Thornburg Investment Income Builder Fund – 3rd Quarter Update 2023

Thornburg Investment Income Builder Fund – 3rd Quarter Update 2023

Adam Sparkman:        Good afternoon, and welcome to the Thornburg Investment Income Builder quarterly update call. My name is Adam Sparkman, and I am a Client Portfolio Manager with Thornburg Investment Management. A few housekeeping items before we get started. At this time, all participants are in listen-only mode; however, you can ask questions at any time by submitting them through Webex or emailing us at questions@thornburg.com. This webcast is being recorded and a replay will be available in a few days. Just to remind you, today’s presentation may contain forward-looking statements based on management’s current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these statements due to various factors, including those described in our SEC filings. For those on the call today who may be less familiar with Thornburg, we’re an investment manager based in Santa Fe, New Mexico overseeing approximately $42 billion dollars of assets across a suite of actively managed equity fixed income and multi-asset solutions. I’d like to quickly introduce our speakers today. Brian McMahon, Portfolio Manager, Vice Chairman and Chief Investment Strategist for Thornburg along with Ben Kirby, Portfolio Manager and Thornburg’s Head of Investments, as well as, Portfolio Managers Matt Burdett and Christian Hoffmann. So, with that, let me turn it over to Brian McMahon who will kick us off.

Brian McMahon:         Okay.  Thank you, Adam, and thanks to, everybody on the call. We’re gonna make some remarks today that will, be accompanied by slides that are on our website at thornburg.com.  Hopefully you, are sitting in front of those slides.  If you’re not, I would encourage you to find them not the website, and I’m gonna start out with, diving directly in on Slide Number 2, which is headlined Key Macro-Economic Issues, and I won’t go through all of these, but I will highlight a couple of points that are made here. Number 1, that inflation rates, still remain above, central bank targets and that’s keeping up with pressure on, policy interest rates, in the United States and elsewhere, although, inflation rate has moderated.  Labor compensation is growing.  real wages are positive, actually, for the first time in a number of years.  It remains to be seen to what extent bad decision makers and other central bank decision makers will factor low bank stress and tighter credit into their decision making on rates, versus other things.  But so far, the recession that, has been predicted by so many for this year in the US and other developed economics has not set in, and you may see even this morning retail sales numbers surprised by a, by a factor of two for last month so that the consumer is still spending.  Despite, this, cautious, macro-economic outlook that, economists still have about 2024, bottom-up analysts that, that actually cover specific stocks. Expect the S&P 500 Index earnings to go grow about 10 percent next year, so from, 218 to 220 to around 240 is the, prediction for, next year. In my experience, you never had a recession with growing earnings, from the market portfolio, but that’s kind of a, the incongruous, setup that we have at the moment, which explains maybe why investors are struggling a little bit to, assess what to do.  The other thing that I’ll mention is that the bullet point on the rights side of this page that notes venue treasury, yields that increase to, 455 as of a few days ago and as of today, the 10-year US Treasury is at 483.,  with a pretty big sell-off today on the retail sale numbers and, the corporate high yield index is now, about 9.1, percent.  And, the, the other news of the, of the moment is just the Middle East being on fire, with, the basically, the terrible, atrocities that have taken place there and, that’s a very, very difficult situation, and we don’t know how it will, influence financial asset prices but, we kinda have our seat belts buckled. So, with that, I’ll go to, Slide Number 3, the income builder. I’ll just remind you, Thornburg Investment Income Builder’s objective is to pay to active income today to grow it over time, and we believe if we have assets that can grow distributions over time, that that will be accompanied with long-term capital appreciation, and that’s exactly what’s happened.  We’ll go into the particulars on that, the numbers on that, later in the presentation, but what we aim to accomplish our objective with, dividend-paying stocks from around the globe and also bonds and hybrid securities from around the globe and our key focus is on a firm’s ability and willingness to pay dividends from cash-generative businesses. So, that’s the portfolio. Slide Number 4 is just an overview of equity portfolio allocation shifts and, I’ll just point out that the column on the far right is correct in terms of the, changes from September 22 to September 23, but there are typos in the column, just to the left of that.  So what, what’s the exciting conclusion here? We have a lower weighting in financials and some of that is performance, and some of that is lightening, the weights on, on our financials a bit, a higher weight on energy and some of that is performance and some of that is, new investments and some, pipeline, and in energy infrastructure, companies. Other than that, it’s really nothing, remarkable. Those weighs shift from time to time based on performance and, and just adding or subtracting a name or two. Slide Number 5, gives you some portfolio characteristics and I think this is important because, once again, you can see that, equities in the Thornburg Investment Income Builder which comprise about, 83 percent of our assets, are much, much cheaper than the market as a whole. So, if I look at the forward PD estimate, 9.9 times and the global equity index. That equity index is at 17 times, twice the book 1.4 times. That’s about half of the equity index. We can all argue about how important that is, twice the cash flow, 6.6 times, so that’s, indicating that there’s room, for these companies to continue to pay dividends and maybe even to grow their dividends, and the dividend yield at 5.4 percent goes with the index portfolio dividend yield 2.2 percent. So, we have a portfolio that is, well-suited to the job that we’re trying to accomplish, but very, very different from, the market portfolio as a whole. The next two slides, 6 and 7, shows some details on our top 20 equity holdings which, combine, account for, just under 53 percent of the total portfolio assets as of September 30. and, on this, what I would point out is if I you, if you look at the columns on price changes with percent, and this is just share price changes. You’ll notice that, last year on Slide 5, only two of those top ten holdings had, positive share price changes. Eight of the top ten had negative, and it’s the same on the next page. So, our top 20, only four of them, had price increase this last year.  now, this year, 13 of our top 20 holdings have had price increases. You could see the dividend yields on the second column from the right and they’re, pretty darn attractive, dividend yields, and, and then maybe on the far right is, super-important information with respect to the income builder, and that’s a 5‑year dividend growth rate for, each of these stocks, and some of the ones with higher yields have lower dividend,  growth rates and, vice versa, some of them with lower yields . Let’s say Broadcom, had much higher dividend growth rates, but the interesting thing to me is, when you look at these dividend growth rates on these two slides, it’s pretty remarkable that only four out of those, top 20 holdings, had, positive share price changes last year and, and seven of them are negative this year. There’s real value, in this portfolio, and I think one question that investors always ask is are we too late?  and I think my answer to that is no. We’re not, we’re not too late. In fact, we’re pretty early here, because these are, really an attractive, 5 percent-plus, yielding, set of, of assets that we have, and, we’ll talk about dividend growth a little bit later. The next, ten slides, 8 through, 17 just give some specific information on our top, ten holdings and, you can look at those at your leisure. Maybe I’ll just talk about couple of them, and I’ll start with our, our largest single holding, which is Orange, which is a multinational telecommunication service provider.  It’s headquartered in France. They have 246 million mobile customers, and almost 25 million terrestrial broadband customers in 27 countries in Europe, the Middle East and Africa.  So, if you look at the share price there, it’s been a lot more volatile than, maybe one would expect for a company that, doesn’t have to ship a box, every time they get an order. They have, tens, like hundreds of mullions of customers that, mostly pay monthly and, there’s been a little bit of, of upward pressure on the, tariffs, which his a good thing.  if you look at the, the top left here, the market cap of Orange is 29 billion. You expect it to generate at least 3 and a‑half billion of free cash after cap-ex, from the business this year.  So, you can kinda do that math in your head, but, with a, nearly 7 percent dividend yield and, really good cash generation. And another, bullet point that, that we’ll point out here is that they built a terrestrial fiber footprint that passes more than 68 million homes in Europe, and of those 68 million, only 15 million were connected as of June 30. So, you think about it, when it’s costing, maybe close to 1,000 euros per home to build that footprint, and now, it’s largely built out and, now, they, the job is to, get some of those, more of those 68 million people to actually hook up and start paying, anywhere between 30 to 50 euros a month, but the heavy lift is done,  and the cash generation should improve. And, the reason that, I, maybe spend a little time on this is this is the characteristic we’re looking for in a business, that, Thornburg Investment Income Builder owns. So, it’s worked its way to our top holding mostly because, if you look back to September of ’22, the share price was about 9, and now, it’s a little over 11, and so the share price performance has been positive, but it’s still way cheap. So, another one that I’ll point out, is a lower yield. It’s Slide 11. It’s Broadcom, 370, billion, equity market cap.  Broadcom’s share price declined in the, in the early months of COVID, by almost 50 percent, by negative 48 percent, which is exactly how much it’s increased this year, in the first 9 months, but if you, look at, at what they did last year as the share price was down about 16 percent, their revenue was up 21 percent last year. Their EBITDA was up 32 percent, last year. So, and this year, estimates have, increased, from the end of last year through, the, end of September. So, they continue to grow, and importantly, the revenue EBITDA dividends for, Broadcom, as we point out in the bottom, box on this slide have grown a compound average growth rates of 13 percent, 22 percent and 32 percent per year, over the last 5 years. So, it’s a, it’s a technology play. It’s a technology play that shares the wealth and, by the way, we see them as somewhat tied in artificial intelligence.  they’re just not talked about so much, in that, in that conversation. So, I won’t talk about all the rest of them, but if you want to talk about them, give us a call, and we’ll talk your ear off about them, as we feel pretty, pretty good about these things. So, I’ll skip to Slide 18, and just talk about the, the dividend growth that we, that we saw in the portfolio last year.  And we have to focus on last year for, regulatory reasons, but about 75 percent of our, equity portfolio by weight grew their dividends last year, 8 percent or flat. So, that’s 83 percent and 17 percent paid a lower dividend with that 17 percent kinda split between companies that, lowered their dividend for whatever reason because their, spending, cap max.  And, and some of them paid a special dividend in 2021, but they didn’t repeat in 2022 with the special, dividend. So therefore, it was a lower dividend, but if you look at those ratings, it’s too early to know exactly what’s gonna happen this year. But, based on what I expect, I think the holdings growing the dividend will be closer to 70 percent,  this year, and, the rest will be relatively evenly split, we think. Between flat and lower dividends for this year. So, and these are all in home currencies, so, dollar strength or dollar weakness can influence what we have in US dollars to, share with our shareholders. But, importantly, the companies that we own, by and large are growing their distributions over time, and if you look at their valuations, we think they have room to continue to do that. So, with that, I’ll turn over to Matt Burdett.

Matt Burdett:  Thanks, Brian.  I will start on Slide 19.  Let us just give a little perspective on the portfolio around how it’s behaved in different, interest rate rising environments. It’s timely now, but I think it’s also timely to think about it within the context of your, your client portfolios, as you think about income solutions.  for, for those clients. And so, what we show here is various periods.  the number of periods over the history of the income builder fund with a 10-year US Treasury yield rose by 40 basis points or more. There were 35 periods over our, little over 20 year history, and what we’re showing is the frequency, of the time that the investment income builder outperformed various other income solutions, i.e., bond portfolios, and what you can see on the slide here, depending on the index, we end up having a better, a better performance 83 percent of the time,  for the US Corporate Bond Index and then down to our blended index, 77 percent of the time.  And we do this while having an average dividend yield that’s 220 basis points higher, than that of the US Aggregate Bond Index over, over history there. So, how do we do it? Well, one, it’s a lower bond allocation, over the history. We buy bonds when yields are high. We don’t buy bonds when yields are low.  And most of the bonds that we buy, it’s, it’s usually a credit risk story, and we avoided bond-like equities over, over periods of time when those, those became, in our opinion, overvalued. Advancing to Slide 20, this is showing you a similar, outperformance in different rising rate environments. Here we’re showing various specific periods, and what you can see in the bars, the dark blue bar, is, is the Thornburg Investment Income Builder iShare’s total return performance. Orange is are blended index, and then the gold color is the US Corporate Bond Index total return. And really, the take home here, you could look and see the outperformance that we’ve had over these periods. I think the takeaway is that we, we, we’ve managed to, to provide both upside and downside, captured, and it’s favorable in these different rate environments. And again, we managed to do this while having about 250 basis points higher dividend yield than our blended index over this, this history. Advancing to Slide 21 showing various market portfolios across the world. A lot of this will not be news to many of you. I guess I would just highlight, the year-to-date column. Pretty reasonable returns for, for most equity portfolios.  I would highlight that the US performance is highly concentrated into the magnificent seven stocks. So, it’s, it’s a bit skewed. And then I would just highlight that the, the US Universal Bond Index is modestly negative, year-to-date after having a negative period.  Last year where, where most financial assets were deeply negative. Advancing to Slide 22, this is showing our, our investment performance. You can, you can look at the numbers in greater detail. I guess I would just highlight, the quarter to date return.  we managed to have less downside capture there. We were down, the iShares were down about 17 basis points versus about 340 for the blended index. And then I think, more importantly, is to just look at the, the inception date return.  looking at the iShares, that’s about 881 basis points per year for over 20 years. So, so none of that, not a bad performance there. Advancing on to Slide 23, this is showing you the quarterly returns for the Investment Income Builder Fund. Since inception, we have, completed 83 quarters. Sixty of those quarters we had a positive total return.  and 15 out of the 20 years has been a positive total return. Advancing to Slide 24, I think this is, you know, we, we utilize fixed income, I think, in a unique way with, with the Investment Income Builder. As I mentioned earlier, and as this chart highlights, we buy bonds when the yields are high, and we don’t really buy bonds when the yields are low. Right? And so, what you can see on the chart here is going all the way back to inception. The dark blue line is our, fixed income in cash allocation, which got up to 45 percent in the depths of the financial crisis, and over on the right side of the, of the chart on the Y axis, you can see what the yield-to-worst is for our bonds, as well as US high yield and European high yield. Christian, later, will give some color on the market and what we’re seeing now, but that gives you a sense for how we use dynamic asset allocation, to provide the income solution, that we have over the last 20 years.  advancing to Slide 25, it’s showing the quarterly distributions.  We just paid 30 1/2 cents here, which was flat year on year. You can see the other numbers, on the page here. I would, I would highlight the trailing 12 month was about 120 cents, and that’s down modestly from the prior trailing month, or trailing year, where it was close to 124 cents. And some of that was due to, to just getting more special dividends, as well as some tax reclaims. Advancing to Slide 26, this is just a highlight the income builder’s yield over, in different calendar years versus our blended index, as well as versus the US Corporate Bond Index, and then in the dark blue line we have CPI.  What you can see here is that we’ve, we’ve consistently had, 4 percent or higher dividend yield.  Over the history, we have grown the dividend at, at 4.9 percent cager a little over 20 years and have grown the NAD by close to 400 basis points a year. So, roughly, roughly split between the two. Advancing to the next slide, this is probably, the slide we, we show this often. This is our, what we call our report card.  this is a hypothetical $100,000.00 investment in the Investment Income Builder A shares starting at inception. This individual made a $100,000.00 investment, collects the dividends and spends them, over time. And what we tabulate there with some of the numbers is, how much income they received over this period. So, cumulative dividends was $171,555.00, and if you do the math over, over 20 years, that’s roughly $8,576.00 per ann. Or, or another way to think about it is an 8.6 percent yield for, for 20 years.  and you now have capital appreciation where you, where you basically doubled your capital base.  So that’s, that’s a fairly attractive income solution in our mind. I think another way to think about it is, if you were to take the trailing 12-month dividends received, that’s $10,173.00, we think about the concept of yield on cost. That means that your yield on cost is roughly 10.2 percent.  So, it’s the power of growing dividends over time, that we’re trying to harness here. Advancing to Slide 28, this is a similar hypothetical $100,000.00 investment. The difference here is that this is, perhaps, for a younger client that you might have that doesn’t need the income immediately, so they reinvest all the dividends that they receive, and over this 20-year period, little over 20-year period, they have received cumulative dividends of $300,196.00. So, basically 3x the original investment. They started with 8,375 shares on their initial $100,000.00 investment. They are now sitting with 24,142 shares. Okay? So, they nearly tripled the number of shares, and if this, this person decided now’s the time to turn on the income, I wanna get the cash, they could do that, and if you were to just use the same math we had on the prior page,  you would end up with 24,142 shares times 121, the dividend, trailing 12 month dividend, and you end up with 29,355 bucks. Right? So, yield on original cost of 29 percent. Which I think highlights the power of this type of investing, and by the way the total capital appreciation will end up with an account value over this period of over half a million bucks. Advancing to, to the last slide here, it’s Slide 29, just a reminder to everyone, to think about where your total returns are gonna come from for the next, you know, 3, 5, 10, whatever years, this is a table that we like to show, it’s just a breakdown of the S&P 500 Index, going all the way back to 1871 where we break it out by decade.  You have an average price depreciation cone over that decade, and an average annual income component over that decade, and the sum of those two is the total return, and then the far right is the income that’s a percentage of the total return, so how important is dividends are to your total return, over time. The punch line over the, over that entire period, the average is roughly 50 percent, right? The 49.3 percent in the lower, lower right of the page is telling you dividends are roughly half your total return. But when you look at that column, you see that that number can vary wildly over time, right, and there some periods where dividends don’t matter very much, i.e., like the great financial crisis period of 2011 to 2020, when it only was 16.7 percent of your total return which means price was very, very important to getting total return. Right, go back to the .com era, 1991 to 2000. Dividends were even less important at 14.9 percent of your total return, with price, on average price return of 14.9 percent per annum over that decade. Now, of course, that was followed by a decade where the S&P 500 on average went down 50 bps a year for 10 years. So, you have to, we think put it into context, you know, remember, starting multiple today, I think Brian said the MSCI world is 17 times right now, and coming’ out of the financial crisis the multiple is more like ten. So getting the price return, high share price return out of your total return, was a lot more plausible until, it probably means dividends, will matter more, and with that we’ll, we’ll stop there and turn it back to Adam.

Adam Sparkman:        All right, Thanks, Matt. We’ll turn now to some, Q & A and questions that have come in from, from y’all who are joining us. Maybe before we get into that, some of the work it out with concurrent positioning. I see one question here that’s a little bit more mechanical, in nature, though, I’ll throw out. The question is, why do we use a US Bond benchmark, but a global equity index within the, or blended index, Brian, I don’t know if you wanna opine on that?

Brian McMahon:         Yeah, I’ll take it, it’s, this goes way back to when we started, Thornburg Investment Income Builder in, 2002, so, yeah, we use the global index because, as you could see from our, from my tech, we, we buy stocks from all over the world. While we do, buy bonds from all over the world, most of the bonds that we buy are dollar denominated, so even if it’s a non-domestic credit, we tend to buy the dollar denominated bonds. We don’t,  take the, the currency exposure so much, with our bonds, and that’s, the biggest reason, but the other thing that I’ll point out is, the, the Bloomberg Global Ag would actually be an easier, benchmark, as I’m just looking as of today, the yield, yield on the Global Ag is 4.27 percent for the Global Bond Ag and for the US it’s, 125 basis points higher than that, so, just over 5-1/2 so,  it would be, it would be an easier hurdle to clear if we used to Global Ag, but it’s more representative of what we actually do to use the, the US Bond Ag.

Next Speaker:  All right, thanks. That’s good color Brian. And Christian, maybe we’ll, turn it over to you on fixed income side. Yields, and spiking yields have obviously been in the headlines, through the third quarter, we saw Treasury yields reach some of the highest levels and it really is more than 15 years pre-financial crisis. Looking at the yield environment, how attractive do you think the opportunity is right now, and do you anticipate, the income builder adding more bond exposure to the portfolio?

Christian Hoffmann:    Yeah. Investors are getting used to new fall traditions, pumpkin spice lattes, watching the leaves change color and watching bond prices fall.  the case this year to the case the last year, it was actually the case the year before as well but not quite to the same dramatic effect,  you know, as we’ve talked about on these calls,  we get to the market, particularly in higher quality high yield last fall when things got a bit choppy,  so rates are higher than they were at that point in time, and some might wonder, you know, are we more active at that period of time or, or what are we doing. But the spread story is actually quite a bit different, just like quarries being higher, spreads are notably tighter, so last fall high yield was almost, yield 10 percent of the market level. We’re closer to 9 percent today, and again spreads are, are the big delta there, were we actually got to 580 on spreads versus 400 today.  so those remain good purchases outright and for the fund, the vast majority of those purchases that we did, are still trading higher, you know, than where we bought them despite this backup in rates. You know I think broadly that core rates are more interesting than, than spreads. Again, core rates, and real yields are as effective as they’ve been in call it 10 to 17 years, depending on the tranche and the day, and there’s certainly good reasons for that. Arguably they were way too tight for, for a long period of time. But now, you’re getting something that makes a lot more sense, and you look at that relative to the world. You know, I can’t think of a lot of other assets or asset classes that are at, you know, call it the cheapest they’ve been, you know, in a decade plus.  you know, despite the choppiness we’ve seen in the market, we’re coming off of very tight levels, so things got very tight in early September, and really what has happened is we’ve given some of that back.  there’s been a lot of commentary about the rate moves. But broadly, again some of these things you can point to, government dysfunction, you know, excessive spending, global demand, you know, a lot of these things have been true for, for a decade plus. I do think that while it’s all anyone is talking about today that 6 months from now, I think we’re going to be talking about most likely a very different economic environment and most likely different, different bond yields. So it’s a long way of saying we’re, we’re watching the market very closely.  This has given us an opportunity to do some nibbles but it remains, you know, not nearly as attractive it was last fall but, but it’s getting there.

Next Speaker:  All right. Thanks Christian.  Ben maybe turning to you and I think, you know, echoing a little bit of what Brian said during his, his opening comments. I think we’ve all been, surprised by the resiliency of, of the economy here in the US as well as globally in 2023.  what your thoughts around the possibility of a soft vs. hard landing?

Ben Kirby:      Yeah, like something we, talk about a lot. I think one, one takeaway is don’t underestimate the spending power of the US consumer.  you know, consumer sales I think they need to be pretty strong this year, especially in nominal terms which is kind of surprising given the inflation we had last year. The consumer remains so robust. I think that when we look at a recession, you know, the odds of recession and 2024 are probably higher than you would, guess on average. But we look at all the same indicators as, as most people in the market. You know we’re lookin’ at, the yield curve reversion, the change in global rates, EMIs, leading indicators, all these things that indicate a recession is higher probability in the next 12 months than, a typical 12-month period. That said, we don’t really manage the portfolio to aggressively position for, you know, a, a, a certain economic outlet.  this is a portfolio that is built on a, on a bottom-up basis, with a fundamental perspective. The companies we own as you hear, Brian and Matt talking are, high quality companies, excellent business, free cash generation, good balance sheets and, you know, we think that even in an economic slowdown, these businesses continue to perform, and they continue to pay dividends, and that’s really what we’re focused on, on a daily basis.

Adam Sparkman:        Great. Thanks, thanks Ben.  Brian, coming to, to you with this next one, and I think, maybe the example you gave on Orange was a, a microcosm but,  this question indicates the media continues to focus on headwinds with the Euro Zone, but sticking your inflation in slower growth. Given that this portfolio is overweight Europe, what makes you optimistic about the companies you own in this portfolio, especially in Europe.

Brian McMahon:         Yeah. I guess, what makes me optimistic is it’s kind of a combination, in these specific names of,  high yield modest valuation, sound capitalization,  and some growth, so if you, if you kind of look at these, at these firms, and look at the summary descriptions of the ones that we, that we list,  with, with only one exception and that,  I think we identify as a special situation, that’s Vodafone from where we expect some breakup kind of activity to continue, but, the others, they’re, they’re grown businesses. They have, a growing customer basis and they’re paying customers. They’re not customers that are getting’ a product for free, because someday the venture capitalists think that they’ll be able to, have somebody pay for something that they’re selling at low cost today. So, paying customers, good cash flow, some growth and very modest valuation combined with, a good capital. That’s, that’s kind of why we’re there it’s suited for the, the, the mission of, of the funds. So, I wouldn’t listen too much to, to some, some of the general commentary. I will say, by the way that, as has been the case with the US, the pessimism about the economy in Europe has been, kind of overstated so, people expect that a, a significant European recession this year and, that hasn’t happened so, the, the growth has been, has been okay and above expectations. So, but mostly we’re focused on the fundamentals of the individual businesses.

Adam Sparkman:        All right. Thanks, Brian.  Maybe even sticking with the individual, individual, businesses, Matt, can you talk a bit about, what you’ve seen so far on the earnings front,  as, as we’re diving into the third quarter there and maybe make your surprises, to you of what you’ve seen?

Matt Burdett:  Well, it’s very early still.  we’ve had, we’ve had a few bank earnings, which, which, you know, the team here is still into pretty deeply, and, and so far, it’s, it, it looks pretty good.  but again, it’s, it’s, it’s still very early.

Adam Sparkman:        Okay.  maybe moving back to, to fixed income.  Christian, where do you see some of the best route to value? You mentioned spread is still, still pretty tight, in this market despite what yields have done.  kind of what are you targeting specifically in this portfolio and across the fixed income thoughts, in the perfect environmen

Christian Hoffmann:   As it relates to this portfolio, there’s been really just some opportunistic trades.  in high-quality investment grade we’re getting, call it 7 percent plus. I think it’s an interesting add. You know, if Demar can only find those opportunities with some high-yield names that we’ve, we’re claimed are right size on, on price depreciation as well.  that’s the setup today. Broadly speaking, the fixed income market as a whole, you know, our team really sees a barbell that’s kind of most interesting places to play while still being yet active and diversified, and one is on the short end.  on the front end looking at structured product, we have, you know, high-quality structures, monthly cash flows, and getting six, seven, sometimes even 8 or 9 percent, this year in those structures. And that’s, you know, A to triple-A rated paper.  And then pairing that with some total return opportunities, very high-quality bonds that are trading at, call it you know, 80 cents on the dollar where you have, you know, a convexity profile that’s, you know, almost never on offer, price depreciation, and very low credit risk. So, I think you can probably look to get a nicely and get a nice income, and total return.

Adam Sparkman:        All right. Maybe one, one more here, on the fixed income side.  Christian, do you think we’ll get further tightening from the fed this year, and what’s your base case, for kinda directionally the move of, of rates over the next 12 months?

Christian Hoffmann:   So, so, quantitative tightening continues, and that’s kinda happening behind the scenes. So, we continue to, to get that, even though, you know, you don’t read about it in the paper every day.  As for an additional hike with the market’s pricing and roughly a coin flip, I think they probably don’t go in November, although the data, I think they don’t wanna go, but the data keeps coming in hot, and it’s putting them in a little bit of an uncomfortable position. I think December is probably more on the table. Again, broadly cross the street people keep waiting to see economic data cool, and it keeps coming in, you know, surprisingly hot. But look, the other, the other big story here, and the fed has not been quiet about this, it is, you know, on the lying of the curve you’ve had, you know, a tremendous move there, if you call it going from, you know, four to almost 5 percent on the 10-year. That’s worth a lot more than, you know, a 25-basis point hike in the front end, and changes a lot of people’s realities, and you know, should not be underestimated, but I think the fed gets that. They’re talking about it. I think they would love not to hike unless the economic data just really puts them in a corner where they feel like they have to.

Adam Sparkman:        All right. Thanks, Christian.  Ben, maybe coming to you, can you provide some perspective on, on what will trigger a shift, to the wider market from the magnet sevens of the US tech stocks that we’ve really seen lead, throughout the year to date period?

Ben Kirby:      Yeah, thanks for the question. It has been, it has been a pretty narrow market, as, as the question observes. I think, what would cause a pivot would probably be the fact that, many of the, of the companies who have benefited this year in their stock price from AI are not really making much money from AI yet. Right? So, there’s a lot of hope and excitement and indirect expectations, but we kinda need to see the earnings actually come through, and so, there is the possibility for, you know, those earnings to take longer to come through, or for there to simply be a gap and for expectations to have run ahead of reality. That said, in order for AI to really, you know, achieve the promise and, you know, the, the valuation of, of the magnificent seven, you’re gonna need a lot of applications into the AI that end up reducing costs, for a lot of companies, which means, many of the companies we own in theory to be able to apply AI and, and have a, a margin benefit so they would benefit as well. So, I think we’re looking kinda down the road for, those applications, that can benefit a broader set of companies and consumers, as opposed to just the data center, providers today.

Adam Sparkman:        All right. Thanks, Ben.  I think we’ve got one final question here.  Brian and Matt, maybe I’ll let, either or both of you opine on, this kinda broader question.  What areas of the market do you think are most at risk given the current environment we find ourselves in, and where are you seeing some of the most attractive opportunities?

Brian McMahon:         Yeah, maybe I’ll start, and Matt weigh in, but I think the biggest risk is with, companies with high financial leverage, because, obviously the cost of, of carrying that debt has, has gone up a lot, and so, we are pretty focused on that. We don’t want to, own a bunch of over-leveraged companies, and when you think about how congruent that is with the mission of our fund, we’re looking for ability to pay and willingness to pay, a great, dividend today, and, and grow it in the future.  it’s, at least on the equity side, it’s incongruent for us to own heavily leveraged companies, but I think we’ll see some fireworks there, and maybe the other thing is just rising interest rates that challenge the most extended equity valuations.  So, it’s I think it’s really, really hard for, companies with, P/E multiples over 30 to deliver the kind of growth, especially larger cap companies that, that justify that kind of valuation as, rates creep, higher and higher. So, I guess that would, that would be my answer, and maybe if there are problems with leverage, that we won’t, necessarily, have problems in the equity part of our portfolio. But as they say in golf, every shot makes somebody happy, and Christian might be very happy to, see some companies that have, had relatively low yields despite having high leverage,  and bond prices that come down a whole lot and then offer the prospect of, of really cool equity returns, going forward, and that is certainly what we saw, during the global financial crisis, and if you look back at the slide back and see how we heavied up our weighting in bonds in that period, you’ll see that we, we did take advantage of the fallout at that time. So, Matt, do you have anything to add to that?

Matt Burdett:  I’d, I’d just say, you know, look, I think from an opportunity standpoint, you know, you’ve got, you’ve got the market multiple at a pretty high level. Right? The US market 20 times roughly forward earnings.  But within the market there’s a lot of dispersion around. You know? Brian, Brian just touched on those, those very, very high valuation companies. Right? But there’s also a cohort of companies that are well below that, and in fact, you know, as Brian highlighted earlier, this portfolio is less than ten times forward earnings.  But yet we focus on businesses that we believe will, will have durable cash flows. Obviously, it depends on the sector. Obviously, energy companies’ cash flows will be a function of commodity prices, but that’s, that’s a small part of the portfolio. So, you know, at some point it seems, it seems there’s valuation re-rating potential within this cohort compass. Right? And, it goes back to that table that, that we showed earlier about where your total return comes from and, and dividends matter. Roughly half your total return over time.  So maybe you see the market multiple come in a little bit, but you know, that dispersion also lessen. So, generally still feel like there’s a lot of fire power left in the portfolio at this point.

Adam Sparkman:        Right. Well, I think that’s a, a good note to, to end it on.  I’d like to thank everybody for joining us today on the call and making it as interactive as it’s been. As always, please feel free to reach out to us.  As Brian mentioned, we love getting on the phone and, talking about stocks and the portfolio broadly, and we’re happy to make ourselves available. Thank you.