Tim Buckley: John, as you know, our clients love to hear from our global chief economist Joe Davis. But they only hear the surface of his vision. You get a full in-depth analysis of it and you can debate it with his team. So give us a window. What do you do What is your vision at the moment and how are you launching it with our funds?
John Holly: Yes, Tim, at the highest level, working with Joe, we got his team insights that it could be a very deep and very sharp recession – really, histor is historically big. But also, it can be relatively short-lived. And it will reopen the economy and significantly strengthen the economy with the benefits of financial and economic stimulus, essentially building a bridge across that deep, short gap on the other side of the economic growth stage.
They point out that when growth occurs later this year, it may not look good, because when growth is positive, we will start at a very low level – below the potential growth rate of the economy. Now that we take that approach to return to growth with broader policy, fiscal and monetary stimulus, our view is that we would prefer to take some additional credit risk in this assessment over the past month and a half.
So using Joe’s team insights and our own credit team approach to the market, we’ve been using this as an opportunity to increase our fund’s credit risk exposure because we think revenue will be quite attractive over time because of this economic outlook. We think that, importantly, in the case of working with Joe, that really strong policy response has not been eliminated eliminated, but has been reduced to some tail risk of negative, bad results.
Team: Now John, going back to our previous conversation, you mentioned that you took some risks from the table. I called it “dry powder”, a term you often use. So actually, you’ve set up some of it. That’s not all, though. Are you ready for more instability, just enough?
John: Yes, that’s right, Tim. We look at the current assessments, the assessments we have felt over the last six or eight weeks and we have certainly found them interesting. But we have to admit that we do not have perfect foresight. No one does in this environment. And so sticking to the dry powder method, we’ve deployed a fair amount of our risk budget. If we get a negative result, worse than expected, we will be more likely to add more risk at a more attractive price. It requires some guts because on the way there, some of the investments we have made will not work well.
But all of this is all part of riding through a turbulent time. You don’t have perfect foresight. If you can get 60% or 0% right thing, invest if the prices are really attractive and avoid being over-invested or over-confident, usually, in the long run, we will get a good result.
Team: I think it just needs to show why people really need to rely on your experts, your portfolio managers and analysts to help them deal with a crisis like this. Those who are still out buying bonds on their own, well, they can’t get variety, and they don’t have that dry powder, or they don’t have the ability to analyze everything you can do for them with your team.
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