Tim Buckley: John, as you know, our clients love hearing from Joe Davis, our global chief economist. But they only hear the surface of his outlook. You get his whole in-depth analysis and you get to debate it with his team. So give us a window into that. What do you guys do? What’s your outlook right now and how are you putting it in motion with our funds?
John Hollyer: Yes, Tim, at the highest level, working with Joe, we’ve gotten his team’s insights that this is likely to be a very deep and very sharp downturn—really, historically large. But also, that it’s likely to be relatively short-lived. And that will be as the economy reopens and importantly as the benefits of fiscal and monetary stimulus bolster the economy, essentially building a bridge across that deep, short gap to an economic growth phase on the other side.
They’ve pointed out that the growth, when it happens later this year, might not feel that good, because while growth will be positive, we’ll be starting from a very low level—well below the economy’s potential growth rate. Now when we take that outlook for eventual return to growth with the large policy, monetary, and fiscal stimulus, it’s our view that we would prefer to be taking some extra credit risk at these valuations in the market over the last month and a half.
So using Joe’s team’s insights and our own credit team’s view of the market, we’ve been using this as an opportunity to raise the credit risk exposure of our funds because we think the returns over time, given this economic outlook, will be pretty attractive. We think, importantly, as well, in working with Joe, that the really vigorous policy response has reduced—not eliminated, but reduced—some of the tail risk of a downside, worse outcome.
Tim: Now John, going back to our earlier conversation, you had mentioned that you had taken some risk off the table. I called it “dry powder,” a term you often use. So actually, you’ve deployed some of that. Not all of it, though. You’re ready for further volatility, fair enough?
John: Yes, that’s right, Tim. We’re looking at current valuations, the valuations we’ve experienced over the last six or eight weeks, and we’ve definitely found those attractive. But we have to acknowledge that we don’t have perfect foresight. No one does in this environment. And so sticking with that sort of dry powder approach, we’ve deployed a fair amount of our risk budget. If we do get a downside outcome, things worse than expected, we’ll have the potential to add more risk at more attractive prices. That will require some intestinal fortitude because on the way there, some of the investments we’ve made won’t perform that well.
But it’s all part of riding through a volatile time like this. You don’t have perfect foresight. If you can get things 60% or 70% right, deploy capital when the prices are really attractive, and avoid overinvesting or being overconfident, generally, in the long term, we’ll get a good outcome.
Tim: I think it just goes to show why people should really lean on your experts, your portfolio managers, and analysts to help them manage through a crisis like this. People who are still out buying bonds on their own, well, they can’t get the diversification, and they don’t have that dry powder, or they don’t have that ability to do all the analysis that you can do for them with your team.