FOCUS 2026: The long and short of fixed income - Peter Khan, Olivier Simon-Vermot

Peter Khan and Olivier Simon-Vermot identify opportunities across fixed-income markets and consider the role of long/short strategies as conditions change.

Transcript

00:00.000 --> 00:06.406

Subtitles are AI Generated

00:07.040 --> 00:09.609

Peter, Olivier, wonderful to have you here in Nashville.

00:09.609 --> 00:12.612

It's your first time at the FOCUS event so

00:12.612 --> 00:14.080

this is wonderful and again, welcome.

00:15.181 --> 00:18.351

We're gonna talk about fixed income in

00:18.351 --> 00:21.654

a rising rate environment but not a traditional fixed income

00:21.654 --> 00:24.758

approach, alternative, and this is called the Fidelity

00:24.758 --> 00:27.193

Alternative Bond Fund. I think you're gonna find it very

00:27.193 --> 00:30.063

interesting. I really didn't know much about the fact that

00:30.063 --> 00:32.198

you could short fixed income and we're gonna learn more

00:32.198 --> 00:34.634

about that today, on top of the long positions and high

00:34.634 --> 00:35.635

yield as well.

00:36.903 --> 00:39.906

Olivier, why don't we start with you, just get more

00:39.906 --> 00:42.242

of your background, what brought you to Fidelity and what

00:42.242 --> 00:45.145

your responsibility is now, what it has been and, of course,

00:45.145 --> 00:46.279

you're a portfolio manager now.

00:48.214 --> 00:49.682

First of all, thanks for having us.

00:49.682 --> 00:51.051

It's great to be here.

00:51.051 --> 00:54.220

I started with Fidelity back in 2008

00:54.220 --> 00:57.357

in the UK as a equity research

00:57.357 --> 01:00.760

analyst initially where I covered a few sectors before

01:00.760 --> 01:04.330

switching to the credit research team in 2012

01:04.330 --> 01:06.499

and became a senior analyst on that team.

01:06.499 --> 01:10.503

In 2018 I had the great opportunity to

01:10.503 --> 01:13.706

relocate to Canada as a director of research

01:13.706 --> 01:16.843

with a mandate to build out the

01:16.843 --> 01:20.346

credit research team based in Canada to further enhance our

01:20.346 --> 01:23.450

global research capabilities.

01:23.450 --> 01:26.486

That's really been the focus since, and then more

01:26.486 --> 01:29.722

recently since 2022 as a portfolio manager

01:29.722 --> 01:32.959

have been co-managing funds alongside Peter.

01:32.959 --> 01:36.596

Excellent. You were on the equity research side, how

01:36.596 --> 01:39.766

has that applied to your fixed income

01:39.766 --> 01:42.202

focus today. It's interesting you've been on both sides of

01:42.202 --> 01:43.203

the balance sheet.

01:45.238 --> 01:48.174

There's a lot of similarities between equity research and

01:48.174 --> 01:50.143

credit research. There's some differences too.

01:50.143 --> 01:51.811

If you think about in the equity research side

01:53.279 --> 01:56.850

analysts are focused on you know analyzing a

01:56.850 --> 02:00.053

business's quality, looking at industry dynamics,

02:00.053 --> 02:03.156

growth trends, building financial models, looking at

02:03.156 --> 02:04.958

the valuations, and then trying to find

02:06.392 --> 02:09.529

those situations where our view is different to what

02:09.529 --> 02:12.532

the market has priced in. On the credit side

02:12.532 --> 02:16.236

we do all of those things as well so all of that focus is

02:16.236 --> 02:19.339

quite similar but there's a bit more focus on the

02:19.339 --> 02:22.809

downside, protecting against the

02:22.809 --> 02:25.478

situations where things can go wrong because that's really

02:25.478 --> 02:28.581

so critical to performing on the

02:28.581 --> 02:29.582

credit side.

02:30.783 --> 02:32.652

If I think about my own experience, and I started as an

02:32.652 --> 02:35.922

equity research analyst just on the eve of the

02:35.922 --> 02:39.058

great financial crisis, great timing on

02:39.058 --> 02:40.059

my part.

02:41.227 --> 02:43.897

I went through the experience of covering highly cyclical

02:43.897 --> 02:46.966

names and some of those

02:46.966 --> 02:48.368

businesses did not survive.

02:48.368 --> 02:50.537

They went bankrupt. They had to restructure, recapitalize.

02:50.537 --> 02:53.806

I spent a lot of time analyzing

02:53.806 --> 02:56.809

what separated those businesses that survived

02:56.809 --> 03:00.713

from those that didn't and that's

03:00.713 --> 03:03.783

something that really set me up well for investing on

03:03.783 --> 03:04.617

the credit side.

03:04.617 --> 03:07.053

Wonderful. Thank you. Peter, tell us about your journey

03:07.053 --> 03:08.588

within Fidelity.

03:08.588 --> 03:11.291

Glen, thanks very much, and thanks to all of you for joining

03:11.291 --> 03:13.159

us here in Nashville.

03:13.159 --> 03:15.995

I've been with Fidelity now since the year 2000.

03:15.995 --> 03:19.065

I joined as a trader in the fixed income team

03:19.065 --> 03:21.234

at Fidelity International in London

03:23.136 --> 03:26.172

and wore a couple of hats for

03:26.172 --> 03:27.840

almost 10 years.

03:27.840 --> 03:30.543

I was the head of fixed income trading for about a half a

03:30.543 --> 03:33.613

dozen years there for the international group and

03:33.613 --> 03:37.050

was asked at around the time of the great financial crisis

03:37.050 --> 03:39.719

to step into portfolio management full time where I had been

03:39.719 --> 03:42.422

working together with a couple of the senior PMs.

03:42.422 --> 03:45.625

That was also a baptism by fire moment and

03:45.625 --> 03:49.195

a fantastic experience looking back

03:49.195 --> 03:52.131

at it. Didn't necessarily feel that way every day at the

03:52.131 --> 03:55.201

time but tremendous opportunity to learn

03:55.201 --> 03:58.271

about the functioning of the markets, or dysfunction in the

03:58.271 --> 04:01.441

markets, and where you can take advantage of

04:01.474 --> 04:04.577

that if you've got a rational, disciplined

04:04.577 --> 04:05.578

approach.

04:06.246 --> 04:09.249

Really, for the last 15 years my focus has been

04:09.249 --> 04:12.285

on building out our income generating products, everything

04:14.153 --> 04:17.357

from global short duration income to global high

04:17.357 --> 04:18.691

yield.

04:18.691 --> 04:21.794

n 2022 Olivier had blazed the trail

04:21.794 --> 04:24.831

over to Toronto already well before me to

04:24.864 --> 04:27.033

start building out the credit research team.

04:27.033 --> 04:30.503

In 2022 we finally took the step of adding

04:30.503 --> 04:33.606

portfolio management and trading capabilities

04:33.606 --> 04:37.477

into the Toronto desk and

04:37.477 --> 04:40.680

that gave me the opportunity to really sit down

04:40.680 --> 04:43.983

and help build a more

04:43.983 --> 04:47.920

disciplined focus upon US high yield,

04:47.954 --> 04:50.990

global high yield and to brainstorm about opportunities

04:50.990 --> 04:53.493

like the Alternative Bond Fund.

04:53.493 --> 04:56.562

It's absolutely a delight to be able to

04:56.562 --> 05:00.133

be here today with a live solution for

05:00.133 --> 05:02.468

clients in that space.

05:02.468 --> 05:04.904

Olivier talked about how being an equity analyst has

05:04.904 --> 05:07.440

benefited his thinking today on the fixed income side.

05:07.473 --> 05:10.109

You were a trader and now you work with the trader.

05:10.109 --> 05:13.146

I don't know how many of them are watching today — well, no,

05:13.146 --> 05:16.249

they're trading but how do you work them today?

05:16.249 --> 05:19.285

You have such great knowledge from the past on how fixed

05:19.285 --> 05:21.954

income trading works but how do you implement that into your

05:21.954 --> 05:22.622

day-to-day?

05:22.622 --> 05:26.259

Yeah, it's a very different

05:26.259 --> 05:29.429

and unique model within Fidelity fixed income, the way

05:29.429 --> 05:32.498

that the different pillars of the investment team interact

05:32.498 --> 05:36.002

with one another. We've got four kind of key disciplines,

05:36.002 --> 05:39.372

portfolio management, of course, kind of at the hub,

05:39.372 --> 05:42.575

but credit research, trading, and quantitative research

05:42.575 --> 05:46.212

are also integral parts of our investment process.

05:46.212 --> 05:49.482

And in an asset class that is not as

05:49.482 --> 05:52.685

deep and liquid as equities, it's very important to

05:52.685 --> 05:55.755

have intelligent sets of eyes and ears out

05:55.755 --> 05:59.359

there, speaking to market counterparties,

05:59.359 --> 06:02.462

challenging our assumptions about the

06:02.462 --> 06:05.231

appropriate compensation for risk and reward,

06:06.265 --> 06:09.502

and advising us about the under

06:09.502 --> 06:12.939

all, overall I should say,

06:12.939 --> 06:14.507

under all I'm thinking about fabric.

06:14.507 --> 06:16.342

So the fabric of the market.

06:16.342 --> 06:19.712

Is extremely important the further down

06:19.712 --> 06:23.082

you go in the credit quality spectrum.

06:23.082 --> 06:26.452

And so a lot of the times you can find tail wag's

06:26.452 --> 06:29.922

dog in the credits markets where technical factors,

06:29.922 --> 06:32.658

quote unquote, is fancy, trade or speak.

06:32.658 --> 06:35.428

Apologies, ladies and gents who are listening from the

06:35.428 --> 06:38.064

trading desk at the moment, but that's sort of fancy trade

06:38.064 --> 06:40.800

or speech for imbalances between supply, demand, and

06:40.800 --> 06:42.735

anticipated flow in the market.

06:42.735 --> 06:46.172

And it's those kinds of things in a market that's not as

06:46.172 --> 06:49.342

broad and deep as equities that can really create

06:49.342 --> 06:52.111

short-term opportunities, but they can also create a lot of

06:52.111 --> 06:55.281

nail-biting events and some challenges for

06:55.281 --> 06:58.284

the investment team where we need to go back and ask

06:58.284 --> 07:01.120

ourselves, did we really believe in this story?

07:01.120 --> 07:04.090

Why are we being proven wrong by the markets?

07:04.090 --> 07:07.794

So there's a lot to and fro of information

07:07.794 --> 07:09.295

in the fixed income investment.

07:09.295 --> 07:12.398

Well, thank you both for the backgrounds that you bring

07:12.398 --> 07:16.035

to the table. The table is in Canada, and I just want to

07:16.035 --> 07:19.172

suggest or say that our viewers would recall that

07:19.172 --> 07:22.074

when we have fixed income portfolio managers and teams up

07:22.074 --> 07:24.510

here, they talk about Merrimack New Hampshire.

07:24.510 --> 07:27.313

This is a team that was built out in Toronto, Canada.

07:27.313 --> 07:29.015

Olivier, tell us about that.

07:29.015 --> 07:32.752

Sure, yeah, so since 2018,

07:32.752 --> 07:35.621

really, the focus has been on growing the credit research

07:35.621 --> 07:38.991

team in Toronto, and we

07:38.991 --> 07:41.194

have quite a strong experienced team in place now.

07:41.194 --> 07:44.163

There's 10 investment professionals on the credit-research

07:44.163 --> 07:47.834

side, including our director of research.

07:47.834 --> 07:51.571

We also have three credit traders working alongside

07:51.571 --> 07:55.041

Peter and myself on the portfolio management side so Quite

07:55.041 --> 07:58.211

a good group in place of course working as part of the

07:58.211 --> 08:01.614

the larger global team But

08:01.614 --> 08:04.083

in terms of the structure, you know some some of you might

08:04.083 --> 08:06.419

be more familiar with how the equity research team is

08:06.419 --> 08:09.655

structured with Sector sector

08:09.655 --> 08:11.557

assignments and the credit research team.

08:11.557 --> 08:15.094

Is really very similar So every analyst is an expert on

08:15.094 --> 08:18.231

the sectors they cover they know the company is inside now

08:18.264 --> 08:21.334

They understand the industry trends And their job is really

08:21.334 --> 08:24.437

to make sure the best ideas from their sectors make it

08:24.437 --> 08:25.438

into our fund.

08:26.506 --> 08:29.175

And just on that point, we sit right next to the equity

08:29.175 --> 08:32.612

research team, too. So there's a lot of cross-collaboration

08:32.612 --> 08:35.882

and pollination between the two teams, with analysts sharing

08:35.882 --> 08:37.517

notes, sharing management meetings.

08:37.517 --> 08:40.753

And so that's also a really great resource that

08:40.753 --> 08:42.555

we have access to.

08:42.555 --> 08:45.191

That's wonderful. And so, Peter, why don't we talk about

08:45.191 --> 08:47.560

style? So if you were an equity PM, I might say, are you

08:47.560 --> 08:51.130

more equity or sorry, you more growth blend, value,

08:51.130 --> 08:53.633

garp, who knows, fixed incomes different.

08:53.633 --> 08:56.769

So how would you describe the process behind this?

08:56.769 --> 08:59.405

It is different, and risk management and the trading

08:59.405 --> 09:02.141

background definitely plays into that as well, right?

09:02.141 --> 09:04.243

Because we have to have a healthy respect for market

09:04.243 --> 09:05.611

liquidity conditions.

09:05.611 --> 09:08.514

And also, the further you go down in the credit quality

09:08.514 --> 09:11.651

spectrum, the greater the chance is that you

09:11.651 --> 09:13.352

could face a significant loss, right.

09:13.352 --> 09:17.490

So in our parlance, that's asymmetric credit risk.

09:17.490 --> 09:21.127

And a lot of the ways that we think about generating

09:21.127 --> 09:24.363

and preserving returns for clients

09:24.363 --> 09:27.433

to over. The course of an economic cycle, the course of a

09:27.433 --> 09:31.370

credit cycle, is avoiding things that blow up.

09:31.370 --> 09:34.807

And one of the hardest things to learn as you're

09:34.807 --> 09:38.177

a younger investment professional is to

09:38.177 --> 09:41.080

let go of a story that you thought was fundamentally strong

09:41.080 --> 09:44.116

because things are moving against you.

09:44.116 --> 09:47.219

You might have a little bit more tolerance for loss

09:47.219 --> 09:50.489

in certain sectors or certain qualities or certain regions

09:50.489 --> 09:53.960

than others, but it's incontrovertible.

09:53.960 --> 09:57.029

The quantitative evidence that we've gathered over the

09:57.029 --> 10:00.433

years working together with our proprietary quant team.

10:00.433 --> 10:03.903

The price momentum factor, which is so important

10:03.903 --> 10:06.906

on the upside with equities

10:06.906 --> 10:10.343

to many of the managers that we have the opportunity to

10:10.343 --> 10:13.479

listen here today, is equally important on the credit

10:13.479 --> 10:16.315

side. But it works in reverse.

10:16.315 --> 10:19.652

So that's clearly a very important factor

10:19.652 --> 10:21.721

for the way that we think about the world.

10:21.721 --> 10:24.824

And, you know, another benefit, and we are a global

10:24.824 --> 10:28.160

product, of course, as well, and Olivier has highlighted the

10:28.194 --> 10:31.163

local team here in Toronto and how that's built out.

10:31.163 --> 10:34.467

But we've got a network of more than 100 fixed income

10:34.467 --> 10:36.168

professionals around the world.

10:36.168 --> 10:39.338

So we've a lot of very good inputs coming

10:39.338 --> 10:42.742

into us to help us isolate and identify

10:42.742 --> 10:44.677

ideas and opportunities.

10:44.677 --> 10:47.713

The Alternative Bond Fund, when I

10:47.713 --> 10:50.216

read about it, seems to me to be tailor-made for this

10:50.216 --> 10:51.717

environment. It was launched in May.

10:51.717 --> 10:54.253

Olivier, can you talk about what differentiates it from,

10:54.253 --> 10:55.955

say, competition?

10:55.955 --> 10:58.157

Sure, yeah, I think there's a few things.

10:58.157 --> 11:01.394

I mean, one, just on the back of Peter's

11:01.394 --> 11:04.397

comments about the global team, it's a global fund.

11:04.397 --> 11:07.400

The benchmark is global, the fund is global and

11:07.400 --> 11:09.735

most importantly, the team is global.

11:09.735 --> 11:12.238

So we're not constrained to a specific region and we're

11:12.238 --> 11:15.274

looking for the best risk-adjusted returns no matter where

11:15.274 --> 11:16.976

they might be located.

11:16.976 --> 11:19.779

So that's definitely one, having that team.

11:19.779 --> 11:22.348

Having established research and trading teams in Europe and

11:22.348 --> 11:25.551

in Asia that help us navigate those areas is definitely one

11:25.551 --> 11:27.219

key differentiator.

11:27.219 --> 11:29.989

The other is the duration positioning.

11:29.989 --> 11:33.392

So this is a short duration fund with flexibility

11:33.392 --> 11:36.729

on duration. And as you mentioned, in today's environment

11:36.729 --> 11:40.132

where rates have been rising, there's a lot more volatility,

11:40.132 --> 11:43.202

that negative correlation between equities and bonds

11:43.202 --> 11:45.237

has broken down.

11:45.237 --> 11:48.674

This fund was really designed for this type of environment.

11:48.674 --> 11:51.143

And then, you know, the last thing I would highlight is on

11:51.143 --> 11:53.079

the credit selection front.

11:53.079 --> 11:56.449

You know, this is really where we try to capitalise

11:56.449 --> 11:59.485

on the analyst's best ideas on the long and the

11:59.485 --> 12:03.689

short side. So, having the ability to go long and short is

12:03.689 --> 12:06.792

great to capture

12:06.792 --> 12:09.962

those opportunities, have the flexibility to invest

12:09.962 --> 12:11.597

a sleeve into high yields.

12:11.597 --> 12:14.734

Names also allows us to capture the best ideas

12:14.734 --> 12:16.202

from that team as well.

12:16.202 --> 12:18.938

So you can be short duration, you can go to mid duration.

12:18.938 --> 12:21.240

Tell us about where you're seeing things right now within

12:21.240 --> 12:22.241

the portfolio.

12:23.909 --> 12:26.979

Well, so we, you know, I think we are

12:26.979 --> 12:31.083

generally cautious on rates,

12:31.083 --> 12:33.452

long end rates. I mean, there's just so many drivers that

12:33.452 --> 12:35.988

are pushing rates higher.

12:35.988 --> 12:39.024

And we think the, you now, if you

12:39.024 --> 12:43.129

look at the environment right now,

12:43.129 --> 12:44.463

rates have obviously gone up a lot.

12:44.463 --> 12:47.166

They're more attractive, but the curve is also quite flat,

12:47.166 --> 12:50.736

so you don't need to extend out long on the,

12:50.736 --> 12:52.571

in terms of duration to.

12:52.571 --> 12:54.940

Capture an attractive yield, and we're fighting a lot of

12:54.940 --> 12:58.043

opportunities in corporate bonds that are relatively

12:58.043 --> 13:01.113

short, that are yielding five, six, seven, eight

13:01.113 --> 13:04.183

percent, even on the that's been great side that

13:04.183 --> 13:05.251

look very attractive.

13:06.852 --> 13:10.055

And maybe, Peter, I'll go to you with

13:10.055 --> 13:13.292

the high-yield component.

13:13.292 --> 13:15.294

So this can go 25% high- yield.

13:15.294 --> 13:17.863

How does that complement what you're trying to achieve?

13:17.863 --> 13:21.300

Yeah. So it's a tremendous diversifier

13:21.333 --> 13:24.737

and income enhancer, particularly in an environment where

13:24.737 --> 13:27.807

rates are rising. And as we heard earlier today from

13:27.807 --> 13:30.943

some of our colleagues, the consensus view is that rates

13:30.943 --> 13:32.912

are rising for the right reason.

13:32.912 --> 13:34.346

You know, growth is good.

13:34.346 --> 13:36.081

Earnings are strong.

13:36.081 --> 13:39.185

There's a lot of dialogue about the consumer in

13:39.185 --> 13:43.155

the K-shaped economy. But the macroeconomic

13:43.155 --> 13:46.258

statistics. And indicators are all showing that we've

13:46.258 --> 13:49.428

got an economy that's firing on most, if not

13:49.428 --> 13:51.130

all, cylinders.

13:51.130 --> 13:54.700

And in that kind of environment, high-yield

13:54.733 --> 13:56.869

companies, they've got more leverage.

13:56.869 --> 14:00.072

They require more opportunities to de-lever, either

14:00.072 --> 14:03.409

via increasing earnings streams and cash

14:03.409 --> 14:07.146

flows or improving asset valuations.

14:07.146 --> 14:10.583

And therefore, this is a reasonably good time to

14:10.583 --> 14:11.951

own high- yield. That's the good news.

14:11.951 --> 14:13.419

The bad news is that.

14:13.419 --> 14:16.522

You know that's largely in the price to a

14:16.522 --> 14:18.858

great extent of it. So it's just really weighing the risks

14:18.858 --> 14:21.894

and opportunities of that in an environment

14:21.894 --> 14:24.897

where income generation is increasingly important and

14:24.897 --> 14:27.266

you don't have to reach too far.

14:27.266 --> 14:30.369

As Olivier pointed out along the yield curve in order

14:30.369 --> 14:33.472

to earn some fairly healthy real

14:33.472 --> 14:36.575

yields and high yield is a

14:36.575 --> 14:39.411

perfect match for this kind of environment with very low

14:39.411 --> 14:40.713

empirical duration.

14:40.713 --> 14:43.883

So low sensitivity to five year rates,

14:43.883 --> 14:47.319

10 year rates 30 year rates and very

14:47.319 --> 14:50.556

you know kind of levered to economic growth

14:50.556 --> 14:53.993

and it's you know the fund is

14:53.993 --> 14:57.029

it's a flexible concept right so we need to think

14:57.029 --> 15:00.132

about how we want to be positioned over the course of a of

15:00.132 --> 15:03.402

a cycle and measure the risk and reward quite

15:03.402 --> 15:06.505

carefully with that sort of discipline that we

15:06.505 --> 15:09.775

referred to earlier But as it stands now, we're

15:09.775 --> 15:12.845

still pretty constructive on on high yield after

15:12.845 --> 15:16.048

a little bit of spread widening, it perhaps looks even more

15:16.048 --> 15:19.518

interesting with the yields on the intakes headed over

15:19.518 --> 15:22.988

8%, which attracts in a lot of

15:22.988 --> 15:26.792

different asset liability matching investors

15:26.792 --> 15:27.793

into the asset.

15:27.793 --> 15:29.361

Class as well.

15:29.361 --> 15:32.164

Olivier, how does that variability work as far as long

15:32.164 --> 15:34.633

positions, short positions, high yield?

15:34.633 --> 15:37.703

There's a variance that you can take

15:37.703 --> 15:40.072

advantage of based on economic conditions, I suppose.

15:40.072 --> 15:42.608

What kind of variants are we looking at?

15:42.608 --> 15:45.611

Yeah, I mean, the beauty

15:45.611 --> 15:48.781

of being able to go long and short in this

15:48.781 --> 15:52.117

market is that credit spreads overall are still

15:52.117 --> 15:55.154

relatively tight compared to long-term history,

15:55.154 --> 15:57.423

but there's an incredible amount of dispersion underneath

15:57.423 --> 16:00.993

the surface. And so that is by

16:00.993 --> 16:04.029

ratings. So the BBB and

16:04.029 --> 16:07.166

BBB type names have held in quite well, whereas CCCs have

16:07.166 --> 16:08.701

really alone out.

16:08.701 --> 16:11.337

We've seen different sectors move completely opposite

16:11.337 --> 16:13.639

directions this year. Some have tightened a lot, like

16:13.639 --> 16:16.742

energy. Some have really widened out, like some of the cable

16:16.742 --> 16:18.577

and communications names.

16:18.577 --> 16:21.714

And then the individual companies have really

16:21.714 --> 16:23.382

moved around a lot too.

16:23.382 --> 16:25.484

So there's a lot of action happening within the credit

16:25.484 --> 16:28.687

markets, despite the overall spread

16:28.687 --> 16:29.688

levels.

16:30.856 --> 16:34.159

And one of the great things, if you think about what credit

16:34.159 --> 16:35.661

analysts,

16:38.063 --> 16:41.500

what we ask downside potential, think

16:41.500 --> 16:44.103

about what can go wrong and how much money we can lose if

16:44.103 --> 16:47.172

things do go wrong. So they just naturally uncover a lot of

16:47.172 --> 16:50.843

ideas that they don't like, that they think are sells.

16:50.843 --> 16:52.978

And the long only funds, really the only thing you can do

16:52.978 --> 16:55.014

with those ideas is not own them.

16:55.014 --> 16:58.050

And the beauty of being able to

16:58.050 --> 17:01.153

shorten this fund is you can put an active bet on those

17:01.153 --> 17:03.055

ideas and try to capture some of that value as well.

17:04.089 --> 17:06.291

I would think that to our viewers today, the most

17:06.291 --> 17:09.161

intriguing, certainly one of the most intriguing components

17:09.161 --> 17:11.363

of this portfolio is the fact that you can short fixed

17:11.363 --> 17:12.364

income.

17:12.998 --> 17:16.135

As I said at the outset, I really rarely hear people talk

17:16.135 --> 17:17.536

about shorting bonds.

17:17.536 --> 17:20.706

Can you take us through how you do that and the

17:20.706 --> 17:22.074

risks associated with that, Peter?

17:23.475 --> 17:26.512

I'll jump into it, and maybe Olivier

17:26.512 --> 17:30.115

will want to pick up along the way, but firstly,

17:30.115 --> 17:33.252

the one thing about shorting a bond is that that means

17:33.252 --> 17:36.288

that you bear the cost of paying the

17:36.288 --> 17:38.490

coupon to the investor, right?

17:38.490 --> 17:41.760

So that's the first thing to think about.

17:41.794 --> 17:44.963

So lots of analogies about turning over stones,

17:44.963 --> 17:47.533

right, so our credit analysts are turning over stone,

17:47.533 --> 17:49.868

looking for things that don't have a bit of gold dust

17:49.868 --> 17:53.205

underneath them quite a lot so that we can avoid that.

17:53.205 --> 17:56.208

And if they find the ones that say, actually, this

17:56.208 --> 17:59.278

is a stone that's going to crumble into dust,

17:59.278 --> 18:02.581

then that's when the gears start cranking into effect.

18:02.581 --> 18:05.317

And we say, what's the borrow cost?

18:05.317 --> 18:08.253

What's the funding cost of funding the coupon?

18:08.253 --> 18:10.923

And then, what the catalyst?

18:10.923 --> 18:14.293

We need a real, clear, tangible horizon

18:14.293 --> 18:17.362

for bad things to happen to this company

18:17.362 --> 18:20.432

or this industry to help us monetize

18:20.432 --> 18:22.101

our bet. It's a bit.

18:22.101 --> 18:25.804

You know, pessimistic and negative some might say,

18:25.804 --> 18:29.308

but you know for us that's our bread and butter every day.

18:29.308 --> 18:32.478

So it's pretty exciting to be able to incorporate

18:32.478 --> 18:35.581

this kind of thinking in the funds, but it definitely

18:35.581 --> 18:38.817

means that, you know we are effectively

18:38.817 --> 18:41.920

to short something, we have to go borrow it from somebody

18:41.920 --> 18:44.123

in order to acquire it.

18:44.123 --> 18:47.126

And you know knowing that it might be a finite resource on

18:47.126 --> 18:49.962

the borrow and the cost of the borrow can.

18:49.962 --> 18:51.964

Fluctuate over time as well.

18:51.964 --> 18:55.400

People can buy the bonds that you've borrowed to

18:55.400 --> 18:57.402

sell on back.

18:57.402 --> 18:59.838

It's called a buy-in effect.

18:59.838 --> 19:03.041

And all these things take into account

19:03.041 --> 19:05.577

that we need to take into count when we think about the

19:05.577 --> 19:08.881

forward expected return on the short ideas are

19:08.881 --> 19:11.517

really what dominates a lot of our thinking about risk

19:11.517 --> 19:14.720

management in the short book, aside from the difficult

19:14.720 --> 19:17.789

business of identifying the things that are most likely

19:17.789 --> 19:19.358

to deteriorate.

19:19.358 --> 19:20.726

Fastest.

19:20.726 --> 19:23.729

So for example, just to bring it into reality in the

19:23.729 --> 19:25.564

high yield market where we are today, which is yielding

19:25.564 --> 19:28.634

about 8%, if we want to short an instrument in

19:28.634 --> 19:31.670

that universe, it's probably going to cost

19:31.670 --> 19:34.740

us 8% annualised to short it just to

19:34.740 --> 19:36.742

fund the coupon, then we're gonna have to pay the borrow

19:36.742 --> 19:39.778

cost, could be anywhere from the GC repo

19:39.778 --> 19:44.116

rate, 35 basis which which is nothing, to 5%

19:44.116 --> 19:47.386

and it starts to add up pretty quickly when

19:47.386 --> 19:50.656

you've got. Earning income on the long

19:50.656 --> 19:53.725

side, so it nicely forces

19:53.725 --> 19:56.862

a discipline upon our selection process too to think

19:56.862 --> 19:58.030

about these costs.

19:58.030 --> 20:01.333

Can you use derivatives to equate to shorting a fixed income

20:01.333 --> 20:04.469

security or are you actually shorting the security?

20:04.469 --> 20:07.506

So we're doing both when it's coming to the

20:07.506 --> 20:10.509

bottom up ideas that are germinating from the team,

20:10.509 --> 20:13.212

you know, we want to isolate an individual security or a

20:13.212 --> 20:16.815

particular sector that we think is

20:16.815 --> 20:19.818

set to set to decline in one

20:19.818 --> 20:22.554

way or another. But we can also manage interest rates in the

20:22.554 --> 20:24.756

portfolio, which is another thing we haven't really talked

20:24.756 --> 20:26.425

about too much here today.

20:26.425 --> 20:29.528

But the framework of the parameters of the

20:29.528 --> 20:32.397

portfolio as it's established is we can be anywhere from.

20:32.397 --> 20:35.634

Minus two and a half years of interest rate risk to plus

20:35.634 --> 20:38.737

five. Today we're just

20:38.737 --> 20:40.939

a little bit above one and a 1.5.

20:40.939 --> 20:44.076

And the way that we can accomplish that when we're investing

20:44.076 --> 20:47.145

on the funded side in instruments that we think are gonna

20:47.145 --> 20:51.383

provide us with a solid income stream is to use futures

20:51.383 --> 20:54.553

in order to really damp down the

20:54.553 --> 20:58.023

interest rate risks that we are unfavourable

20:58.023 --> 20:59.258

at this point in time.

20:59.258 --> 21:01.460

Olivier, this sounds very institutional.

21:01.460 --> 21:03.562

Can you talk about that relative to retail?

21:03.562 --> 21:05.764

And that's perhaps why I hadn't really heard a lot about

21:05.764 --> 21:07.532

shorting fixed income in the past.

21:07.532 --> 21:09.434

It's certainly much more of an institutional vehicle.

21:10.502 --> 21:13.739

Yeah, I mean, I guess the one thing I would add is that

21:13.739 --> 21:16.742

the asymmetry of returns in credit can

21:16.742 --> 21:19.978

work in your favour when you're shorting bonds.

21:19.978 --> 21:23.749

So just as an example, if we put on

21:23.749 --> 21:26.551

a high-yield bond that's trading at $0.98 on the dollar,

21:27.986 --> 21:31.189

and if we're wrong and the bond goes up, it can go to par,

21:31.189 --> 21:33.725

maybe slightly above par, but it's a...

21:33.725 --> 21:36.662

Relatively limited loss, whereas on the equity side, you

21:36.662 --> 21:38.830

know, if you have a short that goes the wrong way, the stock

21:38.830 --> 21:40.465

can go up a lot, right?

21:40.465 --> 21:41.500

It can double, triple.

21:42.801 --> 21:46.071

So that's, you know that's different on the credit side.

21:46.071 --> 21:49.107

And if you're short one of these bonds and you're right,

21:49.107 --> 21:52.544

you can still make a lot of money because if you

21:52.544 --> 21:55.047

short an unsecured bond in a highly levered capital

21:55.047 --> 21:58.250

structure, you now those bonds can and do

21:58.250 --> 22:01.953

sometimes go to zero. So there's a lot upside if

22:01.953 --> 22:03.088

you get the call right.

22:04.723 --> 22:07.392

As we talked about earlier, this seems really tailor-made

22:07.392 --> 22:09.561

for this environment. Rates have been increasing.

22:09.561 --> 22:12.597

It's an opportunity to be

22:12.597 --> 22:14.166

shorting fixed income as you have been.

22:14.166 --> 22:17.235

If rates collapsed, this isn't just really

22:17.235 --> 22:20.005

a rate-dependent solution because it is corporate fixed

22:20.005 --> 22:22.040

income as well, as you mentioned. So it could have to do

22:22.074 --> 22:24.609

with what's going on with a business.

22:24.609 --> 22:27.112

It's not, so you're not gonna zero out your shorts because

22:27.112 --> 22:29.514

of where rates are. You've also gotta look at corporate

22:29.514 --> 22:32.751

fundamentals. You gotta look macro environment as well.

22:32.751 --> 22:34.152

Peter, that's valid.

22:34.152 --> 22:37.622

Very valid, and a number of those

22:37.622 --> 22:40.692

variables are what we're focused on day

22:40.692 --> 22:43.028

in and day out when we're thinking about the portfolio

22:43.028 --> 22:46.064

construction. We don't want to churn

22:46.064 --> 22:49.101

the portfolio at all because that incurs a lot

22:49.101 --> 22:52.337

of friction and drag and eats away

22:52.337 --> 22:55.440

at the income stream, but we also want to

22:55.440 --> 22:58.610

be nimble and flexible and have

22:58.610 --> 23:01.980

a philosophy as if we're reconstructing the book.

23:01.980 --> 23:05.083

Every day I mean we provide daily liquidity so

23:05.083 --> 23:08.120

effectively we've got a fresh sheet of paper and

23:08.120 --> 23:10.989

we look at it and say is this the best risk reward

23:10.989 --> 23:14.159

opportunity and that applies from everything from the top

23:14.159 --> 23:17.295

down characteristics of the portfolio, the asset allocation

23:17.295 --> 23:20.599

preferences by sector or geography and of course

23:20.599 --> 23:23.902

in credit as it is with equity which

23:23.902 --> 23:27.239

is what everyone thinks about first when I think when

23:27.239 --> 23:30.575

they think about fidelity is just the solid high

23:30.575 --> 23:32.310

conviction, fundamental.

23:32.344 --> 23:33.879

You know, selection ideas.

23:33.879 --> 23:37.382

All of those things go into our daily calculus.

23:37.382 --> 23:40.051

Makes sense. And where are you seeing opportunities right

23:40.051 --> 23:43.455

now on the credit side? Well, you know one

23:43.455 --> 23:47.192

sector that we particularly like is technology.

23:47.192 --> 23:50.395

It's clearly been a heavy growth area

23:50.395 --> 23:53.064

of markets, particularly in investment grade markets, but

23:53.064 --> 23:55.100

also in high yield.

23:55.100 --> 23:58.170

The good news is that the menu has not been

23:58.170 --> 23:59.771

homogenous at all.

23:59.771 --> 24:02.607

There are you know there's a laundry list of different

24:02.607 --> 24:05.911

flavours of risk and reward of execution

24:05.911 --> 24:08.980

risk implementation risk when it comes to a lot of the

24:08.980 --> 24:12.184

data centre financings for example that have been

24:12.184 --> 24:15.253

arriving in the high yield market for

24:15.253 --> 24:18.723

about 12 months now and you know clearly capturing

24:18.723 --> 24:20.692

a lot more attention these but

24:21.693 --> 24:25.030

Some of these very solid underlying asset

24:25.030 --> 24:28.733

coverage and guarantees from hyperscaler

24:28.733 --> 24:31.970

parents really, they don't

24:31.970 --> 24:35.440

completely eliminate a lot of the risks with the

24:35.440 --> 24:38.477

credit boxes, but they give you quite a

24:38.477 --> 24:41.613

lot comfort that you're getting well in

24:41.613 --> 24:44.683

excess of the appropriate compensation for the risk that you

24:44.683 --> 24:46.117

are taking.

24:46.117 --> 24:49.221

And the variety that's developed there

24:49.221 --> 24:51.823

is really giving us lots of.

24:51.823 --> 24:54.826

Pause for thought and some select opportunities

24:54.826 --> 24:58.363

for the portfolios and you know just to

24:58.363 --> 25:01.433

say what we don't like because it just it I

25:01.433 --> 25:04.469

wanted to stand up and cheer for Dan as he was

25:04.469 --> 25:07.906

speaking 20-30 minutes ago about his distaste

25:07.906 --> 25:11.443

and disregard for the insurance industry we're 100%

25:11.443 --> 25:15.013

on board with his views and looking for sensible

25:15.013 --> 25:18.149

cost-effective ways to apply that in our

25:18.149 --> 25:21.219

portfolios has occupied a

25:21.219 --> 25:23.822

lot of discussion for us over the last.

25:23.822 --> 25:25.590

Quarter or two. Thank you for that.

25:25.624 --> 25:27.993

A couple of minutes left. Olivia, I'd like to take you to

25:27.993 --> 25:30.328

the rest of the world. What are you seeing from a global

25:30.328 --> 25:32.130

allocation standpoint?

25:32.130 --> 25:35.133

Yeah, I mean, you know, the the the benchmark for this fund

25:35.133 --> 25:38.236

is global. It's just a bit over half North America.

25:38.236 --> 25:40.138

And then outside of that, it's quite diversified.

25:40.138 --> 25:43.141

No other country accounts for more than 10

25:43.141 --> 25:46.311

percent. So it is it is a diversified benchmark,

25:46.311 --> 25:48.179

diversified fund.

25:48.179 --> 25:51.016

You know, and in terms of where we see opportunities, we're

25:51.016 --> 25:55.186

really looking for, you know, individual idiosyncratic

25:55.186 --> 25:57.522

opportunities no matter where they might be.

25:57.522 --> 26:00.625

So. You know, one area that we've found, we have found some

26:00.625 --> 26:03.795

interesting opportunities in is Latin America.

26:04.963 --> 26:07.365

So just as one example, you know, earlier this year, we were

26:07.365 --> 26:09.200

looking at U.S.

26:09.200 --> 26:12.837

Airlines. Our analyst comes to us and mentions,

26:12.837 --> 26:16.341

you now, by the way, there are more attractive yields

26:16.341 --> 26:19.811

available for lower credit risk elsewhere in the world,

26:19.811 --> 26:21.279

Latin America being one of those places.

26:21.279 --> 26:24.950

And it turns out that a lot of these airlines in that region

26:24.950 --> 26:27.218

have gone through debt restructurings post the pandemic

26:27.218 --> 26:30.522

period, have really wiped their balance sheets clear

26:30.522 --> 26:34.392

of debt, improve their cost base,

26:34.392 --> 26:36.361

improve their liquidity runways.

26:36.361 --> 26:39.564

In the meantime, industries in certain countries have

26:39.564 --> 26:42.233

consolidated. So these are businesses that have really

26:42.233 --> 26:45.837

fundamentally improved a lot and we're offering additional

26:45.837 --> 26:49.207

yields compared to some of the US names.

26:49.207 --> 26:51.810

On top of that, some of them also have significant fuel

26:51.810 --> 26:53.311

hedging in place Switch.

26:53.311 --> 26:56.147

US airlines, by and large, no longer hedge fuel.

26:56.147 --> 26:59.451

So in today's environment, that's another great benefit.

26:59.451 --> 27:01.886

So those are the type of situations where we're constantly

27:01.886 --> 27:03.588

on the lookout for.

27:03.588 --> 27:06.891

Well, this is an exciting new addition to Canada,

27:06.891 --> 27:09.294

to have the team build out like you've talked about, to

27:09.294 --> 27:12.497

understand more about your backgrounds, and then to see what

27:12.497 --> 27:14.499

alternative bond fund is about. Because I think people are

27:14.499 --> 27:17.602

afraid to talk about fixed income, but then when they

27:17.602 --> 27:21.439

hear alternative, high yield, long credit, short credit,

27:21.439 --> 27:24.242

risk controls, you mentioned that quite a few times.

27:24.242 --> 27:26.745

It's a really important addition to a portfolio.

27:26.745 --> 27:28.747

This is in ETF form.

27:28.747 --> 27:30.415

It's also in a fund.

27:30.415 --> 27:33.118

A structure as well which makes it available to every type

27:33.118 --> 27:36.121

of investor. So Peter and Olivier, thanks very much

27:36.121 --> 27:38.423

for talking to us today. Wonderful.

27:38.423 --> 27:39.424

Thank you.

27:41.626 --> 27:43.695

Thanks for watching or listening to

27:43.728 --> 27:45.930

the Fidelity Connects podcast.

27:45.930 --> 27:47.766

Now, if you haven't done so already,

27:47.799 --> 27:49.367

please subscribe to Fidelity Connex

27:49.367 --> 27:51.803

on your podcast platform of choice.

27:51.836 --> 27:53.138

And if you like what you're hearing,

27:53.171 --> 27:54.673

please leave a review or a five-star

27:54.673 --> 27:55.707

rating.

27:55.707 --> 27:57.442

Fidelity Mutual Funds and ETFs are

27:57.475 --> 27:58.777

available by working with a

27:58.810 --> 28:00.311

financial advisor or through an

28:00.345 --> 28:02.047

online brokerage account.

28:02.080 --> 28:04.282

Visit Fidelity.ca slash howtobuy

28:04.282 --> 28:05.850

for more information.

28:05.850 --> 28:07.652

While on Fidelity dot CA, you can

28:07.652 --> 28:09.254

also find more information on future

28:09.287 --> 28:10.255

live webcasts.

28:10.288 --> 28:11.456

Don't forget to follow Fidelity

28:11.489 --> 28:13.692

Canada on YouTube, LinkedIn,

28:13.725 --> 28:14.726

and Instagram.

28:15.727 --> 28:17.529

We'll end today's show with a short

28:17.529 --> 28:18.596

disclaimer.

28:18.596 --> 28:20.198

The views and opinions expressed on

28:20.231 --> 28:21.633

this podcast are those of the

28:21.666 --> 28:23.401

participants and do not necessarily

28:23.401 --> 28:24.602

reflect those of Fidelity

28:24.636 --> 28:26.471

Investments Canada ULC or its

28:26.538 --> 28:27.439

affiliates.

28:27.472 --> 28:28.973

This podcast is for informational

28:28.973 --> 28:30.508

purposes only and should not be

28:30.508 --> 28:32.210

construed as investment, tax, or

28:32.243 --> 28:33.278

legal advice.

28:33.311 --> 28:35.346

It is not an offer to sell or buy,

28:35.346 --> 28:37.082

or an endorsement, recommendation,

28:37.082 --> 28:39.050

or sponsorship of any entity or

28:39.050 --> 28:40.552

securities cited.

28:40.552 --> 28:41.986

Read a funds prospectus.

28:41.986 --> 28:43.455

Before investing, funds are not

28:43.455 --> 28:44.355

guaranteed.

28:44.355 --> 28:45.757

Their values change frequently and

28:45.757 --> 28:47.025

past performance may not be

28:47.025 --> 28:48.093

repeated.

28:48.093 --> 28:49.594

Fees, expenses, and commissions are

28:49.594 --> 28:50.962

all associated with fund

28:50.962 --> 28:52.130

investments.

28:52.130 --> 28:53.665

Thanks again. We'll see you next

28:53.665 --> 28:54.632

time.

Share

FOCUS 2026: The long and short of fixed income - Peter Khan, Olivier Simon-Vermot

Listen to the podcast version