Core-plus manager Ashok Bhatia, CFA, presents his views for the core-plus bond space with the help of Dr. Brian Jacobsen, chief portfolio strategist with Wells Fargo Asset Management.


Aldo Ceccarelli: I’m Aldo Ceccarelli.

Brian Jacobsen: And I’m Brian Jacobsen.

Aldo: And you are On the Trading Desk. We continue our journey through the markets with insights from equity and fixed-income portfolio managers—like today’s featured portfolio manager, Ashok Bhatia, who manages in the core-plus bond space. Dr. Brian Jacobsen, chief portfolio strategist from Wells Fargo Asset Management also joins us to react and reinforce their big points. Brian, welcome!

Brian: Thanks for having me.

Aldo: On the mid-January investment panel where Ashok spoke, he lent his thoughts on what fundamentals might affect his markets in 2017.

Ashok Bhatia: We’re going to find out a lot in the next couple of months. But two quick things I would say are that, there is, I think, a high degree of confidence that increasing tariffs by 10 or 15 percent, that the negative growth impact to the U.S. of that type of policy, will dwarf any positives from tax reform in these types of things—so negative policy there, bigger GDP drags than any of the positives. And then second is a foreign country, other countries will get a vote on this and some of those things can have very quick spillovers to the U.S.

Aldo: Can you add color to what Ashok said about “foreign countries will get a vote” … and … “things can have very quick spillovers to the U.S.?”

Brian: I’d be happy to. Policies are not set in a vacuum. If the U.S. changes its policies—whether it is for taxes, tariffs, or other things—other countries can also change theirs. One country withdrawing or changing its relationship can, often by agreement, require immediate imposition of tariffs or penalties. And those can be costly. That’s what helps enforce these trade agreements. Companies have spent years designing their supply chains. And these can’t be changed quickly or without cost

Aldo: OK, so foreign countries are an area of focus for Ashok’s core-plus strategy. He pointed to Argentina as a country he liked in 2016 and continues to have confidence in. Let’s listen.

Ashok: Argentina, it’s a country that has good debt management, and the ability to pay—they just haven’t had the willingness to pay. But there’s a new government, market-friendly finance ministers. And it had this large premium because of their default history that we thought was unjustified. And it’s still something we’re still holding.

Aldo: Can you talk about why Ashok’s core-plus strategy looks to countries like Argentina?

Brian: Well, the plus in a core plus [strategy] is the ability to look outside your traditional U.S. investment grade core exposure. That means high yield and non-U.S. exposure. Without attention to risk, there can be misuses to that plus. But markets can also misprice risk. The mispricing, I think, was from looking at the history of Argentina’s defaults rather than the fundamental improvements that have happened.

Aldo: Great, thanks for that Brian. Lastly, an audience member asked Ashok about potential policy change and is that being priced in?

Ashok: I think proposals from the House on interest deductibility of debt could create pretty strong incentives for corporations over time to basically have more of an equity-oriented balance sheet than a debt-oriented balance sheet, which would reduce supply of corporate bonds, reduce net issuance. That probably impacts and would allow for tighter spreads against some of the higher quality investment grade names than the lower-quality investment grade or high yield. But I’m not sure if that’s sort of in market prices right now. I think that’s one of the things that our people are waiting to see about in the next couple months.

Aldo: Brian, anything you’d add, clarify, or call attention to here?

Brian: When change is afoot, you have to weigh the probabilities. Markets will price in policy changes, but not always with the right probabilities and they don’t always predict the outcomes perfectly.

A portfolio manager will often have to ask, “What’s priced in, what isn’t, and how does that create opportunity?” With every policy change, there are trade-offs. Lowering corporate taxes sounds great—and I think it would be—but it also lowers the benefit of issuing more debt. That one policy change affects cash flows, but it also affects the mix of debt and equity a company might want to issue. That has implications for supply and demand and ultimately spreads in the fixed income market. Successful investing means getting beyond the superficial and digging deeper, asking, “Then what?”

Aldo: Okay. Well, Brian, let’s wrap it up here. I’ll remind our audience that there’s more information about the teams we feature on this program at Dr. Jacobsen, thank you for being with us.

Brian: My pleasure, thank you.

Aldo: Until next time, I’m Aldo Ceccarelli; take care.


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