Inside Tactical High Income

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<b>Subtitles are AI Generated</b>

 

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Hello and welcome to Fidelity

 

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Connects, I'm Glenn Davidson.

 

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Treasury Secretary Scott Besson

 

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wants to put a twist on the treasury

 

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market.

 

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The proposed strategy aims to bring

 

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down long-term borrowing costs as

 

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investors weigh rising debt levels

 

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and higher bond yields.

 

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But our next guest says one of the

 

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market's most important signals this

 

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year has been the resilience of

 

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credit spreads despite inflation

 

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concerns and geopolitical

 

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uncertainty.

 

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What does that tell us about

 

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investor sentiment and what's

 

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driving record portfolio yield?

 

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Joining me now to share where he's

 

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finding his highest conviction

 

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opportunities today is Scott Menci,

 

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Institutional Portfolio Manager of

 

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Fidelity Tactical High Income Fund.

 

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And before we begin, a quick

 

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reminder to our viewers that today's

 

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webcast features live French,

 

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Mandarin, and Cantonese audio

 

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interpretation.

 

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Welcome Scott. Great to have you in

 

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Toronto.

 

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It's great to be here again, guys.

 

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You and Adam are very good with

 

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being present for

 

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our investors in the Tactical High

 

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Income Fund to talk about what's

 

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going on within the portfolio

 

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because it's a very diversified one.

 

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And you do these frequently and

 

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there's so many changes in the

 

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world, there's always something new

 

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to talk. And I know as a guy

 

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from Massachusetts you're probably

 

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excited about Dunkin' Donuts

 

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potential IPO at the end of the

 

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year. We're not gonna talk about

 

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that though. What we should do is

 

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start off this webcast really

 

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talking about the fact that U.S.

 

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Debt is over $40 trillion.

 

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Treasury yields were increasing.

 

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Basin stepped in, they came off,

 

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they came back up, they've come down

 

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a little bit. Can you give us

 

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perspective on what's happening debt

 

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wise?

 

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Yeah, sure.

 

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So again, thanks for having me here.

 

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It's always great to be in studio

 

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with you, Glenn.

 

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And I think what we see,

 

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not in the U.S., but just globally,

 

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there's a lot of debt in the world

 

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and that ultimately costs something,

 

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right? So when we see yields

 

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move higher, it starts to put

 

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pressure on the

 

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funding of the U S government,

 

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whether that's entitlements,

 

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defense spending, everything else

 

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that the government does.

 

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So that's, and then you have the

 

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interest costs. And as that becomes

 

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bigger, it becomes harder to spend

 

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on other things. So it starts with

 

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stress. On the U.S.

 

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Government. Now, what does that mean

 

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in the long term?

 

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It's hard to know because when we

 

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look at historically other countries

 

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that have dealt with this problem,

 

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they haven't been the world reserve

 

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currency. So that's the advantage I

 

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think the U S has right now.

 

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And I think when you think about

 

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what it means for the U s dollar,

 

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you know, the

 

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economy, the global economy runs on

 

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U S dollar. So it gives it a little

 

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bit more wiggle room.

 

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But I think this 5.25 level is

 

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one that's important.

 

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You saw Besson step in and talk

 

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about.

 

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Using the Treasury's balance sheet

 

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to try to manage yields.

 

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I don't know if that will work But

 

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ultimately right now when we look at

 

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the yield a five and a quarter

 

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percent that starts to

 

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look attractive on a nominal basis

 

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So, you know, we're watching it

 

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closely, but it's not something I

 

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think we need to Or I

 

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should say an existential crisis and

 

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something we have to think about as

 

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we move forward

 

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Is the tenure, the level it's

 

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at right now, is it punitive to

 

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equity valuations?

 

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Well.

 

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The stock market would say no,

 

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right, as that keeps moving higher.

 

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But the higher the yields go, then

 

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you get the alternative, right?

 

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What's the investor alternative?

 

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Part of the reason why stocks do

 

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really well when yields are low

 

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is because there's no, the better

 

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alternative is to put your money in

 

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stocks because you're not getting a

 

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lot of real return out

 

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of the treasuries.

 

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Now with yields a little bit higher,

 

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you start to get other

 

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opportunities, potentially putting

 

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it into risk-free assets.

 

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That could potentially draw money

 

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away from the stockmarket, but it

 

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hasn't yet.

 

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And there's certainly a connection

 

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to the consumer, in particular

 

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mortgage rates, isn't

 

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Sure. So, yeah, housing has been

 

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struggling. It's been in its own

 

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recession for a while in the U.S.,

 

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but the underlying consumer

 

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continues to be really positive.

 

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We saw great earnings from Visa.

 

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The banks have talked pretty

 

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positively about the U S consumer.

 

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We're seeing it growth in earnings,

 

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not just in tech, but in a lot of

 

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the other areas of the market.

 

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Most people focus on tech being the

 

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driver of earnings, but you look at

 

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consumer discretionary, consumer

 

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staples. The other areas of the

 

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market, the earnings are growing

 

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there. So that means consumers are

 

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still spending.

 

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And the leverage consumers have now

 

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is much less than it was back in

 

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2007, 2008, which people

 

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are somewhat worried about having a

 

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similar type situation.

 

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So there's a lot of things different.

 

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And the US economy continues to be

 

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moving along quite well.

 

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The beauty of Tactical High Income

 

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Fund is the diversity of

 

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income sources, and what's really

 

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great is we can talk about all those

 

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buckets today, but it's pretty

 

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amazing what you have at your

 

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fingertips to put within that

 

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portfolio, and things that you're

 

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keeping your eye on for future

 

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investments as well.

 

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We can touch on that.

 

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Why don't we do this, though, as we

 

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are getting towards, I hate to say

 

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this, we're getting towards the end

 

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of summer.

 

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Could you give us a year in review,

 

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year to date in review for Tactical

 

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high income?

 

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Sure, yeah, you know, we did

 

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a pretty good job in February when

 

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we had the software

 

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kind of apocalypse, the SaaS

 

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apocalypse, as people were talking

 

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about. We didn't have a lot of

 

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exposure there, so we held in quite

 

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well. What we started to see happen

 

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once the war started occurring

 

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was we saw the

 

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digital asset treasury companies,

 

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which we owned, not perform great.

 

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We had some confusion about what was

 

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happening with the oil tankers

 

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and the oil trade, which created

 

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some disruption in those names.

 

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So we pulled back a little bit.

 

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But during that period of time.

 

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What we always do is we buckle down,

 

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we talk with management teams, we

 

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talk to our analysts, try to either

 

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gain conviction or see if the story

 

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has changed. And through most of

 

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that, we gain conviction.

 

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So we added to a lot of those teams

 

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that have been detracting during

 

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that short period in June, July.

 

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And what we've seen now is those

 

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assets start to rebound.

 

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And when we think about what that

 

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means for the portfolio, it's had a

 

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great return.

 

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It's in the double digits when you

 

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look at it on a US dollar basis.

 

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And the yield now is close to

 

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an all-time high in the portfolio,

 

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running close to around 6% on a

 

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current yield basis.

 

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Wow, let's start with the buckets,

 

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let's with start with treasuries,

 

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just based on what we've been

 

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talking about.

 

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Yeah, so we've always said when we

 

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think about our fixed income

 

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allocation, when credit spreads get

 

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really tight, it doesn't make

 

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sense to own corporate bonds,

 

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investment grade corporate bonds.

 

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So no corporate bonds.

 

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But within our portfolio, we're

 

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always balancing the

 

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income, the duration, and

 

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the equity sensitivity.

 

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And we have a benchmark that's a

 

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50-50 split of the S&P 500

 

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and the Barclays Act bond index.

 

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So when we get to these tight

 

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spreads, what we like to do is use

 

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as little amount as capital as

 

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possible to build that.

 

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Investment grade duration.

 

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So what we've done instead of buying

 

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investment grade bonds, we've been

 

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buying treasuries to build out that

 

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duration. And at five, you know, at

 

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a quarter percent yield, that's

 

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attractive.

 

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You can start to make the case that

 

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the risk reward in terms of

 

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where rates could go, that could be

 

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interesting.

 

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So we're a little bit overweight

 

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duration in the portfolio on

 

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the investment grade side and doing

 

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it primarily through the long term

 

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treasurys.

 

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I think it was three years ago,

 

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you and Adam talked about

 

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tankers, ships,

 

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and I'm sure a lot of people in the

 

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audience said, don't hear a lot

 

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about those these days.

 

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We do now, including today, just

 

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talking about shipping to China of

 

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oil from Iran and so on.

 

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We hear about the dark fleet, those

 

264

00:06:53,579 --> 00:06:54,981

that are turning off transponders

 

265

00:06:54,981 --> 00:06:56,916

and just sort of sneaking through.

 

266

00:06:56,916 --> 00:06:58,418

Can you give us perspective on

 

267

00:06:58,418 --> 00:07:00,520

tankers as an investment and

 

268

00:07:00,520 --> 00:07:01,854

just where this is today.

 

269

00:07:01,854 --> 00:07:03,689

Yeah, so we've liked Tankers

 

270

00:07:03,689 --> 00:07:05,024

for a long time. They've been in the

 

271

00:07:05,024 --> 00:07:06,159

portfolio, as you mentioned, for

 

272

00:07:06,159 --> 00:07:06,993

many years.

 

273

00:07:06,993 --> 00:07:08,661

I think when we think about the

 

274

00:07:08,661 --> 00:07:10,596

history we have as a team, Adam

 

275

00:07:10,596 --> 00:07:11,998

covered the Tankers back when he was

 

276

00:07:11,998 --> 00:07:13,166

an analyst within the high-income

 

277

00:07:13,166 --> 00:07:14,467

and alternatives division.

 

278

00:07:14,467 --> 00:07:15,635

So he's known these management teams

 

279

00:07:15,635 --> 00:07:16,436

for a longtime.

 

280

00:07:16,436 --> 00:07:18,104

What they've done, just from a

 

281

00:07:18,104 --> 00:07:19,205

balance sheet perspective, gets us

 

282

00:07:19,205 --> 00:07:20,673

really excited. They've paid down

 

283

00:07:20,706 --> 00:07:22,475

debt. They're free cash flow

 

284

00:07:22,475 --> 00:07:23,976

positive at the cycle trough.

 

285

00:07:23,976 --> 00:07:25,411

So, they're doing a lot of the right

 

286

00:07:25,411 --> 00:07:26,779

things. Most people remember tankers

 

287

00:07:26,779 --> 00:07:28,014

as kind of a boom bust type

 

288

00:07:28,014 --> 00:07:29,415

industry. And that was because they

 

289

00:07:29,415 --> 00:07:31,417

were typically spending money at the

 

290

00:07:31,417 --> 00:07:32,919

peak and then they would be in

 

291

00:07:32,919 --> 00:07:34,454

trouble when the markets moved in

 

292

00:07:34,487 --> 00:07:35,621

the opposite direction.

 

293

00:07:35,621 --> 00:07:37,356

That's not the case anymore, as I

 

294

00:07:37,356 --> 00:07:38,925

mentioned. And what we started to

 

295

00:07:38,925 --> 00:07:40,159

see happen is they're paying a lot

 

296

00:07:40,159 --> 00:07:41,961

their net income out as

 

297

00:07:41,961 --> 00:07:43,696

dividends. So, similar to like MLPs

 

298

00:07:43,696 --> 00:07:44,630

or REITs.

 

299

00:07:44,630 --> 00:07:46,566

And in the case of one of them, DHT,

 

300

00:07:46,566 --> 00:07:47,900

the dividend yield now is up near

 

301

00:07:47,900 --> 00:07:49,001

the 20% range.

 

302

00:07:49,001 --> 00:07:50,903

So, there's spending a lot or paying

 

303

00:07:50,903 --> 00:07:51,904

investors a lot money.

 

304

00:07:51,904 --> 00:07:53,139

And the reason being...

 

305

00:07:53,139 --> 00:07:55,241

Is that the

 

306

00:07:55,241 --> 00:07:57,677

rate that they charge to move these

 

307

00:07:57,677 --> 00:08:00,213

commodities around the globe is

 

308

00:08:00,213 --> 00:08:01,814

going up because the routes are

 

309

00:08:01,814 --> 00:08:03,416

getting bigger and there's less

 

310

00:08:03,416 --> 00:08:05,284

coming and going.

 

311

00:08:05,284 --> 00:08:07,420

So that's been a really net positive

 

312

00:08:07,420 --> 00:08:08,721

for all these companies.

 

313

00:08:08,721 --> 00:08:09,956

Now, there has been some question

 

314

00:08:09,956 --> 00:08:11,891

about with

 

315

00:08:11,891 --> 00:08:13,826

everything that's happening in the

 

316

00:08:13,826 --> 00:08:15,261

Middle East, what happens to the

 

317

00:08:15,261 --> 00:08:17,096

tankers as a result of the

 

318

00:08:17,096 --> 00:08:18,030

straight shutting down?

 

319

00:08:18,030 --> 00:08:19,599

And what we've seen is that there's

 

320

00:08:19,599 --> 00:08:20,833

other ways to get the commodity

 

321

00:08:20,867 --> 00:08:22,001

around. That we've seen.

 

322

00:08:22,001 --> 00:08:23,703

Other pipelines open up, other

 

323

00:08:23,703 --> 00:08:25,104

routes open up. So the flow is

 

324

00:08:25,104 --> 00:08:26,372

happening, but it's still at a

 

325

00:08:26,372 --> 00:08:28,074

pretty restrictive level.

 

326

00:08:28,074 --> 00:08:29,375

The other thing that I think people

 

327

00:08:29,375 --> 00:08:31,110

don't understand about these

 

328

00:08:31,110 --> 00:08:33,045

companies is that if we do get

 

329

00:08:33,045 --> 00:08:34,013

peace in the world, and you alluded

 

330

00:08:34,046 --> 00:08:36,182

to this, we get

 

331

00:08:36,182 --> 00:08:38,117

Iran getting folded back

 

332

00:08:38,117 --> 00:08:40,486

into the world trade

 

333

00:08:40,486 --> 00:08:42,388

system. And what you start to see

 

334

00:08:42,388 --> 00:08:44,023

happen is these illegal ships, the

 

335

00:08:44,023 --> 00:08:45,324

Dark Fleet, right?

 

336

00:08:45,324 --> 00:08:46,626

The ones that Iran is sending to

 

337

00:08:46,626 --> 00:08:48,027

China and other areas of the world.

 

338

00:08:48,027 --> 00:08:49,295

They come out of the market because

 

339

00:08:49,295 --> 00:08:50,563

the oil majors will wanna do

 

340

00:08:50,563 --> 00:08:51,797

business in Iran.

 

341

00:08:51,797 --> 00:08:53,199

And they won't do business with

 

342

00:08:53,199 --> 00:08:55,134

these sanctionships

 

343

00:08:55,134 --> 00:08:56,702

for, they won't get insurance for

 

344

00:08:56,702 --> 00:08:58,104

them, they don't meet a lot of the

 

345

00:08:58,104 --> 00:08:59,105

standards. So what does that mean?

 

346

00:08:59,105 --> 00:09:00,907

That means the tankers that we have

 

347

00:09:00,907 --> 00:09:02,275

within the companies we own will be

 

348

00:09:02,275 --> 00:09:03,576

the ones to benefit from there.

 

349

00:09:03,576 --> 00:09:05,444

So there'll be a supply shrinkage on

 

350

00:09:05,444 --> 00:09:06,913

the tanker side if we ever do get

 

351

00:09:06,913 --> 00:09:07,847

peace in the world.

 

352

00:09:07,847 --> 00:09:10,316

And that's a real nice kicker

 

353

00:09:10,316 --> 00:09:11,784

for what is already a pretty good

 

354

00:09:11,784 --> 00:09:13,486

environment for the tankars.

 

355

00:09:13,486 --> 00:09:14,487

Interesting.

 

356

00:09:15,054 --> 00:09:16,656

Let me tangent, because we're

 

357

00:09:16,656 --> 00:09:18,491

talking about the Middle East, how

 

358

00:09:18,491 --> 00:09:20,226

do you and the team keep up on all

 

359

00:09:20,226 --> 00:09:22,428

the geopolitics that's going on?

 

360

00:09:22,428 --> 00:09:23,629

Because as I said at the outside of

 

361

00:09:23,629 --> 00:09:24,997

this discussion, there's always

 

362

00:09:24,997 --> 00:09:26,832

something new to talk about with

 

363

00:09:26,832 --> 00:09:28,067

portfolio managers, but in

 

364

00:09:28,067 --> 00:09:29,902

particular with a

 

365

00:09:29,902 --> 00:09:31,604

group as vast as your High Income

 

366

00:09:31,604 --> 00:09:32,772

Group. How do you keep up?

 

367

00:09:32,772 --> 00:09:34,907

Yeah, so we have ongoing

 

368

00:09:34,907 --> 00:09:36,709

meetings with the various groups

 

369

00:09:36,709 --> 00:09:37,944

within Fidelity, whether that's at

 

370

00:09:37,944 --> 00:09:39,946

the macro level, at the micro level.

 

371

00:09:39,946 --> 00:09:41,614

We have consultants that come in,

 

372

00:09:41,614 --> 00:09:43,049

you probably remember David Bridges

 

373

00:09:43,049 --> 00:09:44,784

who used to work at Fidelity but now

 

374

00:09:44,784 --> 00:09:46,452

is a consultant, and we talk with

 

375

00:09:46,452 --> 00:09:47,853

him pretty regularly in terms of

 

376

00:09:47,853 --> 00:09:49,655

what's going on, how these impact

 

377

00:09:49,655 --> 00:09:50,423

supply chains.

 

378

00:09:50,456 --> 00:09:52,425

So it's about finding

 

379

00:09:52,425 --> 00:09:54,327

that information and rather than

 

380

00:09:54,327 --> 00:09:55,328

having a meeting.

 

381

00:09:55,328 --> 00:09:56,896

Saying what's happening now about

 

382

00:09:56,896 --> 00:09:58,397

this, what we like to do is have

 

383

00:09:58,397 --> 00:10:00,299

these meetings that go on for years

 

384

00:10:00,299 --> 00:10:02,134

really, regular meetings with all

 

385

00:10:02,134 --> 00:10:03,369

these different specialists with

 

386

00:10:03,369 --> 00:10:05,237

infidelity, so we just pick up like

 

387

00:10:05,237 --> 00:10:07,139

we left off, where we left of

 

388

00:10:07,139 --> 00:10:08,541

I should say. So it's just an

 

389

00:10:08,541 --> 00:10:10,009

ongoing discussion and makes it easy

 

390

00:10:10,009 --> 00:10:11,410

for us to understand how is this

 

391

00:10:11,410 --> 00:10:13,412

different than it was before and

 

392

00:10:13,412 --> 00:10:14,714

what could this could potentially

 

393

00:10:14,714 --> 00:10:16,215

mean moving forward, since we're

 

394

00:10:16,215 --> 00:10:17,817

thinking about this regularly and

 

395

00:10:17,817 --> 00:10:19,518

have this ongoing dialog rather than

 

396

00:10:19,518 --> 00:10:21,287

saying. Oh boy, I need to focus on

 

397

00:10:21,287 --> 00:10:22,588

this now, what happened.

 

398

00:10:22,588 --> 00:10:24,490

It takes a lot more time to come

 

399

00:10:24,490 --> 00:10:26,826

up with a conclusion or an

 

400

00:10:26,826 --> 00:10:28,661

actionable item that way, whereas if

 

401

00:10:28,661 --> 00:10:30,496

you have the ongoing discussion, it

 

402

00:10:30,496 --> 00:10:31,597

makes it a little bit easier to make

 

403

00:10:31,597 --> 00:10:32,398

the decisions.

 

404

00:10:32,398 --> 00:10:33,466

Kind of like what we're doing.

 

405

00:10:33,466 --> 00:10:34,300

Exactly. This is great.

 

406

00:10:34,300 --> 00:10:35,901

Okay, preferred shares, that's been

 

407

00:10:35,901 --> 00:10:37,770

an area you've been very specific, I

 

408

00:10:37,770 --> 00:10:38,704

believe, from the past.

 

409

00:10:38,704 --> 00:10:39,238

Where are you at now?

 

410

00:10:39,238 --> 00:10:41,440

Yeah, so, you know, preferred stocks

 

411

00:10:41,440 --> 00:10:43,943

have been not great from an

 

412

00:10:43,943 --> 00:10:44,977

asset class perspective.

 

413

00:10:44,977 --> 00:10:46,278

Most traditional preferred stocks

 

414

00:10:46,278 --> 00:10:48,414

are in money center banks,

 

415

00:10:48,414 --> 00:10:49,515

financials, et cetera.

 

416

00:10:49,515 --> 00:10:50,750

They haven't been a great performer

 

417

00:10:50,750 --> 00:10:51,617

this year.

 

418

00:10:51,617 --> 00:10:53,019

But where we have been focused is on

 

419

00:10:53,019 --> 00:10:54,620

the security selection side within

 

420

00:10:54,620 --> 00:10:56,155

what we call digital asset treasury

 

421

00:10:56,155 --> 00:10:57,857

companies. So I'm sure everybody

 

422

00:10:57,857 --> 00:10:59,191

knows Strategy, but there's other

 

423

00:10:59,191 --> 00:11:00,693

ones called Strive.

 

424

00:11:00,693 --> 00:11:01,961

There's another one called Bitmine

 

425

00:11:01,961 --> 00:11:03,462

Immersion Technologies.

 

426

00:11:03,462 --> 00:11:04,864

And these have been areas where

 

427

00:11:04,864 --> 00:11:05,665

we've been focused.

 

428

00:11:05,665 --> 00:11:06,799

And what we've done.

 

429

00:11:06,799 --> 00:11:08,200

Is we've looked at the yields in

 

430

00:11:08,200 --> 00:11:09,235

these areas and they're in the

 

431

00:11:09,235 --> 00:11:11,137

double digits,

 

432

00:11:11,137 --> 00:11:13,639

some in 10%, some 12%.

 

433

00:11:13,639 --> 00:11:15,241

And what we've done is we said,

 

434

00:11:15,241 --> 00:11:16,475

look, if we look at our credit

 

435

00:11:16,475 --> 00:11:18,344

exposure, think

 

436

00:11:18,344 --> 00:11:20,179

about high-yield leverage loans,

 

437

00:11:20,179 --> 00:11:21,347

those spreads, as I mentioned, are

 

438

00:11:21,347 --> 00:11:22,948

very tight. So we have almost no

 

439

00:11:22,948 --> 00:11:24,050

exposure to those assets.

 

440

00:11:24,050 --> 00:11:25,818

And we said we can get the yield

 

441

00:11:25,818 --> 00:11:27,653

that we would be getting in a

 

442

00:11:27,653 --> 00:11:30,056

distressed loan name,

 

443

00:11:30,056 --> 00:11:32,591

like something in AI, which could

 

444

00:11:32,591 --> 00:11:33,726

have a high probability of

 

445

00:11:33,726 --> 00:11:34,527

defaulting.

 

446

00:11:34,527 --> 00:11:36,295

We can only get this type of yield

 

447

00:11:36,295 --> 00:11:37,530

and that type of risk.

 

448

00:11:37,530 --> 00:11:38,964

Why don't we look at these digital

 

449

00:11:38,964 --> 00:11:40,166

asset treasury companies and when we

 

450

00:11:40,166 --> 00:11:41,767

look at them, what we see happening

 

451

00:11:41,767 --> 00:11:43,836

is they own the

 

452

00:11:43,836 --> 00:11:45,071

cryptocurrency, whether that's

 

453

00:11:45,071 --> 00:11:46,906

Bitcoin or Ethereum, depending

 

454

00:11:46,906 --> 00:11:48,674

on the, on the company.

 

455

00:11:48,674 --> 00:11:50,242

And we look the amount they hold

 

456

00:11:50,242 --> 00:11:51,577

relative to the amount of debt they

 

457

00:11:51,577 --> 00:11:54,380

have, have outstanding relative

 

458

00:11:54,380 --> 00:11:56,115

to them out of income that they,

 

459

00:11:56,115 --> 00:11:57,216

they have to pay out.

 

460

00:11:57,216 --> 00:11:58,417

And what we're seeing is really

 

461

00:11:58,417 --> 00:12:00,820

attractive loan to value levels

 

462

00:12:00,820 --> 00:12:01,554

talking with them.

 

463

00:12:01,554 --> 00:12:03,522

High yield last I checked was zero,

 

464

00:12:03,522 --> 00:12:04,824

still the same? Still the same.

 

465

00:12:04,824 --> 00:12:06,158

It's just. You know, as I said

 

466

00:12:06,158 --> 00:12:08,227

earlier, the spreads are in

 

467

00:12:08,227 --> 00:12:09,228

sub 300.

 

468

00:12:09,228 --> 00:12:10,896

They've been that way for a while.

 

469

00:12:10,896 --> 00:12:12,164

And you know, you mentioned at the

 

470

00:12:12,164 --> 00:12:14,033

open, that has been a

 

471

00:12:14,033 --> 00:12:15,768

great indicator for what's been

 

472

00:12:15,768 --> 00:12:17,103

happening in the equity market.

 

473

00:12:17,103 --> 00:12:18,337

We've always said that as credit

 

474

00:12:18,337 --> 00:12:20,339

spreads start to move above, let's

 

475

00:12:20,339 --> 00:12:22,441

say 400, 500 into that level,

 

476

00:12:22,441 --> 00:12:23,576

it starts to signal something's

 

477

00:12:23,576 --> 00:12:25,444

getting. Shaky with the economy.

 

478

00:12:25,478 --> 00:12:27,012

We haven't seen credit spreads get

 

479

00:12:27,012 --> 00:12:28,814

above that 300 level more than a

 

480

00:12:28,814 --> 00:12:30,516

couple of days over the last year.

 

481

00:12:30,516 --> 00:12:31,650

So that's telling you that the

 

482

00:12:31,650 --> 00:12:33,219

underlying economy is doing pretty

 

483

00:12:33,219 --> 00:12:34,453

well. And if you had just followed

 

484

00:12:34,453 --> 00:12:35,988

that signal and own equities

 

485

00:12:35,988 --> 00:12:37,123

outright, you would have done pretty

 

486

00:12:37,123 --> 00:12:37,757

well this year.

 

487

00:12:37,757 --> 00:12:39,258

And you've got a huge high-yield

 

488

00:12:39,258 --> 00:12:41,260

team that you tie into, full of

 

489

00:12:41,260 --> 00:12:42,695

portfolio managers, analysts,

 

490

00:12:42,695 --> 00:12:44,263

lawyers, you name it, and they're

 

491

00:12:44,263 --> 00:12:46,298

going to send the alert if there's

 

492

00:12:46,298 --> 00:12:47,433

a real opportunity for you to look

 

493

00:12:47,433 --> 00:12:47,633

at it.

 

494

00:12:47,633 --> 00:12:49,201

Exactly. And we had that kind of

 

495

00:12:49,201 --> 00:12:51,303

alert phase in February when we had

 

496

00:12:51,303 --> 00:12:52,938

the AI, the, you know, the

 

497

00:12:52,938 --> 00:12:54,240

SASpocalypse, as people were talking

 

498

00:12:54,240 --> 00:12:56,108

about, the leverage loan market is

 

499

00:12:56,108 --> 00:12:58,277

around 15% in software

 

500

00:12:58,277 --> 00:13:00,379

AI names. So we did have a mini

 

501

00:13:00,379 --> 00:13:02,314

kind of crisis within that market,

 

502

00:13:02,314 --> 00:13:04,016

but it's decided because nobody

 

503

00:13:04,016 --> 00:13:05,518

knows exactly who the winners and

 

504

00:13:05,518 --> 00:13:06,719

the losers are going to be, but it

 

505

00:13:06,719 --> 00:13:07,853

is pretty clear that not everybody

 

506

00:13:07,853 --> 00:13:08,654

is going to a loser.

 

507

00:13:08,654 --> 00:13:10,489

And now it's more about finding

 

508

00:13:10,489 --> 00:13:11,657

the right ones that could

 

509

00:13:11,657 --> 00:13:13,092

potentially move forward.

 

510

00:13:13,092 --> 00:13:14,226

Okay. So you mentioned loans.

 

511

00:13:14,226 --> 00:13:15,694

Let's go there. Where are you at?

 

512

00:13:15,694 --> 00:13:16,996

We've got a little bit of exposure

 

513

00:13:16,996 --> 00:13:18,831

there, but still the

 

514

00:13:18,831 --> 00:13:20,232

spreads there aren't great.

 

515

00:13:20,232 --> 00:13:21,534

They're better than high yield.

 

516

00:13:21,534 --> 00:13:22,835

But still, you know, when we're

 

517

00:13:22,835 --> 00:13:24,770

thinking about the optionality

 

518

00:13:24,770 --> 00:13:25,938

we have and some of these other

 

519

00:13:25,938 --> 00:13:27,373

assets in the preferred space that I

 

520

00:13:27,373 --> 00:13:29,041

mentioned still makes more sense for

 

521

00:13:29,041 --> 00:13:31,277

us to be overweight those relative

 

522

00:13:31,277 --> 00:13:32,578

to the loan market.

 

523

00:13:32,578 --> 00:13:34,980

So small percentages in loans,

 

524

00:13:34,980 --> 00:13:36,849

almost nothing in high yield, almost

 

525

00:13:36,849 --> 00:13:38,317

all of our yield from the credit

 

526

00:13:38,317 --> 00:13:40,452

side is coming from those

 

527

00:13:40,452 --> 00:13:41,887

digital asset treasury companies.

 

528

00:13:41,887 --> 00:13:43,789

Can you expand on the phrase

 

529

00:13:43,789 --> 00:13:45,791

credit spreads are an indicator,

 

530

00:13:45,791 --> 00:13:47,226

as we mentioned at the outset?

 

531

00:13:47,226 --> 00:13:49,261

Sure. So a credit spread is the

 

532

00:13:49,261 --> 00:13:51,297

amount that you get paid over

 

533

00:13:51,297 --> 00:13:52,832

the risk free rate.

 

534

00:13:52,832 --> 00:13:54,633

Right. So when that starts to move

 

535

00:13:54,633 --> 00:13:56,368

higher, meaning the spread goes

 

536

00:13:56,368 --> 00:13:57,770

higher, that means people are

 

537

00:13:57,770 --> 00:13:59,772

requiring more compensation

 

538

00:13:59,772 --> 00:14:01,974

to take on the risk of that company.

 

539

00:14:01,974 --> 00:14:03,108

Right? And the risk that we're

 

540

00:14:03,108 --> 00:14:04,577

dealing with is the risk that the

 

541

00:14:04,577 --> 00:14:06,212

company defaults and you don't get

 

542

00:14:06,212 --> 00:14:07,513

your money back.

 

543

00:14:07,513 --> 00:14:09,481

So as that moves higher, that means

 

544

00:14:09,481 --> 00:14:10,883

investors are getting worried about

 

545

00:14:10,883 --> 00:14:11,851

potentially getting their money

 

546

00:14:11,851 --> 00:14:13,853

back. They require a premium,

 

547

00:14:13,853 --> 00:14:15,254

a larger premium relative to

 

548

00:14:15,254 --> 00:14:16,488

treasuries. And that's what drives

 

549

00:14:16,488 --> 00:14:17,389

credit spreads up.

 

550

00:14:17,389 --> 00:14:18,791

Now, if they're compressed, that

 

551

00:14:18,791 --> 00:14:20,192

mean the economy is doing pretty

 

552

00:14:20,192 --> 00:14:21,694

well and that the underlying

 

553

00:14:21,694 --> 00:14:23,095

businesses themselves are doing

 

554

00:14:23,095 --> 00:14:24,930

well. So if we continue to see

 

555

00:14:24,930 --> 00:14:27,333

low levels of spreads,

 

556

00:14:27,333 --> 00:14:29,335

that means the economy or the

 

557

00:14:29,335 --> 00:14:30,769

investors are saying economy is

 

558

00:14:30,769 --> 00:14:32,137

good. I don't need as much

 

559

00:14:32,137 --> 00:14:33,839

compensation to take that risk to

 

560

00:14:33,839 --> 00:14:35,174

own the bonds of these companies.

 

561

00:14:35,174 --> 00:14:36,108

Okay, makes a lot of sense.

 

562

00:14:36,108 --> 00:14:38,010

Now, equities, can you

 

563

00:14:38,010 --> 00:14:39,545

remind the viewers where equities

 

564

00:14:39,545 --> 00:14:41,413

sit within the portfolio and some

 

565

00:14:41,413 --> 00:14:42,514

themes that you're looking at right

 

566

00:14:42,514 --> 00:14:43,849

now? And I know Ramona Prasad's a

 

567

00:14:43,849 --> 00:14:45,718

big asset when it comes to looking

 

568

00:14:45,718 --> 00:14:46,118

at the equities.

 

569

00:14:46,118 --> 00:14:48,120

She is. We work closely with her

 

570

00:14:48,120 --> 00:14:49,755

on this strategy, as well as some

 

571

00:14:49,755 --> 00:14:50,990

other strategies, so we always know

 

572

00:14:50,990 --> 00:14:52,258

her best ideas.

 

573

00:14:52,258 --> 00:14:54,026

You know, equities in the portfolio

 

574

00:14:54,026 --> 00:14:55,895

historically have been around the 45

 

575

00:14:55,895 --> 00:14:56,896

percent range.

 

576

00:14:56,896 --> 00:14:58,030

We're a little bit higher than that,

 

577

00:14:58,030 --> 00:14:59,865

a little over 50 actually today.

 

578

00:14:59,865 --> 00:15:01,400

And it's got all U.S.?

 

579

00:15:01,400 --> 00:15:02,868

Not all U .S. There's a small

 

580

00:15:02,868 --> 00:15:04,870

allocation to non-U.S.,

 

581

00:15:04,870 --> 00:15:06,772

but we've had, we're probably at the

 

582

00:15:06,772 --> 00:15:08,040

lower end of that non- U.

 

583

00:15:08,040 --> 00:15:09,808

S. Allocation than we were a couple

 

584

00:15:09,808 --> 00:15:10,809

years ago.

 

585

00:15:10,809 --> 00:15:12,711

I would say, you know, the buckets

 

586

00:15:12,711 --> 00:15:14,380

where we have been taking money away

 

587

00:15:14,380 --> 00:15:16,448

from was in the after

 

588

00:15:16,448 --> 00:15:18,050

that SASpocalypse, we did add a

 

589

00:15:18,050 --> 00:15:20,019

little bit back to the

 

590

00:15:20,019 --> 00:15:21,887

MAG7 and some of the semi

 

591

00:15:21,887 --> 00:15:23,055

and AI names.

 

592

00:15:23,088 --> 00:15:24,590

We've seen that trade start to

 

593

00:15:24,590 --> 00:15:26,091

unwind and the valuations and the

 

594

00:15:26,091 --> 00:15:27,426

story coming apart a little.

 

595

00:15:27,426 --> 00:15:28,761

So what we've done is sold a little

 

596

00:15:28,761 --> 00:15:30,696

of that down and we've gone into

 

597

00:15:30,696 --> 00:15:32,398

healthcare. So we've got a basket of

 

598

00:15:32,398 --> 00:15:34,700

let's say 15

 

599

00:15:34,700 --> 00:15:36,568

to 20 of Ramona's best ideas

 

600

00:15:36,568 --> 00:15:38,237

where we've invested in healthcare.

 

601

00:15:38,237 --> 00:15:39,505

And what the interesting thing about

 

602

00:15:39,505 --> 00:15:41,507

that is it's really can be a

 

603

00:15:41,507 --> 00:15:42,875

play on AI, right?

 

604

00:15:42,908 --> 00:15:44,009

If we, you know, one of our bigger

 

605

00:15:44,009 --> 00:15:46,378

holdings is a company called Moderna

 

606

00:15:46,378 --> 00:15:48,480

and they had a great breakthrough in

 

607

00:15:48,480 --> 00:15:50,549

trials as a result of using AI

 

608

00:15:50,549 --> 00:15:51,817

to help create these drugs.

 

609

00:15:53,018 --> 00:15:54,653

You know, Eli Lilly is in a similar

 

610

00:15:54,653 --> 00:15:56,221

situation. So this is a way we can

 

611

00:15:56,221 --> 00:15:58,057

get exposure to the theme of AI, but

 

612

00:15:58,057 --> 00:15:59,758

not being intact with much better

 

613

00:15:59,758 --> 00:16:00,993

valuations and risk reward.

 

614

00:16:00,993 --> 00:16:02,294

So that's one area.

 

615

00:16:02,294 --> 00:16:04,163

Now I mentioned, we talked about

 

616

00:16:04,163 --> 00:16:05,397

tankers and one of the other themes

 

617

00:16:05,397 --> 00:16:06,865

within tankers is that we're gonna

 

618

00:16:06,865 --> 00:16:08,300

need to rebuild.

 

619

00:16:08,300 --> 00:16:10,803

The inventory of oil

 

620

00:16:10,803 --> 00:16:11,904

across the globe.

 

621

00:16:11,904 --> 00:16:13,605

We hear the numbers about the

 

622

00:16:13,605 --> 00:16:15,174

strategic reserves in the US and

 

623

00:16:15,174 --> 00:16:16,241

other areas of the world getting

 

624

00:16:16,241 --> 00:16:18,344

down to very low levels.

 

625

00:16:18,344 --> 00:16:19,945

So that's gonna need to happen at

 

626

00:16:19,945 --> 00:16:21,647

some point. So what we've also done

 

627

00:16:21,647 --> 00:16:23,382

is pair that with buying some of the

 

628

00:16:23,382 --> 00:16:25,217

oil majors. So we've got

 

629

00:16:25,217 --> 00:16:27,119

a basket of those names now in the

 

630

00:16:27,119 --> 00:16:28,821

portfolio as well.

 

631

00:16:28,821 --> 00:16:30,522

So those are the things that we've

 

632

00:16:30,522 --> 00:16:32,458

done to change the

 

633

00:16:32,458 --> 00:16:33,726

position of the portfolio a little

 

634

00:16:33,726 --> 00:16:35,260

bit and take advantage of what we

 

635

00:16:35,260 --> 00:16:36,195

think are more attractive

 

636

00:16:36,195 --> 00:16:37,963

opportunities outside of, you know,

 

637

00:16:37,963 --> 00:16:39,498

the traditional MAG-7 socks.

 

638

00:16:39,498 --> 00:16:41,633

Any Canada in your equity portfolio?

 

639

00:16:41,633 --> 00:16:43,602

There's a little bit, one of the

 

640

00:16:43,602 --> 00:16:45,304

energy names, so we'll have a little

 

641

00:16:45,304 --> 00:16:47,306

there, but not

 

642

00:16:47,306 --> 00:16:48,540

as much as we had a couple years

 

643

00:16:48,540 --> 00:16:49,241

ago. Okay.

 

644

00:16:49,241 --> 00:16:51,643

I wanted to ask you about

 

645

00:16:51,643 --> 00:16:53,345

AI because you mentioned about

 

646

00:16:53,345 --> 00:16:55,381

Moderna benefiting from AI

 

647

00:16:55,381 --> 00:16:56,582

and development of drugs.

 

648

00:16:57,716 --> 00:16:59,084

Maybe premature to ask, but

 

649

00:16:59,084 --> 00:17:00,919

questions come in from a viewer.

 

650

00:17:00,919 --> 00:17:02,554

What do you think about AI's

 

651

00:17:02,554 --> 00:17:04,456

contribution to, in

 

652

00:17:04,456 --> 00:17:06,258

this case, they're asking about to

 

653

00:17:06,258 --> 00:17:07,659

decreasing the federal debt?

 

654

00:17:07,659 --> 00:17:09,762

That's probably a long shot

 

655

00:17:09,762 --> 00:17:11,497

discussion, but it certainly is

 

656

00:17:11,497 --> 00:17:12,831

making a difference in the economy.

 

657

00:17:12,831 --> 00:17:13,832

It certainly is.

 

658

00:17:13,832 --> 00:17:15,534

And I think the first, you know,

 

659

00:17:15,534 --> 00:17:16,535

well, to address that question with

 

660

00:17:16,535 --> 00:17:17,636

the federal debt, I'm not sure

 

661

00:17:17,636 --> 00:17:19,104

exactly how the government would use

 

662

00:17:19,104 --> 00:17:20,272

it.

 

663

00:17:20,272 --> 00:17:21,840

It seems like an interesting idea.

 

664

00:17:21,840 --> 00:17:22,908

And if you get the right people in

 

665

00:17:22,908 --> 00:17:24,610

there, you should can certainly use

 

666

00:17:24,610 --> 00:17:26,145

this tool to help solve that

 

667

00:17:26,178 --> 00:17:27,279

problem.

 

668

00:17:27,279 --> 00:17:29,081

I think at first when people thought

 

669

00:17:29,081 --> 00:17:31,050

about AI and, you know, people's

 

670

00:17:31,050 --> 00:17:32,418

jobs getting taken over, they

 

671

00:17:32,418 --> 00:17:34,253

thought it was very deflationary.

 

672

00:17:34,253 --> 00:17:35,487

Right? So that was the initial kind

 

673

00:17:35,487 --> 00:17:37,689

of jab to the economy and

 

674

00:17:37,689 --> 00:17:38,924

worries was, oh boy, everybody's

 

675

00:17:38,924 --> 00:17:39,825

going to lose their jobs. What's

 

676

00:17:39,858 --> 00:17:40,726

going happen?

 

677

00:17:40,726 --> 00:17:42,127

But I think as we read about this,

 

678

00:17:42,127 --> 00:17:43,695

there are bottlenecks obviously in

 

679

00:17:43,695 --> 00:17:44,563

power.

 

680

00:17:44,563 --> 00:17:46,432

And because of that, it's

 

681

00:17:46,432 --> 00:17:47,733

become somewhat inflationary.

 

682

00:17:47,733 --> 00:17:48,901

The cost of everything is going

 

683

00:17:48,901 --> 00:17:50,502

higher to create this.

 

684

00:17:50,502 --> 00:17:52,371

You hear headlines about the cost of

 

685

00:17:52,371 --> 00:17:53,872

tokens moving higher.

 

686

00:17:53,872 --> 00:17:55,774

The cost compute is getting

 

687

00:17:55,808 --> 00:17:57,743

more. So it has been, I think,

 

688

00:17:57,743 --> 00:18:00,045

a little bit inflationary in the

 

689

00:18:00,045 --> 00:18:01,180

short to medium term.

 

690

00:18:01,180 --> 00:18:02,881

And I think that persists because of

 

691

00:18:02,881 --> 00:18:04,583

the bottlenecks in the power grid

 

692

00:18:04,583 --> 00:18:05,818

within the US and broadly North

 

693

00:18:05,818 --> 00:18:07,386

America. Makes a lot of sense.

 

694

00:18:07,386 --> 00:18:08,987

Convertible securities, they have

 

695

00:18:08,987 --> 00:18:10,956

been what you and Adam would

 

696

00:18:10,956 --> 00:18:12,724

say is the special sauce for

 

697

00:18:12,758 --> 00:18:14,626

tactical high income, but not as

 

698

00:18:14,626 --> 00:18:16,528

significant today as they have been.

 

699

00:18:16,528 --> 00:18:18,430

No, not as significant today as they

 

700

00:18:18,430 --> 00:18:20,165

have been. We still think there is,

 

701

00:18:20,165 --> 00:18:21,667

and the convertible bond market's

 

702

00:18:21,667 --> 00:18:22,935

the best performing asset class here

 

703

00:18:22,968 --> 00:18:25,237

today. It's up around 20%.

 

704

00:18:25,237 --> 00:18:27,072

So we had up to around 12 of

 

705

00:18:27,072 --> 00:18:29,108

the 15% in the portfolio earlier

 

706

00:18:29,108 --> 00:18:30,109

in the year.

 

707

00:18:30,109 --> 00:18:31,577

Again, I think we've talked about

 

708

00:18:31,577 --> 00:18:32,644

this in the past, but the

 

709

00:18:32,644 --> 00:18:33,946

convertable bond market is very

 

710

00:18:33,946 --> 00:18:35,781

heavy in tech, right,

 

711

00:18:35,781 --> 00:18:36,815

semis in particular.

 

712

00:18:36,815 --> 00:18:38,250

So a lot of those names did really

 

713

00:18:38,250 --> 00:18:39,051

well and.

 

714

00:18:39,051 --> 00:18:40,352

Part of the funding of some of those

 

715

00:18:40,352 --> 00:18:42,054

equity positions came from the

 

716

00:18:42,054 --> 00:18:43,021

convertible bond part of the

 

717

00:18:43,021 --> 00:18:44,857

portfolio. So we took that down

 

718

00:18:44,857 --> 00:18:46,725

a little bit and reallocated to

 

719

00:18:46,725 --> 00:18:47,893

areas where I think we have better

 

720

00:18:47,893 --> 00:18:48,660

valuations.

 

721

00:18:48,660 --> 00:18:50,395

We still think that convertible

 

722

00:18:50,395 --> 00:18:51,997

bonds moving forward could be an

 

723

00:18:51,997 --> 00:18:53,031

interesting asset class because

 

724

00:18:53,031 --> 00:18:54,967

there are technical dynamics there

 

725

00:18:54,967 --> 00:18:56,835

that are still really strong.

 

726

00:18:56,835 --> 00:18:57,970

About a third of that market's gonna

 

727

00:18:57,970 --> 00:18:59,171

mature over the next couple of

 

728

00:18:59,171 --> 00:19:00,305

years. There's gonna be more new

 

729

00:19:00,305 --> 00:19:01,773

issuance. And when we get that new

 

730

00:19:01,773 --> 00:19:03,675

issuerance, that's when we find

 

731

00:19:03,675 --> 00:19:06,145

the lions, as we like to say, right,

 

732

00:19:06,145 --> 00:19:08,213

the bonds that can move

 

733

00:19:08,213 --> 00:19:09,047

up.

 

734

00:19:09,047 --> 00:19:10,949

2, 3, 4, 5x,

 

735

00:19:10,949 --> 00:19:12,885

10x in the case of

 

736

00:19:12,918 --> 00:19:14,786

companies like Tesla and Nvidia

 

737

00:19:14,786 --> 00:19:16,255

and Rocket Lab.

 

738

00:19:16,255 --> 00:19:18,023

So there's ripe for opportunities

 

739

00:19:18,023 --> 00:19:19,191

there, but we're just waiting for

 

740

00:19:19,191 --> 00:19:20,259

those to come to us.

 

741

00:19:20,259 --> 00:19:21,960

And what we did was, you know, let's

 

742

00:19:21,960 --> 00:19:23,462

just take that capital and put it in

 

743

00:19:23,462 --> 00:19:24,897

areas where we think there is a

 

744

00:19:24,897 --> 00:19:26,398

valuation mismatch.

 

745

00:19:26,398 --> 00:19:28,534

It is interesting to see how AI

 

746

00:19:28,534 --> 00:19:30,569

tech overall have worked its way

 

747

00:19:30,569 --> 00:19:32,237

into convertible bonds, isn't it?

 

748

00:19:32,237 --> 00:19:33,505

Yeah. You know, the convertible bond

 

749

00:19:33,505 --> 00:19:35,574

ebbs and flows with, you know, the,

 

750

00:19:35,574 --> 00:19:37,342

the sector du jour, I should say,

 

751

00:19:37,342 --> 00:19:39,144

or, or maybe a de cycle

 

752

00:19:39,144 --> 00:19:40,479

rather than a du jour.

 

753

00:19:40,479 --> 00:19:42,114

Um, you, it does get heavily

 

754

00:19:42,114 --> 00:19:43,382

concentrated in certain sectors.

 

755

00:19:43,382 --> 00:19:44,983

A lot of those sectors tend to be

 

756

00:19:44,983 --> 00:19:46,385

growth areas, right?

 

757

00:19:46,385 --> 00:19:48,220

You have, um, areas where

 

758

00:19:48,220 --> 00:19:49,188

they get into distress.

 

759

00:19:49,188 --> 00:19:50,722

They tend to use the convertable

 

760

00:19:50,722 --> 00:19:51,957

market to help with liquidity.

 

761

00:19:51,957 --> 00:19:53,926

So those are some of the ways that

 

762

00:19:53,926 --> 00:19:55,761

you can see convertibles, um

 

763

00:19:55,761 --> 00:19:57,529

or issuance happen in convertibles.

 

764

00:19:57,529 --> 00:19:59,298

What we've seen, you now, we've some

 

765

00:19:59,298 --> 00:20:00,532

of these tech companies actually

 

766

00:20:00,532 --> 00:20:02,234

change their business models.

 

767

00:20:02,234 --> 00:20:04,036

Bitcoin miners becoming data center

 

768

00:20:04,036 --> 00:20:04,970

providers, right?

 

769

00:20:04,970 --> 00:20:06,905

So you see interesting things happen

 

770

00:20:06,905 --> 00:20:08,740

there. And it's, you know, a lot

 

771

00:20:08,740 --> 00:20:09,675

of times there's companies that

 

772

00:20:09,708 --> 00:20:11,877

we've never known or technologies

 

773

00:20:11,877 --> 00:20:13,078

we've ever known.

 

774

00:20:13,078 --> 00:20:14,646

And, you, know, one is again, we'll

 

775

00:20:14,646 --> 00:20:15,714

see what happens here.

 

776

00:20:15,714 --> 00:20:17,482

But, you in the energy space,

 

777

00:20:17,482 --> 00:20:18,483

potentially, you're going to have to

 

778

00:20:18,483 --> 00:20:19,418

expand.

 

779

00:20:19,418 --> 00:20:21,520

We might see nuclear fusion rather

 

780

00:20:21,520 --> 00:20:23,789

than, you know, replicating the sun.

 

781

00:20:23,789 --> 00:20:25,224

And part of what we need there is

 

782

00:20:25,224 --> 00:20:27,059

Tungsten, a very

 

783

00:20:27,059 --> 00:20:28,760

well, it has a very low melting

 

784

00:20:28,760 --> 00:20:30,729

point or high melting point.

 

785

00:20:30,729 --> 00:20:32,831

And it's scarce around the world and

 

786

00:20:32,831 --> 00:20:34,466

we started to think about as we hear

 

787

00:20:34,466 --> 00:20:35,300

about some of these emerging

 

788

00:20:35,300 --> 00:20:36,802

technologies and that brought us to

 

789

00:20:36,802 --> 00:20:38,136

another opportunity in the

 

790

00:20:38,136 --> 00:20:39,771

convertible bond market as well as

 

791

00:20:39,771 --> 00:20:40,706

in the equity market.

 

792

00:20:40,706 --> 00:20:42,441

Well, tungsten, like tankers, is

 

793

00:20:42,441 --> 00:20:43,642

something that you and Adam have

 

794

00:20:43,642 --> 00:20:45,143

talked about for a couple of years.

 

795

00:20:45,143 --> 00:20:46,144

Tungsten more recently.

 

796

00:20:46,144 --> 00:20:48,013

Yes. And now it is certainly more

 

797

00:20:48,013 --> 00:20:49,181

topical.

 

798

00:20:49,181 --> 00:20:50,449

And let's expand on that because

 

799

00:20:50,449 --> 00:20:51,850

there is a shortage.

 

800

00:20:51,850 --> 00:20:53,085

Talk about the use case.

 

801

00:20:53,085 --> 00:20:54,419

It's not light bulbs like I

 

802

00:20:54,419 --> 00:20:56,221

remember. It's actually very broad

 

803

00:20:56,221 --> 00:20:57,723

to the point of nuclear fusion as

 

804

00:20:57,723 --> 00:20:57,756

you see.

 

805

00:20:57,756 --> 00:20:59,424

Yeah, so that could potentially

 

806

00:20:59,424 --> 00:21:01,293

happen, the energy side

 

807

00:21:01,293 --> 00:21:02,494

of things. I think if you look

 

808

00:21:02,494 --> 00:21:04,896

historically, the price

 

809

00:21:04,896 --> 00:21:06,765

of Tungsten has been pretty good

 

810

00:21:06,765 --> 00:21:09,001

at indicating geopolitical

 

811

00:21:09,001 --> 00:21:10,402

unrest because if you think about

 

812

00:21:10,402 --> 00:21:12,504

what goes into the

 

813

00:21:12,504 --> 00:21:13,705

armaments that are used in

 

814

00:21:13,705 --> 00:21:15,807

conflicts, Tungston is a heavy

 

815

00:21:15,807 --> 00:21:17,643

piece of that because it's such

 

816

00:21:17,643 --> 00:21:18,710

a heavy metal.

 

817

00:21:18,710 --> 00:21:20,612

So as we see a

 

818

00:21:20,612 --> 00:21:22,047

lot of these things getting used,

 

819

00:21:22,047 --> 00:21:23,749

whether that's in Russia and Ukraine

 

820

00:21:23,749 --> 00:21:25,150

or in the Middle East, there's going

 

821

00:21:25,150 --> 00:21:26,251

to be a rearmament.

 

822

00:21:26,251 --> 00:21:27,619

I think in Europe, you could

 

823

00:21:27,619 --> 00:21:28,654

probably make the case that they're

 

824

00:21:28,654 --> 00:21:29,721

gonna rethink their defense

 

825

00:21:29,721 --> 00:21:31,256

strategy. So there's always been a

 

826

00:21:31,256 --> 00:21:32,524

demand for it there.

 

827

00:21:32,524 --> 00:21:34,059

Now what a lot people don't realize

 

828

00:21:34,059 --> 00:21:36,061

is the importance of tungsten in

 

829

00:21:36,061 --> 00:21:37,496

the production of semiconductors.

 

830

00:21:37,496 --> 00:21:39,231

So you can refine tungsten in a

 

831

00:21:39,231 --> 00:21:41,566

number of ways that it becomes a

 

832

00:21:41,566 --> 00:21:43,902

very important, it's called WFC

 

833

00:21:43,902 --> 00:21:45,971

is the gas, and that is important

 

834

00:21:45,971 --> 00:21:47,306

in the in the production of

 

835

00:21:47,306 --> 00:21:49,041

semiconductor. So semiconductors are

 

836

00:21:49,041 --> 00:21:50,876

huge for the AI trade,

 

837

00:21:50,876 --> 00:21:51,877

obviously.

 

838

00:21:52,144 --> 00:21:54,279

So with a lack of supply,

 

839

00:21:54,279 --> 00:21:56,181

potentially, that could be an

 

840

00:21:56,181 --> 00:21:57,783

interesting area where you could see

 

841

00:21:57,783 --> 00:21:59,217

more demand for Tungsten moving

 

842

00:21:59,217 --> 00:22:01,586

forward. And it is moving forward,

 

843

00:22:01,586 --> 00:22:02,788

and I think part of the reason why

 

844

00:22:02,788 --> 00:22:04,156

you see more headlines about it is

 

845

00:22:04,156 --> 00:22:05,590

because the major supplier of

 

846

00:22:05,590 --> 00:22:07,426

Tungst- it historically

 

847

00:22:07,426 --> 00:22:09,094

globally has been China and North

 

848

00:22:09,094 --> 00:22:10,262

Korea, and they're not exporting

 

849

00:22:10,262 --> 00:22:11,163

anymore.

 

850

00:22:11,163 --> 00:22:12,898

And that's a big problem for

 

851

00:22:12,898 --> 00:22:14,066

countries, obviously, that are

 

852

00:22:14,066 --> 00:22:14,866

consuming it.

 

853

00:22:14,866 --> 00:22:16,668

So we found a company called El

 

854

00:22:16,668 --> 00:22:18,036

Monte, used to be a Canadian

 

855

00:22:18,036 --> 00:22:19,271

domo-south company, they're going

 

856

00:22:19,271 --> 00:22:21,306

back to the U.S., but they have

 

857

00:22:21,306 --> 00:22:23,442

a

 

858

00:22:23,442 --> 00:22:25,043

mine that's been dormant in South

 

859

00:22:25,043 --> 00:22:26,611

Korea that they're reopening, and

 

860

00:22:26,611 --> 00:22:28,347

that's just starting to flow through

 

861

00:22:28,347 --> 00:22:29,715

into the earnings in July.

 

862

00:22:29,715 --> 00:22:31,283

So we haven't even seen the cash

 

863

00:22:31,283 --> 00:22:33,085

flow generation coming from that

 

864

00:22:33,085 --> 00:22:34,653

mine yet, but The anticipation of

 

865

00:22:34,653 --> 00:22:36,688

that has helped that stock.

 

866

00:22:36,688 --> 00:22:38,590

You know, we've seen the US

 

867

00:22:38,590 --> 00:22:39,558

starting to announce that they're

 

868

00:22:39,558 --> 00:22:40,992

not letting scrap tungsten leave the

 

869

00:22:40,992 --> 00:22:42,227

country. You've got a lot of

 

870

00:22:42,227 --> 00:22:44,029

countries talking about it now.

 

871

00:22:44,029 --> 00:22:46,131

Too bad as a Canadian to hear that

 

872

00:22:46,131 --> 00:22:48,033

it was Canadian domicile now it's in

 

873

00:22:48,033 --> 00:22:49,601

the states as I joked with you this

 

874

00:22:49,601 --> 00:22:50,769

morning when I saw you I'm glad you

 

875

00:22:50,769 --> 00:22:52,037

made it up here today without being

 

876

00:22:52,037 --> 00:22:53,739

tariffed.

 

877

00:22:53,739 --> 00:22:55,006

A question's come in from our

 

878

00:22:55,006 --> 00:22:56,708

audience and it's asking about the

 

879

00:22:56,708 --> 00:22:58,009

tariff headlines there's lots of

 

880

00:22:58,009 --> 00:22:59,811

unknowns but does that change

 

881

00:22:59,811 --> 00:23:01,213

the way you and the team are looking

 

882

00:23:01,213 --> 00:23:01,813

at things today?

 

883

00:23:01,813 --> 00:23:03,382

So I think one of the things Adam

 

884

00:23:03,382 --> 00:23:04,649

and I always say is that we don't

 

885

00:23:04,649 --> 00:23:05,584

make predictions, right?

 

886

00:23:05,584 --> 00:23:06,752

We wait for the opportunities to

 

887

00:23:06,752 --> 00:23:07,652

come our way.

 

888

00:23:07,652 --> 00:23:08,920

You know, we have to be cognizant of

 

889

00:23:08,920 --> 00:23:10,021

the risks out there.

 

890

00:23:10,021 --> 00:23:12,023

The tariffs are the risks right

 

891

00:23:12,023 --> 00:23:13,291

now as well as what's happening with

 

892

00:23:13,325 --> 00:23:14,359

the Middle East and inflation

 

893

00:23:14,359 --> 00:23:15,227

broadly.

 

894

00:23:15,227 --> 00:23:16,661

You know I think if we take a step

 

895

00:23:16,661 --> 00:23:18,497

back and look what happened in

 

896

00:23:18,497 --> 00:23:20,432

2025, there's a lot of talk

 

897

00:23:20,432 --> 00:23:22,868

and then not a lot of action.

 

898

00:23:22,868 --> 00:23:24,736

So I thinks that's probably our

 

899

00:23:24,736 --> 00:23:26,438

base case right now, a lot of talk,

 

900

00:23:26,438 --> 00:23:27,873

not a lots of action, we'll see if

 

901

00:23:27,873 --> 00:23:29,708

we get there. But we do start to see

 

902

00:23:29,708 --> 00:23:31,009

these tariffs really play a role

 

903

00:23:31,009 --> 00:23:32,077

economically.

 

904

00:23:32,077 --> 00:23:33,311

Could start to slow the U.S.

 

905

00:23:33,345 --> 00:23:35,380

Economy, and then it

 

906

00:23:35,380 --> 00:23:36,882

would be nice to have some

 

907

00:23:36,882 --> 00:23:38,116

treasuries because what we haven't

 

908

00:23:38,116 --> 00:23:40,051

seen over the last several

 

909

00:23:40,085 --> 00:23:41,052

years, and I think part of the

 

910

00:23:41,052 --> 00:23:42,053

reason Treasury yields have moved

 

911

00:23:42,053 --> 00:23:43,722

higher, is a real liquidity-driven

 

912

00:23:43,722 --> 00:23:45,557

sell-off, right, where the

 

913

00:23:45,557 --> 00:23:47,392

economy shrinks and

 

914

00:23:47,392 --> 00:23:49,394

people need to flock to assets, to

 

915

00:23:49,394 --> 00:23:50,896

safety assets.

 

916

00:23:50,896 --> 00:23:52,898

And if we did see that happen,

 

917

00:23:52,898 --> 00:23:54,199

I think the treasurys would be a

 

918

00:23:54,199 --> 00:23:55,200

nice insurance policy.

 

919

00:23:55,200 --> 00:23:56,668

So while you're getting that nice

 

920

00:23:56,668 --> 00:23:58,336

five and a quarter percent yield, it

 

921

00:23:58,336 --> 00:23:59,604

provides us a little insurance and

 

922

00:23:59,604 --> 00:24:01,373

we do see a real slowdown in the

 

923

00:24:01,373 --> 00:24:02,674

economy. That creates a

 

924

00:24:02,674 --> 00:24:04,409

liquidity-driven sell-off.

 

925

00:24:04,409 --> 00:24:05,911

Scott, we covered a lot of ground

 

926

00:24:05,911 --> 00:24:07,712

today, lots of unknowns, lots of

 

927

00:24:07,712 --> 00:24:08,547

knowns, and it'll be really

 

928

00:24:08,547 --> 00:24:10,148

interesting when we are able to

 

929

00:24:10,148 --> 00:24:11,716

speak again. Thank you for coming up

 

930

00:24:11,716 --> 00:24:13,685

here to Canada to speak to me and to

 

931

00:24:13,685 --> 00:24:14,753

speak to our viewers today.

 

932

00:24:15,954 --> 00:24:18,023

Thanks for watching or listening to

 

933

00:24:18,056 --> 00:24:20,258

the Fidelity Connects podcast.

 

934

00:24:20,258 --> 00:24:22,093

Now, if you haven't done so already,

 

935

00:24:22,127 --> 00:24:23,695

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936

00:24:23,695 --> 00:24:26,131

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937

00:24:26,164 --> 00:24:27,466

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938

00:24:27,499 --> 00:24:29,000

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939

00:24:29,000 --> 00:24:30,035

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940

00:24:30,035 --> 00:24:31,770

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941

00:24:31,803 --> 00:24:33,104

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942

00:24:33,138 --> 00:24:34,639

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943

00:24:34,673 --> 00:24:36,374

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944

00:24:36,408 --> 00:24:38,610

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945

00:24:38,610 --> 00:24:40,178

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946

00:24:40,178 --> 00:24:41,980

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947

00:24:41,980 --> 00:24:43,582

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948

00:24:43,615 --> 00:24:44,583

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949

00:24:44,616 --> 00:24:45,784

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950

00:24:45,817 --> 00:24:48,019

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951

00:24:48,053 --> 00:24:49,054

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952

00:24:50,055 --> 00:24:51,857

We'll end today's show with a short

 

953

00:24:51,857 --> 00:24:52,924

disclaimer.

 

954

00:24:52,924 --> 00:24:54,526

The views and opinions expressed on

 

955

00:24:54,559 --> 00:24:55,961

this podcast are those of the

 

956

00:24:55,994 --> 00:24:57,729

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957

00:24:57,729 --> 00:24:58,930

reflect those of Fidelity

 

958

00:24:58,964 --> 00:25:00,799

Investments Canada ULC or its

 

959

00:25:00,866 --> 00:25:01,766

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960

00:25:01,800 --> 00:25:03,301

This podcast is for informational

 

961

00:25:03,301 --> 00:25:04,836

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962

00:25:04,836 --> 00:25:06,538

construed as investment, tax, or

 

963

00:25:06,571 --> 00:25:07,606

legal advice.

 

964

00:25:07,639 --> 00:25:09,674

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965

00:25:09,674 --> 00:25:11,409

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966

00:25:11,409 --> 00:25:13,378

or sponsorship of any entity or

 

967

00:25:13,378 --> 00:25:14,880

securities cited.

 

968

00:25:14,880 --> 00:25:16,314

Read a funds prospectus.

 

969

00:25:16,314 --> 00:25:17,782

Before investing, funds are not

 

970

00:25:17,782 --> 00:25:18,683

guaranteed.

 

971

00:25:18,683 --> 00:25:20,085

Their values change frequently and

 

972

00:25:20,085 --> 00:25:21,353

past performance may not be

 

973

00:25:21,353 --> 00:25:22,420

repeated.

 

974

00:25:22,420 --> 00:25:23,922

Fees, expenses, and commissions are

 

975

00:25:23,922 --> 00:25:25,290

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976

00:25:25,290 --> 00:25:26,458

investments.

 

977

00:25:26,458 --> 00:25:27,993

Thanks again. We'll see you next

 

978

00:25:27,993 --> 00:25:28,960

time.