Expert: Andrew Norelli – “There’s opportunity everywhere” | JP Morgan Asset Management

Bryce: [00:00:17] Welcome back to another episode of Equity Mates, or should I say float like a butterfly, Sting like a bee? And welcome to another knockout episode of Equity Mates. My name is Bryce, and, well, it's not, Ren, who am I? 

Alec: [00:00:30] You are Mohammad Ali.

Bryce: [00:00:31] Yes. 

Alec: [00:00:31] I'm glad you did a shorter intro there because any more would have just been wasted for people new to the show. Welcome. Every episode, Bryce has asked ChatGPT to rewrite his standard introduction. I have to guess. But really, I mean. That wasn't even a rewrite, you just quoted one of the most famous boxes of all time.

Bryce: [00:00:52] ChatGPT is losing it a bit. Yes, I am going to. You've been very good at guessing them today. I don't think you've got one wrong. So now I'm just going to be giving you one line.

Alec: [00:01:05] Okay. 

Bryce: [00:01:05] So that was the, Well, that's just starting. And it is not gonna be quoting. 

Alec: [00:01:09] You're just giving me famous quotes next week, it will be like, ask not what your country can do for you, but what you can do for your country. Who am I? 

Bryce: [00:01:16] I'll take that feedback on board.

Alec: [00:01:18] All right. Well, anyway, Bryce, we're excited today. The energy's high because we're going to speak about what is easily the most exciting asset class in the investing world. Corporate bonds. Fixed income. It's exciting because as interest rates have come up, this whole asset class, which has been forgotten for most of the time, we've been doing Equity Mates. It's really come back into focus.

Bryce: [00:01:43] We've had a number of experts on now, you know, the some of the yields that you can get on these on bonds is is becoming quite exciting. I guess still the challenge for me in which it's it's I think it's a positive or definitely a positive that there are ETFs available like JP API because getting access is as retail and thinking about how this forms part of my portfolio is something that I'm really thinking through at the moment. For full transparency, I don't have any like direct fixed income ETFs at the moment. I don't have any direct exposure primarily because for the last ten years, as you've said, it's just been completely off the radar. Mm hmm. And that idea of having 10%, 20%, 30%, even 40% of your portfolio as fixed income from a defensive sort of play, that hasn't just been top of mind for me. So I'm really interested in these discussions because I am genuinely thinking through at the moment.

Alec: [00:02:36] Yeah, well, portfolio construction is an interesting one because a lot of the textbooks, you know, the finance textbooks, not that I've read a lot of finance textbooks, but a lot of them supposedly, from what I've heard on Instagram, a lot of them talk about the 60-40 portfolio, which is 60% stocks, 40% bonds, and like that was our grandparents portfolio construction. Even our parents for most of their lives, like if I went to a financial advisor, they would have been put in a 6040 portfolio, 60% stocks. When the market is growing and the economy is growing, that does really well. And then when we're in a recession or anything, the 40% bond is the defensive part of the portfolio. And that for generations was the sort of wealth building portfolio construction. And, you know, like that was in days when you're 40% bond, part of your portfolio would have been yielding, you know, 7%. So it was almost equity-like returns. That wasn't the case in our lifetime or in our investing lifetime. The amount of articles written by like Forbes and Fortune and all of them talking about the 60-40 portfolio being dead is just countless because in the last decade as rates have been cut, the yield on the bond portion of the portfolio wasn't great. But also we saw this positive correlation where normally stocks would fall, bonds would rise and so your portfolio would bounce out. But over the last decades, stocks would fall, bonds would fall as well. Not great. But now with interest rates coming back up, yields on bonds being compelling again, I guess the question is, is the 60-40 portfolio back? 

Bryce: [00:04:25] Well, then the good thing about this podcast is that while we don't always have the answers, we have the experts that do to connect with our audience, to give them the answers that we're searching for. And we are lucky today to be joined by Andrew Norelli. 

Alec: [00:04:38] That's right. Andrew is a member of JP Morgan Asset Management's Global Fixed Income, Currency and Commodities Group. He's a managing director at JP Morgan Asset Management and he's the portfolio manager for JP Morgan Asset Management's latest fixed income ETF, the JP Morgan Income ETF, Ticker JPIE, which is recently listed on CBOE.

Bryce: [00:05:00] That's right. Ren and CBOE is another exchange here in Australia committed to the ASX that you might not be aware of but you've got access to through your brokers. Now Andrew is based in Columbus, Ohio and works with Bob Michel, who appeared on the podcast earlier this year. Before we do a reminder that while we're licensed, we're not aware of your personal circumstances. Any information on this show is for education and entertainment purposes only. And any advice is general advice. But with that said, let's jump on and have a chat with Andrew. Andrew, welcome to Equity Mates. 

Andrew: [00:05:37] Thanks, guys. Great to be here.

Bryce: [00:05:38] So before we get into the meat of the episode, I'd love to start with a would you rather so would you rather have the ability to see 10 minutes into the future or 150 years into the future?

Andrew: [00:05:51] Oh, 10 minutes for sure. Well, I'm a professional investor. If you give me 10 minutes in the future, I could be the richest person on the planet. 

Bryce: [00:06:00] That was. I was expecting that answer. 

Andrew: [00:06:03] As an easy one.

Alec: [00:06:05] Well, Andrew, we're here to talk about, I guess, all things fixed income. And when we're talking about fixed income in 2023, we really have to start the conversation with inflation and interest rates. The US is has a target range of five and a quarter to five and a half percent in Australia where 4.1%. We've both experienced pretty rapid rises over the past sort of 12 to 18 months where we are now in October 2023. How do you assess, I guess, our current monetary policy settings? 

Andrew: [00:06:35] All right. Well, I would say it's actually somewhat different between the US and Australia. So I'll start with the U.S. because that's what I spend most of my time focussed on. The portfolios I manage are predominantly U.S. assets. So the US monetary and economic dynamics a bit a bit more in my wheelhouse. So we'll start with that one. There is this perception in the media and as communicated by the Fed, that somehow inflation is still too hot or way too hot as they characterise it only a month or two ago. But I'm going to suggest something different and I think many of our listeners probably haven't looked at us inflation this way, but I try to make it simple. The way we measure inflation in the United States is the consumer price index, the CPI basket, and typically policymakers focus on core CPI. So price rises, x food and energy, which tend to be more volatile, but really consumers experience headline CPI. So when the whole consumption basket is going up, we're in inflation. And when the whole consumption basket is not rising, we're not in inflation. Here is the kicker, about 30% of the CPI basket is housing costs. And the way we measure that is owner equivalent rent, which is a really quirky concept and rent a primary residence, which is straightforward. How much rent are people or folks paying for shelter as a service in the economy? However, these two measures of the cost of shelter as a service are very lagged. So in CPI, primary rent of residence and owners equivalent rent actually reflect simplistically what happened in the economy more than a year ago. So this is part of the reason why, in my opinion, the Fed missed the initial run up in inflation because the whole basket, as measured by the data, reflected a tranquil rent market from a year gone by. But now we've come full circle. So rent inflation in the United States, as measured by these two lagging categories in CPI, peaked in December of 2022. That was the fastest month of rent inflation as measured. But in that open economy, rent growth peaked in 2021 as measured by the fastest month of rent growth. So effectively the whole CPI basket in the US is fairly accurate in measuring contemporaneous price changes except for shelter shelters just reflecting a year ago. So let's look at the whole basket shelter and all items less these two housing components on a three month, six month and 12 month annualised rate of inflation. All of them are below target and the three month and six month annualised inflation rates x housing started declining right after the Fed started hiking rates and the sequential rates of all items ex housing have been declining ever since, which is exactly what's supposed to happen. And so through that rents, inflation is already below target in the US. And if the trends continue, it's going to disappear altogether. So I do feel that the monetary policy framework in the U.S., which is the combination of the five and a quarter to 550 policy rate in active quantitative tightening is actually sufficient to snuff out inflation. It's progressing right on the pathway that it should. Now I don't actually think the Fed should hike again, will probably come back to that later in the episode. But so just quickly turning to Australia, because I have less but less to say about that, I would say that in Australia it's actually the central banks in a tougher spot because you've had really rapid pass through to the broader economy for the rate rises. And I'll simplistically chalk it up to the fact that the mortgages are much shorter, so the interest rate hikes pass through more quickly to the housing market than they have in the U.S. and it's affected consumption. So Australia consumption doesn't look as good as it does in the US. However, the other challenge is that the high frequency measures of inflation in Australia have actually ticked up lately. So I believe we'll get another quarterly release here pretty soon. But I actually think that we're going to get more hikes in Australia and it's probably justified purely on a on an inflation uptick, which again is in contrast to what we're seeing in the US right now.

Bryce: [00:11:17] Not good.

Alec: [00:11:17] Not good. Andrew, Bryce just bought a house this week so he doesn't. And in Australia, unlike the US, we're much more a variable rate mortgage sector rather than fixed. So that's, that's not what he wants to hear. 

Andrew: [00:11:31] Bryce did you do a variable rate? Did you get a little fixed period in the front?

Bryce: [00:11:35] No. So, well, we actually haven't got the loan yet. I just signed the contract yesterday and there's a bit of a settlement period. But interestingly, our mortgage brokers are advising that we don't fix because their assumption is that we're likely to see over the next three years rates pull back more than they do go up into another hiking cycle. 

Andrew: [00:12:00] I agree with that.

Bryce: [00:12:01] Oh, you agree with that? Okay, great. Well, I'm so then. 

Andrew: [00:12:05] And because Australia, the interest rate curve is still upward sloping or fairly flat, depending on how you look at it. It probably should be inverted. So even if the policy rates over the very near term do increase, I don't actually expect long in rates to go up that much, at least not after the upcoming syndication, which I think is later in October. Long dated bond syndication.

Alec: [00:12:30] Okay. So just help people explain that because you said that you think Australia does have, you know, some of the indicators of inflation are ticking up, but you think it's more likely that we see a rate cut than a rate rise. So how do those two assimilate? 

Andrew: [00:12:45] Ultimately. So higher first and then because of that, on the policy rate and then because that further tightening really affects everyone's cash flows, who's on floating rate mortgages is going to it's very likely to snuff out inflation at some point soon and to further restrain consumption. So perhaps perhaps we could be in a little bit of a stagflation area environment. But briefly, because in my view and I think this I think this is true in Australia, but definitely my view for the U.S. or stagflation. So for our listeners, meaning a period of zero or maybe a little bit negative growth but still above target inflation is really difficult to sustain because the consumption basket has already gotten so expensive and wage growth notwithstanding, the narrative to the contrary has been decelerating and just due to lack of affordability and the fact that when consumption declines that you usually get a round of joblessness, layoffs and increased unemployment when stuff's already expensive, it's very hard for consumption to continue if the consumption basket gets even more expensive. And remember, inflation doesn't mean expensive, inflation means expensive and getting more expensive incrementally. So stagflation to me, sort of rolls over into a run of the mill recession where inflation kind of disappears and then you get central bank cuts. So if it were up to me, I'd probably take the floating rate mortgage too. 

Alec: [00:14:24] Say I good, good. Now we didn't think we'd talk about housing. 

Bryce: [00:14:28] Not advice, not advice this week. 

Alec: [00:14:31] So, Andrew, let's get to fixed income because it's a fascinating part of the market today. And conceptually, you know, we have to think of it a little bit differently to, I guess, the stock market, the way I sort of I think about it is that it's like a stock and a flow problem. So like there is a stock of fixed income assets which are, you know, not having a great time. I think I was writing this morning that long dated US bonds in like one of their worst bear markets ever. And then they flow like the new issues of treasuries and corporate bond printing yields that are quite interesting. You know, there's sort of 6% more. And so on one hand, people that own the bonds a couple of years ago, you know, underwater and then on the other hand, fixed income managers seem to be a lot more popular at parties now because that has a lot more money moving into that space. So I guess before we get into the detail, just from a high level and, you know, from your perch as a fund manager inside JP Morgan Asset Management, how are you saying the fixed income markets today? 

Andrew: [00:15:40] Well, for the first time in a generation or half a generation, let's say the first time in more than 15 years, risk free, secure. These are paying positive real yields. And what that means in English is that you can lend money to the U.S. government. With no default risk and get paid inflation plus. So the two year real yield right now in round numbers is about CPI plus 3%. So that inflation statistic we talked about whatever it is in the next two years, even if it's 9%, which isn't going to happen, you get to 12, so you're guaranteed to make more money than inflation. And that's in stark contrast to our generation, our younger generation of investors who from their teenage years have grown up with money in their savings account, being worth less the next day because inflation exceeds whatever the interest rate was and it was commonly zero. So we've had a huge change, so a massive opportunity. So the base rate curves, meaning the treasury curve in both in real terms is very positive and in nominal terms, what that means is, you know, four and five handle yields on depending on the part of the curve for treasuries. And then you add credit spread on top of that for high quality corporates in investment grade or lower quality corporates in high yield or emerging market credit. And all of a sudden 8% isn't that hard to generate. So the portfolio is I mean, it's the income strategy. For example, you know, eight and a half, 9% yield and you don't have to stretch that much on the risk curve to be able to attain that type of return. That's equity like returns in the past. So you've had a monumental shift in the opportunity set. Now, here's a problem that was kind of true at the beginning of this year. And fixed income managers all over the world, my peers. Go out preaching the gospel to the investing community, saying fixed income is back. All of a sudden you can make money in fixed income. And it was a totally rational, well thought out argument. So investors invested and then they lost money because yields kept going up all year. So here's the hard part or one of the hard parts in fixed income, there's almost no amount of yield that you can have in your portfolio that will prevent your fund from going down in price on a day where you go up, yields go up, price goes down. Even though if you hold a bond fund. To the duration of the bond fund. You are very likely for low, low credit risk portfolios, very likely to make an annualised return very similar to the yield on the day you bought it. But the pathway can be somewhat rocky. So that's a challenge, I think, for our industry to help investors build confidence that when you invest in fixed income, when the returns stream as measured by yield spreads, looks attractive, you ought to be able to close your eyes, put in your portfolio and not look at it again and be fairly confident that over time you're going to make the loss adjusted yield on the day you bought it. 

Bryce: [00:19:01] So, Andrew, you mentioned that your fund is sort of returning between, you know, eight and 9%, which is getting close to that long term equity average, which you also mentioned. So have you seen a lot of investors, you know, moving down the risk curve? How are you seeing investors constructing portfolios these days? You know, when Ren and I first started investing, the concept of that 60-40 portfolio was very much a thing, but fast became not a thing over the most recent decade. So how are you seeing investors now use fixed income in their portfolio? 

Andrew: [00:19:35] Well, there's a recency bias, meaning because in 2022, for virtually all of 2022, the 60-40 portfolio didn't work, meaning bonds went down and stocks went down. And that's an extremely painful period of time for investors because it's the antithesis of what modern textbooks would say. Portfolio construction, CFA, the MBA, you know, all of the certifications that folks who are professional wealth managers can get, say, 60-40 is sort of the base case of how you build portfolios and then you go from there. Now, the reason it didn't work is because what I call wrong way correlation and wrong way correlation means when the sign of the correlation coefficient between bond prices and stock prices is positive. So even though it feels fine when bond prices and stock prices go up together, that's actually not desirable. That happened today in the U.S. And really what you want is what I call right way correlation, which means that the sign of the correlation coefficient between bond prices and stock prices is negative. And that has been the prevailing sign of the correlation over the last couple of decades, three decades, let's say. And before that it wasn't. So if you go back to the seventies, there was wrongly correlation everywhere, like bonds and stocks went down together all the time. And there is a school of thought now after having lived through 2022 that wrongly correlation is here to stay in the 60-40 portfolio is dead, I do not believe the 60-40 portfolio is dead, regardless of which way I think interest rates are going to go over the near term. If we take as a given that we're going to enter a recession either in the US and Australia or a global recession, at some point the yields will fall because central bankers will respond by cutting rates. Once job loss increases and economic human household prosperity declines, there will be zero tolerance for keeping monetary policy super tight. But also inflation is going to disappear. Households cannot afford to happen to the consumption basket, continuing to increase in price unless wage growth continues and you get a wage price spiral. But Labour's bargaining power is declining in the U.S. right now, not withstanding the UPS strike and the UAW strike that's ongoing and the actors and writers strike, every union is striking and getting wage growth. But unions are such a small portion of the U.S. economy that the economy, wide statistics have had wage growth declining for more than a year, and it's continuing. We have leading indicators that for wage growth, for which the correlation is still quite strong, that suggests wage growth notwithstanding the headline to the contrary is continuing to decline. So we don't have a wage price spiral in the U.S. we're getting further from it. So in response to recession, central banks cut rates and they will stop and you have right way correlation returning when that happens. So equities generally are overvalued, especially in the US. Non non-U.S. equities are much more fairly valued. But if I have new cash, let's say one of our listeners just just sold a business, you know, you had you built a great product, great business, you just sold it. You've got 10 million bucks after taxes coming to you and now you have 10 million in cash. What are you going to do? You're going to put some of that money in equities and you're going to put some of that money in equities when the valuations of equities aren't that great. The expected returns on equities are maybe even lower than they are in bonds now. In order to protect yourself on the downside, if and when we do get a recession, now more than ever makes sense to have high quality duration in your portfolio because if you need it, it's very likely to work. Meaning, if your stocks are crashing, you know bonds are going to work.

Alec: [00:23:47] So, Andrew, there's a lot to consider in the fixed income markets. I mean, there's a lot to consider if you're investing in any market. And I guess, you know, we've covered sort of the headline macro themes, interest rate, policies, inflation, and then you know into some of the intricacies of the fixed income market. We now want to distil that all into sort of how you approach it as a fund manager and your investing philosophy because you are the portfolio manager of J. Morgan Asset Management's latest ETF to come to the Australian market, the JP morgan Income ETF or JPIE. So how do you take everything we've spoken about and distil that into an investing philosophy? And then, you know, how do you manage the fund? 

Andrew: [00:24:33] Well, the things we've talked about so far are primarily macro, and we do very actively manage that particular portfolio from a macro perspective. I want to come back to that in a second because the income strategy, JPIE, we spend an enormous amount of time trying to succeed in a simple goal, and that is to give our investors a returns dream over time that's very similar to U.S. high yield corporates, but to do it with much less volatility, in order to achieve that goal, we must achieve genuine textbook diversification. And what I mean by that is I mention correlation on our episode so far before but we need risk premium to harvest uncorrelated or ideally negatively correlated risk premium from throughout the global fixed income landscape in order to achieve portfolio level risk reduction through diversification. So if we label this portfolio diversified and all I buy is investment grade credit, higher your credit and emerging market credit, that sounds diversified. I got a lot of different regions and names and in issuers, but all those things are super correlated. So what we do instead is bond by bond and then subsector by subsector, trying to pair up risk premium in fixed income, typically combining corporate credit with securitised products, some of which have credit risk and intentionally some of which don't. So that we can create a portfolio of higher credit that yields 8% and securities credit yields 8% and securitised prepay risk premium that yields 8%. So I have an 8% portfolio, but the fundamental economic environment that is a threat to one of those sectors is different than the fundamental environment, which is a threat to another sector. So that's the essence of diversification, because I haven't given up any yield. But instead of having a portfolio of 100% higher corporates, all of which will go down in price when high yield corporates go down in price, we have 20% higher corporates and 80% other stuff, and yet it yields the same as high yield corporates. 

Bryce: [00:26:55] So Andrew, we are going to take a very quick break, but on the other side, we're going to unpack the different parts of the debt market and understand what parts are really exciting. We'll be right back. Welcome back. We're here with Andrew Norelli, managing director and a member of the Global Fixed Income Currency and Commodities Group and the portfolio manager for J.P. Morgan Asset Management's latest fixed income ETF, the JP morgan Income ETF Ticker, JPIE. Now, Andrew, your portfolio has over a thousand holdings which compared to the holdings we have in our equity portfolios, is quite significant. You have everything from Treasuries to corporate bonds, asset backed securities. So firstly a portfolio construction question, why such a large number? And you kind of touched on it there, but is it like equities where, you know, if you get to a point with diversification, the incremental addition of a stock doesn't really contribute to the same level of, I guess, value that diversification delivers. 

Andrew: [00:28:06] Yes. There you can get to a point of diminishing benefits. 

Bryce: [00:28:12] That for anything returns. 

Andrew: [00:28:15] But interestingly, a thousand holdings, isn't it? So you can get to the point where incremental risk premium don't provide you diversification because they're perfectly correlated with other risk premium you have in your portfolio. And the point is to create sources of yield contribution to yield. For our total portfolio come from six major risk premium. Whereas when you look at each sector like high yield or agency mortgages, there's usually two or three which dominate it. So we harvest all of them from across the fixed income landscape and the portfolio as a whole has. Contributions to yield from a much more balanced array of risk premium than in the individual subsector. On the other hand, we do have a large number of holdings, and there's a fairly simple answer for that. First is that from a corporate issuer perspective. Corporations have lots of bonds outstanding typically. So like Ford, we only have one equity, but dozens and dozens of bonds outstanding. And that's one reason why individual fixed income securities aren't as liquid as stocks. Ideally, we would have everything in fixed income traded on exchanges, but equities are traded on an exchange because they are liquid and not the other way around. Because there are so many fixed income securities, it's difficult to obtain. Equity like liquidity in each individual underlying bond. So that's the first thing. But the second thing is that securitised products, by their very nature gives you loads and loads and loads of CUSIPS. So you might have a sponsor of a particular securitised subsector. Let's say auto loans, for example. And every time that sponsor creates a new securitisation that has a portfolio of auto loans underlying it, you get a new ticker. A new set of cue sips for the capital structure of that particular trust, for example, that issues the securities. So there is a proliferation of CUSIPS. Now that can be. Beneficial as well to the portfolio because I have found that when working with our securitised experts, the portfolio managers who more or less I delegate the security selection to for our securitised allocations within the income strategy. They have proven over time to find genuine mispricing. The securitised market has so many CUSIPS that a careful diligent observation of the available bonds in the market will genuinely offer opportunities that are mispriced. And so that's a benefit to our investors, even though it might seem unwieldy that the portfolio has a thousand holdings, the mutual fund, I mean, it's two mutual funds in the same style as the JPIE ETF, and they each have 3000 sips. And the reason it's more is because they have been outstanding for longer than the ETF. 

Alec: [00:31:36] And just just for people who are unfamiliar. CUSIP in the U.S. is like a nine digit code that identifies like any individual securities. So like Apple, the stock has a CUSIP, but then like every Apple bond that's issued has its own CUSIP as well. Is that correct? I got that, yes. 

Andrew: [00:31:55] Yes Alec, thank you. Sorry for the jargon there. 

Alec: [00:31:58] No, that's all good. That's all good. So I guess, you know, like you've mentioned a few different categories of fixed income corporate bonds, which I think a lot of people are familiar with. And then some of the other ones are asset backed securities. You know, there might be a whole bunch of car loans that have been put together into a securitised product or for people that have watched the Big Short, you know, mortgage backed securities, a whole lot of mortgages are put together and into a securitised product. There's a range of different, I guess, subsections in the fixed income market. You mentioned the some of your analysts are finding mispriced opportunities from just bottoms up, doing the work, crunching the numbers and finding good opportunities. But I guess from a more top down perspective, are there any particular categories that you're finding particularly interesting or exciting at the moment? 

Andrew: [00:32:49] Right now, because of the rise in Treasury yields and generally spreads kind of tight, but not nearly as tight as they got during the QE era? There's opportunities everywhere. And I would say securitised products in general, if you if you compare a securitised bond, let's say securitised bond that has credit risk. To the corporate bond that has the same default risk. For simplicity's sake, we'll say the same credit rating. I think our listeners know that that's not a perfect measure of default risk, but for my explanations. Same credit rating in a corporate bond or securitised credit, securitised credit is going to give you more spread. And that's not always the case, but it has been the case recently. And so typically, because the income strategy is always going to have a mix between securitised and corporate credit and right now has quite a bit more securitised than corporate credit, we're over significantly overweight, securitised. Our portfolio actually yields more than high yield corporates right now. And the simple reason for that is that securitised spreads are wider. 

Bryce: [00:34:10] So, Andrew, to close out our convo today, when it comes to fixed income, it's all about the default risk. As you've alluded to, it's you know, you just don't want to lose money if a company goes bankrupt. Government defaults or borrowers don't pay back their mortgages or car loans. So how do you approach this risk when there's just more and more financial stress coming through the system for consumers and for companies these days? 

Andrew: [00:34:35] Well, it's surprisingly still up for debate whether there is financial stress for consumers. I happen to be pretty strong believer, and this is actually more true in Australia than the US currently, but that the consumer is not in great shape. So what we have done intentionally in our portfolio is concentrate on seasoned bonds. And that word in American English basically just means bonds that are not new, that have been outstanding for a period of time. And in the security space, when your bonds are outstanding for a period of time because of the way the structure works, the credit enhancement or credit support, meaning the cushion of the portfolio of underlying loans, the cushion for losses gets thicker. The longer the bond stays outstanding. So we intentionally focus our portfolio on seasoned bonds that have built up a big cushion for consumer loan losses. The second thing we've done is try to keep the duration on the short side, and that's another benefit of securitised products, is that they typically have shorter durations, shorter average lives, something like two or three years, and they're seasoned. So they are amortising rolling down or we have better near-term visibility on the consumer health and cushion below us to absorb losses. And then the other thing that we have done is when buying new issues, things that aren't seasoned. We have a long standing relationship with issuers. And I would say within JP Morgan, a leadership position in structuring securities deals. Where we've been able to modify the terms so that the cushion on new issues builds up substantially more quickly. So when the PM team is sitting on top of the portfolio saying, Hey, we're worried about a near term recession, we need to make sure that the bonds we're buying protect us from a near-term recession, or at least that the spread they pay compensates us for the risks that we're taking. That's an important point. From a credit risk perspective, which bonds are riskier, a bond is trading at $0.90 on the dollar, or one that trades at $0.09 on the dollar. I would argue the 90 is actually riskier. So it does depend on price. 

Alec: [00:37:06] Is that just because you've got more to lose if it's trading at $0.90 on the dollar? 

Andrew: [00:37:10] Put it this way, if you're a benchmark investor and there is a bond in the benchmark that trades at $0.09 on the dollar and you don't own it. You're at way more risk of that thing ripping back higher. Then if you are owning a 90 cent that goes down. 

Alec: [00:37:30] Yeah. Well let's just load up on high yield then. Well, Andrew, look, it's a fascinating conversation. We've been speaking more and more about the world of fixed income this year. As you know, every investor and financial media publication has been because, you know, as rates have come back, the asset classes certainly come back into focus. And it's great. And, you know, we're lucky that we can speak to people who have been focusing on it for the last, you know, you know, however many years. So we do really appreciate your time and you sharing your wisdom. If people want to learn more, they can check out the JP Morgan Asset Management website and the fund that Andrew manages, the JP Morgan Income ETF, the ticker is JPIE. But, Andrew, a massive thank you for joining us today on Equity Mates. 

Andrew: [00:38:21] Thanks, guys. Great to be with you. 

Bryce: [00:38:22] Thanks, Andrew.