It is both a blessing and a curse of being a 21st-century portfolio manager that you are likely to have worked through two major market crashes: the tech bubble of the early 2000s and financial crisis of 2007/8.
The curse is obvious: many a reputation ran aground on one or both of these disasters. The blessings, however, are more varied. Playing these crises well could make a career. Further down the food chain, they also provided valuable lessons for junior managers and analysts, many of whom are in leadership roles today.
Matt Brill, co-manager of the $3.1 billion Invesco Core Plus Bond and $1.5 billion Corporate Bond funds, is one such investor. An economics undergrad until 2002 and a bond analyst in 2008, he is now part of a team that oversees $40 billion in fixed income assets.
It should be stressed that Citywire A-rated Brill was just a student during the tech bubble, so the fact that an early stock pick got caught up in the dotcom crash should not be held against him.
Things were very different in 2008. Brill had recently moved from being a commercial mortgage-backed securities analyst to covering corporate bonds at ING Investment Management. Alongside the man who is now his boss at Invesco, Michael Hyman, they made the decision to hedge ING’s entire Lehman Brothers position just a few days before the bank collapsed.
‘We hedged every single bond that we had through credit default swaps or we sold it in cash,’ he says. ‘That was a small group decision to do that and it saved the company probably $100 million. It was a binary event – either they were going to get bailed out or they weren’t, and we didn’t want to take the risk. The upside was limited but the downside was so much.
‘It was the old thing of the market can always stay irrational longer than you can stay solvent. And Lehman Brothers was about as vicious as you could get on the downside.’
Brill moved with Hyman to Invesco in 2013. He is now a named manager on a string of funds and is broadly responsible for investment grade allocations. The Core Plus Bond is his largest strategy and is top-quartile over three and five years in the highly competitive Core Plus category.
Playing it safe
An avid soccer fan and player – Brill competes in an over-30s league and has only missed one World Cup in nearly 20 years – he likens his investment style to his approach on the pitch. ‘It may not be the flashiest or the most exciting,’ he says. ‘It doesn’t overwhelm you in terms of panache, but at the end of the game I’ve won. I grind it out, win all the loose balls and don’t let anything go out of laziness. And that’s kind of how we manage money. If there’s a nickel to be made, we’re going to make it.’
As an investment grade specialist, Brill believes US corporates continue to offer the best opportunities to bond investors, in part due to fundamentals but also because of demand from overseas investors.
‘Look at Asia and Japan in particular – there’s no yield over there,’ he says. ‘There’s no yield in Europe, so those investors are being forced to buy assets in the US. And US investment grade credit is generally the best place to get that. We want to be overweight investment grade credit because we are expecting these inflows to continue from overseas.’
Within investment grade he likes financials – particularly preferred securities from Morgan Stanley, Citi, Goldman Sachs and JPMorgan – as well as technology, media and telecoms (TMT).
He is also constructive on energy, but says that caution is required. His investments may be US-based but his outlook is international. While loath to predict oil prices, Brill believes the Saudis’ plan to partially float their $2 trillion state-owned oil company Saudi Aramco means that oil prices are unlikely to drop until the IPO next year.
‘If you are going to sell your prize asset you are going to get a higher valuation if oil prices are high, so we think they have a huge incentive to keep oil prices higher or stable because they want to get as much out of this IPO as possible,’ he says.
On tech too, he believes government policy closer to home should boost his holdings. Although the Republicans’ tax plans seem unlikely to land in the immediate future, one element – repatriation tax – could come in sooner and would push up the value of tech bonds. If tech companies decide to repatriate overseas cash, they would no longer need to borrow from the market, meaning fewer bonds in circulation. ‘Less supply given foreign demand bodes quite well for US investment grade credit and TMT particularly,’ says Brill.
‘To be honest we thought some of this might have happened quicker, but at this point people are kind of writing off [the idea that] anything is going to get done. If it does occur and it’s not priced in that’s a nice tailwind.’
Brill’s belief that the global hunt for yield is making America the place to be means that the fund’s ‘plus’ portion of the portfolio is more in high yield than emerging markets (EM), despite carrying some Argentinian debt and Chinese corporates such as Tencent.
In both high yield and EM, Brill is quick to point out that he’s not looking to add significant risk and is instead targeting those bonds most likely to be upgraded to investment grade, which will then be attractive to income-hungry investors facing a shortage of more established names.
‘We’re not looking for high yield bonds to outperform the high yield index; we’re looking for our high yield bonds to outperform investment grade,’ he says. ‘We view it as an off-index bet and we don’t want to be buying single B or triple C securities that are typical of the high yield market. We want to be looking for the best quality high yield names that have the opportunities to be rising stars and get upgraded to investment grade within the next 18 months.’
The fund is underweight agency mortgages by around 15% versus the Bloomberg Barclays US Aggregate Bond index, which Brill says is down to the Federal Reserve’s recently confirmed plans to reduce its balance sheet. But in other areas he sets less store on the central bank’s ability to influence markets, particularly around rate rises.
As BlackRock’s Rick Rieder told us earlier this year, Brill believes that an ageing population’s demand for income coupled with technological advances pushing down prices will keep inflation and rates low. ‘Is a 2.2% 10-year treasury normal? Probably not, but it doesn’t mean you go back to the days of 5% or 6%. We just don’t think that is going to happen in this environment,’ he says.
‘The Wholefoods Amazon deal is emblematic of the whole thing. Amazon has really been pushing prices down. Now they are getting into groceries, the idea is that this is going to be deflationary. This is technology pushing its way into the kitchen. Amazon takes lower margins than other corporations and the stock market is fine with it, because it has growth. It really does show what’s happening. You have these technology companies making the supply of goods easier and the cost cheaper. That’s why we don’t really feel rates will rise.’
Frank Talbot, head of investment research, Citywire
Matt Brill’s Core Plus mandate is certainly at the least risky end of the peer group, with only 13.5% of its total allocation in high yield issuance.
This hasn’t proved a hindrance to returns, however, with the fund delivering investors a return pattern that is very similar to BBB-rated debt over the past three years.
Two questions remain though: does this fit with investors’ idea of a core plus fund, and is the team adventurous enough to adapt when necessary? Nevertheless, returns do the talking, and it’s hard to question the numbers.