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About this podcast

Dave Richardson sits down in London with Mike Reed, Partner & Senior Portfolio Manager at BlueBay Asset Management, to discuss his background and why it’s important for Canadians to consider investing in global and specialty fixed income.

Transcript

Welcome to Personally Invested. I’m your host, Dave Richardson. This time, I sit down with Mike Reed. Mike is a partner and Senior Portfolio Manager at BlueBay Asset Management in London. And Mike is one of my favorite people to run into in London, because he is a true Renaissance man, a bon vivant. Whether it’s food, wine, clothing, racing cars, or knowledge of almost any subject, Mike is an incredible personality, and I think you’ll really enjoy the conversation that we have about the importance of Canadians investing in fixed income, not just in Canada, but all around the world. Enjoy.

Great to see you, especially in London, where you live. Again, welcome

Thank you very much for inviting me. So, it’s great to be speaking to you again and great to see you and your colleagues here in London this week.

Well, you know, it is unfortunate that we are doing it as a podcast and not a videocast because you are wearing—as you will get to know Mike, he is truly one of London’s bons vivants—he has a spectacular waistcoat on that is really worth seeing. We’ll post a picture with the podcast. And he has given me a lovely waistcoat myself, which is the British flag.

It is a Union Jack waistcoat, and you are wearing it very well, I might say.

Oh, very well, very well. I have been travelling and eating a little bit too much: It may not fit. We might need to get it altered. But that is not why people are here. We really want to get to know you a little bit because, again, you have got such an interesting history in terms of the investment industry. What got you started in investments and along this career path?

Well, you are taking me back a few years now. I guess my background—I started, I trained as an engineer and graduated an engineer back in the late ’80s. And, at that time, the London financial scene was booming. It had just taken off here. We had had the Big Bang and the American banks were moving over here, and they would bring a different type of financial expertise into the markets here. And the traditional stock broker model of picking stocks and shares and taking an agency commission—that was changing rapidly here in London. They were looking for people who were financial engineers, and I was recruited into Salomon Brothers. That is a name from—a blast from the past there. But I was on the trading side, which was phenomenal training and discipline in the markets, to work with some of the biggest names—some maybe that people shouldn’t remember so well now. Let’s breeze over the ‘91 treasury scandal. But there were some amazing, amazing financial brains there. What we were looking at: we were looking at using finance, and using engineering, using mathematical methods to look at financial markets and look at analysis and be much more rigorous rather than the “let’s go and have lunch and a glass of wine,” which is also quite nice, but is maybe not the best way to be managing your money. And that is where I learned my discipline. I was in an arbitrage group there. I moved to Japan, spent a couple of years there, which was very experimental—very interesting for a 6-foot-tall, fair-haired gentleman. Standing in Tokyo, I definitely stood out on the tube. But that was fun. That was a really amazing experience, and I learned a lot out there. And then I worked in derivatives, and from 2001 to 2002, I joined some former colleagues of mine in working in a hedge fund they had set up and doing convertible bonds, which has become my specialty at this time. So, I have been working in convertible bonds since about 1994/95 as part of the derivatives group, managing it for Salomon Brothers. Then, in 2007 I was given the opportunity by the founders of BlueBay—and we will come back to the BlueBay history, I suspect, in a minute—with Hugh Willis and Mark Poole to come and join BlueBay, which at that point was a 12-billion-dollar organization. So, it was a pretty punchy hedge fund, at that time, to come to and set up, not just a hedge fund, but a long-only business here at BlueBay in the convertible bond space. And I have been doing that for about 10 years or so, as you are aware. And in the last year or so, I have done a lot of work with Canada. So, I have travelled a lot there through the Canadian products that we’ve been doing and have met with a lot of people there And I have got to know the RBC business well. So, I have taken on a role in the last year of working much more closely in a strategic-partner role with RBC. And that’s the role I have in the business today.

Yeah, and I think that really goes to the meat of what we want to discuss today, which is for Canadian investors that need to be: We’ll go along two fronts: one, that Canadian investors need to be invested outside of Canada, and you’ve got some very interesting thoughts on that. But also, the need to be in specialty types of fixed income. You mentioned convertibles and some of the different programs that are here at BlueBay and are just something you are not going to get in most places in Canada. So maybe we’ll start with global and investing globally, and, obviously, the perspective that is a little different from someone who grew up in the industry in London and Tokyo as opposed to on the streets of Toronto or Vancouver.

Yeah, I think, we ran some stats the other day for the presentations we were looking at when you brought some colleagues here. And Canada fixed income—we are fixed income specialists; I should mention that, by the way—the BlueBay specialty is fixed income. We don’t do anything else but fixed income.

Stocks?

We don’t do stocks

What else could we do? Canadian stocks?

We don’t do a lot of Canadian stocks, in fact we do none.

Fixed income only?

Fixed income is where we are at.

Okay

If we were to all wear T-shirts, they would say, “Fixed Income R Us.” If that is correct—you know, maybe, English is not our strength either—but we specialize in fixed income. Canadian fixed income represents about 3% of the global capacity.

Oh wow!

For such a strong and developed country as Canada (and that includes the corporate bond as well as the government bond markets), it is quite small. So, there is, as we say, a whole lot of world out there. So, we look at the other 97% and that’s our specialty. And there is a lot to look at there. We have deep teams in European fixed income, corporates and governments, in emerging markets where there is a lot of things to look at there, both in local currency and sovereign. We look at high-yield in Europe and in the U.S. So, there is a lot for us to look at. But what we then do is: we invest a lot of time in people, in developing our analyst teams to look at the fundamentals from the bottom up. Because I can imagine from Canada, as I am talking about the rest of the world here, and say, “Well, there is some scary stuff out there.” Once I start mentioning EM, people tend to run. That is why we need to think about what we’re doing and pick the right companies. And so, we travel a lot. We looked at, in the last year, our EM team, between them, travelled to 120 different countries to examine, on their own—they’re looking at corporates, at sovereigns, they’re meeting finance ministers. They’re meeting the heads of the ECB, They’re meeting even members of Trump’s administration. Apparently, somebody there does have something sensible to say. But we need to hear it. These are all data points for us to put together. It’s part of the mosaic we are trying to establish to work out what’s going on all over the globe. We are trying to manage the money that we are looking after for our clients more effectively.

So, absolutely critical for Canadian investors to be looking outside of Canada. And, you know, it’s so amazing, having worked and grown up in the industry in Canada. The number 3% is bandied about, but I don’t really think most investors get beyond that and think about just how limiting that is. We’re very comfortable investing in Canada, but it’s just such a small part of the world. There are so many opportunities out there, and you just have to be a part of it.

Not only is it a relatively small part of the world in terms of fixed income. It’s actually, if you look at the characteristics currently of Canadian markets, you’ve got around about 2.5%, 3% yield and about eight years of duration and that’s probably… Maybe were you don’t want to be at this point in the cycle if yields are going to rise. First of all, you have not got a lot of yield to help you, and the duration is going to hurt. If that’s the scenario we are looking at. And so, a lot of the asset classes we look at have shorter durations, and so less interest-rate risk, and also higher yields. But, obviously, with those high yields there can be greater risk, potentially. These are different characteristics. So, what we specialize in is looking at those risks and picking the right sovereigns, picking the right companies and understanding them to make the best investments.

So that’s the global angle. Now, let’s take a look at the specialty angle. So, again a lot of portfolios that, when I worked with clients over the years, very focused on sovereigns. Again, particularly in Canada, Canadian government debt or high-grade corporate debt. But there is a whole world beyond that, which is so important, and BlueBay really gets at that.

Yes very much so. I can pick a couple of examples. By being close to the market, with things like high yield, we spend a lot of time within our investment-grade team using a bit of flexibility to look at companies that are going to become investment-grade. We anticipate that. We work with the ratings agencies. We understand. We put a lot of time into it. We speak to management. What are they trying to do? Are they trying to achieve an investment-grade rating? In which case, we anticipate that. And we allocate a small portion of our investment-grade portfolios to that. We use our flexibility to generate returns rather waiting until the event has been done and the news is out there, and people then buy it, but then it is already priced in and you have lost that pick up. And that’s the way we can add extra value just in terms of technicals. And then, there is in terms of individual companies, it’s looking at the management in the eye, looking at understanding the industries, and then understanding something about the trends, understanding ESG and incorporating that into our portfolios. You know, ESG for us is a concept that we have always used in our portfolios. We now have more of a label for it. But we have to understand what the implications are for that. And good governance within companies, that’s a fundamental credit risk: good governance, environmental risk. We don’t want to invest in companies that are throwing their rubbish out into the river behind the factory because that is going to catch up with you. And that’s going to be a bad investment going forward. So, we need to be aware of that. So, we think about those sorts of things. But also, within the ESG, I think it’s very important how we are looking into the future is that we are now trying to work out what ESG means for other investors and what impact that is going to have for future returns and flows, which will have an impact on pricing going forward. And those sorts of factors are very important—as important as some of the fundamental factors these days.

And that is so critical that investors focus on every way they can diversify. And I know with equities, I think even moderately sophisticated investors have gotten to that understanding of diversification and equities. I think it is less known with retail investors in general the importance of diversification with fixed income and you have given some great examples of why that’s so important. One of those things that we talked about on this podcast with some of the other guests we have had because I think it’s so fundamental. People think of investment management strictly as the numbers, and, obviously, the numbers are important as an engineer and the engineering background and how many more engineers and financial engineers are coming into the industry, obviously the numbers are important. But also, when you’re looking at a firm and having success and sustainable success just like the way you would look at a company or a country having a strong culture and a culture that allows those great professionals and those mathematicians and engineers to thrive is also critically important and when you are here at BlueBay, you feel that. You feel a very special culture here. How would you describe that culture yourself, having worked in it for such a long time? And why do you think it’s important to the success that BlueBay has?

One of the things we really bring and I have been fortunate, I have worked on both sides of the fund management industry. I have worked as an alternatives manager and also as a long-only manager. But what we have tried to do since I have been at BlueBay—and one of the reasons I joined BlueBay—was that the founders of the company always felt that they should be run together, that you bring an absolute return mindset to the protection of capital within what you’re doing from a long-only side. It’s not just purely about a benchmark. We are trying to generate returns to the upside and make sure that we’re at the right point in the cycle to be invested and at the right point to be out. And that takes… you have to be a little bit braver and be bold with some of your decisions. But that requires a process, a repeatable process. And that is what we have tried to develop at BlueBay. That is also why we specialize. We don’t do equities here. There are parts of RBC GAM that do equities very well. That’s not what we do. We specialize in fixed income and global fixed income, and that’s what we’re looking at. And so we bring those processes and the alternative, some of the alternative approaches in the way that some of the hedge funds understand and look at things in a more active way along with the traditional long-only. And bringing, combining those and getting the best of both worlds in there, I think, is very key to our long-term success in the future returns.

Great, well, Mike. Thanks for your time on the podcast. We really appreciate it. And thanks for hosting me this week in your beautiful facility. What I think we should do right now is we should go grab a pint somewhere.

Sounds like a great idea. There is a lovely pub across the road. And for once Dave, you’re buying.

I think I could do that. That would be my absolute pleasure. Thanks again.

Disclosure

Recorded on March 27, 2019
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