March 20, 2025 • 52 mins
Amid rising market turbulence, finding stable income sources has become increasingly crucial for investors seeking portfolio resilience. In this compelling discussion, Jay Hatfield draws on his 35 years of Wall Street experience to illuminate the path forward for income-focused investing strategies that can weather economic uncertainty.
Hatfield challenges conventional wisdom with his razor-sharp macroeconomic analysis, demonstrating why tariffs are actually deflationary rather than inflationary and how this misunderstanding creates opportunities for well-positioned investors. His forecast that the 10-year Treasury will drop to 3.75% as the Federal Reserve finally acknowledges economic slowdown provides a framework for strategic positioning across asset classes.
The discussion reveals why traditional S&P 500 portfolios yielding just 1.3% simply can't generate meaningful income in today's environment. Instead, Hatfield outlines a comprehensive approach using preferred stocks (PFFA yielding ~9%), high-yield bonds (BNDS yielding ~8%), dividend-paying stocks, and reformed MLPs to create substantial income streams while managing risk. His insights on small caps are particularly compelling – currently trading at significant discounts to large caps, they offer both attractive income and growth potential as rates decline and M&A activity accelerates.
What sets this conversation apart is Hatfield's practical approach to portfolio construction. Most investors unknowingly carry excessive technology exposure through their index funds and individual holdings, leaving them vulnerable to tech sector volatility. By strategically incorporating income-producing assets, investors can create more balanced portfolios that generate consistent returns regardless of market conditions. As Hatfield notes, "staying out of trouble is about 90% of the battle" when it comes to long-term investment success.
DISCLAIMER – PLEASE READ: This is a sponsored episode for which Lead-Lag Publishing, LLC has been paid a fee. Lead-Lag Publishing, LLC does not guarantee the accuracy or completeness of the information provided in the episode or make any representation as to its quality. All statements and expressions provided in this episode are the sole opinion of Infrastructure Capital and Lead-Lag Publishing, LLC expressly disclaims any responsibility for action taken in connection with the information provided in the discussion. The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.
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Episode Transcript
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Speaker 1 (00:00):
For those that are starting to come in here into
the webinar.
Give us just a second to makesure everybody comes in.
I think this is going to beactually quite informative from
a lot of perspectives.
Jay, candidly, has been spot ona lot of his macro calls and
his funds is quite strong.
I think this will be veryeye-opening from the perspective
of how to think aboutgenerating income in an
(00:20):
environment which isincreasingly getting more
volatile, which personally Ienjoy.
I will be popping in and out.
This is Jay's show.
If you don't know Jay Halffield, you unequivocally should know
Jay Halffield.
I've been doing more of thesewith him and I've very much
gotten to enjoy his view onmarkets.
So, Jay, this is all you.
As you can tell, he's notexactly in his office right now,
nor is on a virtual backgroundbut you're getting the full,
(00:49):
unfiltered J-Half right there.
Speaker 2 (00:50):
Thank you, michael.
Thanks everybody for joining.
So we're going to go through anoverview of our fund, spend a
fair amount of time on macrobecause I know everybody's
pretty concerned about macroright now I think maybe a little
bit over-concerned and thenjust talk a little bit about
some of our funds that arerelevant.
And then just talk a little bitabout some of our funds that
are relevant.
So, just in terms of our fund,we believe in investing in super
(01:15):
high quality companies, a lotof time in old economy
industries with a lot of assets,particularly on the credit side
.
We also believe in super highquality large and small cap
stocks, but specifically they'reprofitable, trading at
reasonable multiples, have lowleverage and typically pay
dividends.
(01:35):
And we think if you stick tothat philosophy either by buying
the funds or doing it yourselfyou will stay out of trouble.
Either by buying no funds ordoing it yourself, you will stay
out of trouble, and staying outof trouble is about probably
90% of the battle.
If you look at your returns onsome of your portfolios and if
(02:00):
you have some wipeouts or somehuge decliners, you can wipe out
a lot of solid income, as I'vebeen on Wall Street for 35 years
.
I have a CPA from Ernst Young,undergrad degree in monetary
economics from UC Davis, mba infinance with distinction from
Wharton.
15 years as an investmentbanker, mostly at Morgan Stanley
(02:20):
.
I've worked for two hedge fundsand then launched my own money
management company in 2018,founded an MLP and then launched
our six ETFs, the first beingAMZA in 2014.
So we have the best way to thinkabout our funds.
(02:41):
We have three that are in fixedincome.
The best way to think about ourfunds we have three that are in
fixed income.
So the biggest is PFFA.
That's a preferred stock fund.
Bnds is a bond fund.
That's similar to PFFA but it'ssenior.
It's a lower risk, lessvolatility.
(03:01):
Scap is our small cap dividendincome fund.
We do write some index callsthere.
Icaps are um large cap dividendstrategy.
Uh, we do write a lot of shortterm individual calls.
You can do that with large cap,not small cap.
The AMCA is our um is our MLPfund and we do also have PFFR.
(03:28):
If some of you own that.
That's an index read preferredfund.
And we did recently launch ourhedge fund.
In case anybody's interested andis an accredited investor and
looking at those materials, butwe don't usually talk about that
in the general audience verymuch.
So in terms of the market, I'mnot going to go through so we
don't usually talk about that inthe general audience very much.
So in terms of the market, I'mnot going to go through every
(03:51):
one of these slides, but wherewe've been 100% differentiated
is that, instead of followingthe political talking points
that the Trump administration'spolicies are inflationary, we
actually do what's calledeconomic analysis on those
policies.
So, specifically, the mostimportant is tariffs.
Tariffs do not cause inflation,they're actually deflationary
(04:17):
and, most importantly, they'rerecessionary.
So they're sales taxes, theequivalent of a sales tax.
So if you think about a salestax, like an extreme sales tax,
say 50%, what would the economicimpact of that be?
Well, it'd be highlydeflationary.
You're taking money away fromthe consumer paying down
government debt.
That's very deflationary.
(04:39):
The demand would dropsignificantly and the people,
like the Fed, would look throughthe one-time price increase
because it's never going to berepeated at 50%.
So, whether it's 50% or 5% or10%, that's the way they analyze
tariffs.
So that's at the margin.
(05:07):
Policy of deporting criminalsand or recent immigrants who
aren't working is mildlydeflation, irrelevantly
deflationary.
But the whole notion that it'sinflationary was ridiculous.
Inflationary, it was ridiculous.
Also, if you listen to theTrump administration which a lot
of people don't prefer to do,but if you do you'll hear that
(05:28):
they're trying to admit morewealthy investors they talked
about that yesterday and alsoH-1B immigrants.
Those all are highly trained,are deflationary, do increase
economic growth.
So it's important to try toleave your politics behind and
just analyze what the actualpolicies are.
(05:51):
And then the other element abouttariffs that's critical to us
is it does raise revenue.
It could raise up to $2trillion of revenue that could
be used to fund tax I'm sorry,corporate tax decreases and
those are the taxes that matter.
So I wouldn't focus too much onthe individual taxes or the
tariffs.
What matters is corporate taxes.
(06:13):
If you're a stock investor, soif there's a cut in the
corporate tax rate to 18, ourtarget goes up by 400 S&P points
because earnings estimates goesup.
So this is not like a politicalsubjective argument.
Simply, the companies earn more.
Plus, say, multiple stockprices go way higher and we saw
(06:34):
that in 2017.
There was a lot of deniers backthen.
President Trump then was highlyunpopular versus now just sort
of 50-50 unpopular.
So you know we do have theother tailwinds.
So even if we don't get quiteto 18% deregulating the
antitrust side of it, otherderegulation is all positive for
(07:00):
multiples and stock prices.
So we're comfortable formultiples and stock prices.
So we're comfortable.
It's unclear exactly where thetax bill is going, but I think
there will be some significantcorporate tax relief and we
think that we're bullish on themarket.
Short term we're neutralbecause it's not earning season.
(07:21):
That's a simple way to tradethe market.
It could long when it's notearning season.
That's a simple way to tradethe market.
You get long when it's earningseason and you get less long or
not short, but less long whenit's not earning season.
So it's not earning season atnvidia yesterday, but that's not
earning season.
That's one data point.
Wasn't fabulous, so salesforcewasn't was negative, so you're
(07:42):
saying it took off today.
But we're really in a newsvacuum.
We are bullish about PCE corebeing in line with expectations
at 0.3.
That means it rolls down to 2.6.
We think that clears the wayfor the Fed to cut rates,
because we do think the economyis very slow.
We have ultra tight Fed policy,as evidenced by not only the
(08:06):
fact that the yield curve isinverted but also by the fact
money supply is growing anegative 5%, which is
deflationary.
Inflation mark-to-market on areal-time basis is below the
Fed's 2%, both on CPI and PCCorp percent, both on CPI and PC
(08:27):
Corp.
And so the combination of tightmonetary policy and then these
deflationary slash, recessionarypolicies of the Trump
administration, tariffs, butalso Doge job cuts up to 300,000
, that's negative for economicgrowth.
We're hopeful and expect the Fedto figure this out.
It seems like they're slowlyfiguring out Still to get three
(08:47):
rate cuts.
That's getting price in themarket.
So everybody's coming around toour view.
We're about like 56 base points, so not that far from three
rate cuts.
So we get to three grade cuts.
We don't think we'll have arecession.
And then the last kind of macropoint is that the best cure for
higher rates is lower rates.
So we had this non-consensusview and rates are 480.
(09:11):
Now they're at 430.
Well, that's a lot better forthe economy, it's better for the
housing sector, it's better forthe auto sector.
So if the market justanticipates Fed cuts, then
that's good enough to keep us inthe 2% growth area.
The market doesn't anticipatemaybe one to two.
We don't see a recessionbecause of tech spending being
(09:32):
very strong.
We do think M&A volume is goingto accelerate throughout the
year.
It takes a long time to get M&Adeals announced.
It sounds easy but it's not.
It takes six to nine months.
So we're bullish on investmentbanks and also on small caps
because they tend to get boughtout more than large caps, just
(09:53):
for obvious reasons.
It's easier, it's more creative, easier to get the deal done,
easier to finance.
So we're bullish on small caps.
Talked about this already Fed'sway too tight Administration
policies are recessionary.
Adds up to slower growth.
That's becoming consensus overthe last couple weeks.
(10:15):
We're talking about it a monthand a month and a half ago.
So these are the rate cuts.
This is just like a few daysout of date.
So it says 37 base point cut inthe US, but that's up to 53.
So it's been tracking rapidlyhigher.
But you can see we're going tohave global rate cuts.
(10:36):
Global monetary policy mattersbecause rates are global.
So we think it's a bullish timeto invest, notwithstanding
today's tech wreck.
This is on our website.
So we've been among the mostaccurate forecasters after the
last four years, over the lastfour years.
But we don't have some secretmodel.
(10:59):
Our key advantage we're givingyou the keys to the kingdom.
Our key advantage we're givingyou the keys to the kingdom.
Our key advantage is, we thinkthe money supply matters for
both inflation and also economicgrowth.
And so if you just follow likethis monetary base, you can see
it peaked in late 21.
When global central banks aretightening, you want to be out
of the market.
Right now they're loosening,our Fed's going too slowly but
(11:23):
still bullish time.
And then you have deregulation,us lower tax rates, so pretty
easy to stay long and prettynormal to have these pullbacks
when we're not entering season,so we're not concerned about it.
Uh, six thousand targets.
So that means right now, in theshort run.
So market goes over sixthousand.
I mean sell it sell, and thenyou know, if it goes to 5,900,
(11:44):
5,800, 5,700, it becomes moreattractive.
Then be cautious, though,because the next catalyst, well,
tomorrow's PC, but after thatit's really earnings season,
which is really April.
So we've got a fairly longperiod of time before we get an
obvious catalyst or rally.
So it's okay to be cautious.
Now the Eurozone's a differentstory.
(12:07):
They're definitely cuttingtheir disaster inflations down
there.
They blew up their economy withthe poor energy transition.
Ukraine war, um over regulationunder savings.
So you're.
The reason we put this here isthat europe and the rest of the
world has to cut.
The US can get away with notcutting, probably so that's
(12:30):
bullish for global equities andactually European stock's been
doing well.
We don't necessarily recommendthat, but they got super cheap
so they're rallying.
We talked about this.
I'll give it just a little bitmore detail.
On bonds, we are forecasting10-year.
It's now at 430, goes to 375.
We estimate the terminal Fedfunds rates 275.
(12:54):
That's normal, that's inflationplus about 50 to 75 base point
premium, and then the normalpremium between the Fed funds
and the 10-year is 100 basepoints.
So 275 gives you 375.
That call looked a lot worsewhen the 10-year was at 480.
I do think to get below fourwe're going to have to get the
(13:18):
Fed to finally figure out theeconomy's weakening.
The Fed acts as if its thirdmandate is to be behind the
curve, so they may take them alittle while, but that's going
to be the catalyst probably thattakes us down below this 430
level.
Everybody thinks and alwaysobsesses about the US budget
(13:38):
deficit and other problems inthe US, but they don't recognize
it's a global bond market andall of those negative things are
already reflected in our bondyields and so we think
particularly if the Trumpadministration is more fiscally
prudent which they're makingnoises about that that our rates
could drop down to like Canada,which is obviously a similar
(14:03):
economy, and they're 10 years atthree, so that would be a lot
lower than even our forecast.
But it's important to keep inmind it's a global bond market
and US rates are extremelycompetitive.
Just another chart of howterrible Europe was.
The other thing that's slowingthe real economy is just high
(14:24):
mortgage rates.
Anything over seven is going tochoke off.
Housing Housing is already in arecession and this chart says
1.8 or 1.79 times more expensiveto buy a home than rent.
So if you're a new couple andthinking, oh, it's a great time
to buy an apartment, and thenyou go look at the apartment and
(14:45):
say, oh, maybe it's not a greattime because it costs 1.8 times
our rent to service a similarapartment.
So that's why the old economyis slowing.
Commercial construction isslowing, offset by tech spending
, but we are definitely slowing.
This is a good chart because ifyou listen to television which
I recommend um, everybody willobsess about the consumer and
(15:08):
say, oh, the consumer istwo-thirds, so that's what
drives recessions, and so we'reeither predicting recession or
not because of the consumer.
But what they're missing is allrecessions are caused not by the
consumer.
The average drop in consumptionduring recession is zero, so
it's very resilient, but theaverage drop in investment is
13%, so that smaller investmentis about 20% of the US economy.
(15:32):
So that smaller component,being so much more volatile,
creates recessions.
It comes from Fed policy.
They hammered the housing andand construction markets just
like they are now.
That produces layoffs, whichthen produces less consumer
spending, and that createsrecession.
So that's a normal patternwhich very few people seem to
(15:54):
appreciate, but that's why we'reobsessed with investment.
It was was down last quarter.
That's negative, continues tobe negative on the old economy
side, so we think it's prettyclear growth slowing rates will
go lower.
We still don't think there'sgoing to be recession, though,
mostly because of tech spendingand also, hopefully, the Fed
(16:17):
cuts rates and also, like I said, the markets cut rates for the
Fed by 50 base points, so thatshould help stabilize the
housing market.
And this is just our index thatI mentioned.
You get this on the website and, if you look at it closely,
cpi-r, so that's real-time rentstracked from below market rates
(16:41):
or, I'm sorry, below the CPIshelter calculation, which is
about two years behind what themarket's doing.
It's important to look atreal-time inflation and, by the
way, it's important to look atit both on the upside and
downside.
Right now we're on the downside.
You can see from the chart thatthe Fed had followed CPI-R on
the way up, they would haveraised rates way sooner.
(17:02):
So they really get damaged andwe've been recommending the Fed
reform their policy frameworkbecause they focus on this index
is two years behind, so theymiss the inflation increasing
and they also miss it decreasing, so they're always behind the
curve.
So then getting into our fundsand how to build an income
(17:26):
portfolio.
So obviously, to build anincome portfolio, you can see
the yields here on the S&P isonly 1.3%.
So if you buy S&P equivalents,your portfolio yield is going to
be about 1.3%, and that'sclearly, unless you're a
billionaire, your portfolioyield is going to be about 1.3.
And that's clearly, unlessyou're a billionaire, not enough
to move the needle from anincome perspective.
(17:46):
And so if you want more income,you have to layer in some of
these other securities that areequities to get equity upside,
but more income, but the otherthing to pay attention to is and
this is done in order of riskso utilities have the least
market risk, down to the S&P 500, which has a normal market risk
(18:10):
.
And so if you look at theutility sector, it's highly
correlated, though, to bonds.
So you're basically takinginterest rate risk with very low
about 50% correlation to themarket.
Reits are similar 81%correlated to bonds, 57% to the
market.
Same with telecom.
(18:31):
That's really AT&T and thosetype MLPs.
We have an MLP fund, amca.
That's an interesting assetclass because right now it has
very low beta the s&p 0.3 and nointerest rate risk in today's
market at least large capdividend stocks.
So that's like icap or largecap dividend fund.
(18:56):
So negative correlation to bonds, you're not taking industry
risk and lower than the marketat 0.82 and higher yield.
If you just buy the index atfour, our funds is closer to
eight, and then you can see howthat obviously compares to the
(19:18):
S&P right now a lot of times isnegative, but because of 2022,
has just a 25% correlation tothe market.
Same thing.
So you can be in all equitiesand build pretty decent income
from just using equities, but alot of more conservative
(19:39):
investors want to use some bondsas well, and this, like the
prior chart, is in order of risk, market risk lowest market risk
being on the top.
But also the inverse is true,because typically the ones at
the top have the highestcorrelation to bonds.
So treasuries obviously have ahigh correlation to themselves.
(20:01):
So that's one, and a lowcorrelation to the market at 0.2
.
Municipals similar but not quiteas high 0.58, 1.0, 0.19.
Corporate bonds a lot ofindustry risk and more beta to
the stock market.
Preferred stocks PFFAs areflagship funds.
(20:23):
The current yield is 6.6 forthe index, but our fund's 9.
Correlation of government bonds0.79.
So those have well,particularly the index, more
than PFFA as interest rate riskand modest risk to the S&P at
0.6.
High-yield bonds BNGS is ourfund.
(20:44):
There we have a higher yield ateight.
Similar risk characteristics.
Low sensitivity to bondsbecause they're getting higher
yields, that's less sensitive tobonds.
Lower sensitivity to the S&Plower sensitivity to the S&P and
also, just on an absolute basis, high yield bonds have quite
(21:09):
low volatility at 9%.
So you know, below the S&P,well below the S&P, like a
quarter of the S&P and seniorloans we don't have fund there,
but they were a good asset classto be when rates are going up,
have low interest ratesensitivity because they're
floating and pretty lowsensitivity to the S&P.
So that's definitely worthconsidering as an asset class.
(21:31):
Convertible bonds aren't reallythat attractive from a risk
reward.
You get a little bit extrayield at four but you really get
a beta.
The market is pretty close Well, it's 0.8, so it's pretty high.
So you can consider convertiblebonds but it doesn't give you
that much more income for therisk you're taking.
(21:52):
So now we're getting into ourfunds a little bit Small cap
value stocks.
So when S-Cap is our fund there,we focus on companies that are
profitable.
40% of the Russell 2000 areunprofitable companies, a lot of
biotechs, pretty riskycompanies.
(22:12):
We also require that everycompany has a substantial
dividend, as I mentioned earlier, has low leverage, reasonable
leverage, strong credit metrics,um and um has good dividend
coverage.
And then finally, probably mostimportantly, trades that are
(22:34):
reasonable, multiple growth.
We also look at yield, but forsmall caps yield is not that
important, so you don't want to.
You know it's fine.
It's exciting to buy Palantirat 110.
It's trading at about 150 timesearnings, so you can do that,
but you're basically gambling,so we don't do that.
We buy companies that are cheapto their.
The growth rate of Palantir islike 25%, so maybe you could
(22:59):
justify a 50-60 multiple, butnot 120.
So once you get above thosevaluations you're basically
gambling, so we avoid those kindof stocks.
We do think that it's anattractive time to add small
caps.
When rates come down, typicallysmall caps outperform or when
(23:20):
you come out of a cycle theyoutperform.
They benefit from M&A.
They're inefficient.
We have detailed research coveron every company in our
portfolio so we have analystswith quarterly estimates coming
up with targets and valuation sowe can add more value with
small caps because there's nosell side coverage there.
(23:42):
And also nice thing about smallcaps is domestic exposure, so
less exposure to tariffs or newtariffs, whether it be in us or
retaliatory tariffs.
We do think small cap values abetter approach Get rid of the
money-losing companies, get ridof the biotechs with new drugs
(24:07):
Not established biotechs, butbiotechs that are losing money
with established drugs.
So long-term, notwithstandingrecent last two or three years,
small caps have had very goodlong-term returns, typically
depending on the period andexcess of the market.
As I mentioned already, wecurate away the money-losing
company and all its companiesand also these super high PE
(24:31):
companies.
So you know we're much lesslikely to have blow-ups.
And then when companies report,typically they report decent
earnings, as they normally do.
You get pretty good priceappreciation um and you can look
it up on our website.
But s cap has dramaticallyoutperformed the index.
But do your own research onthat.
(24:52):
In terms of returns you can seethat um the current p multiple
um, normally it of the marketssort of in line with small caps.
Right now it's trading at likenine times multiples higher.
It's also I think we might havea chart in here.
But it's important to look bysector too, because a lot of
(25:14):
that overvaluation from largecap stocks.
So this is just the overview ofthe sector, so pretty well
diversified by sector, and hereyou can see the performance of
Beacon Index.
But quite a bit, it's prettystraightforward, as I mentioned,
(25:35):
you just curate these companiesthat are profitable, trading at
reasonable multiples and highquality, and it works pretty
well.
The next fund I'm going to coverreal quickly is high cap.
That's our large cap um highdividend stock fund um.
You know these companies in thesector have good shock ratios.
(26:01):
That means you get lessvolatility than S&P but over
long periods of time, morereturn and, of course, more
income, which we like, which canreduce your risk as well,
particularly if you need moneyright away.
(26:23):
Most important feature of ICAPis that we write individual
calls on these large cap stocksusing HI, so human intelligence.
So we do it at levels where wehave profits and where the
companies are fully valued,based on our models, and we do
them very short term, like oneor two weeks out, maybe three,
and we constantly monitorexposure to the market.
So we're not like JEPI and someother funds that write almost
(26:46):
their whole portfolio but if youlook at the returns, they
underperform dramatically if themarket runs hard and we our
objective is to not have thathappening by monitoring what's
called like our delta to themarket.
So and if it gets too low, thenwe make adjustments and you can
(27:06):
see we've had solid returns onthis fund and the good thing is
that writing these calls is justa very consistent way to add
alpha and it's a lot of work andtakes a lot of expertise, but
reliable way to add alpha andit's a lot of work and takes a
lot of expertise, but reliableway to add alpha because you're
not just riding in the wholeportfolio, which can lead to
(27:28):
capture churns.
Mlps is an asset class.
It's a little bit controversial.
It shouldn't be now, and thereason it shouldn't be is that
really what happened is.
Five years ago these companieswere trying to be growth.
Companies said low coverage ofdividends, high leverage, needed
to issue equity all the time.
(27:48):
When the big downturn in oiloccurred, they reformed
themselves.
They reduced leverage,increased the coverage of the
dividends, increased retainedearnings buying back shares,
coverage of the dividends,increased retained earnings,
buying back shares, low leverage.
So if you've been burned byMLPs in the past, that's no
longer relevant On the commodityside.
(28:10):
It's an argument for buying MLPsand not pure energy.
We actually think that the onepolicy that Trump administration
is going to be able toimplement that will affect
inflation is we think they'regoing to try to keep oil prices
capped, not so much from drill,baby drill, but because our US
companies are in a pretty tightbox in terms of how much more
(28:33):
they're willing to spend.
But the Saudis have threemillion barrels of extra
capacity.
The Trump administration isvery close to the Saudis, so we
think the prices start to runsignificantly above 70.
The Saudis will increaseproduction and you might say,
okay.
Well, I don't want to beanything energy related.
(28:53):
But MLPs do the best whereenergy prices are contained and
they're also benefiting fromdramatic increases in natural
gas consumption, which isdisconnected from price, because
natural gas prices in the USare always below the rest of the
(29:13):
world the green charts the restof the world.
That's because natural gas isproduced with oil production, so
we produce way too much.
We have to export it.
It also is available, of course, to expand electricity
production.
So there's a big growth storyof natural gas through US
pipeline companies.
So those companies have beendoing well but likely to
(29:34):
continue to do well.
So this is just like historicalreturns.
There was a big drawdown on MLPsduring the pandemic which was
100% irrational.
So I think AMCA is up.
Don't have that data here, butlike 600% or something from the
pandemic.
It was way down before that butthere was a huge buying
(29:56):
opportunity.
People tend to overreact and,to be fair, of course, these
companies were already in theprocess of becoming way higher
quality but continued to do thatafter the pandemic.
So lower risk than we've seenin the past.
We talked about both thingsalready.
The companies no longerconsistently issue equity.
(30:17):
Hedge funds don't short themanymore, have really good
coverage, growing dividendsabout five.
Current yield on AMCA is aboutseven, so you get about 12%
total return.
So good addition to mostportfolios looking for income.
And then, in terms of fixedincome, our two funds here we
(30:41):
focus on are PFFA and BMDS.
As a bond fund, obviously Goodticker.
The big benefits of the assetclass, particularly preferreds,
is you have low default rates.
Preferred stocks are almostalways issued by public
companies.
They care about their credit,they can issue more equity, they
can cut their dividends.
So that's what we've seen.
We never had a default in PFFAover six years.
The default rate's only 0.3.
(31:02):
For preferred, it's about threepercent for high yield bonds
and 0.1 for investment gradebonds.
So attractive default ratesmeans that you should be able to
close to realize your coupon isa long-term return.
I mean, we're always optimizingour portfolio so we're trying
to beat the coupon, but noguarantees, of course.
(31:24):
So the good thing aboutpreferreds, if you can look at
this chart over on the right, isand a lot of people appreciate
this you're senior to common, soyou can continue to be paid
even if the common stockdividend is suspended.
A lot of times they'll take itto one cent, but even it's
suspended you continue to bepaid, and particularly on
cumulative dividends.
(31:45):
The companies are so you inother words, they don't pay you,
they owe it to you laterreluctant to suspend the
dividend because it doesn'treally do them any good in the
long run.
And that's what we've seen isvery few suspensions of
preferred dividends, even duringthe pandemic.
Tons, tons of common cuts, butvery, very few preferred cuts,
(32:05):
and a lot of times they suspendthem and then catch up right
away.
So you can see that the marketcap of the company's issue
preferred is very large.
So good credits, high yield also.
And the good thing aboutpreferreds, only 10% are private
.
You do in high yield generalbonds, you get a fair amount of
(32:28):
private companies.
We don't let private companiesrun by private equity firms
typically trying to take moneyout of the company.
So with our BNDES fund, we arealmost exclusively public
issuers that care about theircredit ratings, will issue
equity, not try to takedividends like private
(32:50):
high-yield issuers.
Here's the default rates I wastalking about just under 0.6 for
preferreds and about 3% forhigh-yields, and they were only
a little bit worse during thefinancial crisis.
So in terms of comparing thetwo funds, you can see that we
(33:21):
have large market cap issuersand attractive yields and so
pretty similar in terms ofnumber of issues.
So somewhat similar funds, buthigh yield bonds tend to be less
volatile.
Preferred stock a little bitmore volatile, but higher longer
(33:44):
term returns.
So the key advantages the reasonreally we have to have active
management for bonds and fixedincome securities is these three
risks interest rate risk, callrisk, credit risk.
None of those exist withequities, so it's okay to be an
index fund for equities becausethey're not.
These are characteristics offixed income.
(34:05):
So we manage the interest raterisk by both adjusting the
coupon and looking for floatingrate.
We're actually selling ourfloating rate now because we
think rates will come down.
Call risk when they go abovepar, which is $25, you really
need to sell them because theybecome unattractive above par.
And then the most obvious,credit risk.
We're constantly monitoring tomake sure we don't have any
(34:27):
defaults.
But it's good to outsource thattoo, because you should have a
diversified portfolio.
So you have 120 creditschallenging for an individual to
monitor 120 credits.
Bmds is a high yield bond fundthat yields 8.
It's reasonable expenses at 0.8.
We look for very strongcompanies, usually very old
(34:54):
economy, asset intensive, likeweights, utilities pipelines,
but with attractive yields.
We're looking for, you know,attractive spreads, and this is
the key point about high yieldis that in terms of getting a
(35:16):
good amount of yield relative tovolatility, really high yield
bonds are the best.
So high yield bonds are halfthe volatility of preferreds and
about a third of volatility ofthe S&P the volatility of the
S&P.
So you know, if you're lookingfor lower risk or lower
volatility way to add income,high yield and BNDS is very
(35:37):
attractive from that perspective.
It's true about total returnand yield.
So it's a little bit less.
It's not at the opposite topwhen it comes to yield to
volatility.
So the other I mentioned thisalready but to extend, you have
higher coupons, you have lessduration and less correlation to
(35:58):
interest rates, and so that'swhat we typically look for.
So even if we're wrong aboutthe 10, you're going to 375,.
Bnds should continue to do well, get your eight coupon.
Even if it doesn't appreciatein price that much, you still
get eight, and so it's not assensitive to interest rate risk
as most bonds are.
(36:20):
Call risk Just need.
If something's trading abovepar, you've got to sell it.
It's pretty easy to manage that, but it's time intensive.
If you are an individual Creditrisk.
We have our own credit ratings.
Rating HEs a lot of times aretoo negative on dividend paying
stocks, so like utilities, reits.
(36:40):
So we have a lot of thosepipelines.
So it's easy really to come upwith better ratings than rating
HEs.
They also tend to be a littlebit too positive about
financials.
We saw that over the lastcouple of years where First
Republic was rated double Asingle A rather two weeks before
(37:00):
they went bankrupt.
So that's our prepared remarks.
Speaker 1 (37:05):
So if there's any questions, michael, maybe we can
answer those, or if you haveany questions, yeah, and so I
always go back to this broaderpoint that typically income
isn't demand when volatility isrising, right, I think, of the
total return spectrum in termsof there are times everybody
wants capital appreciation,times everybody wants income,
(37:27):
and typically the pendulumswings back to income when
capital appreciation is at risk,right from a volatile
environment.
Now, great that this is kind ofa very short-term movement, but
it does look like markets aregetting more volatile.
You see a lot of that actuallyintraday look like a strong
comeback and then a heavysell-off in tech.
At the end Do you get a sensethat that pendulum is going to
(37:47):
really swing hard now towardsthe income side of the equation?
Speaker 2 (37:51):
Well, I think so, because not just because we're
having this kind of seasonalvolatility, but we're becoming
more and more confident that ourcall on slowing growth is going
to unfold.
So in a declining interest rateenvironment, obviously that's
really good for fixed income,but it's also good for the
non-tech sector.
(38:11):
But when tech's not doing well,the overall market is flat to
down, like it was today, likeactually there's a lot of stocks
up today, so in thatenvironment you could vary In
terms of opening the S&P versusfixed income funds.
You're probably going to bedoing quite well on a
risk-adjusted basis.
(38:32):
We do think it's a good time tobe in small caps on these
interest rate sensitive stocksthat do better when tech's
rolling over to that, to getboth price appreciation in the
fixed income side and rotationinto old economy and small caps.
Speaker 1 (38:56):
From experience and you have these very abrupt
momentum breakdowns like we'restarting to see in tech.
Are these short-lived or did ittend to be maybe suggestive of
more broader cycle shift ofmoney rotating?
Speaker 2 (39:12):
well it does.
It depends on the economicoutlook.
So during 22, everybody keptsaying that, oh, tech stocks are
down because rates are rising,because they're longer term
duration.
Well, that sounds perfectlyreasonable, but it just doesn't
happen to be the case.
So tech stocks have the sameduration.
All stocks have very long thecase.
So tech stocks have the sameduration, all stocks have very
long durations and they'rebasically all the same.
(39:33):
They have to be profitable,which most of them are.
So in the case of 22, you didn'twant to catch those falling
nines because you had the Fedconstantly raising interest
rates, slowing economy, risinginterest rates.
So you really have to get toget that answer.
You need to get the macro right.
We think that the macro is goodbecause of growth in the tech.
(39:59):
Even if the stock prices aredead, there's still a lot of
spending going on and a lot ofstartups are going to go public,
which helps employment, helpsCapEx.
So our assessment is theeconomy's fine, so that this is
just a minor pullback, and it'salso entirely normal late
(40:20):
February through March to havepullbacks.
So that's our call.
We have the 6,000 target on theS&P, so that implies it's you
know, don't rush, but at somepoint you should catch, you know
, or not catch a flying knife,hopefully.
But when things go down, startstabilizing and we're getting
close to the end of March wherewe're going to get an earnings
season, we think it's going tobe totally fine, but it does.
(40:43):
It's a good time to demonstratethat.
Maybe it seems blind on PFFA toyields nine, but it basically
does nothing whether themarket's way up or way down.
So on days like today, I feelpretty good about it.
I mean, it's flat, basically,and tech stocks are down well
(41:04):
over one, the S&P is down one,so good place to be during
drawdowns of the regular stockmarket yeah, it does look like.
Speaker 1 (41:12):
Um yeah, this is another point you and I've
talked about on the podcastbefore um I, it does look like.
Again, I go back to this kindof flight to safety dynamic with
treasuries.
It's maybe coming back, whichis more like the way the market
used to work prior to the past.
I say about history as we thinkthrough valuations now, granted
(41:33):
, this is a sweeping question,but, generally speaking, is it
fair to say that fixed income asan asset class is considerably
cheaper than equities as anasset class?
Speaker 2 (41:46):
Well, equities are about 22 times earnings and
we're using that for 7 000target as well.
I mean, you roll forward to getthere right, because we have
about 10 percent growth built inand I'd say real quickly that
earnings growth is more or lessautomatic, that just retained
earnings being invested inreasonable returns like 15 so%.
(42:07):
So when you hear, oh, the S&Pis going to grow at 10%, a lot
of pundits will say, oh, my God,that's too high.
Well, that's like it normallygrows at 10.
But 22 is high relative towhere the bond yields are.
We kind of need my 375 to takehold to make equities attractive
(42:29):
where they are now.
So they arguably are overvaluedby you know, the two.
That's two like almost twomultiple.
So that's a lot, or we thinkthey're fine, but that's
theoretically.
You can easily make thatargument.
And then I think maybe, um,high yield bonds are a little
(42:49):
bit similar to that becausespreads are pretty tight.
Now we buy ones where thespread's wider.
So I don't think ours areovervalued.
But if you just go buy theindex funds, they're at least
somewhat tight.
So I'm not sure they're thatmuch more cheap.
But if we do have a situationwhere rates are dropping, people
continue being nervous abouttech stocks.
(43:11):
They're going to dramaticallyoutperform.
Speaker 1 (43:13):
I don't think we've talked about this before, but I
am generally curious about this.
If somebody on small caps, ifyou look at small cap equities
versus the equivalent small capequity bond issuances by these
companies, how do those look?
Are there dislocations in thesmall-cap bond side of things
relative to the?
Speaker 2 (43:33):
equity side.
Well, you know that's.
One advantage of not beingsmall-cap is that there's some
diseconomies of scale to issuingbonds.
So all the bond investors wantto have really big issues of
like $300 million, $400 million,$500 million at every, every
maturity.
So when you do that math youhave to have like three billion
dollars of bonds to really makeit economic.
(43:57):
And the rating agencies hatesmall companies, I think too
much.
So they tend to get single b,double b ratings.
So most of the time, um, smallcaps have lines of credit and
term loans.
They can swap them out.
So they're like the notion thatthey're taking tons of credit
risk I'm sorry, interest raterisk is not really true because
(44:18):
I can swap those but sotypically their portfolios are
more dominated by those type ofsecurities and then only when
they're getting closer to themid-cap is it economic tissue a
ton of bonds.
So if you look at ourportfolios, would they tend to
be?
You know the issuers are moreof the large cap issuers and
they are safer.
(44:38):
They're more equity.
You know, easier to issueequity and bail out the bonds
and fail from.
Speaker 1 (44:45):
How closely do you consider liquidity in in BNDS of
some of the underlying bondpositions?
Speaker 2 (44:51):
I mean we're definitely looking for more
liquidity.
We do have some positions inthe portfolio that are just
meant for liquidity.
So we have a small amount ofETFs so that we can, if we need
to sell something quickly, wecan just do that.
But all the bonds are, you know, well-traded.
(45:11):
They're not all listed.
Some of them are.
A good portion of them actuallyare listed on stock exchange,
which is unusual.
So we do have a favor there.
So I think about, off the topof my head, like 30 to 35% are
actually listed Very unusual.
But the rest is or have goodover-the-counter markets.
So liquidity is definitely aconsideration, yeah.
Speaker 1 (45:33):
Yeah, as you look across the various funds that
you have out there, if you wereto blend them into one
all-encompassing portfolio, whatwould be, in your view, sort of
the overweights of thedifferent six funds?
Speaker 2 (45:50):
Well, I mean it's always important to bifurcate
between fixed income and equityincome because you're like
taking three times as much risk.
So I would just say, withinfixed income, I do think it's
important to have a goodallocation to preferreds and
high yields because in the longrun you're going to get better
returns and lower interest raterisk and only a little bit more
(46:14):
equity risk.
And in particular now, whereit's more neutral now, but
before, earlier in the year, ourinterest rate call was much
more controversial than ourequity call and so if we were
wrong about the interest rateside but right about equities,
you definitely want to be inhigh yield and preferred and not
(46:37):
in investment grade bonds,aggregate bonds, mortgages and
treasuries, so they're prettyall weather.
So I'd recommend, like, if youhave 40%, it's fine to have even
half of that 40% bonds, half ofthat, or 10% or 25% of your
fixed income and high yield andanother 25% in preferreds.
(46:58):
You're going to get much betterlong-term returns and better
risk characteristics.
And then on the equity incomeside, so say you're 60-40, so
that'd be 60% of your portfolio.
I do think that having 5% or 10%small caps makes sense.
Having dividend stocks 5% to10% makes sense, because when I
(47:21):
go I don't do it a lot, but goanalyze individuals' portfolios,
they basically all have the S&Pportfolios.
They basically all have the S&PLike they're called different
things, but you know it's largecap this, mad and some other
maybe active funds and so youjust end up with 40, 45% tech.
You know whether you like it ornot, but when you mix in these
(47:46):
dividend stocks you get close tozero tech.
So they're more defensive, moreincome.
So if you have a slug of MLPs,small cap dividend, large cap
dividend and then the normal.
However, some people like puretech stocks, which you don't
really need if you have S&Pfunds.
But a lot of people have thoseand also their individual names
tend to be tech stocks as wellbecause they like Apple or
whatever, and also they getlocked into it.
(48:07):
I launched with a friendyesterday.
He said well, I've owned applefor like 25 years because if he
sells it pays a million dollarson it.
So most investors are over,slightly by accident, over
allocated tech.
So, putting a big slug ofdividend stocks in, like you
know, our three funds, if youwant diversification and to do
(48:31):
like our funds are roughly flattoday, even though the market
was getting annihilated.
Yeah, a little bit more of asleep, well at night.
Speaker 1 (48:37):
type of Right.
Speaker 2 (48:39):
No, you shouldn't have tech stuff.
I mean, we're bullish on techand they'll, you know, think
tech stuff will do fine.
But I prefer lower volatilityreturns, like today, where our
funds are boring.
They're not skyrocketinganything, but they're boring.
And if you're in a tech fundlike if you're in a pure tech
fund, it would be down likewhatever.
The one and a half 2%.
I didn't see how to work itclose, exactly.
Speaker 1 (49:00):
For those on the webinar, Jay, who want to see
more in terms of fact sheets orread the actual prospectus, it's
imprecatfundscom.
Speaker 2 (49:08):
Yes, yes, yes, and you can also ask questions on
the website.
You can register for a monthlyyou have a regular monthly
webinar and send directquestions to me, or?
Speaker 1 (49:20):
marketing people, everybody that's here again
those that are attending for theCFP CE credit.
I will email you shortly,either later today or early
tomorrow morning.
We'll get that done with therequest information.
Appreciate those that didattend.
Hopefully you found thisinsightful.
We'll be doing more of thesewebinars with all kinds of
interesting content with Jay andhis team in the coming months.
Everybody enjoy the rest ofyour evening.
(49:40):
Thank you, jay, I appreciate it.
For those that are starting to come in here into
the webinar.
Give us just a second to makesure everybody comes in.
I think this is going to beactually quite informative from
a lot of perspectives.
Jay, candidly, has been spot ona lot of his macro calls and
his funds is quite strong.
I think this will be veryeye-opening from the perspective
of how to think aboutgenerating income in an
(00:20):
environment which isincreasingly getting more
volatile, which personally Ienjoy.
I will be popping in and out.
This is Jay's show.
If you don't know Jay Halffield, you unequivocally should know
Jay Halffield.
I've been doing more of thesewith him and I've very much
gotten to enjoy his view onmarkets.
So, Jay, this is all you.
As you can tell, he's notexactly in his office right now,
nor is on a virtual backgroundbut you're getting the full,
(00:49):
unfiltered J-Half right there.
Speaker 2 (00:50):
Thank you, michael.
Thanks everybody for joining.
So we're going to go through anoverview of our fund, spend a
fair amount of time on macrobecause I know everybody's
pretty concerned about macroright now I think maybe a little
bit over-concerned and thenjust talk a little bit about
some of our funds that arerelevant.
And then just talk a little bitabout some of our funds that
are relevant.
So, just in terms of our fund,we believe in investing in super
(01:15):
high quality companies, a lotof time in old economy
industries with a lot of assets,particularly on the credit side
.
We also believe in super highquality large and small cap
stocks, but specifically they'reprofitable, trading at
reasonable multiples, have lowleverage and typically pay
dividends.
(01:35):
And we think if you stick tothat philosophy either by buying
the funds or doing it yourselfyou will stay out of trouble.
Either by buying no funds ordoing it yourself, you will stay
out of trouble, and staying outof trouble is about probably
90% of the battle.
If you look at your returns onsome of your portfolios and if
(02:00):
you have some wipeouts or somehuge decliners, you can wipe out
a lot of solid income, as I'vebeen on Wall Street for 35 years
.
I have a CPA from Ernst Young,undergrad degree in monetary
economics from UC Davis, mba infinance with distinction from
Wharton.
15 years as an investmentbanker, mostly at Morgan Stanley
(02:20):
.
I've worked for two hedge fundsand then launched my own money
management company in 2018,founded an MLP and then launched
our six ETFs, the first beingAMZA in 2014.
So we have the best way to thinkabout our funds.
(02:41):
We have three that are in fixedincome.
The best way to think about ourfunds we have three that are in
fixed income.
So the biggest is PFFA.
That's a preferred stock fund.
Bnds is a bond fund.
That's similar to PFFA but it'ssenior.
It's a lower risk, lessvolatility.
(03:01):
Scap is our small cap dividendincome fund.
We do write some index callsthere.
Icaps are um large cap dividendstrategy.
Uh, we do write a lot of shortterm individual calls.
You can do that with large cap,not small cap.
The AMCA is our um is our MLPfund and we do also have PFFR.
(03:28):
If some of you own that.
That's an index read preferredfund.
And we did recently launch ourhedge fund.
In case anybody's interested andis an accredited investor and
looking at those materials, butwe don't usually talk about that
in the general audience verymuch.
So in terms of the market, I'mnot going to go through so we
don't usually talk about that inthe general audience very much.
So in terms of the market, I'mnot going to go through every
(03:51):
one of these slides, but wherewe've been 100% differentiated
is that, instead of followingthe political talking points
that the Trump administration'spolicies are inflationary, we
actually do what's calledeconomic analysis on those
policies.
So, specifically, the mostimportant is tariffs.
Tariffs do not cause inflation,they're actually deflationary
(04:17):
and, most importantly, they'rerecessionary.
So they're sales taxes, theequivalent of a sales tax.
So if you think about a salestax, like an extreme sales tax,
say 50%, what would the economicimpact of that be?
Well, it'd be highlydeflationary.
You're taking money away fromthe consumer paying down
government debt.
That's very deflationary.
(04:39):
The demand would dropsignificantly and the people,
like the Fed, would look throughthe one-time price increase
because it's never going to berepeated at 50%.
So, whether it's 50% or 5% or10%, that's the way they analyze
tariffs.
So that's at the margin.
(05:07):
Policy of deporting criminalsand or recent immigrants who
aren't working is mildlydeflation, irrelevantly
deflationary.
But the whole notion that it'sinflationary was ridiculous.
Inflationary, it was ridiculous.
Also, if you listen to theTrump administration which a lot
of people don't prefer to do,but if you do you'll hear that
(05:28):
they're trying to admit morewealthy investors they talked
about that yesterday and alsoH-1B immigrants.
Those all are highly trained,are deflationary, do increase
economic growth.
So it's important to try toleave your politics behind and
just analyze what the actualpolicies are.
(05:51):
And then the other element abouttariffs that's critical to us
is it does raise revenue.
It could raise up to $2trillion of revenue that could
be used to fund tax I'm sorry,corporate tax decreases and
those are the taxes that matter.
So I wouldn't focus too much onthe individual taxes or the
tariffs.
What matters is corporate taxes.
(06:13):
If you're a stock investor, soif there's a cut in the
corporate tax rate to 18, ourtarget goes up by 400 S&P points
because earnings estimates goesup.
So this is not like a politicalsubjective argument.
Simply, the companies earn more.
Plus, say, multiple stockprices go way higher and we saw
(06:34):
that in 2017.
There was a lot of deniers backthen.
President Trump then was highlyunpopular versus now just sort
of 50-50 unpopular.
So you know we do have theother tailwinds.
So even if we don't get quiteto 18% deregulating the
antitrust side of it, otherderegulation is all positive for
(07:00):
multiples and stock prices.
So we're comfortable formultiples and stock prices.
So we're comfortable.
It's unclear exactly where thetax bill is going, but I think
there will be some significantcorporate tax relief and we
think that we're bullish on themarket.
Short term we're neutralbecause it's not earning season.
(07:21):
That's a simple way to tradethe market.
It could long when it's notearning season.
That's a simple way to tradethe market.
You get long when it's earningseason and you get less long or
not short, but less long whenit's not earning season.
So it's not earning season atnvidia yesterday, but that's not
earning season.
That's one data point.
Wasn't fabulous, so salesforcewasn't was negative, so you're
(07:42):
saying it took off today.
But we're really in a newsvacuum.
We are bullish about PCE corebeing in line with expectations
at 0.3.
That means it rolls down to 2.6.
We think that clears the wayfor the Fed to cut rates,
because we do think the economyis very slow.
We have ultra tight Fed policy,as evidenced by not only the
(08:06):
fact that the yield curve isinverted but also by the fact
money supply is growing anegative 5%, which is
deflationary.
Inflation mark-to-market on areal-time basis is below the
Fed's 2%, both on CPI and PCCorp percent, both on CPI and PC
(08:27):
Corp.
And so the combination of tightmonetary policy and then these
deflationary slash, recessionarypolicies of the Trump
administration, tariffs, butalso Doge job cuts up to 300,000
, that's negative for economicgrowth.
We're hopeful and expect the Fedto figure this out.
It seems like they're slowlyfiguring out Still to get three
(08:47):
rate cuts.
That's getting price in themarket.
So everybody's coming around toour view.
We're about like 56 base points, so not that far from three
rate cuts.
So we get to three grade cuts.
We don't think we'll have arecession.
And then the last kind of macropoint is that the best cure for
higher rates is lower rates.
So we had this non-consensusview and rates are 480.
(09:11):
Now they're at 430.
Well, that's a lot better forthe economy, it's better for the
housing sector, it's better forthe auto sector.
So if the market justanticipates Fed cuts, then
that's good enough to keep us inthe 2% growth area.
The market doesn't anticipatemaybe one to two.
We don't see a recessionbecause of tech spending being
(09:32):
very strong.
We do think M&A volume is goingto accelerate throughout the
year.
It takes a long time to get M&Adeals announced.
It sounds easy but it's not.
It takes six to nine months.
So we're bullish on investmentbanks and also on small caps
because they tend to get boughtout more than large caps, just
(09:53):
for obvious reasons.
It's easier, it's more creative, easier to get the deal done,
easier to finance.
So we're bullish on small caps.
Talked about this already Fed'sway too tight Administration
policies are recessionary.
Adds up to slower growth.
That's becoming consensus overthe last couple weeks.
(10:15):
We're talking about it a monthand a month and a half ago.
So these are the rate cuts.
This is just like a few daysout of date.
So it says 37 base point cut inthe US, but that's up to 53.
So it's been tracking rapidlyhigher.
But you can see we're going tohave global rate cuts.
(10:36):
Global monetary policy mattersbecause rates are global.
So we think it's a bullish timeto invest, notwithstanding
today's tech wreck.
This is on our website.
So we've been among the mostaccurate forecasters after the
last four years, over the lastfour years.
But we don't have some secretmodel.
(10:59):
Our key advantage we're givingyou the keys to the kingdom.
Our key advantage we're givingyou the keys to the kingdom.
Our key advantage is, we thinkthe money supply matters for
both inflation and also economicgrowth.
And so if you just follow likethis monetary base, you can see
it peaked in late 21.
When global central banks aretightening, you want to be out
of the market.
Right now they're loosening,our Fed's going too slowly but
(11:23):
still bullish time.
And then you have deregulation,us lower tax rates, so pretty
easy to stay long and prettynormal to have these pullbacks
when we're not entering season,so we're not concerned about it.
Uh, six thousand targets.
So that means right now, in theshort run.
So market goes over sixthousand.
I mean sell it sell, and thenyou know, if it goes to 5,900,
(11:44):
5,800, 5,700, it becomes moreattractive.
Then be cautious, though,because the next catalyst, well,
tomorrow's PC, but after thatit's really earnings season,
which is really April.
So we've got a fairly longperiod of time before we get an
obvious catalyst or rally.
So it's okay to be cautious.
Now the Eurozone's a differentstory.
(12:07):
They're definitely cuttingtheir disaster inflations down
there.
They blew up their economy withthe poor energy transition.
Ukraine war, um over regulationunder savings.
So you're.
The reason we put this here isthat europe and the rest of the
world has to cut.
The US can get away with notcutting, probably so that's
(12:30):
bullish for global equities andactually European stock's been
doing well.
We don't necessarily recommendthat, but they got super cheap
so they're rallying.
We talked about this.
I'll give it just a little bitmore detail.
On bonds, we are forecasting10-year.
It's now at 430, goes to 375.
We estimate the terminal Fedfunds rates 275.
(12:54):
That's normal, that's inflationplus about 50 to 75 base point
premium, and then the normalpremium between the Fed funds
and the 10-year is 100 basepoints.
So 275 gives you 375.
That call looked a lot worsewhen the 10-year was at 480.
I do think to get below fourwe're going to have to get the
(13:18):
Fed to finally figure out theeconomy's weakening.
The Fed acts as if its thirdmandate is to be behind the
curve, so they may take them alittle while, but that's going
to be the catalyst probably thattakes us down below this 430
level.
Everybody thinks and alwaysobsesses about the US budget
(13:38):
deficit and other problems inthe US, but they don't recognize
it's a global bond market andall of those negative things are
already reflected in our bondyields and so we think
particularly if the Trumpadministration is more fiscally
prudent which they're makingnoises about that that our rates
could drop down to like Canada,which is obviously a similar
(14:03):
economy, and they're 10 years atthree, so that would be a lot
lower than even our forecast.
But it's important to keep inmind it's a global bond market
and US rates are extremelycompetitive.
Just another chart of howterrible Europe was.
The other thing that's slowingthe real economy is just high
(14:24):
mortgage rates.
Anything over seven is going tochoke off.
Housing Housing is already in arecession and this chart says
1.8 or 1.79 times more expensiveto buy a home than rent.
So if you're a new couple andthinking, oh, it's a great time
to buy an apartment, and thenyou go look at the apartment and
(14:45):
say, oh, maybe it's not a greattime because it costs 1.8 times
our rent to service a similarapartment.
So that's why the old economyis slowing.
Commercial construction isslowing, offset by tech spending
, but we are definitely slowing.
This is a good chart because ifyou listen to television which
I recommend um, everybody willobsess about the consumer and
(15:08):
say, oh, the consumer istwo-thirds, so that's what
drives recessions, and so we'reeither predicting recession or
not because of the consumer.
But what they're missing is allrecessions are caused not by the
consumer.
The average drop in consumptionduring recession is zero, so
it's very resilient, but theaverage drop in investment is
13%, so that smaller investmentis about 20% of the US economy.
(15:32):
So that smaller component,being so much more volatile,
creates recessions.
It comes from Fed policy.
They hammered the housing andand construction markets just
like they are now.
That produces layoffs, whichthen produces less consumer
spending, and that createsrecession.
So that's a normal patternwhich very few people seem to
(15:54):
appreciate, but that's why we'reobsessed with investment.
It was was down last quarter.
That's negative, continues tobe negative on the old economy
side, so we think it's prettyclear growth slowing rates will
go lower.
We still don't think there'sgoing to be recession, though,
mostly because of tech spendingand also, hopefully, the Fed
(16:17):
cuts rates and also, like I said, the markets cut rates for the
Fed by 50 base points, so thatshould help stabilize the
housing market.
And this is just our index thatI mentioned.
You get this on the website and, if you look at it closely,
cpi-r, so that's real-time rentstracked from below market rates
(16:41):
or, I'm sorry, below the CPIshelter calculation, which is
about two years behind what themarket's doing.
It's important to look atreal-time inflation and, by the
way, it's important to look atit both on the upside and
downside.
Right now we're on the downside.
You can see from the chart thatthe Fed had followed CPI-R on
the way up, they would haveraised rates way sooner.
(17:02):
So they really get damaged andwe've been recommending the Fed
reform their policy frameworkbecause they focus on this index
is two years behind, so theymiss the inflation increasing
and they also miss it decreasing, so they're always behind the
curve.
So then getting into our fundsand how to build an income
(17:26):
portfolio.
So obviously, to build anincome portfolio, you can see
the yields here on the S&P isonly 1.3%.
So if you buy S&P equivalents,your portfolio yield is going to
be about 1.3%, and that'sclearly, unless you're a
billionaire, your portfolioyield is going to be about 1.3.
And that's clearly, unlessyou're a billionaire, not enough
to move the needle from anincome perspective.
(17:46):
And so if you want more income,you have to layer in some of
these other securities that areequities to get equity upside,
but more income, but the otherthing to pay attention to is and
this is done in order of riskso utilities have the least
market risk, down to the S&P 500, which has a normal market risk
(18:10):
.
And so if you look at theutility sector, it's highly
correlated, though, to bonds.
So you're basically takinginterest rate risk with very low
about 50% correlation to themarket.
Reits are similar 81%correlated to bonds, 57% to the
market.
Same with telecom.
(18:31):
That's really AT&T and thosetype MLPs.
We have an MLP fund, amca.
That's an interesting assetclass because right now it has
very low beta the s&p 0.3 and nointerest rate risk in today's
market at least large capdividend stocks.
So that's like icap or largecap dividend fund.
(18:56):
So negative correlation to bonds, you're not taking industry
risk and lower than the marketat 0.82 and higher yield.
If you just buy the index atfour, our funds is closer to
eight, and then you can see howthat obviously compares to the
(19:18):
S&P right now a lot of times isnegative, but because of 2022,
has just a 25% correlation tothe market.
Same thing.
So you can be in all equitiesand build pretty decent income
from just using equities, but alot of more conservative
(19:39):
investors want to use some bondsas well, and this, like the
prior chart, is in order of risk, market risk lowest market risk
being on the top.
But also the inverse is true,because typically the ones at
the top have the highestcorrelation to bonds.
So treasuries obviously have ahigh correlation to themselves.
(20:01):
So that's one, and a lowcorrelation to the market at 0.2
.
Municipals similar but not quiteas high 0.58, 1.0, 0.19.
Corporate bonds a lot ofindustry risk and more beta to
the stock market.
Preferred stocks PFFAs areflagship funds.
(20:23):
The current yield is 6.6 forthe index, but our fund's 9.
Correlation of government bonds0.79.
So those have well,particularly the index, more
than PFFA as interest rate riskand modest risk to the S&P at
0.6.
High-yield bonds BNGS is ourfund.
(20:44):
There we have a higher yield ateight.
Similar risk characteristics.
Low sensitivity to bondsbecause they're getting higher
yields, that's less sensitive tobonds.
Lower sensitivity to the S&Plower sensitivity to the S&P and
also, just on an absolute basis, high yield bonds have quite
(21:09):
low volatility at 9%.
So you know, below the S&P,well below the S&P, like a
quarter of the S&P and seniorloans we don't have fund there,
but they were a good asset classto be when rates are going up,
have low interest ratesensitivity because they're
floating and pretty lowsensitivity to the S&P.
So that's definitely worthconsidering as an asset class.
(21:31):
Convertible bonds aren't reallythat attractive from a risk
reward.
You get a little bit extrayield at four but you really get
a beta.
The market is pretty close Well, it's 0.8, so it's pretty high.
So you can consider convertiblebonds but it doesn't give you
that much more income for therisk you're taking.
(21:52):
So now we're getting into ourfunds a little bit Small cap
value stocks.
So when S-Cap is our fund there,we focus on companies that are
profitable.
40% of the Russell 2000 areunprofitable companies, a lot of
biotechs, pretty riskycompanies.
(22:12):
We also require that everycompany has a substantial
dividend, as I mentioned earlier, has low leverage, reasonable
leverage, strong credit metrics,um and um has good dividend
coverage.
And then finally, probably mostimportantly, trades that are
(22:34):
reasonable, multiple growth.
We also look at yield, but forsmall caps yield is not that
important, so you don't want to.
You know it's fine.
It's exciting to buy Palantirat 110.
It's trading at about 150 timesearnings, so you can do that,
but you're basically gambling,so we don't do that.
We buy companies that are cheapto their.
The growth rate of Palantir islike 25%, so maybe you could
(22:59):
justify a 50-60 multiple, butnot 120.
So once you get above thosevaluations you're basically
gambling, so we avoid those kindof stocks.
We do think that it's anattractive time to add small
caps.
When rates come down, typicallysmall caps outperform or when
(23:20):
you come out of a cycle theyoutperform.
They benefit from M&A.
They're inefficient.
We have detailed research coveron every company in our
portfolio so we have analystswith quarterly estimates coming
up with targets and valuation sowe can add more value with
small caps because there's nosell side coverage there.
(23:42):
And also nice thing about smallcaps is domestic exposure, so
less exposure to tariffs or newtariffs, whether it be in us or
retaliatory tariffs.
We do think small cap values abetter approach Get rid of the
money-losing companies, get ridof the biotechs with new drugs
(24:07):
Not established biotechs, butbiotechs that are losing money
with established drugs.
So long-term, notwithstandingrecent last two or three years,
small caps have had very goodlong-term returns, typically
depending on the period andexcess of the market.
As I mentioned already, wecurate away the money-losing
company and all its companiesand also these super high PE
(24:31):
companies.
So you know we're much lesslikely to have blow-ups.
And then when companies report,typically they report decent
earnings, as they normally do.
You get pretty good priceappreciation um and you can look
it up on our website.
But s cap has dramaticallyoutperformed the index.
But do your own research onthat.
(24:52):
In terms of returns you can seethat um the current p multiple
um, normally it of the marketssort of in line with small caps.
Right now it's trading at likenine times multiples higher.
It's also I think we might havea chart in here.
But it's important to look bysector too, because a lot of
(25:14):
that overvaluation from largecap stocks.
So this is just the overview ofthe sector, so pretty well
diversified by sector, and hereyou can see the performance of
Beacon Index.
But quite a bit, it's prettystraightforward, as I mentioned,
(25:35):
you just curate these companiesthat are profitable, trading at
reasonable multiples and highquality, and it works pretty
well.
The next fund I'm going to coverreal quickly is high cap.
That's our large cap um highdividend stock fund um.
You know these companies in thesector have good shock ratios.
(26:01):
That means you get lessvolatility than S&P but over
long periods of time, morereturn and, of course, more
income, which we like, which canreduce your risk as well,
particularly if you need moneyright away.
(26:23):
Most important feature of ICAPis that we write individual
calls on these large cap stocksusing HI, so human intelligence.
So we do it at levels where wehave profits and where the
companies are fully valued,based on our models, and we do
them very short term, like oneor two weeks out, maybe three,
and we constantly monitorexposure to the market.
So we're not like JEPI and someother funds that write almost
(26:46):
their whole portfolio but if youlook at the returns, they
underperform dramatically if themarket runs hard and we our
objective is to not have thathappening by monitoring what's
called like our delta to themarket.
So and if it gets too low, thenwe make adjustments and you can
(27:06):
see we've had solid returns onthis fund and the good thing is
that writing these calls is justa very consistent way to add
alpha and it's a lot of work andtakes a lot of expertise, but
reliable way to add alpha andit's a lot of work and takes a
lot of expertise, but reliableway to add alpha because you're
not just riding in the wholeportfolio, which can lead to
(27:28):
capture churns.
Mlps is an asset class.
It's a little bit controversial.
It shouldn't be now, and thereason it shouldn't be is that
really what happened is.
Five years ago these companieswere trying to be growth.
Companies said low coverage ofdividends, high leverage, needed
to issue equity all the time.
(27:48):
When the big downturn in oiloccurred, they reformed
themselves.
They reduced leverage,increased the coverage of the
dividends, increased retainedearnings buying back shares,
coverage of the dividends,increased retained earnings,
buying back shares, low leverage.
So if you've been burned byMLPs in the past, that's no
longer relevant On the commodityside.
(28:10):
It's an argument for buying MLPsand not pure energy.
We actually think that the onepolicy that Trump administration
is going to be able toimplement that will affect
inflation is we think they'regoing to try to keep oil prices
capped, not so much from drill,baby drill, but because our US
companies are in a pretty tightbox in terms of how much more
(28:33):
they're willing to spend.
But the Saudis have threemillion barrels of extra
capacity.
The Trump administration isvery close to the Saudis, so we
think the prices start to runsignificantly above 70.
The Saudis will increaseproduction and you might say,
okay.
Well, I don't want to beanything energy related.
(28:53):
But MLPs do the best whereenergy prices are contained and
they're also benefiting fromdramatic increases in natural
gas consumption, which isdisconnected from price, because
natural gas prices in the USare always below the rest of the
(29:13):
world the green charts the restof the world.
That's because natural gas isproduced with oil production, so
we produce way too much.
We have to export it.
It also is available, of course, to expand electricity
production.
So there's a big growth storyof natural gas through US
pipeline companies.
So those companies have beendoing well but likely to
(29:34):
continue to do well.
So this is just like historicalreturns.
There was a big drawdown on MLPsduring the pandemic which was
100% irrational.
So I think AMCA is up.
Don't have that data here, butlike 600% or something from the
pandemic.
It was way down before that butthere was a huge buying
(29:56):
opportunity.
People tend to overreact and,to be fair, of course, these
companies were already in theprocess of becoming way higher
quality but continued to do thatafter the pandemic.
So lower risk than we've seenin the past.
We talked about both thingsalready.
The companies no longerconsistently issue equity.
(30:17):
Hedge funds don't short themanymore, have really good
coverage, growing dividendsabout five.
Current yield on AMCA is aboutseven, so you get about 12%
total return.
So good addition to mostportfolios looking for income.
And then, in terms of fixedincome, our two funds here we
(30:41):
focus on are PFFA and BMDS.
As a bond fund, obviously Goodticker.
The big benefits of the assetclass, particularly preferreds,
is you have low default rates.
Preferred stocks are almostalways issued by public
companies.
They care about their credit,they can issue more equity, they
can cut their dividends.
So that's what we've seen.
We never had a default in PFFAover six years.
The default rate's only 0.3.
(31:02):
For preferred, it's about threepercent for high yield bonds
and 0.1 for investment gradebonds.
So attractive default ratesmeans that you should be able to
close to realize your coupon isa long-term return.
I mean, we're always optimizingour portfolio so we're trying
to beat the coupon, but noguarantees, of course.
(31:24):
So the good thing aboutpreferreds, if you can look at
this chart over on the right, isand a lot of people appreciate
this you're senior to common, soyou can continue to be paid
even if the common stockdividend is suspended.
A lot of times they'll take itto one cent, but even it's
suspended you continue to bepaid, and particularly on
cumulative dividends.
(31:45):
The companies are so you inother words, they don't pay you,
they owe it to you laterreluctant to suspend the
dividend because it doesn'treally do them any good in the
long run.
And that's what we've seen isvery few suspensions of
preferred dividends, even duringthe pandemic.
Tons, tons of common cuts, butvery, very few preferred cuts,
(32:05):
and a lot of times they suspendthem and then catch up right
away.
So you can see that the marketcap of the company's issue
preferred is very large.
So good credits, high yield also.
And the good thing aboutpreferreds, only 10% are private
.
You do in high yield generalbonds, you get a fair amount of
(32:28):
private companies.
We don't let private companiesrun by private equity firms
typically trying to take moneyout of the company.
So with our BNDES fund, we arealmost exclusively public
issuers that care about theircredit ratings, will issue
equity, not try to takedividends like private
(32:50):
high-yield issuers.
Here's the default rates I wastalking about just under 0.6 for
preferreds and about 3% forhigh-yields, and they were only
a little bit worse during thefinancial crisis.
So in terms of comparing thetwo funds, you can see that we
(33:21):
have large market cap issuersand attractive yields and so
pretty similar in terms ofnumber of issues.
So somewhat similar funds, buthigh yield bonds tend to be less
volatile.
Preferred stock a little bitmore volatile, but higher longer
(33:44):
term returns.
So the key advantages the reasonreally we have to have active
management for bonds and fixedincome securities is these three
risks interest rate risk, callrisk, credit risk.
None of those exist withequities, so it's okay to be an
index fund for equities becausethey're not.
These are characteristics offixed income.
(34:05):
So we manage the interest raterisk by both adjusting the
coupon and looking for floatingrate.
We're actually selling ourfloating rate now because we
think rates will come down.
Call risk when they go abovepar, which is $25, you really
need to sell them because theybecome unattractive above par.
And then the most obvious,credit risk.
We're constantly monitoring tomake sure we don't have any
(34:27):
defaults.
But it's good to outsource thattoo, because you should have a
diversified portfolio.
So you have 120 creditschallenging for an individual to
monitor 120 credits.
Bmds is a high yield bond fundthat yields 8.
It's reasonable expenses at 0.8.
We look for very strongcompanies, usually very old
(34:54):
economy, asset intensive, likeweights, utilities pipelines,
but with attractive yields.
We're looking for, you know,attractive spreads, and this is
the key point about high yieldis that in terms of getting a
(35:16):
good amount of yield relative tovolatility, really high yield
bonds are the best.
So high yield bonds are halfthe volatility of preferreds and
about a third of volatility ofthe S&P the volatility of the
S&P.
So you know, if you're lookingfor lower risk or lower
volatility way to add income,high yield and BNDS is very
(35:37):
attractive from that perspective.
It's true about total returnand yield.
So it's a little bit less.
It's not at the opposite topwhen it comes to yield to
volatility.
So the other I mentioned thisalready but to extend, you have
higher coupons, you have lessduration and less correlation to
(35:58):
interest rates, and so that'swhat we typically look for.
So even if we're wrong aboutthe 10, you're going to 375,.
Bnds should continue to do well, get your eight coupon.
Even if it doesn't appreciatein price that much, you still
get eight, and so it's not assensitive to interest rate risk
as most bonds are.
(36:20):
Call risk Just need.
If something's trading abovepar, you've got to sell it.
It's pretty easy to manage that, but it's time intensive.
If you are an individual Creditrisk.
We have our own credit ratings.
Rating HEs a lot of times aretoo negative on dividend paying
stocks, so like utilities, reits.
(36:40):
So we have a lot of thosepipelines.
So it's easy really to come upwith better ratings than rating
HEs.
They also tend to be a littlebit too positive about
financials.
We saw that over the lastcouple of years where First
Republic was rated double Asingle A rather two weeks before
(37:00):
they went bankrupt.
So that's our prepared remarks.
Speaker 1 (37:05):
So if there's any questions, michael, maybe we can
answer those, or if you haveany questions, yeah, and so I
always go back to this broaderpoint that typically income
isn't demand when volatility isrising, right, I think, of the
total return spectrum in termsof there are times everybody
wants capital appreciation,times everybody wants income,
(37:27):
and typically the pendulumswings back to income when
capital appreciation is at risk,right from a volatile
environment.
Now, great that this is kind ofa very short-term movement, but
it does look like markets aregetting more volatile.
You see a lot of that actuallyintraday look like a strong
comeback and then a heavysell-off in tech.
At the end Do you get a sensethat that pendulum is going to
(37:47):
really swing hard now towardsthe income side of the equation?
Speaker 2 (37:51):
Well, I think so, because not just because we're
having this kind of seasonalvolatility, but we're becoming
more and more confident that ourcall on slowing growth is going
to unfold.
So in a declining interest rateenvironment, obviously that's
really good for fixed income,but it's also good for the
non-tech sector.
(38:11):
But when tech's not doing well,the overall market is flat to
down, like it was today, likeactually there's a lot of stocks
up today, so in thatenvironment you could vary In
terms of opening the S&P versusfixed income funds.
You're probably going to bedoing quite well on a
risk-adjusted basis.
(38:32):
We do think it's a good time tobe in small caps on these
interest rate sensitive stocksthat do better when tech's
rolling over to that, to getboth price appreciation in the
fixed income side and rotationinto old economy and small caps.
Speaker 1 (38:56):
From experience and you have these very abrupt
momentum breakdowns like we'restarting to see in tech.
Are these short-lived or did ittend to be maybe suggestive of
more broader cycle shift ofmoney rotating?
Speaker 2 (39:12):
well it does.
It depends on the economicoutlook.
So during 22, everybody keptsaying that, oh, tech stocks are
down because rates are rising,because they're longer term
duration.
Well, that sounds perfectlyreasonable, but it just doesn't
happen to be the case.
So tech stocks have the sameduration.
All stocks have very long thecase.
So tech stocks have the sameduration, all stocks have very
long durations and they'rebasically all the same.
(39:33):
They have to be profitable,which most of them are.
So in the case of 22, you didn'twant to catch those falling
nines because you had the Fedconstantly raising interest
rates, slowing economy, risinginterest rates.
So you really have to get toget that answer.
You need to get the macro right.
We think that the macro is goodbecause of growth in the tech.
(39:59):
Even if the stock prices aredead, there's still a lot of
spending going on and a lot ofstartups are going to go public,
which helps employment, helpsCapEx.
So our assessment is theeconomy's fine, so that this is
just a minor pullback, and it'salso entirely normal late
(40:20):
February through March to havepullbacks.
So that's our call.
We have the 6,000 target on theS&P, so that implies it's you
know, don't rush, but at somepoint you should catch, you know
, or not catch a flying knife,hopefully.
But when things go down, startstabilizing and we're getting
close to the end of March wherewe're going to get an earnings
season, we think it's going tobe totally fine, but it does.
(40:43):
It's a good time to demonstratethat.
Maybe it seems blind on PFFA toyields nine, but it basically
does nothing whether themarket's way up or way down.
So on days like today, I feelpretty good about it.
I mean, it's flat, basically,and tech stocks are down well
(41:04):
over one, the S&P is down one,so good place to be during
drawdowns of the regular stockmarket yeah, it does look like.
Speaker 1 (41:12):
Um yeah, this is another point you and I've
talked about on the podcastbefore um I, it does look like.
Again, I go back to this kindof flight to safety dynamic with
treasuries.
It's maybe coming back, whichis more like the way the market
used to work prior to the past.
I say about history as we thinkthrough valuations now, granted
(41:33):
, this is a sweeping question,but, generally speaking, is it
fair to say that fixed income asan asset class is considerably
cheaper than equities as anasset class?
Speaker 2 (41:46):
Well, equities are about 22 times earnings and
we're using that for 7 000target as well.
I mean, you roll forward to getthere right, because we have
about 10 percent growth built inand I'd say real quickly that
earnings growth is more or lessautomatic, that just retained
earnings being invested inreasonable returns like 15 so%.
(42:07):
So when you hear, oh, the S&Pis going to grow at 10%, a lot
of pundits will say, oh, my God,that's too high.
Well, that's like it normallygrows at 10.
But 22 is high relative towhere the bond yields are.
We kind of need my 375 to takehold to make equities attractive
(42:29):
where they are now.
So they arguably are overvaluedby you know, the two.
That's two like almost twomultiple.
So that's a lot, or we thinkthey're fine, but that's
theoretically.
You can easily make thatargument.
And then I think maybe, um,high yield bonds are a little
(42:49):
bit similar to that becausespreads are pretty tight.
Now we buy ones where thespread's wider.
So I don't think ours areovervalued.
But if you just go buy theindex funds, they're at least
somewhat tight.
So I'm not sure they're thatmuch more cheap.
But if we do have a situationwhere rates are dropping, people
continue being nervous abouttech stocks.
(43:11):
They're going to dramaticallyoutperform.
Speaker 1 (43:13):
I don't think we've talked about this before, but I
am generally curious about this.
If somebody on small caps, ifyou look at small cap equities
versus the equivalent small capequity bond issuances by these
companies, how do those look?
Are there dislocations in thesmall-cap bond side of things
relative to the?
Speaker 2 (43:33):
equity side.
Well, you know that's.
One advantage of not beingsmall-cap is that there's some
diseconomies of scale to issuingbonds.
So all the bond investors wantto have really big issues of
like $300 million, $400 million,$500 million at every, every
maturity.
So when you do that math youhave to have like three billion
dollars of bonds to really makeit economic.
(43:57):
And the rating agencies hatesmall companies, I think too
much.
So they tend to get single b,double b ratings.
So most of the time, um, smallcaps have lines of credit and
term loans.
They can swap them out.
So they're like the notion thatthey're taking tons of credit
risk I'm sorry, interest raterisk is not really true because
(44:18):
I can swap those but sotypically their portfolios are
more dominated by those type ofsecurities and then only when
they're getting closer to themid-cap is it economic tissue a
ton of bonds.
So if you look at ourportfolios, would they tend to
be?
You know the issuers are moreof the large cap issuers and
they are safer.
(44:38):
They're more equity.
You know, easier to issueequity and bail out the bonds
and fail from.
Speaker 1 (44:45):
How closely do you consider liquidity in in BNDS of
some of the underlying bondpositions?
Speaker 2 (44:51):
I mean we're definitely looking for more
liquidity.
We do have some positions inthe portfolio that are just
meant for liquidity.
So we have a small amount ofETFs so that we can, if we need
to sell something quickly, wecan just do that.
But all the bonds are, you know, well-traded.
(45:11):
They're not all listed.
Some of them are.
A good portion of them actuallyare listed on stock exchange,
which is unusual.
So we do have a favor there.
So I think about, off the topof my head, like 30 to 35% are
actually listed Very unusual.
But the rest is or have goodover-the-counter markets.
So liquidity is definitely aconsideration, yeah.
Speaker 1 (45:33):
Yeah, as you look across the various funds that
you have out there, if you wereto blend them into one
all-encompassing portfolio, whatwould be, in your view, sort of
the overweights of thedifferent six funds?
Speaker 2 (45:50):
Well, I mean it's always important to bifurcate
between fixed income and equityincome because you're like
taking three times as much risk.
So I would just say, withinfixed income, I do think it's
important to have a goodallocation to preferreds and
high yields because in the longrun you're going to get better
returns and lower interest raterisk and only a little bit more
(46:14):
equity risk.
And in particular now, whereit's more neutral now, but
before, earlier in the year, ourinterest rate call was much
more controversial than ourequity call and so if we were
wrong about the interest rateside but right about equities,
you definitely want to be inhigh yield and preferred and not
(46:37):
in investment grade bonds,aggregate bonds, mortgages and
treasuries, so they're prettyall weather.
So I'd recommend, like, if youhave 40%, it's fine to have even
half of that 40% bonds, half ofthat, or 10% or 25% of your
fixed income and high yield andanother 25% in preferreds.
(46:58):
You're going to get much betterlong-term returns and better
risk characteristics.
And then on the equity incomeside, so say you're 60-40, so
that'd be 60% of your portfolio.
I do think that having 5% or 10%small caps makes sense.
Having dividend stocks 5% to10% makes sense, because when I
(47:21):
go I don't do it a lot, but goanalyze individuals' portfolios,
they basically all have the S&Pportfolios.
They basically all have the S&PLike they're called different
things, but you know it's largecap this, mad and some other
maybe active funds and so youjust end up with 40, 45% tech.
You know whether you like it ornot, but when you mix in these
(47:46):
dividend stocks you get close tozero tech.
So they're more defensive, moreincome.
So if you have a slug of MLPs,small cap dividend, large cap
dividend and then the normal.
However, some people like puretech stocks, which you don't
really need if you have S&Pfunds.
But a lot of people have thoseand also their individual names
tend to be tech stocks as wellbecause they like Apple or
whatever, and also they getlocked into it.
(48:07):
I launched with a friendyesterday.
He said well, I've owned applefor like 25 years because if he
sells it pays a million dollarson it.
So most investors are over,slightly by accident, over
allocated tech.
So, putting a big slug ofdividend stocks in, like you
know, our three funds, if youwant diversification and to do
(48:31):
like our funds are roughly flattoday, even though the market
was getting annihilated.
Yeah, a little bit more of asleep, well at night.
Speaker 1 (48:37):
type of Right.
Speaker 2 (48:39):
No, you shouldn't have tech stuff.
I mean, we're bullish on techand they'll, you know, think
tech stuff will do fine.
But I prefer lower volatilityreturns, like today, where our
funds are boring.
They're not skyrocketinganything, but they're boring.
And if you're in a tech fundlike if you're in a pure tech
fund, it would be down likewhatever.
The one and a half 2%.
I didn't see how to work itclose, exactly.
Speaker 1 (49:00):
For those on the webinar, Jay, who want to see
more in terms of fact sheets orread the actual prospectus, it's
imprecatfundscom.
Speaker 2 (49:08):
Yes, yes, yes, and you can also ask questions on
the website.
You can register for a monthlyyou have a regular monthly
webinar and send directquestions to me, or?
Speaker 1 (49:20):
marketing people, everybody that's here again
those that are attending for theCFP CE credit.
I will email you shortly,either later today or early
tomorrow morning.
We'll get that done with therequest information.
Appreciate those that didattend.
Hopefully you found thisinsightful.
We'll be doing more of thesewebinars with all kinds of
interesting content with Jay andhis team in the coming months.
Everybody enjoy the rest ofyour evening.
(49:40):
Thank you, jay, I appreciate it.
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