Podcast Summary
Real Estate Manager's Comprehensive Perspective: Principal Asset Management offers a holistic approach to real estate investing, combining local insights and global expertise across various sectors and asset classes to identify compelling opportunities in public and private equity and debt markets.
Principal Asset Management, as a real estate manager, offers a comprehensive perspective in investing, combining local insights and global expertise across various sectors and asset classes. Their approach allows them to identify compelling opportunities in public and private equity and debt markets. For investors looking for in-depth market discussions, it's essential to engage with professionals like David Schall, a credit portfolio manager at New River Investment, who actively invests and manages risk on a daily basis. This conversation provides insights from a real-life investor, offering valuable perspectives beyond the noise and market commentary.
Unexpected start in managing fixed income portfolio during financial crisis: During the financial crisis, an inexperienced equity analyst stepped in to manage an insolvent fixed income portfolio, gaining valuable knowledge and experience in complex securities and leading to a career in managing opportunistic income strategies.
The interviewee's career in managing an opportunistic income strategy at New River Investments began unexpectedly during the financial crisis in 2008. He started as a credit analyst at a commercial bank, Square 1 Financial, which catered to the venture capital community. The bank had an outsourced investment manager who had invested heavily in subprime bonds, and when these bonds began to go bad, the CEO approached the interviewee for help despite his lack of experience in fixed income. The interviewee, who had previously worked in equity research on Wall Street and had completed the CFA program, agreed to help. However, the portfolio was insolvent, and the investment manager and treasurer both left, leaving the interviewee to manage the cash flows and reprospectuses during the crisis. This experience provided him with valuable knowledge and experience in the illiquid and complex world of fixed income securities, leading him to his current role at New River Investments managing an opportunistic income strategy.
Managing a diverse fixed income portfolio during the 2008 financial crisis: During financial crises, managing a fixed income portfolio requires understanding the macro component, specifically the concept of duration, which measures a bond's sensitivity to interest rate changes.
During the financial crisis in 2008, David began his career in fixed income after coming from an equity background. He was thrown into managing a diverse portfolio of mortgage-backed securities, corporate bonds, preferred stocks, municipal bonds, and asset-backed securities. Despite the challenging circumstances, he had the freedom to be creative in setting up the portfolio. The key difference between fixed income and equities, according to David, is the macro component and the concept of duration. Duration measures the sensitivity of a bond's price to changes in interest rates. In theory, a 1% increase in interest rates would cause a 3% decrease in the price of a bond with a duration of 3. This macro aspect, driven by interest rates, is a significant difference between fixed income and equity investing.
Understanding the Differences Between Equity and Fixed Income Management: Equity managers focus on upside potential and beating indices, while fixed income managers prioritize downside avoidance. Fixed income benchmarks, like the Bloomberg Barclays Aggregate Bond Index, play a significant role in determining return profiles.
The role and goals of an equity manager differ significantly from those of a fixed income manager. While an equity manager focuses on upside potential and beating the indices, a fixed income manager prioritizes downside avoidance. The risk-reward dynamic is different in fixed income, and benchmarks play a crucial role in determining the return profile. For instance, the Bloomberg Barclays Aggregate Bond Index, often referred to as the "S&P 500 of the bond world," serves as a benchmark for many investors. As a leading real estate manager, Principal Asset Management offers a unique perspective, uncovering opportunities across public and private equity and debt. When it comes to investing, the process begins by assessing the current market conditions and identifying investments that meet specific investment objectives and risk tolerance. Regardless of the investment approach, it's essential to understand the unique characteristics and goals of each asset class.
Primary drivers of return in fixed income investing: Considering the current market environment, investors should assess which primary driver of return - duration, credit risk, liquidity, or leverage - is most attractive for fixed income investments.
When it comes to fixed income investing, there are four primary drivers of return: duration, credit risk, liquidity, and leverage. These components can be adjusted to pursue higher yields, but it's essential to consider which one is most attractive in the current market environment. For instance, after Trump's election in 2016, duration was less attractive due to falling interest rates, while credit risk became more attractive during the oil scare and high yield blowout. However, in today's market, with concerns about lofty valuations and potential overvaluation in certain fixed income sectors like high yield bonds and consumer loans, it can be challenging to make investment decisions. A crucial reminder is that market commentary about overvaluation is not necessarily indicative of the actual market situation, and it's essential to conduct thorough research and analysis before making investment decisions.
Assessing risks in managing assets: Consider potential losses, use scenario analysis, and mix different bonds for a well-diversified portfolio with superior overall profiles.
When managing assets, it's important to consider various risks and assess their potential impact on returns. While some risks may seem unfavorable in isolation, they can contribute to a well-diversified portfolio and create superior overall profiles. For instance, housing related debt may have favorable underlying fundamentals, but it's essential to consider potential losses and adjust yields accordingly. Scenario analysis can help in making informed decisions and preparing for different market conditions. Additionally, long-term zero coupon bonds, such as 30-year California school district munis, can offer attractive risk-reward ratios when added to a portfolio with other securities. Overall, the key is to mix different bonds and assess their potential impact on the overall portfolio, rather than focusing solely on individual securities.
Exploring Opportunities in Fixed Income Markets: Fixed income markets offer various investment opportunities through duration, interest rate sensitivity, credit risk, liquidity risk, and leverage. Those interested can learn more from podcasts like Money Stuff or O'Reilly VeriScan.
Fixed income markets offer investment opportunities through various vectors including duration, sensitivity to interest rates, credit risk, liquidity risk, and leverage. David Schall, a portfolio manager at New River Investments, explained these opportunities in detail during a podcast interview. While some may find the idea of managing money in fixed income markets exciting, others may find it frustrating due to the numerous factors that need to be considered. The journalist perspective tends to focus on potential risks, which may explain why some individuals remain in their current jobs rather than pursuing a career in fixed income management. For those interested in exploring this field further, Matt Levine and Katie Greifeld's new podcast, Money Stuff, offers valuable insights into Wall Street finance and related topics every Friday. Listeners can tune in on Apple Podcasts, Spotify, or wherever they get their podcasts. Additionally, O'Reilly VeriScan provides a free report with solutions for check engine light issues based on over 650 million verified vehicle scans.