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A
Today's Animal Spirits is brought to you by the Motley Fool Asset management. Go to fooletfs.com to learn more about the Motley Fool Momentum Factory ETF. Ticker MFMO. Today's show is also brought to you. Got a two for one here by Morgan Stanley Eaton Vance. Go to eatonvance.com to learn more about the new Eaton Vance Preferred securities and Income etf. That's Ticker evpf.
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B
Welcome to Animal Spirits, a show about markets, life and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.
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A
Welcome to Animal Spirits with Michael and Ben on today's Talk youk book. Michael, we have a two for one. We're diversifying for people.
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C
That's right, Ben. It's two for Tuesday.
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A
First we talked to Bill Mann, who's been a regular on the show, he's the chief investment strategist at Motley Fool Asset Management, to talk about their momentum etf, which is, as you mentioned on the show, probably one of the most underlooked factors of all in terms of flows.
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C
I don't think it's the most underrated, but it's the most under allocated to.
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A
Yes, yes, I will say, like, everybody
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C
knows it's a thing, but relatively nobody puts money there.
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A
Yes.
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C
And it's funny, they do. They, they, they do with like individual stocks, but not at like the systematic level.
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A
Yes, I agree quantitatively. Value is way more obviously. And then in this. That's the first half of the show. In the second half of the show, we talk to Kevin Liniak, who is the managing director at Morgan Stanley. Morgan Stanley partnered with Eden Vance to list a new preferred securities fund. Eden Vance Preferred Secures Income etf efpv.
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C
It's actually, it's more than a partnership. Then. Morgan Stanley owns Heat Advance.
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A
Okay. They partner with him by owning them. How's that? And Kevin, Listen, Kevin is a pro.
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C
I, I gotta call him a straight shooter.
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A
He's a straight shooter. He's a great guy in my book because he said he read one of my, one of my actual books. So Kevin's good with me and he's called us in the world of preferred securities, which I think are not understood by a Lot of people. I love the fact that he led with the tax taxable nature of these preferred securities.
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C
Yeah, that was that. I don't think I knew that.
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A
I'm not sure I did either, but. So another interesting talk on let's call it as.
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C
I had no idea.
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A
Yeah, well, listen, we're not. I don't think many people are experts in preferred securities. Right. It's kind of an unknown area with. You see a high yield and you go, wait, how do these work? What's the risks? And so we get into all that with Kevin, talk about private credit and all this other stuff. So first up is Bill Mann from the Motley Fool.
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C
Bill, welcome back.
- [03:03]
D
Great to see you guys. Great to be on.
- [03:06]
C
All right. We are talking. Great to see you too. We are talking momentum today. And I think it's really interesting. I think there's a logical explanation for this. But there I'm making this up. For every $1 that's invested in Momentum strategies, Momentum ETFs, there's gotta be 20, 40, what dollars invested in value. And they are two sides of the same coin. I think value was the. I guess one of the first factors that came mainstream. Let's buy a dollar for 80 cents. It's a very clean story. Let's buy low, let's sell high. It's intuitive. Everybody wants a bargain. Momentum is maybe not as. Yeah, that's how you're supposed to invest. No, you're supposed to buy high and sell high. Or no, I thought you're supposed to buy low and sell high.
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D
Okay.
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C
But in this environment, in this new structural regime that we're in with the retail trader and the 24, 7 trading and the speed and the copying, it just seems so obvious that momentum should be given more consideration from investors than value. And yet that's not the case. What are your thoughts?
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D
Value seems like it's the good child, the good son. And the momentum kind of feels like the goth kid who makes mainly good decisions, but is a little bit counterculture. We think of momentum, I should say, as a way of cheating off the market's paper. I love that our experience at the Motley fool suggests strongly to us that there are people and there are entities that are good at security selection, that they can generate alpha that way. But in a world where market participants outsource so much of their research to AI, I think it'll be even more so the case that cheating off the market's paper is going to help because there's really three primary ways that good security analysts Leak alpha, the first of which is by underreacting to the market. The second is overreacting. And the third, which is maybe the most damaging, is overacting too late. The way that we think about momentum is a way of we or our sister company, the Motley Fools Company, coming up with securities based on their tried and true criteria. And then we're allowing the market to tell us what's working right now. And you were exactly right. That is not necessarily something that's completely counter to value. It's very much aligned with value.
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A
I like what you said there, because it is like momentum is the ultimate behavioral factor. It's the overreactions and the under reactions, like one compound's on top of the other. How much do you think it matters in terms of how you calculate momentum? Because there's a lot of different quants who have ideas about how you should look at it, what the look back period should be. You change it. Do you think that it matters that much or do you think it matters more? Like. Well, you have to have good reasoning behind it and you have to have some rules in place. But it's just, can you follow those rules? Like how much do you, does your process think it matters? Like how you, how you define momentum?
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D
Yeah, for us it's entirely rules based in terms of allowing the factor to speak for itself and defining momentum. And we look back monthly, but recalculate quarterly. So we don't put our finger on the scale. One of the smartest people I've ever worked with was a guy named Don Krueger who used to work with us at Motley Fool Asset Management. And he always said that the market traded on a 1.7 derivative to fundamentals. And I always thought that was like a weirdly specific way to think about it. But if you think about what's happening in the market now, there aren't much in the way of qualitative factors that suggest the dispersion that we're seeing in the market. And so we're allowing the momentum, that, you know, factor that we've predefined to help us determine how to play the market at this point. Like we don't, we don't make any decisions on top of letting that factor do its work for us.
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C
Well, what is the 1.7 times unpack that? I wasn't really clear on what that meant. I like it, but what does it mean?
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D
It sounds sciency. I wrote a paper this last month and it was, and it was called the Greatest Day and it was talking about, for example, media stocks. And there was a day in the market in which all of the newspaper companies had their best day ever. And sometime not necessarily aligned, but not necessarily separate from that, it became pretty clear that they were in what seems like a terminal decline. And what Don's thesis was was that those two events aren't necessarily linked with each other directly, but they do inform one another. And so you're not necessarily trading on the first derivative. Like the best day ever for the stock isn't necessari necessarily the best day ever for the business or for the sector. But they do have, you know, they do have an alignment with each other that is at least somewhat predictable.
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A
So I'm curious how. Because I think one of the reasons Michael said that more people are value makes more sense to people is because they, they think that momentum aligns with performance chasing and people are told that performance chasing is bad. You shouldn't do this.
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C
Yes, you should do it just systematically
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A
how you define the idea of momentum and explain it why it's actually good to chase performance versus the way other people do. Most people do it on, listen, I look at the best, the fund with the best one, three and five year returns. I'm going to put my money to that. And then it goes underperform. Like how do you, how do you explain the difference between that? Because again, I think part of the reason there aren't many people allocating momentum is because they just don't understand how it works in practice.
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D
Well, yeah, and I love the way that you put that because it almost, it almost feeds to what we think is our worst basis. Basic instinct when it comes to investing is that are we performance chasing? And you go back to your basic finance classes and they will tell you that one of the worst things that you can do is to performance chase. If you are a fundamental based investor, obviously value is a very, very clear story how you go about investing. What a momentum factor is suggesting is that you are letting some of that control go in terms of, in terms of what you believe the market ought to do and you're signing on to what the market is doing. You know, so in some ways it's just the reality that at some point different sectors are going to work and you don't necessarily get those signals the market, you're allowing the market to define it for you. And so in some ways it is letting go of a little bit of control. I mean, you're setting up a different set of rules and you're telling the market, yes, go chase a Little bit of momentum, go chase the companies, the stocks that are doing well. But I think in some ways we think of that as being the most highly valued stocks at all times. And in some cases, like for example, now some of the sectors that have worked this year are not the ones that you would say from a momentum basis, are the ones that you would
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C
necessarily think, okay, so I'm glad you mentioned that because some people to your point associate momentum with either performance chasing or maybe like junkie stocks for example, can have a lot of momentum and when it goes, it goes. So you want to make sure that in your process there is some sort of quality screen so that you're not buying this piece of junk business that just happens to have momentum. Maybe it got memed and whatever. And of course I'm not even talking about like screening out the price volatility because a company that's flat and then up 40%, my measure is a 40%. Obviously it's not momentum. That's a, you know, exogenous sort of impact. But anyway, the point, the underlying point is you want to make sure that you own decent companies. How do you do that?
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D
So that's the Motley fool way. So that's how we base our, we base Motley fool momentum ETF based on the Motley fool research, which is screening out for high quality companies. That's the top of the funnel. And so the momentum that we are finding within our universe is based upon the companies that they, the publishing company and our 50 analysts over there have already pre cleared. We very much view quality as being high free cash flow companies, companies that have exhibited long term growth, asset light capital compounders, a fairly stringent set of companies that allows us to own the companies that are the highest quality companies and then using that universe to put a momentum factor on top of it. Because you're exactly right. I think in some ways when you think about momentum, you're just talking about licking your finger and holding it in the air and saying what's working now I'm going to do that. And what we found over time with lower quality companies is that that signal turns off and off and on much quicker than it does with companies that have a long term history of generating positive free cash flow and growing.
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A
So how long do you hope to let these things run for? What's your ideal holding period for your momentum strategy?
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D
Forever. I mean it would be great if it's forever. We would allow a company to, you know, to, to run for a long time. So we could talk about the Largest company by market cap. Excuse me, not by market cap. Our largest holding within mfmo for example, is LAM Research, which, you know, it's the largest weighting based on the fact that, you know, we have a, we have a position size ceiling upon recalculation of about 4.8% this company is now over 6%. Because it's done very well since we went through the last form. I would be more than happy to hold Lam Research in perpetuity. You know, the second largest holding is Walmart and that's a company that the Motley fool recommended almost two decades ago. So we are very, very happy to, you know, for companies that, you know, demonstrate long term free cash flow generation, you know, to be within the portfolio for a really long time. And so it is. MFMO is our highest turnover etf, you know, and, and you know, obviously it's, it's only been out, we, we launched it in early December of 2025. So I don't want to be too prescriptive about the characteristics of it just yet from a, you know, but it should have a little bit of a higher turnover than say a straight value ETF would.
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C
In terms of the composition of the portfolio. You mentioned Lam and Walmart that we're recording March 25, two biggest holdings. It does seem like it's living in the Mega Cap land. Is that the pond that it's swimming in?
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D
Yeah, it will probably mainly be within Mega cap. It is 100 of the largest companies by Market cap that we're looking at is the basic universe. Yeah, they should generally speaking be larger companies as those two are.
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A
So you mentioned a little higher turnover. How much of the portfolio is turning over every time you guys rebalance?
- [14:04]
D
The portfolio is now four months old. So we're just coming up on our second rebalance. Again, we're recording in late March. In early April we will have our next reconstitution. But we're targeting it to be about 50% per year so you can derive from that on a quarterly basis. And again that's how we've set the model to start with. But in a period of time in which you have a real dislocation in the market. And let's look at reality right now. You know, you've had oil prices go through the roof. You know, we, you know, we have had a software industry that seems currently uninvestable. Even six months ago it was amongst the highest flying. So in times of, of market dislocation I think you can expect that the turnover would be Somewhat higher.
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C
What happens in a complete washout? Like what would this portfolio have looked like in February 2009 when momentum is only going negative, when there's no stocks that are working? Are you looking at. Because you have to own something. Would you be looking at like relative momentum? Like you could be owning like Coca Cola? What, what would that look like?
- [15:14]
D
That's exactly what it would tend to look like. It would look at. I'm going to try and define a term here. The least negative momentum. For us, we view those periods of time as, you know, as fundamental driven analysts and a fundamental driven shop as, you know, as, as opportunities, although they don't necessarily feel like it at the time. If there is nothing working in the market, as you know, our momentum portfolio is long only so we have to hold something. And so we would be looking at the least negative momentum, if you will. If you're, you're looking at a period like in February of 2025 in which everybody was running away as quickly as they could.
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A
I'm curious, how are there any sector constraints on the portfolio? Because obviously momentum, I think one of the interesting things about it is that it's kind of a chameleon strategy. Like you said, there's sectors that work, sometimes they don't work. Other times, if risk is off, maybe it's these boring sectors and risk is on, it's these high flying sectors. Do you kind of let it be free and open or do you have some sort of constraints on there?
- [16:13]
D
We don't have industry constraints. We do have position sizing constraints. So on a security level basis, we would have some constraints on. But if it is all, you know, in a theoretical market, if the only thing that's working is a, is a single industry, you would see us very heavily weighted towards, towards that industry. And, and happily so. But you know, we would not be as heavily weighted as a pure momentum strategy that doesn't have position sizing constraints, but at a 4.8% position size maximum at rebalance, it, it does in fact limit the overall concentration in a specific industry, but somewhat organically so rather than prescriptively.
- [17:01]
C
All right, we're talking to Bill Mann from Motley Fool. The ticker is mfmo. Bill, as always, great seeing you. Thank you for your time today. Appreciate it.
- [17:10]
D
Great to see you guys.
- [17:14]
A
Okay, thanks to Bill. Remember, check out full ETF to learn more. And now in the second part of our talk, your book. Here is our talk with Kyle Liniak from Morgan Stanley.
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C
Kevin, welcome to the show.
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E
Thank you guys. Thanks for Having me.
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C
So the world of fixed income through the lens of a wealth manager was, was, was tricky talking pre Covid times. There was a lot of duration, not a lot of, not a lot of income. And it was just like not the most awesome thing to talk about with clients. And we all remember what happened in 2022 with the inflation and the rate hikes and the 10 year going from 1% or even below up to 5% and all sorts of tumult and, and volatility and then opportunity. And so as we look at the fixed income landscape today, or more specifically where people are generating income, one area that you don't hear a lot about anymore that we're going to be talking about today is the preferred stock vehicle. So what is it about preferred stocks that you guys thought was so exciting that you had to launch an ETF to, to deliver to investors?
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E
Yeah, it's the income part of it, Michael. But yeah, I mean going back to those times, there was a little, very little income in fixed income. We used to call the government risk free rate, the rate free risk. And I think for you guys in diversified portfolios, it was really difficult to see where fixed income fit in because there was just rates were so low for so long. Part of that was post financial crisis, very low inflation, The Fed policy, QE1 through 4, I mean all of it really kind of kept the lid on rates. And even for high quality investors or investors that didn't want to take a lot of risk, the problem is you couldn't see a lot of income. I think a lot of folks at that point had gone into preferred securities to find income, but also tax advantaged income. The coupons or dividends in preferred securities, they pay qualified dividend income, which means you're getting taxed at that capital gains rate instead of the ordinary income rate. And that's a big difference. I think it juices up your yield. But even going back post, as we went into Covid, we went back into that really zero lower bound again on rates. And I think for a lot of financial advisors who are doing managed money, you think back 2020, 2021, I don't know what you guys charged, maybe 2%, 3%. I'm just kidding. But if you charge like 1% 50 basis points on a portfolio, if you had munis out to 10 years or investing in corporates, they yielded below 1%. So it was really after fees. Didn't really make a lot of sense even for folks that really wanted safe portfolios. Being in fixed income or high quality Fixed income. So we saw a lot of people go into preferreds around that point. And at that time we saw a lot of getting issued around 4% or so, which brought a lot of risk as we went as rates backed up in 2022 and 2023.
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A
There's a lot of people who probably just don't understand how preferreds work. They think it's a little equity, it's a little debt. How do you explain them to people in terms of their risk reward profile?
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E
Yeah, I think they're a hybrid of each. They really trade like fixed income. And I see where they fit into a portfolio would be kind of in your income fixed income area. They're certainly not as is Munis and Treasuries and investment grade corporates. But a lot of them are rated investment grade actually. And I think of them as similar yielding to double B high yield, but probably with less risk. Now there's a little bit of interest rate risk, but we're able to kind of manage that out. And I think one of the unique interest rate components to the preferred securities market is the retail part of the market is perpetual and kind of fixed for life. Meaning that if they issued a preferred right now around 6%, it'd probably be callable in five years, but it'd still be a perpetual. Some of the ones that were issued at 4%, they were callable after five years, which has now come up, but they're trading between 70 and 80 cents on the dollar. I think a lot of those securities will never see par again. But the institutional part of the market, which is a real growing part of the market, I think the opportunity in the preferred space, especially where we're invested in evpf, they have this unique fixed income yield, basically interest rate component that you don't see in other parts of fixed income. And what is that? They're issued as a fixed rate security, but they're either called after five years, typically after five years, or they float and they reset off the five year treasury, sometimes quarterly, sometimes every five years. But it's actually a fixed to floating rate security. It keeps your duration lower and really kind of what else is like that in an advisor's portfolio that has that kind of inflation insurance or floating rate voting rate type of insurance. And so these, we really only find them kind of in the institutional market or they're much more prevalent in the institutional preferred market. I think they become very popular in financial advisors portfolios who understand this part of the market. And it's a unique part of the market. And I think it's growing in popularity.
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C
Why would a company decide to issue preferred stock as opposed to traditional plain vanilla equity or bonds?
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E
I think it's a great question and there's a couple different reasons for that, but they're essentially priced in between both. The investment grade corporate market yields a little over 5% right now. Preferred is kind of trade between 6 and 6.5% right now. Let's call that cost of equity. You guys are the smart guys running CAPM and everything else. But that's probably north of 10%, right? So it's more expensive than investment grade debt, but less expensive, much less expensive than equities for a financial institution like a bank. Post Dodd Frank In 2010, we got a whole new set of kind of financial rules and the preferreds I think kind of fall under a lot of that stuff. A financial institution can issue up to 1.5% of the risk weighted assets in preferred securities and have them count as equity for the regulators. And that's a big thing. So you know, the financials go through annual stress tests for the biggest banks and they issue preferreds because it's a lot cheaper than issuing equity. So there's kind of the arbitrage in that. And if you had to go through another thing like we went in the financial crisis and God willing we never will, is that there are areas where preferreds would actually help recapitalize the bank and probably would get wound down with the equity. And we've seen this with a few of the kind of regional banks, bank, you know, kind of wind downs since then. Why else would a company issue them? A lot of corporations are starting to issue preferreds and I think the issue here is the rating agencies give them equity credit out to 10 years. And Moody's kind of changed the rule on this just a few years ago. Why is that important? Well, you see like a sector, like the utility sector right now they got huge capex needs, right? They're able to issue preferred and have a certain sliver that count as equity so that they're able to kind of do, you know, lever up and do a little bit of capex. But they're issuing a sliver of this stuff in the preferred world because between 6 and 6.5% is a lot cheaper than equity. All right? And so we're seeing them issue a lot more of these. They probably will call them after 10 years. At least that's kind of our expectation.
- [24:50]
A
Why?
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E
Because they will no longer count as equity. So they'll just be kind of expensive debt at that point. But with the call features on these securities, the duration lower and portfolio managers are able to kind of model that out versus other kind of fixed income risks that they have. So there's a little bit of an equity arbitrage, regulatory arbitrage of why they issue this stuff. And that's brought opportunities to the market. Last year we saw 25 billion of utilities issued in the market. Would you like to buy an investment grade utility north of 6%? We think that's really attractive. And some of these are now in bond indices for core and core plus. So we're seeing some of the traditional fixed income managers start buying some of these preferred hybrid securities from the utility space.
- [25:35]
A
So I have this theory that people in finance and the market people only have the ability to concentrate on one story at a time. Right. This is a general theory, but in fixed income there's a lot of stories
- [25:45]
E
going on right now. I don't know, it's a hard thing. Yeah, true.
- [25:49]
A
But in fixed income risks, how about we only focus on one risk at a time? But in fixed income, that risk right now is private credit. Everyone's talking about it and it seemed like a couple years ago private credit kind of boxed everything out in terms of interest from advisors in the wealth management channel too. So it's interesting to see both sides of that. Right. It's the only thing people can talk about because the yield is so great and it's floating rate and all this stuff. And now people are talking about the risks. What do you think the private credit impact has been on the rest of the income landscape in terms of just interest from people and then flows? Has it impacted the rest of fixed income land at all or not quite yet?
- [26:26]
E
Absolutely. I mean I speak to financial advisors all the time and there were folks like me go around the branches and try to discuss our solutions. It was very popular to run into this whole private credit crowd and the BDCs over the last few years. In fact, I was probably marketing against them for the last three or four years. Just saying we're a little bit different in that if you get 6, 6.5% in preferreds, you've got something, especially in an ETF, you got something that's liquid transparent and public. But there were better returns to be had. Double digit returns we had in the private credit world. So we saw a lot of advisors really kind of running income strategies as a barbell, a lot of higher quality munis and investment grade and then taking their yield where they had either gone into bank loans or other kind of yieldier products in the past and going into private credit and I think it's a real. Was a real popular area probably north of 10% of these BDCs are kind of retail money. So I think with some of the larger financial advisor teams who do privates, private credit became real kind of interesting allocation for them. But we've seen this many times before in the past. I've been doing this 30 plus years. When you offer equity like returns in fixed income, you're always taking risk. And I think what you're trying to do there is you're trying to harvest the illiquidity premium. I think advisors right now are a little bit worried about private credit. All of a sudden they're trying to get out and they're realizing there's a reason for this illiquidity premium. The gates are up, there's outflows are north of kind of 5% now we think the gates here make sense. I mean I find myself almost defending private credits to some folks now more than. And I was marketing against them for years. But I think maybe some of the risks are either not well or kind of maybe over concerned. I think of people starting to say this reminds me of 2008 and CDO squared. That's a little overdone in my view.
- [28:29]
C
I'm so glad you said that. I tend to agree. I think that there is legitimate smoke. Right. I don't think the outflows are completely media panic driven. I think there are genuine reasons why assets are leaving. And they started to leave. As you mentioned the floating rate nature of some of these vehicles. They started to leave not just last month like the attractiveness of these BDCs. And you saw them in the publicly traded ones, they peaked a year ago because as we were entering a rate cutting cycle it was plainly obvious that the rates were going to come down. And then you mix in the software fears on top of it which is the 25% of some of these portfolios. There's. There's legitimate reasons to be concerned but this idea that there is systemic risk I think is a bit hyperbolic. And I'd be curious to hear your take specifically and I know understand that we're talking to a Morgan Stanley employee. The model of the banks lending to these alternative asset managers who are then lending to these companies as opposed to the banks going straight to it. Is there any concern that the banks are exposed to some of these loans going bad?
- [29:38]
E
Yeah, look, I absolutely agree with your take that you had there. And the banks are clearly exposed here in that we do lend to non bank financial institutions but it's much safer than lending to them directly. You would have to have a complete Armageddon model before you had any type of risk. I have a good friend who's a portfolio manager at one of the large private credit firms. They're looking to spin off maturities and capital that gives them probably 8% a quarter. That's why the gates are set up around 5%. They want to pay that organically. They also have bank loans and high yield bonds in there and a little bit of cash to help assuage some of those outflows as well. If they couldn't solve all of that stuff, there's backstop facilities set up with the banks that would help with any of kind of real outflows. I do think the SaaS situation with software is serious. Then again, we work with a lot of folks here from our tech team. I mean they're very excited about everything going on with Claude, Cowork and OpenClaw and all that kind of space. And I remember when it kind of rolled out like a month and a half ago, they were so excited. I probably should have shorted all the SaaS stocks at the that time. But you know, it's. You're not going to replace everything right now. You're not going to replace your CRM, you're not going to place your cyber security software. It's just not going to happen. So I mean I think it's probably more of an equity issue than is a debt issue. But given, you know, I think when you have too much debt concentrated in one certain area, it's really risky. So some of these BDCs that have 25% risk in one sector in software, I guess and with leverage and. Yeah, and there's leverage on. Yeah, you're levering up recurring revenue. And I think, you know, the risk that we have with AI here is people are really guessing that recurring revenue. I do think that's risky. Is it systemic?
- [31:32]
D
No.
- [31:32]
E
Doesn't strike me that way at all. Kind of reminds me of commercial real estate back in 23 that hit the regional banks and we, you know, we're involved in that space as well. What we would do there is just really kind of shun the regional banks that are helping have very heavy CRE exposure in their portfolios. Did some of them have problems? Yes. Was it systemic? No, it wasn't. A few of them had real issues that we saw with kind of Silicon Valley bank. But I think those are A little more idiosyncratic. It was an issue that needed to get worked through in the banking system that it did. I view this kind of somewhere more analogous in that we're all looking at the risk and probably re rating where we see some of that risk. And software is definitely one of them. Now you brought up too that there were risks, some of it ahead of time. Yeah, I think rates going lower was one of them. Because these are floating rate assets. We have cut rates 175 basis points. And the reason that a lot of this asset class has grown so much over the last 10 years is because the banks kind of stepped back from this. In Dodd Frank, the legislation that we got post financial crisis, we decided the regulatory environment made it really expensive for the banks to be lending. So a lot of this lending kind of went out of the bank and into the shadow banking system. And a lot of these private credit firms set themselves up and there are different parts of private credit. I'm not going to get into all the nuance there. It's not just one large leverage lending area. I mean there are asset based lending and a lot of other areas. But I think for the overall system and for our overall advisors and clients, it's important to know you would rather this lending to be going on in an unlevered solution owned by the private credit folks than I think in a 10 to 12 times levered bank. And that's where it was going on before 2010. And by the way, we were more levered than 10 to 12 times pre financial crisis and that was a different issue.
- [33:30]
A
So I think a lot of traditional fixed income investors felt kind of betrayed by the 2022 bear market. Like hey, I didn't sign up for this. I wasn't planning on getting smoked like a aggregate bond fund lost 18% or something piqued the trough. I think one of the cool things about the market now in ETFs these days open up that there's. There's so many different income products you can invest in. You have preferred securities you're talking about, you can do clos and asset backed securities and there's income oriented products with options and there's just a lot more fixed income opportunities. Right. Bank loans and floating rate debt. And I think a lot of those traditional bond investors have realized or should have realized. I probably need to diversify my sources of income more. So I'm just curious how you help people think through those decisions because there are just a lot more products and strategies to consider these days.
- [34:14]
E
Yeah, I Think advisors have a lot in their place when they're thinking about asset allocation. There is no free lunch in investing. But diversification gives you the closest thing to it and it allows you to build a portfolio, get you closer to the efficient frontier. I think as I said, the interest rate component here is really unique to the preferred market. But I think there's a lot of decent income solutions. But if you're getting a decent amount of income in the high single digits, you're taking risk. Look, I'd even say you're taking risk in the corporate bond market or even the treasury market. We have 39 trillion of debt outstanding right now. We're at 100% debt to GDP. The debt and deficit issue in this country kind of continues and I would say the one we call it a horseshoe politically where both sides get together closer to the link in the horseshoe and that is both parties don't really seem to care about deficits right now. So I would say there's risk in all parts of the capital markets and in all parts of the fixed income market. And I think diversifying some of that and going some of those asset classes that you mentioned makes a lot of sense to me.
- [35:22]
C
Kevin, for people that want to learn more about Eden Vance's EF evpf, where do we send them to?
- [35:31]
E
You can go on the Eaton Vance website and we've got a case for preferred securities kind of primer that kind of takes you about, walks you through the overall market structure and, and our overall solution. It's interesting, Michael, that there's probably around 40 billion of preferred ETFs outstanding. About half of them are passive. And I really do think there's a great opportunity in active here. And you've probably had a gazillion PMs that have come on here and told you why active makes a lot of sense. I would just say a lot of people wonder why fixed income portfolio managers are more intelligent than equity portfolio managers. And I think it's because we create indices that are easy enough to beat where the equity guys have a lot harder time. I'm just kidding.
- [36:18]
A
Jump over those six inch hurdles. Not six foot hurdles. Right?
- [36:21]
E
Exactly, exactly. Or six percent hurdle. Active here makes a sense because you can diversify away from some of these different indices and allows you to access different parts of the market or take a different interest rate bet that you can if you just go off the passive index. You know, a bunch of these solutions only own the 25 part of the market and they don't have that interest rate structure that I mentioned, the fix, the floating rate, rate reset structure, 90% of our portfolio is set up that way. We do think there are some interesting retail opportunities in the 25 par market that portfolio managers who only access have limited opportunities to buy. So we do have part of our portfolio there, but it's a small, it's 10% right now. So we think in the corporate hybrid market, that utility story that I was telling you, we think there's some attractive new issue opportunities there. And in the global part of the market, anything issued outside of the US is considered a contingent convertible security, also known as Cocos, also known as AT1 and Basel III regulation, kind of covers the rest of the world. The US has decided to kind of go, we're good with what we had after Dodd Frank. And we said, you know, we're going to keep the structure here, but there's decent opportunities outside of the US we have the right to own up to 30% of them in our portfolio there. It's a little bit lower than that right now, but we think that's a real opportunity.
- [37:44]
C
All right, Kevin, well done. Appreciate the time. Thank you for doing this.
- [37:47]
E
Thanks a lot, guys.
- [37:51]
A
Thank you to Kevin. Remember, check out eatonvance.com learn more and then email us analspeets.com.