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On Apple, Spotify, YouTube or wherever you get your podcasts. Hello and welcome to the Credit Edge, a weekly markets podcast. My name is James Crumby. I'm a senior editor at Bloomberg. I'm Rob Schiffman, a senior analyst covering Tech at Bloomberg Intelligence. This week we're very pleased to welcome Alex Mackie, Co-Chief Investment Officer or Fixed Income and MFS Investment Management. How are you doing today, Alex? Doing great. Thanks for having me. Happy to be here. Awesome. So as Co-CIO, Alex has joined oversight of MFS's global fixed income team and works collaboratively with the firm's investment leadership team to ensure its fixed income investors have the tools and skill sets necessary to serve clients globally. He's also a fixed income portfolio manager on several strategies, including the firm's multi-sector fixed income strategies with oversight of dedicated US credit portfolios. So James, why don't you get us started here? Thanks, Robert. And great to have you on the show, Alex. And we should say, say also that you oversee around $120 billion in fixed income assets, having diverse institutional and retail investors around the world. And to be clear, also we are talking about MFS Investment Management, not market financial solutions, the UK property lender that went bust amid all allegations and put the spotlight on lending to non-banks, stoking anxiety about defaults in private credit. We are though talking at a time of high anxiety for global markets with energy prices spiking and geopolitical risk rising. And yet public corporate debt, at least at a very high level, projects an air of calm and stability. Two big risks though we've been discussing on this show are US recession and the rate hike from the Fed. Neither seems very likely at the moment, but the odds are definitely rising. So Alex, I want to start there. To what extent are you positioning for either of those outcomes and how would they affect credit markets if they did happen? Yeah. And it's great to be able to think about the evolution of the year because coming into 2026, the priorities for conversation here at MFS across the global platform focused on fixed income were really about an improving outlook, at least for the first type of 2026, from a macro perspective, right? And then comparing and contrasting that relative to the micro perspectives that we've got from a global research organization that's deeply staffed across the globe. And that landscape I think has been one where we've continued to have relatively high conviction about the strength and fundamentals. So that's been really supportive. But the narrative is shifted, meaningfully, when it comes to the thing that we've all spent a lot of time talking about, that's inflation. And inflation is a byproduct of what's been going on with conflict. So the persistence of that, right? How long that lasts is going to have a whole host of implications from bottom up and the top down, you mentioned the Fed and frankly central banks around the world. So we don't have high conviction yet that there is a step function change, but the duration of this conflict and the availability of energy globally is going to be an important input into how that decision for us as an investor for our clients is going to be allocating capital over the course of 2026. And then the downstream effects that we hear about every single day that are impacting companies and how they're being operated. So it's been a change every year. There's a set of risks that evolve. And sometimes you get a mostly right. I don't think there were a lot. There were calling for a global energy crisis and a significant conflict in the Middle East. But that's what we do, right? So how do you manage through these geopolitical events? Just a couple of months ago, I was talking every single day about an AI bubble, which we're going to get into later. But now everything's just shifted towards the Middle East and the implications. So how do you manage potentially a short-term process versus long-term results, or it may even vice versa? Right. Right. Yeah, the background noise of AI, the background noise of private credit that had really dominated the credit market for the first couple of months of 2026. Those are still percolating in the background. They're just not the leading edge of what's been driving volatility in the markets. In the short-term, and we do believe that resolution will come in some form. We can't, and we don't have a crystal ball to understand what that resolution is going to look like for the crisis in the Middle East. We do believe that that is expecting in the not-too-distant future. That means that we're going to have a landscape where all the positive impulses that we've been spending a lot of time talking about at the end of 2025 and in the beginning of 2026 will be pulling through. It's just a question of the order of magnitude of those. And then the risks related to AI and the risks related to private credit, which really have the dominant features for credit investors, are going to get a lot more airtime. We expect that fully. Those aren't on the shelf. They're active discussions that we're having every single day. When you look at where markets currently are pricing risk at the moment, the high yield is red, wide and down to bit. So did the IGs for it. But they both come way back down again. They're both around long-term averages. We're pretty much pricing very, very tight levels of not much credit risk in the market as of now. Well, it's where the market is. The features of technicals. So frameworking it, fundamentals, valuations, technicals, technicals can do play an important part in how investors are choosing to allocate capital yields and move higher. So while spreads haven't really moved yields and moved higher, so the value proposition of fixed income has improved somewhat, assuming the risk-free rate is mostly that. Risk-free rate. We think that that's been pulling some capital into the markets. If you look at on offerings, deal book sizes, they're still well over-subscribed. And that's an important indicator of what demand is in reality. So the demand function seems to be healthy. Higher yields are a really important predictor of what future returns are going to look like. And the reason that I talk with clients about all the time is just look at where your starting yield is and you can have a pretty high confidence interval around what your expected future return is going to look like. That depends on the parts of the market you're investing in, but starting yield really matters. And yields increased. So demand for fixed income continues to be there. Frankly, on the valuation strictly from a spread perspective, that's been a little bit frustrating for us because we have a lot of concerns. And there are some fat-tailed risks that are out there and yet the market hasn't, of course, finally increased the premium that you're getting compensated for putting capital to work. So yeah, the IG market has barely budged off of multi-dicatal tights, the high yield market same. That's true in the US as well as over in Europe. As a by-prach, of that, our risk positioning across the platform really hasn't changed all that much because, frankly, valuations haven't changed all that much. And we think that investors are going to be well served to be patient. Do you worry at all though that the demand might hold up at this point and we've seen not a great cause of her returns. We're starting to see some outflows from the funds. And then there's all this noise that you referred to earlier about private credit, there are redemption there and all that. At the same time, we've got this ton of supply coming on. So the net new supply of high yield and IG could just be very substantial in the highest in years at the time when not just US demand, but possibly foreign demand is also staying closer to home where yields are higher. Also there might be losses that you need to sell liquid stuff to cover. So there's a whole load of stuff that worries me more about demand than anything. Yep. And we would echo that caution and particularly as it relates to take a look at, for example, three months returns for the US Ag space. They've gone negative by order magnitude roughly 2%, a little north of 2%. If you look at that in historical context, you typically see flows.
moderate, go slightly negative, that's what's been happening here more recently. It hasn't happened in other parts of the market. It hasn't happened in the emerging market debt sector. It has happened in high yield that has happened in investment grade, but I think we categorize it as really relatively tempered at this point, but we do know with pretty high confidence that meaningful negative flows can create pretty outsized spread responses. It's one of the things we spend a lot of time talking about in the post GFC era. You had these bouts we referred to them as mini cycles where you'd get a burst wider of spread really on a technically driven dynamic. Take you back to 2018 in the beginning of 2019. It was really in December where there was a fear that the Fed was going to go too far, that they were going to push the economy into a recession, and you had selling into an environment where there just were no buyers. Some of it was seasonal, but selling can push spreads, meaningfully, wider in a very short period of time, and you better be positioned to take advantage of that. That also is something we talk about all the time. How are you putting a plan in place so that when the markets offer a better value proposition to you, you can deploy that cap of what segments are you most interested in, what sectors you most interested in, what issuers are you most interested in, and then what are your levels? You mentioned getting to long-term averages. We'd actually argue that current spreads are still somewhat through long-term averages, and we'd like to see long-term averages and probably get a little bit more excited about deploying more cap of. So my spidey sense started tingling, as soon as you mentioned fatales. I guess we're always worried about Doomsday in the fixed income markets. We'd love to hear a little bit more about what those risks or the top risks are from your perspective. And you know, if you're having a pretty big war that's affecting energy prices across the globe, and we're still in such an uncertain period, and this doesn't move credit markets that much wider. What will? Recession would. And the the catalyst for a recessionary environment are always really difficult to project, and forecasting recession is extraordinarily difficult to forecast. But I think we would be quite concerned if inflationary metrics continued to rampire, and the markets instead of just reading through that that was ultimately going to cause recession yields fell. If we had a significant spike higher in yields, that would be a scenario that could drive some real powerful technical pressures, and we'd be quite concerned about that. The byproduct of lack of energy availability into certain economies around the world, particularly in in Southeast Asia, China as well, you know, the outcomes of what that means for those economies and spillover effects that it was had, those are difficult to project. They're also difficult to plan out the scope of the impact. So there are a number of different things that we do worry about. A lot of it comes down to what is and what could be catalysts for recession. And we don't expect a recession. We're not anticipating that. I've mentioned at the beginning of this conversation that fundamentally we feel quite good about the landscape for corporations, particularly in the US. But there are there are flags and in those flags, may turn into something more than just a flag, and that would be that would be the outcome that would really be concerned about. Again, that's feeding into how aggregate risk positioning ends up proliferating across the platform. Right. This is not an environment where we want to be really pro-risk. So how do you prep for that? Do you keep more cash on hand? Do you move up in credit quality? Do you shift away from credit to other asset classes? Yep. Well, it's going to be mandate by mandate, so a little bit unique to each. So it can be a little bit more cash. It tends to be a little bit more treasuries. It may be some mortgages. It certainly will be a migration up the quality continuum. So think about corporates moving up the rating scale, if you will. And that in this environment is not a high cost proposition. Right. What you're sacrificing in compensation to move up the quality continuum from double bees to triple bees to single a's or single a's to double a's. That compensation is low in a historical sense. I was just looking at some charts earlier today comparing dispersion or trying to look at measures of dispersion. I think there's lots of idiosyncratic examples, but when you look at a market-based level, the dispersion, so take the 90th percentile, less the 10th percentile of market spreads. It's hardly moved. So the market is not asking for a lot of compensation to take on risk. Is that fair? I mean, and also what level do you think that you would jump back into, let's say IG, it's around, let's say mid 80s right now spread. I yield around 300. What levels would get you excited about jumping back in? Yeah. We look at long-term averages. We also look at long-term mediums and you know long-term averages. You're talking into the 120 context somewhere there abouts. That was for a moment in time. I thought that could have happened around liberation day last year. We would have anticipated. I wouldn't say we were we were hopeful, but we were interested in whether or not this current bout of volatility, which really hasn't leaked into the credit markets, was going to end up putting us back into a similar environment. It just hasn't happened yet. But long-term averages are a good starting point and that would be the important statement is its starting point. So the beginnings of stepping into credit and of course we'll revisit the fundamental dialogue and what the current risks are at that point in time to determine how much and which segments of the marketplace to step into risk. Give you an example of how you can do that differently. You know, COVID was a moment in time where you wanted to let bond math do the work for you. So you just by long duration high-quality credit and the aggregate of the market risk premium that increased was more than substantial enough to compensate you in excess ways as opposed to taking real risks in an environment where your forecasting ability and your visibility was exceptionally low. So the environment will dictate how you take that risk, but our conversations about starting that process would absolutely begin as we get and and approach levels that are more along the lines of long-term averages. Before we get into how you're playing AI from the sector's perspective, I'd love a bigger picture thought process. There's you know so much conversation on AI disruption and how it possibly could have a significant negative impact on so many sectors. Just wondering your thought process on how you're thinking about that. May might be most exposed or do you have any real concerns and if so, how do you how do you adjust your portfolio for that? Well fortunately we benefit from having a large research organization at MFS and that resource organization is not just credit research focused individuals we have equity focused individuals and we have quantitative solutions focused individuals. The evolution of AI and the impact that it has on all of our lives and every business that operates today and the businesses that will operate in the future, that is a that's a conversation where we can get an incredible amount of bottom-up input to help us to try to risk assess those very difficult to answer questions that I think you're getting at. What businesses are at risk? What are the disintermediation possibilities? Are you looking at revenue risk? Are you talking about expense opportunities? This is where our team comes together and we help each other to make better investment decisions right where you're investing across the capital stack is a very different question but do in deep research on the companies there are a lot of analogies that can be drawn about what a credit investor is doing relative to what an equity investor is doing. So from a from a very high level work cited about the AI ecosystem as debt investors as credit investors we're excited about the growth of the ecosystem. It's challenging all of us to start to look at different structures to think about different means of financing. We've had a couple of different financing in the marketplace. One just yesterday was placed for multiple billion, multiple billions of dollars in support of data centers in the IG market kind of first of its kind structure. These are opportunities but it's not just blindly buying into an area.
of growth, we need to do the cross-sector comparison. Is this financing being sought out for the market where they can get the least cost option and the security packages are not commensurate with what the corresponding risks are? Or alternatively, are AI financing requirements supporting growth in non-corporate segments of the fixed income marketplace? Is that a great place for us to go and think about ways that we can take on comparable risks and growth dynamics and at the same time get better security and comparable compensation? So it's creating new opportunities for us. It's also putting an incredible amount of debt into the marketplace, which is adding liquidity. It's giving you the opportunity to have potentially more tactical investment opportunities. So it's an exciting time filled with risks. I think a lot of this is more risky for the equity value proposition than it is at least today for the credit proposition. If you have fears of the growth of a business slowing because of some degrees of AI, some of the intermediation, that could be very problematic for the equity price. It may not be problematic at all for the credit profile. And so I think there are going to be examples where we can look back and point to maybe maybe with the bathwater or a bit of hyperbole as to the disintermediation threat that exists. I can think of some particular names. I can unfortunately share those with you. But those are the kinds of opportunities where we say, yes, this may end up slowing down the top line. But these are essential services that companies are providing for their clients and they're extraordinarily difficult to rip out of those businesses. So yes, maybe the cash flow growth slows somewhat, but the ability to repay your debt obligations remains incredibly sound. And when spreads respond a negative way, that's an opportunity for us at MFS to step into a situation. Do you have specific sectors though that you don't like? I mean, the poster child for disintermediations, financial services, legal and certainly in tech, high yield software, which is underperformed dramatically. I'm just wondering what you've thought about those spaces or others that give you pause. Yeah, I'll give you the unfortunate, well, on the one hand, this and on the other hand, that it is going to be somewhat idiosyncratic. And data centers is an area where we have plenty of different ways to own that risk. We don't subscribe to the view that owning data centers is definitely a great way to take credit risk. But these are just boxes. You're kind of left with an entity that can't be repurposed into anything valuable. The chips that are going inside those units have a very short depreciation life. And then it's a question of will they be reupped at the end of that useful life? You don't know. That's a lot of risk. So there are plenty of issuers who are putting that kind of content or that kind of asset into the debt markets today. And we're scrutinizing that heavily. We think that that could be potentially a dangerous way to allocate debt capital. So that would be one software, obviously, in particular in the high yield market is a sector where we have plenty of reasons for concern between high leverage between asset light models and the possibility of disintermiation, which is going to be difficult to forecast. So those are being heavily scrutinized. I don't think that's very differentiated for the rest of the market. You've seen that sector come under a lot of pressure both in public and in private credit markets. So I think those are the two principle callouts. But overall for corporate issuers in the public bond markets, typically these are really large businesses that have significant market share that had been operating for many decades. And their ability to defend their marketplace is pretty significant and they're not just going to sit on their hands and watch as AI eats their lunch. They're going to be investing proactively to try to help grow their business. I think it's much, much harder to be an equity investor facing these prospects than it is to be a debt investor facing these same risks. I completely agree. We've been wildly bullish on uninvestment-grade issuance so far that like you said, demand has been sort of through the roof. I'm wondering though, these effectively are the amount of rush-mores of credit. We talked about being worth more than the US government, Microsoft has rated higher than the US government. But with so much issuance, which record issuance last year probably going to be record issuance again because we're talking about trillions of dollars of CAPEX, companies now are starting to issue not just multi currencies, but all along the curve. I mean, we saw Alphabet do 100-year bond. Is there a certain sweet spot for you? Do you get to a point where you don't care what the carrier is on a 30 or 50-year bond because you're too worried about the technology 50 years out? As to the front-end, where do you see the most value of running issuers? It's funny because I feel like that question has really evolved when it comes to assessing the technology landscape. I covered technology back in the early 2000s, and that was the first question on every credit. Well, what's the substitution risk? These guys are going to go away. You can't possibly buy a 10-year bond in this Cisco as an example. It's obviously changed with the essentiality of what these mega-cap companies are delivering to the market to the global economy today. We don't have nearly the same kinds of reservations. It really comes down to the strategy, the capability that needs to invest the capital. It depends on the nature of what is that capability. Is it a short duration, intermediate duration, longer duration product? If there is an offering from, you mentioned, Alphabet, if there is a long duration security that is on offer, we can entertain that. It's really about the fit for the capability that intersects with what the clients' outcomes and goals are aligned with. We're not terribly concerned. 100-year bonds, that's to me a great insurance type of conversation. It's a unique type of a structure. We've seen those and other corporate issuers over time. I wonder if some of it was just a desire on the part of the company and the bankers to prove that we are who we say we are. I know Robert is well debilished. I'll take the other side of that. I'm worried about the bubble bursting and other people seem to be given the demand for hedges and there have been some solutions out there. There are CDS, getting more active, becoming part of the CDX, which is giving you more exposure. I wonder about that in terms of your ability to hedge the bubble risk and whether you are doing that to a certain extent right now. We have some strategies and we have some investors who are more active in hedging and utilization of derivatives in order to affect that type of hedge strategy. We do have the ability to manage cash bonds along those lines. Hedging the AI risk is a very different question than just hedging aggregate risk at the portfolio level. Reasons for caution when you think about the CAPEX cycle. We'll just turn it around a little bit. Related to AI is going through this never seen before type of growth experience. When you get to 28 and 29 and 30, the scale of that spend plan that's out there is so large and there is going to be a demand at some point on the part of the market that returns will be required. Again, I think this is maybe Robert and I are agreeing on some of the same things here. For credit investors, the returns are important but they're not nearly as important as they are for the equity investor. The magnitude of returns is going to dictate the pace of spending that will continue. We've got a blueprint for the next five years. Maybe it goes smoothly, maybe it continues to grow or maybe there's a hiccup in between where the returns become a little bit unsatisfactory. That likely has a response function on the part of those who are spending and they slow it down. These companies are only going to get bigger and with that as a credit investor and particularly as an organization at MFS where we have benchmark awareness or customized benchmarks solutions for our clients, we need to manage that risk. The technology sector just continues to grow. You can go in and look at the composition of the indices. Tech has been the fastest growing sector for a very long period of time.
the fastest growing sector prior to this boom that we're going through and that's only going to continue. So you have to hedge that or risk manage that, not hedge, but it's risk manage it. Do you got to choose how you're going to take that risk? There's going to be plenty of bonds to choose from. So pick your credits, do the deep work, and then along the way, would like to believe that there are going to be some idiosyncratic opportunities that are might be adjacencies to the names that get all the press, get all the headlines that like the hyper scalers continue to receive. I think there's some good examples of that. I think Broadcom is one of those very good examples of in the ecosystem growing like a weed, but they're not spending anywhere along the same lines as the hyper scalers. That's funny years ago, everyone was worried about Broadcom leavering up and going to Junk and now they're superstar. Just one more on this topic from me. I get this asked a lot with all this debt issuance and likely a lot more coming. Do you end up reaching limits like how much of an individual name can you own regardless of what the index size would be? Does it get too large relative to other holdings where you just say, "I can't own it?" My answer has been one of the, it's simple from the BI perspective to say, at the right price, people won't anything. But do you see not becoming a potential problem that it's just, "I can't own another bond of this name?" I don't think we see that as a problem. It could be a gating factor on the spread level. Maybe that's saying the same thing that you're saying, but just saying it a little bit differently. The ability for a double-a credit like meta to trade like a double-a credit is going to face some challenges when you're putting tens of billions of new issue paper into the marketplace on a recurring basis. There are new issue concessions that the market does command. There is going to be a proliferation of exposure where some investors may have explicit limits like you're talking about. At MFS, the value proposition is going to dictate the size of the position. Then you run that through your risk models and it will give you a few credit risk at the issuer level. That is going to then determine when if you've hit some form of a limit. Those are also models that are going to be benchmark or customize benchmark aware. There will be some sort of disintermediation of absolute issuer size as a gating factor, at least here at MFS. You certainly have that for some investors. Where that could be a problem, this is an area that we haven't really spent a lot of time talking about. Were there to be a moment in time where there were regulatory constraints that impacted market participants, like say segments of the investment grade market insurance, just because it's an easy sector to highlight as a really large active investor in the investment grade market. Reached limits on regulatory requirements for individual issuer names or these names in particular or a name in particular, that would create some indigestion. There are other sectors in the past where that's happened for very different reasons than we could think of for the hyperscalers. But that could be a risk to the absolute exposure on an issuer level. The tech spread has widened out quite a bit with all this supply. Do you think it's going to go a lot wider? Do you think new issue concessions have to go a lot higher to clear all of this massive debt that Robert's talking about? Well, the market's pretty smart. Bankers are pretty smart. Typically, supply doesn't come unless there's demand. Yes, there'll be bouts of modest new issue concessions that get put into the marketplace. When you see those "concessions hit at least in the IG space 10, 15, maybe 20 basis points, those are significant." At that point, usually the supply funnel starts to squeeze a little bit tighter and the market digest and corrects. The underperformance of tech that has been an interesting observation. That had been trading well through, industrials, well through utilities, well through financial or banking specifically for years. That now is trading wide, I think, to all of those groups except for financials, financials, maybe a few basis points behind them at this point. There's an improved value proposition within technology. It does put a little bit of a limit on how fast you could see a reversal of that trend. If you keep pumping bonds into a sector, then you're going to be creating a little bit of a dynamic that pushes against persistent spread tightening and normalization of valuation. The other big thing that we keep hitting is private credit. I know you're mostly a public credit shop, but I'm interested in your views. First of all, how all this noise is affecting your day-to-day and the perception of risk because not that many weeks ago people were saying this is all 2008 all over again, which I don't think it really is, but status side, there is a huge amount of noise. There was a lot of fear about debt, generally about companies, about risk, about software, about all that stuff. It seems to be emanating mostly from the BDCs, with dimensions side. I'm curious as to you of you of that, but is there an option due to buy BDC debt cheap because those spreads are really wide as well? Well, we get asked about private credit all the time by our clients, by the marketplace, by prospects. While we're not an active investor in private credit, we want to understand the participation of private credit investors, private credit capital allocators. What you can simply look at is the flow of capital into that marketplace and has been very rapid. History never repeats itself, but it oftentimes rhymes, where capital flows with the greatest speed, typically is where the accidents tend to happen. Now, that's not saying that we will have an accident in private credit, and it is a value proposition that for certain investors makes all the sense in the world. The biggest question, and I think this is coming through with a lot of the headlines that we're getting about redemption and so forth, is the matching up of who are the capital owners, and how are they choosing to allocate into private credit? How has it been sold? Has it been put into the bright marketplaces? That's not a decision and/or an observation that we have responsibility for making a call on, but there are some pretty reasonable signs to say that the growth of the market has been more recently sponsored by a less traditional and/or maybe in some cases some of the misplaced customers or clients. So the pressures on redemptions for BDCs, because you brought that group up in particular, the pressure on redemptions or for redemptions that they're facing likely ends up causing creating some opportunities within the public credit markets. You can look at the portfolio of these companies, right? The portfolios of these companies, you can see all the issuers, you don't get the details of what those issuers actually are, but you can see the diversification, diversification matters. You can also see the accruals and you can see the losses. The possibility that you have a lowly levered in BDCs are designed in a very low debt to equity leverage construct. Low leveraged, manageable redemption, diversified portfolio of assets, getting compensated for taking on that risk at a level will become fairly compelling. So we've been spending a lot of time talking about BDCs you have to and they had been a segment of the market or sector within the investment grade marketplace, particularly that had grown a lot. The counter-vissuers had been growing significantly and there's been a pretty significant dislocation in spreads, right? In a market where spreads haven't moved much and the market broadly hasn't provided a lot of dispersion, BDCs have created some dispersion. So, you know, they're going to be some losses. There are not, you can't just say that this is a buy every name because the business model is perfect. You've got to do the bottom up work. You've got to look at the individual companies, see where their loan risk is being taken. Are they at the first lane level? Are they taking equity risk? What's the composition of that? Worried their diversification levels. So that is an opportunity. But again, you've got to do the deep research and, you know, fortunately at MFS we've got a large team that's focused on doing just that and our portfolio managers are partnering with the analysts who are doing the deep research. To identify ways that the appropriate portfolios can allocate capital when those idiosyncratic stories are providing the right value proposition. And so, just to be clear, that opportunity would be to buy the bonds of the BDCs. Correct. Correct. From a positioning standpoint, typically in fixed income, we don't usually have screaming buys. We may have screaming sells. I'm just wondering, you know, what sectors, what names are screaming at you right now? I think the next question is, I think the next question is, I think the next question is,
names that are screening most are the ones that phrase a baby with the bathwater. There are some companies that are being unduly punished and it's all on a relative basis, but being unduly punished for having some degrees of threat that AI is putting at them. We can make that evaluation as to the order of magnitude of what that threat is and when the market is just wholesale selling an individual company and or maybe a small group within a particular sector, that is where the covering analysts are going to be banging the table and we have a very structured process as to how you bang that table. But banging the table to say we should be scrutinizing this, you should be thinking about allocating into this name. We haven't owned it in the past or we don't own enough of it and then making sure that we're doing that across the platform where appropriate. So that is one where we're not focused on or the center of focus in the markets is energy and the conflict, but every day we're talking about the disintermediation, the baby with the bathwater, what's most oversold and why aren't we owning it, challenging ourselves to step toward risk and that's what we have to do, right? That's where you're going to end up generating the most significant excess returns over time. Do the BDCs fall into that set of baby with the bathwater because a lot of people seem to be panicking about that? I think it's a little bit too early to tell if it's that kind of category, but the ability to differentiate one issue or relative to another. That part is becoming increasingly important and the differentiation in spreads or valuation, I think in our view, has not become dispersed enough. It is increasing but it has not become dispersed enough. So we think that there are going to be opportunities within there, but you're going to have to be very selective in how you step towards that. And is the opportunity there now or is it wait and see because there's still so much uncertainty and a lot more problems to come over the next few weeks? Well, I think there are going to be lots of questions that are going to take the better part of this year and maybe into next year to end up being resolved. I'd say it's a lot better value proposition today than it was coming into the beginning of 2020-26. There's names you mentioned, you know, difference between equity and credit before like Blue Out, whose equities are at their lows. Bonds have certainly sold off with maybe not as bad as what happened with equity. Is that the type of name that you've got your iron, have you creeped into names like that? Is there anything specific there you want to talk about? Yeah, unfortunately, I can't really talk about specific names that we might be making actionable decisions around. But what I can tell you is that you can line up all the public and the private BDCs and you can go through and see which ones have the leverage metrics that are most attractive. You can see which ones have the accruals that are either most attractive and or most concerning. Then you can line up valuation against that and then dig deeper into the portfolio companies that are underlying each of these businesses. You can see you want diversification, you want low leverage, you want low accruals. Those are the kinds of characteristics that you'd really want to zoom in on before choosing to proactively step into what we know is a business model that's geared towards lending on a highly levered basis to smaller companies. On that note though, I think a lot of the fear is around the portfolio not knowing how much is it worth? How is it being marked if it's being marked? What are the actual defaults if you can even see them? Yes, you can see something of the portfolio, but can you get down to a level that you're comfortable with all of the risk involved? You're never going to have perfect precision and that's where the diversification piece comes into play. We're also in the business of taking risk. You can't get something for nothing. The ability of our analysts who are deep experts focused on industries digging into companies, meeting with them regularly, understanding what management's priorities are, ripping apart the portfolios in the case of the BDCs, the portfolio companies to the best of the ability from a transparency perspective, and then making the assessment as to whether the valuation proposition on a risk-adjusted basis is significant enough. That'll feed through into how you size positions. That'll feed into how diversified of an allocation you might choose to make. You have to take risk. You're never going to have perfect foresight as a matter of how you risk management. When you look around everything you're doing, it's quite a big global portfolio. You see tons of different things, but I'm wondering where you think best relative value is right now. I know it's a really murky 12 months horizon, but let's say for the next 12 months, what would you put your finger on as really great credit relative value right now? Well, our preference is to be making that up in quality trade. Our preference is really to take risk. Martially into the investment grade market, you've got great liquidity, you've got really durable credits, you've got a landscape for fundamentals that continues to be relatively healthy with modest, if not better than modest top-line growth and corresponding cash full of growth. If you have to allocate to risk, trying to focus on that up in quality, if you're talking about a high yield mandate, staying invested, trying to be competitive relative to what the market yield may be, but skewing up the quality continuum there. Thinking about going single-beeted double-be, those will be our preferences. This is a global, new is not just US, it's everything. That's a global view. We have a global conversation around risks and opportunities, which is really focused on spread markets globally, whether it's IG, high yield, US, European, EM, corporate EM sovereign. And in those exercises, really, the dominant conclusion is leaning toward up in quality. Do you not, in that segment, worry about some leverage increasing and potential downgrade risk, because we get more M&A, as we get more supplies, we get potentially the economies starting to slow? But do worry about that. That's an interesting byproduct of, frankly, the current administration that has really been much, much more supportive environment for getting regulatory approval. And businesses wanting to grow grow faster. M&A is a traditional playbook for that. We're seeing it. We are seeing that. So that is a concern. I would say the way that we can offset that is because those concerns or those risks tend to be idiosyncratic in nature. They don't tend to drive the aggregate of the market. So if we have the ability, and we do, to cover companies, cover them globally, and to have our analysts focusing as investors in trying to identify excess returns as a kind of a nor star or goal for the way that they're recommending credits, we can idiosyncratically identify with a degree of reasonability how to avoid those types of situations. And that it's a great question to bring up because we've been talking about that a lot more over the last number of months. What's the one thing that your clients worry most about other than the things we've already talked about? Is there one thing concern that you think we're missing here? 222 PTSD. I think that's the thing that clients worry about most. And we worry about some, the reality of the environment today relative to 222. And this is where it's important that we have an open dialogue with our clients. Our view is significantly different than this. Where we are now, the starting point is very different than 222. The starting point for 222 was you had an environment for global central banks that were all moving in a direction of a tightening cycle. You were coming off of floor rates and the prospect for returns, the break even for returns, was solo. You compare that to the environment now where you have in historical context, relatively high starting yield. You have monetary policy that broadly speaking has pivoted from a loosening or maybe a pause preference to now universally pause with the possibility of maybe some short term hikes. That's not our call, but that's what's changed there. The other thing that's really changed is
the labor environment. The labor environment in 2022 was in a shortfall position, right? Employers were talking about not being able to find the workers that they wanted. Now you've got a relatively weak labor environment, right? Payrolls, run rate payrolls of zero is becoming an acceptable outcome. That is incredibly different than 2022. So we think for those reasons, the possibility that the PTSD of inflation rising, yields rising, fixed income value proposition, not delivering the diversification benefits relative to other risk sectors that clients can get exposure to, we're skeptical of that. And we think that it's an understandable emotional state, because it just happened only four years ago. But we don't think that the fundamental setup is consistent with that type of experience. And the risk then is that they miss out on all the potential gains rather than they invest too much at this point. That's exactly right. Because if and when you do have growth slow and if and when you do have something that looks and smells more like the possibility of recession, you know what all the central banks are going to do. They're all they're they're going to do it about face and they are going to be supportive. And that is going to that is going to drive yields significantly lower and that's going to provide powerful returns. And the probability that we're having that conversation and inflation is still key concern for showing increased upward pressure is a extraordinarily low. Great stuff Alex Mackie with MFS investment management. It's been a pleasure having you on the credit edge. Many thanks. Thank you so much. And to Robert Schiffman with Bloomberg Intelligence. Thank you so much for joining us today. Great day. Three even more analysis. Read all of Rob's great work on the Bloomberg terminal. Tech is his life. Call him. Bloomberg intelligence is part of our research department with 500 analysts and strategists working across all markets. Courage includes over 2000 equities and credits and outlooks on more than 90 industries and 100 market indices, currencies and commodities. Please do subscribe to the credit edge wherever you get your podcasts. We're on Apple's Spotify and all other good podcast providers, including the Bloomberg terminal at B pod go. Give us a review. Tell your friends or email me directly at
[email protected]. I'm James Crumby. It's been a pleasure having you join us again next week on the credit edge. (upbeat music)
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