Transcript: Matt Eagan – The Big Picture

 

 

The transcript from this week’s, MiB: Matt Eagan, Loomis Sayles Fixed Income, is below.

You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here.

 

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00:00:02 [Speaker Changed] Bloomberg Audio Studios, podcasts, radio News.

00:00:09 [Speaker Changed] This is Masters in business with Barry Ritholtz on Bloomberg Radio.

00:00:15 [Barry Ritholtz] This week on the podcast, I have an extra special guest. If you are at all interested in fixed income, how you assess bonds, how you evaluate the economy, the market, what the fed’s gonna do, what clients want, how to assess risk in credit markets, well then you are gonna really enjoy this conversation. Matt Eagan has spent his entire career in fixed income from credit analyst to portfolio manager. Now he’s the head of the discretion team at Loomis Sales, which manages well over $335 billion in client assets. He’s really seen every aspect of the fixed income side more than just a bond manager, but someone who has really covered it from credit analyst to research analyst to fixed income member to full unconstrained bond manager, and now running this discretionary team. His group has about 75 billion that they’re responsible for. I don’t, I don’t know what else to say other than there are a few people in the world that understand running a fixed income portfolio on behalf of institutional or retail clients, a as well as Matt Egan does. I thought this conversation was fascinating, and I think you will also, with no further ado, Loomis sales. Matt Eagan.

00:01:37 [Matt Eagan] Thanks For having me, Barry.

00:01:38 [Barry Ritholtz) Well, well, thanks for coming. Let, let’s talk a little bit about your background. You get a bachelor’s from Northeastern and an MBA from Boston University. Was finance always the career plan?

00:01:49 [Matt Eagan] It was not. I started Northeastern as an electrical engineering. Oh, that’s interesting. Major. And the good thing about Northeastern University, they have tremendously great cooperative education program that saved my life because it made me understand I did not want to be a double E or an engineering prof in my profession. And the key was I started, after one year, I kind of gutted through one year of engineering classes. I wasn’t really that interested, but I gutted through it and I started interviewing for the first internships, and I started, you know, I had a number of them. I realized I am not like these people and this is not what I want to do. And so I transferred to the business school after that.

00:02:27 [Barry Ritholtz] It’s so funny you say that. I started out math and, and physics, and in high school I was a rock star in math and physics. And you get to college and suddenly it’s like, oh, I’m okay at this. But those guys are great, right? And you quickly realize, hey, this is way above my pay grade, right. I, I need to figure out what I need to do. So Northeastern and Boston, were you a Boston kid?

00:02:47 [Matt Eagan] Boston kid…Well, I grew up outside in a relatively small city, and of course moved to the city to go to school and just fell in love with Boston. I’ve stayed ever since.

00:02:58 [Barry Ritholtz] Right…Oh, that’s interesting. And is that where you are today? You’re not New York, you’re Boston Based?

00:03:01 [Matt Eagan]. I’m in Boston. Right, huh.00:03:03 [Barry Ritholtz] And, and there’s a giant set of finance firms in in Boston. That must be fun

00:03:08 [Speaker Changed] There. Yeah, there was a lot to choose from, you know, as a, as a, you know, newly minted finance major coming outta school. There were a lot of things to do. This profession wasn’t necessarily my first choice coming out of undergrad, but there were plenty of other things to do in, in the field too. It’s a broad field

00:03:24 [Speaker Changed] For, to say the least. So, so you, you start out credit analyst at Century back in Bank and Trust prior to getting an MBA, what was it like being a credit analyst in the 1980s? Yeah, I

00:03:36 [Speaker Changed] Gravitated to, I, I had envisioned myself as a commercial banker, you know, back when I graduated and I had done an internship at Bank of Boston. One of the first things I did was spread financial statements. This in the old days before, really, there were spreadsheets there and we would take Fortune 500 annual reports or 10 Qs and put ’em into a spreadsheet, give ’em to the commercial loan offers. That was when I first started getting involved with looking at companies. So when I, you know, I fancy myself as a loan officer. There were great programs in that field there, there was a super regional banking industry in Boston. However, when I graduated, there was a really kind of a nasty correction in the market. You know, what year? 1989. And you remember there was a pretty nasty recession? Sure. In 1990, believe it or not, Massachusetts unemployment was over 10% back then. Wow. Which is hard to believe. ’cause Mass always had relatively low. But there was a real estate crisis back then. I, we

00:04:28 [Speaker Changed] Were just talking about this over the weekends. You know, the problem with the financial crisis models were supposedly many failed to contemplate real estate prices going down. But I remember coming outta grad school in the late eighties, and friends who had purchased co- ops in New York City in like 87, 88, 89. You didn’t get back to break even till like the late nineties. There was a major dip. It might’ve been worse in some areas than others, but nationally real estate founded in the

00:05:01 [Speaker Changed] Nineties. Right. New England was crushed. Yeah. There was a big glut of condos. You know, you’d walk, ride by certain, you know, you’d be on the highway, you’d b go by say a hundred unit condo building, and there was one light on. Right. You know, it also hit hard in Texas too, which was, you know, after the oil bust,

00:05:18 [Speaker Changed] The See-through buildings. Yep. Right.

00:05:19 [Speaker Changed] So that was the origination of See-through buildings. Right, right. And it was a great learning experience for me. But first of all, when I was in the, you know, looking for jobs, you had to go to the placement office back then. And as I was looking at jobs, I remember looking at a GE finance job, and as I was looking at it, somebody pulled it down in front of me and said, it’s not available anymore. That’s where the economy was at that point. Right. And so, but I, I, I knew a fellow, this guy George Duncan, who was a friend of my dad’s. He, he was a president of a small bank enterprise bank up in Lowell. He didn’t have a job for me, but he got me in touch with Century Bank and Trust. I had a, an interview there, became credit analyst. I was thankful I had an opportunity at that point. So I did that first, and that was a good learning experience. Again, you know, what I witnessed then, as you know, that real estate bubble kind of burst is those same loan officers with their underwriting loans that I was helping them do, they became landlords. Oh, really? You know, that was the thing, you know, because they were, you know, they, they were taking on some losses and they would have to go in and show the buildings, you know,

00:06:15 [Speaker Changed] Property managers Oh, other ones. They would take over buildings. They

00:06:17 [Speaker Changed] Were taking them over. Yeah. So, so I mean, that thing did fine. We were fine. But, you know, that was, it was an experience.

00:06:22 [Speaker Changed] So essentially they go from underwriters to default managers. Sure. To suddenly we’re a real estate portfolio. Right.

00:06:29 [Speaker Changed] It’s like working with the borrower. Right. You know, that whole, that concept. But, but I didn’t stay there a lot that long. I learned how commercial banking worked, but I had an opportunity after that to move over back to Bank of Boston, which is where I was interested in at the time. So,

00:06:42 [Speaker Changed] So how did you end up as a senior fixed income analyst at Liberty Mutual Insurance?

00:06:47 [Speaker Changed] It was funny, that same fellow, George Duncan, when I talked to him, he said, go, go check out this bank. He said, you know, whatever you do, you’re gonna need to go back for a graduate degree. Go get your MBA and make sure your company pays for it. And the guy who ran Century Bank of Trust was an older fella, guy Sloan. He, he was, it was a family owned bank. And I asked him, Mr. Sloan, will you, will you pay for my MBA? He said, absolutely not. He said, you’re gonna get it and you’re gonna move on. Fair, fair assessment. And I said, all right. You know, and, and actually, so that’s why I went to Bank of Possum. From there, I started, I enrolled in Boston University, and that’s when I started meeting people that were actually in the investment business. And I met a really good friend of mine at that time. We went through our entire career together, MBA career, and he said, why don’t you come over to Liberty Mutual and, and apply for a job in the investment department? And so I did that and I started working there. And that was, to me, really my first sort of entry into, you know, investing.

00:07:40 [Speaker Changed] So I’m assuming at Liberty Mutual what you’re investing is the firm’s own capital from the insurance. Right. It’s

00:07:46 [Speaker Changed] The, the pot of money that the, it’s the insurance money.

00:07:49 [Speaker Changed] And, and what was that experience like? How did that affect how you approach fixed income today?

00:07:55 [Speaker Changed] To me it was sort of the bootcamp for fixed income investing. So we were a pretty lean group of individuals by nature. Most of us were research people and we were giving corporate, you know, insurance companies do a lot of corporate investing. So we each had our own sectors. I took on the banking sector, which was interesting. I had a number of other things as well. But we also traded for our sector. So we had an empty trading room, and the tart phones were in there. If you wanted to trade, you say, Hey fellas, we’re, you know, I’m gonna go do some bank trades, you know, come on in. And we’d call Wall Street and we’d, you know, we’d do the trades right there. And when we’re done, we would go back to our research and also dabbled in a little portfolio management. At the time, I ran a Mexican peso denominated portfolio, believe it or not. So it was a really great bootcamp. And, you know, I had a, a really interesting manager there who was really disciplined people in terms of research. It was deep dive research. We did a really good job.

00:08:49 [Speaker Changed] Huh, really interesting. So from Century Bank to Liberty Mutual, the rest of your career has been primarily on the fixed income side, right? Wa was that happenstance by design? What, what led to that outcome?

00:09:02 [Speaker Changed] You know what, I think it just was a natural fit for me, you know, with the, the training as a, as a commercial bank analyst. And then it just really kind of fascinated me more. And so I think, you know, my skillset when I was, you know, approaching employers, it just naturally gravitated towards the fixed income area. And for me, surprising to say, it’s a little bit more exciting than, than stocks. I mean, stocks are, are interesting, but there’s so many different facets to fixed income. It’s become highly, much more specialized. But I’m fortunate, I I span a lot of different areas, you know, my career, which is, has

00:09:36 [Speaker Changed] Been so, so let’s talk about that. So not only are you head of the full discretionary team, and we’ll, we’ll get to exactly what that means in a bit. But you run 10 different mutual funds and 10 institutional strategies. I assume there’s a lot of overlap. And it covers the spectrum of fixed income from treasuries here to high yield there, and everything in between.

00:09:58 [Speaker Changed] Everything in between globally. So we’re kind of an eclectic group, you know, in terms of investment style, it sounds like there’s a lot of, of strategies that we do. And that’s true. But really there’s the same common investment engine underneath it. And that’s really what we’re focused on. I spend most of my time on that. And what does that mean? It means the frameworks and the investment processes that we put in place, provide through that, provide the raw materials for investing that’s views on rates. You know, where do you want to the duration to be, et cetera, views on the value in certain sectors, views on individual securities, you know, so that’s the raw material that we get. And then we can mix and match that to our various portfolios. Most of our portfolios, really, it’s a spectrum, is kind of think about it. And it’s a spectrum for, I would say, lower risk to a higher degree of risk that’s usually, but not always defined by the quality that you can invest in. So as you go down more non-investment grade, for example. Huh.

00:10:55 [Speaker Changed] So, so I like the idea of this engine as the underlying driver of all these different strategies. It’s not that there are 10 completely novel approaches and 10 different funds. It’s really the core, and you are just playing with how much returns you want and how much risk you have to take to get that. What sort of duration you’re looking at, what sort of geographies. But the underlying engine is the same across all these different portfolios.

00:11:22 [Speaker Changed] That’s right. That’s right. And, you know, we can expand that risk depending on the client. And so when you look across our least risky brand, we run a really great core plus product. It’s a a bit more out there than the typical core plus

00:11:34 [Speaker Changed] That you’ll see.

00:11:35 [Speaker Changed] You know, in other words, got

00:11:36 [Speaker Changed] Core plus meaning treasury, corporates,

00:11:38 [Speaker Changed] Treasury corporates, you know, but we don’t do, for example, we don’t do a lot of agency. We don’t know agency mortgage backed securities. We, we definitely tilt into corporates. That’s our, you know, our bread and butter, what Loomis is known for our research. And sothat’ll have, you know, the least amount of risk, let’s say relative to say, a multi-sector bond fund style portfolio, strategic income that’s gonna tilt down. But when you look across those, you’ll see commonalities in terms of interest rate, positioning, names, exposures from a top down and a bottom up perspective.

00:12:10 [Speaker Changed] So, so you are now the head of the discretion team. Tell us what that means. Certain funds have discretion, others don’t. I think the average late person is not familiar with discretion in that context.

00:12:23 [Speaker Changed] You know, the business sometimes does a poor job of labeling things, and this is not no different, you know, and, and I, I, the way I kind of describe it is that, you know, a more constrained approach is typically something wrapped around an index. You know, and I, a lot of our competitors in the core plus space are like this. They take a benchmark in that case, the aggregate index is by bar the, the most common one used. And they’ll all have a very low tracking error that they’ll just ebb and flow with pretty much the beta that’s, you know, assigned to that with maybe generating a little bit of excess return for the good managers that, that are there. You know, when you start to get into something that has full discretion, the client says, okay, let’s sort of go or lean into your opportunity set where your skills are. Let, let’s allow you to do more and have a wider degree of risk and off benchmark in your sector. And that’s where that full discretion notion, so when you think of core plus, it’s those plus sectors, non-investment grade, you know, emerging markets, things like that, that somebody was looking to you to have discretion. But full discretion doesn’t mean you don’t have any limits. Right. You still, we all have constraints, right? There’s always constraints.

00:13:27 [Speaker Changed] So the phrase I always hear is, it’s an unconstrained fund, right? What’s the difference between constraints and discretion, or, or are they just really the same terms? They’re,

00:13:36 [Speaker Changed] To me, they’re, they can be used interchangeably. I think the nomenclature typically, you know, when I started and multi-sector, for example, is changed. We run the bond fund, which is kind of a go anywhere strategy or strategic income. Those used to be called multi-sector, even before they were medium grade or something like that.

00:13:52 [Speaker Changed] See, today, when I think of multi-sector, I think of corporates, treasuries, high yield equities, right? And privates, including private credit. All that seems to be multisector unconstrained. Yeah.

00:14:04 [Speaker Changed] It’s cha this is where the nomenclature changes over time. I’ve known it causes some confusion. And then, you know what emerged too, and I launched one of these over 10 years ago, was that unconstrained or non-traditional space? That was the, right, you know, what’s the difference between unconstrained in multisector? Well, there’s not really that much difference. The young constraint typically does not have a benchmark. That was one aspect of it. So the,

00:14:27 [Speaker Changed] So does that mean it’s an absolute return fund or Yes. Yeah. So,

00:14:31 [Speaker Changed] And don’t care about

00:14:32 [Speaker Changed] Relative

00:14:32 [Speaker Changed] Performance. And what’s the difference between absolute return and total return? Right. In some ways, because like the bond fund we’re looking, I, I don’t really manage on atracking year. I don’t like managing on a relative return. Let’s say, you know, like let’s say, oh, Mr. Client, you know, the, we outperformed, but your index was down 10% and we were only down nine. That’s not really a great outcome, right? Right. We’re looking to make money and that’s absolute return or total return, whatever you wanna call it. That’s what we were able

00:14:58 [Speaker Changed] To do. See to, we talk about jargon and confusing labels. To me, total return on the equity side is equity plus dividends. Right. As on the bond side, it means something else. Income.

00:15:09 [Speaker Changed] Right. That’s income and principal return. That’s

00:15:12 [Speaker Changed] Right. So you’ve spent more than 27 years at Loomis sales and company. That’s rather unusual these days. What has kept you around so long? What’s it like growing with the firm that that’s been in business coming up on a hundred years?

00:15:29 [Speaker Changed] Sometimes you’re, you know, you’re, you’re looking and doing your job and you wake up, you know, you look up and you go, wow, I’ve been here this long. It’s been fun. I’ve enjoyed it. You know, when I first came to Loomis, you know, I encountered this guy named Dan Fuss, and I was, to me it was like a duck to water. I just took to his style. I can’t imagine doing investing any of the way. It just suited me to a team.

00:15:49 [Speaker Changed] And, and he is a little bit of a legend, isn’t he? He is

00:15:51 [Speaker Changed] A, he is a legend. Yeah.

00:15:52 [Speaker Changed] He, he’s been around a while. And how long have you, did you work with him?

00:15:57 [Speaker Changed] Well, the funny story, I, when I first came to Loomis, I was interviewed, there was a sort of a, an arms race for research analyst on the street on the buy side. At that point in time, wall Street had tons of research analysts, but the buy side was really ramping up. And I had a lot of opportunities to, to interview. And one of them was at Luma Sales. And I got the job and a fellow helped me. This guy Dan Holland at Goldman Sachs was Instru instrumental helping me. I, and so I got the job and I’m like, well, there’s this guy Dan Fuss there, and I know I don’t really know him that well, but he’s 65, let’s say. At the time. I said, I don’t know, you know, it seems like he’s really a key marquee part of that firm. Maybe there’s a risk there. And Dan told me it was great advice. He said, Matt, five years is an eternity. Right. Take the job. Right. So many eternities later, because Dan worked, is still working. He’s 90. Really? Yeah. He could still come to

00:16:45 [Speaker Changed] The office. God bless him. Wow.

00:16:46 [Speaker Changed] He stopped managing money a while ago, but never did I expect what was to come. And nor did I expect that I would become a successor for him. That was the, the entry point. And I’ll tell you a story about when I first came, there was 97, 98. Okay? The Asian crisis was just getting going. Remember the T bot to value it went down like 50% and, you know, LTCM was gonna hit Russian

00:17:08 [Speaker Changed] Default. Right? Right.

00:17:10 [Speaker Changed] And so it was, you know, bonds were coming out and, and back then there was the, the Brady Bond market was still big. Brazilian sea bond was the most liquid bond in in the universe. The market was going down. And I witnessed Dan with a big smile on his face in the trading room in the morning meetings. I’d go there and he would be snapping up all these bargains, right? Our portfolios went from, you know, close to zero in the Asian market to reaching, like, we’re talking about constraints, reaching the limits that we could do by specified by the guidelines at 30, 35%. Right? And so that was a huge lesson for me. First of all, I said, this is where I want to be. What he was doing there was providing liquidity to ILE liquid markets. Now, I participated in some of that as a research analyst by looking at companies like Total Access Communications that tie wireless company, PL dt, Philippine, long Distance Telecom. It’s like at t of, and all

00:18:04 [Speaker Changed] These companies have fixed income, all

00:18:06 [Speaker Changed] Fixed income.

00:18:07 [Speaker Changed] They’re all, and they’re trading way

00:18:08 [Speaker Changed] Below bar cents in the dollar, right? Cents a dollar. In the case of total access communication, bought the stock at 11 cents, went to five, you know, went

00:18:16 [Speaker Changed] To 5 cents or $5. $5.

00:18:18 [Speaker Changed] That’s

00:18:18 [Speaker Changed] A good trade.

00:18:19 [Speaker Changed] Yeah. I should have specified that. So these were, you know, like in my formative stages, like as a, as a research analyst and becoming, you know, not just a research analyst and making calls or, you know, sort of opining on the credit quality or, or the opportunities and, and risks of a particular credit. It’s really becoming an investor. And that’s, that’s sort of what Dan taught me.

00:18:39 [Speaker Changed] I I, I love the expression providing liquidity to illiquid markets, which usually means picking up things at fractions of their actual value. The same phrase was during the financial crisis when people talked about toxic assets. And my answer was always, there’s no such thing as a toxic asset, right? There’s only a toxic price at the right price. Everything has value

00:19:02 [Speaker Changed] Without a doubt. And it introduced me to sort of that concept of margin of safety. A lot of people talk about it, but with bonds, it’s really interesting, particularly corporate bonds. As the dollar prices come down, your risk goes down because there’s a recovery in the worst case scenario, you end up, you know, owning the company basically. Right? Right. So the recovery value, and sometimes those recovery values are the trading value you could come close to, or if not below the actual recovery value in those situations. So, ’cause like a quant person would come in and say, oh, your value at risk is going bonkers right now, you know, vol of your portfolio is 9% and your, they’ve got it backwards.

00:19:36 [Speaker Changed] It,

00:19:36 [Speaker Changed] It’s like, no, no, this is the time you want to go. And in fact, at that point the returns are skewed in your favor. Right. The forward looking returns. Huh.

00:19:43 [Speaker Changed] Really fascinating. So let’s talk a little bit about the team. You work with, your head of the full discretion team. What does the team do? How are they working with various funds and strategies and how do they work with client? Right.

00:19:55 [Speaker Changed] So we’re managing roughly about $74 billion in fixed income portfolios. We have four main product categories that talked about our core plus offering, which is our largest over $28 billion. And then it goes into sort of multi-sector. And then after that you’re into the high yield. We do all our dedicated high yield and bank loan investing as well. Like I said, we’re a pretty eclectic, we tend to not look like our benchmarks. We have a lot of discretion to go outside and we’re, you know, really interested in just generating the best total returns we can from a very wide opportunity set.

00:20:28 [Speaker Changed] Hmm. Really, really interesting. You talk a bit about various strategies across all the funds. I wanna dive into these and get a handle on what they mean. So I often see the phrase research driven bottom up approach. I assume that means we’re not making big macro calls, we’re looking at quality, we’re looking at duration, we’re looking at risk,

00:20:49 [Speaker Changed] Right? I mean, it’s hard to get away from macro calls altogether. Fixed income portfolio, for example, duration is a big call you gotta get. But you know, a lot of our alpha, our so-called total excess total return is driven by our bottom up security selection. And that comes through really excellent research. When you look at our process, we do think about a macro. We are credit cycle investors, as I said before, we lean into the credit markets where we’re gonna make our money is tilting into risk. So for us, you know, most of our intermediate quality is gonna be triple B average quality of our portfolios. So we, so that’s

00:21:24 [Speaker Changed] A little below investment.

00:21:25 [Speaker Changed] Yeah. And we think that it really makes sense to tilt in through the cycle. Okay. To get that spread premium, you get compensated for it as an investor, you know, maybe it’s only a hundred or 200 basis points, but compound that over five years, you got more than double the money. It’s significant. Yes. The key is to not, to avoid permanent losses. And that’s where, you know, the individual security selection comes out. We tend to be concentrated in those. So we, when we find something we like, we’ll buy it relatively big size, not as big as they say a 40. You know, you look at the stocks, you might say something like a 35 stock portfolio. You can’t do that in the fixed income. Right. You gotta diversify more. But that’s what we seek to do.

00:22:06 [Speaker Changed] Opportunistic. We’ll get to value driven. That, that is so interesting on the fixed income side. And so different than what people mean when they say value and equity. What are you getting paid for the risk, you assume in fixed income, like if we look currently, especially with an inverted yield curve, you’re not getting paid a lot for a very long duration. But there’s some risk with very short duration that hey, if the Fed decides to eventually one of these days cut rates, well the, your, your short term duration, now you have reinvestment risk. How do you think of value relative to fixed income?

00:22:45 [Speaker Changed] You’re bringing up a a point. There are a lot of different types of risk premium in fixed income, more so than there are just in the stock market. And that’s interesting because you can build really interesting portfolios that have different risk factors that covariate very well together. It was not perfectly correlated. So that has diversification. So let, let’s just focus on the interest rate risk premium that you’re talking about. You bring up a good point here. So first and I learned a lot about the this from Dan, but you think about this, let’s take a big, big step back about interest rates. You know, we all know for a long time your concept of reinvestment rate risk andprinciple risk are the key big picture risks that you take in fixed income for many decades. You know, after the poll, voler SL inflation, right? Your

00:23:31 [Speaker Changed] Biggest

00:23:32 [Speaker Changed] Risk people really didn’t understand this, but your biggest risk was reinvestment rate risk.

00:23:35 [Speaker Changed] Right? Especially when you’re in a 30 year market where rates continue to fall. I, I remember my father-in-law saying to me back in like 2000, he had a bunch of NYC go bonds that were 15% when New York City was in trouble, right? And he is like, what can I do with this? I’m like, ah, we get six and a half, seven on the treasury. He’s like 7%. That’s why would I want 7%, right? Well, it’s going lower. We will talk in a few years, it’ll be 5%. No, can’t be

00:24:04 [Speaker Changed] Yes. Yes. Yeah. So race start came down more and more, more than people are expecting over time. You know what’s interesting? Dan used to run a 10 year duration in his portfolio. That’s for people to know. That’s very difficult to do. You have to buy basically 30 years zeros, right? To kind of get you out there. And he was doing that in the Canadian bond market. Zero. So it was very interesting. People ask em, well, well you don’t manage duration, it’s sort of artifact of your portfolio. It’s like, no, no, no, I want to maximize that because I wanna capture this yield for as long as possible. Don’t worry about the cycles because you’re gonna have lower lows and lower highs. And that persistent until about 2003. Remember the conundrum, the bond conundrum, right? Rates started getting really low. We was kind of back then even approaching the lower bound,

00:24:47 [Speaker Changed] That whole excess savings nonsense we heard from, oh, at least I thought it was nonsense, fixed income people might have a different view,

00:24:54 [Speaker Changed] Right? And so, so then you, now you, you had to get to a point where you start, okay, now you have to start considering the principal risk. Now it took a long time before principal risk has become a problem. But over, even, I would say even before the pandemic, there were signs that you needed to start flipping your calculus as a fixed income vector investor on a secular basis.

00:25:16 [Speaker Changed] On other words saying, Hey, we’ve been at zero for a long time. Eventually rates are gonna go up and I would rather be sooner than later. ’cause if I wait too long, especially with long duration rising, rising rates in long duration, fixed income leads to capital loss

00:25:35 [Speaker Changed] In 2020. The tenure was 50 basis points. We ran a very low duration there. And you gonna say, well it wasn’t a big risk because you were at the zero lower bound. What are the chances they’re gonna go lower?

00:25:45 [Speaker Changed] And you weren’t getting paid for it

00:25:46 [Speaker Changed] And you weren’t getting paid for it. Now that seems like an e decision now, but it, not necessarily at the time because people weren’t sure. But that was a really good call for us. And before you used to be able to ride the, like Dan did the tenure, you could just stay long. You cannot stay short right? In this market and expect to do well over the long run. You’ve gotta manage through the fed cycle. So I like to think about it as a fed cycle. I think we’re, you know, obviously coming to a cutting cycle soon, your risk now on reinvestment rate risk is in the short end. And I think it’s time to kind of move out into the intermediate of the part of the curve.

00:26:20 [Speaker Changed] I I, I totally agree. Yeah. We, we’ve sort of taken the same approach internally. Let’s go over the rest of your core principles for the, for the key strategies we briefly mentioned multi-asset. Does that include equities that, does that include private credit? How multi is multi-asset?

00:26:38 [Speaker Changed] Multi-asset does include for certain portfolios, you know, the more risky portfolios we, we can start putting in stocks, our most risky strategic income, we can do up to 35% stocks in that portfolio. Then you go into something called global allocation, which I manage the bond sleeve, but with a couple of great equity managers and a great global manager on the fixed income side, that is typically like 70% stock. So we, we do bottom up stock selection as well.

00:27:05 [Speaker Changed] So, so in your multi-asset where you’re looking at the equities, is it a particular type of equities? Are you looking at dividend payers? Are you looking at convertibles? What, what sort of equities complement the fixed income side and the multi-asset? Yeah,

00:27:20 [Speaker Changed] You, you, you bring a, a good point. Equity premium can be gotten from not just stocks, but also from converts. Yeah. Right? So we do that across all our portfolios, right? Even ones that don’t necessarily allow us to buy outright stocks. We can buy convertible bonds and we’ve made hay in that market because it’s, I think it’s less efficient. So it’s,

00:27:38 [Speaker Changed] It’s a challenging space because if if done right, you get the best of both worlds. Yes. And if done poorly, it’s the worst of both worlds. Hey, low yield, but at least there’s principle risk. That’s right. Who wants that?

00:27:50 [Speaker Changed] Well, it’s the only kind of bond that’s a growth bond too. So if you’re right, you’re really right. And we’ve had some really great winners like Corning over the years.

00:27:58 [Speaker Changed] Well, if the underlying, if the, if the parent company has some positive corporate event, well obviously the, the convertibles right. Do really well. And some of them have, you know, the terms that say, Hey, well this is gonna convert at this low price when the prices up here, it’s a win-win other than having to pay the taxes. Right?

00:28:17 [Speaker Changed] So we do that and, and we’re very good at that, always have been. And on the stock side, you know, we are, we’re, we’re fixed income investors. Our investors expect us to generate yield. So that pushes us into the dividend paying stocks for the most part, I would say from a bottom up perspective, you know, our research group does a tremendous job at uncovering value. What I ask my analysts to do is really understand what the assets of a company are worth. Okay? This is our fixed income analyst. You know, this typically, you know, you think of equity,

00:28:44 [Speaker Changed] Meaning invent of a default. What do we end up with as as, yeah. But even

00:28:47 [Speaker Changed] What is, yeah, but what is the value? Because then I can look at the cap structure and I can say, how well is that debt covered? But, and then I can look at, have a view on the stock too. So oftentimes where we see the best value is that in the equity market misses it is when a company is going from say, you know, a low quality, but is all of a sudden moving up rapidly from a credit fundamental perspective that starts to accrue eventually to the stock. It’s sort of goes from sort of worry about the leverage to, oh, we’re not worried about it. The risk premium starts to come down the stock. And, and it starts to

00:29:19 [Speaker Changed] Reflect. So, so when you’re doing your fixed income corporate analysis of bonds, you can also identify mispricing on the equity side.

00:29:27 [Speaker Changed] Absolutely, yes.

00:29:28 [Speaker Changed] We see that all the time. You, that, that explains this sort of pet thesis I’ve had for many, many years. A lot of my favorite equity analysts began as bond analysts or our bond analysts with opinions on equities. And it’s very different than the equity side, perhaps because of that exact reason. They’re really in the minutia of cap table, the corporate structure, what the priorities are. And that really seems to provide a lot of insight into what is this company really worth going forward.

00:30:02 [Speaker Changed] I agree. We see it all the time.

00:30:04 [Speaker Changed] So, so let’s talk a little bit about your clients. Luma sales manages, oh, well over $300 billion, 330, 300 $40 billion. Who are your clients? I know they’re primarily institutional and they’re spread out over 20 countries. Is it us, Europe, Asia? Who and where are your clients?

00:30:22 [Speaker Changed] The most of our asset bases in North America, as you would expect being a US manager, but we’ve expanded both in Europe. Asia I think is our biggest pot of money out outside of the United States. So we’re, we’re pretty much everywhere. We have offices now in Singapore for Loomis offices in Singapore and, and, and London. And that’s something that’s grown as I’ve grown over there. It’s been, it’s been fun to kind of expand internationally of my client base. Half of it is retail, you know, we’re either doing our own funds or sub advising on that half. And you know, so we’re dealing mainly with the, the big wirehouses, like the Merrill Lynchs of the world, et cetera. You know, the fas are investing in the, in the funds. That’s for the most part RIAs too, places like that. And then on the institutional side, we do, of course, all private pensions, sovereign wealth funds, public pensions, taf, Hartley plans, insurance, all of that.

00:31:13 [Speaker Changed] Huh, really interesting. How often do you get to London or Singapore?

00:31:17 [Speaker Changed] I go to Asia. My wife’s from Sydney. I was just in Sydney a couple weeks ago. Interesting contrast between the US and Sydney right now. But

00:31:25 [Speaker Changed] Why, why is that?

00:31:26 [Speaker Changed] Well, one, this goes back to the Fed and the transmission of policy here in the United States. We’ve been, what’s the, the average mortgage now is like a three handle. Yeah,

00:31:34 [Speaker Changed] Three. Like if you look at the pool of mortgages, 5% or below, it’s like 65, 70% of yes, all outstanding. Whereas most of the rest of the world is variable, not fixed mortgages. That’s

00:31:45 [Speaker Changed] Just it. So that transmission is muted on the upside for when the raising rates for the Fed on the downside.

00:31:53 [Speaker Changed] Refinance,

00:31:53 [Speaker Changed] Refinance. I’ve ref, I’ve refinanced mortgage once a long time ago before I made one coupon payment. But that, so there’s a sort of asymmetry now I, when I was over in Sydney visiting family and doing some business, you talk to people there, their mortgage bills is hitting theirpocket buts right away. Right. A little bit of a lag, but it’s killing ’em right now. Right. And you know, inflation is tough there. The same themes here are there, but you can start to see it more. There

00:32:17 [Speaker Changed] Is, is that why we’ve seen who, who’s cut rates over the past few weeks? The Bank of

00:32:22 [Speaker Changed] Canada, well, Canada

00:32:23 [Speaker Changed] Bank of Australia, right. B, CB, our

00:32:26 [Speaker Changed] RBA has not done that. They just, they have not yet. Yeah. And they’re even talking about raising, because inflation is still a problem there. Now the, the difference there is they got way more immigration. Right. And it’s a growing population. You talk to a developer there, they have the same housing problem, not enough. They just can’t enough. Right. And you can’t find skilled laborers to, to do the job. So that’s, that’s where the similarities are.

00:32:45 [Speaker Changed] It’s still a robust economy that’s doing pretty well. It’s

00:32:47 [Speaker Changed] A robust economy. Yeah. So, and Australia’s always been like that ’cause of that growth. Right.

00:32:51 [Speaker Changed] Plus they have China, they’re a giant supplier to China for commodities. Everything else. I would love to go to Australia. I am just so intimidated by that flight. It’s a long flight, right? It’s like 18, 20 hours, something crazy like

00:33:04 [Speaker Changed] That. You bring a good book with you. Yeah.

00:33:05 [Speaker Changed] You gotta bring a couple of books, a couple of movies and yeah. And some sleeping pills and you’re halfway there. Right. It’s, it’s really tough. Alright, so across your career at Loomis for 27 years, you have gone from analyst to portfolio manager to head of, of the full discretionary team. Tell us what that transition was like and how are you able to relate with some of the younger analysts in the firm considering you started out where they did?

00:33:34 [Speaker Changed] I kind of got lucky in that there was an opening as a, as a portfolio manager. And you know, I had spent only three years in the research group. I was sort of snake bitten as an analyst. Anything I touched as a, as an industry seemed to blow up. But when I came to Loomis, I was covering oil and gas when oil went to $5 a barrel, right? Or $10 a barrel, something like that. And then I also covered

00:33:50 [Speaker Changed] $8 a barrel. Yeah. I wanna say late nineties, something like that, right?

00:33:55 [Speaker Changed] It was, yeah, it was late nineties. And on the cover of the Economist it said $5, right. With a, and I’m like, that’s the

00:34:00 [Speaker Changed] Bottom. And that was, so, it’s so funny you say that I, I sat in on a meeting, I won’t mention the firm, and listened to the market strategist slash managing partner scream about two and $3 oil. Yeah. And I leaned over the guy next to him. I’m like, you’ll never see a lower print of oil in our lifetime. Literally read the same nonsense that this guy was spewing in Barron’s that weekend. I’m like, gee, this sounds kind of like the opposite of what you get at the tops in equity markets. That’s it. O oil is bottomed. And that was it. Sure

00:34:34 [Speaker Changed] Enough, it was, yeah. And so we made some good money, we made tons of money at Chesapeake Energy back then and the Asian crisis made a a lot of money with Dan in the trading desk at that time. I also covered wireless telecom. So that entered into a, you know, so anyways, I had a lot of swings there that went really well. And I was asked to manage money with Dan and I, I didn’t expect it at that time, but it just happened. And so I fell into that. Back then it was a lot different. You ate what you killed. What I mean by that is you were loosely affiliated as a portfolio manager. You know, I basically would hang my name up on a shingle, say Matt Egan, portfolio manager and a client would hire me, right? Not necessarily Loomis. And we were loosely affiliated around like the Dan Fuss style, and I love the Dan Fuss style. So I was investing like that. But my first opportunity as a, as a portfolio manager, you know, you had to go where other people didn’t want to go. The other senior managers didn’t want to go. So an opportunity came up in the middle of January to go to Helsinki, Finland for a high yield opportunity. And I raised my hand

00:35:29 [Speaker Changed] In the middle of January,

00:35:30 [Speaker Changed] In the middle of January, which is quite interesting. It’s very cold

00:35:33 [Speaker Changed] And very dark and

00:35:34 [Speaker Changed] Very dark. And I went there and I got a, it was like two or $300 million mandate for high yield. So that was great. At the same time we started institutionalizing as a business because Loomis was really created as an investment counselor back in the day. The manager did bonds and stocks and worked directly with that client, right? one-on-one. And we needed to institutionalize, when I first started Loomis, we were 80 billion in a UM and we were growing, right? So now we’re almost 350 billion. So it’s been a lot of growth. And that’s one of the reasons growth creates opportunities for people. So we need to institutionalize. We, we hired a new C-E-O-C-I-O came in to help us do that. And we created teams. And that’s when we started to create the, the team that, you know, Dan was on, I was on Elaine Stokes, everybody’s retired except for me off that original team. You know, from there I started creating that product team that you see over 20 people today. We institutionalize the products, the, the product offerings, which really makes you think about how do you explicitly state what the objectives are, right? And then we institutionalize the framework. And I think behind every great shop, equity, bonds, whatever, behind every great manager is a great framework, a repeatable framework. That’s the hardest thing we did.

00:36:50 [Speaker Changed] Yeah. Developing the process that you can do over and over again.

00:36:53 [Speaker Changed] We had the foundation, we had it up in our brains. The idea was to put it on paper and, and, and write it out. And that took a long time. And then of course, succession for Dan was a huge part of my, my role.

00:37:05 [Speaker Changed] So, so let’s, let’s talk a little bit about what you describe as the Dan fuss approach. I, I love the concept of opportunistic investing. So a few questions. Let me just start with, explain what is the Dan Fuss approach?

00:37:23 [Speaker Changed] Before I answer that question, let me just describe, you know, a situation when I became a portfolio manager. I was a credit guy, you know, I was a credit research analyst and I really liked high yield investing. And you know, Dan was covering all these markets and it looked really daunting. I mean, when I say everything, everything around the globe, he was reading, you know, Asianpapers, he was covering Canadian bond markets and all the Aussie bond markets, et cetera. I said, Hmm, maybe I can just do high yield. I said, Dan, you know, I think I just wanna focus on our high yield portfolios. I what do you think about that? And Dan said, you’re not gonna get away with that.

00:37:55 [Speaker Changed] Too easy.

00:37:55 [Speaker Changed] You’re not gonna get away with that. So you are, you are going to be a better investor. Trust me, you’re gonna be a better investor if you can cast a wider net. So that’s one of the first thing, cast a wide net. Okay? So I said, all right, how does he do that? So what I, I started observing him and what people know Dan very well, most of the times when you, and this to this day, he still does this. He stands up in his office and there’s a sort of a table that he’s at. He, he charts things by hand. He, he charts commodities, bond prices, stock price, all of these market information. So I asked him to show me this, and it was done on green ledger paper, you know, the old green accounting paper. Sure. And he started flipping this thing open and it just flipped page after page, after page. He used to have a, he has a, a, a slide ruler that he says he used to scratch his back and also to, to do straight lines.

00:38:47 [Speaker Changed] And I said, wow.

00:38:49 [Speaker Changed] Right. I said, why do you do this? He said, I learned through the end of a pencil. Okay. And what it does is it allows you to connect disparate spots and connect points that seem unconnected. And then you see that they are connected, right? And that’s where, how you learn as an investor. So I started doing that. I did it through spreadsheets. It’s different than just looking at a chart. You pull up a bloom chart, you look at it, right? It doesn’t stay with you as well. Another way method is actually either writing it out or putting it into a spreadsheet and looking at the data over time and tracking it. Economic data, GDP data, employment data, bond prices, auction, I, I have auction, you know, data going back on a spreadsheet back to the 2000. So that helped me become a multi-sector investor.

00:39:39 [Speaker Changed] Huh. Really, really intriguing. Yeah. I, I took the technical analyst course in the nineties with Ralph Empo, and I had not only heard something very similar from him to what you’re describing with Dan, but a number of traders and fund managers and technicians all had said, I, I like the expression, learning from the end of a pencil looking at a chart is not the same as drawing a chart. You end up feeling something viscerally that you can’t get just by visually viewing it. Especially when you’re doing it every day with a whole run of different assets. What you begin to feel is a real rhythm, a real intuition as to what’s going on. It, it may look random and often is, but when you’re doing it manually day by day, you kind of get a sense of what’s happening. Yeah.

00:40:29 [Speaker Changed] In fact, it’s almost, it’s your intuition that everybody talks about. You start to build this kind of intuition about the market and these funny feelings that something’s going on, you know, under the surface. And then, you know, I like to listen to that. And you start sort of unpeeling that and it leads you to start to focus on areas that maybe other people aren’t focusing on. That’s,

00:40:47 [Speaker Changed] That’s the art, not the science. That’s right. When I think of opportunistic investing on the equity side, it’s very much, you know, buying, when there’s blood in the streets, taking the opposite side of, of panic, it’s a little harder. Tops and bottoms. Bottoms are very visible. Tops are this long, slow process, but it’s really visceral and emotional and people are panicking. And I’ll make alittle liquidity over here. What you described in terms of opportunistic investing on the fixed income side seems somewhat qualitatively different. What is opportunistic investing on the bond side?

00:41:26 [Speaker Changed] I think it’s, it’s similar. I mean, like I said, we provide liquidity to markets, so we’re looking for dislocations in the market and that because of greed and fear, you know, or different differences in timing of, of horizons of investments, you know, for the street is very short. You know, we can be longer. I think, you know, for the temperament, for my style, I think you have to really enjoy volatility. I notice that while I’m smiling, when the market is down, and I think that’s an important kind of trait to have. I get antsy and kind of more grouchy. Unfortunately, a lot of the times you’re in these markets where they’re just kind of going sideways and there’s not a lot of value. Right. That makes me grouchy. I try not to bring that home, but, you know,

00:42:07 [Speaker Changed] Grouchy or is it just boring? It’s

00:42:09 [Speaker Changed] Boring. Which makes you a little bit irritable, you know? And I, I think, you know, I really enjoy, I I probably would’ve been a good er doctor. I, I like it, you know, in 2020, you know, we’re in the pandemic, right? Right. And that’s going on. And you can buy McDonald’s at 70 cents of the dollar. I love that kind of market.

00:42:27 [Speaker Changed] That’s hilarious. That’s, I, I remember in the middle of even the early months of oh eight and after being kind of a goat for a year saying warning, Hey, it’s coming. I don’t know exactly when it’s gonna start, but you could see this can’t last in, in oh eight, I used to play free falling by Tom Petty on the computer, and one of the older senior people said, listen, I understand what you went through and you’re finally getting a little comeuppance for everybody who doubted the analysis, but people are getting fired, there’s blood in the streets, you gotta take it down. Right. So that, that like smile is like, okay, you gotta kind of Yeah,

00:43:05 [Speaker Changed] Exactly.

00:43:06 [Speaker Changed] Gotta kind of keep it on the inside. But I, when I was younger and dumber, I, I didn’t realize that now I’m older and dumber and I kind of figured some of that out. So let’s talk about the state of the bond market. You and I kind of began around the same time around mid nineties, we were the beneficiary of Paul Volcker’s breaking the back of inflation. For, for anybody who has been working in markets for most of the past, you know, 40 years rates primarily trended downwards. How does that impact how you think about fixed income? Sure, there have been occasional spasms upwards, and we’ll talk about the 2020s next, but what does that framework do to how you were running a bond portfolio in a multi-decade long bond bull market?

00:43:57 [Speaker Changed] Right. Well, you know, I, of course we went into the QE years and, and you know, you had to look at like real, what QE does is it pulls real rates into the negative market and, and the Fed basically sells, tells you do something else. Go buy risk, right? During those periods, you just had to follow what the Fed was doing, you know, and if they were providing liquidity in the market, you could feel pretty comfortable taking risk. And

00:44:17 [Speaker Changed] That’s literally the past 20 years. You gotta go back to the 2001 recession. And then September 11th, we were pretty close to zero for decades. Yeah.

00:44:27 [Speaker Changed] So, you know, the, the bond market really changed during that. You remember, you know, you used to earn, you know, you used to think about the yield curve under classical thinking, thought processes, what the fed’s doing, what the economy’s doing during those QE years, you’re just worried about what the balance sheet of the fed looked like. Is it, is it expanding or contracting? And that pretty much told you what to do. Really. I think QE now is sort of in the rear view mirror for now. I don’t think it’s gonna come back. I think we’re in a different type of market where people who have not witnessed an era where inflation is driving more decisions, I think you really should look, you know, at longer history we, I was telling some of the younger people like, do not try to expect to extrapolate what’s going to happen based on recent, I mean, I’m talking like decade or two type of bond markets

00:45:13 [Speaker Changed] Mean reversion doesn’t mean going back to zero. No, it means it goes to 5%.

00:45:17 [Speaker Changed] Right? So I, I think that, you know, it kind of goes back to that concept we were talking about reinvestment rate, risk and principal risk. Now going forward, your biggest concern or your challenge and it’s manageable, is how do you preserve principle while getting to a higher level of yield? So you think of in today’s market, you know, used to be we were watch walking down a a steep staircase, it was going down, down, down. Now you’re looking at steps going up before you, I believe

00:45:42 [Speaker Changed] Is is that the new trend? I believe

00:45:43 [Speaker Changed] It is. I think we can talk about that there’s a structural feature to this market that’s gonna keep it higher for longer. Let’s call at least over the next decade or so. And then there’s a cyclical component, which we can talk about in a moment. But the structural components are, there are tailwinds to inflation. And the biggest drivers, the is the fiscal deficit.

00:46:03 [Speaker Changed] I was gonna ask about that. We, we’ve had this giant regime change that during those 20 years, the prime driver was monetary policy. Right? Now it feels like not only do we have a massive fiscal stimulus first with the tax cuts under Trump and then CARES act one and two, which were giant fiscal stimulus. But now you have cares Act three plus all of these 10 year long, the infrastructure bill, the semiconductor bill, the inflation reduction bill, whatever the name of the bill was, that added a whole bunch of money to the veterans hospitals. And those are all 10 year ongoing fiscal stimulus. Is, is that what you mean when you talk about Yeah,

00:46:44 [Speaker Changed] I started, this actually really predates the, when I started thinking about this, like for example, you know, I was always asking me during those QE years what fundamentally needs to change for us to start thinking differently about structurally where rates are going. ’cause we were starting to see labor market conditions tighten. Remember around 18, 19 the Fed was starting to Yep. You know, it started to go the other way.

00:47:06 [Speaker Changed] QQ four 18 was a major draw down in the equity market, almost 20%.

00:47:10 [Speaker Changed] Yeah. And so you could see wages were just starting to lift up and now all of that was hidden by the pandemic after that. But there’s a tightening in the labor force underneath all of this. And that’s the demographics I was reading, the great demographic reversal at that time, by good heart et all it was talking about the aging of the population. People used to think aging of the population is deflationary. Well, he put a different spin on it and it kind of got me thinking. And the big thing there is globally in the industrialized world, this is true.

00:47:37 [Speaker Changed] Wait, the aging of the population is deflationary or is not,

00:47:41 [Speaker Changed] Is not

00:47:42 [Speaker Changed] So, so the traditional discussion is people get older, they stop consuming as much as they do when they’re younger. They already own their house, the mortgage paid off, they own their cars, they’ll drive ’em forever. And that’s somewhat deflationary. What, what’s the counter? Well, he

00:47:57 [Speaker Changed] Talks about, it’s really about the working age population. And if you looked at the big event that we had was the ascension of China to the World Trade Organization around 2001 or something like that. They brought 800 million people to the working age population. So our wages in the developed world were crushed on a, you know, on a, on a real basis. So there was sort of stagnation in there. You know, their wages grew in the emerging markets, they, they became richer. Now we all know that story now that China’s, you know, population is rolling over now, right? And globally in the industrialized world, the working age population is kind of stagnant. And that’s the tightness there. You’re seeing there, the people who spend are the young folks and the older folks in the middle the way working age populations where the saving takes place. So as you age, you actually spend your wealth.

00:48:47 And so that’s what’s going on. I think, you know, there a lot of people push against that theory and I, I understand a lot of that. But I look at it anecdotally, what did we see? We saw, you know, some immunization efforts happening in this country for the first time, and it’s small, right? But in Amazon and so on, and we can feel it, you know, in our spending, you know, wages, you know, haven’t necessarily kept, kept up with this boost in inflation, but they’re, they’re continuing. So that was one aspect of it. The other thing that was going on in Trump was, you know, really started more or less a trade war with China. Trade had been sort of, you had the chimerica, you know, you all understood that it worked well for both parties. Now we’re in a situation where it’s not working well. There’s tensions there. Securities concerns are, are rising and have risen. So now you have nearshoring, you have chips, war, things like that. You have this fence spending going up. So all of these things are adding to that inflation. And then on top of that, you have electrification through climate change and other factors, EVs, all of that stuff.

00:49:47 [Speaker Changed] What, what’s the impact of electrification? Which I saw a chart this morning that just showed China’s electrification has just blown everybody else away. They, they are moving towards full electrification, right? Faster than anybody else by an order of magnitude, right?

00:50:04 [Speaker Changed] They’re winning sort of in the battery in the EV space. We know, we know that they’re leapfrogging in certain areas where they can just sort of jump technologies, if you will. That happens a lot in the emerging markets. So the electrification though, you know, in the United States, in the developed world, it’s all about the grid and how, you know, we’ve gotta get our grid able to handle all these EVs, all the electrification that’s gonna take place. And that’s gonna require just an, a massive amount of investment and also stranded assets down the road. Hmm. So all of you add all of these factors. I think structurally there are tailwinds to inflation. Now, what I think that means, what the consequences are of that are, is that inflation will be unstable. And so you’ll have cyclicality inflation. Think of it as like the saw tooth where the teeth become, you know, steeper.

00:50:50 You probably remember this. You have more variability in the economic cycle because what inflation does is it adds uncertainty to consumers spending. It adds uncertainty to planning for businesses. And so you get these fits and starts, it’s a more compacted business cycle. It makes it difficult or trickier for the Fed to deal with. So I think that’s what we’re going to see. This last cycle was really weird, you know, and I think we’re gonna see more of these types of cycles. And so I just think you need to have that in your brain about how this market’s gonna be behave. And, you know, we can talk about the cyclical component of that today and how you play it in the near term.

00:51:26 [Speaker Changed] The big counter to hire for longer that I keep hearing is, you know, the things that are bringing rates down hasn’t been higher interest rates because of the lack of pass through in the housing market. Although it is impacting the bottom half of the economic stratas credit spending. It’s costing them more. But wherever we look, we see these structural shortages. So you mentioned how tight the labor market is. A lot of that is a reduction in legal immigration, not just under Biden and under Trump, but going back about 10, 15 years, that kind of post nine 11, we, we tightened our, our rules. Some people have said the entire jobs growth over the past few years has been primarily immigration, giant shortage in housing in the United States. Mostly because since the financial crisis, we pivoted to multifamily homes and, and didn’t build enough homes to keep up with population growth. And suddenly there’s a giant surge. E even things like cars and a shortage of semiconductors and how long it took to get all that back online. We haven’t had enough automobiles out there. That’s what’s elevated prices. So that’s a long-winded way to say, how much can the Fed influence this current cycle of inflation when it’s driven in part by so many things that are responsive to policies outside of the Federal Reserve.

00:52:52 [Speaker Changed] Yeah. And I think that’s been their number one problem here. And there’s been, you know, supply side issues. I know you’ve talked before about, you know, the housing market, you know, you raise rates and then people stop building new homes and how does that impact the supply of housing? It’s counter, you know, right? It’s

00:53:06 [Speaker Changed] Counteracting raising rates makes inflation higher. Seems sort of weird. It’s,

00:53:09 [Speaker Changed] It’s, it’s a weird situation. I think all of that is true. I do not know for sure that we’re structurally on a higher, for longer type of scenario, higher highs and higher lows. That that is the way I think you should bet right now based upon what I see. Other factors that I think are gonna, you know, know particularly on the demographic side, what about ai, right? How does that affect, you know, productivity, the productivity mirror to have some,

00:53:32 [Speaker Changed] I mean, outside of the AI companies, the rest of the marketplace,

00:53:35 [Speaker Changed] The rest of the, you know, just how does it affect wages? How does it affect productivity? Can you actually have rising wages and rising productivity and growth without, you know, wage inflation? Because if you don’t have wage inflation, it’s tough to get kind of like a more of a sort of a spiral of, of

00:53:50 [Speaker Changed] Inflation, not a structural inflation,

00:53:51 [Speaker Changed] Right? It’s not structural. So if you do, if you start those things start to fall away, you kind of have to say, well, maybe we’re back to a 2%. I, I think it’s, it’s not, I’m not talking about a reverse. I saw the seventies as a young, you know, young person. I know what that’s, I’m not suggesting it’s gonna be like that, but I just think that what’s important for a bond ambassador tounderstand is that inflation, which was stuck below structurally below two is gonna be above two. Right? To some level, how much, I don’t know. But I think it’s gonna spend more it time above there. Higher for longer in my mind means higher real rates and higher inflation premiums for the uncertainty of that inflation. So what does that mean? I think for example, like on 10 year today, like long term, you know, maybe fair value in the 10 year, somewhere around four point a half percent. So

00:54:39 [Speaker Changed] That would suggest now is the time to start lengthening duration if you haven’t already.

00:54:45 [Speaker Changed] Yes. And with a caveat that I think that it’s gonna be a shallow rate cutting cycle. I think they start at, sometime at the end of this year would be my expectation. I think the economy cyclically is losing momentum. You’re, you’re

00:54:55 [Speaker Changed] Seeing it on the consumer spending side, starting to drift lower retail

00:54:59 [Speaker Changed] Sales. The while the yield, there’s a lot of problems with the job data that I, you know, can’t even want to go into. It’s hard to trust that data. But when you look at claims data, but even when you start digging into the, the job data, you know, you look at permanent job losers rising, you see, you know, part-time overtaking sort of full-time. So on the, you know, it’s not, I’m not, this is not a big correction, let’s face it, unemployment’s really low. But on the margin, you know, you’re gonna see that deceleration.

00:55:27 [Speaker Changed] It’s a robust economy, but cracks are starting to show in the foundation.

00:55:31 [Speaker Changed] And you know, like you always see, like people are not gonna know your, let’s say you go into a recession, I don’t think it’s gonna be a full blown recession. Those numbers are revised. Like I always thought, it is funny to me that we spend so much time, you know, job report Friday comes out and everybody trades all over the number. It’s

00:55:46 [Speaker Changed] The most important number that all

00:55:47 [Speaker Changed] The month and a year later, all those numbers are revised in a big, big way. Yes. And you’ll often see, oh, we actually were losing jobs in that period of time. You know, I don’t know if that’s going to happen. It can go both ways. It can revise to the upside too. But I do sense, my, my sense is that it, you know, looking at the tea leaves out there that were decelerating, if,

00:56:08 [Speaker Changed] If that’s the case, then I have to ask you to put on your Fed chairman hat and say, what are we waiting for?

00:56:15 [Speaker Changed] I think the, the Fed has been jawboning rates as they lower, they wanna, yeah, they’ve been jaw boning. So remember they, they last November timeframe, they, they did the doubles pivot. I think they did that to get ahead of the election cycle. I know people say, well, the Fed doesn’t respond to elections. I talked to a prominent fed chairman, says, you know, in a weak moment, said, you know, you kind of have to take that into consideration. I do think they’re political animals at the end of the day, to a certain degree,

00:56:41 [Speaker Changed] Although they have raised in previous ele, they,

00:56:43 [Speaker Changed] They’ll do what they need to do.

00:56:45 [Speaker Changed] They, they’ve done rate changes in prior election years,

00:56:48 [Speaker Changed] But this election is a big one, right? And so I think they just wanted to be outta the way and then they could be in a position to jaw bone the rates. ’cause they knew they had done a yeoman’s work already to reduce the spike in inflation to get down to that beginning of the last mile, right? So the last mile that’s been more difficult than it expected. We were thinking that as well. We faded that bond rally in the fourth quarter. The curve, I think it’s a shallow rate cycle. Most of the rate cuts are gonna come from the front end of the market. Remember, the Fed controls the front end of the market out to the two year, maybe even a little bit in the five year after that. It’s,

00:57:26 [Speaker Changed] It’s all the bond market.

00:57:26 [Speaker Changed] It’s all the bond market, particularly the 30 year. It’s in its own, it’s its own beast. It runs to supply and demand. I don’t want to get stuck long, the long end, especially going to the election uncertainty. So I think you don’t wanna get that reinvestment rate risk on a TBI and you know, watch that 5% go down to a four or 3% handle in short order. You want to move out in that five, seven year part of the curve. That’s the best risk reward I think.

00:57:52 [Speaker Changed] The belly of the curve. Yes. The middle of, of the duration. So let me throw one more question at you and then we’ll get to our favorites. The curve ball question is tell us what Boston scores is. What do you do working with kids and team environments to help build character?

00:58:09 [Speaker Changed] It’s an interesting organization I’ve been involved in for a while now, and what Boston Scores does, it’s the largest K through 12 after school program for Boston Public Schools. So they partner with Boston Public Schools, they’re known for their soccer program. So they provide free soccer programs after school for children to get involved. A number of days, a weeks. And they also, in addition to that, provide other Richmond like poetry and they actually have an entrepreneurial type class, which I, I find interesting. So this is a terrific way to get these kids together working as groups. It’s about mind, body and, and spirit really. And they learn how they can, you know, solve problems in their community, gets ’em prepared for potentially going into to college, you know, as they come towards their 12th year. So it’s terrific. I’ve seen the outcome for, for kids and they have so much confidence. Some of these kids that are coming out, I look at ’em from where, you know, when I was graduating at that time. And it’s just amazing what these kids in this program does for the Boston School.

00:59:11 [Speaker Changed] So, sounds really interesting. All right. Our favorite questions, and we’re gonna turn this into a speed round. Tell us what’s keeping you entertained these days? What are you watching or listening to?

00:59:20 [Speaker Changed] I’m watching The Three Body Problem On, loved It. Yeah. So I read the book a while ago, somebody, I was reading the New York Times, like, what is this book? You know, the Chinese,

00:59:28 [Speaker Changed] It’s such a slog to get through.

00:59:29 [Speaker Changed] It was, I read all three of them. Wow. I actually read, there was a fourth one written by a fan that finished it. Interesting to read if you’re, you want to continue that saga, but do you know that that’s on Amazon and Netflix? There’s a, there’s a Chinese version on Amazon. Oh really?

00:59:43 [Speaker Changed] I had no idea that that one is like, did you see, did you subtitle? Did you watch that one?

00:59:47 [Speaker Changed] I started that one and I flipped to the Netflix one because it’s faster moving. I think I That’s a hard book to translate. I

00:59:53 [Speaker Changed] Picked it up and tried to read it a few times and just got, it’s like, it’s like the first 92 pages of, of 1984 is a tough, tough, tough slog. But I was, I was down with Covid in March and just binged it and it was, I thought it was fabulous.

01:00:09 [Speaker Changed] Yeah, typically don’t read a lot of sci-fi. But I, I read that and somebody said, if you like that read Isaac Asimov and it was Read Foundation. Sure. It’s an old, you know, classic.

01:00:18 [Speaker Changed] You, you, you know, once you go down that rabbit hole, there’s no coming back. You should be, you should be aware. What else? What are the other ones you’re watching? So

01:00:25 [Speaker Changed] I, I have more, I have a bigger group of portfolio managers now. We, we went from four to about eight people, like managing different kinds of portfolios. And what I’m most interested is behavior biases now, because you get more people in the, you know, in this, in making decisions, it’s important for a strategy to have consistency and temperament and all that. The problem is you get eight people, they don’t all have the same temperament. So I want people to really understand what their biases. So the greatest guy to go to is a, is a conman on, on thinking fast and slow. Right? They’re all those behavioral biases. I read that again, thinking fast and slow. And you know, the fast part reminds me is that’s the intuitive side of investing, right? And, and we were talking a little bit about that. That’s really important. I want to, you know, foster that. But that can lead to a lot of behavioral biases and the slow part, which is more difficult to slow down and really think about. That’s sort of the checks. So, so you know, you have your investment thesis, you’re like, go, we’re, we’re ready to go. You want to keep checking it on those.

01:01:20 [Speaker Changed] Any other books you wanna mention? As long as we’re,

01:01:23 [Speaker Changed] I think going into the elections, I’ve been reading a lot, I’ve done a lot of reading on, on China over the years. Culture revolution. Mao from Mao to now is a great one to understand what’s going on in China. I think our eastern civilization history was never that good for a lot of people in the United States. So revisiting that, and what I’m reading now is called Economic Independence in War by Copeland. I think his name is Copeman. Interesting. Talking about even though you have trade that’s very interdependent, that doesn’t mean there won’t be conflict. And it’s about trade expectations, right? This is really key. It’s key going up to the election because we’re talking about big tariffs on both sides of the aisle, right?

01:02:04 [Speaker Changed] And that’s a tax on consumers, that’s

01:02:05 [Speaker Changed] A tax on consumers. It’s, I I think it’s there. That’s inflationary by the way. Sure. And we have to be careful how we as a nation respond to these challenges. You know, it’s gonna be a rivalry, right. But expectations and you know, if people think one is us serpent the other or boxing people out, that’s gonna lead to possibility

01:02:24 [Speaker Changed] Conflict. You know, you mentioned China, the other book PE that that’s next up in my queue is Chip Wars. People keep telling me I have to read that. Fantastic. You read it.

01:02:32 [Speaker Changed] You I I have not, but I want to read it. Yeah. Alright,

01:02:34 [Speaker Changed] Next question. Who are your mentors who helped shape your career? Yeah.

01:02:39 [Speaker Changed] Well, so there’s so many. I mean, I, I remember the, there was an old guy, old banker, Don Lang at Century Bank of Trust. He taught me how commercial lending worked. You know, he is basically, somebody puts a deposit in, we lend them back their money and we make this amount of money. He went through the math and I’m like, wow, that’s a great return. He lend people their own money. But he also said to me, Matt, ’cause as I was leaving, he said, Matt, whatever you do, stay close to the revenues.

01:03:01 [Speaker Changed] That

01:03:01 [Speaker Changed] Was a good advice

01:03:02 [Speaker Changed] Career-wise, career

01:03:04 [Speaker Changed] Wise. Yeah. No matter what you do. I think that’s, that’s something I always tell, you know, graduating students, obviously Dan Fuss has been an, an amazing, you know, he’s a non- traditional mentor, but he really, you know, taught me how to invest. He also taught me this is a people business. Our clients say really understanding your clients. He was very close to his clients, but it’s also about people in your work in the organization. There’s a lot of stress in investing. We don’t try to create that at work. And, and that was an important lesson I learned from him. And I would say, you know, I don’t think he would know he’s a mentor on me, but Howard Marks is just a fantastic thinker. I read all of his stuff. He’s got the, I would say to of force on

01:03:43 [Speaker Changed] The most important thing he wrote on liquidity,

01:03:45 [Speaker Changed] Which was amazing. I think people should read that.

01:03:47 [Speaker Changed] What, what was the name of that? It’s one

01:03:49 [Speaker Changed] Of the letters he wrote about liquidity.

01:03:50 [Speaker Changed] I, I’ll, I’ll dig that up and link to it. And the book, the most important thing was really right, super seminal. Dan Fuss has all these aphorisms and rules. Did anybody ever put that together? Has there ever been something

01:04:03 [Speaker Changed] Like that? We did, essentially did, Dan was our investment framework. Right? I like to think we made it better. ’cause Dan was one person. And you know, we’ve extended that into other markets like securitized bank loans, but it’s the same underlying principles.01:04:18 [Speaker Changed] I would love to see his quotes in like a top 10 or top 20 list. I know in prepping for this, I keep coming across him in various articles and stuff being quoted. I, I, I thought it was really some fascinating stuff. Our last two questions. What advice would you give to a recent college grad interested in a career, in fixed income or investing?

01:04:41 [Speaker Changed] One thing, I, I would, I’d say as soon as you can’t figure out what type of investor you are, understand what your temperament is. And that sounds easy, but it’s, you really, you really gotta think about this and, you know, describes, you know, where you might fit the best. And as, and I think that’s important. You really gotta gel with what you’re doing. I also think, I wish I knew this, you know, coming into the, to the market is really don’t wait. Even if you don’t know what you’re doing, just pretend you’re in the business and you’re trying to invest and make money. Start reading things and you know, you know, all the jargon and all of the things, things that go in, start reading it. If you don’t understand something, go figure out what it is. And that will just, you know, keep you going to the, to the next thing and the next, before you know, you’ll, you’ll get it.

01:05:23 [Speaker Changed] And our final question, what do you know about the world of investing today? You wish you knew 35 years or so ago when you were first getting started? Well,

01:05:32 [Speaker Changed] I think I was sort of this view, I was a pure, fundamental person. I thought, you know, there was this hard, fast number that you would get and you could transact on pretty much all the ideas that you would, you would get. And what I realized is that there are a lot of other things that move prices in the market, including technicals. And, you know, things can stay cheap for a lot longer. And you really have to understand what the other side of the argument is and understand what’s being priced in. And so you might have this great idea, but if it’s already priced into the market, right, it ain’t worth anything. So you really have to understand that and see, you know, where your edge is and understand why that edge is pertinent. Huh. Really

01:06:14 [Speaker Changed] Fascinating. Matt, thank you for being so generous with your time. We have been speaking with Matt Egan, portfolio manager and head of the full discretion team at Loomis Sales. If you enjoy this conversation, well be sure and check out any of the previous 500 plus interviews we’ve done over the past 10 years. You can find those at Bloomberg, iTunes, Spotify, YouTube, wherever you find your favorite podcasts. Be sure and check out my new podcast at the Money short, 10 minute conversations with experts about topics related to your money, earning it, spending it, and most importantly, investing it at the money in the Masters in Business Feed, or wherever you find your favorite podcasts. I would be remiss if I did not thank the crack team who helps me put these conversations together each week. My audio engineer is Meredith Frank. My producer is Anna Luke Atika is my project manager. Sean Russo is my head of research. Sage Bauman is the head of podcasts at Bloomberg. I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.

 

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