September 4, 2025 • 46 mins
Traded corporate debt is much more attractive than private credit, according to RBC BlueBay Asset Management. “Public credit is far superior,” Tom Moulds, senior portfolio manager for investment-grade fixed income at the $534 billion firm, tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Tolu Alamutu in the latest Credit Edge podcast. “There’ll probably be a point where you do see losses and people get very concerned,” says Moulds, referring to private debt, which he doesn’t invest in. “If we did slip into a period where growth looked weaker, then I think it would be a problem,” he adds. The three also discuss impact investing, defense sector opportunities, financial debt valuations, real estate stress and European sovereign risk.
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Episode Transcript
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Speaker 1 (00:15):
Hello, and welcome to the Credit Edge Weekly Markets Podcast.
My name is James Crumbie. I'm a senior editor at Bloomberg.
Speaker 2 (00:20):
And I'm Tolu Alamutu, a senior analyst at Bloomberg Intelligence.
This week, we are very pleased to welcome Tom mauld
who is senior portfolio manager of investment grade Debt at
RBC Blue Bay Asset Management. How are you Tom?
Speaker 3 (00:36):
Very good, Thank you, Jail. It's great to be.
Speaker 2 (00:38):
Here, great, thank you for joining us. Tom's focus is
on European non sovereign debt. He manages Blue Bay's European
corporate strategy, including a flagship mutual fund and several bespoke mandates.
Tom joined Blue Bay Asset Management in December two thousand
and five and the investment grade team in July two
(01:01):
thousand and seven. Blue Bay is of course now part
of RBC Global Asset Management, where the total AUM exceeds
half a trillion dollars.
Speaker 4 (01:10):
Tom has been instrumental.
Speaker 2 (01:12):
In driving the success of the European id credit strategy,
both in absolute return and benchmark portfolios.
Speaker 1 (01:18):
Over to you, James, delighted to have you Tom. Just
to set the scene a bit here before we get
to the questions. Credit markets are hot, with bond spreads
at the titles in twenty seven years, as demand saws
and net new supply remains thin. Elevated US political and
macro risk has pushed global credit investors into other markets,
especially Europe, to diversify portfolios, but that brings its own
challenges also political. Just look at all the volatility in
(01:41):
the UK brance and Holland Plus says the trade war
to contend with, and countries across the region have to
significantly boost their defense spending. Globally, in credit markets, we
are seeing more distress, default and bankruptcy, but you wouldn't
know it looking at the price. So Tom break it
down for us, how do you position yourself in these markets?
Given elevated volatility, rising macro risk, turbulent geopolitics, but also
(02:04):
very tight credit spreads.
Speaker 3 (02:06):
Hi ja Yeah, I mean, when you paint the pits,
you've just painted it.
Speaker 5 (02:09):
It makes it very hard to kind of come back
with what I would call it a positive view. I mean,
it's unquestionable that you were at a point where credit
spreads are extremely tight and there are a whole host
of risks out there, and we've been probably running the
lowest level of credit risks that we have done for
for quite some time in various products. The opportunity set
(02:30):
to take kind of big beata positions, you know, clearly
just isn't.
Speaker 3 (02:34):
There at the moment.
Speaker 5 (02:35):
And if it wasn't for the kind of positive tail
winds impacting credit asset classes in terms of demand and supply,
which have obviously been incredibly strong and really fueled fueled
credit market spreads. Getting to these sorts of levels, you know,
one would be definitely thinking about maybe taking an even
more defensive stance, But just in the kind of short
(02:55):
to medium term, you know, it feels like some of
these conditions which have pushed credit markets to where they
are are still in place and aren't necessarily going to
meaningfully change anytime soon despite the risks. So you know,
we can definitely see a bit of a pick up
in volatility, but at this point in time, you know,
running a beta close to home. But you know, focusing
(03:16):
I mean, it's probably a bit of a boring thing
to say, but focusing on our for opportunities I think
is more appropriate.
Speaker 3 (03:22):
And I think what's been interesting, particularly.
Speaker 5 (03:24):
Kind of in the second half of last year and
this year is I think those opportunities have become a
lot more prevalent. You know, you're seeing a bit more
dispersion in credit asset classes, despite the fact that you're
at very tight spreads, not all completely boring.
Speaker 3 (03:40):
I think there's some quite interesting things to play for.
Speaker 5 (03:42):
Still.
Speaker 2 (03:44):
One of the things that you mentioned is staying away.
I guess from the lowest level of credit risk, what
does that look like for you in terms of your positioning.
Does it mean that there's nothing there at all in
terms of you know, the lower part of from grade
and maybe high yield, or does it mean that you're
much more selective in terms of sectors and names and
(04:06):
so on.
Speaker 5 (04:06):
Yeah, it's much more about being selective, because I think
when you're in this kind of environment, if you believe
that spreads that are kind of going to stay where
they are, let's say, you know, investment grade spreads at
the kind of levels that we've got to, you know,
the longer that you stay there, you're automatically going to
see some compression.
Speaker 3 (04:21):
And obviously the.
Speaker 5 (04:22):
Last kind of part of this moving credit has been
people reaching for the kind of wider things which they
consider safe. So I think it's important too that's an
important part of decision making when certainly investing on alongside
at this point, looking for things which have some value
that are a bit wider, that are a bit further
down the credit spectrum, you know, in within investment grade.
(04:44):
It's obvious to look at the things like subordinated financials
and corporate hybrids. I think overall a lot of those
parts of the market have actually you know, got quite tight,
but there are still you know, really interesting situations and issuers.
So as you say, being selective, you know, really very
much is the key, and I think, like I said,
I think it's been working actually a lot better more recently.
Speaker 3 (05:06):
If I jump back a few years and.
Speaker 5 (05:08):
Think about when when investment grades spreads were as tight
as this in the kind of CSPP you know, ECB
buying period, I feel like there was a lot less
dispersion and a lot less kind of maybe differentiation between
the kind of slightly higher beta parts of the credit
market and the lower beat than there is now. So
perhaps a bit more interesting, you know, a more interesting
(05:30):
playing field still and definitely room for lower parts of
the credit spectrum.
Speaker 1 (05:36):
What we keep hearing, though, Tom, is that it doesn't
matter what the spread is it's all about the yield.
Yields are very high and the Fed's about to cut,
so you know, those high yields, those high coupons, they
are going to be there for long. So just buy
as much as you possibly can right now. Why not
follow that strategy?
Speaker 5 (05:51):
Yeah, I mean, look, I think I think some people
are following that strategy, which is what which is kind
of kind.
Speaker 3 (05:58):
Of where we are, you know, why we are where
we are? You know, I think in.
Speaker 5 (06:05):
There's no doubt there's been a big pick up in
the type of products which are very yield focused. We
keep hearing about these fixed maturity funds, you know, which
are kind of either targeting certain durations, targeting certain maturities,
which are trying to lock in yields, and you know,
they're they're kind of indiscriminate buyers of credit focused on yield. So,
(06:27):
you know, I think that's where it can be a
bit dangerous and obviously you need I think it's where
you need to be a bit more kind of careful
from the research side. And obviously you can't be an
indiscriminate buyer. You have to make sure that you're buying
things that if they are at the wider end of
the spectrum that you're you know, you're very sure you've
done a credit research on and so, and obviously you know,
as as an active manager on the credit side, we
(06:49):
kind of pride ourselves in being good at that.
Speaker 3 (06:52):
It's more important now than ever.
Speaker 2 (06:55):
One of the areas that you mentioned which has piqued
my interest anyway, has been subordinated financials and corporate hybrids,
obviously relatively high beta compared to the sort of higher
ranking parts of issuers capital structures and so on. One issue
that I've had anyway looking at some of the corporate
hybrids in real estate has been that you've seen prices
(07:17):
go up even on securities that are not even pain anymore.
And our news colleagues as well as our BI colleagues
have been writing about what's happening in the additional tier
one market and how basically valuations are not what they
used to.
Speaker 4 (07:33):
Be a couple of years ago.
Speaker 2 (07:35):
So how are you viewing that part of the market now,
especially that we're given that we're seeing more and more issuance,
at least on the eighty one side.
Speaker 4 (07:46):
Do you still think that there's value?
Speaker 2 (07:47):
And as James said, you should just look at yield
or do you think that spreads have come in a
little bit too much.
Speaker 5 (07:53):
On the financial side, it's still relatively interesting. I mean, yes,
spreads have moved a long way. You're much tighter spreads
that we've been at before. There's been a lot of compression.
I think the overall yields that you can get in
financials are still quite attractive. I mean, even in senior space.
You know, some people are arguing that financials versus non
(08:13):
financials for example, has compressed too much. But actually, if
you look back over a really long period of history,
you know, it's not unusual for financial senior spreads to
trade meaningfully inside non financial spreads. And I think where
we are now, after an incredibly long period of regulation
and improvement in fundamentals in the finance, you know, in
(08:35):
particularly in European financials, where profitabilities as good as it's
been an incredibly long time, it's not you know, it's
not difficult to imagine why we are here and why
we can't actually even maybe go go slightly inside. If
I think about comparing some of the kind of senior
senior non preferred financial spreads versus kind of almost like
(08:56):
cyclical industrials, and you know that them being at similar levels,
I think I rather be on the financial side then
moving into the kind of more subordinated space. You know,
I think if you kind of follow that theory that
actually financial is fundamentally in a very good place, and
look at the kind of yields and spreads that you
can still still attain in the subordinated financial space, whether
(09:18):
that's lower tier two or eighter one, there's still some
you know, interesting opportunities there. I think, provided your you know,
selective and you know, careful in your kind of credit work,
it's still a really good place to allocate your investments.
On the corporate hybrid side, I think it's you know,
there's probably a few more different you know, we could
probably have a whole podcast on corporate on corporate hybrids,
(09:39):
I think, particularly if we start talking about real estate
corporate hybrids, which are almost an entirely separate topic on
their own, I think, you know, that's that's somewhere where
I think you need to be particularly careful right now.
I mean, you know that you know, you've had a
you know, twenty twenty two created such a dramatic move
(09:59):
across the real estate space and clearly a lot of
the real estate companies that had issued corporate hybrids in
hindsight probably looking back, thinking they rather that they hadn't.
Speaker 3 (10:10):
You know, the price action was it was extreme.
Speaker 5 (10:12):
And obviously there are situations now where previously investment investment
great companies have hybrids outstanding where they're not paying coupons,
et cetera. So I think there's an incredible amount to
in that space. You need to be incredibly selective. I mean,
I think at this point in time, having had such
a big move tighter following twenty twenty two, for me,
(10:33):
I feel quite defensive on the real estate space, particularly
because my view is that there are tailwinds for Europe
European economy that will put pressure on interest rates, I
pressure upward pressure on interest rates, and you know, we've
seen time and time again over history that that doesn't
go too well for the real estate space. And having
(10:54):
you know, rallied back to what I would kind of
consider a fair value, I'd be a bit more defensive.
Speaker 3 (10:59):
And then in other corporate hybrids. It's a very long
answer to.
Speaker 2 (11:02):
Your question, but again.
Speaker 5 (11:05):
You have the kind of bit of dispersion there. I mean,
there's you know, you have some very cyclical names. In
corporate hybrids, you have some very safe names. I would
argue that the kind of safer utility, like certainly I
G rated corporate hybrids trade extremely tight at the moment,
and you know, are very expensive. I think the opportunity
set there is very limited, and so you are having
(11:27):
to like go into maybe the more the stories with
a little bit of should we call it hair on
them to maybe gain some value.
Speaker 3 (11:35):
And I still think there's you know that that's.
Speaker 5 (11:37):
Actually where you can get some some some interesting, some
interesting value for your money within the hybrid space. So
in all of these kinds of areas, you know that
the name of the game is is definitely being selective
at the moment.
Speaker 4 (11:50):
Yeah, and I agree with that.
Speaker 2 (11:52):
But one of the there's a lot I want to
sort of go into from what you've touched on there,
Thank you. But the first thing I was going to
touch on is on financials and the effect of government interference,
if we want to call it that. So we've seen
some reports saying that there might be some sort of
special tax levied in the UK on banks which has
(12:16):
affected the equities, maybe not so much credit. Is that
a concern for you when you're looking at additional Tier
one or other financials instruments, whether it's seen in a
nonpreferred or the more junior stuff, maybe we start with that.
Are you concerned about government intervention?
Speaker 5 (12:31):
Yeah, I mean I think you've always got a factor
that in and I think you know within financials that
I think the areas right now where you'd be a
little bit more cautious is the UK, where obviously the
UK does not feel in such a great place, and
the spill over into financial institutions and banks could definitely
be prevalent. So I think that warrants a bit more caution.
(12:56):
And I think the other obvious area is, you know,
within Europe is obviously France. I mean there's no doubt
that within banks, the you know, the kind of link
between how the solign behaves and how banks tend to
behaving credit is very strong. And so at this point
in time, looking down the barrel of kind of French volatility,
you know, akin to what we saw last year, got
(13:19):
a kind of factor that into what's going on in
French banks. But you know, French banks do trade wider
than I would say there they're kind of non French counterparts,
so there is some value there. So you could argue
that to some degree, there's some pricing in of that
volatility premium that we may well see in the coming weeks.
And I guess the other thing that I would kind
(13:40):
of anecdotally highlight is it feels quite clear that people
are more defensive already on French banks. So for example,
you know, in the last couple of weeks, when you
started seeing a bit more volatility in French assets, you know,
French banks obviously went wider. They were probably the biggest
underperformer out of the French you know, out of the
(14:02):
French assets in European credit. But at the same time,
you know, what we actually saw in the market was
people trying to buy those bonds pretty quickly on that
small backup, which kind of shows you that people probably
are underweight. There are speculative accounts that are already short by.
People are a bit more prepared this time round. You know,
(14:23):
last year, when you sort of suddenly moved into this
period of you know, the focus on French politics, it
was slightly out of left field, and I think people
were more taken by surprise and it created much bigger
moves in credit, So I think this time round it's
going to be quite interesting to kind of see how
how that you know, how that plays out.
Speaker 3 (14:42):
You know, if you're in a scenario.
Speaker 5 (14:43):
Where you know, BEAVU loses the loses the confidence vote,
which clearly seems fairly likely, but there is you know,
potentially a move to put another technocrat in place, you
could see French spreads calming down incredibly quickly. But on
the other hand, you know, if there are snap elections
and you know we're already seeing that, you know, some
(15:05):
of the more extreme parties have gained popularity, I think
that's going to be a point where you do see
a big pickup in volatility in European spreads in general,
and that will be concentrated in certainly and in French
banks and French domicile corporates to some degree as well.
Speaker 2 (15:24):
Yeah, there's definitely lots to discuss, I think, and we'll
definitely come to that in terms of the outlook for
French issuers, and maybe we'll even touch on some of
the Dutch issuers as well, given their political challenges there too.
But before we get on to that, you did mention
earlier what's going on in the real estate sector with hybrids,
(15:44):
and the fact that some issuers started off twenty twenty
three I think as an investment grade and they are
no longer there, to say the least, some.
Speaker 4 (15:52):
Of them are even triple seen now. And I would
tend to agree that some.
Speaker 2 (15:58):
Of those secues are looking fairish valued now. But one risk,
I guess maybe that you have further liability management like
buybacks and so on. Do you see that as a risk,
And also do you think that we need to give
more weight to some of the transformation programs that are
(16:22):
coming up. But some of these real estate entities, for instance,
we've had one entity that is no longer investment grade
but now has a new shareholder that's willing to put
more money in and so on. So there's those sorts
of moves as well that I guess could mean you
see another bump up in valuations. Is that something that
you think is a risk in terms of seeing it
(16:42):
as fair value or not?
Speaker 4 (16:44):
Really?
Speaker 3 (16:46):
I think some of those situations are are very likely
to happen.
Speaker 5 (16:50):
In the kind of the names that have perhaps fallen
from grace quite far. I think one of the things
that you've seen since twenty twenty two is actually you know,
some very clever financial engineering by some of the real
estate guys where the reason some of the IG spreads
(17:10):
you know, went to eight hundred over in twenty twenty
two because it's because the market participants didn't think that
the levers would be available for these guys to pull
renegotiate the terms of their outstanding debt, you know, to
extend maturities that they would effectively be you know, falling
into a potential default scenario very quickly. And I think
(17:35):
it's been really fascinating to see the ability of some
of these guys to be on the front foot and
how much actual access to liquidity that they did have.
Some of the things that you're probably alluding to were
very clever, you know, people doing hybrid exchanges for example,
enabling them to you know, kind of slightly under the radar,
(17:57):
extend you know, be quite investor friendly, extend their maturities,
extend their call dates, and put themselves in the position
where they are actually able to wear the storm. So
and I think you know that I think this is
still going to happen. It's clearly on the table, particularly
now that we're in a scenario where yes, rates are
a bit high, but obviously the market feels a lot better,
and so people are willing to lend to these guys,
(18:19):
particularly if they have good, good assets. So I would
be you know, I guess the point of the question
and the point of the answer is I'd be quite
cautious on being you know, let's say outright short. For example,
in the kind of high the high yield names that
have come already come back from the brink. Yes they're
high yield, but they've still got very wide spreads, because
(18:41):
I think these sorts of leavers are very much on
the table for these guys still, and they probably will
continue to muddle through and maybe get themselves into a
back into a better position. I think where the opportunity
perhaps to be more defensive is better is in the
names that are still ig that have come all the
way back to the kind of spread level that they
were at pre twenty twenty two. So you could very
(19:03):
much argue that that's a fair value spread level, you know,
in this environment where now you've had two or three
years of higher rates, you know, you know, their average
cost of funding is just naturally going to keep going up.
Speaker 3 (19:15):
And I think.
Speaker 5 (19:16):
Particularly for some of the issuers where their actual kind
of ability to grow as a company is very limited.
You know, for example, in Germany residential it's very very
difficult to kind of actually get any rental growth there.
So let's say you've got two or three percent rental growth,
but your cost of funding, you know, is kind of
a four percent over time. It's just a bit of
(19:37):
an attrition for these guys. And you know, I think
that's where there's just an interesting relative value argument to
make to zoom.
Speaker 1 (19:45):
Out Tom a little bit, just look globally at the
credit landscape. You know, since April, you know, the idea
of American exceptionalism has really been tested and has been
more and more questioned as we get into questions of
you know, fed independence and governance all that stuff. So
there was a big kneeja reaction to, Okay, well everyone
needs to diversify because we're so long the US and
(20:06):
we need to start looking at other places and or
look Europe. That makes sense, Let's get into Europe and
then now you know, hitting the the challenges of scale
of complexity of you know, all of the different jurisdictions
and languages and everything else. And now the political situation,
how does it look relative value wise Europe against the
US for you?
Speaker 5 (20:27):
For me, it's a theme that I was pretty keenly
focused on from the kind of beginning of last year.
Really so I think, I know, it was much more
obvious theme then because at that point you had, you know,
if you were just like looking at European credit spreads
versus versus the US, you know, within investment grade and
you know, to some degree, within high yield, Europe looked cheaper.
(20:49):
And there are a number of reasons for that, you know,
I think twenty twenty two was a period that really
kind of pushed that relationship, probably to a point where
it was slightly unfair. I mean, at the time, what
drove it there, I think was very relevant. You know,
you had, at the beginning of the Russia Ukraine conflict,
you had very high energy prices. The impact of those
(21:10):
energy prices on European companies was clearly a lot more acute.
You know, I think that was relatively justified. But in
the subsequent and a couple of years, you kind of
this relationship of Europe being wide the US kind of
remained in place for some time, and there's a number
of other kind of factors that kind of participated or
fueled that. But I think, you know, into twenty twenty four,
(21:31):
for me, it was much more like that relationship doesn't
really make sense. I think Europe should trade at least flat,
if not slightly inside the US, and as you came
into the end of the year, that's kind of played out.
So now now we're kind of sitting with you know,
spreads pretty similar to each other. I mean, you could
make an argument that in Europe durations a bit lower,
so maybe the fair value slightly inside. I think you're
(21:53):
a bit fairer. I mean, I'm you know, I'm certainly
not going to push the US exceptionisms over.
Speaker 3 (22:00):
You know, everything should be in Europe. I quite I
still have the I still quite like the bias.
Speaker 5 (22:05):
I think the kind of dynamics on the two sides
of the Atlantic are a bit different. I think, you know,
in the US, it feels like you could be at
a point where you're obviously starting to see growth slow
down a little bit. There's a little bit of pressure
on the data, particularly on the labor side. You know,
people are obviously slightly concerned about that. I think in Europe,
to pick up in spending I mean, everybody's going to
(22:26):
be talking about this, but it's thin it. I think
it's quite relevant. I think the magnitude of the fiscal
impulse of what's coming, I think perhaps people still even underestimate.
And I think one of the things I'd be a
bit concerned about is, I mean, you're seeing it even
in the last few days, rates going up a bit
more quickly. I think, you know, you could have a
(22:47):
that theme.
Speaker 3 (22:47):
Could you could see it a bit more prevalently.
Speaker 5 (22:49):
I think, you know, rates going up a bit more
because people are saying, Okay, well, actually the fiscal is
going to be really quite powerful. It is going to
help growth, is going to mean that, you know, monetary policy.
He certainly isn't getting any lusive from here. So you
can see, you know, potentially steeper curves in Europe and
higher longer term rates. And that's something that I think
(23:11):
we have to factor in as investors.
Speaker 1 (23:13):
Yeah, the big theme right now is defense spending in
Europe issuance to support that. Is that a good fit
for your strategies? And if so, where do you put it?
Speaker 3 (23:21):
Yeah, I mean it's a difficult one.
Speaker 5 (23:23):
Defense in European funds has always been quite hot, but
it's been a hot topic for for a long time.
I mean, a lot of European strategies, including the strategies
that we run here, obviously have quite a bit of
ESG ESG kind of rules baked into them. You know,
a lot of our flagship funds are articulate articulate defined
(23:48):
under the SFDR regulations.
Speaker 3 (23:51):
And so we do have restrictions on defense.
Speaker 5 (23:53):
We have some restrictions on certain aspects of controversial weapons
actually at the company level as well.
Speaker 3 (24:00):
So from that perspective, there's.
Speaker 5 (24:02):
Always a little bit of discussion in terms of, you know,
how we can capture this theme. It's clearly a very
interesting theme at the moment within Europe.
Speaker 3 (24:16):
So there are some there.
Speaker 5 (24:17):
Are some issues that I think a lot of European
asset managers just wouldn't be able to buy. And to
be fair, I don't necessarily think that's wrong because it's
the issuers that get singled out generally are the ones
that do manufacture controversial weapons. And I think one of
the things that's really difficult in this topic is it's
really important to work out, you know, for the issuers
(24:38):
that are in this sector, you know, where are they
selling their goods and services. And I think that's that's
where you know, there's a big debate whether should you
have blanket restrictions or should it be something that you
are able to decide on yoursels as an investor based
on your own research. I mean, at the moment, there
(24:58):
are these restrictions in place. Some of our fun you know,
some of the some of the strategies that Blue Bay
would would be restricted. And also within the credit space,
certainly within ig there's actually a fairly limited opportunity set
as well. There aren't a tremendous number of issuers that
focus on defense, and the ones that do focus on
defense actually tend to be quite high quality from a
(25:20):
credit from a credit rating perspective, let's say, and actually
do trade are quite expensive spreads already. I mean in
the US that's particularly true. You know, you can think
of a number of really interesting issuers that are clearly
going to very much benefit from from this kind of
spending coming out of Europe. But when you look at
you going sort of look at their bonds and you
think what can I include in my portfolios, you'd say
(25:43):
the opportunity set is actually generally quite limited. I think
it's actually, you know, I think it's going to change.
I mean, clearly, there's lots of spending coming in Europe.
It's going to catalyze a trend of people starting to
issue more bonds into public bond markets. It is what
people want to go to up. It is what people
are going to want to see, and I think managers
(26:04):
like us obviously have to have to have a little
bit of a look internally and kind of think about
our current rules and is there some you know, is
there a discussion to be had in terms of modifying
some of those rules, because you know, on the one side,
I've talked about you know, I think it's very important
to focus on the defense companies where they're selling their
goods and services. But on the other hand, you know,
(26:26):
if you think from a sustainability perspective, I think the
quote I heard the other day was, you know, you
can't be sustainable if you can't defend yourself, and say,
that's something I think we have to think.
Speaker 1 (26:35):
About as well, because the whole sort of idea of
defense is kind of morph from you know, it's offensive,
it's attacking, to it's you know, defending your country or democracy.
It's a it's a great you know, it's an asset
and now we've got labeled issuance. There was there was
a very well bid deal last week. I don't know
if you participated, but it seems to come at a
pretty good level for investors in a you know, as
(26:57):
we've discussed a very tight credit so that there must
be a ton of opportunity. But I'm interested in what
you said about ESG because it's one topic that you know,
eighteen months ago everyone wanted to talk about it. Now
no one wants to talk about it. Really quite a
tricky one, but you are, you know, still excited about
the concept of impact investing. I'm interested in you know,
(27:20):
what that means to you and does it make you money?
Speaker 3 (27:25):
For me, it's a.
Speaker 5 (27:25):
Really it's a really fascinating topic, you know, ESG investing,
impact investing, and I think ultimately it's something that it's
still really relevant. I mean, it's obviously very relevant in Europe.
You know that there has been quite a bit of
sentiment shift in the last kind of few years, I
think globally when it comes to ESG, but I think
(27:47):
we're still in a place where ESG is extremely important.
I think focusing on ESG as part of your investment
framework can genuinely help you live are better investment results
because I think one of the misconceptions about you know,
ESG investing, you know, people kind of think ESG investing
(28:08):
and they just think, Okay, that's you know, sustainable investing.
If I invest in that way, I'm going to save
the world. And you know, I think one of the
things that happened in the last few years, particularly twenty
twenty two and into twenty twenty three, a lot of
the kind of ESG label products they meaningfully underperformed. It
was really more in the equity space as particularly the
(28:30):
individual funds as well, So ESG funds in twenty twenty two,
you know, particularly because they don't have they generally don't
have much exposure to the energy sector, and the energy
sector was one of the best performing sectors in twenty
twenty two because energy prices were high, et cetera. I
think the energy sector was actually up meaningfully, whereas the
whole market was down. And so the underperformance of some
(28:52):
of the equity funds on the sustainability side was incredibly meaningful,
and it kind of led to this, you know, kind
of whole discuss that people can't therefore shouldn't be allocating
to ESG funds. It's you know, excluding some parts of
the universities, you know, contravening managers for duciary duty to
have access to all the different, you know, interesting investments.
(29:15):
And you know, in the US, some states even went
so far as to actually implement anti ESG laws for
state you know, for state investments, which clearly politicized the
argument very meaningfully. So for me, ESG investing though, is about,
you know, ESG investing is a framework. It's a framework
to focus on risks associated with environments, social and governance.
(29:39):
And actually, if you are thinking about it as a
risk framework, it can actually really help you and be
quite additive. And generally what does that mean. That usually
means you end up with funds, You end up with
indices that kind of exclude things which have the highest
ESG risks. And actually, when you when you kind of
look at historical historical performances of ESG or ESG funds,
(30:01):
they actually tend to have a fairly decent performance, if
not better performance than traditional funds. And I think one
of the most important points is that they do it
with a lower volativity. So one of the one of
the kind of very strong themes that you see, particularly
in ESG equity indices that they do exhibit exhibit a
lower volatility, so long term risk adjuster returns tend to
(30:22):
be very good. Comparing that to impact investing, I think
one of the things that you know, it's most prevalent
with ESG in if you have just a typical ESG
fund or a typical ESG index, you are generally removing
that you know, the highest risk ESG companies. But when
it comes to impact investing, the contrast, the difference is
(30:44):
it's much more of a.
Speaker 3 (30:44):
Screening in approach.
Speaker 5 (30:46):
So we are you know, when I think particularly impact
investing in public markets, it's much more of a you
are looking for the solution providers to sustainability issues, and
so it's not necessarily about okay, let's just remin the
worst ESG names. Is about saying, Okay, these are the
things I think are the most important problems that we're
facing from a sustainability perspective. Let's find the companies that
(31:09):
are doing something about it and focus them. So it's
much more of a screening in approach, and you're looking
for kind of companies that are creating the best outcomes,
and you know, I think it only really works if
you can kind of do it in a way that
you're saying, yes, I want to kind of try and
generate some impact with my portfolio, but I need to
(31:29):
deliver returns as well. So striking that balance between returns
and you know, outcomes oriented impact investing, you know, for us,
is really key, and I think it's something you're going
to see more and more. And I also think it's
something that can really make you money as well, because
a lot of the themes that you know, we focus on.
(31:50):
You know, despite the fact that you've seen this kind
of big humpin sentiment, it's.
Speaker 3 (31:54):
Not going away.
Speaker 5 (31:55):
You know, all of the problems that are facing us
from a sustainability perspective, it's going to be very important
to allocate capital towards them. And I think the companies
that are doing this best are going to be incredibly
successful and they can really help you generate very interesting
investment returns, but then.
Speaker 1 (32:12):
High political risk at the same time. You presume that,
you know, if you get into solar panels or windmills,
and you know, Donald Trump wakes up one day and
just decides to ditch the lot. You're kind of exposed
to that.
Speaker 3 (32:21):
Right utually.
Speaker 5 (32:23):
Yeah, I mean, I think it's becoming a bit harder
to navigate, you know, to navigate this this world at
the moment, and I think the last few weeks have
demonstrated that quite clearly. You know, there's been some pretty
radical moves by Trump and US policy. It's had a
big impact on European issuers that do focus on renewable energy.
(32:44):
You know, I would like to think that this is
a relatively temporary phenomenon, you know, I think I think
when it comes down to it, I mean, Trump is
a little bit unpredictable, but at the end of the day,
he's focused on actually cheap energy. So I think that's
one of the challenges faces. You know, if we want
to dig into the kind of the energy topic, it's
(33:05):
going to be about making sure that we get clean
energy that is cost effective one way or another.
Speaker 2 (33:10):
What do you think returns look like this year spread
wise and so on, Given that we've had two relatively
good years for credit, what do you think twenty twenty
five might bring at the end.
Speaker 5 (33:24):
So sector wise, I think I guess the one small
sector we haven't touched upon, which I think is really
interesting is the satellite space. And so I think that
for me is one which has been incredibly interesting for
the last twelve months because I think sentiment has been
incredibly divided. Also, I think what makes it interesting is
(33:46):
it's kind of one of the areas where you can
play the defense theme in Europe. Now you're going to
be in a position where a portion of the defense
funding will clearly be channeled towards these sorts of operators.
You know, jump back nine to twelve months, I think
sentiment in this sort of small sector was very, very weak,
(34:09):
driven by competition from Stylink et cetera. And you've been
on an incredibly large round trip and you know, you've
come from a place where you know, I think the
market was very divided, but lots of people thought these
these guys would be under a whole lot of pressure.
Speaker 3 (34:25):
You know.
Speaker 5 (34:25):
Jump forward into twenty twenty five, you've got the tail
with the defense spending and a number of other things
which which are feeling them spread still I think at
very interesting levels. So I think that's that kind of
ticks a few boxes in terms of things that maybe
stand out because away from that, and you.
Speaker 3 (34:42):
Know, there are obviously a few individual situations.
Speaker 5 (34:44):
I mean, I think generically in ig it's it's hard
to kind of get too excited about any kind of
larger sector because spreads have just got so compressed. I mean,
there are you know, there are things that are interesting,
you know, financial especial non financials we've talked about. I
think utilities probably screen somewhere that there is a little
bit of value as well. I think that's partly driven
(35:07):
by the fact that you're seeing quite a lot of
capex being actually channeled towards transition and you know, developing
new types of more clean energy.
Speaker 3 (35:17):
But it means they need to issue.
Speaker 5 (35:19):
A lot of bonds, and I think, you know, the
kind of consistent level of supply that you see in
the market in Europe keeps spreads a little bit wider there,
so I think, and obviously there's an element of you know,
they're not too cyclical, so they feel a bit more defensive,
and so the evaluation argument's a bit better there. Look,
I mean, so far, credit performance this year has been
(35:40):
obviously very very good. We've reached the tightest levels. What's
it going to be like into the end of the yet. Look,
I think my base case would be September is going
to be a little bit wobbily, you know. I think
it's seasonally a week month. We're going to have lots
of supply. I think you could have, you know, some
volatility driven by France, but I think coming into the
(36:02):
end of the year will probably be a fairly good
for credit. You know, A hasten to say, it's a
bit of a wider than tighter, and we can end
up finishing the year on a fairly good note. But
I think that's that's probably the path forward from where
we are now. I think, you know, the conditions that
pushed credit spreads to where they are do remain in place.
(36:25):
I think overall, I mean the camp that growth remains
okay in the US, and you know, and I think
the tailwinds.
Speaker 3 (36:33):
In Europe are probably slightly greater.
Speaker 5 (36:34):
So those things, you know, along with the fact that
we've got interesting yields. Spreads are very tight, but you've
got a tremendous amount of demand coming into credit in
both the US and Europe at these sorts of levels
from fixed maturity funds. I think you're seeing interesting developments
in things like active ETFs. You know, there's lots of
(36:55):
kind of new products, which are are you know, facilitating
access to the market. I think you've got cross currency
dynamics from other parts of the world making European credit
look a bit more interesting as well. So all these
things will will help. I think if you do have
a backup in September and you do see a bit
of volatility, I think there's plenty of plenty of firepower
(37:18):
on the side to re engage with the market and
maybe take us back to not necessarily the tights, but
market in relatively decent shape.
Speaker 1 (37:28):
I think what Totally was also asking kind of was
what's your edge in terms of, you know, how you
differentiate yourself, which I will which I will get to.
But when we ask people that on this show, they
mostly say structure, products, clos and everyone loves private credit.
So I'm wondering, what's your view right now in private
against public You know that the yields seem great opportunity
(37:49):
of the century.
Speaker 3 (37:51):
Yeah, I mean, I.
Speaker 5 (37:52):
Think public credit is far superior, coming from a domestic
bias of being heavily involved in public credit. But look,
it's easy to it's easy to trash private credit at
the moment, I think, you know, you're seeing rising, you
are seeing you know, default rates, especially in leverage loans
(38:12):
in the US, go up a bit. You know, it's
been a tremendous few years of an explosion in terms
of the assets that have gone there. You know, is
it this kind of big kind of disaster waiting to happen?
I look, I mean, I think it's easy to be concerned.
It's probably right to be concerned. I think if you
had a credit downturn right now, if we did kind
(38:33):
of slip into a period where growth and weaker, then
I think it would be a problem.
Speaker 3 (38:40):
Do I think it would be a systemic issue. I don't.
I personally don't think it would. You know, I kind
of do subscribe.
Speaker 5 (38:46):
To the notion that actually, you've taken a lot of
this debt off, you know, leathered bank balance sheets into
unleathered format or certainly less leathered format, which provides some
element of cushion. So I think that's kind of quite
an interesting concept to think about. But yeah, look, I
mean I think they'll they'll probably be a point where
(39:08):
you know, you do see you do see losses, and
people get very concerned. You know, I think at this
point in time. Public markets provide a tremendous amount of
flexibility for people. You know, the returns on offer are
actually pretty good. Liquidity is obviously a lot better. In
my sort of sales pitch of public versus private, i'd
probably highlight those points. There are definitely concerns on the
(39:29):
private side, but I yeah, probably not.
Speaker 3 (39:33):
I'm not going to go into the bang the doom
and gloom drum too hard.
Speaker 1 (39:39):
But you just don't do it. You just don't have
the ability to do private is that right? Or you
could do it, we just don't want to.
Speaker 3 (39:45):
We don't do private credit here on our side. Note
so I mean obviously I'm part of the investment grade
team and so we it's not it's not part of
our product suite.
Speaker 2 (39:58):
I think if we can dig a little bit in
to that sales pitch that you mentioned of public versus
private credit without giving all the secrets away, maybe you
can touch a little bit more on what you mean
by far superior in the public markets, because I'm sure
that will raise a few eyebrows.
Speaker 4 (40:16):
Are you saying far superior.
Speaker 2 (40:17):
In terms of default or maybe the visibility point that
you touched on, or maybe it's even returns. And if
it's returns, like how differentiated or superior do you think
public market returns might be versus private.
Speaker 5 (40:34):
But obviously that comment was slightly tongue in cheek, like
I say, I'm not I'm not the private credit expert,
so I'm not really going to hound the private credit
side too hard. I think the returns on offer, it's hard.
It's hard to kind of look back over the last
few years and say and say anything too negative because
the returns are being incredibly consistently good. You know, you
(40:55):
give up some liquidity, you are at a point where
you can be a bit more. And I think about
credit quality. You know, you have now had probably two
or three years where within private credit interest rates have
been much higher on the kind of floating rate loans.
That's clearly going to put some pressure, you know, some
pressure within the space. And you know, obviously there's been
(41:18):
lots of chat about the level of picks and there
are warning signs there. So at this point in time,
you know, if you're if you're looking at the kind
of returns on offer, I think from you know, from
a good active manager in the public space that you
know can outperform the market, you know, give you, provide
you with a lot of liquidity. It's got to be
(41:39):
at least a very very good competitive comparison. And yeah,
you know there's room for both. But but I think
maybe you're shifting into a period where the flexibility that
public market products offer you, you know, maybe maybe gives
it that slight attraction.
Speaker 1 (41:57):
So what's your edge, Tom, What's the thing that you
do that no one else does. What's the most contrariant
thing you've got up your sleeve?
Speaker 3 (42:04):
Was it the impact?
Speaker 1 (42:05):
Is it? I know, defense? Is it European banks? What's
the trade right now that you know you think is
going to get helper for this year?
Speaker 3 (42:13):
Yeah?
Speaker 5 (42:14):
Look, I mean I think the most interesting thing is
particularly because the last few years, people have really shied
away from investing from a sustainability perspective. So I would
just urge people to think about that, think about the
fact that it can actually be additive to returns as
well as actually doing something that's really meaningful. I don't
think there are a lot of managers out there that
(42:35):
kind of take this concept, you know, far enough or
to the extremes. So I think that's something that where
we do differentiate ourselves here with the strategy that we run.
So I would, I guess urge people to have a
think about that, and you know, look across the market
for strategies that are similar. I think it's really important
(42:56):
that people do allocate their capital or more thoughtfully going forward.
And it's very much something that can can tick both
boxes in terms of you know, making a difference and
generating returns.
Speaker 2 (43:11):
So you touched on a lot of the opportunities that
you see, and at the start of the program we
talked about some of the things that keep others up
at night, whether it's geopolitical risk or parish.
Speaker 4 (43:24):
And so on.
Speaker 2 (43:25):
But what keeps Blue Bay up at night then, or
what keeps you as a fund manager at Blue Bay
up at night at this point.
Speaker 5 (43:33):
My two children. Obviously that's not my answer, but so
I don't want to deviate too much. I mean, the thing,
the thing that I think is most that will have
the biggest negative impact on markets in the near terms
if we do see if we do see weak growth
in the US. It's a boring answer, but I think
(43:54):
that's the thing that's you know, the jury is a
bit out and you know, we've seen a few periods
in the last kind of year or two where you've
seen sort of dips in the data and suddenly people
start talking about procession.
Speaker 3 (44:08):
I think it's very much.
Speaker 5 (44:09):
Out of people's mindset for the for the most part currently,
but it's the thing that I think would would kind
of facilitate the biggest move in markets if we were
to see you know, another very weak payrolls print and
we saw you know, kind of weaker economic data.
Speaker 3 (44:27):
I think that's that's probably the.
Speaker 5 (44:28):
Thing I think, you know, I think we haven't touched
on tariffs very much, which I think is another interesting
kind of topic where we haven't really seen them the.
Speaker 3 (44:36):
Impact of tariffs yet as well.
Speaker 5 (44:37):
So I think that's something worth you know, contributing a
little bit of time too when you go to sleep
in terms of being concerned, because you know, I think
you could you could be you could be at a
point down not too far down the line, where you
do start seeing, well, you start you know, seeing how
companies are passing on the potential tariff costs. Are you
(45:00):
going to see it in higher prices? Are you going
to see it in margin pressure? And therefore, you know,
pressure on earnings, which is clearly something that the market,
you know, will focus on as well. So I think
that's something which I think is worth thinking about. And
obviously we've talked about France, but you know, it's just
in the very here and now that's probably the third
(45:20):
thing to be kind of a bit concerned about, particularly
from a European perspective.
Speaker 1 (45:25):
Great stuff, Tom Molds with RBC Blue Bay Asset Management
in London. Many thanks for joining us on the Credit Edge.
Speaker 3 (45:31):
Pleasure. Great to be here, guys, Thank.
Speaker 1 (45:33):
You, and of course very grateful to Tolu Alamutu with
Bloomberg Intelligence. Thanks for joining us today.
Speaker 4 (45:38):
Great to be here, Thank you, James, Thank you Tom.
Speaker 1 (45:41):
For more credit market analysis and insight, read all of
Tolou's great work on the Bloomberg terminal. Bloomberg Intelligence is
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(46:04):
We're on Apple, Spotify and all other good podcast providers.
Including the Bloomberg terminal at b pod Go, give us
a review, tell me your friends, or email me directly
at Jcromby eight at Bloomberg dot net. I'm James Crombie.
It's been a pleasure to having you join us again
next week on the Credit Edge
Hello, and welcome to the Credit Edge Weekly Markets Podcast.
My name is James Crumbie. I'm a senior editor at Bloomberg.
Speaker 2 (00:20):
And I'm Tolu Alamutu, a senior analyst at Bloomberg Intelligence.
This week, we are very pleased to welcome Tom mauld
who is senior portfolio manager of investment grade Debt at
RBC Blue Bay Asset Management. How are you Tom?
Speaker 3 (00:36):
Very good, Thank you, Jail. It's great to be.
Speaker 2 (00:38):
Here, great, thank you for joining us. Tom's focus is
on European non sovereign debt. He manages Blue Bay's European
corporate strategy, including a flagship mutual fund and several bespoke mandates.
Tom joined Blue Bay Asset Management in December two thousand
and five and the investment grade team in July two
(01:01):
thousand and seven. Blue Bay is of course now part
of RBC Global Asset Management, where the total AUM exceeds
half a trillion dollars.
Speaker 4 (01:10):
Tom has been instrumental.
Speaker 2 (01:12):
In driving the success of the European id credit strategy,
both in absolute return and benchmark portfolios.
Speaker 1 (01:18):
Over to you, James, delighted to have you Tom. Just
to set the scene a bit here before we get
to the questions. Credit markets are hot, with bond spreads
at the titles in twenty seven years, as demand saws
and net new supply remains thin. Elevated US political and
macro risk has pushed global credit investors into other markets,
especially Europe, to diversify portfolios, but that brings its own
challenges also political. Just look at all the volatility in
(01:41):
the UK brance and Holland Plus says the trade war
to contend with, and countries across the region have to
significantly boost their defense spending. Globally, in credit markets, we
are seeing more distress, default and bankruptcy, but you wouldn't
know it looking at the price. So Tom break it
down for us, how do you position yourself in these markets?
Given elevated volatility, rising macro risk, turbulent geopolitics, but also
(02:04):
very tight credit spreads.
Speaker 3 (02:06):
Hi ja Yeah, I mean, when you paint the pits,
you've just painted it.
Speaker 5 (02:09):
It makes it very hard to kind of come back
with what I would call it a positive view. I mean,
it's unquestionable that you were at a point where credit
spreads are extremely tight and there are a whole host
of risks out there, and we've been probably running the
lowest level of credit risks that we have done for
for quite some time in various products. The opportunity set
(02:30):
to take kind of big beata positions, you know, clearly
just isn't.
Speaker 3 (02:34):
There at the moment.
Speaker 5 (02:35):
And if it wasn't for the kind of positive tail
winds impacting credit asset classes in terms of demand and supply,
which have obviously been incredibly strong and really fueled fueled
credit market spreads. Getting to these sorts of levels, you know,
one would be definitely thinking about maybe taking an even
more defensive stance, But just in the kind of short
(02:55):
to medium term, you know, it feels like some of
these conditions which have pushed credit markets to where they
are are still in place and aren't necessarily going to
meaningfully change anytime soon despite the risks. So you know,
we can definitely see a bit of a pick up
in volatility, but at this point in time, you know,
running a beta close to home. But you know, focusing
(03:16):
I mean, it's probably a bit of a boring thing
to say, but focusing on our for opportunities I think
is more appropriate.
Speaker 3 (03:22):
And I think what's been interesting, particularly.
Speaker 5 (03:24):
Kind of in the second half of last year and
this year is I think those opportunities have become a
lot more prevalent. You know, you're seeing a bit more
dispersion in credit asset classes, despite the fact that you're
at very tight spreads, not all completely boring.
Speaker 3 (03:40):
I think there's some quite interesting things to play for.
Speaker 5 (03:42):
Still.
Speaker 2 (03:44):
One of the things that you mentioned is staying away.
I guess from the lowest level of credit risk, what
does that look like for you in terms of your positioning.
Does it mean that there's nothing there at all in
terms of you know, the lower part of from grade
and maybe high yield, or does it mean that you're
much more selective in terms of sectors and names and
(04:06):
so on.
Speaker 5 (04:06):
Yeah, it's much more about being selective, because I think
when you're in this kind of environment, if you believe
that spreads that are kind of going to stay where
they are, let's say, you know, investment grade spreads at
the kind of levels that we've got to, you know,
the longer that you stay there, you're automatically going to
see some compression.
Speaker 3 (04:21):
And obviously the.
Speaker 5 (04:22):
Last kind of part of this moving credit has been
people reaching for the kind of wider things which they
consider safe. So I think it's important too that's an
important part of decision making when certainly investing on alongside
at this point, looking for things which have some value
that are a bit wider, that are a bit further
down the credit spectrum, you know, in within investment grade.
(04:44):
It's obvious to look at the things like subordinated financials
and corporate hybrids. I think overall a lot of those
parts of the market have actually you know, got quite tight,
but there are still you know, really interesting situations and issuers.
So as you say, being selective, you know, really very
much is the key, and I think, like I said,
I think it's been working actually a lot better more recently.
Speaker 3 (05:06):
If I jump back a few years and.
Speaker 5 (05:08):
Think about when when investment grades spreads were as tight
as this in the kind of CSPP you know, ECB
buying period, I feel like there was a lot less
dispersion and a lot less kind of maybe differentiation between
the kind of slightly higher beta parts of the credit
market and the lower beat than there is now. So
perhaps a bit more interesting, you know, a more interesting
(05:30):
playing field still and definitely room for lower parts of
the credit spectrum.
Speaker 1 (05:36):
What we keep hearing, though, Tom, is that it doesn't
matter what the spread is it's all about the yield.
Yields are very high and the Fed's about to cut,
so you know, those high yields, those high coupons, they
are going to be there for long. So just buy
as much as you possibly can right now. Why not
follow that strategy?
Speaker 5 (05:51):
Yeah, I mean, look, I think I think some people
are following that strategy, which is what which is kind
of kind.
Speaker 3 (05:58):
Of where we are, you know, why we are where
we are? You know, I think in.
Speaker 5 (06:05):
There's no doubt there's been a big pick up in
the type of products which are very yield focused. We
keep hearing about these fixed maturity funds, you know, which
are kind of either targeting certain durations, targeting certain maturities,
which are trying to lock in yields, and you know,
they're they're kind of indiscriminate buyers of credit focused on yield. So,
(06:27):
you know, I think that's where it can be a
bit dangerous and obviously you need I think it's where
you need to be a bit more kind of careful
from the research side. And obviously you can't be an
indiscriminate buyer. You have to make sure that you're buying
things that if they are at the wider end of
the spectrum that you're you know, you're very sure you've
done a credit research on and so, and obviously you know,
as as an active manager on the credit side, we
(06:49):
kind of pride ourselves in being good at that.
Speaker 3 (06:52):
It's more important now than ever.
Speaker 2 (06:55):
One of the areas that you mentioned which has piqued
my interest anyway, has been subordinated financials and corporate hybrids,
obviously relatively high beta compared to the sort of higher
ranking parts of issuers capital structures and so on. One issue
that I've had anyway looking at some of the corporate
hybrids in real estate has been that you've seen prices
(07:17):
go up even on securities that are not even pain anymore.
And our news colleagues as well as our BI colleagues
have been writing about what's happening in the additional tier
one market and how basically valuations are not what they
used to.
Speaker 4 (07:33):
Be a couple of years ago.
Speaker 2 (07:35):
So how are you viewing that part of the market now,
especially that we're given that we're seeing more and more issuance,
at least on the eighty one side.
Speaker 4 (07:46):
Do you still think that there's value?
Speaker 2 (07:47):
And as James said, you should just look at yield
or do you think that spreads have come in a
little bit too much.
Speaker 5 (07:53):
On the financial side, it's still relatively interesting. I mean, yes,
spreads have moved a long way. You're much tighter spreads
that we've been at before. There's been a lot of compression.
I think the overall yields that you can get in
financials are still quite attractive. I mean, even in senior space.
You know, some people are arguing that financials versus non
(08:13):
financials for example, has compressed too much. But actually, if
you look back over a really long period of history,
you know, it's not unusual for financial senior spreads to
trade meaningfully inside non financial spreads. And I think where
we are now, after an incredibly long period of regulation
and improvement in fundamentals in the finance, you know, in
(08:35):
particularly in European financials, where profitabilities as good as it's
been an incredibly long time, it's not you know, it's
not difficult to imagine why we are here and why
we can't actually even maybe go go slightly inside. If
I think about comparing some of the kind of senior
senior non preferred financial spreads versus kind of almost like
(08:56):
cyclical industrials, and you know that them being at similar levels,
I think I rather be on the financial side then
moving into the kind of more subordinated space. You know,
I think if you kind of follow that theory that
actually financial is fundamentally in a very good place, and
look at the kind of yields and spreads that you
can still still attain in the subordinated financial space, whether
(09:18):
that's lower tier two or eighter one, there's still some
you know, interesting opportunities there. I think, provided your you know,
selective and you know, careful in your kind of credit work,
it's still a really good place to allocate your investments.
On the corporate hybrid side, I think it's you know,
there's probably a few more different you know, we could
probably have a whole podcast on corporate on corporate hybrids,
(09:39):
I think, particularly if we start talking about real estate
corporate hybrids, which are almost an entirely separate topic on
their own, I think, you know, that's that's somewhere where
I think you need to be particularly careful right now.
I mean, you know that you know, you've had a
you know, twenty twenty two created such a dramatic move
(09:59):
across the real estate space and clearly a lot of
the real estate companies that had issued corporate hybrids in
hindsight probably looking back, thinking they rather that they hadn't.
Speaker 3 (10:10):
You know, the price action was it was extreme.
Speaker 5 (10:12):
And obviously there are situations now where previously investment investment
great companies have hybrids outstanding where they're not paying coupons,
et cetera. So I think there's an incredible amount to
in that space. You need to be incredibly selective. I mean,
I think at this point in time, having had such
a big move tighter following twenty twenty two, for me,
(10:33):
I feel quite defensive on the real estate space, particularly
because my view is that there are tailwinds for Europe
European economy that will put pressure on interest rates, I
pressure upward pressure on interest rates, and you know, we've
seen time and time again over history that that doesn't
go too well for the real estate space. And having
(10:54):
you know, rallied back to what I would kind of
consider a fair value, I'd be a bit more defensive.
Speaker 3 (10:59):
And then in other corporate hybrids. It's a very long
answer to.
Speaker 2 (11:02):
Your question, but again.
Speaker 5 (11:05):
You have the kind of bit of dispersion there. I mean,
there's you know, you have some very cyclical names. In
corporate hybrids, you have some very safe names. I would
argue that the kind of safer utility, like certainly I
G rated corporate hybrids trade extremely tight at the moment,
and you know, are very expensive. I think the opportunity
set there is very limited, and so you are having
(11:27):
to like go into maybe the more the stories with
a little bit of should we call it hair on
them to maybe gain some value.
Speaker 3 (11:35):
And I still think there's you know that that's.
Speaker 5 (11:37):
Actually where you can get some some some interesting, some
interesting value for your money within the hybrid space. So
in all of these kinds of areas, you know that
the name of the game is is definitely being selective
at the moment.
Speaker 4 (11:50):
Yeah, and I agree with that.
Speaker 2 (11:52):
But one of the there's a lot I want to
sort of go into from what you've touched on there,
Thank you. But the first thing I was going to
touch on is on financials and the effect of government interference,
if we want to call it that. So we've seen
some reports saying that there might be some sort of
special tax levied in the UK on banks which has
(12:16):
affected the equities, maybe not so much credit. Is that
a concern for you when you're looking at additional Tier
one or other financials instruments, whether it's seen in a
nonpreferred or the more junior stuff, maybe we start with that.
Are you concerned about government intervention?
Speaker 5 (12:31):
Yeah, I mean I think you've always got a factor
that in and I think you know within financials that
I think the areas right now where you'd be a
little bit more cautious is the UK, where obviously the
UK does not feel in such a great place, and
the spill over into financial institutions and banks could definitely
be prevalent. So I think that warrants a bit more caution.
(12:56):
And I think the other obvious area is, you know,
within Europe is obviously France. I mean there's no doubt
that within banks, the you know, the kind of link
between how the solign behaves and how banks tend to
behaving credit is very strong. And so at this point
in time, looking down the barrel of kind of French volatility,
you know, akin to what we saw last year, got
(13:19):
a kind of factor that into what's going on in
French banks. But you know, French banks do trade wider
than I would say there they're kind of non French counterparts,
so there is some value there. So you could argue
that to some degree, there's some pricing in of that
volatility premium that we may well see in the coming weeks.
And I guess the other thing that I would kind
(13:40):
of anecdotally highlight is it feels quite clear that people
are more defensive already on French banks. So for example,
you know, in the last couple of weeks, when you
started seeing a bit more volatility in French assets, you know,
French banks obviously went wider. They were probably the biggest
underperformer out of the French you know, out of the
(14:02):
French assets in European credit. But at the same time,
you know, what we actually saw in the market was
people trying to buy those bonds pretty quickly on that
small backup, which kind of shows you that people probably
are underweight. There are speculative accounts that are already short by.
People are a bit more prepared this time round. You know,
(14:23):
last year, when you sort of suddenly moved into this
period of you know, the focus on French politics, it
was slightly out of left field, and I think people
were more taken by surprise and it created much bigger
moves in credit, So I think this time round it's
going to be quite interesting to kind of see how
how that you know, how that plays out.
Speaker 3 (14:42):
You know, if you're in a scenario.
Speaker 5 (14:43):
Where you know, BEAVU loses the loses the confidence vote,
which clearly seems fairly likely, but there is you know,
potentially a move to put another technocrat in place, you
could see French spreads calming down incredibly quickly. But on
the other hand, you know, if there are snap elections
and you know we're already seeing that, you know, some
(15:05):
of the more extreme parties have gained popularity, I think
that's going to be a point where you do see
a big pickup in volatility in European spreads in general,
and that will be concentrated in certainly and in French
banks and French domicile corporates to some degree as well.
Speaker 2 (15:24):
Yeah, there's definitely lots to discuss, I think, and we'll
definitely come to that in terms of the outlook for
French issuers, and maybe we'll even touch on some of
the Dutch issuers as well, given their political challenges there too.
But before we get on to that, you did mention
earlier what's going on in the real estate sector with hybrids,
(15:44):
and the fact that some issuers started off twenty twenty
three I think as an investment grade and they are
no longer there, to say the least, some.
Speaker 4 (15:52):
Of them are even triple seen now. And I would
tend to agree that some.
Speaker 2 (15:58):
Of those secues are looking fairish valued now. But one risk,
I guess maybe that you have further liability management like
buybacks and so on. Do you see that as a risk,
And also do you think that we need to give
more weight to some of the transformation programs that are
(16:22):
coming up. But some of these real estate entities, for instance,
we've had one entity that is no longer investment grade
but now has a new shareholder that's willing to put
more money in and so on. So there's those sorts
of moves as well that I guess could mean you
see another bump up in valuations. Is that something that
you think is a risk in terms of seeing it
(16:42):
as fair value or not?
Speaker 4 (16:44):
Really?
Speaker 3 (16:46):
I think some of those situations are are very likely
to happen.
Speaker 5 (16:50):
In the kind of the names that have perhaps fallen
from grace quite far. I think one of the things
that you've seen since twenty twenty two is actually you know,
some very clever financial engineering by some of the real
estate guys where the reason some of the IG spreads
(17:10):
you know, went to eight hundred over in twenty twenty
two because it's because the market participants didn't think that
the levers would be available for these guys to pull
renegotiate the terms of their outstanding debt, you know, to
extend maturities that they would effectively be you know, falling
into a potential default scenario very quickly. And I think
(17:35):
it's been really fascinating to see the ability of some
of these guys to be on the front foot and
how much actual access to liquidity that they did have.
Some of the things that you're probably alluding to were
very clever, you know, people doing hybrid exchanges for example,
enabling them to you know, kind of slightly under the radar,
(17:57):
extend you know, be quite investor friendly, extend their maturities,
extend their call dates, and put themselves in the position
where they are actually able to wear the storm. So
and I think you know that I think this is
still going to happen. It's clearly on the table, particularly
now that we're in a scenario where yes, rates are
a bit high, but obviously the market feels a lot better,
and so people are willing to lend to these guys,
(18:19):
particularly if they have good, good assets. So I would
be you know, I guess the point of the question
and the point of the answer is I'd be quite
cautious on being you know, let's say outright short. For example,
in the kind of high the high yield names that
have come already come back from the brink. Yes they're
high yield, but they've still got very wide spreads, because
(18:41):
I think these sorts of leavers are very much on
the table for these guys still, and they probably will
continue to muddle through and maybe get themselves into a
back into a better position. I think where the opportunity
perhaps to be more defensive is better is in the
names that are still ig that have come all the
way back to the kind of spread level that they
were at pre twenty twenty two. So you could very
(19:03):
much argue that that's a fair value spread level, you know,
in this environment where now you've had two or three
years of higher rates, you know, you know, their average
cost of funding is just naturally going to keep going up.
Speaker 3 (19:15):
And I think.
Speaker 5 (19:16):
Particularly for some of the issuers where their actual kind
of ability to grow as a company is very limited.
You know, for example, in Germany residential it's very very
difficult to kind of actually get any rental growth there.
So let's say you've got two or three percent rental growth,
but your cost of funding, you know, is kind of
a four percent over time. It's just a bit of
(19:37):
an attrition for these guys. And you know, I think
that's where there's just an interesting relative value argument to
make to zoom.
Speaker 1 (19:45):
Out Tom a little bit, just look globally at the
credit landscape. You know, since April, you know, the idea
of American exceptionalism has really been tested and has been
more and more questioned as we get into questions of
you know, fed independence and governance all that stuff. So
there was a big kneeja reaction to, Okay, well everyone
needs to diversify because we're so long the US and
(20:06):
we need to start looking at other places and or
look Europe. That makes sense, Let's get into Europe and
then now you know, hitting the the challenges of scale
of complexity of you know, all of the different jurisdictions
and languages and everything else. And now the political situation,
how does it look relative value wise Europe against the
US for you?
Speaker 5 (20:27):
For me, it's a theme that I was pretty keenly
focused on from the kind of beginning of last year.
Really so I think, I know, it was much more
obvious theme then because at that point you had, you know,
if you were just like looking at European credit spreads
versus versus the US, you know, within investment grade and
you know, to some degree, within high yield, Europe looked cheaper.
(20:49):
And there are a number of reasons for that, you know,
I think twenty twenty two was a period that really
kind of pushed that relationship, probably to a point where
it was slightly unfair. I mean, at the time, what
drove it there, I think was very relevant. You know,
you had, at the beginning of the Russia Ukraine conflict,
you had very high energy prices. The impact of those
(21:10):
energy prices on European companies was clearly a lot more acute.
You know, I think that was relatively justified. But in
the subsequent and a couple of years, you kind of
this relationship of Europe being wide the US kind of
remained in place for some time, and there's a number
of other kind of factors that kind of participated or
fueled that. But I think, you know, into twenty twenty four,
(21:31):
for me, it was much more like that relationship doesn't
really make sense. I think Europe should trade at least flat,
if not slightly inside the US, and as you came
into the end of the year, that's kind of played out.
So now now we're kind of sitting with you know,
spreads pretty similar to each other. I mean, you could
make an argument that in Europe durations a bit lower,
so maybe the fair value slightly inside. I think you're
(21:53):
a bit fairer. I mean, I'm you know, I'm certainly
not going to push the US exceptionisms over.
Speaker 3 (22:00):
You know, everything should be in Europe. I quite I
still have the I still quite like the bias.
Speaker 5 (22:05):
I think the kind of dynamics on the two sides
of the Atlantic are a bit different. I think, you know,
in the US, it feels like you could be at
a point where you're obviously starting to see growth slow
down a little bit. There's a little bit of pressure
on the data, particularly on the labor side. You know,
people are obviously slightly concerned about that. I think in Europe,
to pick up in spending I mean, everybody's going to
(22:26):
be talking about this, but it's thin it. I think
it's quite relevant. I think the magnitude of the fiscal
impulse of what's coming, I think perhaps people still even underestimate.
And I think one of the things I'd be a
bit concerned about is, I mean, you're seeing it even
in the last few days, rates going up a bit
more quickly. I think, you know, you could have a
(22:47):
that theme.
Speaker 3 (22:47):
Could you could see it a bit more prevalently.
Speaker 5 (22:49):
I think, you know, rates going up a bit more
because people are saying, Okay, well, actually the fiscal is
going to be really quite powerful. It is going to
help growth, is going to mean that, you know, monetary policy.
He certainly isn't getting any lusive from here. So you
can see, you know, potentially steeper curves in Europe and
higher longer term rates. And that's something that I think
(23:11):
we have to factor in as investors.
Speaker 1 (23:13):
Yeah, the big theme right now is defense spending in
Europe issuance to support that. Is that a good fit
for your strategies? And if so, where do you put it?
Speaker 3 (23:21):
Yeah, I mean it's a difficult one.
Speaker 5 (23:23):
Defense in European funds has always been quite hot, but
it's been a hot topic for for a long time.
I mean, a lot of European strategies, including the strategies
that we run here, obviously have quite a bit of
ESG ESG kind of rules baked into them. You know,
a lot of our flagship funds are articulate articulate defined
(23:48):
under the SFDR regulations.
Speaker 3 (23:51):
And so we do have restrictions on defense.
Speaker 5 (23:53):
We have some restrictions on certain aspects of controversial weapons
actually at the company level as well.
Speaker 3 (24:00):
So from that perspective, there's.
Speaker 5 (24:02):
Always a little bit of discussion in terms of, you know,
how we can capture this theme. It's clearly a very
interesting theme at the moment within Europe.
Speaker 3 (24:16):
So there are some there.
Speaker 5 (24:17):
Are some issues that I think a lot of European
asset managers just wouldn't be able to buy. And to
be fair, I don't necessarily think that's wrong because it's
the issuers that get singled out generally are the ones
that do manufacture controversial weapons. And I think one of
the things that's really difficult in this topic is it's
really important to work out, you know, for the issuers
(24:38):
that are in this sector, you know, where are they
selling their goods and services. And I think that's that's
where you know, there's a big debate whether should you
have blanket restrictions or should it be something that you
are able to decide on yoursels as an investor based
on your own research. I mean, at the moment, there
(24:58):
are these restrictions in place. Some of our fun you know,
some of the some of the strategies that Blue Bay
would would be restricted. And also within the credit space,
certainly within ig there's actually a fairly limited opportunity set
as well. There aren't a tremendous number of issuers that
focus on defense, and the ones that do focus on
defense actually tend to be quite high quality from a
(25:20):
credit from a credit rating perspective, let's say, and actually
do trade are quite expensive spreads already. I mean in
the US that's particularly true. You know, you can think
of a number of really interesting issuers that are clearly
going to very much benefit from from this kind of
spending coming out of Europe. But when you look at
you going sort of look at their bonds and you
think what can I include in my portfolios, you'd say
(25:43):
the opportunity set is actually generally quite limited. I think
it's actually, you know, I think it's going to change.
I mean, clearly, there's lots of spending coming in Europe.
It's going to catalyze a trend of people starting to
issue more bonds into public bond markets. It is what
people want to go to up. It is what people
are going to want to see, and I think managers
(26:04):
like us obviously have to have to have a little
bit of a look internally and kind of think about
our current rules and is there some you know, is
there a discussion to be had in terms of modifying
some of those rules, because you know, on the one side,
I've talked about you know, I think it's very important
to focus on the defense companies where they're selling their
goods and services. But on the other hand, you know,
(26:26):
if you think from a sustainability perspective, I think the
quote I heard the other day was, you know, you
can't be sustainable if you can't defend yourself, and say,
that's something I think we have to think.
Speaker 1 (26:35):
About as well, because the whole sort of idea of
defense is kind of morph from you know, it's offensive,
it's attacking, to it's you know, defending your country or democracy.
It's a it's a great you know, it's an asset
and now we've got labeled issuance. There was there was
a very well bid deal last week. I don't know
if you participated, but it seems to come at a
pretty good level for investors in a you know, as
(26:57):
we've discussed a very tight credit so that there must
be a ton of opportunity. But I'm interested in what
you said about ESG because it's one topic that you know,
eighteen months ago everyone wanted to talk about it. Now
no one wants to talk about it. Really quite a
tricky one, but you are, you know, still excited about
the concept of impact investing. I'm interested in you know,
(27:20):
what that means to you and does it make you money?
Speaker 3 (27:25):
For me, it's a.
Speaker 5 (27:25):
Really it's a really fascinating topic, you know, ESG investing,
impact investing, and I think ultimately it's something that it's
still really relevant. I mean, it's obviously very relevant in Europe.
You know that there has been quite a bit of
sentiment shift in the last kind of few years, I
think globally when it comes to ESG, but I think
(27:47):
we're still in a place where ESG is extremely important.
I think focusing on ESG as part of your investment
framework can genuinely help you live are better investment results
because I think one of the misconceptions about you know,
ESG investing, you know, people kind of think ESG investing
(28:08):
and they just think, Okay, that's you know, sustainable investing.
If I invest in that way, I'm going to save
the world. And you know, I think one of the
things that happened in the last few years, particularly twenty
twenty two and into twenty twenty three, a lot of
the kind of ESG label products they meaningfully underperformed. It
was really more in the equity space as particularly the
(28:30):
individual funds as well, So ESG funds in twenty twenty two,
you know, particularly because they don't have they generally don't
have much exposure to the energy sector, and the energy
sector was one of the best performing sectors in twenty
twenty two because energy prices were high, et cetera. I
think the energy sector was actually up meaningfully, whereas the
whole market was down. And so the underperformance of some
(28:52):
of the equity funds on the sustainability side was incredibly meaningful,
and it kind of led to this, you know, kind
of whole discuss that people can't therefore shouldn't be allocating
to ESG funds. It's you know, excluding some parts of
the universities, you know, contravening managers for duciary duty to
have access to all the different, you know, interesting investments.
(29:15):
And you know, in the US, some states even went
so far as to actually implement anti ESG laws for
state you know, for state investments, which clearly politicized the
argument very meaningfully. So for me, ESG investing though, is about,
you know, ESG investing is a framework. It's a framework
to focus on risks associated with environments, social and governance.
(29:39):
And actually, if you are thinking about it as a
risk framework, it can actually really help you and be
quite additive. And generally what does that mean. That usually
means you end up with funds, You end up with
indices that kind of exclude things which have the highest
ESG risks. And actually, when you when you kind of
look at historical historical performances of ESG or ESG funds,
(30:01):
they actually tend to have a fairly decent performance, if
not better performance than traditional funds. And I think one
of the most important points is that they do it
with a lower volativity. So one of the one of
the kind of very strong themes that you see, particularly
in ESG equity indices that they do exhibit exhibit a
lower volatility, so long term risk adjuster returns tend to
(30:22):
be very good. Comparing that to impact investing, I think
one of the things that you know, it's most prevalent
with ESG in if you have just a typical ESG
fund or a typical ESG index, you are generally removing
that you know, the highest risk ESG companies. But when
it comes to impact investing, the contrast, the difference is
(30:44):
it's much more of a.
Speaker 3 (30:44):
Screening in approach.
Speaker 5 (30:46):
So we are you know, when I think particularly impact
investing in public markets, it's much more of a you
are looking for the solution providers to sustainability issues, and
so it's not necessarily about okay, let's just remin the
worst ESG names. Is about saying, Okay, these are the
things I think are the most important problems that we're
facing from a sustainability perspective. Let's find the companies that
(31:09):
are doing something about it and focus them. So it's
much more of a screening in approach, and you're looking
for kind of companies that are creating the best outcomes,
and you know, I think it only really works if
you can kind of do it in a way that
you're saying, yes, I want to kind of try and
generate some impact with my portfolio, but I need to
(31:29):
deliver returns as well. So striking that balance between returns
and you know, outcomes oriented impact investing, you know, for us,
is really key, and I think it's something you're going
to see more and more. And I also think it's
something that can really make you money as well, because
a lot of the themes that you know, we focus on.
(31:50):
You know, despite the fact that you've seen this kind
of big humpin sentiment, it's.
Speaker 3 (31:54):
Not going away.
Speaker 5 (31:55):
You know, all of the problems that are facing us
from a sustainability perspective, it's going to be very important
to allocate capital towards them. And I think the companies
that are doing this best are going to be incredibly
successful and they can really help you generate very interesting
investment returns, but then.
Speaker 1 (32:12):
High political risk at the same time. You presume that,
you know, if you get into solar panels or windmills,
and you know, Donald Trump wakes up one day and
just decides to ditch the lot. You're kind of exposed
to that.
Speaker 3 (32:21):
Right utually.
Speaker 5 (32:23):
Yeah, I mean, I think it's becoming a bit harder
to navigate, you know, to navigate this this world at
the moment, and I think the last few weeks have
demonstrated that quite clearly. You know, there's been some pretty
radical moves by Trump and US policy. It's had a
big impact on European issuers that do focus on renewable energy.
(32:44):
You know, I would like to think that this is
a relatively temporary phenomenon, you know, I think I think
when it comes down to it, I mean, Trump is
a little bit unpredictable, but at the end of the day,
he's focused on actually cheap energy. So I think that's
one of the challenges faces. You know, if we want
to dig into the kind of the energy topic, it's
(33:05):
going to be about making sure that we get clean
energy that is cost effective one way or another.
Speaker 2 (33:10):
What do you think returns look like this year spread
wise and so on, Given that we've had two relatively
good years for credit, what do you think twenty twenty
five might bring at the end.
Speaker 5 (33:24):
So sector wise, I think I guess the one small
sector we haven't touched upon, which I think is really
interesting is the satellite space. And so I think that
for me is one which has been incredibly interesting for
the last twelve months because I think sentiment has been
incredibly divided. Also, I think what makes it interesting is
(33:46):
it's kind of one of the areas where you can
play the defense theme in Europe. Now you're going to
be in a position where a portion of the defense
funding will clearly be channeled towards these sorts of operators.
You know, jump back nine to twelve months, I think
sentiment in this sort of small sector was very, very weak,
(34:09):
driven by competition from Stylink et cetera. And you've been
on an incredibly large round trip and you know, you've
come from a place where you know, I think the
market was very divided, but lots of people thought these
these guys would be under a whole lot of pressure.
Speaker 3 (34:25):
You know.
Speaker 5 (34:25):
Jump forward into twenty twenty five, you've got the tail
with the defense spending and a number of other things
which which are feeling them spread still I think at
very interesting levels. So I think that's that kind of
ticks a few boxes in terms of things that maybe
stand out because away from that, and you.
Speaker 3 (34:42):
Know, there are obviously a few individual situations.
Speaker 5 (34:44):
I mean, I think generically in ig it's it's hard
to kind of get too excited about any kind of
larger sector because spreads have just got so compressed. I mean,
there are you know, there are things that are interesting,
you know, financial especial non financials we've talked about. I
think utilities probably screen somewhere that there is a little
bit of value as well. I think that's partly driven
(35:07):
by the fact that you're seeing quite a lot of
capex being actually channeled towards transition and you know, developing
new types of more clean energy.
Speaker 3 (35:17):
But it means they need to issue.
Speaker 5 (35:19):
A lot of bonds, and I think, you know, the
kind of consistent level of supply that you see in
the market in Europe keeps spreads a little bit wider there,
so I think, and obviously there's an element of you know,
they're not too cyclical, so they feel a bit more defensive,
and so the evaluation argument's a bit better there. Look,
I mean, so far, credit performance this year has been
(35:40):
obviously very very good. We've reached the tightest levels. What's
it going to be like into the end of the yet. Look,
I think my base case would be September is going
to be a little bit wobbily, you know. I think
it's seasonally a week month. We're going to have lots
of supply. I think you could have, you know, some
volatility driven by France, but I think coming into the
(36:02):
end of the year will probably be a fairly good
for credit. You know, A hasten to say, it's a
bit of a wider than tighter, and we can end
up finishing the year on a fairly good note. But
I think that's that's probably the path forward from where
we are now. I think, you know, the conditions that
pushed credit spreads to where they are do remain in place.
(36:25):
I think overall, I mean the camp that growth remains
okay in the US, and you know, and I think
the tailwinds.
Speaker 3 (36:33):
In Europe are probably slightly greater.
Speaker 5 (36:34):
So those things, you know, along with the fact that
we've got interesting yields. Spreads are very tight, but you've
got a tremendous amount of demand coming into credit in
both the US and Europe at these sorts of levels
from fixed maturity funds. I think you're seeing interesting developments
in things like active ETFs. You know, there's lots of
(36:55):
kind of new products, which are are you know, facilitating
access to the market. I think you've got cross currency
dynamics from other parts of the world making European credit
look a bit more interesting as well. So all these
things will will help. I think if you do have
a backup in September and you do see a bit
of volatility, I think there's plenty of plenty of firepower
(37:18):
on the side to re engage with the market and
maybe take us back to not necessarily the tights, but
market in relatively decent shape.
Speaker 1 (37:28):
I think what Totally was also asking kind of was
what's your edge in terms of, you know, how you
differentiate yourself, which I will which I will get to.
But when we ask people that on this show, they
mostly say structure, products, clos and everyone loves private credit.
So I'm wondering, what's your view right now in private
against public You know that the yields seem great opportunity
(37:49):
of the century.
Speaker 3 (37:51):
Yeah, I mean, I.
Speaker 5 (37:52):
Think public credit is far superior, coming from a domestic
bias of being heavily involved in public credit. But look,
it's easy to it's easy to trash private credit at
the moment, I think, you know, you're seeing rising, you
are seeing you know, default rates, especially in leverage loans
(38:12):
in the US, go up a bit. You know, it's
been a tremendous few years of an explosion in terms
of the assets that have gone there. You know, is
it this kind of big kind of disaster waiting to happen?
I look, I mean, I think it's easy to be concerned.
It's probably right to be concerned. I think if you
had a credit downturn right now, if we did kind
(38:33):
of slip into a period where growth and weaker, then
I think it would be a problem.
Speaker 3 (38:40):
Do I think it would be a systemic issue. I don't.
I personally don't think it would. You know, I kind
of do subscribe.
Speaker 5 (38:46):
To the notion that actually, you've taken a lot of
this debt off, you know, leathered bank balance sheets into
unleathered format or certainly less leathered format, which provides some
element of cushion. So I think that's kind of quite
an interesting concept to think about. But yeah, look, I
mean I think they'll they'll probably be a point where
(39:08):
you know, you do see you do see losses, and
people get very concerned. You know, I think at this
point in time. Public markets provide a tremendous amount of
flexibility for people. You know, the returns on offer are
actually pretty good. Liquidity is obviously a lot better. In
my sort of sales pitch of public versus private, i'd
probably highlight those points. There are definitely concerns on the
(39:29):
private side, but I yeah, probably not.
Speaker 3 (39:33):
I'm not going to go into the bang the doom
and gloom drum too hard.
Speaker 1 (39:39):
But you just don't do it. You just don't have
the ability to do private is that right? Or you
could do it, we just don't want to.
Speaker 3 (39:45):
We don't do private credit here on our side. Note
so I mean obviously I'm part of the investment grade
team and so we it's not it's not part of
our product suite.
Speaker 2 (39:58):
I think if we can dig a little bit in
to that sales pitch that you mentioned of public versus
private credit without giving all the secrets away, maybe you
can touch a little bit more on what you mean
by far superior in the public markets, because I'm sure
that will raise a few eyebrows.
Speaker 4 (40:16):
Are you saying far superior.
Speaker 2 (40:17):
In terms of default or maybe the visibility point that
you touched on, or maybe it's even returns. And if
it's returns, like how differentiated or superior do you think
public market returns might be versus private.
Speaker 5 (40:34):
But obviously that comment was slightly tongue in cheek, like
I say, I'm not I'm not the private credit expert,
so I'm not really going to hound the private credit
side too hard. I think the returns on offer, it's hard.
It's hard to kind of look back over the last
few years and say and say anything too negative because
the returns are being incredibly consistently good. You know, you
(40:55):
give up some liquidity, you are at a point where
you can be a bit more. And I think about
credit quality. You know, you have now had probably two
or three years where within private credit interest rates have
been much higher on the kind of floating rate loans.
That's clearly going to put some pressure, you know, some
pressure within the space. And you know, obviously there's been
(41:18):
lots of chat about the level of picks and there
are warning signs there. So at this point in time,
you know, if you're if you're looking at the kind
of returns on offer, I think from you know, from
a good active manager in the public space that you
know can outperform the market, you know, give you, provide
you with a lot of liquidity. It's got to be
(41:39):
at least a very very good competitive comparison. And yeah,
you know there's room for both. But but I think
maybe you're shifting into a period where the flexibility that
public market products offer you, you know, maybe maybe gives
it that slight attraction.
Speaker 1 (41:57):
So what's your edge, Tom, What's the thing that you
do that no one else does. What's the most contrariant
thing you've got up your sleeve?
Speaker 3 (42:04):
Was it the impact?
Speaker 1 (42:05):
Is it? I know, defense? Is it European banks? What's
the trade right now that you know you think is
going to get helper for this year?
Speaker 3 (42:13):
Yeah?
Speaker 5 (42:14):
Look, I mean I think the most interesting thing is
particularly because the last few years, people have really shied
away from investing from a sustainability perspective. So I would
just urge people to think about that, think about the
fact that it can actually be additive to returns as
well as actually doing something that's really meaningful. I don't
think there are a lot of managers out there that
(42:35):
kind of take this concept, you know, far enough or
to the extremes. So I think that's something that where
we do differentiate ourselves here with the strategy that we run.
So I would, I guess urge people to have a
think about that, and you know, look across the market
for strategies that are similar. I think it's really important
(42:56):
that people do allocate their capital or more thoughtfully going forward.
And it's very much something that can can tick both
boxes in terms of you know, making a difference and
generating returns.
Speaker 2 (43:11):
So you touched on a lot of the opportunities that
you see, and at the start of the program we
talked about some of the things that keep others up
at night, whether it's geopolitical risk or parish.
Speaker 4 (43:24):
And so on.
Speaker 2 (43:25):
But what keeps Blue Bay up at night then, or
what keeps you as a fund manager at Blue Bay
up at night at this point.
Speaker 5 (43:33):
My two children. Obviously that's not my answer, but so
I don't want to deviate too much. I mean, the thing,
the thing that I think is most that will have
the biggest negative impact on markets in the near terms
if we do see if we do see weak growth
in the US. It's a boring answer, but I think
(43:54):
that's the thing that's you know, the jury is a
bit out and you know, we've seen a few periods
in the last kind of year or two where you've
seen sort of dips in the data and suddenly people
start talking about procession.
Speaker 3 (44:08):
I think it's very much.
Speaker 5 (44:09):
Out of people's mindset for the for the most part currently,
but it's the thing that I think would would kind
of facilitate the biggest move in markets if we were
to see you know, another very weak payrolls print and
we saw you know, kind of weaker economic data.
Speaker 3 (44:27):
I think that's that's probably the.
Speaker 5 (44:28):
Thing I think, you know, I think we haven't touched
on tariffs very much, which I think is another interesting
kind of topic where we haven't really seen them the.
Speaker 3 (44:36):
Impact of tariffs yet as well.
Speaker 5 (44:37):
So I think that's something worth you know, contributing a
little bit of time too when you go to sleep
in terms of being concerned, because you know, I think
you could you could be you could be at a
point down not too far down the line, where you
do start seeing, well, you start you know, seeing how
companies are passing on the potential tariff costs. Are you
(45:00):
going to see it in higher prices? Are you going
to see it in margin pressure? And therefore, you know,
pressure on earnings, which is clearly something that the market,
you know, will focus on as well. So I think
that's something which I think is worth thinking about. And
obviously we've talked about France, but you know, it's just
in the very here and now that's probably the third
(45:20):
thing to be kind of a bit concerned about, particularly
from a European perspective.
Speaker 1 (45:25):
Great stuff, Tom Molds with RBC Blue Bay Asset Management
in London. Many thanks for joining us on the Credit Edge.
Speaker 3 (45:31):
Pleasure. Great to be here, guys, Thank.
Speaker 1 (45:33):
You, and of course very grateful to Tolu Alamutu with
Bloomberg Intelligence. Thanks for joining us today.
Speaker 4 (45:38):
Great to be here, Thank you, James, Thank you Tom.
Speaker 1 (45:41):
For more credit market analysis and insight, read all of
Tolou'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. Courage includes over two thousand
equities and credits, plus outlooks on more than ninety industries
and one hundred market induices, currencies and come out. Please
do subscribe to the Credit Edge wherever you get your podcasts.
(46:04):
We're on Apple, Spotify and all other good podcast providers.
Including the Bloomberg terminal at b pod Go, give us
a review, tell me your friends, or email me directly
at Jcromby eight at Bloomberg dot net. I'm James Crombie.
It's been a pleasure to having you join us again
next week on the Credit Edge
Host
James Crombie
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