Today’s podcast features a conversation about how Wells Fargo Asset Management (WFAM) is embracing tomorrow’s financial unknowns through the foundational investment processes and teams that deliver active equity, fixed income, and systematic investing solutions to our clients. To discuss, we’re talking with Ann Miletti, Head of Active Equity; George Bory, Managing Director, Fixed Income Strategy and Portfolio Specialists; and Jonathan Hobbs, Head of U.S. Solutions for the Multi-Asset Solutions team.
Brian Neuman: I’m Brian Neuman and you’re listening to On the Trading Desk®.
In this episode, we’ll be discussing how Wells Fargo Asset Management is evolving, innovating, and adapting to an ever-changing market with a specific focus on how we are embracing tomorrow’s financial unknowns in order to uncover opportunity for our clients.
Today, we have a full trading desk. We’re joined by Ann Miletti, Head of Active Equity; George Bory, Managing Director, Fixed Income Strategy and Portfolio Specialists; and Jonathan Hobbs, Head of U.S. Solutions for the Multi-Asset Solutions team.
Our discussion will center on some of the key components, culture, and ultimate processes that drive our active equity, active fixed income, and systematic investing at Wells Fargo Asset Management. Ann, George, Jonathan, welcome to the program.
Ann Miletti: Thanks for having us.
George Bory: Brian, thanks for having us on the call.
Jonathan Hobbs: Yeah, Brian. It’s great to be with everyone here.
Brian: Great. So to begin, Ann, let me ask you, when you think about active equity, what’s unique about our investment structure and research process here at Wells Fargo Asset Management?
Ann: I think what makes us really unique is the culture. There really is a culture of independent thought, and it’s vitally important to the way we’ve structured the business, and I think it’s been a key part to the success we’ve seen across so many of our investment teams.
The culture really is that the investment teams have full discretion over security selection and portfolio construction, and that leads to truly differentiated portfolios and different styles of investing across all of our teams. That skill set is then supported by a larger structure of the organization.
Brian: I want to pivot to fixed income, as well. George, similar question to you, if we can. What makes our fixed income investment structure and research process truly differentiated here at WFAM?
George: That’s a good question, Brian. And Ann did hit on the ethos of the investment process at WFAM. That’s not unique to equities. It sort of spans all of our investment teams.
But when we look at fixed income specifically, the fixed-income investment teams, we build portfolios from the bottom of up. Similar to what Ann said, we emphasize independent thought. That’s critically important to our investment process.
We also focus very, very closely on security selection. That’s a key differentiator around our investment process. We employ deep, fundamental analysis, and we always have a robust culture of risk management. And it’s the culmination of these three factors that helps us build smart, risk-adjusted strategies that meet each individual’s needs.
And when we think about it, research is really at the heart of our investment decisions. A strong credit culture, it really permeates our investment process. Our analysts dive deep into companies. We tear apart securities to quantify the risks inherent in the investments and then we kind of reconstitute all the pieces. We bring it all back together to ensure that we imply very smart, relative value assessments. And we do that at every step of the investment process.
Brian: Yeah, that’s interesting. Thanks, George. I want to round things out. Jonathan, as you think about our Systemic Investment structure and process, what’s unique about how we approach this capability, and how do we ensure that we are delivering value to our clients?
Jonathan: Well, delivering for clients is why we’re here, so let’s start there. What we’re hearing more and more from clients is that they are looking for a specific investment outcome. That could be something like a return profile of inflation plus five, a maximum drawdown constraint, targeting investments that adhere to a climate standard, or just gaining exposure to a specific collection of factors.
Now while all of those are very different objectives, they do share a common need for data and systems. And our systematic investment structure brings together four independent investment teams focused on multi-asset solutions, fixed-income, quantamental equities, and factor-based equity and equity options. Each team has their own unique independent investment process, but they have shared technology requirements. As part of a $40 billion systematic investment platform, we think we’re large enough to support the research and systems required to remain at the head of our field, but small enough to provide the kind of bespoke solutions and transparency that investors desire.
Brian: And actually, Jonathan, if I can stick with you for a moment, I’m curious to know what you consider some of our core principles of systematic investing. And even further, is there one area that you believe that we are better positioned to add value than some of prominent peers?
Jonathan: Well, that’s an interesting question, because there isn’t really a standard definition of systematic investing, even within our four teams. However, I do think we can all agree on some core principles.
First, our investment insights are fundamentally driven, empirically studied, and systematically implemented. So it’s just not good enough to uncover a potential alpha source. We need to understand why it works, how it interacts with other alpha sources we’re using, and if it will persist.
Second is an unwavering commitment to risk management. Understanding the limits of models is paramount, such as idiosyncratic events, like, say, a natural disaster or unexpected policy decisions.
Then, there’s continuous improvement to research. Systematic investing is definitely not set-and-forget.
And finally, adaptability to the current environment.
So in summary, what we’re aiming for is a repeatable and disciplined investment process that continuously monitors and captures investment opportunities.
Brian: That’s a lot of great stuff to think about. I want to actually now come back to fixed income. And George, if you were to break down active fixed-income investing, what are the areas a manager can really shine? And maybe another way to think about this is does a rising tide lift all boats in the fixed-income market?
George: Brian, those are really, really good points. And I think one of the most important things to think about when we look at fixed income is active management works really well in the world of fixed income. A typical fixed-income index or a broad market benchmark, it’s a very crude measure of risk. Now in some instances, that measure of risk matches perfectly to what a client needs, but usually it’s used as a sort of a general reference.
In addition, the replication of fixed-income indices, it’s an imprecise science. Now it can be done, but when it is done, it tends to generate pretty meaningful amounts of tracking error relative to that broad market. As we know, fixed income can be an illiquid market at times and that illiquidity makes kind of market replication a strategy.
And so when we think about what an investor needs or what a client needs, a typical bond portfolio, it’s a stream of clearly defined cash flows. And what we do well is you establish the cash flows, you assess the risks around those cash flows, and then you manage that portfolio of cash flows through time. And that very much lends itself to active management.
The sort of “build it and let it run” strategy, it may work at times and for some clients, that’s exactly what they want, but many clients need a customized form of cash flows and streams of cash flows, and that’s really what an active manager does and that’s what we think we do really well.
Now your question about rising tides, we do focus a lot on security selection and the building of those cash flows. Now we know that interest rates will dominate a fixed-income portfolio. And so when bond yields go up and bond yields go down or the slope of the yield curve shifts, that’s going to have a meaningful impact on the price and the total return of the fixed-income portfolio.
But it’s really, really important to remember that different segments of the market move at different speeds and then that’s always dependent on the type of risk inherent in each of those sectors. It can be duration, it can be credit, it can be optionality. There are a lot of different factors that can go into that.
So there is a real opportunity to both asset allocate across different parts of the market, but really to sort of define your best cash flow stream at any one particular point in time and then manage that cash stream as you move through time and that really can only be done by active management.
Brian: Thanks, George. Ann, you first commented on the uniqueness of our active equity structure and process, and as we work to embrace tomorrow’s financial unknowns, do you foresee our process and structure changing over time? Or even, has it already?
Ann: No, I think the principles really haven’t changed over time, but the capabilities, the tools, the people, even the environment can evolve and change, but those principles probably will remain pretty solid. And I think it’s because that culture that I talked about, that independence of thought, really is something that we hold near and dear to what we do every day.
And as George eluded to, active management in general requires a willingness to take a view and sometimes, and very often, it requires a differentiated view. And so for our active equity teams, that requires them using their time-tested investment processes to really get the conviction they need to put their portfolios together and really put those differentiated views to work.
So this is really quite the opposite of trying to blend in and look just like an index or just like someone else. It’s really about being unique and adding value and delivering alpha to clients over time. It’s really the secret sauce.
Brian: And so if we can remain focused on active equity, 2020 certainly reminded us all that the market can be quite volatile, financial unknowns persist, and the marketplace is extremely competitive. So if we think about the landscape, how does our active equity teams and process and structure ultimately deliver value for our clients?
Ann: That’s a really good question, Brian. Certainly the volatility that we saw in 2020 and even the early part of 2021 were extreme levels. And the investment processes that our managers use really have kept them focused on making decisions from a bottom-up perspective, selecting the names that provide better risk-reward. It’s making very educated decisions on which securities will provide the best return versus risk for their clients. And I know very often, investors look at volatility as a negative and when our managers see volatility, very often they look at it as an opportunity to add value over a long period of time.
Brian: Yeah, that makes sense. George, somewhat of a similar question to you. When discussing our active fixed-income teams and strategies, how are we differentiated from many of our strong peers? And ultimately, same question, what’s the value proposition that we can deliver to our clients?
George: The value proposition for fixed income is a little bit different than Ann just mentioned, as she discussed. Equities has a growth component to it, has a capital appreciation component to it. And certainly at times, fixed income can provide a capital appreciation strategy.
But generally speaking, as I mentioned earlier, it’s about creating a defined stream of cash flows that you’re going to ultimately utilize over time. So when we think about fixed-income investing, it really has three dominant components.
Number one, it’s about capital preservation. Is the dollar I have today still has same amount of purchasing power 1 year, 2 years, 5 years, 10 years, 30 years down the line?
Number two, it’s about income generation. What’s my coupon flow? What’s my income stream that I’m actually generating from my principal over the life of my investment?
Then lastly, and perhaps most importantly, as we all know, fixed income is still an over-the-counter market, so liquidity management is critically important. Am I able to sort of maneuver my portfolio or adjust my cash flow streams if I need to over the life of my investment?
And so our fixed-income investment culture, it’s been honed over many years to be able to tackle all three of those challenges simultaneously for each and every client that we serve. And so when we bring all those together, our products and our team and our businesses, we can adapt to changing market conditions. We can adapt to changing requirements from clients, but we never lose focus on those three basic principles.
Brian: Jonathan, I want to bring you back into the conversation. And thinking about your focus on capabilities and solutions, what do our systematic strategies offer our clients? Is there a typical challenge or solution that we’re able to effect for them?
Jonathan: Well, this brings us back full circle, Brian, doesn’t it? Back to our clients’ objectives. George touched on this by talking about how they work with clients in fixed income to structure a cash flow profile.
And for us in the systematic team, our systematic approach allows us to deliver on a range of outcomes. We can manage to a risk budget, such as an alpha target or a drawdown constraint. It gives us the flexibility to implement a strategy across asset classes, geographies, cap sizes, or fixed-income market segments.
I think quite common these days are thematic approaches. We’re having a lot of conversations about generating income in the current environment, supporting climate goals, and reducing downside risk. And finally, a robust philosophy can support custom solutions for any number of investment challenges.
Brian: Thanks. And as we continue to embrace tomorrow’s financial unknowns in the hopes of uncovering opportunity for our clients, I really appreciate you sharing some of the secret ingredients across your areas of expertise. With that, Ann, is there a last thought that you’d want to leave our listeners with?
Ann: I think there is. Something that Jonathan said really resonated with me. Certainly, he spends a lot of time focusing on trying to fit the needs of clients and tring to satisfy the objectives they have. And there are a lot of people who think investing is confusing and overly complicated. But I think there’s some easy things that all investors can focus on. Maybe some simple metrics or measures that can reveal some truths really about each investment process and philosophy. And so I sometimes think simplifying things and just doing quick gut checks are a good way for all investors to take a first pass at all the products they’re invested in and see if they really do fit their objectives.
Brian: That’s good perspective. George, how about you?
George: Well, I think Ann makes a great point. Simple solutions to complex problems is what every client wants. And as I mentioned earlier, on the fixed income side, we try to build portfolios from the bottom up, and that really helps kind of simplify the solution.
As I mentioned earlier, we emphasize independent thought and that we need to come at solutions and questions from different angles. Security selection sits at the heart of any fixed-income portfolio. You need to really understand what you’re investing in, so deep fundamental analysis is a cornerstone. And having a robust culture of risk management can never be underestimated.
So when you take the combination of these four factors, it really does help us build smart, risk-adjusted investment solutions. And to the extent we can do this over and over and over again, then we feel that we’re doing the right thing for our clients and that really, at the end of the day, is our ultimate objective.
Brian: Jonathan, final word to you.
Jonathan: As Ann said, sometimes investing can sound confusing and involves a lot of choices, such as fundamental versus systematic investing. But if we think about the ultimate objectives clients are seeking, we can work backwards to determine the best way to achieve that objective. And I don’t think any of us on the systematic teams feel like we have a monopoly on good ideas or value-added investment strategies. That’s why when we’re creating customized investment solutions, we can tap into the compelling fundamental strategies that George and Ann represented.
We find that combining fundamental and systematic strategies oftentimes results in a better outcome for clients and that’s ultimately what we’re trying to do.
Brian: Thanks so much for sharing your insights with us today.
Ann: Thanks, Brian.
George: Thanks for having us on the show, Brian. It’s been great.
Jonathan: Yeah, thanks for having us.
Brian: That wraps up this episode of the On the Trading Desk® podcast. If you’d like to read more market insights and investment perspectives from the investment teams at WFAM or learn more about how we are embracing tomorrow, you can find them at our AdvantageVoice® blog, as well as by visiting WFAM.com.
To stay connected to On the Trading Desk® and listen to past and future episodes of the program, you can subscribe to the podcast on iTunes, Stitcher, Overcast, or Google Podcasts. Until next time, I’m Brian Neuman; stay invested.
Wells Fargo Asset Management draws on deep capabilities across investments, solutions, and risk management, including the expertise of our specialized investment teams. Customized solutions and securities products are available to intermediaries and professional/qualified investors only, and are not offered to retail investors. Tracking error measures the extent to which a manager’s performance mimics that of a benchmark. The value is the standard deviation of the difference between a fund’s performance and a benchmark’s performance. Tracking error is based on historical performance and does not represent future results. Alpha measures the excess return of an investment vehicle, such as a mutual fund, relative to the return of its benchmark, given its level of risk (as measured by beta). Alpha is based on historical performance and does not represent future results.