Lead-Lag Live

Income Strategies for Uncertain Markets with Jay Hatfield

• Michael A. Gayed, CFA

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Speaker 1:

I appreciate those that are joining this webinar, which is sponsored by Infrastructure Capital and my clients.

Speaker 1:

I hope this will be a good discussion on how to think about income in this environment, talking about some of the different funds and macro views that Jay Hatfield and his team have. For those that are attending this, for the CE credits, I will email you after this webinar. I'll get your information. I'll submit it to the CFP board. I am pretty much caught up on all the prior ones, but if anything is missing and you've attended them in the past, let me know and I'll make sure that that credit is given to you. If you are a financial advisor and you're watching this and you're in an office with a bunch of other financial advisors, please show some love and let them know that this webinar is underway. Have them join us during this conversation and, as always, appreciate those that support these types of educational discussions around different ways to think about asset classes markets and with great people like Mr Jay Hatfield. So, jay, I will leave it to you, but OU is my friend.

Speaker 2:

Great Thanks, michael. We do think it's a good time to add fixed income. We'll get into it. But the most important thing that happened over the last couple of days, you have two permanent Fed governors and there's only seven permanent Fed governors. There's never been a dissent of a permanent Fed governor. So the seven actual Federal Reserve Board members not the FOMC a large two of them have come out for a July rate cut Al was speaking today seems recalcitrant, but we think there's going to be a shift in the next meeting to dovishness maybe not a cut but a dovish pause. So we think it's a great time to add, to fix the income.

Speaker 2:

So just in terms of our firm real quickly, we are a deep, fundamental company, so we do quantitative screening, fundamental analysis. We have our own models. We talk to the companies to update our models. We have our own models. We talk to the companies to update our models, obviously review all the public information and then have relative value measurements to determine when to sell and when to buy. And that's proven to be highly effective over the years of running our funds, which the oldest fund, amza, was founded 11 years ago. We also are income focused, so even our equity funds have substantial income. We like old economy and call it infrastructure, utilities, real estate, great way to generate reliable income. And we do invest for the long term and you can do that when you're getting income. You can be long term focused. So we have six ETFs.

Speaker 2:

It's very critical to draw a distinction between fixed income and equity income ETFs. A lot of you know there are a lot of ways of generating really high equity income. For instance, you can have call writing funds that are based on the Qs. But it's just important to realize that's going to probably make your portfolio more volatile, not less portfolio more volatile, not less. So, whereas fixed income will lower the volatility of your overall portfolio and increase the income substantially. So fixed income generally lowers the volatility of your portfolio dramatically, compared to the stock market, that is. But equity income should be roughly in line with the markets.

Speaker 2:

So, in terms of our funds, bndes is our high-yield bond fund. Sec yields seven, the distribution yields about eight. The SEC yield for PFFA is 9.7, which is in line with the distribution yield, and same thing with PFFR it's 7.67. Pffas are active preferred stock fund. We do think preferred stocks are a great asset class, which we'll get into later in the presentation and PFFR is our REIT preferred index fund. We're not going to just talk about our fund, we're going to talk a lot about macro and about how to allocate between asset classes. We'll get into that in a minute.

Speaker 2:

On our equity income portfolio S-cap, small cap stocks, sec yields six, icap, sec yields 655. We do write a lot of calls in ICAP so we do distribute more than that 655. And AMZA is right on top. The SEC yields on top of the distribution yield Pipelines we think are well positioned because of natural gas. We'll get into that more later. Large cap and small cap dividends are good core holdings in anybody's portfolio. This just lines up all the SEC yields. We do believe if you're trying to add yield to your portfolio, we would suggest doing substantial income. So not just adding like 1% or 3%, even or 4%, but 6, 7, 8, 9%. That's how our funds are structured and this is probably the most unique part of the presentation and I, in my not humble opinion, most valuable.

Speaker 2:

We have in the past had extraordinarily accurate targets on the S&P. We were at 6,000 last year, which was by far the highest, and that target worked absolutely perfectly. It's important to keep in mind that it's just a sell when you reach a target. So I think we went up to 6,100, fell back slightly below 6,000 and closed. The 6,000 was the perfect target. So we have a 6,600 target which, frankly, is looking too conservative right now. But we do have quantitative backing for its 22 times next year's earnings for the S&P, which is roughly 300 bucks. We could overshoot, probably because of AI overvaluation. Most big AI stocks are fairly valued. There's a few, like Palantir, that are not, so those could become overvalued because of enthusiasm. So that could drive it above our target. But everybody became super bearish during the tariff situation. We did not.

Speaker 2:

Terrorists are just not that important. They're great political fodder, great way to attack the administration which a lot of people don't like. We're, you know, nonpartisan. We belong to the greed is good party, so we're pretty objective. So we just analyze the economics, not the politics of it. So, tariffs we have about 10% of the US economy Effective tariff. When you share it with the producers and the retail channel, it's probably about 5%. So that's less than a half percent of GDP. Meanwhile I mean this was not true three days ago, but meanwhile oil prices are down about 15% on the year. That's 6% of CPI and also about 6% of the total economy. So the reduction in energy prices and now we can say that we had to rewrite our notes a little bit for a few days before the price crashed, the last couple of days is way more important than tariffs. But nobody wants to talk about energy prices because there's no political angle to it. So important to separate your politics from your economics and that's the best way to make money Go give to your favorite politician with all the money you make in the stock market by being objective is our recommendation.

Speaker 2:

Another distortion that's out there, it's not so political, it's really just more administrative. That's out there, it's not so political, it's really just more administrative. The OMB when they estimate bills, they say what the impact is over 10 years compared to what would happen if legislation expires. So, in other words, 2017 Tax Act occurred, a big tax cut about four trillion. And then so the um, the omb, will say okay, well, if you extend the tax cuts, that's a four trillion dollar increase in deficit, but it's only relative to having expired. So, um, a lot of the quotes say oh well, the new budget bill is going to increase the deficit by 2.4 trillion. Well, what that budget bill is going to increase the deficit by $2.4 trillion. Well, what that really means is they cut it relative to current law by $1.6 trillion. Now the other nonsense about OMB is they quote it over 10 years, so it's really only $150 billion, to be fair. So it's relevant for people to say, well, that's not much in cuts, but it does not include tariffs, so you're going to get about a $300 billion reduction in the deficit which will make it manageable. It'll go from about $2 trillion to $1.7 trillion. We still have Medicaid and Medicare and Social Security bomb out there. So we do need to grow quickly to grow our ways out of that.

Speaker 2:

But we are bullish on rates and we do not think that there's been commentary that some of the sell-offs in treasuries was due to budget busting bills and it's just not true. What happened is Japan had a meltdown in their bond market. Us bond prices are not really determined by fiscal policy. Fiscal policy is pretty static. It's quick. We always run a budget deficit. In other words, it's determined 65% by the expected terminal rate on Fed funds, which right now is about 3%, and the remainder comes mostly from the global bond market. So most US investors overestimate the value of the US. They don't realize the bond market's global. So we're bullish on bonds and the stock market.

Speaker 2:

We don't think we're going to have a recession and you know we do acknowledge that tariffs are really unpopular. But, like I said before, and you can see, we have some data here that shows that the Republicans' chances of losing the House is now up to about 80 percent. Some of that increases due to tariffs. So they're unpopular, but that doesn't mean that they're economically significant. So I'm sure many people on this call are not happy about having to pay more for certain goods, but not economically critical to the US economy. And we talked about a lot of this. But the labor market, the Fed is always behind the curve and just not really good at its job, so they haven't really focused on the fact job markets weakening up. Really, inflation is already contained when you correct for shelter, which is two years lag, and so we do think the Fed will cut maybe not in July, but there's four meetings, so at least twice and we think the 10-year will get below 4%. So great tailwind.

Speaker 2:

And we had called. There was a lot of people said, oh, we're going to have stag inflation and we thought they were totally wrong. So for about four months we said we're going to have stag deflation. It's exactly what we've had Super cool prints on both CPI, ppi and PCE. Pce is going to print below 0.2 at the end of this month, almost certainly because it's predetermined by CPI and PPI. So all the bad news bears on inflation are wrong. Should look at oil money supplied Money supplied shrank 8% year over year. That indicates a recession Economy slowing, propped up by a booming tech market. But it is slowing and the Fed will eventually figure that out. They're usually about one to two years behind, so they'll figure it out soon.

Speaker 2:

Commodities this is actually pretty prescient in that we actually wrote a note over the weekend that, yes, after the strikes, oil will be up a couple of bucks knee-jerk reaction but we'll trade back to what we think is fair value around 70s actually collapsed below that. So it's important to realize there is supply and demand in the oil market. If nothing gets destroyed in terms of capacity in Iran, then there's gonna be a lot of pressure on oil prices and the Trump administration does have stroke with the Saudis, and so they will get increased production. Saudis are bitter enemies of Iran, so they are a close ally, for better or for worse, and the Trump administration does have influence over them. So we think that'll keep a lid on oil prices. That's super bullish for the markets and, by the way, not doesn't materially impact MLPs. They're mostly driven right now by natural gas and not oil, and lower oil prices don't really affect MLPs significantly.

Speaker 2:

Just a couple of slides. So normally, to back up what we were saying, the data is critical. The opinions are not as critical, which you can take our data and come up with your own opinions or take your own data, obviously. But the old economy slowing and this chart really demonstrates why. The cost of buying a home is now 1.9 times renting a similar home or similar apartment, so that's super negative. Kbh just blew up their earnings and kind of warned not kind of did warn because rates are just taking its toll and you've already seen that in the investment. And, by the way, investment is what caused recessions, not the consumer, which you'll never hear on television, but it's true and so you should look at investment housing investments, lagging construction investments, lagging Tech is booming, so we don't have a recession yet.

Speaker 2:

I would look at the monetary base. My supply is absolutely critical. Everyone ignores it, almost everyone except us and a couple others. And you know it's shrinking 8%. That is a headwind for the economy. It's starting to grow a little bit in the rest of the world so that's going to give global liquidity two or three times, will start to increase the money supply. To do that well, to cut the rates, they have to increase the money supply. So that'll inject capital into the capital markets and be super bullish. So the Fed does matter If anybody tells you, oh, it doesn't matter, it's only 25 base points, totally wrong, and if there's questions about that, we'd love to answer them.

Speaker 2:

So this is just our or not even not just, but is our critical CPI-R. So it corrects the shelter component, marks it to market. The BLS, shockingly, only recalculates the shelter index every six months. So there's no rationale for that in the modern economy. And they use these arcane panels of houses that they surveyed and they do renewing rents. So the shelter index is about two years behind. That's why the Fed missed the increase in inflation. Now is missing the decrease in inflation. Cpi-r is only 1.3% year over year. And we also calc PCE-R or real-time using. We use data from the internet, which is, of course, way better than these limited surveys they're doing. Basically, home prices are up about 1%, rents are pretty flat. So some housing inflation is somewhere between zero and one. But the BLS thinks it's, year over year, well over four, like four and a half. So just flat out mismeasured. Fed doesn't care. But if you're worried about inflation, you should not be. It's already changed.

Speaker 2:

So this is, you know, one of the two money slides, what I call the money slides. When you're constructing a portfolio, you should just focus on the two money slides, what I call the money slides. When you're constructing portfolio, you should just focus on two key risks interest rate risks and stock market risk. So you should know, like I was asked by a reporter for a stock recommendation and I said KKR, which is a phenomenal company, private equity company. But they said well, what are the risks? And I looked up the data and it's 1.9 times the market, so it's 90% more risky than the market. So you know that's your risk. It is a great company, it's undervalued, but if the market's weak, it's down. It's going to be down. There's no doubt about it.

Speaker 2:

So any investment, whether it's an individual stock, individual bond or bond funds or equity funds or, in our case, equity income funds should know roughly what the but are more risky than market right now. Reit's about the same Utility is only 0.6. Telecom's half, that's like AT&T type telecoms, large cap dividend stocks. Usually it's a little bit lower than this, but 0.99. So pretty modest, a little bit sort of in line, except for utilities, with the stock market. And it's probably reasonable to assume most funds are going to be close to the stock market anyway, regardless of how this data shows.

Speaker 2:

But it's interesting about MLPs they have negative correlation to the bond market. Reits, understandably, are very high, 1.5. Utilities 1. Telecoms also, understandably very high, 1.5. Utilities 1. Telecoms also, understandably, 1. Large-cap dividend stocks are only 0.76. And the reason that these correlations they usually are way lower but because it incorporates 22, they're higher than normal, normal. And so we actually are probably revives a slide to be instead of what is 10 years. But it's still higher than what's happening right now in the market. And then this is since we're talking about fixed income, I'll spend a little bit more time on this. So, same chart. You can see the beta to the S&P.

Speaker 2:

The high yield bonds are very, very attractive at 0.14. Treasuries now actually are negative over the last two years this is 10 years but are low to negative depending on the type of market. Unisame corporates those are all investing grade Preferreds are about 0.4, senior loans are close to zero. So you can add a lot of income but not a lot of risk on the S&P side. But the trade-off, of course. You buy treasuries, you get 100%. Treasury risk meanies 50, corporate bonds about 100%. Preferreds are 0.6, and then senior loans are close to zero. So you should look at all these sensitivities when you're thinking about these asset classes and try to build a portfolio that's not too sensitive to interest rates but not overly dependent on the stock market as a whole. We are bullish on both. So we do think both fixed income and equity income are going to do and equities we're going to do really well this year.

Speaker 2:

And just talking a little bit more about the asset classes, we, with our high-yield bond fund, bnds, we look for more liquid bonds. We look for public issuers. They're typically better credits. They can issue equity to improve their credit. In fact there was a huge equity offering in one of our credits. It's more a preferred stock, but gigantic equity offering dramatically improved their credit. So we look primarily, almost exclusively at public companies as issuers.

Speaker 2:

We do favor bonds that are listed, but those are hard to find. So we have about 30% listed. We look for infrastructure or asset-based companies because they're a great collateral. If you lend people money, you want collateral, and you know. We do look for higher yields or mispriced securities that you know have good liquidity. Bndes does have monthly income. We manage it actively, no leverage and we do have a little bit of preferred equity. That gives it a little benefits from some of our preferred ideas, gets a little bit more yield as well. Firds typically yield more than high yield bonds. This makes sense because they have higher volatilities. They have lower default rates, which we'll get into, but higher volatilities, and this is just the data that I had referred to before. So we're 24% listed bonds whereas the index is only two, and we do have 19% preferreds, where the index says zero.

Speaker 2:

Sectors are well diversified. Energy is a little misleading, it's really pipelines. So although energy companies are good credits now because they've reduced their leverage but and very well diversified by sector. So Plains is our biggest holding. That's a pipeline company, if you don't know that company. So pipelines are good credits because they're just pass-through entities and they're way better credits than they were five years ago because they have less leverage and better coverage and performance.

Speaker 2:

Bmds was launched this year. It's been like we would hope, just like watching paint dry. It's been like we would hope, just like watching paint dry. It's been kind of a volatile year, but it's basically trading where we issued it at $50 and producing its 8% yield.

Speaker 2:

Preferreds are a great asset class. You should focus on this. Everybody should own preferreds. In our opinion, they have lower default rates. We'll get into details 0.6 versus three percent for high yield bonds. They typically yield more than high yield bonds and they have better way better taxation than high yield bonds. Their effective tax rates usually in the low 20s, you know, assuming a 40 tax rate.

Speaker 2:

You do want to have active management if you're buying ETFs or mutual funds. The passive funds don't have smart beta rules so they do things that are really, really stupid. So this is an example of one security. So keep in mind that $25 is like fair value for preferreds. So these index funds bidded up to 34, was added to the index at the last minute, so nobody was ready for it and the index funds bid up to 30, you know, as high as almost 35. We sold most of ours a little bit too early because we didn't know how irrational it was going to be. Then it straightened back 25, we bought a little bit back and so we can take advantage of their lack of smart beta or you could say, stupidity. There's nobody stupid there, they're just following the rules that have no intelligence in them. So key message preferreds you need active management. Here's the data 0.59.

Speaker 2:

Preferreds. Investment grade, by the way, is only 0.1. Value of bonds 3.2, and for preferreds wasn't a lot worse during the financial crisis, but was way worse for high yield bonds. Uh, also well diversified. Right now we have more financials selling some of those down, but we're opportunistic. We're really low financials, uh, by design, going into the mini financial crisis we had in 22. We thought they were overrated and the yields were way too low. So that was correct. But now the new issues have been very attractive. So we will change the sector weightings depending on attractiveness or weightings depending on attractiveness. Pffas one of the top performing funds, not just the preferreds, but high yield. But do your own work on that. And then, quickly, because we're mostly focused on fixed income, I'll just cover equity income funds before we open up for questions.

Speaker 2:

Small caps we do like Everybody else hates them. It's a great time to get involved. They are bull market stocks. Their technical beta might be around one, but they always do better when the market's booming. We do think we're going to have a really strong second half as we get the tax bill behind us, get a little bit more clarity on tariffs not that they're that critical and get into summer earnings season as well. So we think small caps will do well. They traded a big valuation gap and they have great long-term growth opportunities. It's easier to grow a small company. They get acquired. One of our companies just got acquired. Mr Cooper got acquired in S-CAP. So there's always big, significant acquisitions happening. Less so on our large cap fund, icap.

Speaker 2:

Like all our funds, we pay monthly. We only invest in profitable companies. That's important. With small caps, 40% of the index is unprofitable and we only have companies that pay dividends. So we screen for attractive dividend yields and we only buy companies that trade a reasonable PE ratio compared to their growth plus their yield. If you do all those things, you'll stay out of trouble. It's a lot of work, though. It's hard to cover small companies. There's no, no street research and, if you look at this closely, so we've had excellent um performance in in s cap, but do your own work. Like I said before, uh, well, diversified. There's a lot of financials and we really focus on small cap value. So small cap value has a lot of financials, but well diversified Large cap dividend stocks. The real key here great asset class.

Speaker 2:

The reason to buy ICAP, our fund, is that we write very short-term calls that are highly curated, based on valuation and taking gains. A lot of call writing funds do index calls, do too many of them too far out and get run over. So if you look at like JEPI doesn't do well in strongly up markets, which is we find unacceptable. So we want great total returns. We don't want to tell you oh, we underperformed because we wrote too many calls, and dividend stocks are typically less volatile than the super high beta tech stocks in particular. Same thing with ICAP monthly income. Same thing with ICAP monthly income, garf valuation. We do look for higher yields and that's easier to do in large cap because you have companies like AT&T yielding well over six. You have some large cap utilities with great yields, some old line industrials. There's a lot of yield opportunities between three and six. No-transcript. There's the returns. You can review the returns for ICAP.

Speaker 2:

Good sector diversification and then a sector that is not well understood and a lot of people were burned by them about five years ago pipeline MLPs. The thing that was wrong with them five years ago is they were structured as growth companies are paying out all their free cashflow flow, trying to grow as fast as possible, spending a ton of growth capex. The problem with that is if the capital markets aren't there, then none of it works. So the hedge funds attacked them. Energy prices came down, they got religion, increased their dividend coverage, slowed down the dividend growth and cut back on growth capex. So now they have close to two to one coverage of dividends. They retain a lot of earnings self-fund. Most of their capex do share repurchases. So if hedge funds attack them, it's actually good for them because they can buy the shares back cheaper. So complete 180 degree turn where they're really solid asset class and they're tax deferred. So you can get sort of a total return of 12, yield is seven. That's pretty well, usually pretty well, tax deferred rather. And then these are very long-lived assets, your critical assets that go between major basins support exports of natural gas, support electricity generation where natural gas is moving. So a huge growth opportunity. On the natural gas side, renewables particularly after these tax bills are passed they're probably going to slow down Need a ton of new natural gas here but also overseas. So great export opportunities, so big growth.

Speaker 2:

Driver of MLPs. And, as I mentioned, our fund is 1099. If you buy them individually, get K1, which can make your tax return really complicated and expensive. So good to have 1099. But you get typically return of capital, not because we're not getting the cash in but because we're getting excess depreciation from the pipeline companies because they are still growing. They get makers. They get tax advantaged deductions for CapEx and that defers the typically not always defers the tax on the income and, like all of our funds, monthly great tax benefits for AMCA. And we do. We run small leverage, less than 20, but we do cycle that. So we try to take advantage of up markets and avoid being levered during down markets. So, as I mentioned, 1099 back supporting is critical. We have our fiscal year set up up so your 1099 won't be delayed. We close out on october 31st makes it complicated. Um, we also makes our dividend payment schedule a little bit complicated, but you still get go x. You just get paid like in january instead of november, december.

Speaker 2:

But there's a reason for that. Cleans up all of your tax reporting, so a massive simplification relative to owning the stocks individually, and you can look at this performance data. Obviously, uh, we've been great over the last five years, but do your own work. You know some diversification although you're going to get pipelines and I tend to trade together, so you should look for diversification although you're going to get pipelines and it's tend to trade together, so we should look for diversification by the rest of your portfolio, not within this portfolio. If energy is down, it's going to be down. Energy is up, it's going to be up, so we can't really diversify away from that key risk and then, with that, we just have disclosures. So, michael, I don't know if there's any questions that we can cover.

Speaker 1:

Yeah, there's a couple here. Jeff Goodman asking when you get to the right point, show slide five Head info on BNPS, pffa and PFFR again. I guess he just wants to take a look.

Speaker 2:

Okay, let's see if I can do that Yep slide five.

Speaker 1:

And folks if you want to ask a question, just click on that Q&A button. I'll bring it up here. Yeah, I'm surprised I was able to do that so quickly. You have skill, jay. Come on. I know it's hot in New York. I'm in New York too. I get it.

Speaker 1:

I don't know if there's any specific questions, but no, I think you just want to kind of see sort of the primary categories here, which is, yeah, this slide, just kind of get into that. Also, asking about a copy of the slide deck, I will have this as an edited webinar on the Leah Blank report YouTube channel. So stay tuned for that. You'll get that soon. There's a question from Robert Witt. I don't know if this is appropriate to ask or not, but any update on the CODIB preferred, codib preferred. I don't know if that's too.

Speaker 2:

Yeah, so we've done a lot of work on. I don't know if that's too, but the preferreds should be good. We do expect them to sell one of their subsidiaries and de-lever as quickly as possible, but it might take six months to a year. So we're okay with that situation. But it is a good example For those of you who don't know. They had a fraud in one of their subsidiaries and that's just impossible for managers like us to anticipate.

Speaker 2:

But the way we deal with that is we have a diversified portfolio, so it's only 2% of our portfolio. We're constantly booking other gains from new issue and that's a huge opportunity for active funds. They can buy new issue 25, sell on the 26th. So people tend to overreact to a couple situations and also misanalyze them. A lot of people were super concerned about BW, which is a Babcock and Wilcox-grade company, been around 150 years and calling us out on that. Meanwhile we were talking to them and swapped their bonds into secured bonds that have fantastic coverage. So we're on the job and if we don't think that the preferreds are covered, then we wouldn't sell them.

Speaker 1:

A question about thoughts on convertibles, and I don't mean the car.

Speaker 2:

Right? Well, that is a great question because if you do buy PFF, is the fund we can be with? We stole their ticker sort of. So it's where PFF is for active. They do have about 14 percent mandatory convertibles. They're not just convertibles but mandatory, so really de facto equity we have a little bit. I think about 5% or about 5% in some really really solid companies. So just be aware of those mandatories. You get a lot of them with the index funds and we're just taking equity risk, which is probably OK. I mean, we're bullish on equities but we like to bifurcate. So if you buy a preferred fund, you get preferreds, not disguised equity.

Speaker 2:

We have a lot of busted converts though that have really good yields, like Flagstar. Preferred U is a busted convert. Yields back 8.7. We like the credit which we can get into, but it's controversial. We like it and it's not very likely, but there are substantial backers there that really want to grow that company. So it's stocks trading 11. It's convertible 20. So that's just like sort of free upside because you're getting paid 8.7 to hold it and irrespective and it's not callable. So busted converts could be, can be a great R. Preferred A is one of our bigger holdings Also a busted convert so they're not callable, usually have pretty good yields. It's a good asset class Mandatories you have to like the underlying equity to want to be in a mandatory.

Speaker 1:

It's a question on expense ratios. I mean this relates to sort of the asset class or maybe the difficulty of the positions ratios. And maybe this relates to sort of the asset class or maybe the difficulty of the positions. But somebody commenting there's a decent difference in the expense ratio between BNDES and PFFA. Is there something about one or the other that makes it more active or that needs more activity?

Speaker 2:

just from an expense ratio perspective? Well, so that's a great question because it's misleading due to SEC regulations. So BNDES has no leverage. Pffa I should have mentioned, but I didn't. We run very low leverage 20% target, which is the lowest you'd find of any security that has any leverage. Most closed-end funds are at 40% leverage. But what the SEC requires us to do. So we charge 80 basis points for almost all of our funds. Pffr is 47, but just stick with 80. And that's what we charge for both the NDS and PFFA. Pffa, though, the total expense is going to include that interest expense from borrowing, but it's misleading because it includes the interest expense but none of the interest income that we earn by borrowing. So it's just really a meaningless statistic. So we charge reasonable fees 80 base points and you know PFFAs almost doubled the index in terms of returns since inception, and that's net of our 33 basis points of extra fees we charge. So we paid not only paid for our fees, but also added another 4% a year, which is a lot for preferreds.

Speaker 1:

It's a question around the rollover of all this government debt. From Gerald here I was reading that there's over 7 trillion in US debt rolling over the next 12 months. As you know, when those treasuries are rolled over, they'll be at much higher rates, further amplifying interest costs burdening the federal budget. So kind of the doom loop argument. How do you foresee the fact this factory impacting inflation and long-term treasure rates, in particular 30-year?

Speaker 2:

There's always big, huge waves of refinancings, just to be clear, because that's always kind of a bear case out there. But Trump administration has indicated they're going to keep it shorter term until long rates come down. So they should be able to keep it contained at least. And as you heard from our macro presentation, you know budget deficits should be coming down, not withstanding all the negativity out there. And that's not the key driver. The Fed, you know. Shrinking the money supply 8% a year, that's about 500 billion. It should be increasing it at five, that's about 300 billion. So you have 800 billion more of capital going in the capital markets. So we think rates, long rates, are going to decline below four and then the refinancings should be less negative at least. And if they just shorten everything, then they should be able to keep it relatively static. But we don't believe in all the doom and gloom out there. We think it's mostly political and or just confusion, because the CBO's methodology is arcane. What's your view?

Speaker 1:

on low credit spreads, on high yield, which for me has been the bane of my existence for a lot of reasons. Those are my tracks on my work, but any thoughts on credit spreads? Are they a?

Speaker 2:

problem. You know they're low, going lower in our opinion. So they're correlated with the stock market. So if we're right about the stock market, you know one thing that nobody talks about. But we have this huge global retirement boom. I mean there may be a time, kind of a short squeeze on your portfolio, where you just can't get yield. So whatever you think is tight spreads now might be way tighter in the future. So just keep that in mind. This is the first time in history where so many people on the OECD are close to retirement.

Speaker 2:

Tremendous demand for securities. So I wouldn't be. You know, if you can play specific events sometimes in September and market freaks, maybe that's a time to add some capital. But it's better to be fully invested, get your income and not worry too much about spreads being mean or tight. I mean our fund. We look for more attractive yields with less, with similar or less risk. Like a Plains is a good example, great credit in our models. Rating entities don't like it. You can get like eight and a half yield on it. So it's 400 over. That's plenty of spread. So we don't. Our bond funds don't have super tight spreads.

Speaker 1:

Getting a lot of praise, by the way, people saying you're a great presenter. Good question here, which is more of an interesting structural question what's the advantage of an ETF over a closed-end fund when it comes to fixed income?

Speaker 2:

Well, that's a great question too, and we always try to give great advice. If it benefits us, fine, if it doesn't, fine. So closed-end fixed income can be very, very attractive when it's trading at big discounts relative to its normal discount. So let's say we do have a September pullback, after a big rally, by the way. So I wouldn't sell now based on potential pullback in August, september. But so maybe closed.

Speaker 2:

In a lot of times closed in funds have really high fees, like, if you think, 80 base points high, they have like one and a half or something crazy like that.

Speaker 2:

And so when they have other issues, maybe their performance is not that good. So normally trades, say, at a five discount, but during market downturns they can go through 10 discount or 15. And so in that case if you were just putting new money to work, you might say, oh well, I'd rather have this super discounted closing fund than this ETF that trades right at market. But if now, like in this normal market, it's less risky to buy an ETF trading at NAV, because then if there is a downturn in the market, it won't get dislocated from its NAV, the market, it won't get dislocated from its NAV. So keep in mind that you're losing twice with closed-end funds. Like the spread gaps out and of course the underlying securities are dropping at the same time, so you just have more volatility with the closed-end funds. But there's opportunities. Like I said, if you find a closed-end fund normally trades at a 10, discount, trading at a 20, yielding 11 or something with good securities then that's probably better than an ETF, because it's just a dislocated market.

Speaker 1:

Again, folks, those that are here for the CE credits I will email you all after this conversation and, if you want to get access to this presentation, I will have this edited as a video and as a podcast under LeadLag Live. Final question here, someone saying they're very much interested in PFFA what about the elevator risk, or is there any kind of risk around low default rates? Normally people would think about risk being high default rates, but I think the mean reversion argument is there.

Speaker 2:

So what's the risk there?

Speaker 1:

Around PFFA, just any sort of views on low defaults maybe being too low when it comes to preferreds.

Speaker 2:

Oh well, we don't really believe that. I mean that's a 30-year default rate. So the driver there is what I briefly alluded to. So the company that I was referring to is a company called DHC, which is not in any case, the point being that, without getting into all specifics, that these companies are public, so they, first of all, they care about their credit ratings. They're not like high yield issuers run by private equity firms. They're public, so they almost always can get deals off, like there was a REIT that did a deal like a two and a large institution came in and bought like $300 million. So that's just not an opportunity you have when you're a private company.

Speaker 2:

But more important than just being able to issue equity, they usually pay substantial dividends. They can cut the dividend common dividend, not the preferreds and the management team is compensated based on maintaining the ratings. So they're going to sell assets and do a whole bunch of other things before they cut their preferred dividends. So we don't really think that's going to happen. The key risk with preferreds is market risk. People irrationally sell preferreds but when the market's weak, like during the tariff tantrum, they sold them down like 5%. It's 100% irrational. Referred issuers are not affected by tariffs. Almost universally they're old line REITs, utilities and boring companies like that. So there's market risk that we can't control, risk that we can't control. But for that reason you get better returns likely than bond funds because the volatility creates opportunity for active managers like us.

Speaker 1:

Jay, for those who want to learn more about the products and who might maybe reach out to you directly. How can they do so?

Speaker 2:

So then go to wwwinfracapfundscom and you'll get all the information. You can also email us. You can sign up for our webinar, which is this Thursday.

Speaker 1:

It's our monthly webinar update on the funds and we're happy to directly answer any questions, as well, appreciate those that attended this webinar sponsored by infrastructure capital and hopefully we'll see you all on the next one. Thank you, jay, appreciate it. Thanks, michael's great Cheers, cheers, bye-bye.

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Michael A. Gayed, CFA

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