REVIEW Q4 2019 WWW.ASSETTV.COM
NAVIGATING VOLATILITY: THE NEW BLUEPRINT FOR FIXED INCOME
Three-step Investment Process: Matt Toms, CIO of Fixed Income for Voya Investment Management
EXPERT INSIGHTS American Century, Capital Group, MSCI, PIMCO
MASTERCLASS Fixed Income in Focus November 2017 | REVIEW ASSET TV | 1
EDITOR’S NOTE On top of all those happenings in New York, we have been on the road quite a bit lately! This summer one of our highlights was Cetera’s conference Connect19 in Denver where we covered everything from cybersecurity to strengthening client relationships. This fall, we hosted dozens of exciting interviews at the Financial Planning Association annual conference in Minneapolis and the T3 Enterprise conference in sunny Fort Lauderdale. And in case you missed it on Twitter, we even did a report in a golf simulator at FPA!
Jenna M. Dagenhart Anchor
WOW. What an exciting journey it has been with Asset TV! Nearly half a year ago I made one of my best decisions yet when I joined this visionary and dynamic company as an Anchor on our Content Team. On my very first day- before I even had my badge for the GE building where we are located- I was thrust into our new studio and was behind the desk hosting an in-depth interview on pension risk transfer. The pace of our operations since then hasn’t slowed down one bit. In fact, it seems to have accelerated exponentially! Please allow me to fill you in on a few recent highlights and some of our big projects in the pipeline. Alongside Remy Blaire, our Head of Content, we have been doing interviews with top 100 advisors, investment updates from the New York Stock Exchange and Nasdaq, our signature Masterclass panels, 1-on-1 interviews with the names making waves in the industry, and much more. In line with our mission to stay ahead of the innovation curve, we have been bringing you more live coverage via LinkedIn. Shark Tank star Kevin O’Leary just joined us live for 45 minutes to talk about entrepreneurship, big tech, the economy, and the 2020 election. “Mr. Wonderful” also told us why he thinks it could be smart to put your money in watches, wine, and companies led by women. Another unforgettable conversation was with Anthony Scaramucci. I sat down with “The Mooch” for an Exclusive on his time in the White House, his take on the Fed, and his investment advice as a leader in the hedge fund space.
Now as we head into November, I can’t wait to bring all our positive momentum to San Diego. My team and I are conducting interviews on the floor of The Exchange with some of the brightest minds at Schwab IMPACT. Please come say hello and I look forward to seeing you at Schwab IMPACT! And for those of you who don’t me, here’s my background in a nutshell. I came to Asset TV earlier this year from Bloomberg Television. While at Bloomberg, I covered macroeconomic data and geopolitical events, presented First Word Global News headlines, and booked newsmaker interviews for Television and Radio. Prior to Bloomberg, I reported and anchored at NBC29 News in Charlottesville, Virginia, where I won an Associated Press Award for my continued coverage of breaking news. I graduated with honors from the University of Virginia and was selected to live on the famed Thomas Jefferson’s Lawn, a UNESCO World Heritage Site. Then I got my Master’s degree at the Columbia University Graduate School of Journalism, where I also served as Speakers Director of the Society of Professional Journalists and co-launched the CJS Women in Media organization. When I’m not busy traveling to conferences or anchoring at Asset TV, you’ll find me running around training for marathons and exploring New York’s endless restaurant scene.
Featured Interview: Navigating Volatility: The New Blueprint for Fixed Income Voya Investment Management 4-5
MASTERCLASS: Fixed Income Aquila Group of Funds Fidelity Investments Smith Capital Investors Weitz Investment Management 6-7
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THE NEW BLUEPRINT
FOR FIXED INCOME
We spoke with Matt Toms about his teamâ€™s three-step investment process that combines a qualitative and quantitative approach to find the best total return opportunities while managing the upside versus downside. What are the benefits of a multi-sector approach? Our multi-sector approach allows us to cast a wider net with access to greater total return opportunities across the bond market. This flexibility also allows us to assess where there is attractive upside but also a margin of safety to help protect on the downside, driving better value and potentially consistent returns over time. What is Voyaâ€™s three-step investment process? First, we assess the macro environment. All of our 160 fixed-income investment professionals feed into our macro view which acts as a global radar. This overarching macro view helps to identify key upside and downside risks within the global economy, and ultimately informs our overall level of risk taking within portfolios. Step two uses our macro view to develop an optimal risk allocation, including overweight and underweight positions at the sector level. We believe relying on fundamental views versus making broad macro bets results in strong, risk-adjusted results. Investors will not see significant interest rate calls defining performance in most of our strategies.
MATT TOMS, CFA
Chief Investment Officer of Fixed Income for Voya Investment Management
4 | REVIEW ASSET TV | Q4 2019
Step three is to have the broad teams choose individual securities within their sectors. We need those experts, as opposed to one portfolio manager, choosing all bonds across all sectors. When choosing individual securities, awareness of the macro environment helps us be better informed about risks germinating outside their specific sectors. The information sharing makes our security selection better.
REVIEW FACING THE UNCERTAINTY OF THE GLOBAL MACRO ENVIRONMENT REQUIRES A FIRM THAT CAN LOOK BROADLY TO ASSESS CURRENT OPPORTUNITIES AND RISKS.” How do you balance the quantitative and qualitative approach? We were early adopters of the quant research evolution as we wanted to use every tool possible to inform our dialogue. We use quantitative tools to assess business cycles, economic growth outlook and market valuation over many cycles. Ultimately, we try to assess what we think forward correlations are going to be and use this analysis to better inform both our individual sector teams and multi-sector portfolio managers in assessing where to allocate risk. How does Voya manage investment risk? We start with a strong desire to understand and manage risk in our portfolios with heavy skepticism that any individual tool can provide a perfect holistic overview. We look at many different vectors such as tracking error, VaR and scenario analysis. We use a host of risk systems to do this, both off-the-shelf and proprietary. We also look at portfolio risk from a nominal or percentage exposure to different sectors and their duration exposure to different components of the bond market. Risk management in fixed income investing is critical given the substantially greater degree of downside risk relative to upside opportunity in individual bonds. Said another way, it is more valuable to figure out that you are wrong sooner, than it is to be right. What is your view on Fed policy and how does it fit in with your macro themes? Regarding Fed policy, we’d say that the world is looking too much at the central bank’s role in the financial crisis and beyond.
The problem is the central banks have been in the lead role and have used monetary policy very aggressively, to a certain extent, it’s looking long in the tooth, not exhausted but nearly exhausted. The Fed policy of lowering interest rates is losing some of its efficacy. It still has benefits, but lower rates have headwinds too. We don’t think political pressure is helpful. It’s always been there but it’s much more outspoken today and adds to the uncertainty. Where do you see opportunities and risks? The macro-environment is challenging. The level of uncertainty is where we’re seeing the biggest change. Two factors that are creating the level of uncertainty are: 1) International trade 2) Central bank rate policy and its effectiveness In this environment, we’re looking to stay away from global trade uncertainty and from investments that will be harmed if interest rates move, or stay, lower. U.S.-centric risks that do well with lower interest rates and ones that are tied to the U.S. consumer base is where we’re focusing. Another opportunity is investment grade corporate bonds, particularly BBB rated issuers that are committed to de-leveraging and balance sheet repair. We think some of the fear in corporate bonds is overblown. It’s alright to highlight the risks, but we’re also seeing BBB corporate issuers begin to pay down debt and respond to market concerns about increasing leverage. Overall, we’re much more cautious on things tied to international growth like emerging markets. We’ve been more cautious on financials and banks as the unintended consequences of lower rates hurting financial systems is another offset to the effectiveness of monetary policy, and so all else equal, our long-held preference for financial institutions and banks has been whittled down in this environment.
Q4 2019 | REVIEW ASSET TV | 5
MASTERCLASS: FIXED INCOME IN FOCUS The focus on fixed income has intensified! Uncertainty over the trade war and the global economic outlook have put a lot of pressure on borrowing costs.The capital markets are keeping a close eye on the 2-year and 10-year yield curve since it inverted this summer.
“So if you can rotate into sectors that are cheap and out of sectors that are expensive, you don’t have to be right peak and trough, but it adds a lot to the portfolio if you get that sector rotation right. Sometimes you’ll get fat pitches, and other times it’s going to be harder to come by, which is when you rely on security selection. And there I think is where Fidelity spends a lot of time.”
“It’s important to have different ways to access the market. Individuals have three primary ways to do it. They can certainly own municipal bonds on an individual basis. But they can also access professionally managed portfolios through mutual funds and more recent development in exchange traded funds. And each of those vehicles brings a lot of advantages. Investors are certainly familiar with the idea of being able to hold an individual bond to maturity, and at the same time, professionally managed portfolios provide value because you’re getting instant diversification.”
HEAD OF FIXED INCOME AND GLOBAL ASSET ALLOCATION INSTITUTIONAL PORTFOLIO MANAGERS, FIDELITY INVESTMENTS
6 | REVIEW ASSET TV | Q4 2019
SVP, AQUILA INVESTMENT MANAGEMENT AND PORTFOLIO MANAGER OF AQUILA TAX-FREE TRUST OF ARIZONA
REVIEW Individual bonds may be the best-known type of fixed income security but the category also includes bond funds, ETFs, CDs, and money market funds. In this panel discussion, four experts discuss the investment landscape for fixed income, monetary policy, and interest rates. They share why fixed income may provide a buffer against stock market volatility - particularly when there are market downturns.
INVESTOR, SMITH CAPITAL INVESTORS “We’ve seen volatility in many, many different parts of the market, in the global economy, in the political arena, with interest rates. Although the volatility with respect to interest rates has been one way, down. We’ve just seen all of these factors come into play, and our thesis really was what could go right because if you remember at the beginning of the year, people were really worried that we were going into a different market in a different economy.”
FIXED INCOME PORTFOLIO MANAGER, WEITZ INVESTMENT MANAGEMENT “I think the punchline is, “It’s been a wonderful environment to be a borrower.” The recent rush of money into long term U.S. treasuries has pushed the 30-year treasury to a level of below 2%, which I believe is an all-time low. I think we’re sitting about 1.9% today. So, I think it’s no surprise that the U.S. Treasury actually has come out recently and talked about contemplating buying or selling 50 in 100-year debt, which would be the first time we’ve done that in the country.”
Q4 2019 | REVIEW ASSET TV | 7
Here is a glimpse of some of the latest and greatest content on Asset TV. The experts cover ETFs, the Fed’s interest rate trajectory, balanced income, factor investing, and much more!
Fed’s Interest Rate Pivot Brings New Risks
Facing Down Yields and Volatility
MIKE GITLIN, HEAD OF FIXED INCOME
DAN IVASCYN, GROUP CHIEF INVESTMENT OFFICER
“There’s a dramatic switch in terms of how people are perceiving interest rate risk. We’ve been long duration, so our view has been we didn’t worry as much as some others on interest rate risk. But we are worried on credit risk. When you look at investment-grade and high-yield spreads, and they’re basically on the border of the richest quartile or the second quartile of richness, we get worried from a valuation standpoint. ”
“We can’t be complacent from a risk-management perspective. What we are really trying to do is protect downside as primarily fixed income investors, be very prudent in portfolio structure, be good liquidity managers, and if we do this well, with a long term focus, we can react and add value during these bouts of market illiquidity.”
How Balanced Income Can Help in Today’s Markets MATTHEW SHERIDAN, PORTFOLIO MANAGER, GLOBAL MULTI-SECTOR ALLIANCEBERNSTEIN “If clients have income needs, then it makes most sense today to look at a balanced approach. A balanced approach to income generation in today’s market offers about 70 percent of the yield of a US high-yield-only portfolio. That’s a pretty attractive distribution that we can build that protects much better against potential drawdowns due to credit-sensitive investments.”
8 | REVIEW ASSET TV | Q4 2019
Q3 2019 Capital Markets Perspective
THRIVENT ASSET MANAGEMENT
AMERICAN CENTURY INVESTMENTS
“The key thing in fixed income and when you are making a bond investment is what you outlook for inflation. Previously about maybe a year ago, it looked like inflation indicators were starting to move up a little bit, but now they have decidedly turned down, (...) inflation seems to just not be coming, at least in the near term here, and that’s the key thing to keeping interest low ”
“The current challenges for any sponsor, any individual is just differentiation. (...) So, as you get through to the investor, that we’ve been in years, been educating the master on what indexes are and how they work and why and how an ETF works. Now we’re onto the next phase. We have to educate still on the structure, but that the structure doesn’t need to be tied to a basic index, it can be alternative weighted index, it can be active, whether it’s equity or fixed income or whatever the next phase brings us.”
MASTERCLASS: Factor Investing
Exclusive MASTERCLASS: Fixed Income, Not Fixed Thinking
JOHN WEILER, MANAGER & REGIONAL HYBRID INVESTMENT CONSULTANT
RAINA OBEROI, EXECUTIVE DIRECTOR, HEAD OF EQUITY SOLUTIONS RESEARCH FOR AMERICAS MSCI INC. “(...) factors have been in the investment process for decades. So, if you think about it, the investment thesis or the academic intuition behind them hasn’t really changed. They tend to have the same characteristics today that they had before. They obviously have economic rationale attached to them. Factors have a long-term premium attached to them. ”
ED ROSENBERG, SENIOR VICE PRESIDENT, HEAD OF ETFS
GAUTAM KHANNA, PM BNY MELLON CORE+ STRATEGY - INSIGHT INVESTMENT BNY MELLON INVESTMENT MANAGEMENT “Having multiple types of assets in your portfolio is only adding to the efficiency of that portfolio. Frankly, owning fixed income allows you to perhaps be a little more free in employing your equity risks in your portfolio because you have that balance. Not to mention, everybody enjoys having that durable, predictable, reliable source of income.” Q4 2019 | REVIEW ASSET TV | 9
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