March 11, 2025 • 35 mins
Gibson Smith, founder and CEO of Smith Capital, discusses some of the unique challenges—and opportunities—facing fixed income investors today.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Ryan (00:03):
Hi, welcome to this episode of the First Trust ROI
podcast.
I'm Ryan Isakainen, etfstrategist at First Trust.
Today I'm joined by GibsonSmith, founder CEO and chief
investment officer at SmithCapital Investors.
Gibson and I are going to talkabout what's happening in the
(00:24):
fixed income markets.
There's a lot to talk aboutwith interest rates, with Fed
policy, with what's happening inthe credit markets and what's
happening with some of thepolicies of the new Trump
administration.
We're gonna tackle all of thatmore in this episode.
Thanks for joining us, gibson.
I'm glad we were able to makethis work on relatively short
notice.
Thanks for making the trip outto our podcast studio out here
(00:48):
in Wheaton.
Your office is in Denver,colorado.
This is our first time meetingin person, so it's great to meet
you, but I was reading on yourwebsite you've spent about 30
plus years in this industry.
Does that sound right, correct?
Time flies, doesn't it?
It?
Gibson (01:03):
does it really does?
Ryan (01:09):
Boy, has the industry evolved and changed over those
30 years.
Yeah, I just finished up my25th year at First Trust and I
tell you, it just seems like Iblinked and 25 years was gone.
Were you always a portfoliomanager?
Gibson (01:18):
No, I started my career at Morgan Stanley in New York in
the junior analyst program.
I worked in fixed income andthen did a little stint in
foreign exchange and then, on myway to get my MBA, they asked
me to stay on and kind of defera year on.
The MBA program Transferred meout to San Francisco where I
worked in institutional sales,planned on only doing it for a
(01:40):
year.
Seven years later I wasinterviewing with Janice.
So it worked out great and agreat chance to really learn
about the business, really kindof understand how kind of buy
side and sell side interact inthat sales role and really a
chance to kind of learn more,more about markets.
But in 2001, I made thedecision to leave Morgan Stanley
(02:01):
and go to Janice where they hada very small fixed income
division, about a billion and ahalf $2 billion in assets.
At the time.
Giannis was known for itsgrowth equity business and they
had about $390 billion.
Ryan (02:12):
This was 2001?
2001.
Oh man, that was Not greattiming right Well.
Gibson (02:18):
I guess, for being a fixed income guy, it was good
timing, but yeah, it workedgreat, but I went there
primarily to learn how toanalyze company, to really dig
into their bottom up fundamentalresearch process, and they had
a really vibrant and intenseresearch culture, which was
great, and I thought it would bea wonderful place to really
expand my skill set and learneven more about markets, and
(02:41):
showed up in a 2001 and 2003.
I took over for all of fixedincome and by the time I left in
2015, we had taken the assetsto about 43 billion dollars and
the team from 7 to 39 and put upsome really you know wonderful
risk adjusted returns andindustry beating performance and
built a great business there.
In 2015 I decided to leave,took a year off and spent some
(03:07):
time with my family andrecharged the batteries and had
the plan of launching thebusiness that we have today.
It's with Capital Investors.
Ryan (03:14):
Okay, wow, so that's 2001.
We're in 2025.
It's 24, 25 years.
As you look back then, comparedto now, do you think the
industry has evolved, haschanged?
I'm sure it's evolved andchanged, but any observations
that you'd make in ways thatit's changed, as a portfolio
(03:35):
manager especially yeah, it'sevolved a lot, particularly on
the fixed income side.
Gibson (03:40):
When I started in the business fairly opaque business,
all over the counter, veryrelationship driven you didn't
have transparency into pricing.
You didn't have transparencyinto what was trading, where it
was trading, how it was trading,who was doing what you know.
Fast forward to today.
We have great transparency interms of how the market is
(04:01):
functioning and flows and thattransparency has kind of leveled
the playing field in many waysfor a lot of players.
If you were a very large fixedincome participant, you had a
competitive advantage in thepast.
Fast forward today with thetransparency of information, of
trading flow, pricing,everything.
It's really leveled the playingfield in a lot of ways.
(04:22):
And the most significant changethat I see on my part is that
when you create thistransparency in markets and you
allow for the leveling of theplaying field, what it means is
that you have to be better atwhat you do.
You have to have a deeper, moreintense fundamental process and
understanding to generate alpha.
(04:43):
You also have to think aboutthe world a little bit
differently.
You have to be a little morecreative.
You have to expand what you'rewatching and what you're
focusing on.
In the early years of fixedincome you just focused on fixed
income market.
Today we have to focus on allmarkets.
We have to be very, veryattuned to what's going on
holistically.
Ryan (05:02):
Yeah, that's a really good point, and I'm going to ask you
about some of the specificviews that you hold and maybe
their impact on fixed incomemarkets.
Looking back, though, you saidyou started at Janus in 2021.
Of course, everyone who wasaround in the late 90s and early
2000s they remember the Janus20 fund and all the technology,
(05:24):
and there's been a lot ofparallels drawn between that
late 90s period, early 2000s,and the environment that we're
in today, especially in theequity markets, but there's some
crossover to fixed income andcredit and that sort of thing.
Do you see some parallelsbetween now and then or any
other historical periods thatyou think, like this is maybe
(05:45):
kind of what we're going throughis similar to what we went
through?
Gibson (05:49):
Yeah, the hard thing is we really don't have a lot of
historical analogs for what'shappening today and a lot of
that kind of because ofquantitative easing and this new
unconventional monetary policythat really kicked in in the
great financial crisis and gotobviously accentuated during
COVID.
But you can draw comparisons.
(06:10):
The dot-com period of time in01 does have a similar feel to
kind of the AI move and big datamove we're seeing today.
The biggest difference betweenthose two periods from my
perspective is that in the 01period there was just reckless
lending in the fixed incomemarkets and the high yield
(06:31):
market was lending money toanyone for various kind of
reasons, but some of the metricsthat they were using to kind of
justify the lending were insane.
Right, you remember the clicksor eyes on websites and all of
that.
There was nothing aboutprofitability.
I think there's more disciplinetoday around the lending side.
But there's still the sameconcerns around valuations in
(06:52):
the 01 versus the period today.
From a macro standpoint we'vebeen in periods where the Fed
has tried to engineer softlandings and has not necessarily
been successful.
So far it's looking pretty good.
It'll be interesting to see ifthe kind of decline in fiscal
stimulus here over the nextseveral years kind of plays out
(07:14):
and actually does put the Fed ina position to ease.
But it's really really hard togo back and find a kind of a
really tight comparison periodor a really kind of tight, shall
we say historical analog, sothat we can kind of a really
tight comparison period or areally kind of tight, shall we
say historical analog, so thatwe can kind of somewhat predict
going forward.
Ryan (07:28):
Yeah, so that is interesting.
You bring up sort of thequantitative easing and some of
the differences in the way thatthe Fed conducts their monetary
policy.
How do you, as a portfoliomanager, how do you manage
through that?
Because, as you said, there'sno real good historical analog
(07:48):
to it.
How do you sort of figure outwhat the Fed is going to do,
what the impact will be on rates, not just on the front end but
at longer term rates andmortgages and things that they
might be either buying or notbuying?
How do you deal with that, andwhat?
Also, as you answer thatquestion, what's your view on
what the Fed is likely to dokind of from here?
Gibson (08:11):
Let's work our way backwards on that.
From the Fed standpoint,they're in a bit of a pickle
where they have a real rateenvironment because of the high
Fed funds rate.
So the difference between whereFed funds is and the inflation
rate is it's a very, very highspread and they know that that's
a very restrictive rate andthey know that over time that
(08:32):
will have an impact on theeconomic growth outlook.
Obviously, high cost of capitalin the front end, where a lot
of the financing is done in theeconomy, will have an impact.
So the Fed, I think at thisstage would really like to lower
rates and normalize that realrate and get into a less
restrictive position.
But they're still fightingconcerns around inflation,
(08:54):
resurgence in inflation.
They're concerned about maybe aslower growth outlook also.
So they're really in adifficult spot and I think the
Fed really has to think aboutthe implications of potential
sticky inflation as well as thepotential for a slowing economic
outlook and they're going tohave to really be real-time
(09:14):
focused on this.
I think they would like tolower rates and normalize the
front end real rate, but I alsothink they want to be very, very
careful.
Our position is that they'remore likely to ease and probably
be put in a position wherethey're going to have to ease
more aggressively than theconsensus in the marketplace
right now.
But we go back to quantitativeeasing.
(09:36):
Managing in this new kind ofunconventional monetary policy
environment that again startedback in the great financial
crisis but really accelerated inthe COVID period of time is
challenging and I think the onething that we've really learned
from that period and kind ofreflected on.
I grew up in an Alan Greenspanenvironment where there was very
(10:00):
cryptic communication out ofthe Fed.
You didn't know what you weregoing to get.
He would surprise the marketsand really exhibit a level of
power and control over markets.
Fast forward through Bernankeand Yellen and now Powell, a Fed
that is much more transparent.
That is much more, I'll say,open in their communication and
telling you what they're goingto do.
(10:21):
I think the biggest learning forus in dealing with this new
unconventional monetary policyis believe what they're saying.
Take them at their word.
They are trying to createtransparency to lower volatility
.
So when they tell you they'regoing to do something, believe
it.
I think the greatest learningduring the COVID period of time
(10:42):
was when they came in andexpanded their balance sheet to
over $9 trillion.
I think many underestimated theimpact that that was going to
have on rates, on the economyand then ultimately the impact
on the overall kind of structureof how financial markets are
supposed to function right.
If rates are your kind offoundation of setting the
(11:04):
discount rate for valuationsacross everything, the impact is
massive and we're still kind ofworking our way through this.
We're still kind of trying tofigure out what the right
discount rate is and what is theinfluence of quantitative
easing and what is the impact ofadditional funding needs at the
federal level.
So there's a lot at play rightnow and so it's very fascinating
(11:25):
period of time.
Ryan (11:26):
Yeah, I don't remember a period of time, at least
recently, where I've seen themarket go from discounting or
expecting so many rate cuts tothen so few, and it just, you
know, it's 10 rate cuts and thenit's you know, three rate cuts
and then it's two rate cuts andthen it's three.
And it just seems like that themarket is pricing in a whole lot
(11:48):
of different scenarios in areally short period of time.
And that seems real.
I mean, I'm not a fixed incomeportfolio manager, so maybe I'm
just now paying attention to itmore, but it seems like it's
just unusual.
Gibson (11:59):
It is very unusual and I think a lot of that change in
sentiment is somewhat related tothe transparency and some of it
is related to trying to get infront of the Fed.
We have this massive amount oftransparency and information.
We have a massive amount oftransparency in terms of data.
Everyone has an analog or asystem or a structure around how
(12:23):
they bring data together andanalyze it and process it.
So there is a much fasterreaction mechanism in the market
today than there has been inthe past, and that's why you see
this very quick reaction to oh,the data says the Fed needs to
ease, we're going to get infront of the Fed more
aggressively.
At one point last year you hadFed funds trading 100 basis
(12:46):
points, maybe 120 basis points,above the two-year treasury,
which is basically the bondmarket, saying, hey, you're
coming to us, right, we knowyou're behind, so get on with it
, let's go right, and so that's.
I think some of that kind ofquick change in sentiment is
related to this transparency andinformation and the environment
that we're in, and that's notgoing to change.
(13:07):
That's going to be with usforever.
Ryan (13:10):
I think, added to that level of complexity.
Now there's a newadministration, that's you know,
kind of a different set ofpolicy tools than the old
administration.
And what everyone seems to befocused on now, as we're
recording this on March 5th, isyou know what the Trump
administration is going to dowith tariffs, in particular on
(13:30):
Mexico, and Canada and in Europeand in China and, you know,
around the world.
Is it going to be reciprocaltariffs?
Is it going to be tariffs as apolicy tool to bring about
change in border security?
There's a whole lot ofdifferent ways to think about
this.
So again, I guess my initialquestion for you is do you think
(13:51):
that that filters through tothe bond market, especially
because some people think maybeit'll be inflationary, others
would argue not, but thatclearly would have an impact on
rates.
So kind of a long question foryou.
But, gibson, what do you thinkthe impact of tariffs could be
on rates and on the bond market?
Gibson (14:09):
I think historically, we could look back at the impact
of tariffs as being somewhatstagflationary, in that you have
a initial impulse of higherprices.
The higher prices could be arestraint on consumption, which
should lead to lower growth.
I think that's the simple wayof thinking about tariffs.
The truth is it depends on thereaction mechanism, how long the
(14:33):
term of the tariff is.
There are a lot of inputs intoit.
The longer and the higher thetariff, the greater the risk to
inflationary pressure, and thelonger that that tariff is in
place, the more sustainable thatinflationary pressure will be.
And the longer it's in place,the more restrictive it will be
(14:54):
on consumption and potentiallygrowth.
So that's how the lens we'relooking through it.
If we can actually say with anylevel of confidence that you
know tariffs are here to stay,or they're going to be long
duration, or they're going to beshort duration, or they're just
a negotiation tool, we don'tknow.
We're learning as we go.
We know Trump is the greatnegotiator, he prides himself on
(15:17):
it and we heard last night inthe state of the union address
that he's serious.
I think the market was somewhatskeptical, thought he was a lot
of bravado and not a lot ofexecution, and now what we're
realizing is he is in executionmode.
He is trying to reset some ofthe imbalances that exist in our
(15:38):
trade policy, really some ofthe imbalances that exist in
general in Washington and inother areas and the market's a
little uncomfortable with it andI understand that it's change.
Some of the change is going tobe fantastic, some of it's
probably not going to be.
But markets like certainty,markets like to know what's
going to play out and then to beable to forecast what that
(16:00):
means.
Right now we're kind of in astate of flux and trying to
figure it out.
Ryan (16:03):
Yeah, even some of what in your explanation I thought was
fantastic.
But I'm listening to sort ofwhat could occur.
And if tariffs cause inflationto maybe ratchet up and that
causes consumption to come down,you've got inflation going up,
the economy getting weaker.
What does the Fed do in thatsort of environment?
Gibson (16:24):
Yeah, unfortunately, the Fed is in somewhat reactionary
mode.
They have to wait and see howit plays out too.
I'm sure they have hundreds, ifnot thousands, of people
building models, trying toforecast what this is all gonna
mean, and the reality is, mostmodel building exercises,
particularly around economicgrowth projections and or
inflation projections, fallshort.
Right, they always have nuanceto them or there's too many
(16:46):
inputs, and the variability isvery, very high.
The Fed's going to have toreact to this, and we have to
step back a little bit, though.
I mean, markets get myopicallyfocused on certain things at
certain points in time, and itis largely influenced by what's
on the TV or what's in thenewspaper I guess today's terms,
what's on the website, what'sthe consensus?
Ryan (17:08):
What's on Twitter.
What's on X.
Gibson (17:10):
Whatever is driving attention, right, but when we
step back and we think aboutwhat is playing out in really
the global economy, where we canjust focus on the domestic
economy, we still have a lot ofdisinflationary pressures at
play.
You've got demographics, you'vegot technology implementation.
I mean to think that big dataand AI are not going to have a
(17:33):
huge impact on the economy issomewhat foolish.
This is a real deal in terms ofimpact.
Ryan (17:40):
And then we have a debt overhang.
Gibson (17:41):
I mean, we can't lose sight of the fact that we are a
levered country and there are alot of levered countries around
the globe and that debt overhangis disinflationary.
So when we think about thosethree kind of power themes that
are going to be with us forprobably two or three decades,
maybe two at a minimum, and thenwe have the other side, which
is this deglobalization or thisreset that we're going through,
(18:05):
I tend to think this side's alot more powerful than just this
.
Ryan (18:09):
And so in the short term.
Gibson (18:10):
Sure, little concern, little repricing In the long
term.
We're still in adisinflationary environment and
a normalization of the inflationrate from the COVID period of
time.
Ryan (18:19):
So maybe some short-term pain for long-term gain sort of
scenario, some short-term painfor long-term gain sort of
scenario.
So, okay, amidst all thisconfusion and all the
complicating factors, you are anactive manager.
The ETF industry is.
It's really evolving in waysthat maybe people wouldn't have
predicted 10 years ago.
(18:40):
When I look at the issuance ofnew funds over the last five
years, it has surged in terms ofthe number of actively managed
strategies, both on fixed income, which is a little bit before
equities, but then equities aswell.
So you know you're again anactive manager.
How do you, as an activemanager, look at some of the
(19:01):
passive strategies and maybewhat's your value add?
How do you add value comparedto just a passive approach?
Gibson (19:09):
Yeah, the passive strategy is obviously
replicating the returns ortrying to replicate the returns
of the indices.
And when we look at the indices,there is a natural dysfunction
that exists in the fixed incomeindices and that they are
largely market cap indices.
So your companies that areissuing the most debt take up
larger weighting positionswithin the index and as we go
(19:33):
through the evolution or time,the size of the debt at the
government level or the size ofissuance at the securitized
level, or mortgages or thegrowth in corporate issuance,
really dictates kind of how thatindex evolves and changes.
If we think about that, what thekind of call it negative
impacts or what the badconsequences of having a market
(19:57):
cap index is that on the creditside, for example, your largest
issuers could be companies thatare deteriorating fundamentally,
and so if you're a passivemanager, you're getting greater
exposure to a company thatactually is not necessarily
doing the right thing with theirbalance sheet and you're, in
(20:18):
essence, getting in a deeperposition in harm's way of things
not going well, more leverage,more risk in the corporate
structure, so on and so forth.
So that's a natural dysfunctionof the construct of the indices,
which translates right into thedysfunction of being a passive
manager or being in a passivestrategy, you're taking on risks
(20:38):
that you don't necessarily wantto be taking because of the
construct of the index.
Same thing at the federal levelas the government issues more
debt and or issues longer debt,the duration of the index
extends or goes longer.
As the duration of the indexgoes longer, you're taking more
interest rate risk, and so thatinterest rate risk can have a
big impact on your returns whenI started in the business, the
(21:01):
aggregate index was around fouryears, four and a quarter years.
Today it's six, six and aquarter years, and two years
doesn't seem like a bigdifference, but basis points
times.
Duration equals percentagechange in price.
Moves are more sensitive.
Right, you have bigger outcomeson the interest rate moves than
you have in the past.
So, the way that we approach itand the way we think about
(21:22):
active management, we believephilosophically that markets
move through cycles and thereare times to take risk and times
to shun risk or to avoid risk,be return-seeking when in
opportunistic or be inpreservation of capital focus
when we're in defensivepositioning.
And the reason that we believethat is we've watched markets go
(21:43):
through cycles for 30, 40, 50years and we think portfolio
positioning has to adapt asmarkets move through cycles.
Part of the active managementpremise is that if you are going
to actively manage a portfolio,first and foremost you have to
be active on the duration side.
Again there are times to takeduration risk, there are times
(22:03):
to not take duration risk, andif you don't believe this, just
look at the bond market over thelast seven years.
It is a case study in why activemanagement is important in
terms of seeking return andpreserving capital at different
points in time.
On the credit side, our processis very focused on security
selection.
We go into the entire creditmarkets, aaa to CCC, and we look
(22:26):
for companies that arefundamentally de-levering,
companies that are generatingfree cash flow, using the free
cash flow to pay down debt,which benefits the bond holders
and, if that benefit accretes,to the equity holders the
management team's really doingtheir job.
They're doing a great work andthat's where we find the best
risk returns for our investors.
So, on an active managementbasis, we want to go and own the
(22:49):
companies that are goingthrough that deleveraging
process and we want to avoid thecompanies that are going the
other way, the other direction.
We call this the power of zero.
There are companies that arelarge issuers in the credit
markets that we will not ownbecause the management teams are
being reckless with theircapital structures.
Ryan (23:07):
It always, I think, surprises people to hear that
their passive fixed income fundis lending more money on the
basis of the companies thatborrowed more money.
And that's the criteria,essentially.
And it just doesn't really makesense to people when they hear
that.
And so you know, the idea thatmaybe you're going to pay
(23:30):
attention to whether or not acompany can repay that debt by
some of the attributes that youmentioned, I think, just rings
true to people.
It just it seems more logical.
Gibson (23:40):
Yeah, very common sense.
And I think in all of investingthere's a real important
premise that you have to stepback and really think about
things in the construct of whatare you trying to achieve as an
investor, and you can nail downwhat you're trying to achieve
and then you can look at themarket through a lens of how can
(24:02):
I achieve this within theconstruct of what's available to
me.
So, from our standpoint, we lookat it and how can we generate
the most amount of return withthe least amount of risk for our
investors, and how can we do iton a highly consistent basis so
that they can sleep well atnight in their fixed income
allocation they don't have toworry about big swings in
performance or big drawdowns.
(24:23):
They can basically use this asan anchor in their portfolio and
that's served us very, verywell.
Going back to that philosophyof markets move through cycles,
there's time to be optimisticand there's times to be
defensive and in a neutralposition.
You let that security selectionand security avoidance really
be a key driver of your alpha oryour return generation.
Ryan (24:44):
What about from maybe a higher level, from a fixed
income sector perspective?
What's your focus on kind ofrotating in and out of sectors?
Is that another way that you'reseeking to add value, or is
that less important?
Gibson (24:58):
Well, our sector allocation is really a residual
of the individual securitiesthat we're buying is really a
residual of the individualsecurities that we're buying.
And so sometimes there areperiods where we're finding a
lot of companies that arefocused on delevering, that are
all in the same sector, and sothat will create a little sector
bias in terms of our allocation.
But again, if you're findingthese companies that are
committed to delevering, thatare generating free cash flow,
(25:21):
have the ability to deliver butmost importantly, the delivering
accretes to the equity holder,that can create some sector
exposure.
But we also look at it from atop-down basis, on a sector
basis, in terms of thinkingabout where the tailwinds are
for sectors or where theheadwinds are for sectors.
A couple examples Coming out ofCOVID.
(25:43):
The auto sector was in a perfectposition to take advantage of
some of the dislocations thatwere created by COVID.
They had pricing power.
They weren't able to build upinventories during COVID so, as
things normalized, people neededto buy cars, they needed to
replace cars, pricing was high,so margins went much higher in
the automotive sector and theyhad this just wonderful tailwind
(26:04):
.
We had significant overweightsto exposure to the auto sector
General Motors, ford, forexample, fast forward a few
years, a year later, whathappens?
We have the war in Ukraine, wehave the kind of outbreak in the
Middle East.
Defense companies are really infocus.
We see a trend that there'sgoing to be massive defense
(26:26):
spending going forward becauseof geopolitical risk and what's
happening around the globe.
Go through, analyze theindividual companies, find
companies that are focused onde-levering and therefore put
them in the portfolio and havean overweight to defense,
because a nice tailwind.
Now, as we're doing that,what's happened with the
automotive sector?
Now they're facing headwinds.
(26:46):
Right.
Things have normalized,inventories have increased, used
car pricing's coming down, sosell autos, buy defense.
Now that's just an example ofone of the things we do.
Most of the return generationis gonna be focused on finding
those individual companies thatare doing the right thing with
their capital structure, thatare de-laboring.
(27:06):
That benefits the bondholdersand thus our investors.
Ryan (27:10):
Yeah, in Smith Capital.
You have done a tremendous jobin adding value over time with
that process.
So, gibson, when you're notfuriously analyzing credits of
companies, what charges yourbattery?
What do you enjoy doing outsideof the office?
Gibson (27:29):
Well, I've got a great wife.
I'm really fortunate.
I've almost 27 years marriedand I've been with her for 31
years.
I spent an enormous amount oftime with her and really have a
great relationship there.
I'm very blessed on that front.
Ryan (27:43):
I am an avid golfer.
Gibson (27:45):
I can't play enough golf .
I love it.
I could play every day.
It's just a passion of mine.
My team kind of laughs at me attimes.
There's times where the marketsare really intense and things
are really wound up and I willleave the office after the
market's closed and just go walk18 by myself and say wow you
(28:05):
enjoy that?
Ryan (28:06):
Yes, it's my reset.
It's a chance to kind ofreconnect.
Gibson (28:10):
Those are my two real passion areas.
I'm an avid reader, you know,always reading something.
I spend a lot of time readingabout culture, about leadership,
about teams.
I spend a lot of time,obviously, focusing on books
that are about markets andspending a lot of time reading
about China and a lot of timereading about globalization and
deglobalization.
I just started a book by, Ithink, paul Samuelson on
(28:34):
inflation that went back andlooked at the inflationary
periods of the 70s and 80s andreally want to just stay attuned
on what's happening in markets,want to stay attuned on kind of
the personal development sideand then really want to be just
the best leader I can possiblybe for my team.
Ryan (28:49):
Yeah, that's phenomenal.
Is it true that you can hit aball, a golf ball, farther at
elevation in a place like Denver?
People say that.
I don't know if I experiencedthat but they say the elevation
matters.
Gibson (29:02):
I think it might be the fact that there's not a lot of
humidity in Colorado, so it doesgo a little further.
You don't get that drag on theball.
Ryan (29:08):
But who knows, who knows?
Gibson (29:10):
One or the other right.
It's fun when I have peoplecome out to Colorado.
They say so do I have to clubdown?
Ryan (29:18):
And I'm like I don't know.
Gibson (29:20):
Is there a way that in Colorado it goes straighter than
more left or right?
Straighter and longer would begood.
Ryan (29:33):
Straighter and longer would be very good.
Well, that's phenomenal, youanticipated.
My final question for you isusually what books are you
reading?
And you already told me that,so I'm going to rephrase it a
little bit Are there any booksthat you would recommend viewers
of the ROI podcast, that youhaven't read yet, that are on
your reading list, that you'reconsidering reading?
Gibson (29:49):
Oh, boy, I didn't come prepared to answer that question
, but I can send you a picture.
I have a process that when Icome across a book whether it's
recommended, or I've read aboutit or I've seen a review I go to
Amazon immediately, I order itand it gets delivered and it
goes into a pile in my officeand then.
I selectively work through thatpile of books, I would again.
(30:14):
I'll send you a picture.
It's almost embarrassing.
I think I'm almost four feethigh on this pile right now
there's a lot of stuff I want toread, but with my team, what I
do every year is, when I comeacross a book that has really
impacted me whether it's on apersonal development side or a
leadership or a culture or teamside I deliver it to them every
(30:37):
year around Christmas, and sothey get a book from me every
December and then, if I findsomething mid-year, I bring it
and it's kind of requiredreading for the team.
So we get everyone on the samepage and yeah walking in the
same way and it's really a lotof fun.
It's been a great process sincewe launched the firm.
You know, one of the one of theareas that we're focused on
(30:57):
right now is a lot of the globaltrade, and I'm really using
that as a focus, and we'rehaving to go back and reread
some things about.
You know how deficits work andhow they normalize and all of
that, so that's been a lot offun.
But the one book that really,really resonated with me last
year was UnreasonableHospitality.
Ryan (31:19):
Oh, I just read that book.
Oh well then, but go ahead,continue to talk about it,
because it's a fantastic book.
Gibson (31:25):
Continue to talk about it because it's a fantastic book
.
You know, danny, danny Meyer'sprotege, you know basically
running the number onerestaurant in the world and all
the lessons of taking over andstarting restaurants and kind of
the impact that you can have onindividuals and, as the title
describes, an unreasonablehospitality.
(31:46):
they are a lot of the lessons inthe restaurant business are
very applicable in everybusiness yeah, isn't that
amazing it's touching people,it's making people feel special,
it's going the extra, you knowthe extra mile to really help
people's lives.
You know, improve and the theelement of service, which is one
of our core values, is reallycritical.
And so when I read this bookand I highlight and I take notes
(32:09):
inside the book it was reallyfun to apply our values and our
process, our vision, to what hewas writing about.
I think it's a very impactfulbook.
I think everyone should read it.
I tell my team this all thetime.
It's very hard to execute on.
You have to be very focused, youhave to be very organized, you
have to be very organized, youhave to be very disciplined and
(32:30):
it's got to come from your heart.
Yeah, you got to do it for theright reason, not just to kind
of give to get.
It has to be the servicecomponent, the element of you
want to connect with people forthe right reason.
Ryan (32:43):
Yeah, isn't that amazing yeah.
Reading that book it made methink, man, I would really love
to run a restaurant, but there'sjust no way I could ever run a
restaurant, you know that.
But the ability to connect withpeople and to show hospitality
and to make them feel seen andmake them feel just this
experience, I think, crossesover to a lot of different
(33:04):
industries crosses over to a lotof different industries.
Gibson (33:09):
It does, and one of the elements in the book that I
think is so important you hearthis statement that you know
clients first, clients first,clients first, and that's
absolutely true, right, Ifyou're going to run a business,
you don't have a business unlessyou have happy clients right
and satisfied clients and you'redelivering something to them
that matters.
But you also have to focus onyour team and that team that is
there to deliver to thoseclients.
(33:30):
And if you're not focusingthere and making sure that's a
high priority, making sure theyfeel the connection, they feel
what's important, they'redirected with what's important,
you're invariably going to letyour clients down.
And so that was the real lessonin the book that really grabbed
me was get your team right andget your team focused in the
same mindset of service and careand connection and make that
(33:52):
kind of your mantra.
Ryan (33:54):
Yeah.
Gibson (33:54):
If you make that your mantra, everything's easier.
Yeah, and that goes forinvesting too.
You think about.
You know, this is all aboutservice, right?
No, it's actually not.
I mean, this is about how youshow up, it's about how you
engage, it's about yourresponsibility, your
accountability and in the assetmanagement business, as you know
, it's critical that everyonedoes their job and does their
(34:16):
job really really well to besuccessful.
So yeah the book's got lessons.
Ryan (34:20):
It does.
Gibson (34:21):
And it's just second and third derivative lessons that
we play off of all the time.
It's a lot of fun, all right.
Ryan (34:26):
Well, gibson, I've really enjoyed this conversation,
enjoyed getting to know you.
Looking at the time, and it hasflown by.
We're at about 33 minutes now,so we'll end things there, but
hopefully we can have you on atsome point in the future to chat
a little bit more.
But thanks for coming on.
Thank you, I really like that.
Thank you for having me.
Thanks for coming on.
(34:46):
Thank you, I really liked that.
Thank you for having meAppreciate it All right, and
thanks to all of you who havejoined us as well for this
episode of the First Trust ROIpodcast.
We will see you next time you.
Hi, welcome to this episode of the First Trust ROI
podcast.
I'm Ryan Isakainen, etfstrategist at First Trust.
Today I'm joined by GibsonSmith, founder CEO and chief
investment officer at SmithCapital Investors.
Gibson and I are going to talkabout what's happening in the
(00:24):
fixed income markets.
There's a lot to talk aboutwith interest rates, with Fed
policy, with what's happening inthe credit markets and what's
happening with some of thepolicies of the new Trump
administration.
We're gonna tackle all of thatmore in this episode.
Thanks for joining us, gibson.
I'm glad we were able to makethis work on relatively short
notice.
Thanks for making the trip outto our podcast studio out here
(00:48):
in Wheaton.
Your office is in Denver,colorado.
This is our first time meetingin person, so it's great to meet
you, but I was reading on yourwebsite you've spent about 30
plus years in this industry.
Does that sound right, correct?
Time flies, doesn't it?
It?
Gibson (01:03):
does it really does?
Ryan (01:09):
Boy, has the industry evolved and changed over those
30 years.
Yeah, I just finished up my25th year at First Trust and I
tell you, it just seems like Iblinked and 25 years was gone.
Were you always a portfoliomanager?
Gibson (01:18):
No, I started my career at Morgan Stanley in New York in
the junior analyst program.
I worked in fixed income andthen did a little stint in
foreign exchange and then, on myway to get my MBA, they asked
me to stay on and kind of defera year on.
The MBA program Transferred meout to San Francisco where I
worked in institutional sales,planned on only doing it for a
(01:40):
year.
Seven years later I wasinterviewing with Janice.
So it worked out great and agreat chance to really learn
about the business, really kindof understand how kind of buy
side and sell side interact inthat sales role and really a
chance to kind of learn more,more about markets.
But in 2001, I made thedecision to leave Morgan Stanley
(02:01):
and go to Janice where they hada very small fixed income
division, about a billion and ahalf $2 billion in assets.
At the time.
Giannis was known for itsgrowth equity business and they
had about $390 billion.
Ryan (02:12):
This was 2001?
2001.
Oh man, that was Not greattiming right Well.
Gibson (02:18):
I guess, for being a fixed income guy, it was good
timing, but yeah, it workedgreat, but I went there
primarily to learn how toanalyze company, to really dig
into their bottom up fundamentalresearch process, and they had
a really vibrant and intenseresearch culture, which was
great, and I thought it would bea wonderful place to really
expand my skill set and learneven more about markets, and
(02:41):
showed up in a 2001 and 2003.
I took over for all of fixedincome and by the time I left in
2015, we had taken the assetsto about 43 billion dollars and
the team from 7 to 39 and put upsome really you know wonderful
risk adjusted returns andindustry beating performance and
built a great business there.
In 2015 I decided to leave,took a year off and spent some
(03:07):
time with my family andrecharged the batteries and had
the plan of launching thebusiness that we have today.
It's with Capital Investors.
Ryan (03:14):
Okay, wow, so that's 2001.
We're in 2025.
It's 24, 25 years.
As you look back then, comparedto now, do you think the
industry has evolved, haschanged?
I'm sure it's evolved andchanged, but any observations
that you'd make in ways thatit's changed, as a portfolio
(03:35):
manager especially yeah, it'sevolved a lot, particularly on
the fixed income side.
Gibson (03:40):
When I started in the business fairly opaque business,
all over the counter, veryrelationship driven you didn't
have transparency into pricing.
You didn't have transparencyinto what was trading, where it
was trading, how it was trading,who was doing what you know.
Fast forward to today.
We have great transparency interms of how the market is
(04:01):
functioning and flows and thattransparency has kind of leveled
the playing field in many waysfor a lot of players.
If you were a very large fixedincome participant, you had a
competitive advantage in thepast.
Fast forward today with thetransparency of information, of
trading flow, pricing,everything.
It's really leveled the playingfield in a lot of ways.
(04:22):
And the most significant changethat I see on my part is that
when you create thistransparency in markets and you
allow for the leveling of theplaying field, what it means is
that you have to be better atwhat you do.
You have to have a deeper, moreintense fundamental process and
understanding to generate alpha.
(04:43):
You also have to think aboutthe world a little bit
differently.
You have to be a little morecreative.
You have to expand what you'rewatching and what you're
focusing on.
In the early years of fixedincome you just focused on fixed
income market.
Today we have to focus on allmarkets.
We have to be very, veryattuned to what's going on
holistically.
Ryan (05:02):
Yeah, that's a really good point, and I'm going to ask you
about some of the specificviews that you hold and maybe
their impact on fixed incomemarkets.
Looking back, though, you saidyou started at Janus in 2021.
Of course, everyone who wasaround in the late 90s and early
2000s they remember the Janus20 fund and all the technology,
(05:24):
and there's been a lot ofparallels drawn between that
late 90s period, early 2000s,and the environment that we're
in today, especially in theequity markets, but there's some
crossover to fixed income andcredit and that sort of thing.
Do you see some parallelsbetween now and then or any
other historical periods thatyou think, like this is maybe
(05:45):
kind of what we're going throughis similar to what we went
through?
Gibson (05:49):
Yeah, the hard thing is we really don't have a lot of
historical analogs for what'shappening today and a lot of
that kind of because ofquantitative easing and this new
unconventional monetary policythat really kicked in in the
great financial crisis and gotobviously accentuated during
COVID.
But you can draw comparisons.
(06:10):
The dot-com period of time in01 does have a similar feel to
kind of the AI move and big datamove we're seeing today.
The biggest difference betweenthose two periods from my
perspective is that in the 01period there was just reckless
lending in the fixed incomemarkets and the high yield
(06:31):
market was lending money toanyone for various kind of
reasons, but some of the metricsthat they were using to kind of
justify the lending were insane.
Right, you remember the clicksor eyes on websites and all of
that.
There was nothing aboutprofitability.
I think there's more disciplinetoday around the lending side.
But there's still the sameconcerns around valuations in
(06:52):
the 01 versus the period today.
From a macro standpoint we'vebeen in periods where the Fed
has tried to engineer softlandings and has not necessarily
been successful.
So far it's looking pretty good.
It'll be interesting to see ifthe kind of decline in fiscal
stimulus here over the nextseveral years kind of plays out
(07:14):
and actually does put the Fed ina position to ease.
But it's really really hard togo back and find a kind of a
really tight comparison periodor a really kind of tight, shall
we say historical analog, sothat we can kind of a really
tight comparison period or areally kind of tight, shall we
say historical analog, so thatwe can kind of somewhat predict
going forward.
Ryan (07:28):
Yeah, so that is interesting.
You bring up sort of thequantitative easing and some of
the differences in the way thatthe Fed conducts their monetary
policy.
How do you, as a portfoliomanager, how do you manage
through that?
Because, as you said, there'sno real good historical analog
(07:48):
to it.
How do you sort of figure outwhat the Fed is going to do,
what the impact will be on rates, not just on the front end but
at longer term rates andmortgages and things that they
might be either buying or notbuying?
How do you deal with that, andwhat?
Also, as you answer thatquestion, what's your view on
what the Fed is likely to dokind of from here?
Gibson (08:11):
Let's work our way backwards on that.
From the Fed standpoint,they're in a bit of a pickle
where they have a real rateenvironment because of the high
Fed funds rate.
So the difference between whereFed funds is and the inflation
rate is it's a very, very highspread and they know that that's
a very restrictive rate andthey know that over time that
(08:32):
will have an impact on theeconomic growth outlook.
Obviously, high cost of capitalin the front end, where a lot
of the financing is done in theeconomy, will have an impact.
So the Fed, I think at thisstage would really like to lower
rates and normalize that realrate and get into a less
restrictive position.
But they're still fightingconcerns around inflation,
(08:54):
resurgence in inflation.
They're concerned about maybe aslower growth outlook also.
So they're really in adifficult spot and I think the
Fed really has to think aboutthe implications of potential
sticky inflation as well as thepotential for a slowing economic
outlook and they're going tohave to really be real-time
(09:14):
focused on this.
I think they would like tolower rates and normalize the
front end real rate, but I alsothink they want to be very, very
careful.
Our position is that they'remore likely to ease and probably
be put in a position wherethey're going to have to ease
more aggressively than theconsensus in the marketplace
right now.
But we go back to quantitativeeasing.
(09:36):
Managing in this new kind ofunconventional monetary policy
environment that again startedback in the great financial
crisis but really accelerated inthe COVID period of time is
challenging and I think the onething that we've really learned
from that period and kind ofreflected on.
I grew up in an Alan Greenspanenvironment where there was very
(10:00):
cryptic communication out ofthe Fed.
You didn't know what you weregoing to get.
He would surprise the marketsand really exhibit a level of
power and control over markets.
Fast forward through Bernankeand Yellen and now Powell, a Fed
that is much more transparent.
That is much more, I'll say,open in their communication and
telling you what they're goingto do.
(10:21):
I think the biggest learning forus in dealing with this new
unconventional monetary policyis believe what they're saying.
Take them at their word.
They are trying to createtransparency to lower volatility
.
So when they tell you they'regoing to do something, believe
it.
I think the greatest learningduring the COVID period of time
(10:42):
was when they came in andexpanded their balance sheet to
over $9 trillion.
I think many underestimated theimpact that that was going to
have on rates, on the economyand then ultimately the impact
on the overall kind of structureof how financial markets are
supposed to function right.
If rates are your kind offoundation of setting the
(11:04):
discount rate for valuationsacross everything, the impact is
massive and we're still kind ofworking our way through this.
We're still kind of trying tofigure out what the right
discount rate is and what is theinfluence of quantitative
easing and what is the impact ofadditional funding needs at the
federal level.
So there's a lot at play rightnow and so it's very fascinating
(11:25):
period of time.
Ryan (11:26):
Yeah, I don't remember a period of time, at least
recently, where I've seen themarket go from discounting or
expecting so many rate cuts tothen so few, and it just, you
know, it's 10 rate cuts and thenit's you know, three rate cuts
and then it's two rate cuts andthen it's three.
And it just seems like that themarket is pricing in a whole lot
(11:48):
of different scenarios in areally short period of time.
And that seems real.
I mean, I'm not a fixed incomeportfolio manager, so maybe I'm
just now paying attention to itmore, but it seems like it's
just unusual.
Gibson (11:59):
It is very unusual and I think a lot of that change in
sentiment is somewhat related tothe transparency and some of it
is related to trying to get infront of the Fed.
We have this massive amount oftransparency and information.
We have a massive amount oftransparency in terms of data.
Everyone has an analog or asystem or a structure around how
(12:23):
they bring data together andanalyze it and process it.
So there is a much fasterreaction mechanism in the market
today than there has been inthe past, and that's why you see
this very quick reaction to oh,the data says the Fed needs to
ease, we're going to get infront of the Fed more
aggressively.
At one point last year you hadFed funds trading 100 basis
(12:46):
points, maybe 120 basis points,above the two-year treasury,
which is basically the bondmarket, saying, hey, you're
coming to us, right, we knowyou're behind, so get on with it
, let's go right, and so that's.
I think some of that kind ofquick change in sentiment is
related to this transparency andinformation and the environment
that we're in, and that's notgoing to change.
(13:07):
That's going to be with usforever.
Ryan (13:10):
I think, added to that level of complexity.
Now there's a newadministration, that's you know,
kind of a different set ofpolicy tools than the old
administration.
And what everyone seems to befocused on now, as we're
recording this on March 5th, isyou know what the Trump
administration is going to dowith tariffs, in particular on
(13:30):
Mexico, and Canada and in Europeand in China and, you know,
around the world.
Is it going to be reciprocaltariffs?
Is it going to be tariffs as apolicy tool to bring about
change in border security?
There's a whole lot ofdifferent ways to think about
this.
So again, I guess my initialquestion for you is do you think
(13:51):
that that filters through tothe bond market, especially
because some people think maybeit'll be inflationary, others
would argue not, but thatclearly would have an impact on
rates.
So kind of a long question foryou.
But, gibson, what do you thinkthe impact of tariffs could be
on rates and on the bond market?
Gibson (14:09):
I think historically, we could look back at the impact
of tariffs as being somewhatstagflationary, in that you have
a initial impulse of higherprices.
The higher prices could be arestraint on consumption, which
should lead to lower growth.
I think that's the simple wayof thinking about tariffs.
The truth is it depends on thereaction mechanism, how long the
(14:33):
term of the tariff is.
There are a lot of inputs intoit.
The longer and the higher thetariff, the greater the risk to
inflationary pressure, and thelonger that that tariff is in
place, the more sustainable thatinflationary pressure will be.
And the longer it's in place,the more restrictive it will be
(14:54):
on consumption and potentiallygrowth.
So that's how the lens we'relooking through it.
If we can actually say with anylevel of confidence that you
know tariffs are here to stay,or they're going to be long
duration, or they're going to beshort duration, or they're just
a negotiation tool, we don'tknow.
We're learning as we go.
We know Trump is the greatnegotiator, he prides himself on
(15:17):
it and we heard last night inthe state of the union address
that he's serious.
I think the market was somewhatskeptical, thought he was a lot
of bravado and not a lot ofexecution, and now what we're
realizing is he is in executionmode.
He is trying to reset some ofthe imbalances that exist in our
(15:38):
trade policy, really some ofthe imbalances that exist in
general in Washington and inother areas and the market's a
little uncomfortable with it andI understand that it's change.
Some of the change is going tobe fantastic, some of it's
probably not going to be.
But markets like certainty,markets like to know what's
going to play out and then to beable to forecast what that
(16:00):
means.
Right now we're kind of in astate of flux and trying to
figure it out.
Ryan (16:03):
Yeah, even some of what in your explanation I thought was
fantastic.
But I'm listening to sort ofwhat could occur.
And if tariffs cause inflationto maybe ratchet up and that
causes consumption to come down,you've got inflation going up,
the economy getting weaker.
What does the Fed do in thatsort of environment?
Gibson (16:24):
Yeah, unfortunately, the Fed is in somewhat reactionary
mode.
They have to wait and see howit plays out too.
I'm sure they have hundreds, ifnot thousands, of people
building models, trying toforecast what this is all gonna
mean, and the reality is, mostmodel building exercises,
particularly around economicgrowth projections and or
inflation projections, fallshort.
Right, they always have nuanceto them or there's too many
(16:46):
inputs, and the variability isvery, very high.
The Fed's going to have toreact to this, and we have to
step back a little bit, though.
I mean, markets get myopicallyfocused on certain things at
certain points in time, and itis largely influenced by what's
on the TV or what's in thenewspaper I guess today's terms,
what's on the website, what'sthe consensus?
Ryan (17:08):
What's on Twitter.
What's on X.
Gibson (17:10):
Whatever is driving attention, right, but when we
step back and we think aboutwhat is playing out in really
the global economy, where we canjust focus on the domestic
economy, we still have a lot ofdisinflationary pressures at
play.
You've got demographics, you'vegot technology implementation.
I mean to think that big dataand AI are not going to have a
(17:33):
huge impact on the economy issomewhat foolish.
This is a real deal in terms ofimpact.
Ryan (17:40):
And then we have a debt overhang.
Gibson (17:41):
I mean, we can't lose sight of the fact that we are a
levered country and there are alot of levered countries around
the globe and that debt overhangis disinflationary.
So when we think about thosethree kind of power themes that
are going to be with us forprobably two or three decades,
maybe two at a minimum, and thenwe have the other side, which
is this deglobalization or thisreset that we're going through,
(18:05):
I tend to think this side's alot more powerful than just this
.
Ryan (18:09):
And so in the short term.
Gibson (18:10):
Sure, little concern, little repricing In the long
term.
We're still in adisinflationary environment and
a normalization of the inflationrate from the COVID period of
time.
Ryan (18:19):
So maybe some short-term pain for long-term gain sort of
scenario, some short-term painfor long-term gain sort of
scenario.
So, okay, amidst all thisconfusion and all the
complicating factors, you are anactive manager.
The ETF industry is.
It's really evolving in waysthat maybe people wouldn't have
predicted 10 years ago.
(18:40):
When I look at the issuance ofnew funds over the last five
years, it has surged in terms ofthe number of actively managed
strategies, both on fixed income, which is a little bit before
equities, but then equities aswell.
So you know you're again anactive manager.
How do you, as an activemanager, look at some of the
(19:01):
passive strategies and maybewhat's your value add?
How do you add value comparedto just a passive approach?
Gibson (19:09):
Yeah, the passive strategy is obviously
replicating the returns ortrying to replicate the returns
of the indices.
And when we look at the indices,there is a natural dysfunction
that exists in the fixed incomeindices and that they are
largely market cap indices.
So your companies that areissuing the most debt take up
larger weighting positionswithin the index and as we go
(19:33):
through the evolution or time,the size of the debt at the
government level or the size ofissuance at the securitized
level, or mortgages or thegrowth in corporate issuance,
really dictates kind of how thatindex evolves and changes.
If we think about that, what thekind of call it negative
impacts or what the badconsequences of having a market
(19:57):
cap index is that on the creditside, for example, your largest
issuers could be companies thatare deteriorating fundamentally,
and so if you're a passivemanager, you're getting greater
exposure to a company thatactually is not necessarily
doing the right thing with theirbalance sheet and you're, in
(20:18):
essence, getting in a deeperposition in harm's way of things
not going well, more leverage,more risk in the corporate
structure, so on and so forth.
So that's a natural dysfunctionof the construct of the indices,
which translates right into thedysfunction of being a passive
manager or being in a passivestrategy, you're taking on risks
(20:38):
that you don't necessarily wantto be taking because of the
construct of the index.
Same thing at the federal levelas the government issues more
debt and or issues longer debt,the duration of the index
extends or goes longer.
As the duration of the indexgoes longer, you're taking more
interest rate risk, and so thatinterest rate risk can have a
big impact on your returns whenI started in the business, the
(21:01):
aggregate index was around fouryears, four and a quarter years.
Today it's six, six and aquarter years, and two years
doesn't seem like a bigdifference, but basis points
times.
Duration equals percentagechange in price.
Moves are more sensitive.
Right, you have bigger outcomeson the interest rate moves than
you have in the past.
So, the way that we approach itand the way we think about
(21:22):
active management, we believephilosophically that markets
move through cycles and thereare times to take risk and times
to shun risk or to avoid risk,be return-seeking when in
opportunistic or be inpreservation of capital focus
when we're in defensivepositioning.
And the reason that we believethat is we've watched markets go
(21:43):
through cycles for 30, 40, 50years and we think portfolio
positioning has to adapt asmarkets move through cycles.
Part of the active managementpremise is that if you are going
to actively manage a portfolio,first and foremost you have to
be active on the duration side.
Again there are times to takeduration risk, there are times
(22:03):
to not take duration risk, andif you don't believe this, just
look at the bond market over thelast seven years.
It is a case study in why activemanagement is important in
terms of seeking return andpreserving capital at different
points in time.
On the credit side, our processis very focused on security
selection.
We go into the entire creditmarkets, aaa to CCC, and we look
(22:26):
for companies that arefundamentally de-levering,
companies that are generatingfree cash flow, using the free
cash flow to pay down debt,which benefits the bond holders
and, if that benefit accretes,to the equity holders the
management team's really doingtheir job.
They're doing a great work andthat's where we find the best
risk returns for our investors.
So, on an active managementbasis, we want to go and own the
(22:49):
companies that are goingthrough that deleveraging
process and we want to avoid thecompanies that are going the
other way, the other direction.
We call this the power of zero.
There are companies that arelarge issuers in the credit
markets that we will not ownbecause the management teams are
being reckless with theircapital structures.
Ryan (23:07):
It always, I think, surprises people to hear that
their passive fixed income fundis lending more money on the
basis of the companies thatborrowed more money.
And that's the criteria,essentially.
And it just doesn't really makesense to people when they hear
that.
And so you know, the idea thatmaybe you're going to pay
(23:30):
attention to whether or not acompany can repay that debt by
some of the attributes that youmentioned, I think, just rings
true to people.
It just it seems more logical.
Gibson (23:40):
Yeah, very common sense.
And I think in all of investingthere's a real important
premise that you have to stepback and really think about
things in the construct of whatare you trying to achieve as an
investor, and you can nail downwhat you're trying to achieve
and then you can look at themarket through a lens of how can
(24:02):
I achieve this within theconstruct of what's available to
me.
So, from our standpoint, we lookat it and how can we generate
the most amount of return withthe least amount of risk for our
investors, and how can we do iton a highly consistent basis so
that they can sleep well atnight in their fixed income
allocation they don't have toworry about big swings in
performance or big drawdowns.
(24:23):
They can basically use this asan anchor in their portfolio and
that's served us very, verywell.
Going back to that philosophyof markets move through cycles,
there's time to be optimisticand there's times to be
defensive and in a neutralposition.
You let that security selectionand security avoidance really
be a key driver of your alpha oryour return generation.
Ryan (24:44):
What about from maybe a higher level, from a fixed
income sector perspective?
What's your focus on kind ofrotating in and out of sectors?
Is that another way that you'reseeking to add value, or is
that less important?
Gibson (24:58):
Well, our sector allocation is really a residual
of the individual securitiesthat we're buying is really a
residual of the individualsecurities that we're buying.
And so sometimes there areperiods where we're finding a
lot of companies that arefocused on delevering, that are
all in the same sector, and sothat will create a little sector
bias in terms of our allocation.
But again, if you're findingthese companies that are
committed to delevering, thatare generating free cash flow,
(25:21):
have the ability to deliver butmost importantly, the delivering
accretes to the equity holder,that can create some sector
exposure.
But we also look at it from atop-down basis, on a sector
basis, in terms of thinkingabout where the tailwinds are
for sectors or where theheadwinds are for sectors.
A couple examples Coming out ofCOVID.
(25:43):
The auto sector was in a perfectposition to take advantage of
some of the dislocations thatwere created by COVID.
They had pricing power.
They weren't able to build upinventories during COVID so, as
things normalized, people neededto buy cars, they needed to
replace cars, pricing was high,so margins went much higher in
the automotive sector and theyhad this just wonderful tailwind
(26:04):
.
We had significant overweightsto exposure to the auto sector
General Motors, ford, forexample, fast forward a few
years, a year later, whathappens?
We have the war in Ukraine, wehave the kind of outbreak in the
Middle East.
Defense companies are really infocus.
We see a trend that there'sgoing to be massive defense
(26:26):
spending going forward becauseof geopolitical risk and what's
happening around the globe.
Go through, analyze theindividual companies, find
companies that are focused onde-levering and therefore put
them in the portfolio and havean overweight to defense,
because a nice tailwind.
Now, as we're doing that,what's happened with the
automotive sector?
Now they're facing headwinds.
(26:46):
Right.
Things have normalized,inventories have increased, used
car pricing's coming down, sosell autos, buy defense.
Now that's just an example ofone of the things we do.
Most of the return generationis gonna be focused on finding
those individual companies thatare doing the right thing with
their capital structure, thatare de-laboring.
(27:06):
That benefits the bondholdersand thus our investors.
Ryan (27:10):
Yeah, in Smith Capital.
You have done a tremendous jobin adding value over time with
that process.
So, gibson, when you're notfuriously analyzing credits of
companies, what charges yourbattery?
What do you enjoy doing outsideof the office?
Gibson (27:29):
Well, I've got a great wife.
I'm really fortunate.
I've almost 27 years marriedand I've been with her for 31
years.
I spent an enormous amount oftime with her and really have a
great relationship there.
I'm very blessed on that front.
Ryan (27:43):
I am an avid golfer.
Gibson (27:45):
I can't play enough golf .
I love it.
I could play every day.
It's just a passion of mine.
My team kind of laughs at me attimes.
There's times where the marketsare really intense and things
are really wound up and I willleave the office after the
market's closed and just go walk18 by myself and say wow you
(28:05):
enjoy that?
Ryan (28:06):
Yes, it's my reset.
It's a chance to kind ofreconnect.
Gibson (28:10):
Those are my two real passion areas.
I'm an avid reader, you know,always reading something.
I spend a lot of time readingabout culture, about leadership,
about teams.
I spend a lot of time,obviously, focusing on books
that are about markets andspending a lot of time reading
about China and a lot of timereading about globalization and
deglobalization.
I just started a book by, Ithink, paul Samuelson on
(28:34):
inflation that went back andlooked at the inflationary
periods of the 70s and 80s andreally want to just stay attuned
on what's happening in markets,want to stay attuned on kind of
the personal development sideand then really want to be just
the best leader I can possiblybe for my team.
Ryan (28:49):
Yeah, that's phenomenal.
Is it true that you can hit aball, a golf ball, farther at
elevation in a place like Denver?
People say that.
I don't know if I experiencedthat but they say the elevation
matters.
Gibson (29:02):
I think it might be the fact that there's not a lot of
humidity in Colorado, so it doesgo a little further.
You don't get that drag on theball.
Ryan (29:08):
But who knows, who knows?
Gibson (29:10):
One or the other right.
It's fun when I have peoplecome out to Colorado.
They say so do I have to clubdown?
Ryan (29:18):
And I'm like I don't know.
Gibson (29:20):
Is there a way that in Colorado it goes straighter than
more left or right?
Straighter and longer would begood.
Ryan (29:33):
Straighter and longer would be very good.
Well, that's phenomenal, youanticipated.
My final question for you isusually what books are you
reading?
And you already told me that,so I'm going to rephrase it a
little bit Are there any booksthat you would recommend viewers
of the ROI podcast, that youhaven't read yet, that are on
your reading list, that you'reconsidering reading?
Gibson (29:49):
Oh, boy, I didn't come prepared to answer that question
, but I can send you a picture.
I have a process that when Icome across a book whether it's
recommended, or I've read aboutit or I've seen a review I go to
Amazon immediately, I order itand it gets delivered and it
goes into a pile in my officeand then.
I selectively work through thatpile of books, I would again.
(30:14):
I'll send you a picture.
It's almost embarrassing.
I think I'm almost four feethigh on this pile right now
there's a lot of stuff I want toread, but with my team, what I
do every year is, when I comeacross a book that has really
impacted me whether it's on apersonal development side or a
leadership or a culture or teamside I deliver it to them every
(30:37):
year around Christmas, and sothey get a book from me every
December and then, if I findsomething mid-year, I bring it
and it's kind of requiredreading for the team.
So we get everyone on the samepage and yeah walking in the
same way and it's really a lotof fun.
It's been a great process sincewe launched the firm.
You know, one of the one of theareas that we're focused on
(30:57):
right now is a lot of the globaltrade, and I'm really using
that as a focus, and we'rehaving to go back and reread
some things about.
You know how deficits work andhow they normalize and all of
that, so that's been a lot offun.
But the one book that really,really resonated with me last
year was UnreasonableHospitality.
Ryan (31:19):
Oh, I just read that book.
Oh well then, but go ahead,continue to talk about it,
because it's a fantastic book.
Gibson (31:25):
Continue to talk about it because it's a fantastic book
.
You know, danny, danny Meyer'sprotege, you know basically
running the number onerestaurant in the world and all
the lessons of taking over andstarting restaurants and kind of
the impact that you can have onindividuals and, as the title
describes, an unreasonablehospitality.
(31:46):
they are a lot of the lessons inthe restaurant business are
very applicable in everybusiness yeah, isn't that
amazing it's touching people,it's making people feel special,
it's going the extra, you knowthe extra mile to really help
people's lives.
You know, improve and the theelement of service, which is one
of our core values, is reallycritical.
And so when I read this bookand I highlight and I take notes
(32:09):
inside the book it was reallyfun to apply our values and our
process, our vision, to what hewas writing about.
I think it's a very impactfulbook.
I think everyone should read it.
I tell my team this all thetime.
It's very hard to execute on.
You have to be very focused, youhave to be very organized, you
have to be very organized, youhave to be very disciplined and
(32:30):
it's got to come from your heart.
Yeah, you got to do it for theright reason, not just to kind
of give to get.
It has to be the servicecomponent, the element of you
want to connect with people forthe right reason.
Ryan (32:43):
Yeah, isn't that amazing yeah.
Reading that book it made methink, man, I would really love
to run a restaurant, but there'sjust no way I could ever run a
restaurant, you know that.
But the ability to connect withpeople and to show hospitality
and to make them feel seen andmake them feel just this
experience, I think, crossesover to a lot of different
(33:04):
industries crosses over to a lotof different industries.
Gibson (33:09):
It does, and one of the elements in the book that I
think is so important you hearthis statement that you know
clients first, clients first,clients first, and that's
absolutely true, right, Ifyou're going to run a business,
you don't have a business unlessyou have happy clients right
and satisfied clients and you'redelivering something to them
that matters.
But you also have to focus onyour team and that team that is
there to deliver to thoseclients.
(33:30):
And if you're not focusingthere and making sure that's a
high priority, making sure theyfeel the connection, they feel
what's important, they'redirected with what's important,
you're invariably going to letyour clients down.
And so that was the real lessonin the book that really grabbed
me was get your team right andget your team focused in the
same mindset of service and careand connection and make that
(33:52):
kind of your mantra.
Ryan (33:54):
Yeah.
Gibson (33:54):
If you make that your mantra, everything's easier.
Yeah, and that goes forinvesting too.
You think about.
You know, this is all aboutservice, right?
No, it's actually not.
I mean, this is about how youshow up, it's about how you
engage, it's about yourresponsibility, your
accountability and in the assetmanagement business, as you know
, it's critical that everyonedoes their job and does their
(34:16):
job really really well to besuccessful.
So yeah the book's got lessons.
Ryan (34:20):
It does.
Gibson (34:21):
And it's just second and third derivative lessons that
we play off of all the time.
It's a lot of fun, all right.
Ryan (34:26):
Well, gibson, I've really enjoyed this conversation,
enjoyed getting to know you.
Looking at the time, and it hasflown by.
We're at about 33 minutes now,so we'll end things there, but
hopefully we can have you on atsome point in the future to chat
a little bit more.
But thanks for coming on.
Thank you, I really like that.
Thank you for having me.
Thanks for coming on.
(34:46):
Thank you, I really liked that.
Thank you for having meAppreciate it All right, and
thanks to all of you who havejoined us as well for this
episode of the First Trust ROIpodcast.
We will see you next time you.
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