October 30, 2025 • 49 mins
Investors are too sanguine after shrugging off recent debt-market distress, according to Crossmark Global Investments. “My key concern is the complacency,” Victoria Fernandez, the firm’s chief market strategist, tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Jean-Yves Coupin in the latest episode of the Credit Edge podcast. “Jamie Dimon talks about the cockroaches, but the investors don’t seem to care,” Fernandez says. They also discuss opportunity and risk in the build-out of AI infrastructure, health-care bond spreads, private credit troubles and the performance of values-based investments.
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Episode Transcript
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Speaker 1 (00:18):
Hello, and welcome to the Credit Edge, a weekly markets podcast.
My name is James Crumby. I'm a senior editor at Bloomberg.
Speaker 2 (00:23):
And I'm Jy COOPI and senior analyst at Bloomberg Intelligence.
This week, we are very pleased to welcome Victori A. Fernandez,
Chief market Strategist at Cross Market Global Investments, a multi
billion dollar investment company based in Houston, Texas. How are you,
Victoria doing well? Thank you, Victoria John Cross Market in
twenty twelve, and in addition to our market strategist role,
(00:44):
she's also hitting the fixed income investment team while serving
as portfolio manager for textable fixed income products. As such,
Victor has a unique perspective on the markets, particularly the
fixingcome market, which is one of the key topics on
to this podcast.
Speaker 1 (00:58):
Thank you Joannie. Before we get going with the questions,
I will say credit markets are bouncing back from the
damage caused by the collapse of First Brands, which dinged
a few banks and investment firms. That and the bankruptcy
of treecy Law at around the same time, caused some
to fear that this was the beginning of the end
for corporate debt, which had been trading at the tightest
spread since the nineteen nineties and had been long due
(01:19):
for a correction, But the storm does seem to have
blown over. There's just so much demand for yield out
there and not enough new supply, So technically credit is
doing okay. Plus earnings have been strong, and the FED
is your friend with a cutting cycle underway. That is
not to say it's risk free and Victoria, you're a
bit more on the hawkish side when it comes to
interest rates. If they do stay high for longer. What's
(01:40):
the impact on weaker companies that have a lot of
debt coming due.
Speaker 3 (01:44):
Yeah, I do think that's going to be an issue,
And you look at some of those small cap names
that would really suffer, and I think that's one of
the reasons. You know, we saw small caps kind of
rally for a little bit on the equity side and
then they pulled back, and it's because those earnings components
are not as strong, and I think there is some
concern that as they have to start issuing new debt,
(02:07):
maybe rates won't be quite as low as what people
are anticipating, and therefore their cost of capital is going
to be higher. Yes, spreads have come in like you
mentioned from some of the scare that we had what
a week ten days ago, and we're not in and
worrisome territory yet. But I think those lower credits, when
you're looking at triple c's or single be rated credits,
(02:30):
you're still seeing some significant movement. You're still about one
hundred basis points wider than you were a year ago
on those lower quality ones.
Speaker 2 (02:40):
Just at the point of earnings, I mean, we're seeing
some company beat into third quarter, as we also so
in the second quarter, but however some of them are
beating because of cost measures enough really really revenue growth.
What's your view on current earnings and the risks that
you can see there.
Speaker 3 (03:00):
Yeah, you know, it's interesting that this is actually a
quarter where we have seen earnings and revenue expectations move
higher going into a quarter than lower. And we were
kind of surprised by that, thinking that higher cost from
tariffs and wages would actually start compressing margins and we
would see that come through and it's not what we're seeing.
(03:22):
We were actually seeing EPs growth up close to ten
percent now as expectation revenue growth up six and a
half seven percent, So it's stronger than what I thought
it would be. Obviously, when you get the majority of
these MAGS seven names getting ready to report, there's going
to be a huge amount of scrutiny on the CAPEX components.
(03:43):
And I think this is really going to drive the
markets considerably here seeing the earnings that we get from them,
because in my opinion, it's really this concept of capex
really driven by these hyperscalers that is given a strong
tailwind to this market. So we'll see how they report
(04:04):
as those earnings reports are coming up. But earnings are
actually a little bit better than what we had anticipated.
Things just keeps, you know, appear to be pushed a
quarter out, two quarters out. Every time you think it's
about time to pay the piper, there's some type of
stimulus event that comes in, gives some support and seems
to push that that paying the piper moment further out.
Speaker 1 (04:27):
And I think also a lot of people expecting a
bit more stimulus from the Fed, but you think that
they may have more challenges on the inflation side.
Speaker 3 (04:35):
I do think we're going to see that, and I
know that's a little bit out of consensus. The FED
has even come out and said we're not worried about
inflation or where that's going. That concerns me a little bit.
I know tear related issues are on the goods side,
and so they're not concerned to see goods prices go higher,
but we are still seeing the services side not come
(04:58):
down to this two perc level. There's still some concern there,
and obviously housing.
Speaker 4 (05:02):
Is one of the biggest components.
Speaker 3 (05:04):
I was just looking at some of the housing reports,
both the FHFA and case Shiller. The latest pricing reports
we see for the month of August and going into
September is the first time and many many months, that
housing prices are actually higher month over month.
Speaker 4 (05:21):
That leads rents by about six months.
Speaker 3 (05:23):
So that tells me if I'm looking six seven months out,
we're going to start to see some higher inflation pressures
come in. And I just have a hard time accepting
that tariffs are a one time.
Speaker 4 (05:36):
Event in pricing.
Speaker 3 (05:38):
So even though the Fed says they're one time, they go, yes,
it's one time, but it can happen over the course
of many, many months.
Speaker 4 (05:45):
Well, to me, that's not one time.
Speaker 3 (05:46):
Then that is a drag you know, higher on inflation
over the course of many months.
Speaker 4 (05:52):
That's going to have to feed through it sometimes.
Speaker 3 (05:54):
So yes, I'm a little concerned that maybe inflation is
not something that we should just ignore right now, which
it seems like the FED is doing, and with the
lack of information coming out, I know they'll take the
opportunity to kind of take an insurance cut. But I
do think as we start to get some of the
data flowing once again, whenever the government decides that they're
(06:15):
ready to open back up again, there could be some
elevated levels there that I think the FED will have
to start paying attention to.
Speaker 1 (06:23):
When you tile that together, Victoria, it seems like a
quite cautious outlook on the economy. How do you express
that in a credit portfolio at a time when everybody
else is trying to buy the same stuff. Everybody's trying
to stay out of the riskiest end of the market,
But there isn't a lot of net new supply of
actual corporate bonds and loans, so you know, it's very
(06:45):
tight out there. People keep telling themselves that the quality
is getting better, and yet with these macro headwinds, how
do you invest?
Speaker 3 (06:53):
Yeah, it's actually a very strong predicament to be in
right now because of exactly what you're saying you're not
seeing a tremendous amount of new issuance coming out, But
I was looking actually just this morning, I was like, Okay,
Southwest Airlines, Ford Tech, Stron these are some of the
companies that I saw this morning that are getting ready
to come to market. And you look at a ten
(07:15):
year basically anywhere between ninety to maybe one hundred and
thirty basis points on the spread for these new issues,
Ford being higher, Ford being closer to two hundred because
it's split rated, so you've got a little bit of
that concern in there from a junk bond rating from
one of the issuers. But there's not a lot out there.
(07:36):
And obviously we want to focus on quality. It's the
type of manager we are, it's the type of clients
that utilize us want that quality in there. This is
not a portfolio that they are looking at to swing
for the fences for returns. They want that consistent cash
flow and not have a lot of credit concerns or
credit risk in their portfolios.
Speaker 4 (07:56):
So when we're looking.
Speaker 3 (07:58):
At names without paying a high premium, because that's the
other element of it, you know, to your question is
if everyone is trying to get this same high quality paper,
the premiums go up pretty significantly, then it doesn't make
as much sense to put in the portfolio. So we
have actually been increasing our treasury allocation in our portfolios
(08:18):
in order to compensate for that a little bit, especially
because depending on where you buy on the treasury curve,
you can get yield comparable to what you're seeing in
investment grade credit. We had previously used fixed rate preferreds
sometimes in our in our fixed income portfolio, but again
you're not getting that much of a kick on the
income side anymore in order to justify some of the
(08:41):
volatility that you could see in the market value of
your portfolios from there. So we want to keep continue
to start to continue to focus on the quality credit names,
but then use treasuries more and more, use some agencies
more if that's available to you as well, to kind
of fill in where you need to, especially if the
(09:01):
FED is lowering rates, which even though we may not
get as many as we think over the next year,
pretty sure they're gonna cut here at this meeting in October.
They'll probably cut at the December meeting. We will see,
but you're gonna be able to get at least a
little bit of positive movement on the yield curve, plus
you're getting a pretty decent coupon. So that's what we're
(09:24):
doing for our clients to try to compensate from that.
And you can do it really short if you want.
You can even go into T bills if you want
to and rotate that out if you're just waiting for
some particular corporate credit names to fill in.
Speaker 2 (09:38):
And in terms of industry or corporate sectors that you're
looking at, how do you see any pockets of value
in some of the maybe more stable, defensive sectors or
do you think the valuation is not there?
Speaker 3 (09:52):
Yeah, you know in the corporate side, I think when
you're looking at spreads, they've actually been somewhat consistent. I mean,
I'm I'm looking here by sector. Let's just look. You know,
we could look year to date and you see financials
tighter by about five basis points, industrials tighter by six
basis points.
Speaker 4 (10:13):
I mean, there's some.
Speaker 3 (10:14):
That are a little bit better than others, you know,
on a month to day, quarter day, year today basis,
but on investment grade they're pretty tight. And where they
are you see that widen out when you go to
high yield. We've seen healthcare on the high yield side
actually tight and pretty significantly year to date. As healthcare
(10:35):
starts to improve on the equity side, you're seeing some
of that flow through to spreads on the fixed income
side as well.
Speaker 4 (10:43):
But areas that we like because we like the.
Speaker 3 (10:47):
Strong balance sheets is really financials in the larger banks.
We're not buying really some of the smaller banks or
the regional banks, but those large banks we really like
their The paper that they have out there and where
it's being priced is pretty good. You do have some
industrials that are doing well too.
Speaker 4 (11:08):
You look at some of.
Speaker 3 (11:10):
The consumer goods have come in a little bit, so
you get a little bit of bonus there, but really
kind of across the board, they're doing pretty well. Even
leisures surprisingly over the last week have tightened up three
to four basis points. So there are some areas where
maybe you get a couple basis point difference on investment grade,
(11:31):
but not a tremendous difference in order to say overweight
one sector versus another.
Speaker 2 (11:37):
And perhaps we drilled down a little bit on healthcare,
which is a sector that I cover, especially for larger companies.
It's been significant headwinds and noise in healthcare, especially in pharma,
with some uncertainty related to potential tariots into regulatory environment.
Do you see the latest developments as as maybe a
(11:59):
a glean of hope in healthcare, especially for large pharuma.
Speaker 4 (12:05):
Yeah.
Speaker 3 (12:05):
I think it might be an opportunity to come in
and maybe pick up some of these healthcare names that
again fit that criteria we've been talking about, those higher
quality names, the names that have.
Speaker 4 (12:18):
Decent balance sheets.
Speaker 3 (12:20):
We can go in and find some names there where
you can add to the healthcare exposure in your portfolio,
on your fixed income portfolio. And there are some healthcare
companies as well, because one thing that we do, and
we'll probably talk about it in a little bit, is
we do have kind of a responsible investing component that
flows through our investment process. But there are certain healthcare
(12:44):
names that score really well on that side as well.
So I think you can get an opportunity to maybe
get some healthcare names at are wider spread than maybe
some of the other sectors and get some principle appreciation
or price appreciation on those names from now through maturity
or at least over the next couple of years and
(13:05):
then maybe have the opportunity to come out of it.
If yields do start to move higher over the next
couple of years, which I would hope they would, then
maybe you can come out of that where you've got
both price appreciation and then you can go into a
higher coupon as well.
Speaker 4 (13:18):
That would be a good move.
Speaker 1 (13:20):
And on the banks, Victoria, it is a sector that
a lot of people have liked for a long time.
It is trading very tight, particularly the big banks, and
then we're seeing this pressure on the on the smaller regionals,
which you know you say you don't directly invest in those,
but they are potentially a spillover effect on the whole sector.
If we see those problems with you know, bad loans
(13:42):
basically we saw that a couple of years ago and
the whole market for financials widening out quite a bit.
Are you are you concerned it's all about spillover from
the regional banks.
Speaker 3 (13:53):
I think if you're looking from an equity point of view, yes,
you can have some concern in regards to ice volatility
on the equity side of the market. But from a
fixed income perspective, when I'm putting this bond into a
client's portfolio, or if I'm putting it into our mutual fund.
I'm looking at those balance sheets and saying, do I
have concern around this company paying their principle and their
(14:16):
interest components?
Speaker 4 (14:17):
Is there a credit risk here?
Speaker 3 (14:19):
And I really don't because of the strength of the
balance sheets of those larger banks, they're sitting in a
much better position now than they have been in previous years,
and so I'm not concerned from a credit perspective. From
a market value or price component, where you know, clients
may be looking daily or monthly going online and looking
(14:41):
at the price of their bond, will there be more
volatility there?
Speaker 4 (14:45):
Yes, I think there will be.
Speaker 3 (14:47):
But the conversations we have with our clients is these portfolios.
We're either trying to match, you know, an asset in
their portfolio with the liability that they have coming up
in terms of maturity. We are trying to generate steady
cash flow for these clients. And so if we're looking
at it from that perspective, we're okay with the little
(15:09):
market value volatility or price volatility, knowing that we're not
going to have concerns around the coupons being paid or
at maturity receiving that, So, yes, I think there can
be some spillover. Yes, it could cost some price volatility,
and be more concerned on that on the equity side
than on the fixed income.
Speaker 2 (15:28):
Side, and so in the fixed income side, I think
we cannot look at the market right now without talking
about some of the comments that have been made recently
about potential cracks emerging in the credit markets. Cleary Jimmie
Diamond's coquch comment comes to mind. What are your views
on what's going on in the credit market. Do you
think that there are some risks that the market is
(15:49):
currently ignoring.
Speaker 3 (15:52):
I think there's a lot of risks that the market
is currently ignoring, and credit could be one of them.
Or a moment ago when we were discussing the big
banks and saying that really the balance sheet is one
of the reasons that we like the big banks instead
of some of the smaller banks. One of the reasons
that I think their balance sheets have been as strong
(16:12):
as they have been is because some of that riskier
loan business, some of the other elements have actually moved
over to private credit, So you've had that removed from
what most people consider the loan portfolio of these larger
banks and to private credit, and private credit has become
more accessible to a retail investor. You're seeing it in
(16:36):
people's four oh one k's the options to do some
private credit, and there's a lot of talk around the
regulatory component of that in order to make sure people
truly understand what they're getting into. But that's where I
think you're seeing some risk. I think private credit has
taken on a lot of the risk that maybe banks
had previously. You know, we think back to some of
(16:58):
the issues around on the banks a couple of years
ago in March what that looks like. I think a
lot of that kind of component and that risk is
now in private credit. So we don't invest in private
credit here at cross Mark in our portfolios. I do
think there could be a place for that and someone's
overall allocation if they have the due diligence components in
(17:21):
order to really work at that, and they don't need
the liquidity aspect of it, because again, that money gets
tied up a little bit longer than what you would
expect in a normal fixed income portfolio. But I think
that's where the credit risks are shifting. And so when
Jamie Diamond says, you know, where there's one, there's usually more.
Speaker 4 (17:40):
The whole cockroach component.
Speaker 3 (17:43):
Then I think that's true, and we probably have not
seen the end of some of these.
Speaker 4 (17:48):
I wouldn't say that they are.
Speaker 3 (17:51):
That it is a scare that is spreading through the
entire sector, but I also don't think we can say
it is simply a one off or a two off.
I do think there is an underlying element going through
this of increased risk that private credit has been taking
over the last couple of years, and some of that
now is kind of floating to the surface, and we
(18:12):
will probably see some.
Speaker 4 (18:13):
More of it.
Speaker 1 (18:14):
You know, we've had quite a few private credit guests
on this show recently. A lot of them have just
dismissed this out of hand. You know, they talk about
first brands having nothing to do with private credit. And
on the other hand, you know, some very large investment
firms like Blackstone have talked about how you can get
one hundred and fifty basis points or two hundred basis
points over public credit for an ig investment in something
(18:39):
that you know is with a household name, data center
or something.
Speaker 4 (18:43):
And there has to be a reason for that, right James.
Speaker 3 (18:45):
I mean, you're not just going to get an extra
two hundred basis points nothing.
Speaker 4 (18:49):
You're taking on some additional rest.
Speaker 1 (18:51):
But it just sounds so good. I mean, so why
would you not do that? That's my question? Because everybody
else is doing it. Why wouldn't you do that?
Speaker 4 (18:58):
Yeah?
Speaker 3 (18:58):
So for me, I always a you know, I was
kind of raised in the bond world, right, the fixed
income world, And I think it's because.
Speaker 4 (19:05):
I'm a very conservative person by nature.
Speaker 3 (19:08):
And I don't mean that from political save and I
just mean it from a risk perspective. I am a
very conservative individual and I don't like to take risks.
And so when I am managing portfolios that are meant
to just provide some cash flow and a little bit
of price return for our clients, and it's supposed to
be that safer component of their overall allocation, I don't
(19:31):
want to go in and take extra risk for them.
And I think most of my clients would agree with that,
right They this is not the part of their investment
that they're saying, let's add some some high yield and
a lot of risk and see what happens. They can
do that on the equity side of their portfolio or
the currency side, if they want to do some things
(19:52):
or real estate not in their in their taxable fixed
income component of their overall allocation.
Speaker 4 (19:59):
So I just don't want to take the risk.
Speaker 3 (20:01):
I would much rather go to a client and say,
you earned five percent over this time period. Maybe we
underperformed by twenty five thirty basis points, but we had
a much lower risk in this portfolio. So if something
is to happen, or you have that black swan event,
we are more protected in this element. Then to go
(20:23):
in and say we took a big risk and it
went against us, and now you know you've lost money
in this strategy, that's just not what my clients are
looking for. So I tend to take a much more
conservative approach in our allocation and in our investment process
than maybe some other people do.
Speaker 2 (20:43):
And maybe to your point of there's no extra return
without taking on a higher risk. I think it was
quite interesting to see what the Bank for International Settlements
said recently, or rather warn in a new paper about
credit ratings on private loans held by US curers. Two
According to them like what have been sematrically inflated, And
(21:06):
I think what they're leading the blame on maybe some
of the smaller rating agencies capturing a greater market share
of that space versus you know, Moodies and SNP and
and potentially some of the of the risk is higher
than than what people think. Do you do you see
(21:29):
potential for uh? I hear you're not invested in private credit,
but do you think there could be like a significant
ripple effect if something were to go wrong? And how
do you protect yourself from that happening in your portfolios? Yeah?
Speaker 3 (21:47):
So I definitely think you can get a ripple effect.
And I do think that when you're looking at credit
issues that maybe do not have as much transparency as
others rating agency could over inflate or inflate what that
rating is. It's why you have to kind of dig
(22:08):
down deeper, and this is how you protect yourself.
Speaker 4 (22:10):
You have to go yourself.
Speaker 3 (22:12):
Look at the the balance sheets of these companies. You
can have a company and you know, I will give
you an example. Al CoA is a perfect example. Alca
was in our portfolio years ago when it got downgraded.
So you know, we always say we're at investment grade
in our corporate holdings, so if something gets downgraded, we
don't have to sell it immediately, but we do tend
(22:35):
to work out of it over time. So ol CoA
gets downgraded to junk bond status. But we're looking at
this balance sheet and we're saying, wait a minute, our
bonds are, you know, coming due in two and a
half years. We're looking at the cash flow they have,
We're looking at the assets they have on their balance sheet.
Speaker 4 (22:53):
We're bond holders.
Speaker 3 (22:55):
There's plenty of money in order to pay the interest
and the mature component the par value on maturity date
for these bonds. So we didn't want to go in
and sell our bonds at seventy cents on the dollar
to get out of the name. So we held them
to maturity. We got our coupon payments, we got our
(23:16):
par value at maturity, and made our holders our clients
whole on that al CoA bond. If we had just
listened to the rating agency, we would have lost out
tremendously on that. So when I'm talking to clients, we're
not just saying, well, it's an A rated bonder, it's
a triple B plus rated bond, and so you're good,
(23:37):
you don't have to worry about it.
Speaker 4 (23:38):
No, we're digging in a little bit.
Speaker 3 (23:40):
We have analysts that look at these names and say,
hold on, let's see what it really looks like. Maybe
they're rated A, but yet we look at their debt
ratios and we go, WHOA, hold on, that's way too
high for us.
Speaker 4 (23:53):
We don't want to take that risk.
Speaker 3 (23:55):
We had done that with some AT and T bonds,
some of the Communications Sect bonds a few years ago.
When those debt ratios got extremely high, we said, no,
we're not comfortable. Let's come out of these names. So
I don't think you can simply rely on a rating agency.
It's a good way to sort bonds, to kind of
do that initial look at them and group bonds together.
(24:17):
But I do think you have to go in and
really kind of do your homework, and that's how you
end up protecting yourself from an event that maybe was unanticipated.
Speaker 1 (24:26):
Right right, We can't obviously talk about markets at all
in these times without saying AI. So I'm interested in
your view of the AI build out, and you know
what opportunity that might be for an an investor, not
just on the data center, but also on the power
and all the other associated infrastructure. Is that something you
think is going to be very exciting for credit.
Speaker 3 (24:47):
We absolutely do, and so when we go through our
investment process, we have multiple steps to it, and one
of it is looking at, you know, individual sectors, and
we work with our equity team on that as well
to see where we think there's some sectors that might
give us a little bit of additional alpha in the portfolio.
Speaker 4 (25:06):
And obviously the energy sector.
Speaker 3 (25:08):
And I sit here in Houston, Texas, right, so everyone
will go, well, she's biased for the energy companies, but
not really. We haven't had a large exposure to energy
for a while, but now you have this extra tailwind
for some of the power companies. I mean, we saw
this week next Tarra, right, there's an announcement from them
(25:29):
that they're teaming up and they're.
Speaker 4 (25:31):
Stock got a big boost.
Speaker 3 (25:33):
You could see some benefits coming from some of these
power companies. As more and more partnerships are made with
some of the hyperscalers or you know, some infra AI
infrastructure deals are made, you can see some more of
these power companies really.
Speaker 4 (25:49):
Coming in and benefiting from that.
Speaker 3 (25:50):
So I do think you want to look at adding
some exposure from the energy side, just like we were saying,
add a little bit to your healthcare, go in and
find some of those areas where maybe spreads were wider
and you could go in and take an opportunity. I
think you can do that on the energy and on
the power side as well. Find some of those elements
that feed into that AI theme that are not just
(26:13):
the hyperscalers, and use that to your advantage. I think
it will be beneficial over.
Speaker 4 (26:18):
The long term.
Speaker 1 (26:19):
It is also a bit of a gold rush at
this point, and things, you know, often go wrong when
everybody's just hysterical about one particular thing. So I'm wondering
if there's any caution out there about things like you know,
obsolescence risk and you know the fact that all this
stuff's been created in terms of like pure blue sky thinking,
we don't know where it's going to go. So for
a credit investor that you know, we're pretty cautious people,
(26:40):
you know, we do ask a lot of questions. But
how how careful should we be about all this?
Speaker 3 (26:45):
Yeah, I think when we talk about risk, I mean
we've been talking about that, you know, for quite a
while here in our conversation. Obviously, you've got to look
at those balance sheets and look and see, you know,
do they.
Speaker 4 (26:58):
Have a lot of debt, are they going to be
able to pay that off? What does their cash flow
look like?
Speaker 3 (27:03):
Those are important components, But I think the other element
that you have to look at is what is the premium?
Is there a very high premium on these bonds, because,
like you're saying, everyone's rushing into something. I never like
to be on the side of the boat where everybody's going, right,
that's the part that goes underwater. So you don't want
to go in and pay a really high premium for
(27:24):
this bond because everyone's doing it.
Speaker 4 (27:26):
Wait for your opportunity.
Speaker 3 (27:28):
Just like you see on the equity side, people you know,
they buy the dips, right, they have a shopping list
and they go in and they buy companies that they
really like when the market pulls back.
Speaker 4 (27:37):
I think you can do the same thing on the
fixed income side.
Speaker 3 (27:39):
You know, if you like certain power names, but the
premiums are getting pretty are up there, pretty high, then
just wait when we have a headline come through where
spreads widen out a little bit, then that's your opportunity
to go in. If you still feel confident in that
name and add to it so you don't have to
be skeptical just on the balance sheet side, on the
(28:03):
credit side, I think you have to be a little
bit skeptical on where you're buying on the spread component
as well.
Speaker 2 (28:12):
Let's maybe just switchgear a little bit and talk about
you know, one of the wholemarks of course mark and
no pen intended. It's clearly doing good and maybe in
line with a face based approach to investment principles. This
involves respect for the environment, responsible governance practices, fair treatment
of employees, just to name a few. How do you
see your mission being affected, if at all, by perceived
(28:35):
as a bit of a pullback on ESG, at least
in the US, and as many people maybe turn more
to doing well as opposed to doing good. I mean,
I'd be interested to hear your views on that.
Speaker 4 (28:45):
Yeah, of course, So you're right.
Speaker 3 (28:47):
One of the things that we talk to our clients
about is really aligning their investments with their values. So
we are not an ESG product per se. We're not saying,
you know, oh, these these whole sectors, were just eliminating
them because they don't fit a particular narrative. We actually
(29:07):
do two different types of screening for our clients, and
so there it can be the negative screening, which is
what a lot of people associate with the ESG components
and other elements, and those are revenue based exclusions for us.
So there are certain areas that we want to avoid.
That would be you know, think of like alcohol or
(29:28):
think of tobacco. If a company generates revenue over a
certain percentage, it usually ranges anywhere from zero to accumulation
of ten percent in certain industries, then that gets excluded out.
So you know, I talk about alcohol, just think of
Anheuser bush right, eighty percent of its revenue comes from
alcohol production. Well, okay, are we saying that you know,
(29:50):
it's horrible that someone drinks alcohol?
Speaker 4 (29:52):
Will know, But we can look and say, you know
that alcohol.
Speaker 3 (29:57):
Consumption is actually the third leading prevent cause of cancer
in the United States.
Speaker 4 (30:02):
We've got over ten percent of Americans.
Speaker 3 (30:04):
Age twelve or older that have alcohol use disorders. So
there are elements that are harmful to our society as
a whole coming from some of these, and so we
choose not to invest in those. You know, you can
see the same thing on tobacco with like a Philip
Morris right, even though they're shifting away from cigarettes to
(30:25):
other things those are there's still risks associated with those
lung functions, cardiovascular diseases, addictions. So there's that negative component,
but I think where it fits into kind of what
you're talking about is more what we call our responsible
investing component or the positive inclusions. So part of my
(30:46):
investing process, I have four steps. My fourth step of
my investing process is I'm looking at not just the
fundamentals and the balance sheets of these companies. Yes, we
do that because it's important and we've spent a lot
of time talking about that, but we also want to
look at what some of their value scores are. We
use third parties to look at that. So an example,
(31:08):
so you can see what I'm talking about, think of
Elevant's Health, right we're talking about healthcare names earlier. Elevants
Health is a top scoring name within the healthcare service
and equipment sector. So it's in name because we like
the balance sheet and because they have good value scores,
we want to put them in play. And why are
they scoring high well, because they are doing a tremendous
(31:31):
amount of work in regards to postpartum depression. They are educating,
they're doing best practices, they have partnered up and they
have a twenty four to seven virtual medical practice to
help mothers in the first year postpartum. And it's interesting
because you see almost half of the people that engage
(31:53):
with this program are asking questions outside of normal business hours,
So it's middle of the night when a brand new
mother probably is not sleeping and she's you know, having issues,
she's able to call and talk to someone and they
can help. So things like that where Elevant's Help is
supporting these types of initiatives, These are reasons.
Speaker 4 (32:15):
That we would include them.
Speaker 3 (32:17):
And you might not think of a staples company like
General Mills as having a really strong positive values component,
but they do a tremendous amount of work with the
WICK services for people that are at the poverty line
or below it. We've got over forty percent of infants
(32:38):
that are on WICK right now, and General Mills has
over two hundred and twenty products that are available to
families on WICK and they actually provide them with these recipes,
which is really kind of a cool thing where they
take some of their lowest cost items and make new
(33:00):
meals from them and provide them to these families so
they are getting the nutrition they need. They're doing it
at a cost that is beneficial to them, and it's
extremely helpful to these families. They support the Special Supplemental
Nutrition Program. They've done it for over forty five years,
and they're using ninety three percent of their packaging as
(33:21):
recyclable now, so trying to help the components there.
Speaker 4 (33:24):
So these types of stories for these.
Speaker 3 (33:27):
Companies, we feel like are things that our clients can say,
we're proud to invest in these companies and we're you know,
they have strong fundamentals, which you have to have in
a portfolio, but yet they also have these responsible components
to them, So we combine the two. We're not just
(33:47):
gonna invest in a company because they do good, they
have to have strong fundamentals as well. So the combination
of those two things is what we do at Crossmark,
and we.
Speaker 4 (33:57):
Feel it's something very beneficial for our clients.
Speaker 1 (34:00):
But we're also operating in a political environment in this country,
in the US where a lot of it's been dismissed
as quote woke or you know, just wasteful virtual virtual signaling.
I mean, I obnestly think what you're saying, it sounds brilliant,
but you know, what's what's gone on in the country.
A lot of it's been pushed back in and so
why why isn't that stuff covered by public health or
(34:20):
charity or whatever? How does it fit into to a
corporate mandate? But but I also also wanted to ask
you about energy because you know, fossil fuels have become
such a big political football as well, and when you're
talking about AI and power, you know, how does that
fit into into this this value based investing? And you know,
do you do you consider nuclear to be a clean option?
(34:41):
And you know that there's been a big nuclear deal
just just announced in these days, so heurius to help you.
Speaker 3 (34:48):
Yes, So the way that we look at it, and
you know, like I said, we use a third party
to value these so that we can be very objective
on these and a lot of it is score on
the risk that these companies have in regards to having
when it comes to energy companies in regards to having
something bad for society happened. So let's go back to BP,
(35:12):
right and the issues that we had there. Following that,
BP put so many buffers in place and new procedures
and things in place that their risk level to being
part of something that would cause those issues again came
down tremendously, so their values forlore actually moved higher because
(35:33):
their risk came down. So I think it's important for
a lot of people to kind of understand there's different
ways that companies can do things. They may not be
out there, you know, charging at the front of a
march for something, but internally the companies are doing things
to try to do better and be better for their
employees and be better for the community around them. And
(35:56):
so there's a lot of companies that do that. Yeah,
when you look at oil and gas companies overall, many
of them are screened out for some of the elements
that people are looking for, but not all of them.
So I do think you have to look and see
what the risk level is of these companies, what they're
(36:18):
doing to help mitigate any issues that their company could cause,
and then those are the types of names that we
would be able to put into the portfolio.
Speaker 2 (36:28):
So I see this is a very detailed, open minding
kind of approach to investing and looking at very specifics
of each company and now just taking a view on
a single sector. What I'd be interested to hear you
talk about is performance. I mean, have you done any
work on how the performance of these responsible and investments
(36:51):
fare compared to a broader index for instance.
Speaker 3 (36:54):
Absolutely, and I'm gonna throw a plug in here real quick,
so don't get mad at me, James. But people you
go to our website, Crossmarkglobal dot com, look on our
insights page. We actually did a white paper not too
long ago on this topic and what you notice is
from quarter to quarter, absolutely there can be differences and performance.
(37:15):
So if you know, if we are screening out for
life ethics, some pharmacy companies and pharma does really well
because there was you know, some type of policy that
was passed by the administration and so pharma names jumped
that quarter, well, then yes, your portfolio will probably have
a drag on performance from not owning the pharma sector.
Speaker 4 (37:39):
Or the same thing could be done for alcohol.
Speaker 3 (37:41):
You know, we talked about alcohol and tobacco components. If
something happened there, and it could be the flip side, right,
you could have a ton of regulation all of a
sudden being put on tobacco companies. So not owning them
is actually a positive element, and we review that every quarter.
In our Investment Policy committee, what was as either the
drag or the added value by owning or not owning
(38:05):
a particular sector because of the screening that we do.
But when you look longer term, and I'm talking one, three, five,
ten years, when you look out over time, there's basically
zero difference in the performance of strategies. So obviously short
term there can be some volatility, but no, on the
(38:28):
longer term, you're not seeing a drag on your performance
because you are implementing these values components into your portfolio.
And remember we're doing a lot of this work. It's
still the fundamental, right, the fundamental drive, So that's driving
your overall performance. We look at the screening, it's that
(38:49):
kind of your extra little element that is in your portfolio,
kind of your whip cream or your cherry on top
of your of your Sunday.
Speaker 4 (38:56):
It's an important part of it.
Speaker 3 (38:58):
But you still have all that underneath, that fundamental analysis
and investment thesis underneath that drives performance.
Speaker 1 (39:08):
You think being in Texas gives you an edge on
this stuff, Victoria, I mean you get tough questions probably
from the people around you.
Speaker 3 (39:15):
Yeah, you know, James, I'd like to say being in
Texas gives us an advantage across the board on everything,
But that's just how we Texans like to think about ourselves. Yeah,
you know, everything's bigger and better, right. So I do
think from an energy perspective, we would get more questions
(39:35):
because obviously, I mean, you know my office, I can
look out my window here and you know I've got
BP and Conico, Phillips and all these companies right across
the street from me.
Speaker 4 (39:45):
So you can get some pushback.
Speaker 3 (39:46):
But I think when we explain how we approach it,
when we talk about how things are revenue based and
we're not just making subjective calls on elements, I think
people tend to understand that a little bit better. These
are things that you know, if a client decides they
don't want this on their portfolio.
Speaker 4 (40:06):
That's okay. Right.
Speaker 3 (40:08):
We could have a client say, but I want to
own energy, Okay, perfect, We can put energy in your
portfolio for you.
Speaker 4 (40:14):
Right.
Speaker 3 (40:14):
This is just something that we like to provide to
our clients.
Speaker 4 (40:19):
So you do get a little bit of pushback.
Speaker 3 (40:21):
But I also think, you know, Texas has become such
a varied economy. Used to it was driven about seventy
percent by oil and gas. Really that has come down tremendously.
It's closer now to thirty to forty percent by oil
and gas. Healthcare has actually taken a huge component of that,
(40:42):
and tech is growing more and more every day, especially
in the Austin areas. So a much more varied economy
than it used to be. And so I think a
lot of people look at an opportunity to, like I
mentioned before, kind of align those investments with some of
their values, and they find this is a great option to.
Speaker 1 (41:02):
Do that excellently. I'm interested also in your view of
the rest of the world. I mean, we don't have
a lot of time left, but you know, a lot
of people did kind of shift a bit of a
little bit out of the US when the tariffs were announced,
but I think a lot of that money has just
come back in. I'm wondering monding's any value for you
in Europe or Asia. And also when you step back
and look at credit against other asset classes that you cover,
(41:25):
how does it stack up.
Speaker 3 (41:27):
Yeah, So obviously, when you know, when we had a
shift in the dollar, you saw some money kind of
flowing out to other countries. You saw it on the
equity side, you saw ETFs that there was a big shift,
and that.
Speaker 4 (41:40):
On the fixed income side.
Speaker 3 (41:42):
We stay focused on US for the credit that we hold,
but I watch spread So I mean you look right
now some of the widening that you've seen over the year.
Over the last quarter, even UK has widened out tremendously,
much more so than the US. The Euro has widened out,
(42:03):
but not near to the extent that you've seen in
the UK. Euro and Asia are pretty are pretty similar,
and emerging markets a little bit more but still tighter
on the year than where we were a little bit
wider on the quarter, but tighter on the year. Really,
looking at sterling bonds is where you have seen the
(42:26):
widest move year to date. So yes, I think you
have to watch spreads globally. We know that when you
look at sovereign debt globally, yields tend to track each other, right,
So we saw for a long time we were seeing
yields move up in Germany, we were seeing yields move
up in France, and that was trickling through to some of.
Speaker 4 (42:48):
The higher moves here in the US.
Speaker 3 (42:50):
Now that has started to shift and we're seeing things
seeing yields come back down globally as well.
Speaker 4 (42:55):
So I think you pay attention to it.
Speaker 3 (42:57):
It's important what happens globally because it does have effect
on us, which is where we're investing. But when you
come down into the actual credit, out of sovereign and
into credit, obviously a lot of these companies have global exposure,
so you want to be mindful of what's happening in
a macro perspective globally. But we're not investing in foreign
(43:21):
currency bonds. We are investing in US dollar US dollar
domestic bonds.
Speaker 1 (43:26):
I will say the UK is a great place, and
I'm not going to drag my colleague John Eve into
the French political discussion because what's going to happen.
Speaker 4 (43:34):
Sorry, Johnny, I did not mean to bring that up.
Speaker 1 (43:37):
But what about equity against credit or credit in the portfolio?
I mean, how does it stack up against other products
that you can invest in.
Speaker 4 (43:45):
Yeah, so it's interesting.
Speaker 3 (43:47):
Are actually our best selling strategy at Crossmark, and it
has been for quite a while, is what we call
our balance core strategy. So it's a fifty to fifty
large cap core and core fixed in and it has
actually been what our clients have really been clamoring for
and I think because it does give them kind of
the best of both worlds. Look, you've got an equity
(44:08):
market that, even though you know, we see some warning signs,
it is a bull market right now, and you don't
really want to stand in the way of that of
that train, and so you want to have exposure to
that side. We've actually been calling it a high risk
bull market because of some of the warning signs we've seen.
But with a FED saying they're going to lower rates,
(44:30):
with tailwinds coming from stimulus both monetary and fiscal coming
in the new year, with some of the tax incentives
that are happening in the capex components, I think you
want to have some exposure to equity, but I do
think because there are elements out there that cause us concern.
We've talked about some of them already today, you need
to have that exposure to fixed income And for us,
(44:53):
we think you want to lock in some of these
rates that you can get north of four percent and
able to have that cash flow which can help buffer
any kind of volatility from the equity side. So we
do believe in a diversified portfolio you need to have
that exposure in there, But overall, we would have your
your total portfolio allocation take a little bit more of
(45:15):
a defensive tone even when you're looking at things outside
of fixed income, even when you're looking at equities or
real estate or currency or alternatives. You know a good
way that a lot of our clients are having other
components in their portfolio but still being income generating. So
something that kind of mirrors fixed income is to use
(45:35):
covered calls. So that's the way you can be in
the equity market but still have income cash flow like
you do on the fixed income. Many people combine those
two elements core fixed and a covered call strategy in
order to get that income that they're looking for and
have exposure to equities and fixed.
Speaker 1 (45:53):
Where's the best relative value though? Do you think in
credit right now?
Speaker 3 (45:56):
It's an interesting question because I think it shifts. I
think it's been shifting this year. But honestly, I don't
want someone going out and paying a high premium to
get investment grade credit. So maybe you wait a little
bit and let those spreads widen to go in. But
I think you can go in and buy the shorter
(46:16):
end of the treasury curve, knowing that the FED is
probably lowering rates twice more this year and maybe not
into next year. You can buy on the short end
of that treasury curve, get some price appreciation or curve.
You know, the carry works in your favor, and you're
getting a nice coupon on that. So I think that's
kind of where your best bet is right now, is that.
Speaker 4 (46:39):
Shorter end of the treasury curve.
Speaker 3 (46:41):
But I would be watching very closely for spreads, and
if I started to see something widen out, I would
hop in and get some credit in there further out
the curve to lock in some income.
Speaker 1 (46:52):
I should also say for listeners that we are speaking
ahead of the September decision, so you don't expect more
than September and October in tons of cuts.
Speaker 3 (47:01):
I think the December cut is a little more up
in the air. It probably will happen, but I think
depending on when the government opens back up and the
data that we get the backlog of data, the December.
Speaker 4 (47:14):
One could be a little more iffy.
Speaker 3 (47:16):
But odds are right now and the market is pricing
in two more rate cuts, which means if they don't
go in December, or it starts to look like they're
not going to, we could see a pushback on yields
and see them move a little higher.
Speaker 2 (47:28):
Okay, and maybe just to finish, what is your key
concern and I'm maybe talking to the portfolio manager here
when you look at the market right now.
Speaker 3 (47:40):
Yeah, my key concern is the complacency that we see
in the market right now. I think too many investors
and too many portfolio managers are saying we are just
all in. Nothing's going to rock this market. You know,
Jamie Diamond talks about the cockroaches, but the investors don't
seem to care. This complacency that they see in the
(48:02):
belief that we're going to continue to see earnings, just
support this market and have it continue to move higher
is a concern for me. I would feel much better
if there were more people out there that were cautious
and putting a little more defensive component into their portfolio.
Speaker 4 (48:18):
That would make me feel a little bit better.
Speaker 3 (48:21):
I think we could be kind of climbing, you know,
up and inflating the markets right now on the belief
that everything's going to be just fine, even though there
are warning signs.
Speaker 4 (48:32):
So that is my biggest concern.
Speaker 1 (48:35):
Great stuff, Victoria Fernandez, chief market strategist at cross Mark
Global Investments. Been a real pleasure having you on the
credit Edge Money.
Speaker 4 (48:41):
Thanks, it's my pleasure. Thanks so much, and of.
Speaker 1 (48:44):
Course very grateful to John ef Coupan from Bloomberg Intelligence.
Thanks so much for joining us today, My pleasure. For
even more credit market analysis, read all of John eve
Coupin's great work on the Bloomberg Terminal. Bloomberg Intelligence is
part of our research department, with five hundred analysts and
strategists working across all markets. Coverage includes over two thousand
equities and credits and outlooks on more than ninety industries
(49:04):
and one hundred market industries, currencies and commodities. Please do
subscribe to Credit Edge wherever you get your podcasts. We're
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tell your friends, or email me directly at jcrombieight at
Bloomberg dot net. I'm James Crombie. It's been a real
(49:25):
pleasure having you join us again next week on the
Credit Edge
Hello, and welcome to the Credit Edge, a weekly markets podcast.
My name is James Crumby. I'm a senior editor at Bloomberg.
Speaker 2 (00:23):
And I'm Jy COOPI and senior analyst at Bloomberg Intelligence.
This week, we are very pleased to welcome Victori A. Fernandez,
Chief market Strategist at Cross Market Global Investments, a multi
billion dollar investment company based in Houston, Texas. How are you,
Victoria doing well? Thank you, Victoria John Cross Market in
twenty twelve, and in addition to our market strategist role,
(00:44):
she's also hitting the fixed income investment team while serving
as portfolio manager for textable fixed income products. As such,
Victor has a unique perspective on the markets, particularly the
fixingcome market, which is one of the key topics on
to this podcast.
Speaker 1 (00:58):
Thank you Joannie. Before we get going with the questions,
I will say credit markets are bouncing back from the
damage caused by the collapse of First Brands, which dinged
a few banks and investment firms. That and the bankruptcy
of treecy Law at around the same time, caused some
to fear that this was the beginning of the end
for corporate debt, which had been trading at the tightest
spread since the nineteen nineties and had been long due
(01:19):
for a correction, But the storm does seem to have
blown over. There's just so much demand for yield out
there and not enough new supply, So technically credit is
doing okay. Plus earnings have been strong, and the FED
is your friend with a cutting cycle underway. That is
not to say it's risk free and Victoria, you're a
bit more on the hawkish side when it comes to
interest rates. If they do stay high for longer. What's
(01:40):
the impact on weaker companies that have a lot of
debt coming due.
Speaker 3 (01:44):
Yeah, I do think that's going to be an issue,
And you look at some of those small cap names
that would really suffer, and I think that's one of
the reasons. You know, we saw small caps kind of
rally for a little bit on the equity side and
then they pulled back, and it's because those earnings components
are not as strong, and I think there is some
concern that as they have to start issuing new debt,
(02:07):
maybe rates won't be quite as low as what people
are anticipating, and therefore their cost of capital is going
to be higher. Yes, spreads have come in like you
mentioned from some of the scare that we had what
a week ten days ago, and we're not in and
worrisome territory yet. But I think those lower credits, when
you're looking at triple c's or single be rated credits,
(02:30):
you're still seeing some significant movement. You're still about one
hundred basis points wider than you were a year ago
on those lower quality ones.
Speaker 2 (02:40):
Just at the point of earnings, I mean, we're seeing
some company beat into third quarter, as we also so
in the second quarter, but however some of them are
beating because of cost measures enough really really revenue growth.
What's your view on current earnings and the risks that
you can see there.
Speaker 3 (03:00):
Yeah, you know, it's interesting that this is actually a
quarter where we have seen earnings and revenue expectations move
higher going into a quarter than lower. And we were
kind of surprised by that, thinking that higher cost from
tariffs and wages would actually start compressing margins and we
would see that come through and it's not what we're seeing.
(03:22):
We were actually seeing EPs growth up close to ten
percent now as expectation revenue growth up six and a
half seven percent, So it's stronger than what I thought
it would be. Obviously, when you get the majority of
these MAGS seven names getting ready to report, there's going
to be a huge amount of scrutiny on the CAPEX components.
(03:43):
And I think this is really going to drive the
markets considerably here seeing the earnings that we get from them,
because in my opinion, it's really this concept of capex
really driven by these hyperscalers that is given a strong
tailwind to this market. So we'll see how they report
(04:04):
as those earnings reports are coming up. But earnings are
actually a little bit better than what we had anticipated.
Things just keeps, you know, appear to be pushed a
quarter out, two quarters out. Every time you think it's
about time to pay the piper, there's some type of
stimulus event that comes in, gives some support and seems
to push that that paying the piper moment further out.
Speaker 1 (04:27):
And I think also a lot of people expecting a
bit more stimulus from the Fed, but you think that
they may have more challenges on the inflation side.
Speaker 3 (04:35):
I do think we're going to see that, and I
know that's a little bit out of consensus. The FED
has even come out and said we're not worried about
inflation or where that's going. That concerns me a little bit.
I know tear related issues are on the goods side,
and so they're not concerned to see goods prices go higher,
but we are still seeing the services side not come
(04:58):
down to this two perc level. There's still some concern there,
and obviously housing.
Speaker 4 (05:02):
Is one of the biggest components.
Speaker 3 (05:04):
I was just looking at some of the housing reports,
both the FHFA and case Shiller. The latest pricing reports
we see for the month of August and going into
September is the first time and many many months, that
housing prices are actually higher month over month.
Speaker 4 (05:21):
That leads rents by about six months.
Speaker 3 (05:23):
So that tells me if I'm looking six seven months out,
we're going to start to see some higher inflation pressures
come in. And I just have a hard time accepting
that tariffs are a one time.
Speaker 4 (05:36):
Event in pricing.
Speaker 3 (05:38):
So even though the Fed says they're one time, they go, yes,
it's one time, but it can happen over the course
of many, many months.
Speaker 4 (05:45):
Well, to me, that's not one time.
Speaker 3 (05:46):
Then that is a drag you know, higher on inflation
over the course of many months.
Speaker 4 (05:52):
That's going to have to feed through it sometimes.
Speaker 3 (05:54):
So yes, I'm a little concerned that maybe inflation is
not something that we should just ignore right now, which
it seems like the FED is doing, and with the
lack of information coming out, I know they'll take the
opportunity to kind of take an insurance cut. But I
do think as we start to get some of the
data flowing once again, whenever the government decides that they're
(06:15):
ready to open back up again, there could be some
elevated levels there that I think the FED will have
to start paying attention to.
Speaker 1 (06:23):
When you tile that together, Victoria, it seems like a
quite cautious outlook on the economy. How do you express
that in a credit portfolio at a time when everybody
else is trying to buy the same stuff. Everybody's trying
to stay out of the riskiest end of the market,
But there isn't a lot of net new supply of
actual corporate bonds and loans, so you know, it's very
(06:45):
tight out there. People keep telling themselves that the quality
is getting better, and yet with these macro headwinds, how
do you invest?
Speaker 3 (06:53):
Yeah, it's actually a very strong predicament to be in
right now because of exactly what you're saying you're not
seeing a tremendous amount of new issuance coming out, But
I was looking actually just this morning, I was like, Okay,
Southwest Airlines, Ford Tech, Stron these are some of the
companies that I saw this morning that are getting ready
to come to market. And you look at a ten
(07:15):
year basically anywhere between ninety to maybe one hundred and
thirty basis points on the spread for these new issues,
Ford being higher, Ford being closer to two hundred because
it's split rated, so you've got a little bit of
that concern in there from a junk bond rating from
one of the issuers. But there's not a lot out there.
(07:36):
And obviously we want to focus on quality. It's the
type of manager we are, it's the type of clients
that utilize us want that quality in there. This is
not a portfolio that they are looking at to swing
for the fences for returns. They want that consistent cash
flow and not have a lot of credit concerns or
credit risk in their portfolios.
Speaker 4 (07:56):
So when we're looking.
Speaker 3 (07:58):
At names without paying a high premium, because that's the
other element of it, you know, to your question is
if everyone is trying to get this same high quality paper,
the premiums go up pretty significantly, then it doesn't make
as much sense to put in the portfolio. So we
have actually been increasing our treasury allocation in our portfolios
(08:18):
in order to compensate for that a little bit, especially
because depending on where you buy on the treasury curve,
you can get yield comparable to what you're seeing in
investment grade credit. We had previously used fixed rate preferreds
sometimes in our in our fixed income portfolio, but again
you're not getting that much of a kick on the
income side anymore in order to justify some of the
(08:41):
volatility that you could see in the market value of
your portfolios from there. So we want to keep continue
to start to continue to focus on the quality credit names,
but then use treasuries more and more, use some agencies
more if that's available to you as well, to kind
of fill in where you need to, especially if the
(09:01):
FED is lowering rates, which even though we may not
get as many as we think over the next year,
pretty sure they're gonna cut here at this meeting in October.
They'll probably cut at the December meeting. We will see,
but you're gonna be able to get at least a
little bit of positive movement on the yield curve, plus
you're getting a pretty decent coupon. So that's what we're
(09:24):
doing for our clients to try to compensate from that.
And you can do it really short if you want.
You can even go into T bills if you want
to and rotate that out if you're just waiting for
some particular corporate credit names to fill in.
Speaker 2 (09:38):
And in terms of industry or corporate sectors that you're
looking at, how do you see any pockets of value
in some of the maybe more stable, defensive sectors or
do you think the valuation is not there?
Speaker 3 (09:52):
Yeah, you know in the corporate side, I think when
you're looking at spreads, they've actually been somewhat consistent. I mean,
I'm I'm looking here by sector. Let's just look. You know,
we could look year to date and you see financials
tighter by about five basis points, industrials tighter by six
basis points.
Speaker 4 (10:13):
I mean, there's some.
Speaker 3 (10:14):
That are a little bit better than others, you know,
on a month to day, quarter day, year today basis,
but on investment grade they're pretty tight. And where they
are you see that widen out when you go to
high yield. We've seen healthcare on the high yield side
actually tight and pretty significantly year to date. As healthcare
(10:35):
starts to improve on the equity side, you're seeing some
of that flow through to spreads on the fixed income
side as well.
Speaker 4 (10:43):
But areas that we like because we like the.
Speaker 3 (10:47):
Strong balance sheets is really financials in the larger banks.
We're not buying really some of the smaller banks or
the regional banks, but those large banks we really like
their The paper that they have out there and where
it's being priced is pretty good. You do have some
industrials that are doing well too.
Speaker 4 (11:08):
You look at some of.
Speaker 3 (11:10):
The consumer goods have come in a little bit, so
you get a little bit of bonus there, but really
kind of across the board, they're doing pretty well. Even
leisures surprisingly over the last week have tightened up three
to four basis points. So there are some areas where
maybe you get a couple basis point difference on investment grade,
(11:31):
but not a tremendous difference in order to say overweight
one sector versus another.
Speaker 2 (11:37):
And perhaps we drilled down a little bit on healthcare,
which is a sector that I cover, especially for larger companies.
It's been significant headwinds and noise in healthcare, especially in pharma,
with some uncertainty related to potential tariots into regulatory environment.
Do you see the latest developments as as maybe a
(11:59):
a glean of hope in healthcare, especially for large pharuma.
Speaker 4 (12:05):
Yeah.
Speaker 3 (12:05):
I think it might be an opportunity to come in
and maybe pick up some of these healthcare names that
again fit that criteria we've been talking about, those higher
quality names, the names that have.
Speaker 4 (12:18):
Decent balance sheets.
Speaker 3 (12:20):
We can go in and find some names there where
you can add to the healthcare exposure in your portfolio,
on your fixed income portfolio. And there are some healthcare
companies as well, because one thing that we do, and
we'll probably talk about it in a little bit, is
we do have kind of a responsible investing component that
flows through our investment process. But there are certain healthcare
(12:44):
names that score really well on that side as well.
So I think you can get an opportunity to maybe
get some healthcare names at are wider spread than maybe
some of the other sectors and get some principle appreciation
or price appreciation on those names from now through maturity
or at least over the next couple of years and
(13:05):
then maybe have the opportunity to come out of it.
If yields do start to move higher over the next
couple of years, which I would hope they would, then
maybe you can come out of that where you've got
both price appreciation and then you can go into a
higher coupon as well.
Speaker 4 (13:18):
That would be a good move.
Speaker 1 (13:20):
And on the banks, Victoria, it is a sector that
a lot of people have liked for a long time.
It is trading very tight, particularly the big banks, and
then we're seeing this pressure on the on the smaller regionals,
which you know you say you don't directly invest in those,
but they are potentially a spillover effect on the whole sector.
If we see those problems with you know, bad loans
(13:42):
basically we saw that a couple of years ago and
the whole market for financials widening out quite a bit.
Are you are you concerned it's all about spillover from
the regional banks.
Speaker 3 (13:53):
I think if you're looking from an equity point of view, yes,
you can have some concern in regards to ice volatility
on the equity side of the market. But from a
fixed income perspective, when I'm putting this bond into a
client's portfolio, or if I'm putting it into our mutual fund.
I'm looking at those balance sheets and saying, do I
have concern around this company paying their principle and their
(14:16):
interest components?
Speaker 4 (14:17):
Is there a credit risk here?
Speaker 3 (14:19):
And I really don't because of the strength of the
balance sheets of those larger banks, they're sitting in a
much better position now than they have been in previous years,
and so I'm not concerned from a credit perspective. From
a market value or price component, where you know, clients
may be looking daily or monthly going online and looking
(14:41):
at the price of their bond, will there be more
volatility there?
Speaker 4 (14:45):
Yes, I think there will be.
Speaker 3 (14:47):
But the conversations we have with our clients is these portfolios.
We're either trying to match, you know, an asset in
their portfolio with the liability that they have coming up
in terms of maturity. We are trying to generate steady
cash flow for these clients. And so if we're looking
at it from that perspective, we're okay with the little
(15:09):
market value volatility or price volatility, knowing that we're not
going to have concerns around the coupons being paid or
at maturity receiving that, So, yes, I think there can
be some spillover. Yes, it could cost some price volatility,
and be more concerned on that on the equity side
than on the fixed income.
Speaker 2 (15:28):
Side, and so in the fixed income side, I think
we cannot look at the market right now without talking
about some of the comments that have been made recently
about potential cracks emerging in the credit markets. Cleary Jimmie
Diamond's coquch comment comes to mind. What are your views
on what's going on in the credit market. Do you
think that there are some risks that the market is
(15:49):
currently ignoring.
Speaker 3 (15:52):
I think there's a lot of risks that the market
is currently ignoring, and credit could be one of them.
Or a moment ago when we were discussing the big
banks and saying that really the balance sheet is one
of the reasons that we like the big banks instead
of some of the smaller banks. One of the reasons
that I think their balance sheets have been as strong
(16:12):
as they have been is because some of that riskier
loan business, some of the other elements have actually moved
over to private credit, So you've had that removed from
what most people consider the loan portfolio of these larger
banks and to private credit, and private credit has become
more accessible to a retail investor. You're seeing it in
(16:36):
people's four oh one k's the options to do some
private credit, and there's a lot of talk around the
regulatory component of that in order to make sure people
truly understand what they're getting into. But that's where I
think you're seeing some risk. I think private credit has
taken on a lot of the risk that maybe banks
had previously. You know, we think back to some of
(16:58):
the issues around on the banks a couple of years
ago in March what that looks like. I think a
lot of that kind of component and that risk is
now in private credit. So we don't invest in private
credit here at cross Mark in our portfolios. I do
think there could be a place for that and someone's
overall allocation if they have the due diligence components in
(17:21):
order to really work at that, and they don't need
the liquidity aspect of it, because again, that money gets
tied up a little bit longer than what you would
expect in a normal fixed income portfolio. But I think
that's where the credit risks are shifting. And so when
Jamie Diamond says, you know, where there's one, there's usually more.
Speaker 4 (17:40):
The whole cockroach component.
Speaker 3 (17:43):
Then I think that's true, and we probably have not
seen the end of some of these.
Speaker 4 (17:48):
I wouldn't say that they are.
Speaker 3 (17:51):
That it is a scare that is spreading through the
entire sector, but I also don't think we can say
it is simply a one off or a two off.
I do think there is an underlying element going through
this of increased risk that private credit has been taking
over the last couple of years, and some of that
now is kind of floating to the surface, and we
(18:12):
will probably see some.
Speaker 4 (18:13):
More of it.
Speaker 1 (18:14):
You know, we've had quite a few private credit guests
on this show recently. A lot of them have just
dismissed this out of hand. You know, they talk about
first brands having nothing to do with private credit. And
on the other hand, you know, some very large investment
firms like Blackstone have talked about how you can get
one hundred and fifty basis points or two hundred basis
points over public credit for an ig investment in something
(18:39):
that you know is with a household name, data center
or something.
Speaker 4 (18:43):
And there has to be a reason for that, right James.
Speaker 3 (18:45):
I mean, you're not just going to get an extra
two hundred basis points nothing.
Speaker 4 (18:49):
You're taking on some additional rest.
Speaker 1 (18:51):
But it just sounds so good. I mean, so why
would you not do that? That's my question? Because everybody
else is doing it. Why wouldn't you do that?
Speaker 4 (18:58):
Yeah?
Speaker 3 (18:58):
So for me, I always a you know, I was
kind of raised in the bond world, right, the fixed
income world, And I think it's because.
Speaker 4 (19:05):
I'm a very conservative person by nature.
Speaker 3 (19:08):
And I don't mean that from political save and I
just mean it from a risk perspective. I am a
very conservative individual and I don't like to take risks.
And so when I am managing portfolios that are meant
to just provide some cash flow and a little bit
of price return for our clients, and it's supposed to
be that safer component of their overall allocation, I don't
(19:31):
want to go in and take extra risk for them.
And I think most of my clients would agree with that,
right They this is not the part of their investment
that they're saying, let's add some some high yield and
a lot of risk and see what happens. They can
do that on the equity side of their portfolio or
the currency side, if they want to do some things
(19:52):
or real estate not in their in their taxable fixed
income component of their overall allocation.
Speaker 4 (19:59):
So I just don't want to take the risk.
Speaker 3 (20:01):
I would much rather go to a client and say,
you earned five percent over this time period. Maybe we
underperformed by twenty five thirty basis points, but we had
a much lower risk in this portfolio. So if something
is to happen, or you have that black swan event,
we are more protected in this element. Then to go
(20:23):
in and say we took a big risk and it
went against us, and now you know you've lost money
in this strategy, that's just not what my clients are
looking for. So I tend to take a much more
conservative approach in our allocation and in our investment process
than maybe some other people do.
Speaker 2 (20:43):
And maybe to your point of there's no extra return
without taking on a higher risk. I think it was
quite interesting to see what the Bank for International Settlements
said recently, or rather warn in a new paper about
credit ratings on private loans held by US curers. Two
According to them like what have been sematrically inflated, And
(21:06):
I think what they're leading the blame on maybe some
of the smaller rating agencies capturing a greater market share
of that space versus you know, Moodies and SNP and
and potentially some of the of the risk is higher
than than what people think. Do you do you see
(21:29):
potential for uh? I hear you're not invested in private credit,
but do you think there could be like a significant
ripple effect if something were to go wrong? And how
do you protect yourself from that happening in your portfolios? Yeah?
Speaker 3 (21:47):
So I definitely think you can get a ripple effect.
And I do think that when you're looking at credit
issues that maybe do not have as much transparency as
others rating agency could over inflate or inflate what that
rating is. It's why you have to kind of dig
(22:08):
down deeper, and this is how you protect yourself.
Speaker 4 (22:10):
You have to go yourself.
Speaker 3 (22:12):
Look at the the balance sheets of these companies. You
can have a company and you know, I will give
you an example. Al CoA is a perfect example. Alca
was in our portfolio years ago when it got downgraded.
So you know, we always say we're at investment grade
in our corporate holdings, so if something gets downgraded, we
don't have to sell it immediately, but we do tend
(22:35):
to work out of it over time. So ol CoA
gets downgraded to junk bond status. But we're looking at
this balance sheet and we're saying, wait a minute, our
bonds are, you know, coming due in two and a
half years. We're looking at the cash flow they have,
We're looking at the assets they have on their balance sheet.
Speaker 4 (22:53):
We're bond holders.
Speaker 3 (22:55):
There's plenty of money in order to pay the interest
and the mature component the par value on maturity date
for these bonds. So we didn't want to go in
and sell our bonds at seventy cents on the dollar
to get out of the name. So we held them
to maturity. We got our coupon payments, we got our
(23:16):
par value at maturity, and made our holders our clients
whole on that al CoA bond. If we had just
listened to the rating agency, we would have lost out
tremendously on that. So when I'm talking to clients, we're
not just saying, well, it's an A rated bonder, it's
a triple B plus rated bond, and so you're good,
(23:37):
you don't have to worry about it.
Speaker 4 (23:38):
No, we're digging in a little bit.
Speaker 3 (23:40):
We have analysts that look at these names and say,
hold on, let's see what it really looks like. Maybe
they're rated A, but yet we look at their debt
ratios and we go, WHOA, hold on, that's way too
high for us.
Speaker 4 (23:53):
We don't want to take that risk.
Speaker 3 (23:55):
We had done that with some AT and T bonds,
some of the Communications Sect bonds a few years ago.
When those debt ratios got extremely high, we said, no,
we're not comfortable. Let's come out of these names. So
I don't think you can simply rely on a rating agency.
It's a good way to sort bonds, to kind of
do that initial look at them and group bonds together.
(24:17):
But I do think you have to go in and
really kind of do your homework, and that's how you
end up protecting yourself from an event that maybe was unanticipated.
Speaker 1 (24:26):
Right right, We can't obviously talk about markets at all
in these times without saying AI. So I'm interested in
your view of the AI build out, and you know
what opportunity that might be for an an investor, not
just on the data center, but also on the power
and all the other associated infrastructure. Is that something you
think is going to be very exciting for credit.
Speaker 3 (24:47):
We absolutely do, and so when we go through our
investment process, we have multiple steps to it, and one
of it is looking at, you know, individual sectors, and
we work with our equity team on that as well
to see where we think there's some sectors that might
give us a little bit of additional alpha in the portfolio.
Speaker 4 (25:06):
And obviously the energy sector.
Speaker 3 (25:08):
And I sit here in Houston, Texas, right, so everyone
will go, well, she's biased for the energy companies, but
not really. We haven't had a large exposure to energy
for a while, but now you have this extra tailwind
for some of the power companies. I mean, we saw
this week next Tarra, right, there's an announcement from them
(25:29):
that they're teaming up and they're.
Speaker 4 (25:31):
Stock got a big boost.
Speaker 3 (25:33):
You could see some benefits coming from some of these
power companies. As more and more partnerships are made with
some of the hyperscalers or you know, some infra AI
infrastructure deals are made, you can see some more of
these power companies really.
Speaker 4 (25:49):
Coming in and benefiting from that.
Speaker 3 (25:50):
So I do think you want to look at adding
some exposure from the energy side, just like we were saying,
add a little bit to your healthcare, go in and
find some of those areas where maybe spreads were wider
and you could go in and take an opportunity. I
think you can do that on the energy and on
the power side as well. Find some of those elements
that feed into that AI theme that are not just
(26:13):
the hyperscalers, and use that to your advantage. I think
it will be beneficial over.
Speaker 4 (26:18):
The long term.
Speaker 1 (26:19):
It is also a bit of a gold rush at
this point, and things, you know, often go wrong when
everybody's just hysterical about one particular thing. So I'm wondering
if there's any caution out there about things like you know,
obsolescence risk and you know the fact that all this
stuff's been created in terms of like pure blue sky thinking,
we don't know where it's going to go. So for
a credit investor that you know, we're pretty cautious people,
(26:40):
you know, we do ask a lot of questions. But
how how careful should we be about all this?
Speaker 3 (26:45):
Yeah, I think when we talk about risk, I mean
we've been talking about that, you know, for quite a
while here in our conversation. Obviously, you've got to look
at those balance sheets and look and see, you know,
do they.
Speaker 4 (26:58):
Have a lot of debt, are they going to be
able to pay that off? What does their cash flow
look like?
Speaker 3 (27:03):
Those are important components, But I think the other element
that you have to look at is what is the premium?
Is there a very high premium on these bonds, because,
like you're saying, everyone's rushing into something. I never like
to be on the side of the boat where everybody's going, right,
that's the part that goes underwater. So you don't want
to go in and pay a really high premium for
(27:24):
this bond because everyone's doing it.
Speaker 4 (27:26):
Wait for your opportunity.
Speaker 3 (27:28):
Just like you see on the equity side, people you know,
they buy the dips, right, they have a shopping list
and they go in and they buy companies that they
really like when the market pulls back.
Speaker 4 (27:37):
I think you can do the same thing on the
fixed income side.
Speaker 3 (27:39):
You know, if you like certain power names, but the
premiums are getting pretty are up there, pretty high, then
just wait when we have a headline come through where
spreads widen out a little bit, then that's your opportunity
to go in. If you still feel confident in that
name and add to it so you don't have to
be skeptical just on the balance sheet side, on the
(28:03):
credit side, I think you have to be a little
bit skeptical on where you're buying on the spread component
as well.
Speaker 2 (28:12):
Let's maybe just switchgear a little bit and talk about
you know, one of the wholemarks of course mark and
no pen intended. It's clearly doing good and maybe in
line with a face based approach to investment principles. This
involves respect for the environment, responsible governance practices, fair treatment
of employees, just to name a few. How do you
see your mission being affected, if at all, by perceived
(28:35):
as a bit of a pullback on ESG, at least
in the US, and as many people maybe turn more
to doing well as opposed to doing good. I mean,
I'd be interested to hear your views on that.
Speaker 4 (28:45):
Yeah, of course, So you're right.
Speaker 3 (28:47):
One of the things that we talk to our clients
about is really aligning their investments with their values. So
we are not an ESG product per se. We're not saying,
you know, oh, these these whole sectors, were just eliminating
them because they don't fit a particular narrative. We actually
(29:07):
do two different types of screening for our clients, and
so there it can be the negative screening, which is
what a lot of people associate with the ESG components
and other elements, and those are revenue based exclusions for us.
So there are certain areas that we want to avoid.
That would be you know, think of like alcohol or
(29:28):
think of tobacco. If a company generates revenue over a
certain percentage, it usually ranges anywhere from zero to accumulation
of ten percent in certain industries, then that gets excluded out.
So you know, I talk about alcohol, just think of
Anheuser bush right, eighty percent of its revenue comes from
alcohol production. Well, okay, are we saying that you know,
(29:50):
it's horrible that someone drinks alcohol?
Speaker 4 (29:52):
Will know, But we can look and say, you know
that alcohol.
Speaker 3 (29:57):
Consumption is actually the third leading prevent cause of cancer
in the United States.
Speaker 4 (30:02):
We've got over ten percent of Americans.
Speaker 3 (30:04):
Age twelve or older that have alcohol use disorders. So
there are elements that are harmful to our society as
a whole coming from some of these, and so we
choose not to invest in those. You know, you can
see the same thing on tobacco with like a Philip
Morris right, even though they're shifting away from cigarettes to
(30:25):
other things those are there's still risks associated with those
lung functions, cardiovascular diseases, addictions. So there's that negative component,
but I think where it fits into kind of what
you're talking about is more what we call our responsible
investing component or the positive inclusions. So part of my
(30:46):
investing process, I have four steps. My fourth step of
my investing process is I'm looking at not just the
fundamentals and the balance sheets of these companies. Yes, we
do that because it's important and we've spent a lot
of time talking about that, but we also want to
look at what some of their value scores are. We
use third parties to look at that. So an example,
(31:08):
so you can see what I'm talking about, think of
Elevant's Health, right we're talking about healthcare names earlier. Elevants
Health is a top scoring name within the healthcare service
and equipment sector. So it's in name because we like
the balance sheet and because they have good value scores,
we want to put them in play. And why are
they scoring high well, because they are doing a tremendous
(31:31):
amount of work in regards to postpartum depression. They are educating,
they're doing best practices, they have partnered up and they
have a twenty four to seven virtual medical practice to
help mothers in the first year postpartum. And it's interesting
because you see almost half of the people that engage
(31:53):
with this program are asking questions outside of normal business hours,
So it's middle of the night when a brand new
mother probably is not sleeping and she's you know, having issues,
she's able to call and talk to someone and they
can help. So things like that where Elevant's Help is
supporting these types of initiatives, These are reasons.
Speaker 4 (32:15):
That we would include them.
Speaker 3 (32:17):
And you might not think of a staples company like
General Mills as having a really strong positive values component,
but they do a tremendous amount of work with the
WICK services for people that are at the poverty line
or below it. We've got over forty percent of infants
(32:38):
that are on WICK right now, and General Mills has
over two hundred and twenty products that are available to
families on WICK and they actually provide them with these recipes,
which is really kind of a cool thing where they
take some of their lowest cost items and make new
(33:00):
meals from them and provide them to these families so
they are getting the nutrition they need. They're doing it
at a cost that is beneficial to them, and it's
extremely helpful to these families. They support the Special Supplemental
Nutrition Program. They've done it for over forty five years,
and they're using ninety three percent of their packaging as
(33:21):
recyclable now, so trying to help the components there.
Speaker 4 (33:24):
So these types of stories for these.
Speaker 3 (33:27):
Companies, we feel like are things that our clients can say,
we're proud to invest in these companies and we're you know,
they have strong fundamentals, which you have to have in
a portfolio, but yet they also have these responsible components
to them, So we combine the two. We're not just
(33:47):
gonna invest in a company because they do good, they
have to have strong fundamentals as well. So the combination
of those two things is what we do at Crossmark,
and we.
Speaker 4 (33:57):
Feel it's something very beneficial for our clients.
Speaker 1 (34:00):
But we're also operating in a political environment in this country,
in the US where a lot of it's been dismissed
as quote woke or you know, just wasteful virtual virtual signaling.
I mean, I obnestly think what you're saying, it sounds brilliant,
but you know, what's what's gone on in the country.
A lot of it's been pushed back in and so
why why isn't that stuff covered by public health or
(34:20):
charity or whatever? How does it fit into to a
corporate mandate? But but I also also wanted to ask
you about energy because you know, fossil fuels have become
such a big political football as well, and when you're
talking about AI and power, you know, how does that
fit into into this this value based investing? And you know,
do you do you consider nuclear to be a clean option?
(34:41):
And you know that there's been a big nuclear deal
just just announced in these days, so heurius to help you.
Speaker 3 (34:48):
Yes, So the way that we look at it, and
you know, like I said, we use a third party
to value these so that we can be very objective
on these and a lot of it is score on
the risk that these companies have in regards to having
when it comes to energy companies in regards to having
something bad for society happened. So let's go back to BP,
(35:12):
right and the issues that we had there. Following that,
BP put so many buffers in place and new procedures
and things in place that their risk level to being
part of something that would cause those issues again came
down tremendously, so their values forlore actually moved higher because
(35:33):
their risk came down. So I think it's important for
a lot of people to kind of understand there's different
ways that companies can do things. They may not be
out there, you know, charging at the front of a
march for something, but internally the companies are doing things
to try to do better and be better for their
employees and be better for the community around them. And
(35:56):
so there's a lot of companies that do that. Yeah,
when you look at oil and gas companies overall, many
of them are screened out for some of the elements
that people are looking for, but not all of them.
So I do think you have to look and see
what the risk level is of these companies, what they're
(36:18):
doing to help mitigate any issues that their company could cause,
and then those are the types of names that we
would be able to put into the portfolio.
Speaker 2 (36:28):
So I see this is a very detailed, open minding
kind of approach to investing and looking at very specifics
of each company and now just taking a view on
a single sector. What I'd be interested to hear you
talk about is performance. I mean, have you done any
work on how the performance of these responsible and investments
(36:51):
fare compared to a broader index for instance.
Speaker 3 (36:54):
Absolutely, and I'm gonna throw a plug in here real quick,
so don't get mad at me, James. But people you
go to our website, Crossmarkglobal dot com, look on our
insights page. We actually did a white paper not too
long ago on this topic and what you notice is
from quarter to quarter, absolutely there can be differences and performance.
(37:15):
So if you know, if we are screening out for
life ethics, some pharmacy companies and pharma does really well
because there was you know, some type of policy that
was passed by the administration and so pharma names jumped
that quarter, well, then yes, your portfolio will probably have
a drag on performance from not owning the pharma sector.
Speaker 4 (37:39):
Or the same thing could be done for alcohol.
Speaker 3 (37:41):
You know, we talked about alcohol and tobacco components. If
something happened there, and it could be the flip side, right,
you could have a ton of regulation all of a
sudden being put on tobacco companies. So not owning them
is actually a positive element, and we review that every quarter.
In our Investment Policy committee, what was as either the
drag or the added value by owning or not owning
(38:05):
a particular sector because of the screening that we do.
But when you look longer term, and I'm talking one, three, five,
ten years, when you look out over time, there's basically
zero difference in the performance of strategies. So obviously short
term there can be some volatility, but no, on the
(38:28):
longer term, you're not seeing a drag on your performance
because you are implementing these values components into your portfolio.
And remember we're doing a lot of this work. It's
still the fundamental, right, the fundamental drive, So that's driving
your overall performance. We look at the screening, it's that
(38:49):
kind of your extra little element that is in your portfolio,
kind of your whip cream or your cherry on top
of your of your Sunday.
Speaker 4 (38:56):
It's an important part of it.
Speaker 3 (38:58):
But you still have all that underneath, that fundamental analysis
and investment thesis underneath that drives performance.
Speaker 1 (39:08):
You think being in Texas gives you an edge on
this stuff, Victoria, I mean you get tough questions probably
from the people around you.
Speaker 3 (39:15):
Yeah, you know, James, I'd like to say being in
Texas gives us an advantage across the board on everything,
But that's just how we Texans like to think about ourselves. Yeah,
you know, everything's bigger and better, right. So I do
think from an energy perspective, we would get more questions
(39:35):
because obviously, I mean, you know my office, I can
look out my window here and you know I've got
BP and Conico, Phillips and all these companies right across
the street from me.
Speaker 4 (39:45):
So you can get some pushback.
Speaker 3 (39:46):
But I think when we explain how we approach it,
when we talk about how things are revenue based and
we're not just making subjective calls on elements, I think
people tend to understand that a little bit better. These
are things that you know, if a client decides they
don't want this on their portfolio.
Speaker 4 (40:06):
That's okay. Right.
Speaker 3 (40:08):
We could have a client say, but I want to
own energy, Okay, perfect, We can put energy in your
portfolio for you.
Speaker 4 (40:14):
Right.
Speaker 3 (40:14):
This is just something that we like to provide to
our clients.
Speaker 4 (40:19):
So you do get a little bit of pushback.
Speaker 3 (40:21):
But I also think, you know, Texas has become such
a varied economy. Used to it was driven about seventy
percent by oil and gas. Really that has come down tremendously.
It's closer now to thirty to forty percent by oil
and gas. Healthcare has actually taken a huge component of that,
(40:42):
and tech is growing more and more every day, especially
in the Austin areas. So a much more varied economy
than it used to be. And so I think a
lot of people look at an opportunity to, like I
mentioned before, kind of align those investments with some of
their values, and they find this is a great option to.
Speaker 1 (41:02):
Do that excellently. I'm interested also in your view of
the rest of the world. I mean, we don't have
a lot of time left, but you know, a lot
of people did kind of shift a bit of a
little bit out of the US when the tariffs were announced,
but I think a lot of that money has just
come back in. I'm wondering monding's any value for you
in Europe or Asia. And also when you step back
and look at credit against other asset classes that you cover,
(41:25):
how does it stack up.
Speaker 3 (41:27):
Yeah, So obviously, when you know, when we had a
shift in the dollar, you saw some money kind of
flowing out to other countries. You saw it on the
equity side, you saw ETFs that there was a big shift,
and that.
Speaker 4 (41:40):
On the fixed income side.
Speaker 3 (41:42):
We stay focused on US for the credit that we hold,
but I watch spread So I mean you look right
now some of the widening that you've seen over the year.
Over the last quarter, even UK has widened out tremendously,
much more so than the US. The Euro has widened out,
(42:03):
but not near to the extent that you've seen in
the UK. Euro and Asia are pretty are pretty similar,
and emerging markets a little bit more but still tighter
on the year than where we were a little bit
wider on the quarter, but tighter on the year. Really,
looking at sterling bonds is where you have seen the
(42:26):
widest move year to date. So yes, I think you
have to watch spreads globally. We know that when you
look at sovereign debt globally, yields tend to track each other, right,
So we saw for a long time we were seeing
yields move up in Germany, we were seeing yields move
up in France, and that was trickling through to some of.
Speaker 4 (42:48):
The higher moves here in the US.
Speaker 3 (42:50):
Now that has started to shift and we're seeing things
seeing yields come back down globally as well.
Speaker 4 (42:55):
So I think you pay attention to it.
Speaker 3 (42:57):
It's important what happens globally because it does have effect
on us, which is where we're investing. But when you
come down into the actual credit, out of sovereign and
into credit, obviously a lot of these companies have global exposure,
so you want to be mindful of what's happening in
a macro perspective globally. But we're not investing in foreign
(43:21):
currency bonds. We are investing in US dollar US dollar
domestic bonds.
Speaker 1 (43:26):
I will say the UK is a great place, and
I'm not going to drag my colleague John Eve into
the French political discussion because what's going to happen.
Speaker 4 (43:34):
Sorry, Johnny, I did not mean to bring that up.
Speaker 1 (43:37):
But what about equity against credit or credit in the portfolio?
I mean, how does it stack up against other products
that you can invest in.
Speaker 4 (43:45):
Yeah, so it's interesting.
Speaker 3 (43:47):
Are actually our best selling strategy at Crossmark, and it
has been for quite a while, is what we call
our balance core strategy. So it's a fifty to fifty
large cap core and core fixed in and it has
actually been what our clients have really been clamoring for
and I think because it does give them kind of
the best of both worlds. Look, you've got an equity
(44:08):
market that, even though you know, we see some warning signs,
it is a bull market right now, and you don't
really want to stand in the way of that of
that train, and so you want to have exposure to
that side. We've actually been calling it a high risk
bull market because of some of the warning signs we've seen.
But with a FED saying they're going to lower rates,
(44:30):
with tailwinds coming from stimulus both monetary and fiscal coming
in the new year, with some of the tax incentives
that are happening in the capex components, I think you
want to have some exposure to equity, but I do
think because there are elements out there that cause us concern.
We've talked about some of them already today, you need
to have that exposure to fixed income And for us,
(44:53):
we think you want to lock in some of these
rates that you can get north of four percent and
able to have that cash flow which can help buffer
any kind of volatility from the equity side. So we
do believe in a diversified portfolio you need to have
that exposure in there, But overall, we would have your
your total portfolio allocation take a little bit more of
(45:15):
a defensive tone even when you're looking at things outside
of fixed income, even when you're looking at equities or
real estate or currency or alternatives. You know a good
way that a lot of our clients are having other
components in their portfolio but still being income generating. So
something that kind of mirrors fixed income is to use
(45:35):
covered calls. So that's the way you can be in
the equity market but still have income cash flow like
you do on the fixed income. Many people combine those
two elements core fixed and a covered call strategy in
order to get that income that they're looking for and
have exposure to equities and fixed.
Speaker 1 (45:53):
Where's the best relative value though? Do you think in
credit right now?
Speaker 3 (45:56):
It's an interesting question because I think it shifts. I
think it's been shifting this year. But honestly, I don't
want someone going out and paying a high premium to
get investment grade credit. So maybe you wait a little
bit and let those spreads widen to go in. But
I think you can go in and buy the shorter
(46:16):
end of the treasury curve, knowing that the FED is
probably lowering rates twice more this year and maybe not
into next year. You can buy on the short end
of that treasury curve, get some price appreciation or curve.
You know, the carry works in your favor, and you're
getting a nice coupon on that. So I think that's
kind of where your best bet is right now, is that.
Speaker 4 (46:39):
Shorter end of the treasury curve.
Speaker 3 (46:41):
But I would be watching very closely for spreads, and
if I started to see something widen out, I would
hop in and get some credit in there further out
the curve to lock in some income.
Speaker 1 (46:52):
I should also say for listeners that we are speaking
ahead of the September decision, so you don't expect more
than September and October in tons of cuts.
Speaker 3 (47:01):
I think the December cut is a little more up
in the air. It probably will happen, but I think
depending on when the government opens back up and the
data that we get the backlog of data, the December.
Speaker 4 (47:14):
One could be a little more iffy.
Speaker 3 (47:16):
But odds are right now and the market is pricing
in two more rate cuts, which means if they don't
go in December, or it starts to look like they're
not going to, we could see a pushback on yields
and see them move a little higher.
Speaker 2 (47:28):
Okay, and maybe just to finish, what is your key
concern and I'm maybe talking to the portfolio manager here
when you look at the market right now.
Speaker 3 (47:40):
Yeah, my key concern is the complacency that we see
in the market right now. I think too many investors
and too many portfolio managers are saying we are just
all in. Nothing's going to rock this market. You know,
Jamie Diamond talks about the cockroaches, but the investors don't
seem to care. This complacency that they see in the
(48:02):
belief that we're going to continue to see earnings, just
support this market and have it continue to move higher
is a concern for me. I would feel much better
if there were more people out there that were cautious
and putting a little more defensive component into their portfolio.
Speaker 4 (48:18):
That would make me feel a little bit better.
Speaker 3 (48:21):
I think we could be kind of climbing, you know,
up and inflating the markets right now on the belief
that everything's going to be just fine, even though there
are warning signs.
Speaker 4 (48:32):
So that is my biggest concern.
Speaker 1 (48:35):
Great stuff, Victoria Fernandez, chief market strategist at cross Mark
Global Investments. Been a real pleasure having you on the
credit Edge Money.
Speaker 4 (48:41):
Thanks, it's my pleasure. Thanks so much, and of.
Speaker 1 (48:44):
Course very grateful to John ef Coupan from Bloomberg Intelligence.
Thanks so much for joining us today, My pleasure. For
even more credit market analysis, read all of John eve
Coupin's great work on the Bloomberg Terminal. Bloomberg Intelligence is
part of our research department, with five hundred analysts and
strategists working across all markets. Coverage includes over two thousand
equities and credits and outlooks on more than ninety industries
(49:04):
and one hundred market industries, currencies and commodities. Please do
subscribe to Credit Edge wherever you get your podcasts. We're
on Apple, Spotify and all other good podcast providers, including
the Bloomberg Terminal at bpod Go. Give us a review,
tell your friends, or email me directly at jcrombieight at
Bloomberg dot net. I'm James Crombie. It's been a real
(49:25):
pleasure having you join us again next week on the
Credit Edge
Host
James Crombie
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