Talk Your Book: Income and Momentum
Animal Spirits Podcast Podcast Recap
Published:
Duration: 38 min
Guests: Bill Mann, Kevin Liniak
Summary
The episode focuses on momentum investing and preferred securities, featuring insights from Bill Mann and Kevin Liniak. Key points include the advantages of momentum strategies and preferred securities in current financial markets.
What Happened
Bill Mann, Chief Investment Strategist at Motley Fool Asset Management, discusses the under-allocation to momentum strategies compared to value strategies. He explains that momentum is a behavioral factor, often misunderstood as performance chasing, and highlights how the Motley Fool Momentum ETF targets high-quality, large-cap companies with a 50% annual turnover.
Kevin Liniak from Morgan Stanley talks about the Eaton Vance Preferred Securities and Income ETF, which offers tax-advantaged income as preferred securities are taxed at capital gains rates instead of ordinary income rates. Preferred stocks are described as a hybrid of equity and debt, providing yield similar to double B high yield but with less risk.
The episode delves into the reasons preferred securities are commonly issued by financial institutions and utilities, mainly for regulatory and cost reasons. Kevin Liniak also highlights the institutional preferred market's fixed-to-floating rate securities, which offer interest rate protection.
There is a discussion on private credit, highlighting its growing popularity among advisors due to high yields, despite liquidity risks. Concerns are raised about private credits being compared to 2008 CDO squared, although some believe this is an overreaction.
The episode touches on the financial sector, noting that 25% of some portfolios are in software, which poses a risk. There is a focus on the model of banks lending to alternative asset managers, which is considered safer than direct lending.
Kevin Liniak explains how private credit firms manage outflows with backstop facilities from banks. There are concerns about SaaS stocks, but they are not expected to be replaced immediately, and AI's impact on recurring revenue is not seen as a systemic risk.
The conversation compares the current situation to commercial real estate issues in 2023, which were not systemic. The growth of private credit over the last decade is attributed to banks stepping back after Dodd Frank, and the challenges faced by traditional fixed income investors in 2022's bear market are noted.
Eaton Vance's EF evpf offers insights into preferred securities and market structure. Active management in fixed income is seen as advantageous, given the ability to diversify and make different interest rate bets. The corporate hybrid and global markets are highlighted for their attractive new issue opportunities.
Key Insights
- Bill Mann notes that momentum strategies are under-allocated compared to value strategies, though they target high-quality, large-cap companies with a momentum factor. The Motley Fool Momentum ETF aims for a 50% annual turnover.
- Kevin Liniak describes preferred securities as a hybrid of equity and debt, offering tax-advantaged income by being taxed at capital gains rates. They yield similar to double B high yield but with less risk, often issued by financial institutions and utilities.
- Private credit is gaining popularity among advisors due to high yields, despite liquidity risks. It is compared to 2008 CDO squared, but concerns may be an overreaction.
- Active management in fixed income is beneficial for diversification and making interest rate bets. The corporate hybrid and global markets present attractive new issue opportunities, with $40 billion of preferred ETFs outstanding.