Lead-Lag Live

Investment Strategies for Uncertain Times

• Michael A. Gayed, CFA

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The financial landscape has dramatically shifted, leaving income-focused investors struggling to find reliable yield. Traditional bonds no longer serve as the dependable ballast they once were, forcing advisors and retirees to explore alternative paths to consistent income.

Howard Chan, formerly of PIMCO and Goldman Sachs, shares how his firm Kurv Investments is addressing this challenge through volatility harvesting strategies that transform growth-oriented technology stocks into income-generating powerhouses. This approach solves a fundamental dilemma: no longer must investors choose between growth potential and current income – they can potentially have both.

What makes these strategies particularly valuable today is the breakdown of traditional asset correlations. The negative relationship between stocks and bonds that underpinned the classic 60/40 portfolio has weakened significantly, with both assets sometimes declining simultaneously during market stress. Volatility itself has emerged as an effective portfolio diversifier with a -0.8 correlation to equity markets this year.

Through covered call writing on high-volatility tech names, these strategies can generate substantial yields (7-14% annually) while maintaining some upside participation. The approach follows a four-step framework for navigating market turbulence: mitigating downside during corrections, generating income while awaiting clarity, repositioning for rebounds, and then capturing upside during risk-on periods.

Particularly enlightening is Howard's warning about NAV erosion in high-yield ETFs – when funds promise distributions above what markets can sustainably deliver, they must return principal to maintain their stated yield, creating a slow death spiral for investor capital. This critical concept is often overlooked by yield-hungry retail investors.

For those approaching or in retirement who rely on portfolio income rather than total return, these alternative income streams may provide the consistency and tax efficiency that traditional fixed income currently lacks. As Howard notes, with US debt growing at 7% while GDP grows at just 2-3%, challenging fiscal choices lie ahead – making thoughtful income strategies more essential than ever.

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Speaker 1:

What happened? Obviously, inflation was a big component of this, but why is it that retail in particular has been so hungry for a higher yielding type of opportunities?

Speaker 2:

I have a cynical answer and I have maybe a market answer. Right, I mean before two years ago. Right, it was very obvious that we were in a zero rate environment. Assets were not providing they're providing capital returns, but not enough yield. Assets we're not providing they're providing capital returns but not enough yield.

Speaker 1:

And you know, in some ways, you know, yield is pretty important, especially we do have so take me through a little bit of a sort of more recent real time example, which is how those types of strategies performed in the midst of the tariff let's call it the tariff tantrum right the initial decline and then obviously this rip back higher.

Speaker 2:

Yeah, I'll use an example for all of our funds. Actually, if you take a look at how it performed from, you know. Let's take a corner case. Let's take an example of Tesla. Right, tesla actually has been selling off even before the tariff war. So it started selling off middle of December and then it got worse during tariffs.

Speaker 1:

This should be a conversation around finding yield in unconventional ways, especially in an environment where people have no idea what's to happen with inflation and they want income. And they can't get it from their job, so they get it from their portfolio. So, with all that said, my name is Michael Guyad, publisher of the Lead Lagerport. Joining me here is Howard Chan of Curve Investments. Curve Investments is one of my clients. I'm a big fan of the kind of work that Howard does with his team. Howard, for those who aren't familiar with you, I think it's worth doing a little bit of a CV background on you. Who are you? What have you done throughout your career? What do you do on Curve I?

Speaker 2:

worked a while at PIMCO, first in the Newport Beach office looking at the Global Bond portfolio, and then Global Bond was sort of everything in the kitchen sink type portfolio, and sort of the breadth of that portfolio then led me to move to the London office to build out their European ETF business, and so, and prior to that, I was at Goldman doing asset allocations for, you know, large institutional clients.

Speaker 2:

What led us to launch Curve was, in many ways, there was a convergence between the US market and the European market In 2019, there was a diverse rule that was passed by the SEC which looked at risk on a VAR framework which was actually more similar to the European market, and so we thought then that opened an opportunity to do something more interesting that more institutional strategies that we typically have been dealing with can now be put into a format that is easily accessible by everyone.

Speaker 2:

The one big change that we made was that those institutions that were using those strategies tend to be non-taxable entities so pension funds, endowments so what we had to do was marry those institutional strategies with certain tax efficiency within it, because now ETFs are available for taxable entities. So all of our strategies are in the vein where there is tax efficiency built into the strategy, built into the strategy, and we try to be in parts of the portfolio where there's sort of a missing link, I guess is the way to say it. So that's how Curve came to be, and we offer not only tax-efficient strategies but we also went into doing, now, tax-deferred solutions, things like 351 exchanges. So we're in sort of this intersection between tax and investment strategies.

Speaker 1:

Talk to me about what happened. Obviously, inflation was a big component of this, but why is it that retail in particular has been so hungry for a higher-yielding type of opportunities? Yeah, I mean.

Speaker 2:

I think I have a cynical answer and I have maybe a market answer, right, I mean before two years ago, right, it was very obvious that we were in a zero rate environment.

Speaker 2:

Assets were not providing they're providing capital returns but not enough yield. And you know, in some ways, some ways, yield is pretty important, especially we do have a large population of boomers and people who are already in retirement and who are going into retirement, whereas price appreciation is not as important as stability of income generation to supplement their income or to be their income. So even at a higher rate environment now, at four and a quarter, that stability of income is still very important for a lot of investors and especially since most of the instruments that we see that generates income either in the form of dividends or interest payments and bonds, those are fixed and so when inflation is higher, that actually aids into your ability to keep the real parity on the cash flow that you get. So I think that, despite not being in a zero rate environment, I think that is still very on top of mind for both advisors and their clients to be able to find sources of very consistent and periodical income.

Speaker 1:

Yeah, I mean I also think, just in general, there's such skepticism now around bonds period, right, that it's like I mean that was your ballast, that was your income source, that was your diversifier and guess what, the last several years that's been hell.

Speaker 2:

Yeah, I mean it's difficult, right when the curve is inverted, you don't get paid for duration.

Speaker 2:

So what a lot of bond funds have to do is load up on credit risk, right, so to get that additional yield.

Speaker 2:

I mean in bond funds, there's really one of two ways in which you would get additional yield from base rate is you either extend duration to take more interest rate risk you should be compensated for taking longer duration risk or you take credit risk in the form of moving beyond from treasuries to credit or high yield or emerging market debt. And what we've seen is in a lot of bond funds is that, since the yield has been inverted for quite a while, you're not being compensated for taking interest rate risk. So most funds are getting their additional yield through filing up on credit risk, and that's great when you are in a zero rate environment, where a lot of corporates can refinance their debt at very low rates and the economy is growing, so they have income to cover the interest payments they have on their debt. But when you have an environment potentially us having gone into recession or are already in a recession where there's a lot of uncertainty in the market, that I think you have to really manage your credit risk in those portfolios as well.

Speaker 1:

Yeah, I hadn't actually thought of this until you framed it like that, but I get it actually now, from the standpoint of today, something you're trying to get high yield to your point. You have to take on a lot of credit risk If you can get high yield by using strategies sophisticated strategies, cover calls around tech names that don't have credit risk because they're so cash flow sensitive. Allls being equal, you can argue that's relatively safer.

Speaker 2:

We actually. I think that's true, but we actually take this. I'm putting up my asset allocation hat that I've been in for a long while, right? So the common wisdom is why do we have the 60-40 portfolio 60% in S&P 500 and 40% in, say, us ags or US bonds, treasuries or otherwise? Is that traditionally what you expect that if one asset is not doing well, the other assets will do well because they're negatively correlated? Right, and it's been written in 2023 and even more recently, that correlation has been breaking down.

Speaker 2:

Bonds are not as negatively correlated as equities. For the first time when there's a risk-off environment. Equity markets sold off, bonds sold off and the US dollar sold off also, so they were actually positively correlated. So from our perspective, we wanted to find a way to generate yield that is still negatively correlated in the portfolio, and one of the places that we see as a diversifier in the portfolio is actually using volatility. So this kind of makes intuitive sense, but you can also back it up empirically. Equity markets sell off negative return, volatility goes up, so those two are actually heavily negatively correlated. Since the beginning of the year, I think, the correlation is negative 0.8. So it essentially in some ways is serving as a diversifier what bonds did in a portfolio. And on top of that, if you're able to be able to capture that volatility premium, whether you know, store volatility while volatility is high or long volatility when it's low and you can clip a good coupon and be able to distribute that as pretty steady income.

Speaker 1:

Let's talk about the mechanics of that, the types of ways that you can harvest vol using options of ways that you can harvest of all using options.

Speaker 2:

Yeah, so we have the way that we think about portfolio and I have this graphic I sent to Michael, but we don't have it here. Really, think about it in four steps. In a crisis, right, when you have a correction, which we've just gone um, april 2nd, etc. When you're when the market is correcting, what you want to do is you want to mitigate downside, right, then you might reach a certain low or some local minimum. Uh, you want to get paid while you wait until the fundamentals sort out. So we've seen this now where we had a period where volatility was really high and it was very, very uncertain what America's trade policy is. It still is, I guess. Today we at least have one, I guess, broad understanding of how we would trade with the UK. So that muddle through. You want to wait, right, you don't have perfect information, so you can wait and you should get paid while you wait. And then you want to reposition Once you have clarity in that market. The third step is then reposition for rebound. Have clarity in that market, the third step is then reposition for rebound. So now it's a little bit clearer in terms of the direction that we're waiting for all of these countries to have bilateral trade agreements with us. And then, once things are clear that there is momentum when risk is coming back into the markets, then you want to magnify your upside. That's the fourth step and I think we can do that all with volatility. And I'll kind of go through how we do it in each one of these stages. So, in the first step, which is when the market is correcting and you're mitigating downside, we we like to shortfall because when, when you write things like cover calls, you could do more complicated strategies like reversals or whatnot you have when you have a stock. Let's just use an example like Tesla right, and you write a cover call on Tesla, your beta to the underlying with that cover call is less than one. So, for instance, in some of our strategies we write 30 delta calls, which means that our sensitivity to the Tesla stock is 0.7. To the tesla stock is 0.7. So if the tesla falls by one percent, that strategy with the cover call which should, you should expect it to only fall by 0.7. So that's like mitigating downside, right. And then, once you're kind of in this stage two, where you're waiting, how can you get paid? Right and you can go between stage one and stage two back and forth. That's. You know.

Speaker 2:

Something that is often very common is that in a moment of correction or you're waiting for things to sort out, volatility is actually pretty high. So at that time, you know and maybe just for those who are not familiar with options is when volatility goes up, the price of your options go up. That's the simplest way to explain it. So when you write volatility, write calls, at that point you actually get more for the calls that you write. But you actually also have an extra benefit, which is when things are falling you can write multiple calls.

Speaker 2:

Because you write a call here and the stock falls, it becomes out of the money. To get to the same amount of exposure, you have to rewrite a call. Further down, you clip another coupon, so you clip the coupon twice, and so you're clipping coupons along the way while things are falling. So you're getting paid, you're mitigating downside and you're getting paid while things kind of sort out, sort itself out, right.

Speaker 2:

And the third stage is reposition for for rebound, right, if you are able to write a call in a way that is a little bit out of the money, you're not capping up your upside, you still have movement for the underlying to rebound, and this part is actually the hardest right. Oftentimes you want to have your portfolio to be conditional, because if there's a rebound, it generally happens very sudden and unexpected and by the time you want to reposition it's already too late. Right, the market has gone ahead of you. So by clipping coupons, writing a little bit out of the money call when it rebounds, you can actually capture some of that upswing and then after that you can reposition your portfolio to magnify whatever momentum is in the market in whatever sector. So that's typically how we think about using volatility and options to navigate a pretty turbulent market environment.

Speaker 1:

So take me through a little bit of a sort of more recent real-time example, which is how those types of strategies performed in the midst of the tariff. Let's call it the tariff tantrum right the initial decline, and then obviously this rip back higher. Let's go to the tariff tantrum right the initial decline and then obviously this rip back higher.

Speaker 2:

Yeah, I'll use an example for all of our funds. Actually, if you take a look at how it performed from, you know, let's take a corner case. Let's take an example of Tesla. Right, tesla actually has been selling off even before the tariff war. So it started selling off middle of December and then it got worse during tariffs, the tariff war, tariff announcement, liberation day on April 2nd and it hit bottom shortly before the reversal and you can see, I think, that the stock had fallen more than 30% and our strategy that writes the covered calls have actually, I think, outperformed 8% to 10% of that, and largely because our beta to the underlying is less than 1%. So 1% move in the underlying means less than 1% move in a strategy and at the same time we have been restriking the call all the way down. So the distribution for that strategy is largely around annualized 55%. So you're getting paid while you wait for the market to sort out, right, and then, when there was a reversal or at least you know step back in the I guess the tariff stance that the administration had there was a rebound and I think it's very hard for people to rebound intraday right To reposition a portfolio for intraday rebound and, because the call was out of the money, we actually captured a lot of that upside when the stock went up.

Speaker 2:

And this, you know, I only bring up Tesla because they have had a very extreme move and it's a stock that I would argue that doesn't really trade on fundamentals. It's trade on sentiment and it's particularly sentiment of one individual. But this, the same behavior, has happened on the other names that we have, like Amazon or Google or Apple, and even in our basket of texts that that this rebound, we were able to manage the correction pretty well. So I think, I think the idea and even if you're not know, um into specific technology names, like to build in some additional conditionality in your portfolio, really would help you navigate in a moment of, you know, market turbulence how much of that process is um mechanical one oriented?

Speaker 1:

is it art versus science mean? There's a lot of, you know, five to six week calls and rolling, you know, on a monthly basis.

Speaker 2:

But when the Delta of the calls uh reaches below a certain amount, we restrict right and then and then we keep doing that until the you know the market kind of, you know rebounds and and and stuff. In our basket basket there is a little bit more discretion, largely because, um, we are a little bit more active in terms of the positions are smaller, so there's a little bit more uh, you, you can pick, you have to, you have to pick a little bit of where you want to be positioned in a portfolio relative to other positions. But generally we try to be pretty mechanical in the portfolios.

Speaker 1:

Okay, so talk to me about the product lineup at Curve. You've got a number of these different funds that are doing this.

Speaker 2:

Yeah, so we have two suites that I would characterize as two suites. The first is the Y premium strategy ETFs, and these are single name, mostly all on technology names, and the original purpose of having these funds was that we were trying to solve a problem in advisors and individuals portfolio where you basically have had to pick growth or income. Most technology stocks do not distribute dividends, so you either have to go for growth or you have to go for higher dividend payments, payment equities. If you're in equity space, that generally is our utilities or financials or industrial names and those don't have growth right, it's very hard to see how utility can grow the same way as a technology company. So what we want to do is to make that trade-off a little bit easier and to generate income on technology names. And I will say this suite is generally used by people who are very dividend-focused, income-focused and people who are close or are already in retirement, where they are focused more on the consistency of distribution versus maximizing the upside potential of these particular names. You still get upside potential up to the strike of the call, but their focus is primarily on consistency of distribution. The second one that we have is what we call the Tech Titans ETF, which is also in the realm of the technology space, the technology space and there it's a basket of names of 15 to 20 names that we focus on and instead of having the cover call always on and we're trying to address this thing where, over a long period of time, if you want to maximize capital appreciation, a cover call ETF will underperform the underlying Just by the nature of writing a call you are trading some of the upside for income that you generate in the portfolio and we wanted to actually solve that.

Speaker 2:

We want to have a bit of best of both worlds. When market is risk on, we want to magnify and capture the upside, and when the market is correcting or trading sideways, that's actually the perfect time to write cover call. So then the cover call gets turned on and we generate income from the technology banks. So this is sort of best of both worlds. One of our team members you know sort of the adaptive cruise of having your kind of technology exposure in your portfolio. So when market is risk on, we want to momentum weight it to capture as much upside as possible.

Speaker 2:

But when the name does not exhibit momentum, price momentum which is what we just experienced in April we write more and more cover calls. And this is sort of indicative because prior to, I would say, february, our dividend yield on that fund ranged around 7% and in a market correction that has actually increased to 14% because the entire basket didn't exhibit price momentum. So we were writing cover calls on the entire basket so we were able to generate more income in a downside market correction environment. So the strategy is built to be a little bit counter-cyclical you get more income when the market is correcting and then you have less income but you capture more of the upside when the risk is back on in the market.

Speaker 1:

What types of declines tend to be better, more prolonged corrections or bear markets, or crashes?

Speaker 2:

in terms of the way that this operates, I would um the prolonged would allow us to clip more assistant coupon over a period of time. Um, if it crashes immediately, there's actually a second question is does it rebound immediately or does it? Where does it go after that? If it crashes immediately and rebounds, that actually doesn't affect the portfolio too much because, again, we generally write five to six weeks call. So if there's a rebound within that period before we roll, it doesn't really actually affect the portfolio that much. If it's a really hard landing, a big correction, volatility tends to spike very quickly also, and then, as I mentioned, we would just restrike the call more often because it becomes out of the money sooner. So in that case we generate more income in that scenario. So it is as we know this month. The market is very context-dependent. A lot of things could happen, but the one thing we are taking advantage of is, when a correction happens, uncertainty tends to increase, volatility increases and therefore that's actually a benefit to our portfolio.

Speaker 1:

Is it fair to say that, in general, you want, as an issuer, to target parts of the marketplace which tend to have more volatility, maybe more hype, more of a narrative than others Meaning? You know, when I think about yield and dividends, I'm thinking about utilities, consumer state holes, healthcare, blue chip, you know, not really highly volatile parts of the marketplace.

Speaker 2:

Yeah, we consider ourselves sort of an alternative income provider. So think about, like, where you traditionally would get income right. It's either from fixed instruments, so you go from, you know, treasury bonds all the way to corporates, to high yield in merchant market debts and increasing amount of risk. But I would say generally interest payments other than munis are taxed at ordinary income. So if you think about it from an after-tax basis, that's not too great. The other source is dividends, but dividends from stock is not always predictable. They can change depending on the quarterly meetings or the set schedule. Or, as in the case with tech, they just don't distribute. So you can't own a lot of that if you're really income focused. So we try to look for different ways in which we can generate income and I think using volatility premia in options is another way. The other thing I would just mention is that the tax treatment for option income is capital gains. So there is a possibility that, depending on how we manage the options and how long you hold the securities, you can get, instead of the highest marginal tax rate of 37% to long-term capital gains, which is 20%. And if we were to able to manage the short-term gains in the funds properly. There's actually a fourth kind of category, which is return of capital, which is actually not immediately taxable. The distribution goes to decrease your basis.

Speaker 2:

I think in this moment in which bonds does not have as strongly the traditional relationship with other asset classes and the fact that bonds distribute ordinary income type interest payments, I think investors should look at alternative ways to generate income. And you're not getting paid for duration risks, so you have to. Right now, the curve is a little bit better than last year, but you're getting paid at four and a quarter right now. On front end, you have to roll that every month, right? Because you don't want to buy a long-end, long-dated treasury. You're not getting compensated for the duration risk you're getting. So that's why, I think, why income is still very much in the focus of people's minds, because, even though base rate is higher, there's not a lot of good places to get good income in the marketplace.

Speaker 1:

So calling alternative income, I think, is accurate. But then of course my mind, speaking of asset allocation, goes to alternative weightings, right, and how do you think about the fits of a total portfolio? So if we say alternative income, that sounds like it should be in the alternative bucket, but we should figure out how to weight both the alternative category and then this within the alternative category. So how do you think about, or how do you see other advisors, institutional investors, think about the positioning sizing?

Speaker 2:

Yeah, I say alternative income because I think most people when they think income, they think about interest payments and dividends. Right, we actually, the way we think about it in portfolio construction context, is we actually are a good complement to dividend equity strategies. So there's plenty of both in etf format and mutual formats that they're dividend equities. So they are overweight financials, energies and utilities and they're definitely underweight. Most of them are definitely underweight technology. And so then if you pair it up with something that is overweight technology that produce dividends, that combination gives you actually closer to the sector weighting of S&P 500. So you actually get the broad exposure of sector weightings for the broad market and you get a yield enhancement.

Speaker 2:

So this is in a traditional equity bucket.

Speaker 2:

So if you have a 60-40 portfolio and you have, let's say that, 60%, you have 30% in dividend-focused equities, in dividend-focused equities, the other 30% in the technology income sleeve, that combined portfolio actually gets you pretty close to an S&P 500 portfolio with dividends, because right now S&P is yielding 1.4%, 1.5% and this can enhance, I think, like 200 or 300 basis points above that and you get a um, a favorable tap streaming on the income.

Speaker 2:

Now, if you think about this as um an alternative bucket because you you liken that as like a option strategy, uh, etc. Uh, what we actually have seen is people actually do the advisors do their math backwards. So, for example, we were working with like he has an eight percent distribution target for his client, right, you can, you can get easily four and a quarter from no risk t-bills, right, so that you have to make up that three percent, three and a half percent deficit. So you just back out what you can get in a portfolio to that 3.5% and that's the allocation to some of these alternative income strategies. So that's the two ways I think we've seen people do it.

Speaker 1:

Yeah, no, that definitely makes a lot of sense. Let's talk about doing it on an individual stock basis versus doing it on an index. Some of the pros and cons of either.

Speaker 2:

I mean, certainly the way we see it, diversification is the free lunch, so you won't have to diversify. We have six names. But we think you could do a diversification a little bit differently. On an index, you have the diversification first and then you write calls on it. So your expected yield should be lower versus individual names have more volatility. So if you write a call on there, you get more yield and then if you buy a basket of it, you get a diversification afterwards. So the ordering is different. So on an index you get diversification first, then you generate the yield.

Speaker 2:

On a single name, I think what makes sense is generate the yield and then buy a basket to get the diversification and I think, net-net, you get a higher yield doing the second way, depending on the names that you have in the basket. So that's how I would think about it. But the amount of yield you get should be proportional to the volatility of the underlying right, and a NASDAQ index is much more volatile than S&P 500 index, although they have many crossover names. So you should expect a slightly higher yield on a NASDAQ versus on a single name. Even single name on very household names like Amazon or that has more volatility than an index. So you should expect more yield on a single name than an index.

Speaker 1:

And, let's face it, people love talking about individual stocks. I mean, there's always a narrative aspect to this which is hard to beat.

Speaker 2:

Especially in this moment.

Speaker 1:

Yeah, yeah, exactly right. You always need to have a good story Now to that end. You know, there's a lot of firms that do strategies that are trying to play in the same space. What would you say? Differentiates Curve from others, and part of that, I think, should be a discussion around NAV erosion.

Speaker 2:

Yeah, I mean. So I think what we want to focus on is consistency and persistence of income, right. We want to be able to. Again going back to what I mentioned, which is, you know who are the current users or end users of these strategies are people who are, you know, income focused and who are gearing towards retirement or in retirement, so they really focus on what the consistency of income is versus other factors, and so how we differentiate ourselves is to be as consistent in distribution as possible. We want to also leave enough principles so we can generate consistent income right, and so we don't have the flashiest yield. Our yield level is where we feel we can generate that consistency, and so that's really. We come from a very institutional background, so we run our strategies very much like for a pension fund or endowment that we have a process in place and whatever we generate from the premium from the call is around where we distribute.

Speaker 2:

You do get a problem in higher distribution ETFs, which is this NAV erosion issue that you mentioned, and I think this is true of any high-yielding ETFs and strategies. So basically, the idea is that you market your ETF as a very high yield and maybe the market didn't allow you to generate that amount of yield. You to generate that amount of yield. So in order to make to, to deliver that higher yield, you actually have to distribute your principal to make that yield so.

Speaker 2:

So the easiest way I the analogy I I used to use and I I think it's very apt is you're you're a landlord, you have a property that you're renting out for $2,500 a month, right, and you're collecting $2,500 a month and everything's peachy, and then one month one of your tenants is late. So to make up that $2,500, you're selling parts of the kitchen to get that income from your income property, right, you're eating into your principal. We all know that's harmful for your asset that you've invested, right. And so the same behavior happens in high distribution ETF is, let's say, the market, you, as the investor, gave the ETF $100 to invest and the fund is promising you 7% yield. So it's distributing $7 every month, but the market only gave you 5%. So in order to make up that $2 difference, you're going to have to distribute part of the principal to make up that $7 distribution and over time, if you continuously do that, your NAV will keep going down and that's what leads into NAV erosion.

Speaker 1:

Yeah, I think that is one of the most underappreciated aspects by a switch to retail. They don't understand that concept. They think almost like it's an infinite money glitch, infinity money glitch, kind of thing. I've seen that word on Reddit and I just shake my just shake my head like wow. I mean, when there's a real bear market, there's a lot of trouble coming yeah, marching calls and you have to post collateral when the market corrects.

Speaker 2:

That's the worst time, just the the last. You don't want to sell when the market is correcting, right, that's the worst time to to do that.

Speaker 1:

So yeah, which becomes an interesting thing to think about when it comes to collecting their yields, because there's collecting the yield and then there's reinvesting the yield. So what do you do with the yield? Right? So a lot of people will take the yield and use it for expenses, but the reinvestment side should be really considered.

Speaker 2:

No, yeah, and I think this is a I think a a thing in our industry. Um, we often post total returns for our funds, right, there's a there's baked in assumption and total return I don't know if everyone appreciates is that it assumes that any distribution of funds you reinvest back into the fund. That's how you get total return. So if you are that pensioner or that person who are income focused, the total return actually overstays your return because if you're dependent on that income, you're not reinvesting it back into the fund. So your return must be somewhere lower than the stated total return, right. And so I think oftentimes and this problem is especially worse when there's NAV erosion, right. So I'll give you an example you give me $100, I made five dollars, right, I distribute that five dollars, my total return is five percent. Because it assumes I reinvest that five dollars back into the fund. Right.

Speaker 2:

For the person who's just clipping coupons and using that distribution for income, your return is zero because a hundred, you made five, so it 105. You distribute that five and you have five, right, you have 100. So your principal hasn't moved, but you generate that $5 for income. So that's no reinvestment, right. But it's even worse when you have NAV erosion. So in the case where you have $100 to invest, I generated $5 and I distribute seven. So now my principal is 98. I don't reinvest, right, because I need the income. My return is actually negative two percent.

Speaker 2:

So it that reinvestment? This is actually you. I'm glad you brought this up like that. Reinvestment is actually a hidden thing that it doesn't show up because, to be honest, to be fair, everybody's showing total return because it's Apple's comparison, right? Because different funds have different distribution rates. So you just make an assumption that everybody reinvests back into the fund. So when you compare funds how good they are, you're comparing like total returns. So when you compare funds, how good they are, you're comparing like total returns. But if you are clipping coupons, that return is not necessarily the return that you get in your portfolio.

Speaker 1:

Thank you for that, because I think it's important for people to understand these dynamics. For those who want to learn more about Curve and maybe just self-educate, because I think a lot of people are intrigued by these types of strategies, they try to do it on their own. They see that as a lot of work. That, by the way, is one of the benefits of using ECF, like what you guys have to offer. Where would you point them to and then talk through sort of the future of Curve? I'm sure you have other things that you're hoping to bring to market.

Speaker 2:

Yeah, so all of the fund information can be found on CurveInvestcom, so K-U-R-V-I-N-V-E-S-Tcom. We have had a lot of demand for our views on not just technology names but like macro outlooks and stuff. So we separate from our funds. We have a podcast called Curb your Enthusiasm where people can find out more about our outlook, and then we do have monthly calls. That goes over our portfolio and what has happened in the strategies that we do a deep dive. So those are maybe three ways that people can find out. Find more, find more information about Curve.

Speaker 1:

We haven't talked about that, but maybe on the last few minutes here let's talk Outlook. I mean, do you get a sense that? I mean, look, it's cliche to say it's going to be a volatile period. It's going to be a volatile year. Everyone was super bearish two weeks ago and everyone's super bullish now, two weeks later. What are your thoughts on the way the year plays out?

Speaker 2:

From the beginning of the year, we always think that the markets were too optimistic. So we think that our base case is that we're heading into a recession that is not already in a very, very tricky position. Do I address the inflation problem or do I address the full employment problem? Our base case is that they're not going to reset rates until towards the end of the year and, if so, it's going to be very modest, because inflation tends to be sticky and it's a harder problem to solve.

Speaker 2:

And this is one of the big macro concerns that we have and I think maybe reflected in the market, is that, for the first time in US economy, our debt to GDP is about 100%, so meaning 1% growth for 1% debt that we own, but they're growing at different rate.

Speaker 2:

Gdp maximum is going to grow at 2% to 3% In fact, less if we're going into a recession and US debt is growing at 7%. So we're entering into an era in which we are actually issuing more debt to pay for our debt, and that's really a debt spiral cycle that we it's it's restrictive on growth. Basically, um and so so it it means two things Either we cut our budget there's a $1.8 trillion deficit for the US that we're financing every year or we raise taxes. Both are contractionary. So we think that there's going to be some tough times ahead, big decisions that have to be made. It's going to be some tough times ahead, big decisions that have to be made it's, but it's going to get worse if potentially, this big tax cut legislation goes through, then you're even in a bigger hole.

Speaker 2:

But and I'm not just kind of speaking, you know about our book, uh, but the you know, last year there was, you know, a lot of questions about valuations, about tech. A lot of it has corrected that. We have seen some rebound, but we've seen actually, even in the current earning cycles, that the earnings are actually still pretty extraordinarily strong. So we always get the question is tech always expensive? So we think, if there's any adjustments, certain tech sectors would do better Things, like Netflix, et cetera, where if the economy is going into recession and people have to decrease their discretionary spending, those kind of things potentially are the last thing to go. So we think that could be potentially defensive from the tariffs. And what tariff negotiations that you know the outcome would be. It still seems extremely unclear and whether we benefit or if there's incremental benefit or it's just a settling down of uncertainty in those you know arenas.

Speaker 1:

We're going to have to do another discussion on this kind of much deeper, which we'll save for the next time, as well as hopefully do a webinar in the coming week. Appreciate those that watch this live. Again, this is a sponsored conversation by Curve. Learn more about their funds and hopefully I'll see you all on the next episode. Thank you, I appreciate it Great. Thank you, michael, cheers everybody.

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Michael A. Gayed, CFA

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