FidelityConnects: Balancing income and risk in today’s markets

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Hello, and welcome to Fidelity Connects. I'm Glen Davidson.

 

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Treasury yields are holding steady even after inflation just hit its fastest

 

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pace since 2023.

 

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Yields are pausing near recent highs as markets weigh what comes next from the

 

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Federal Reserve. Our next guest says the real opportunity may be outside

 

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traditional bonds, selectively finding yield in everything from tankers to

 

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crypto-linked preferreds.

 

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What's changed since we last spoke?

 

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How is he navigating AI, credit markets and global risks?

 

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Joining me to unpack all this and more is Adam Kramer, portfolio manager of

 

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Fidelity Strategic Income Fund and the Tactical High Income fund.

 

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Welcome, Adam, so great to have you here.

 

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Great to be here.

 

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In Toronto.

 

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In Toronto live. Thank you very much. Nice to be here, Glen.

 

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Good of you to come to Toronto. We often do this where you're in Boston but you

 

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and Scott have been, Scott Mensi, have been very active in getting across

 

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Canada talking to our financial advisors so nice for you

 

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to be in Toronto.

 

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Great to be here. Family is here as well. I'm a Canadian so great to be back.

 

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Very nice. We'll never let you forget that.

 

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Tactical High Income, in the intro I talked about updating since the last

 

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time we spoke which was a month or so ago.

 

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What I find every time I talk to you is that there's always lots of

 

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opportunity. You always talk about that opportunity with great enthusiasm.

 

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We're so often focused on AI these days.

 

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There seems to be a single trade out there.

 

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When it comes to your portfolio, Tactical High Income Fund, there's lots

 

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of opportunity, lots that complement someone that might be into

 

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an AI strategy and so on. A real core for a portfolio.

 

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If I could ask you to start off just reminding everybody what Tactical High

 

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Income's goal is.

 

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The Tactical High Income Fund is a flexible mandate to invest across the full

 

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spectrum of income-oriented asset classes.

 

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Really, the goal is to maximize the amount of income

 

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and return relative to the amount of risk or volatility we're taking on.

 

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To do that we have the flexibility to invest the full spectrum of income

 

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oriented asset classes. That's a real differentiator from Treasury bonds on

 

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one end to dividend paying stocks on the other  and everything in the middle,

 

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high yield bonds, convertible bonds, preferred stock, emerging market debt,

 

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investment grade corporates, you name it, anywhere.

 

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That is really the key thing.

 

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It's very important because if you look over the last 25, 30

 

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years all of these major income-oriented asset classes, they take turns as the

 

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best and worst performer. Half the time it's those middle

 

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asset classes I just mentioned that are the best performers.

 

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If we can look for those areas that are pricing in too much good or bad news,

 

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rightfully or wrongly, we can really maximize that

 

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goal that I was talking about. We want to be an alternative to a traditional

 

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balanced fund, a traditional 40/60 fund, 60/40 fund.

 

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It's a bottom-up security selector portfolio where I,

 

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as the lead manager, find the best ideas across all of these asset

 

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classes. We're not using a sleeved approach.

 

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You really are an alternative to a traditional 60/40.

 

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There's a lot of what some may call esoteric asset classes within.

 

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I know you don't think of it that way because you work with all these asset

 

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classes every day. There's also future asset classes that will make

 

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their way into this portfolio.

 

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It's a refreshing change from being focused on what the media is directing

 

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us towards and what everybody seems to talk about these days.

 

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Some asset classes that you're invested in some people have forgotten about and

 

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in some cases they don't know a lot about.

 

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We're going to go through those today. Could you, at the beginning of this

 

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discussion though, give us sort of the world according to Adam?

 

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Can you give us some perspective on all that we're seeing?

 

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The world according to Adam. I use a different lens because like I was saying

 

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before, the market has a tendency to rightly or wrongly price and risk and

 

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reward only to get adjusted the following year when the actual event occurs.

 

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I try not to make predictions but I'm always cognizant of where we are in the

 

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business cycle. I'm trying to find those areas that are mispriced because

 

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that's how we can maximize that return and income relative

 

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to the amount of risk we're taking on.

 

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The world according to me  is we're in a very strong economy.

 

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We're in the midst of an artificial intelligence buildout the lakes

 

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of which we haven't seen probably ever.

 

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It's a very exciting time.

 

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With that comes not only exciting areas that we want to invest in

 

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but also areas that can get mispriced.

 

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Where are the areas that are considered the losers that might not be the

 

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losers? That creates a lot of opportunity that we didn't have a couple of years

 

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ago. Also, there's a lot of headwinds too just like regular economy.

 

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There's a war going on.

 

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There's supply constraints.

 

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We have inflation in some areas. There's risks and rewards

 

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and the market is sort of settling it all out and we're just waiting and

 

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watching for those opportunities to come our way.

 

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That's really the fuel to our process to get these ideas.

 

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Just a reminder to the audience, it's not Adam sitting in an office trying to

 

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figure out the world. You've got an amazing number of resources that come

 

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to you and that you can go to.

 

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You even have someone who's ex-CIA that you can tap into to find out

 

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from a geopolitical risk standpoint.

 

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Can you just talk about what that means to you to have the resources at your

 

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fingertips that you do?

 

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We have so many experts at Fidelity whether it be somebody who's knowledgeable

 

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on geopolitics or somebody who just focuses on inflation,

 

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somebody that just focuses on the business cycles in various countries.

 

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We have industry analysts in the high income and alternatives group where I

 

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reside, the equity group, the investment grade group, international.

 

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My job is really to speak to as many people as possible, get to know the

 

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research, have people come to me with ideas but really be aware of what these

 

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best ideas are. Plus I have these co-managers on my fund that

 

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provide me with their ideas too.

 

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Ramona Persaud who provides me with her insight for her best ideas in

 

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her funds, Ford O'Neil on the investment grade side, Rick Gandhi.

 

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I'm also an asset allocator in 15

 

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to 18 other asset classes where I'm always speaking to those sub-managers.

 

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If I can just find a few of the best ideas in each one of these asset classes

 

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then we could put together a really great portfolio.

 

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That's the mosaic that you're asking about, the mosaic that Fidelity offers

 

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that we're really able to be cognizant of where we are in the business cycle

 

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and with the tools that we have understand where there's too much good or

 

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bad news priced in relative to the amount of risk we're taking on.

 

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Based on everything you just talked about you're not concerned about the

 

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economy we're in. You're looking for opportunities.

 

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There is a lot of pricing that's already factored into

 

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with respect to risk and pricing that we're seeing with different asset classes

 

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but you have lots coming at you, lots of opportunities.

 

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I think in true Adam Kramer fashion we should go through each bucket because

 

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things have changed. We'll start with convertibles.

 

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That's the secret sauce. That's something that you're a specialist in

 

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and it's really been a key component of Tactical High Income overall.

 

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There's been some new issuances too.

 

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Let's get into convertibles.

 

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Convertibles is the secret sauce of the fund.

 

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It's probably the area that I'm most excited about.

 

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Although it's not a secret anymore.

 

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It's not a secret anymore. What's interesting about this fund is that we're

 

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always trying to mimic our risk profile to a traditional 50% S&P,

 

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55% US investment grade index but we've only been overweight equities

 

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one year in the last, I think it was 12 years that we've been doing this fund,

 

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and we use convertible bonds as a way to toggle that equity risk profile.

 

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I'm sorry to interrupt you but I did mention just there, it's not a

 

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secret anymore but it is a competitive advantage.

 

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We'd be remiss if we didn't talk about it's a secret any more, can everybody do

 

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this? Why is it something that you and the team are specialists at?

 

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You definitely do need to have a credit background to look at a convertible

 

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because it is a bond, you have to understand the balance sheet of these

 

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companies, but you also have to have the skills of knowing what the industry

 

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is, is the stock going to do well?

 

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It has a little bit of both. It's a bond with that sort of downside protection,

 

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you collect the coupon, you're senior in the capital structure but you also

 

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have that upside. Around 11% to 12% of all the issues that come

 

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to the market become these multi-baggers.

 

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I like to call them lions.

 

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These lions can be 10, 15, 20 times

 

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your money. It's the only fixed income asset class where you can double,

 

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triple, quintuple, or 15 times your money.

 

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That requires some skill.

 

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Now, I'm also a portfolio manager.

 

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I've been doing this in the convertible bond space since 2008

 

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so it's now 18 years managing convertible bonds.

 

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I look at every single new issue that comes to the market and that's where

 

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the idea flow comes from. That is a real big competitive advantage and we have

 

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our analysts internally that are looking at them instantaneously because these

 

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deals usually price within a day.

 

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We need to have that knowledge base to really give us that fuel to give

 

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an opinion.

 

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Now, what's really great about the convertible bond market, I

 

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was saying to you in previous interviews that we're entering the golden age of

 

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convertible bonds because one-third of the market matures and there's probably

 

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another one-third that go away.

 

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What's really unique about the convertible bond market relative to every other

 

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index that's out there, and I'm just talking about the market now, is that when

 

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you have these names at double, triple, quintuple they eventually leave the

 

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benchmark. They leave the index, they convert into equity and they lock in all

 

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their gains  only to get replaced by something that's lower risk.

 

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That's where the new issue stream really comes into play.

 

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There's less reversion to the mean of  total return over full cycles.

 

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You just had to look in the news the last couple weeks.

 

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You saw Alphabet issued a convertible

 

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bond.

 

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They issued 80 billion but what percentage of that was convertible?

 

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Around half of it. A little less than half of that but that will end up on July

 

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1st in the convertible bond benchmark.

 

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That will be the largest name in the index, 5% of the index, approximately.

 

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Then you have things like Boeing and who knows what other companies will come

 

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to market. We're entering a new exciting area.

 

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The thing about these new issues, the last point, with

 

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the new issue flow we get these ideas that we would never really have

 

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known about. All of a sudden space is in there.

 

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In the previous years it was data centres, Bitcoin miners were converting to

 

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data centres. You have healthcare, you have companies that are trying to

 

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fix their balance sheet. These new ideas come our way and we just

 

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are very nimble and are able to take advantage of those opportunities.

 

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You talked about the fact that only about 12% are actually great opportunities.

 

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I don't know, is that a strangely low number?

 

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It obviously illustrates the benefits of active management when it comes to

 

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convertible security.

 

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That's generally normal. That's how you really do well in this convertible bond

 

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market. What we're trying to do, if we have an overweight in our convertible

 

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bond funds, and I do this with Rick Gandhi, my co-manager on this fund, if we

 

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have an overweight in that best idea in the convertible bonds fund it will find

 

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its way into this fund. Really, that's how you beat that convertible bond

 

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market by finding those multi-baggers.

 

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They're called lions, the new issues are the bag of

 

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kittens, but most of the market house cats.

 

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They keep you happy, they give you joy but they're not the multi-baggers.

 

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They could do just as well as stocks.

 

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We're looking for those really tremendous opportunities.

 

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That's why I like to call this the secret sauce of this fund.

 

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Maybe we'll jump to preferreds. You mentioned about companies that

 

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are involved in digital assets and I think of Strategy as an example, used to

 

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be called MicroStrategy, of course.

 

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That was a convertible you've talked about before and then I think it was last

 

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year converted to preferreds.

 

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That's within the portfolio as well.

 

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One of the biggest innovations in the fixed income market, and just as a

 

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background reminder to the viewers, I started at Fidelity in 2000.

 

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I was a summer intern in 1999, all in the same group that I'm in today, the

 

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Fidelity High Income and Alternatives Group. I'm a credit analyst by heart.

 

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I'm also a Canadian chartered accountant too.

 

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Really, in the last 30 years I haven't seen anything as innovative

 

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as these Bitcoin-backed preferred stock that you're referring

 

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to. Basically, these are

 

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balance sheets of companies that have basically Bitcoin on it.

 

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Last week, there was a company that did a preferred that had Ethereum on the

 

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balance sheet, among other assets as well.

 

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Basically, there's no other debt and they're basically using the strength of

 

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the balance sheet to create these preferred stocks that are traded on either

 

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the NYSE, so very liquid, or the Nasdaq.

 

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They pay out low-teen yields.

 

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They're tax-deferred because they're return on capital dividends.

 

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Relative to the amount of Bitcoin that's on the balance sheet there's

 

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a lot of good asset coverage there. You don't have a legal tie

 

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to the underlying asset ,but there's no other debt ahead

 

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of you essentially.

 

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That gives me a lot of comfort. If you wanted to find a

 

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low double-digit, low-teen yield after

 

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tax you'd have to go into the distressed market where there's lot of

 

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idiosyncratic risk. I think this is an area that's just very, very mispriced.

 

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It's probably the number two or number one area relative to convertibles that

 

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I'm most excited about. There is an episodic sell-off taking place in Bitcoin

 

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and Ethereum. What's interesting about these preferreds is that the volatility

 

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has been muted. You're really not moving with the prices

 

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of the stocks or Bitcoin. You really are supported by the

 

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strength of the balance sheet and their ability to pay the dividends, which our

 

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analysis suggests that they have enough coverage.

 

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Bit of a tangential question maybe related, I was talking to a

 

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subject matter expert recently from Fidelity who's involved in digital

 

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assets from Boston and he talked about staking yield.

 

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I didn't know what that meant. He explained it and I thought, yield, Tactical

 

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High Income. Is that something, and if you could explain what that is to our

 

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audience because I wouldn't do a good job of that, but if you can explain what

 

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that it is and is it something that factors into your portfolio?

 

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We don't do anything with staking outright.

 

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When you think about some of the companies, you have Bitcoin companies and

 

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you have Ethereum companies.

 

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Ethereum companies own Ethereum and those companies that own

 

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the Ethereum are staking their Ethereum to protect the network.

 

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It's called proof of stake. In exchange for protecting the network, acting as

 

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trustware, they earn an income.

 

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At this point it's around 3% but they can get higher if they wanted to.

 

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That 3% is the revenue, basically.

 

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Actually, last week there was the first time we actually saw an

 

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Ethereum company that's publicly traded come and issue one of these

 

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preferred stocks that actually would be supported by the

 

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staking revenue that they're generating.

 

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By my calculations it was very low loan-to-value

 

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coverage which means there's a tremendous amount of assets to support the

 

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model. That's sort of how the staking yield can become more mainstream

 

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in the preferred market by having companies that are doing that issue

 

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preferreds.

 

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Okay, but nothing that's made its way into Tactical High Income but it shows

 

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there are lots of yield opportunities out there and you're doing an analysis on

 

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what makes sense with the right risk for this portfolio.

 

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Exactly. It's an area that is just very, very mispriced

 

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because of the nature of the asset.

 

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If we get the Clarity Act passed in the US I think that will be great.

 

15:23.689 --> 15:27.626

There's a lot of money that's being raised to fund a lot of these IPOs now so

 

15:27.626 --> 15:29.461

there's a liquidity drain.

 

15:29.461 --> 15:33.132

Also, there's inflation, is the Federal Reserve going to be raising rates?

 

15:33.132 --> 15:37.136

The ultimate environment for a lot of this sector

 

15:37.136 --> 15:41.240

would be if you actually had the Federal Reserve on hold or not raising rates

 

15:41.240 --> 15:43.509

and you actually had negative real yields.

 

15:43.509 --> 15:45.811

That's what the market's sort of grappling with.

 

15:45.811 --> 15:49.515

They're out of favour right now but it's very possible they can get into favour

 

15:49.515 --> 15:54.320

going forward. This is when we wanna be stepping into these areas,

 

15:54.320 --> 15:59.024

when we need to mop the floor, when the people are fearful.

 

15:59.024 --> 16:03.395

That makes sense. Adam, every time I see a tanker ship, I think of you.

 

16:03.395 --> 16:06.598

It's something that you've been involved in for a lot of your career, most of

 

16:06.598 --> 16:10.602

your career, and I think you've talked to our audience about a lot in the

 

16:10.602 --> 16:13.806

last year, year and a half because of the importance and now what we're seeing

 

16:13.806 --> 16:17.242

in the Strait of Hormuz and the bottleneck that's been created.

 

16:17.242 --> 16:21.246

We should talk about that, where you feel tankers are right now but I also

 

16:21.246 --> 16:25.184

want to ask you from the perspective of oil, oil

 

16:25.184 --> 16:29.355

seems to be not as high a price as some would imagine given the unrest

 

16:29.355 --> 16:33.292

that's going on. I read something recently that there may be that ghost

 

16:33.292 --> 16:36.962

fleet that's getting through because they've got their transponders off,

 

16:36.962 --> 16:38.630

they're able to get through the Strait.

 

16:38.630 --> 16:40.766

That's keeping some supply going out there.

 

16:40.766 --> 16:42.868

Is that a fair point, do you think?

 

16:42.868 --> 16:47.339

Can you explain ghost ships and what your overall thesis is right now?

 

16:47.339 --> 16:49.008

The shadow fleet.

 

16:49.008 --> 16:52.978

The oil tankers is an area that I've also been involved

 

16:52.978 --> 16:55.481

with for at least 26 years.

 

16:55.481 --> 16:59.485

I looked at my first oil tanker company as an analyst back in 2002.

 

16:59.485 --> 17:03.622

In fact, that was a company that actually had a convertible bond back then.

 

17:03.622 --> 17:05.357

It used to be a boom-bust industry.

 

17:05.357 --> 17:09.094

An oil tanker, basically they transport oil or refined product from point A to

 

17:09.094 --> 17:13.365

point B. They generate a rate, they have their expenses and then

 

17:13.365 --> 17:17.302

that's their cash flow. What they do with the cash flow is the key thing.

 

17:17.302 --> 17:19.905

Over the last number of years, and I know all these management teams, they've

 

17:19.905 --> 17:22.708

sort of become a little bit more like adults.

 

17:22.708 --> 17:25.644

They've paid down their debt to below scrap value.

 

17:25.644 --> 17:29.648

They've reduced their breakeven cost to below cycle trough.

 

17:29.648 --> 17:34.219

It's to the point where they're paying out either 85% or 100%

 

17:34.219 --> 17:38.357

of their net income in dividends and also reserving some cash for

 

17:38.357 --> 17:40.959

growth CapEx or for maintenance CapEx.

 

17:40.959 --> 17:44.129

That has been the area that's mispriced because everybody remembers them as

 

17:44.129 --> 17:48.100

boom-bust. It takes years for some of this risk to get mispriced out of the

 

17:48.100 --> 17:49.068

market.

 

17:49.068 --> 17:52.838

At this point, I mean, we've talked about low-teen yields, you're actually

 

17:52.838 --> 17:56.975

getting a nice yield on these stocks.

 

17:56.975 --> 18:01.013

We own the stocks of these companies, a few convertibles as well.

 

18:01.013 --> 18:04.983

Really, at the end of the day there's a

 

18:04.983 --> 18:08.387

very big supply-demand balance because of what you're talking about, the shadow

 

18:08.387 --> 18:13.025

fleet, the tankers that are operated by

 

18:13.025 --> 18:16.128

Iran, Russia or used to be Venezuela, that if there was peace in the world they

 

18:16.128 --> 18:17.930

wouldn't be able to get insurance, they wouldn't have business.

 

18:17.930 --> 18:21.066

That's around 13, 14% of the fleet.

 

18:21.066 --> 18:24.436

That could go away. That's the bull case for peace in the world.

 

18:24.436 --> 18:28.540

That's what we're rooting for. If there was continuation of

 

18:28.540 --> 18:31.543

disruptions that you're referring to then that slows down the tankers, it

 

18:31.543 --> 18:35.614

reroutes the ships, that supply leaves the system and that elevates

 

18:35.614 --> 18:40.586

rates. It's a very good environment for the rates right now.

 

18:40.586 --> 18:44.723

I was thinking back to 2003, 2007 when I was the

 

18:44.723 --> 18:46.892

analyst the last time we had a super cycle.

 

18:46.892 --> 18:50.028

There was a lot of doubt back then as to what was going to happen with the oil

 

18:50.028 --> 18:52.798

tanker fleet, the demand for oil.

 

18:52.798 --> 18:55.934

Really, all you had to do was sit around and collect the coupon.

 

18:55.934 --> 18:58.370

That's the way I'm thinking about these names.

 

18:58.370 --> 19:02.341

It is probably a better environment, the best environment I've seen

 

19:02.341 --> 19:06.278

that I think will continue because we're going to have an

 

19:06.278 --> 19:10.249

inventory rebuild cycle to the likes of which we've never seen before

 

19:10.249 --> 19:12.484

of oil and refined product.

 

19:12.484 --> 19:16.388

When you look around the world inventory levels are very, very low.

 

19:16.388 --> 19:20.359

On top of normal demand we're gonna have an inventory rebuild cycle and

 

19:20.359 --> 19:22.928

that's all gonna flow to the oil tankers.

 

19:22.928 --> 19:25.264

Oil, helium, fertilizer.

 

19:25.264 --> 19:27.966

It's quite immense.

 

19:27.966 --> 19:32.104

From my understanding, an airplane is best in the air and a ship is

 

19:32.104 --> 19:34.873

best transiting oceans. They've been sitting a long time.

 

19:34.873 --> 19:36.842

You talked about capital expenditures.

 

19:36.842 --> 19:41.246

Is there a risk that these ships that are just sitting are actually stagnating

 

19:41.246 --> 19:44.783

and are going to need more repairs because of their lack of use?

 

19:44.783 --> 19:45.851

Will that increase CapEx?

 

19:45.851 --> 19:49.221

That's a great point. I was reading an article in one of the industry trade

 

19:49.221 --> 19:52.491

rags. It says that because they've been sitting in the Strait of Hormuz or the

 

19:52.491 --> 19:56.361

Persian Gulf for so long they've had these barnacles, these sea life that are

 

19:56.361 --> 20:00.699

on the hulls. That means that they might have to get taken out of

 

20:00.699 --> 20:04.603

the system. Maybe there's a robot, I think there's robot that can clean it

 

20:04.603 --> 20:08.340

but that just takes supply out of this system, slows things down.

 

20:08.340 --> 20:12.277

It's going to take a while, even if the Strait does open it's going to take a

 

20:12.277 --> 20:14.246

while for these ships to leave.

 

20:14.246 --> 20:18.250

The crews have to get off, the maintenance

 

20:18.250 --> 20:22.221

has to come on. It's going to take some time.

 

20:22.221 --> 20:26.992

If you place an order for a ship today you don't really get it until 2028, '29.

 

20:26.992 --> 20:30.762

The supply side is pretty constrained.

 

20:30.762 --> 20:33.732

Well, that makes sense, I mean, the size of these.

 

20:33.732 --> 20:36.969

You and your team prepare for different scenarios.

 

20:36.969 --> 20:40.939

The news is very, very volatile, obviously, it's based on comments from certain

 

20:40.939 --> 20:44.409

people and expectations.

 

20:44.409 --> 20:48.547

That must be an immense number of scenarios that you have to

 

20:48.547 --> 20:52.317

plan for. Could you talk about the fact that the Tactical High Income team, the

 

20:52.317 --> 20:56.288

overall team that you work with, really do plan for different outcomes?

 

20:56.288 --> 20:58.056

How do you do that?

 

20:58.056 --> 21:02.094

The team is myself as lead manager, Rick Gandhi,

 

21:02.094 --> 21:06.531

Ford O'Neil, Ramona Persaud, and our army of analysts and associates

 

21:06.531 --> 21:09.568

that we have in the firm.

 

21:09.568 --> 21:11.937

Really, what I do is I stress test everything.

 

21:11.937 --> 21:15.274

I want to have the proper matching of income to the amount of risk we're taking

 

21:15.274 --> 21:19.244

on. Relative to the portfolio we have today what's

 

21:19.244 --> 21:22.347

the equity sensitivity? What's our current yield that you'll collect every

 

21:22.347 --> 21:26.818

month as a dividend? What's our duration for the bond part of the portfolio?

 

21:26.818 --> 21:29.988

Let's just stress test this portfolio. What would happen to this portfolio in a

 

21:29.988 --> 21:33.925

hypothetical naive scenario where the underlying stocks

 

21:33.925 --> 21:38.030

were to go up or down 10%, or the interest rates or credit spreads

 

21:38.030 --> 21:40.999

were to go up and down the first 100 basis points?

 

21:40.999 --> 21:45.037

We just wanna make sure we have equity upside, a very, very

 

21:45.037 --> 21:46.705

bond leg downside.

 

21:46.705 --> 21:49.675

There's one scenario where we always wanna be positive and that is when the

 

21:49.675 --> 21:53.378

stock market goes down 10% but interest rates or credit spreads actually move

 

21:53.378 --> 21:55.781

down. In other words, positive for bonds.

 

21:55.781 --> 21:57.549

We want that to be positive.

 

21:57.549 --> 22:01.620

Most of our peers or competitors do have a lot of trouble

 

22:01.620 --> 22:05.190

getting to be positive because they either have too much equity exposure, too

 

22:05.190 --> 22:07.292

much bond exposure or not enough yield.

 

22:07.292 --> 22:11.296

It's that fine balance of yield relative to the amount of risk we're

 

22:11.296 --> 22:15.434

taking on. Lastly then, if we just choose the right stocks, the ones that have

 

22:15.434 --> 22:19.438

that episodic sell-off priced in, then we get that extra

 

22:19.438 --> 22:21.606

alpha, that extra downside protection.

 

22:21.606 --> 22:24.710

If bad news occurs and it's already pricing it in you have a natural volatility

 

22:24.710 --> 22:28.647

dampener but you get an equity-like return without having to buy the equity.

 

22:28.647 --> 22:30.582

You could do that with a bond, a preferred.

 

22:30.582 --> 22:34.653

That's where over full cycles we've been able

 

22:34.653 --> 22:39.558

to demonstrate that that's achievable with this process.

 

22:39.558 --> 22:44.162

I hope this is a fair question. Do your models point to more of a

 

22:44.162 --> 22:49.634

steady Fed right now or an increase or decrease in rates?

 

22:49.634 --> 22:53.739

I probably would say that we just want to have the proper matching.

 

22:53.739 --> 22:57.776

I try not to make those predictions because there's positives

 

22:57.776 --> 23:00.645

and there are negatives. We were chatting about this before.

 

23:00.645 --> 23:02.781

There's definitely some short term inflation.

 

23:02.781 --> 23:05.650

The CPI numbers today weren't as bad as people thought.

 

23:05.650 --> 23:09.621

There's definitely some short term inflation and there's shortages that still

 

23:09.621 --> 23:13.358

probably haven't played out yet but with that might actually come a slower

 

23:13.358 --> 23:16.294

economy too. There's a little bit of a fine balance there, what's transitory,

 

23:16.294 --> 23:20.899

what's not? Then we have the whole artificial intelligence era

 

23:20.899 --> 23:25.137

coming forward that might result in either job losses or more productivity.

 

23:25.137 --> 23:28.807

I think there's still a lot of unknowns and that's why I'm sort of saying let's

 

23:28.807 --> 23:32.844

just assume nothing happens, go with the flow but wait for the

 

23:32.844 --> 23:36.515

market to really panic before I can even come up with a conclusion and let

 

23:36.515 --> 23:38.049

those opportunities come my way.

 

23:38.049 --> 23:41.319

That's probably a healthier outlook and better way to [crosstalk] the

 

23:41.319 --> 23:45.323

portfolio.

It's less stressful but it always happens,

 

23:45.323 --> 23:49.261

Glen. Every single year there's a different asset class that's

 

23:49.261 --> 23:53.899

rightfully or wrongly pricing in risk. That's what's duplicable and repeatable

 

23:53.899 --> 23:55.267

about our process.

 

23:55.267 --> 23:57.569

You mentioned equities so let's go there.

 

23:57.569 --> 24:01.807

There's an AI focus, I would imagine on AI specifically but also

 

24:01.807 --> 24:04.342

periphery connected to AI.

 

24:04.342 --> 24:06.378

Can you talk about that?

 

24:06.378 --> 24:10.248

We're seeing the artificial intelligence in the convertible bond market.

 

24:10.248 --> 24:13.018

I mentioned we're see that as a theme. That's one area we can get that

 

24:13.018 --> 24:16.555

exposure. We're also seeing a lot of companies, software companies that are

 

24:16.555 --> 24:19.157

selling off because of artificial intelligence.

 

24:19.157 --> 24:23.094

Is there an opportunity on either a convertible or a stock of a software

 

24:23.094 --> 24:25.797

company that might not be a loser?

 

24:25.797 --> 24:28.066

That's an area that we're sort of looking at right now.

 

24:28.066 --> 24:32.037

Even on the healthcare side, drug companies, some of the names that Ramona

 

24:32.037 --> 24:36.041

likes that we have in the portfolio.

 

24:36.041 --> 24:39.911

Some of them are actually big beneficiaries of artificial intelligence, might

 

24:39.911 --> 24:44.082

not actually get priced in. Where can we find

 

24:44.082 --> 24:48.220

new ideas that are tied to AI, find those exciting ideas in

 

24:48.220 --> 24:52.324

robotics, et cetera, but also find those areas that actually

 

24:52.324 --> 24:55.760

might be selling off because of AI where it's unwarranted.

 

24:55.760 --> 24:59.865

That's sort of why I think it's sort of an exciting time to be investing now.

 

24:59.865 --> 25:03.869

It is definitely something you need to have the expertise in and

 

25:03.869 --> 25:07.973

that's where we're relying on our analysts and also my co-managers

 

25:07.973 --> 25:12.043

as well. We like to sprinkle the

 

25:12.043 --> 25:16.615

portfolio with some small-cap names as well that can be multi-baggers

 

25:16.615 --> 25:19.484

We've spoken about a few retailers in the past.

 

25:19.484 --> 25:23.488

With regards to artificial intelligence, I was just

 

25:23.488 --> 25:26.958

watching my younger son use Claude to do coding.

 

25:26.958 --> 25:30.962

He's building his own website for tracking some

 

25:30.962 --> 25:33.064

sport cards that he has.

 

25:33.064 --> 25:37.402

I've been just in awe what the artificial

 

25:37.402 --> 25:40.639

intelligence capabilities are. Could you imagine what the world's going to be

 

25:40.639 --> 25:42.340

in two, three years?

 

25:42.340 --> 25:46.344

That goes to your inflation question. It also goes to looking at these new

 

25:46.344 --> 25:49.948

ideas with that lens. The world is going to be so much different in two or

 

25:49.948 --> 25:54.052

three years. Think about how much has changed in the last three

 

25:54.052 --> 25:56.988

years. We were just chatting about ...

 

25:56.988 --> 26:00.992

I have a car that just drives me. I was in Arizona, I go in a car,

 

26:00.992 --> 26:05.263

it drives itself. The world is changing so quickly

 

26:05.263 --> 26:09.734

so we gotta really be cognizant of where those opportunities are.

 

26:09.734 --> 26:13.438

If  something sells off really ask the question is that warranted?

 

26:13.438 --> 26:16.808

I like the way you said Claude, by the way, it connects you to Quebec where

 

26:16.808 --> 26:18.944

you're from. Don't ever forget your roots.

 

26:18.944 --> 26:21.947

Are you funding the equity purchases from T-bills?

 

26:21.947 --> 26:23.815

You've talked about that in the past.

 

26:23.815 --> 26:27.586

One of the things about the fund, for the first time in the history of the fund

 

26:27.586 --> 26:31.957

we've owned the least amount of high yield bonds, investment grade corporates

 

26:31.957 --> 26:36.061

and even just straight preferred stock of banks and utilities because they are

 

26:36.061 --> 26:39.331

actually trading in the top five percentile of richness.

 

26:39.331 --> 26:43.768

It means that over its history it's

 

26:43.768 --> 26:48.073

never been trading as rich

 

26:48.073 --> 26:52.110

less than 95% of the time. It's in the top 95% of its

 

26:52.110 --> 26:54.980

richness. In other words, there's not much value in income.

 

26:54.980 --> 26:59.117

Doesn't mean that I think that anything bad is happening over there but there's

 

26:59.117 --> 27:03.321

not that much risk-reward. We had shifted that exposure to T-bills

 

27:03.321 --> 27:07.325

and now the T- bills, we're funding that to find some of

 

27:07.325 --> 27:10.028

those ideas in convertibles and equities.

 

27:10.028 --> 27:10.829

So yes.

 

27:10.829 --> 27:14.232

In the interest of time, you've talked in the past about emerging market debt,

 

27:14.232 --> 27:16.601

looking at Brazil, still a valid point?

 

27:16.601 --> 27:17.102

M'hmm, yeah.

 

27:17.102 --> 27:20.972

You've talked about tungsten, not from the standpoint of light bulbs that old

 

27:20.972 --> 27:24.909

guys like me remember but from the standpoint of nuclear fusion,

 

27:24.909 --> 27:28.947

I believe. You've talked about how there really are supply constraints.

 

27:28.947 --> 27:29.814

Is that still a valid point?

 

27:29.814 --> 27:34.219

Yes. Tungsten is W on the periodic table.

 

27:34.219 --> 27:38.890

It's a very hard asset.

 

27:38.890 --> 27:41.292

It also has a very high boiling point.

 

27:41.292 --> 27:45.497

It's used in everything in defence but also

 

27:45.497 --> 27:49.100

industrial, drill bits, but also defence.

 

27:49.100 --> 27:53.538

What happened around a year and a half ago is that China

 

27:53.538 --> 27:55.306

put export bans on the production.

 

27:55.306 --> 27:57.308

There is a supply-demand shortage.

 

27:57.308 --> 28:01.446

Around 85% of all the supply is coming from China, North Korea,

 

28:01.446 --> 28:05.550

Russia. The Western world

 

28:05.550 --> 28:09.554

is in need of tungsten so we've been looking for those areas that could build

 

28:09.554 --> 28:11.423

out that capacity.

 

28:11.423 --> 28:15.627

In fact, as was in the news, there was a tungsten company that

 

28:15.627 --> 28:17.896

issued a convertible bond just recently so go figure.

 

28:17.896 --> 28:20.398

These names find our way into the market as well.

 

28:20.398 --> 28:24.302

It's amazing that earlier in your career, early in your career, over 20 years

 

28:24.302 --> 28:28.206

ago, you focused on tankers and you focused on convertibles and to this day

 

28:28.206 --> 28:31.543

those are still important areas and very topical as well.

 

28:31.543 --> 28:34.446

I think what we've hopefully illustrated the last couple of comments in

 

28:34.446 --> 28:37.782

particular is that you're always looking for new and interesting opportunities.

 

28:37.782 --> 28:39.484

You have that flow coming to you.

 

28:39.484 --> 28:43.488

Maybe we should conclude for our viewers with this, could you talk about where

 

28:43.488 --> 28:47.358

Tactical High Income fits as a core for a portfolio?

 

28:47.358 --> 28:50.228

It's a set it and forget it total return compounder.

 

28:50.228 --> 28:53.598

That's the way I like to think about it.

 

28:53.598 --> 28:56.234

You have downside protection, you have upside.

 

28:56.234 --> 28:59.070

Half our returns come from income over time.

 

28:59.070 --> 29:03.675

It's an alternative to a traditional 50/50, 40/60,

 

29:03.675 --> 29:07.479

60/40 balanced fund but it's also an alternative to all the single asset class

 

29:07.479 --> 29:11.883

funds that we invest in.

 

29:11.883 --> 29:14.018

I like to just think of it as a set it and forget it total return compounder

 

29:14.018 --> 29:17.288

because there's always an opportunity no matter where we are in the business

 

29:17.288 --> 29:21.593

cycle, as we discussed, the market's tendency to misprice

 

29:21.593 --> 29:24.929

asset classes, but there's less reversion to the mean of total return because

 

29:24.929 --> 29:28.299

the portfolio is always going to change every couple of years in a tax aware

 

29:28.299 --> 29:29.100

manner.

 

29:29.100 --> 29:31.836

Makes a lot of sense. Adam, it was wonderful to have you in Toronto.

 

29:31.836 --> 29:35.840

We all wish you a great trip back to Boston and thank you for your insights

 

29:35.840 --> 29:36.274

today.

 

29:36.274 --> 29:37.809

Thank you very much, Glen. Really appreciate it.

 

29:37.809 --> 29:41.746

Thanks for watching or listening to the Fidelity Connects

 

29:41.746 --> 29:45.884

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30:15.413 --> 30:19.250

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30:19.250 --> 30:23.188

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30:23.188 --> 30:27.192

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Fees, expenses, and commissions are all associated with fund investments.

 

30:48.580 --> 30:50.882

Thanks again. We'll see you next time.