Broadening the opportunity set in fixed income for volatile times

Erica: we've seen so much volatility in the yield curve, where we've seen some volatility in spreads, but still historically tight for this part of the cycle. Why do you think having actively managed fixed income with more flexible mandates will be especially important in this market environment?

Brian: Yeah. I think you need to take a little bit of a different approach than your traditional core plus investing, given the way rates have moved in here. And so having flexibility to go beyond your Treasury, your mortgage, your high quality investment grade corporates gives you, I think, an opportunity set that allows you to be return-seeking regardless of where the opportunity is or what the environment is. And so flexibility to go to securitized credit, which is a growing market. Where we've seen securitization of a number of different assets such as data centers, fiber, aircraft leasing in the last few years. That esoteric asset backed space is now 40% of the overall asset backed market. So it's been growing quite significantly. Higher quality bank loans. There are five-B rated and six-B rated investment grade rated bank loans that are, we think, can provide you with an excess return over triple B investment grade corporates at this point in time. And so that's a couple of examples. And one more would even just be crossover high yield. Thinking about names that can cross over from high yield rating into investment grade. And again, good, we think, yield there but also the potential for price appreciation as spreads tighten when they get those upgrades. And so we want to be flexible and we want to be able to look for excess return across a number of different segments of the market that may not be tied to that traditional core plus or multi sector type of investing.

ERICA CASALE: Certainly one of the top questions we've been asked, and probably one of the primary reasons that consumers have maybe become a little bit more cautious, say, the unknowns around Trump's potential tariff policy and the impact from that. How do you say you're viewing the proposed tariff policies, as we understand them today, and the potential impact on inflation this year?

BRIAN KENNEDY: I think we've heard Trump say a few times now that he has a mandate, and he has stated some of the numbers about the election, winning the popular vote, all the electoral ballots that he won, the electoral votes, and also the swing states. So he really, truly believes he has a mandate, and we do think that he actually does believe that tariffs are a good thing in some cases in here, and that they'll be helpful. 

I do think at this point that we're likely looking at tariffs that are going to be in place for a longer period of time. If you think back to the tariffs that were put in place during his first administration, largely against China, most of those are still in place today. Trump has referred to President McKinley, on occasion, as someone that he's looked at in the past and has modeled himself after as far as his economic policies, and McKinley was also very in favor of tariffs at certain points in time. So he truly wants to change the global terms of trade in here, and has been very forthright in the fact that he is willing to sacrifice some short term growth and potentially equity gains in the US to do that. And we've seen some of that right now. So we do think that tariffs, which we initially thought would just be a negotiating tactic, may actually be here to stay for a little while longer than we thought. So I do think that that has ramifications for economic policy and also growth and inflation output over the time in the US here.

ERICA CASALE: Your team has actually been talking for the past several years now about how unstable inflation will most likely be a marker of this post-COVID world. What are the driving forces behind that?

BRIAN KENNEDY: Yeah. I think largely what we've settled on is our secular themes called the four D's. Deglobalization, decarbonization, demographics, and deficits. And while we look at those today, I think they largely are still in place. If I was to assess each of them, I would tell you that deglobalization continues to accelerate here. 

We're past the peak of globalization at this point, particularly given the recent spate of tariff announcements in the US and what we would fully expect to be reciprocal and retaliatory tariffs as well, coming in the future as well. So globalization, as we know it, is largely a thing of the past right now. And that has an impact on costs. If we're going to reshore, near shore some of our manufacturing capabilities and some other capabilities, there's a cost to that. Decarbonization, largely, I would say, decelerating in the US at this point but still maintaining in places like Europe. But that's one that I think over the long term needs to be solved. So we'll continue to keep an eye on that. The demographic patterns around the world. We continue to get older as a population, both in the US, also in Europe, but more specifically in China, where the demographics are actually worse than anywhere in the West. And that has an impact, again, on the ability to produce cheaper goods. And more close to home, the immigration crackdown and what that means for the ability to find workers. Are we going into meatpacking plants? Are we going into fields where people are picking fruits and vegetables? How deep do these policies go, and what kind of an impact does that have on wages and on the labor force in the US in the future? And then finally, deficits. And they continue to rise here, both in the US, but also in Europe. And I think Europe's a new phenomenon, a little bit of a new realization that they're finally going to need to spend for a couple of different reasons. We'll talk about that in a minute. But there is also some potential tax cuts coming here in the US, and so deficits continue to grow. All of these, we think, leads to a higher for longer interest rate regime. And so we do think that this is a different secular environment than what we've seen in the past.