the curve, a conviction level reduces
because then the variables of demand supply, the variables of
(18:07):
not having a very credible and sustainable deficit reduction plan,
and then what does that mean for term premium in
the long end. Those are the variables that reduce our
conviction level whether we'll be eking out or we'll whether
we'll be able to eke out that dual mandate from
the long end of the treasury curve. So that's how
we are sort of going through our conviction level, traveling
(18:28):
the key it duration parts of the curve, if you will,
and then trying to make sure that we have the
highest conviction in parts of the curve that we are
the most expressed. In another way simplistic way to say this,
we are in steepeners, overweight in the back in the
front end, and significant underweights to the twenty and thirty
year part of the curve at the moment.
Speaker 2 (18:47):
So I want to focus on a little bit here
just on the corporate side of things. Specifically, I'm wondering
about how you really focus on those non investment grade positions,
you know, one area that we take a look at
here in Bloomberg Intelligence quite a bit is obviously fallen
angels rising stars being a pretty big area just in
terms of inefficiency. Is that kind of the main focus
(19:10):
there when you're getting into high yeld positions or is
there a little bit more to it?
Speaker 3 (19:15):
Two things. The first part spot on sam. I think
that part of the curve crossover fallen angels rising stars,
how we want to define it, It's almost like a
lost category or lost focus area for a lot of
investors and asset managers as they have grown in size,
so it becomes very difficult for them to focus on
(19:36):
that part of the curve. So invest some great managers,
for example, will never look at a foreign angel or
potential for angel situation because then there'll be force sellers
in that environment, or the other way around, where high
yield investors are always very cognizant of rising stars because
that eats away into that potential yield or a negative
(19:57):
yield environment versus their benchmark or market capuit debt capated
benchmark that they have to beat. On the high l side,
that becomes a fantastic high sort of alpha or high
information ratio region for us, given that we have an
analyst on both sides, and total return strategies allow us
(20:17):
to actually take out alpha from this from this inefficiency.
So I think we can talk about some of the
auto sector names today which are very clearly priced for
angel situation and is getting shunned by some of the
IG investors. That becomes a fantastic one for us. Again, Yes,
we have to look at the fundamentals and valuations apart
(20:40):
from just focused on the technicals of foreign angels and
advising stars. The other big part, the second point that
we also focus on SAM is sort of differentiated. And
that's why some of our results if you look back
on the total return strategy of more consistent upside capture,
more consistent avoiding the downside capture or standards being lower,
(21:01):
is that we pick our best ized ideas from high year.
We don't follow a sleeve approach. What do I mean
by that? Our high yeal team typically every year looks
at or any typical year looks at about eight hundred
two one thousand issuers and they dwindle it down to
about three hundred approximately for their high yield only strategy,
which is trying to beat a debt gap weighted benchmark.
(21:23):
What we are trying to do for total return strategy
is we've built a process where we say that we
don't want all those three hundred names because all those
three hundred names might not have a total return catalyst today.
So give us the top fifty to seventy five names
that have a total return catalyst, are liquid enough and
(21:44):
are in that single be low single bee to dower
b range that they are actually providing much more spread
pickup and you'll pick up versus what I could do
in the high yeal side. So if I can try
to encapsulate some of the comments I made at the
beginning of the call where best ideas, fundament technical valuations,
and bottom up focus. This high yeer process then allows
(22:05):
us to allocate to best ideas from a team that
is already looking at best ideas for that high yeld strategy.
So looking at the higher teams information ratio and sharp
ratios over years, and then you allocate in a way
that you're picking out the best of their best if
you will, and allocating to the total return strategy that
in itself for every toller that can gets invested for
(22:27):
the total return strategy in high YEO is much more
efficiently used very similar to what we do in investment
grade corporates securitize assets and then when we investment in
government balance sheets as well, so that mentality and process
is scaled up in a way that it brings in
those ideas into total return accordingly.
Speaker 1 (22:44):
So you mentioned you know you have different sectors in
the portfolio. Do you have any process in place to
keep the portfolio diversified or is it more about just
finding the best opportunities.
Speaker 3 (22:56):
We have guidelines that keeps us diversified. We have guidelines
of sector limits, guidelines on subsector limits that we that
we keep up, issuer limits that we that we keep up.
That is graded by when you know the issuer limits
for below investment grade in out of index even within
the investigate land securities also securitized being our top allocation
(23:17):
at this point is kepped at half of the fund
or fifty percent of the strategy can be in any
given sector. I think all of these limitations part one
is trying to make sure that we are at any
given point diversified enough for the strategy that there our
clients are trying to allocate to. Also, I think we
(23:39):
are very cognizant that our clients have a lot of choices.
They have great sector funds at any given point that
they can allocate to. So we don't want to be
that sector fund risk reward that a client is trying
to get. So we will never be a high yeal fund,
or a or an EM fund or a bank loan fund.
I think that there are other fantastics str is that
(24:00):
other parts of our franchise run, but I think this
one is the best ideas both from a top down
sector allocation as well as from a bottom up security
selection at any given point. So yes, our guidelines track
all of that, and we have extensive sort of second
and third layer of risk teams as well that keeps
us in our success zone, if you will, so that
(24:21):
we are not steering anywhere close to our gutrails of
risk as well as diversification on that board.
Speaker 1 (24:27):
And now, are you seeing any opportunities outside the US?
Speaker 3 (24:31):
Yes, I think, and it is just not since April second,
just to be clear on that, I think we were
steering our exposure, for example, on the corporate side, to
be a little bit more overweight, to becoming financial heavy,
not only because financials were doing really well from a
(24:51):
tariffs and regulation perspective, but then financials were significantly outperforming
non financials of fundamental balance sheet health. I know, Q
one of twenty twenty three, we went through a regional
banking scare here in the US, but at that same point,
one of the big Jesent banks were actually getting upgraded
(25:12):
in the second week after the crisis that we were
going through in the beginning part of March of twenty
twenty three. So I think a lot of the franchise
banks have done a lot of hard work after the GFC,
and regulations have played a big part as well. A
lot of them are now high quality single A banks.
But when you look at what we are getting paid
(25:33):
in terms of spread levels here in the US versus
what we could as a franchise banks in Europe, quite
a bit more spread compression potential as well as starting
yield that you could get to. So yes, some of
that banking exposure that we had was in European financials.
We could apply that same logic of cleaning up the
balance sheet becoming a lot more debt holder friendly over
(25:56):
the years after that twenty twenty twelve twenty thirteen crisis
that that region went through. I think those banks are
also very fundamentally strong and do provide that valuation pickup.
So we were allocated to some of those sort of
balance sheets in financial balance sheets in Europe during this time.
Speaker 2 (26:15):
I want to switch gears here a little bit, get
into the electronic trading side of things, which you know
obviously on the fixed income side lagging relative to equities.
But I'm wondering how you all are thinking about adoption
of electronic trading and what sort of impact that's going
to have, you know, for the corporate bond markets as
a whole, just in terms of liquidity and how you're
(26:37):
going to be able to trade your portfolio.
Speaker 3 (26:41):
So I'm significantly forward if you had the same exact
conversation probably even three years back, not even you don't
have to go decade back. Decade back, yes, I mean
we weren't talking about these concepts at all. Technology, the
willingness of strategies to actually trade on these venues, both
from the cell side and the buy side. So it
(27:03):
required quite a bit of not only technology investment, but
resources within the team and incentivizing those resources to get
there as well. So I think all of those pieces
had to be done correctly over the last three to
five years, and that's what we've done. So quite a
bit of our ETF trading today goes through portfolio channel.
Quite a bit of our ETF today we are able
(27:24):
to take about eighty percent seventy five to eighty percent
of any creates and redeems in kind in our even
man ETF. All of that is the byproduct of all
the work that our traders, not only on the investment
grate side, but even on the high yeld side that
we've seen that have done over the years. We're bearing
the fruits of that. And then yes, I think some
(27:45):
of the counterparties on the other side have done a
fantastic job of allocating resources and allocating resources in a
way that helps their partners on the other side. So
liquid is better, but ask exactly is decreasing in the
secondary market and the pinpointed risk exposures that you can
get in a basket level are also very sort of
(28:08):
appealing to us as investors. Financials versus non financials, decompression trades,
if you want to put up triple B versus double
B on those sides, I think both those are also
getting very liquidly done. So you can customize now to
a level some of these portfolios and baskets so that
you can sort of find junior risk exposures within portfolios
(28:29):
in very liquidly.
Speaker 2 (28:31):
So as we're closing this conversation out I'm wondering. Obviously,
as a fixed income investor, the big concern is about
the downside. So I'm wondering, in your eyes, you know,
what's the biggest area of concern, Maybe one or two
things that you're looking out for through the rest of
the year.
Speaker 3 (28:49):
I mean, deficit reduction plan deficits is definitely top of mind.
Maybe I'm going to sound like a broken record. We
did that in our outlook since October November last year,
we've been pointing it out market is getting a lot
more cognizance, deepening is becoming a lot more forceful, almost
like a consensus straight at this point. That keeps us
(29:09):
up quite a bit at this point. Profit margins is
another one. I know, we did not hear anything about that.
It was just about uncertainty that we heard in this
earning earning season at this point, and I think that
one is sort of your next step towards before you
start seeing some demand destruction from a labor market perspective
as well as from a consumer and GDP perspective on
(29:32):
the back half of the year. So profit margins is
another one. All that sort of that term will encapsulate
sort of whether this inflation is temporary, whether balance sheets
are able to pass down some of that inflation to
consumers and small businesses on the other side, or are
corporate margin is going to get start to get affected,
which then is a precursor towards your labor market weakness
(29:55):
coming through. So deficits and profit margins, those are the
two spots that we have focused on.
Speaker 1 (30:00):
It's going to be interesting to watch this shall This
was great. Thank you again for joining us.
Speaker 3 (30:03):
Thanks for having me on, David. Thanks Sam and Sam.
Speaker 1 (30:06):
Thank you for joining me as my coast today.
Speaker 2 (30:08):
Yeah, thanks for having me.
Speaker 1 (30:09):
This was great. Until our next episode. This is David
Cone with Inside Active
Welcome to Inside Active, a podcast about active managers that
goes beyond sound bites and headlines and looks deeper into
their processes, challenges, and philosophies and security selection. I'm David Cohne,
i lead mutual fund and active research at Bloomberg Intelligence.
Today my co host is Sam Geier, a corporate credit
strategist for Bloomberg Intelligence. Sam, thank you for joining me
(00:34):
today on our actually it's our first fixed income Bucust episode.
Speaker 2 (00:38):
Thanks for having me excited to be here.
Speaker 1 (00:40):
So on Monday, you and Noel put out a research
note on investment grade bonds, and you know, we know
April was filled with volatility. What could be in store
for the Bloomberg US Corporate Bond Index in the weeks ahead.
Speaker 2 (00:53):
Yeah, so, I mean, obviously, as you said, April pretty
wild ride for most asset classes, but for investment grades specifically.
You know, we saw spreads pushed to some of the
widest levels we've seen over the past year before a
little bit of moderation. But you know, in terms of
over the next couple of months, in our eyes, we
see spread staying pretty range bound, sticking right around that
(01:16):
one hundred basis point mark. That we're at right now,
but you know, the market has had a lot of
time to kind of digest what's going on with tariffs
and what that might mean. We're definitely wide from where
we were, you know, beginning of the year, where spreads
were around some of the titles levels we've seen over
the history of the index. But you know, we've seen
(01:36):
some improvement across a couple of different metrics. Issuance has
spen pretty solid. ETF flows is another area that we've
been seeing over the past you know week, We've seen
a little bit of improvement there, but you know, looking
kind of a little bit longer term over the remainder
of the year, in our eyes, we think spreads could push,
(01:58):
you know, wide from where we're at right now. We
have an ordinarily squares model that we look at on
our end for investment grade. We have two models there.
Both are kind of pointing to the one forty five
one sixty five basis point range, so indicating a little
bit of a mispricing there. So we think spreads can
definitely push wider from from where we're at right now.
Speaker 1 (02:18):
Right well, speaking of spreads and just bonds in general,
i'd like to welcome our first bond portfolio manager. Yest
On inside Active Visual Conduja is a managing director with
Morgan Stanley Investment Management. He's head of the broad markets
Fixed Income team and a portfolio manager for funds including
(02:39):
the Eaton Vance Total Return Bond Fund, which has a
ticker of ei b a X and the Eaton Vance
Total Return Bond ETF, which has a ticker of the
e V t R Vishal, thank you so much for
joining us today.
Speaker 3 (02:51):
Thanks for having me on, David, so Vishel, what are.
Speaker 1 (02:55):
Your thoughts on you know what Sam just mentioned, you know,
with April's volatility.
Speaker 3 (03:00):
Quite a bit of it, and there was there were
very clear signs, I think end of the year last
year that we will be entering into a volatile period
this year. The pendulum swings on the economic outcomes are
very dependent on two very dominant policies, the fiscal and
(03:22):
the monetary policy, and both of them are effectuating change
here as we speak. So yes, I think the volatility
is going to be significantly high this year. We've already
witnessed quite a bit of it, April being a primary
month there. But I think one thing that was very
clear from April was that bards delivered on their dual mandate,
(03:42):
which was income, total return, especially the zero to ten
year part, and then the negative correlation. Yes, we can
speak about the different parts on the curve of how
we behaved during the entire month of April, but overall,
bonds did what they were supposed to do in client portfolios. Great.
Speaker 1 (04:02):
Now, if we talk about the total total return bond strategy,
which you know I mentioned both the mutual fund and
the ETF, what is the investment process you when you're
managing this portfolio. How does that work the two funds?
Speaker 3 (04:16):
I think, David, very if you can take a big
step back, I think we are trying to deliver on
that dual mandate. We're trying to deliver to our clients
that consistency of income and total return. And then we
are also very cognizant of how clients are using fixed
and come allocations in their overall acid allocation framework, if
(04:38):
you will, so keeping that in mind, we want to
make it very clear that these are primarily bond portfolios.
We are not trying to deviate from that basic feature
of bonds. Also, I think the other thing that is
going to be very clear as you look through these
that these are very transparent, long only bottom up focused.
(04:58):
So you shouldn't expect these portfolios on five to six
thousand CUSIPs that you would typically see in some of
the passive portfolios out there, or the benchmarks as well,
which probably have double the amount of those CUSIPs. Should
be very focused on three to five hundred bonds bottom
up selected, and that's where we think that the most
consistent part of alpha comes within fixed income. Happy to
(05:20):
elaborate more on that, but that's primarily primarily what we
are trying to achieve in these two portfolios.
Speaker 2 (05:25):
So Vishell, I want to kind of dig in just
in terms of what your due diligence process looks like.
You know, is the objective more broadly kind of focused
on being paid back for all the bonds that you
invest in. Is it about beta exposure or does it
kind of vary across the different asset classes that you
work invaries.
Speaker 3 (05:45):
And varies by time period as well. But I think
there are very the basic philosophy remains the same. There
are three pillars of what we look at when we
are trying to make an investment on any bond. It's
the fundamentals we are digging through, whether it's a corporate
balance sheet or a consumer balance sheet, or even a
country or a municipality balance sheet that we are digging
(06:06):
to invest in. So fundamentals are very important to dig
in that step number one typically for US, technicals are
the next one. Who are the buyers and sellers of
this bond? And what is the economic or non economic
incentive to be involved in that sector, asset class, or
band specifically? And then valuations? What do valuations tell us
(06:27):
in terms of how much is already priced in and
how much is not? So those three sort of verticals
help us decide or answer the question, is there a
catalyst to be able to get that extra total return,
extra income, extra spread compression from this particular investment in
(06:47):
our portfolio versus what the benchmark owns or versus what
the other alternatives are to invest in that part of
the curve. I'll give you also one more piece there
of information our mentality are investing or doing. Our due
diligence on any investment is focused on what can we
buy that today gives us better return for similar amount
(07:11):
of risk as the benchmark or a passive allocation or
in certain different times we also ask ourselves the question,
which is what can we actually invest in that gives
us similar amount of return but lower risk than what
can typically a passive benchmark provide today. So that mentality
(07:31):
of risk reward also governs what exactly goes out or
goes in into the portfolio at any given point.
Speaker 1 (07:39):
Now you know there's both the mutual fund in the ETF.
How different are they are they? You know, pretty much
the same, just different rappers.
Speaker 3 (07:48):
The second statement actually answers the question, David, But I'll
I'll give you a little bit more background on that
of how we actually launch this in why the reasoning
for having the two one I think the similarity is.
Let's walk through those both of them are in the
core plus sort of category, if you will. That's what
(08:08):
we are trying to or striving to be consistently in
that top quintile and consistently avoid the bottom half of
that peer group, if you will. So we have done
our analysis in terms of how much versus a typical
benchmark do we need to consistently outperform by to be
in that top quintile, and then how much underperformance do
(08:31):
we need to avoid to avoid the bottom a half
of the of the peer group. So that sort of
versus the benchmark versus the peer group and what are
we trying to achieve is very clear within the team
at any human point. The differences now are very respect
are very respectful to the vehicles or the rappers, as
you mentioned. Even on that one, the mutual fund, the
(08:52):
forty act can do a little bit more below investment gage,
which is typically your spread risk sector that we allocate
to at particular times within the economic pycho, we can
do about thirty five percent below and Mustrom grade, so
that truly brings in the best ideas from our high
yal team into the portfolio when the time is right.
(09:15):
In the specific bonds, the ETF can do twenty percent
below in Mustrom grade in bond math terms. The other
differences could be explained in a way where the tracking
error allowance for the mutual fund is zero to four
hundred basis points versus the tracking error allowance for ETF
zero to two hundred. Even with those differences, the similarities
(09:40):
of trying to achieve that top quintile we think mathematically
is possible and is consistently possible to deliver on it.
So we wanted to provide those two wrappers for clients
who are now debating towards active ETFs in their allocations
and be able to do that in a liquid fashion.
And then respecting what we can deliver within our philosophy
(10:00):
and process of total return franchise, and then within within
that ETF rapper which is a lot more liquid versus
the mutual fund.
Speaker 2 (10:08):
Shall I want to get back to kind of what
we've what we were talking about earlier, just in terms of,
you know, the current state of the market and the
volatility that we've been seeing. You know, looking at the
different asset classes that you're invested in in these in
these funds, you know, treasuries, corporates, securitized as well. You know,
out of those three kind of what does the relative
(10:29):
value proposition look like? You know, are you seeing a
little bit more advantage to one over the other, especially
given the uncertainty that we might be seeing over the
next couple of quarters.
Speaker 3 (10:40):
Yeah. Important and uh and a really good question, Sam.
I think if we take a step back, those three
sectors that you talked about, or you questioned me on,
are the three big balance sheets that be as bond
investors invest in, Right, we have a government balent sheet
that we get to invest. There's a big corporate balance
sheet that the invest, whether it's investment, great high yield
(11:03):
bank loans, etc. Both US and global. And then there
is a consumer balance sheet or secured balance sheet in
the US. I think that is a very liquid way
that you can invest in the securitized market. So those
are our three big pillars of what the portfolio at
any given point will be made of. I think right
after twenty twenty, I think prior to the vaccine came
(11:24):
coming out, investment grade corporates were dominating our spread, duration,
attribution within the within the portfolio, secured was much less,
and we were slowly with steadily reducing our government balan
sheet exposure, which was a ballast of the portfolio. We
traveled through twenty twenty one and twenty twenty one, especially
with a lot more corporate balance sheets on the billow
(11:45):
investment grade side, and then increased our secured allocation as
well securitized credit again trying to access that consumer balance sheet,
which was very strong during that time as well. Twenty
twenty two, as we all know, we were hiding away
from anything that behaves like a bond or anything that
had a fixed rate bond feature because of what was
(12:05):
happening with growth and inflation and the fact trying to
catch up. So the quadrant was high growth, high inflation,
which typically, as we've learned through CFA and other programs,
is that's the time where correlations breakdown. So we were
trying to get away, get more floating rate exposures, but
still believing that the balance sheet on the corporate and
(12:26):
consumer side were very strong. Now you travel through twenty
twenty four, I think that's where we thought if you
go back to that initial construct of fundamentals technical valuations,
where valuations were getting to a point where they were
not giving you any room for error on fundamentals and
technicals deteriorating, that's where we moved away from corporate balance
(12:48):
sheets and got it started to build up our balanced again,
which was government balance sheets. So we were coming into
twenty twenty five with the least amount of corporate exposure,
least amount of credit overweight that we've ever had in
the last five years, right, so the ballast was a
lot more. Now the month of April goes back into
(13:09):
technicals deteriorating, valuations adjusting, and future fundamentals at least potentially deteriorating.
Given that we are going to be in a low
growth environment, we can discuss whether it's going to be
high or temporarily high inflation. At that point, that gives
us a loosening of valuations, and we are slowly and
steadily trying to go back into corporate balance sheets which
(13:31):
are very strong, and then to now compensate us for
at least fifty percent of recession coming through in the
next twelve months. So that's how we sort of philosophically
and a processwise think about which balance sheet to investment.
Apart from all the hard work that are analysts, we
have about one hundred and fifty analysts out of the
two hundred and twenty five investors on the team, so
(13:52):
very bottom up focused. That's where I think a lot
of the hard work gets done in picking out the
best ones to invest in. After that top down coom, I.
Speaker 1 (14:01):
Do want to ask a little bit on valuations. You know,
are there value measures that you used to guide your decisions?
Speaker 3 (14:09):
So yes, I think we do have some proprietary models
that we've created. I heard Sam in the beginning of
the call as well talk a few of them. We
do incorporate some of that as well within our analysis,
but then a lot of the hard work is done
by the analysts. We have very specific and focused specialties
(14:31):
that we bring to the table. Yes, your typical IG analysts,
high yeld analysts, but then we have high yield and
bank loans, two different parts of the capital structure, looking
at the similar balance sheets from a different perspective of
what they want to get out. So and then we
have global as well as US focused analysts that that
(14:52):
typically so, for example, a bank analyst sitting here in
the US will give you a very good relative value
of what should we be getting paid for this table
balance sheet in the next twelve months of lower growth
and slightly higher inflation. Similarly, I think we have value
measures that our European analysts will come out with for
European franchise banks that we have an overweight today within
(15:13):
our portfolios as well. So I think that bottom up
relative value is the focus that we spend a lot
of time and effort on that decides actually how our
portfolios are positioned at any given point.
Speaker 2 (15:27):
I'm curious just in terms of you know, thinking about
duration and also fixed versus floating. For the first part
duration Obviously, you know, if you were in duration last year,
you kind of got crushed this year. How are you
kind of thinking about exposures there? Are you trying to time,
you know, getting into the long grand of the curve?
(15:48):
And then you know, obviously given rate cut expectations, how
are you feeling about fixed versus floating exposures?
Speaker 3 (15:55):
Too great? The last the first ten months or nine months,
I would say, of last year, we're fantastic. I think
bonds were delivering, and then the market started to focus
on the inauguration day and started to set up for it.
After the one hundred basis points cud so, Yes, a
little disappointing Q four that hopefully we've made up a
(16:15):
little bit of that in the first four months here
of the year, I think for US nominal GDP, and
then they've the monetary policy reaction to it or reaction
function to it is other dominant two pieces. Yes, we
have good amount of propriety models. We have a eight
member macro team or developed market macro team that only
(16:38):
focuses on country level balance sheet in the ramifications and
interest rates curve exposures as well as then FX quite
a bit of interest in that one, as you can
imagine at the moment. But breaking all of that work
down today, how our we position. We are a lot
more confident in our conviction level on the zero to
(17:01):
seven year part of the curve. I would say that
even that zero part is less conviction because we are
still not very sure of when exactly would the FED
actually come in. I know the two presidents that they've
set the moment that they very clearly see from the
data that their tool mandate is in danger of achieving.
I think they'll come in an act, or financial stability
(17:24):
is at risk, they'll come in an act. Those are
the two presidents. We don't think that in the next
two to three months those presidents are going to be
met or either one of them. So maybe in the
back half. But then as you get out from that
zero to one year, but then try to get out
into that three to five year mark, our conviction level
is much higher that FED will be dubbish. And they
have quite a bit in the toolkit to actually bring
(17:45):
down and anchor down the front part of the yield curve.
So that's where most of our exposures are. And then
you bring in the macro work that our team is doing.
Then if you try to travel out from seven to
thirty year part of the curve, a conviction level reduces
because then the variables of demand supply, the variables of
(18:07):
not having a very credible and sustainable deficit reduction plan,
and then what does that mean for term premium in
the long end. Those are the variables that reduce our
conviction level whether we'll be eking out or we'll whether
we'll be able to eke out that dual mandate from
the long end of the treasury curve. So that's how
we are sort of going through our conviction level, traveling
(18:28):
the key it duration parts of the curve, if you will,
and then trying to make sure that we have the
highest conviction in parts of the curve that we are
the most expressed. In another way simplistic way to say this,
we are in steepeners, overweight in the back in the
front end, and significant underweights to the twenty and thirty
year part of the curve at the moment.
Speaker 2 (18:47):
So I want to focus on a little bit here
just on the corporate side of things. Specifically, I'm wondering
about how you really focus on those non investment grade positions,
you know, one area that we take a look at
here in Bloomberg Intelligence quite a bit is obviously fallen
angels rising stars being a pretty big area just in
terms of inefficiency. Is that kind of the main focus
(19:10):
there when you're getting into high yeld positions or is
there a little bit more to it?
Speaker 3 (19:15):
Two things. The first part spot on sam. I think
that part of the curve crossover fallen angels rising stars,
how we want to define it, It's almost like a
lost category or lost focus area for a lot of
investors and asset managers as they have grown in size,
so it becomes very difficult for them to focus on
(19:36):
that part of the curve. So invest some great managers,
for example, will never look at a foreign angel or
potential for angel situation because then there'll be force sellers
in that environment, or the other way around, where high
yield investors are always very cognizant of rising stars because
that eats away into that potential yield or a negative
(19:57):
yield environment versus their benchmark or market capuit debt capated
benchmark that they have to beat. On the high l side,
that becomes a fantastic high sort of alpha or high
information ratio region for us, given that we have an
analyst on both sides, and total return strategies allow us
(20:17):
to actually take out alpha from this from this inefficiency.
So I think we can talk about some of the
auto sector names today which are very clearly priced for
angel situation and is getting shunned by some of the
IG investors. That becomes a fantastic one for us. Again, Yes,
we have to look at the fundamentals and valuations apart
(20:40):
from just focused on the technicals of foreign angels and
advising stars. The other big part, the second point that
we also focus on SAM is sort of differentiated. And
that's why some of our results if you look back
on the total return strategy of more consistent upside capture,
more consistent avoiding the downside capture or standards being lower,
(21:01):
is that we pick our best ized ideas from high year.
We don't follow a sleeve approach. What do I mean
by that? Our high yeal team typically every year looks
at or any typical year looks at about eight hundred
two one thousand issuers and they dwindle it down to
about three hundred approximately for their high yield only strategy,
which is trying to beat a debt gap weighted benchmark.
(21:23):
What we are trying to do for total return strategy
is we've built a process where we say that we
don't want all those three hundred names because all those
three hundred names might not have a total return catalyst today.
So give us the top fifty to seventy five names
that have a total return catalyst, are liquid enough and
(21:44):
are in that single be low single bee to dower
b range that they are actually providing much more spread
pickup and you'll pick up versus what I could do
in the high yeal side. So if I can try
to encapsulate some of the comments I made at the
beginning of the call where best ideas, fundament technical valuations,
and bottom up focus. This high yeer process then allows
(22:05):
us to allocate to best ideas from a team that
is already looking at best ideas for that high yeld strategy.
So looking at the higher teams information ratio and sharp
ratios over years, and then you allocate in a way
that you're picking out the best of their best if
you will, and allocating to the total return strategy that
in itself for every toller that can gets invested for
(22:27):
the total return strategy in high YEO is much more
efficiently used very similar to what we do in investment
grade corporates securitize assets and then when we investment in
government balance sheets as well, so that mentality and process
is scaled up in a way that it brings in
those ideas into total return accordingly.
Speaker 1 (22:44):
So you mentioned you know you have different sectors in
the portfolio. Do you have any process in place to
keep the portfolio diversified or is it more about just
finding the best opportunities.
Speaker 3 (22:56):
We have guidelines that keeps us diversified. We have guidelines
of sector limits, guidelines on subsector limits that we that
we keep up, issuer limits that we that we keep up.
That is graded by when you know the issuer limits
for below investment grade in out of index even within
the investigate land securities also securitized being our top allocation
(23:17):
at this point is kepped at half of the fund
or fifty percent of the strategy can be in any
given sector. I think all of these limitations part one
is trying to make sure that we are at any
given point diversified enough for the strategy that there our
clients are trying to allocate to. Also, I think we
(23:39):
are very cognizant that our clients have a lot of choices.
They have great sector funds at any given point that
they can allocate to. So we don't want to be
that sector fund risk reward that a client is trying
to get. So we will never be a high yeal fund,
or a or an EM fund or a bank loan fund.
I think that there are other fantastics str is that
(24:00):
other parts of our franchise run, but I think this
one is the best ideas both from a top down
sector allocation as well as from a bottom up security
selection at any given point. So yes, our guidelines track
all of that, and we have extensive sort of second
and third layer of risk teams as well that keeps
us in our success zone, if you will, so that
(24:21):
we are not steering anywhere close to our gutrails of
risk as well as diversification on that board.
Speaker 1 (24:27):
And now, are you seeing any opportunities outside the US?
Speaker 3 (24:31):
Yes, I think, and it is just not since April second,
just to be clear on that, I think we were
steering our exposure, for example, on the corporate side, to
be a little bit more overweight, to becoming financial heavy,
not only because financials were doing really well from a
(24:51):
tariffs and regulation perspective, but then financials were significantly outperforming
non financials of fundamental balance sheet health. I know, Q
one of twenty twenty three, we went through a regional
banking scare here in the US, but at that same point,
one of the big Jesent banks were actually getting upgraded
(25:12):
in the second week after the crisis that we were
going through in the beginning part of March of twenty
twenty three. So I think a lot of the franchise
banks have done a lot of hard work after the GFC,
and regulations have played a big part as well. A
lot of them are now high quality single A banks.
But when you look at what we are getting paid
(25:33):
in terms of spread levels here in the US versus
what we could as a franchise banks in Europe, quite
a bit more spread compression potential as well as starting
yield that you could get to. So yes, some of
that banking exposure that we had was in European financials.
We could apply that same logic of cleaning up the
balance sheet becoming a lot more debt holder friendly over
(25:56):
the years after that twenty twenty twelve twenty thirteen crisis
that that region went through. I think those banks are
also very fundamentally strong and do provide that valuation pickup.
So we were allocated to some of those sort of
balance sheets in financial balance sheets in Europe during this time.
Speaker 2 (26:15):
I want to switch gears here a little bit, get
into the electronic trading side of things, which you know
obviously on the fixed income side lagging relative to equities.
But I'm wondering how you all are thinking about adoption
of electronic trading and what sort of impact that's going
to have, you know, for the corporate bond markets as
a whole, just in terms of liquidity and how you're
(26:37):
going to be able to trade your portfolio.
Speaker 3 (26:41):
So I'm significantly forward if you had the same exact
conversation probably even three years back, not even you don't
have to go decade back. Decade back, yes, I mean
we weren't talking about these concepts at all. Technology, the
willingness of strategies to actually trade on these venues, both
from the cell side and the buy side. So it
(27:03):
required quite a bit of not only technology investment, but
resources within the team and incentivizing those resources to get
there as well. So I think all of those pieces
had to be done correctly over the last three to
five years, and that's what we've done. So quite a
bit of our ETF trading today goes through portfolio channel.
Quite a bit of our ETF today we are able
(27:24):
to take about eighty percent seventy five to eighty percent
of any creates and redeems in kind in our even
man ETF. All of that is the byproduct of all
the work that our traders, not only on the investment
grate side, but even on the high yeld side that
we've seen that have done over the years. We're bearing
the fruits of that. And then yes, I think some
(27:45):
of the counterparties on the other side have done a
fantastic job of allocating resources and allocating resources in a
way that helps their partners on the other side. So
liquid is better, but ask exactly is decreasing in the
secondary market and the pinpointed risk exposures that you can
get in a basket level are also very sort of
(28:08):
appealing to us as investors. Financials versus non financials, decompression trades,
if you want to put up triple B versus double
B on those sides, I think both those are also
getting very liquidly done. So you can customize now to
a level some of these portfolios and baskets so that
you can sort of find junior risk exposures within portfolios
(28:29):
in very liquidly.
Speaker 2 (28:31):
So as we're closing this conversation out I'm wondering. Obviously,
as a fixed income investor, the big concern is about
the downside. So I'm wondering, in your eyes, you know,
what's the biggest area of concern, Maybe one or two
things that you're looking out for through the rest of
the year.
Speaker 3 (28:49):
I mean, deficit reduction plan deficits is definitely top of mind.
Maybe I'm going to sound like a broken record. We
did that in our outlook since October November last year,
we've been pointing it out market is getting a lot
more cognizance, deepening is becoming a lot more forceful, almost
like a consensus straight at this point. That keeps us
(29:09):
up quite a bit at this point. Profit margins is
another one. I know, we did not hear anything about that.
It was just about uncertainty that we heard in this
earning earning season at this point, and I think that
one is sort of your next step towards before you
start seeing some demand destruction from a labor market perspective
as well as from a consumer and GDP perspective on
(29:32):
the back half of the year. So profit margins is
another one. All that sort of that term will encapsulate
sort of whether this inflation is temporary, whether balance sheets
are able to pass down some of that inflation to
consumers and small businesses on the other side, or are
corporate margin is going to get start to get affected,
which then is a precursor towards your labor market weakness
(29:55):
coming through. So deficits and profit margins, those are the
two spots that we have focused on.
Speaker 1 (30:00):
It's going to be interesting to watch this shall This
was great. Thank you again for joining us.
Speaker 3 (30:03):
Thanks for having me on, David. Thanks Sam and Sam.
Speaker 1 (30:06):
Thank you for joining me as my coast today.
Speaker 2 (30:08):
Yeah, thanks for having me.
Speaker 1 (30:09):
This was great. Until our next episode. This is David
Cone with Inside Active
Host
Gina Martin Adams
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