Franklin Templeton's Ed Perks on Fixed Income Investing

Barry speaks with Ed Perks, president of Franklin Advisers, Inc. and chief investment officer of Franklin Income Investors. They discuss income based investment compared to equities, and overall portfolio strategy. They also discuss the evolving pitch for private credit. See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

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• 1:05Speaker 02

  Bloomberg Audio Studios, podcasts, radio, news. This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

• 1:16Barry Ritholtz?

  On the latest Masters in Business podcast, my conversation with Ed Perks. He has been with Franklin Templeton since 1992. He has all of these various titles. He's not only PM of their flagship Franklin Income Fund, but he's CIO of Franklin Income Investors, President of their Advisors Group, Member of the Executive Committee. Not many people have been with the same firm their entire career right out of college. Ed Perks is one of them. Few people more knowledgeable about fixed income and non-bond yield. I thought this conversation was fascinating and I think you will also.

• 1:58Barry Ritholtz?

  With no further ado, my conversation with Franklin Templeton's Ed Perks.

• 2:11Barry Ritholtz?

  Ed Perks, welcome to Bloomberg.

• 2:14Speaker 04

  Thanks Barry, it's great to be with you.

• 2:15Barry Ritholtz?

  Well, that's really quite an impressive CV. Before we get into the various assets you manage, let's start with your background. Economics and political science BA from Yale. That doesn't sound very much like a fixed income manager. What was the original career plan?

• 2:35Speaker 04

  Yeah, it certainly wasn't finance. And, you know, at Yale, I really kind of, you know, certainly had a broad cross-section of studies. You know, like many of my classmates, I think if it wasn't med school, it was either law school or going into government. And I think that's kind of some of what I was thinking during school. Really didn't transition to trying to pursue a career in finance until actually after I graduated. And at that time, I moved out west. I wanted to, you know, experience a different part of the country. And particularly in the early 1990s, the San Francisco Bay Area had a pretty robust financial services

• 3:16Barry Ritholtz?

  Sure.

• 3:17Speaker 04

  ... community. And so I headed out after graduation without a job and was able to land at Franklin.

• 3:23Barry Ritholtz?

  Plus, you're done at 1 o'clock in the afternoon. That's the...

• 3:26Speaker 04

  You do start a bit earlier.

• 3:27Barry Ritholtz?

  You start at 5:30. It's very, very 5:00 in the morning. I remember walking into an office in San Francisco and at 8:45, there are pizza boxes around and it's sort of, "Oh, that's right, we're on New York Wall Street time because the market is live." So let's talk a little bit about the 1990s. You joined Franklin Templeton. Is this your first gig out of school in 1992? You've been at Franklin Templeton your entire career, is that right?

• 3:53Speaker 04

  Yes, it is.

• 3:54Barry Ritholtz?

  That is pretty rare these days. Tell us about what attracted you to Franklin Templeton in the beginning and what's kept you there for, geez, coming up on 40 years, is that right?

• 4:06Speaker 04

  Yeah, well, when I loaded the car up on Long Island, I drove a small Mitsubishi Mirage hatchback across country. No satellite radio, right? No air conditioning.

• 4:19Speaker 04

  No cell phones, so it was a different time, but got out to California, really had the thought that I might experience the West Coast for a year and a half or two years and make my way back to New York and get the real job, so to speak.

• 4:35Barry Ritholtz?

  Right.

• 4:36Speaker 04

  You know, and I was really fortunate to land at Franklin at a time of just tremendous growth, not just in the industry, but for our firm overall. I actually joined the original Franklin Funds.

• 4:47Barry Ritholtz?

  Prior to the Templeton merger.

• 4:50Speaker 04

  Prior to the Templeton merger.

• 4:51Barry Ritholtz?

  Yeah.

• 4:52Speaker 04

  So, yeah, that certainly dates me and makes me, I guess, a little OG. So, you know, I think what was really interesting, and I landed at first and took a role in marketing research. I knew very little about the industry structure and I wanted to learn and it gave me a great cross-section of different investment strategies. I had taken, you know, a class at Yale, investment analysis taught by, you know, a pretty legendary endowment manager, David Swensen.

• 5:22Barry Ritholtz?

  Of course.

• 5:23Speaker 04

  And I think at the time, I maybe hoped that it was a bit more of a, you know, a typical stocks for jocks kind of class, and in fact, it was not. But that did plant a little bit of the seed and, you know, but I knew I had work to do to kind of prepare myself for a role ultimately in pursuing research. And after about a year and a half and taking one of the CFA exams, I was able to get that junior role as a research analyst in the Franklin Equity Team.

• 5:54Barry Ritholtz?

  1990 San Francisco, the tech boom was just ramping up, late 80s, early 90s. What was that experience like? That had to be, the roaring 90s had to be quite an experience in San Francisco.

• 6:07Speaker 04

  Yeah, I'd say it really kind of kicked into gear more in the 96, 97 time period and then certainly right through.

• 6:13Barry Ritholtz?

  The irrational Luke Zuberens.

• 6:14Speaker 04

  Yes, and that was premature, but there was still plenty of, plenty of time to go in it. But it was a very exciting time to be out there, not just in the tech community, but thinking about some of the regional investment banks, Montgomery Securities and Hamburg and Quist.

• 6:28Barry Ritholtz?

  Oh, sure.

• 6:28Speaker 04

  Stevens, you know, so you had a lot happening. The, the, the economy as a whole, I'd say at that time was, was far more diversified than it is maybe today. Obviously, technology is such a dominant player within Northern California.

• 6:42Barry Ritholtz?

  Yeah, it's not that anything else got smaller. It's just that tech ballooned up so large and it dominates everything. Although, to be fair, I, I think finance has, it hasn't grown as fast as tech, but it certainly expanded lock, you know, fairly lockstep with technology. What's fascinating about your time, your early days at Franklin Templeton, you did credit, you did convertibles, you did equities. How important was that sort of cross-asset experience to eventually becoming more of a specialist?

• 7:16Speaker 04

  Yeah, I think it was a key component of it. I really was drawn to early days, I was drawn to the different type of analysis that you would perform based upon the kind of company you were, you were following, industry you were following. And we did have a, a, a broad cross-section of, of strategies managed at Franklin. So as an analyst following companies, you kind of always had something to pitch a given portfolio manager on. And that was something that really attracted me. So whenever we had some movement in the group or growth, adding resources in a certain area that was interesting, I kind of was inclined to put my hand up. And, and that led to a lot of the progression of, of the

• 7:57Speaker 04

  career. Ultimately, moving out of the analyst role in 1997 and, and taking on the duties of portfolio manager for that dedicated Franklin convertible securities fund.

• 8:08Barry Ritholtz?

  So, over all these different experiences and over time, how does that lead to the evolution of your philosophy as an investor? What, what beliefs did it strengthen and, and what beliefs did you learn to, yeah, this just isn't generating any? Anything that's worthwhile anymore?

• 8:29Speaker 04

  Well, I think the first thing is really kind of understanding who you are as an investor. And I'm a pretty firm believer in this, that over time, I came to understand that I like a certain type of investing. I like buying things that trade at reasonable valuations, that might not have an immediate catalyst, but something that you can look out over a longer period of time. By having that longer-term investment horizon, income naturally became something you'd focus on, in terms of just thinking about it from the standpoint of getting paid to wait while your investment kind of performs the way you think it has the potential to.

• 9:11Speaker 04

  So that's something that certainly started to resonate at the early part of my career. But I would say, actually, getting involved in convertible securities was a pretty significant defining moment for me, in that you can pursue investing in convertibles, which are hybrids, which have fixed income characteristics and have an equity tie as well, and seek out investments that have the potential for positive asymmetry. So securities where, with a given time horizon and a certain move in the underlying common stock, you'll do better on the upside than you will get hurt on the downside. And it was just something that really appealed to me, and I think is a core component of

• 9:52Speaker 04

  what we've done historically and tried to do on our multi-asset income strategies.

• 9:57Barry Ritholtz?

  Let me throw something out to you. I have noticed, as both a trader and an investor, that the equity guys who started in fixed income seem to have a greater appreciation for risk management and for thinking about asymmetrical trades, where your downside is X and your upside is 3X or 10X or whatever. What is it about fixed income analysts and investors that makes them so hyper-focused on risk management?

• 10:26Speaker 04

  Yeah, fundamentally, you're just doing a different type of analysis. And I mean, one of the things that we found kind of most fascinating over the years is, given we have an internal team of equity analysts and an internal team of credit analysts, that opportunity when you're meeting with company management and you'll sit down with both analysts. And companies typically come to investors thinking they're on an equity roadshow or a fixed income roadshow. And when you sit down and now you want to talk about it from both perspectives, that's some of the most interesting meetings we've had over the years with companies. They in fact do have kind of different stories for those different investor groups. So I think it gives you that broader perspective of what the capital allocation decision-making process looks like at a given company.

• 11:11Speaker 04

  And ultimately, what we're doing is trying to figure out what money they will have, i.e. what are margins, how are profits growing, and what they'll do with that capital.

• 11:20Barry Ritholtz?

  So in your present roles, you have the latitude to kind of go anywhere, either in the cap structure, or the allocation table, or geographically. How does that affect how you think about what's interesting, what's attractive? Like, it's almost overwhelming, that sort of freedom to pretty much consider almost every asset class.

• 11:46Speaker 04

  Yeah, I would say that's actually kind of our ideal situation, and we are in that today. I think there was a lot of, a long period of time post-financial crisis 2008-9, where almost the intent of the policy was to eliminate large sectors and the fixed income markets from being attractive to investors.

• 12:05Barry Ritholtz?

  Tina, right?

• 12:06Speaker 04

  Exactly. So, you know, I really kind of view today, and you know, the bond market being back was announced pretty loudly in 2022. So, you know, today, the fact that we can look across, you know, the swath of fixed income markets and find, you know, interesting areas, you know, it may be more income focused, i.e. if we're not expecting a significant downdraft in interest rates, the total return potential from fixed income might be more muted. But they can play a really interesting role in generating that kind of stable core total part of total return that we expect income to be.

• 12:41Barry Ritholtz?

  We're going to talk a lot about fixed income coming up, but you're CIO of income investors. What's the biggest macro variable?

• 12:51Barry Ritholtz?

  That the CIO of Franklin Templeton Income Investors looks at every morning.

• 12:55Speaker 04

  Yeah, I mean, we really think there's kind of two components to what we need to do. And, you know, one I would put in this more kind of where we can be proactive. It's the extent to which we think there's risk on the equity side of markets. Credit risk in markets or macro or interest rate risk. Those are the three kind of big risk components that we actively try to think about. I would say that sets our kind of compass for how we want to allocate the assets. And even though over long market cycles, we may be pretty equally split between fixed income and equity assets in our strategy at times, even in the last five years, that's been 75, 25 one way and then flipped the other way. So there is a tremendous amount of latitude.

• 13:40Speaker 04

  And then, you know, I think on a more daily kind of basis, certainly something that we're experiencing in pretty good dose to start the year, is those more reactive components of risk. And, you know, we do think right now, policy matters a lot. And it's, it might be fiscal policy, monetary policy, regulatory policy. But we're in, we're reminded almost on a daily basis now that there's a lot of other factors, foreign policy, geopolitical risk, that that certainly influence markets. It doesn't mean we're going to make wholesale changes to the portfolio. But being able to engage and get our investment team focused on, on where opportunities might be is a big part of the day to day role.

• 14:23Barry Ritholtz?

  So, so let me ask that question. We're waiting for some major Supreme Court decisions in a whole variety of areas. There's the ongoing battle between the White House and the Federal Reserve. That's been heating up lately. It's been sort of simmering for really a year. It seems every morning you wake up and there's some tweet or something else that are roiling the markets. Wait, we're going to cap credit cards 10%? Good luck getting a credit card. If that happened, how do you? Interact with all this news flow, is it something you ignore? Is it noise that you have to sift through?

• 15:03Barry Ritholtz?

  Or are you constantly hunting for what's really meaningful here that's not reflected in prices already? What could potentially move markets if this seems to catch a little bit of fire?

• 15:15Speaker 04

  Yeah, I think the desire would be to tune out of that noise, to largely ignore it. But the reality in markets, those examples that you've given drove some pretty significant movements, even if just for a short period of time. I would use the major banks, those that are more focused on issuing credit cards as an example yesterday and stock price activity. Last week, maybe some of the large defense contractors, how they were impacted by some of the announcements. Those are some pretty significant swings that we do have to pay attention to and do have to think about whether or not there's the opportunity. But I think if you can step back, think about it a little bit more rationally, clearly we want to engage and get the insights from our dedicated analysts on those specific situations.

• 16:00Speaker 04

  That's where some opportunities come in. And I think whether it be an isolated, very specific, maybe more short-term event, that's one instance. But if we go back a year, there was a two- to three-week period of tremendous volatility around a policy shift that really gave investors an opportunity around that tariff day and liberation day.

• 16:25Barry Ritholtz?

  Yeah, it was a week of turmoil and then on pause and off to the races. We had the most recent DOJ referral with the Federal Reserve. I spoke to a buddy on a bond desk over the weekend when this happened, and I love the attitude of, "Well, look at the two-year. It doesn't care, so why should I care?" Is that a little too glib? How do you look at how the market, especially fixed-income market, reacts to the news flow? Is that really the ultimate determiner of what's noise and what's signal?

• 17:01Speaker 04

  Yeah, I think it's a good, I might broaden it from the two year to say, let's look at the curve.

• 17:05Barry Ritholtz?

  Okay.

• 17:06Speaker 04

  Especially today, where I think there's probably more sensitivity around where longer term interest rates are sitting and potentially could go. You know, to me, anything that that increases the confidence, the raises the uncertainty level around the economy, I think are are challenges that, you know, if we were to see the long end respond unfavorably to would be quite problematic for markets.

• 17:30Barry Ritholtz?

  Coming up, we continue our conversation with Ed Perks, Chief Investment Officer of Franklin Income Investors and President of Franklin Advisors, discussing the broader fixed income environment. I'm Barry Ritholtz, you're listening to Masters in Business on Bloomberg Radio.

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• 19:05Barry Ritholtz?

  I'm Barry Ritholtz, you're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Ed Perks. He is CIO for Franklin Templeton Income Investors. He is also, has been PM of a number of their fixed income and hybrid funds, including their flagship Franklin Income Fund, which he became Lead PM, I want to say 2002, is that right?

• 19:32Speaker 04

  Joined the PMT in 2002 and Lead in 2004.

• 19:35Barry Ritholtz?

  2004, alright, not two, that's 20-plus years. So, so let's talk a little bit about what's going on in fixed income. Lot of cross currents, here's what's happening with the Fed, here's what's happening with the dollar, overseas has become more attractive. Let me just, right out of the box, where are you seeing the most compelling risk-adjusted income opportunities today? High yield, investment grade, dividend equities, and I know you could go anywhere, so what do you like these days?

• 20:06Speaker 04

  Yeah, you know, I would say in fixed income, we are really pretty diversified across the range, and for us, that is US Treasuries, it's agency mortgage-backed securities, it's investment-grade corporate bonds and high-yield corporate bonds, and, you know, we have different factors there. You know, one, we do think the carrier, the income component of fixed income is quite attractive again today, and like I said before, it's been a while since, you know, that was the case, or there was a long period of time where that was certainly not a function, not a benefit that investors in fixed income had. Spreads on the corporate side do, you know, concern us a little bit, but at the same

• 20:46Speaker 04

  time, you know, we have seen extended periods of time historically where spreads have stayed on the tighter side, near historical lows. So, you know, our view is that you want to be diversified, look a little bit more at idiosyncratic risk. So, sometimes in our, in our strategy, we do think the biggest lever that we have, moving from one asset class to another, is the most appropriate. We certainly had that in 2000. Twenty twenty one and twenty twenty three. Today, we think that lever is a little less important and it's a little bit more about relative value between sectors and or security selection idiosyncratic risk. So I think in the past year, moving out of some of the significant overweight that we had

• 21:30Speaker 04

  in investment grade corporate debt, for example, in favor of agency mortgages because spreads had really widened out was something that worked out well for us in twenty twenty five.

• 21:38Barry Ritholtz?

  I noticed you didn't mention TIPS, Treasury Inflation Protected Securities. Is that something that at the current level of inflation and the current yield there? Is that attractive?

• 21:49Speaker 04

  Yeah, it's not something that we're focused on on today. You know, I think to the extent that we see inflation continue, you know, to come down and settle in at a lower level, that TIPS may become something that we want in the portfolio to the extent that then inflation could surprise to the upside.

• 22:05Barry Ritholtz?

  And let's talk a little bit about those corporates you mentioned.

• 22:10Barry Ritholtz?

  Are we getting enough spread between investment grade and high yield corporates to make the juice worth the squeeze or because for a long time, there's hardly any daylight between the yield in both. How do you look at that? Are corporates cheap or expensive investment grade relative to high yield?

• 22:32Speaker 04

  Yeah, we do think moving up into the higher credit quality components of high yield is probably one of the more attractive areas. You know, we also like to so if you're looking at triple B double B spreads, we want to be in in the higher quality credits. To the extent that we're owning a broader section of high yield, which we do in our strategy, it's emphasis more on the latter. Security selection, what is an individual company doing to be able to refinance the debt, to term out their maturities, or ultimately to improve the overall credit quality? We do think rating agencies lag by a significant margin. And if you can get ahead of that and use your fundamental analysis, that that's a that's a an area within the fixed income markets we want to be focused.

• 23:13Barry Ritholtz?

  I'm trying to remember who I'm stealing this line from, but it's definitely not mine, which is there's so much variation in the B minus space that some of it is junk and some of it is IG and maybe some of it's in between, but the variance is is enormous. Fair statement?

• 23:32Speaker 04

  Yeah, I think that is and, you know, certainly there are investors that play only in certain parts and when you're flirting with that lower credit quality component, B- minus into triple C, that, that, that starts to change the dynamic of, of who the investor base potentially is.

• 23:47Barry Ritholtz?

  So, you've been doing this for a long time. You've lived through the financial crisis, ZERP, zero interest rate policy, quantitative easing, the most recent inflation shock and, and tightening cycle. For someone who has your authority to go anywhere, what of those types of environments are the most challenging to manage an income portfolio through?

• 24:16Speaker 04

  Yeah, I mean, I, I think certainly the periods of extreme volatility are going to be challenging for any strategy. And, and in my career, the ones that I'll, you know, go back to certainly when managing the convertible fund around the dot com crash. And then in our income strategies, both the financial crisis. So, you know, yeah, markets bottomed in March 09, but September of 08 was pretty difficult for any investor. You know, to me, I think what's really defined our strategies and maybe become a little bit of a, you know, the focal point of, of our approach is, is to continually look forward. I mean, I think the, the number of investors, even if we were to bring this more into the

• 24:57Speaker 04

  current, you know, time, we spoke less than a year ago and tariff volatility was impacting markets. I think a lot of investors have the tendency to, you know, to sit on their hands a bit when there's this kind of volatility playing out in markets. And maybe even, even the worst case would be going to the sidelines, which we know a lot of investors did in September of 08 or March of 09. And-

• 25:20Barry Ritholtz?

  Or the first week of April of last year.

• 25:23Speaker 04

  Exactly. And, and that's where I think because we have such a flexible mandate, our attention turns more to how can we optimize the positioning of the portfolio? We always have assets that are benefiting in some way, have some liquidity profile to them that lets us focus on being, playing offense a little bit more during those periods of time. And I think that's something that has, has always enabled us to kind of recharge the portfolio. Pretty firm believer in the price you pay matters concept, whether it's an income investment or, or something that's designed to create more capital appreciation. And, and that's something that, you know, really has- enabled us to kind of ultimately come out of periods of volatility and deliver for

• 26:06Speaker 04

  our investors, even though there might have been some bumps along the way.

• 26:11Barry Ritholtz?

  So 2022 was the first year that saw double-digit losses in both stocks and bonds since 40 years earlier, 1981, which I recall was also a rate hiking environment, not quite as aggressive as what we saw in 2022. I've noticed people talking about anticipating that again and preparing for it. Is that a little overly cautious? How often do we see stocks and bonds both down that significantly in the same year? Is that likely to happen anytime soon?

• 26:47Speaker 04

  Well, I think the backdrop was really set for that dynamic. And what I mean by that is where rates had declined to. You didn't have the carried offset negative returns in fixed income and the resetting of where rates should have been, provided the fuel to drive those kind of negative total returns. So we really think we're in that, certainly not in that position today. Never say, you know, can we, you know, don't expect that that can never happen again, but certainly not the backdrop that we're envisioning today. So just the rationale of why are bonds, can bonds be a diversifier in a multi-asset

• 27:28Speaker 04

  portfolio? You know, I think we would have argued, and if you look at our asset allocation in 2021, we did not believe so. And they certainly did not offer attractive income for investors.

• 27:39Barry Ritholtz?

  And that was good for prior 20 years. They were not producing a whole lot of income. After 2022, yields were, look, money markets were over 5% for a while. Now, we're in a rate cutting cycle. How does that affect how you look at fixed income products? Are you looking to extend duration? Are you looking to extend credit quality? Is there now reinvestment risk if you're too short? How are you thinking about this?

• 28:10Speaker 04

  Yeah, we made such a significant move in into fixed income in 2022 and and and 2023 that, you know, we do have that now in the corporate space in particular. We have companies that are are engaging the market refinancing. So some of the real prized kind of investments we were able to make at the time. You know, we are now seeing some cash coming back into the portfolio. But way we treat that is that just because a dollar comes out, maybe a high yield bond is called away or matures, which they do in fact do at times. It doesn't mean that dollar goes back into the high yield bond market for us. It's always going to be that next most attractive place that we're looking. Today, we might be looking, you know, more specifically in structured equity

• 28:53Speaker 04

  or in convertible securities where, you know, we think outside of the the very large mega cap tech companies that have driven this market since 2023 that there's pretty reasonable valuation. So there's a lot of companies, whether it's utilities or industrials, that I think have a pretty interesting profile for the rest of the decade. So if we can pursue investments in their common stock, maybe there's a 2% to 3% dividend yield. But if we can access a convertible, we can blend that yield up to something that's more attractive for our strategy and yet still retain, you know, a pretty interesting profile on the upside.

• 29:28Barry Ritholtz?

  My assumption is if something is being called away, it's that it was too generous and now they're refinancing at a more attractive rate. Let's talk a little bit about the Franklin Income Fund. You're only the third lead manager of this flagship fund. You followed Charles Johnson, who was fairly legendary in the fixed income world. And and tell us a little bit about what it was like taking over as lead manager of that fund.

• 29:59Speaker 04

  Well, first let me mention I had a chance to to sit down with Charlie last month, something I try to do on as regular basis as I as I can and to still see and and meet with him and hear the stories of of some of the history is something that I really, really cherish and value doing. You know, I think from the standpoint of of The path that we've been on with Franklin Income, you know, joining in 2002 was, it was a large strategy for Franklin at the time. It was, you know, around eight billion in assets under management. And I think what really kind of maybe though defined the strategy

• 30:39Speaker 04

  was that period coming out of the financial crisis and, you know, navigating our way and being able to engage the broad cross-section of markets and perform very well for five-year period really helped establish this. But at the same time, you know, we realized that investors, financial advisors do like a range of different strategies or the ability to use different vehicles to deliver an investment strategy. And that was something where in 2022, we launched Franklin Income in SMA vehicle and in 2023, we launched Franklin Income Strategy in an ETF. So it's been, and, you know, to see that strategy get adopted

• 31:22Speaker 04

  in different vehicles is something that was a big part of taking this strategy that's been so important for Franklin Templeton as a whole to a different type of investor.

• 31:33Barry Ritholtz?

  And for listeners who may not be familiar with the Franklin Income Fund, a couple of things really struck me about it. First, not too long ago, it celebrated its 75th anniversary. Ain't a whole lot of funds that have been running continuously for 75 years, since 1950. And then secondly, and this amazes me, uninterrupted monthly dividends dating back to the launch, which was, I think, 1948? Is that right? That's unbelievable.

• 32:05Speaker 04

  It is a great, it's really a great story. It was part of the original custodian funds for Franklin. And the first four were, you know, really the four asset classes at the time, a bond fund, a stock fund, a preferred fund, and a utility fund. And then the final series of custodian funds was the Income Fund, which was meant to look at those other four strategies, four asset classes, and find the most attractive income investments.

• 32:31Barry Ritholtz?

  Sure, the four food Groups, that's the core and you create a whole meal out of that. So you mentioned agency mortgage backs. What else do you look at that are either asset backed or CLOs or any exotic other products that theoretically generate pretty good yield relative to the risk the investor assumes?

• 32:56Speaker 04

  Yeah, I mean, I think that agency mortgages tend to be our core component within that part of the fixed income markets, but we're always evaluating different opportunities, asset backed oriented investments. And, you know, right now, we're pretty light. We do have a fair amount of corporate debt that is secured debt.

• 33:15Barry Ritholtz?

  So I recall coming out of the financial crisis, DoubleLine as an example, had a ton of mortgage backs and it just seemed as everybody refinanced and refinanced their homes, the available paper just disappeared. I'm doing this off the top of my head, but it was something like 90% mortgages when it started and ended up at like 25 or 35% mortgages. We've seen a significant slowdown in home sales. Yield has been higher than it's been for the past 20 years, so we haven't seen a lot of refinancing or a lot of new issuance. Is there enough mortgage backed paper out there? What's going on in that space?

• 34:00Speaker 04

  Yeah, and certainly it's been topical just the last week or so with, you know,

• 34:06Barry Ritholtz?

  Fannie and Freddie purchases. 200 billion a month or some wild number?

• 34:10Speaker 04

  Yeah, an additional 200 billion, but even beyond that, there could be an extension. So, you know, we did see the mortgage market react. I mean, we saw spreads kind of come down and, you know, ultimately bringing longer term rates down is going to be probably the biggest beneficiary in terms of activity within the housing market.

• 34:27Barry Ritholtz?

  Right. Do we have to get down to 5% mortgage rates to see this really kick up or where are we now, six and change, six and a quarter?

• 34:35Speaker 04

  Yeah, I mean, I think certainly that needs to be the direction of travel, what that that specific number needs to be to get some activity. Probably there's some other factors as well. Certainly, the overall health of the economy and the labor market are going to be a major, major component of being able to get some of that activity going in the housing market.

• 34:53Barry Ritholtz?

  How closely do you track macroeconomic?

• 34:58Barry Ritholtz?

  News like if I had to describe the labor market today, I would say it's still solid, but not as strong as it was a year ago or even six months ago. Really, since April, we've seen it kind of soften up. We're not seeing big layoffs. Do you I always feel like a macro tourist when I I visit that space because it's not my charge to predict labor markets. How do you integrate looking at all these data points that seem, as you said earlier, so noisy, so hard to find the signal in there?

• 35:35Speaker 04

  Yeah, there's something like the labor market clearly is taking kind of a front seat, right? We had the Fed really focused on fighting inflation. And then as we saw the labor market weakening ultimately and encouraged for the Fed to, you know, begin a resumption of the of the interest rate cuts. Now, you know, I think there's a kind of a reluctance in the labor market on both sides, right? There's a reluctance maybe at the corporate level to hires, a lot of uncertainty. Some of that was brought on by the onset of tariffs and just the uncertainty around where that was going to impact businesses. And then I think you can't ignore AI and the role that that's having. So there's this reluctance maybe to hire and a reluctance to fire. So we're stuck with a little bit more stagnant component in the labor market.

• 36:20Barry Ritholtz?

  Really, really interesting. Coming up, we continue our conversation with Ed Perks, CIO of Franklin Income Investors, talking about where he sees value in various equity markets. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.

• 36:51Speaker 01

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• 37:24Barry Ritholtz?

  I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest today is Ed Perks. He's Chief Investment Officer at Franklin Templeton Income Investors, as well as President of Franklin Advisers. He has managed several go-anywhere, as well as income funds for Franklin Templeton, including the flagship Franklin Income Fund, which can purchase pretty much anything it wants that generates income. We were talking earlier about the fixed income portion. Let's talk about the equity portion. And I recall reading something you said as we were coming out of the pandemic

• 38:08Barry Ritholtz?

  about the dominance then of growth stocks over value. How has your views changed over the past five years of, other than 2022, double-digit gains in equities?

• 38:22Speaker 04

  Yeah, I think we've gone through this period since the pandemic with different cycles within the equity markets. And certainly, there was a tilt immediately towards growth and value underperformed. I think it shifted a bit. Certainly, in '23 and '04, we saw a transition to more of a market cap dominance. And that certainly has proceeded, I think, since the beginning of 2023. Something like the S&P 500 market cap has nearly doubled the performance of the S&P 500 equal-weight index. So we do think there's a lot of other things kind of under that initial layer. If you pull it back and look at the broader

• 39:04Speaker 04

  equity markets, that there's a lot of opportunity across industries where companies are benefiting from the expansion in the economy, that are benefiting from the secular dynamics that we see, whether it be in manufacturing investment or technology investment.

• 39:19Barry Ritholtz?

  Interesting. So we've also seen active equity management under fairly intense competitive pressure, really, for a good couple of decades. How does that change how you look at equity selection or asset allocation?

• 39:37Speaker 04

  Yeah, I think from maybe a bigger picture, the move towards more passive exposures, the flood of money into passive investments has maybe exacerbated some of these dynamics around particularly the dispersion between the mega cap stocks, the market weighted indices and the average stock or the equal weighted indices. I think for us, it really becomes more about security selection. There's still plenty of liquidity in those other stocks and to the extent that we can turn over rocks that maybe other investors are not looking at, that are not being influenced as much by the magnitude of flows coming into passive indices is something that is a big part of our overall allocation.

• 40:22Speaker 04

  But I would really go back to this kind of view that as an income investor, we can look for opportunities where we're not trying to identify the catalyst next quarter or two quarters from now. We're looking at investment with favorable fundamentals that we think over time can deliver for investors and that income component, once again, kind of a significant part of maybe the near term total return.

• 40:46Barry Ritholtz?

  So let's talk about those different asset classes that you're not looking for great quarter guys, you're looking for great decade, convertibles, equity, bonds, credit. Do you play in the private space as well? How significant is that? Tell us about all these different multi-asset options you have and is there an overall core philosophy that sort of strings all of these together, keeps them all in one philosophical bucket?

• 41:18Speaker 04

  Yeah, I think one of the more interesting components of our strategy is taking a little bit more of a holistic approach for how we invest in a company. I mentioned before, sitting down at times with company management teams when you're approaching it from both an equity and fixed income analysis standpoint. Well, looking across the capital structure, it's pretty common that between a third or 40% of the portfolio will be invested in companies where we own multiple parts of a company's capital structure.

• 41:48Barry Ritholtz?

  Meaning their bonds, their equity and their convertibles or some combination?

• 41:52Speaker 04

  Which it is somewhat common in a multi-asset strategy to have kind of different... Components.

• 42:00Barry Ritholtz?

  And if you like the company, if you've done the research and it's income, not just capital appreciation, why not own everything? Do the valuations fluctuate within the same company from corporate to equity to convertible? Sometimes a part of their cap structure is more appealing than others?

• 42:18Speaker 04

  Absolutely, and that's something that we've really seen over the last five years. Certainly when longer term rates were a lot lower, really across the board, there were companies where we saw equities trading in mid teens multiples with 3% dividend yields and the same benchmark longer term debt from those companies yielding one and a half to 2%.

• 42:37Barry Ritholtz?

  Didn't make any sense, right?

• 42:39Speaker 04

  Exactly.

• 42:39Barry Ritholtz?

  Well, I recall-

• 42:40Speaker 04

  At that time, we'd be very tilted to the common stock and using other things within the equity, structured equity in particular. But fast forward two years, rates surge higher. Those same companies, the stocks, in many cases, were at the same levels or same valuations, yet bonds had gone from yielding 2% to maybe yielding 5, 5.5%.

• 42:58Barry Ritholtz?

  I recall a couple of the big tech companies, and I want to include Microsoft and Apple in them, in that list, issued 2% long term bonds, and yet the yield was almost that, and you had all the upside of the equity. Like, I don't know who was enthusiastic about that. How do you, when you see a new issuance like that, 2%, why won't care about 2%? Or is 2% attractive in a zero rate environment?

• 43:30Speaker 04

  Yeah, I think for us, it's much harder to have that make sense in our strategy, to play a role in the portfolio. But it's something that, you know, the more that's out there, we may not have participated in those new issues in 2020 or 2021, but come back in 2022 when rates move and investment-

• 43:48Barry Ritholtz?

  Suddenly, they're attractive, right?

• 43:49Speaker 04

  Yeah, I don't think, you know, many investors didn't expect that investment grade corporate bonds could drop 20 to 25 points, and they did. So there's always a time for it, and the more of that that is issued in the market just gives us that, that opportunity down the line.

• 44:01Barry Ritholtz?

  Just because it's investment grade doesn't mean it's not subject to interest rate risk, right? I think that's kind of, you know, fixed income 101.

• 44:09Speaker 04

  Yeah, that was part of the, you know, like I said before, the very loud announcement that the bond market made around its returning to a more normal functioning in 2022.

• 44:19Barry Ritholtz?

  So, so let's talk about the flip side of that. Real default risk. We haven't seen a whole lot of defaults, other than a handful of very specific corporate. There was a big fraud case recently, that company and all its fixed income. In the automotive sector, crashed and burned. But for the most part, fraud, default rates have been fairly low. How do you look at, at that risk? And is it a sort of top-down macro approach? Or is it company by company, balance sheet line by balance sheet line?

• 44:55Speaker 04

  I think first, from a top-down standpoint, you know, we have had a nice tailwind. We have had an economy that's been growing. We've had capital markets that have provided solutions to companies that need to get through. There's also been probably a fair amount of, of, you know, restructurings along the way that in prior market cycles would have led to a higher default rate. So I think you have to make that, that adjustment as well. I think for us, in our strategy, it's very much though about the fundamental analysis, the idiosyncratic risk and, and working. We want to be in situations, particularly in lower credit quality companies, really understanding that that path that management has to ensure that the company moves to a more solid footing.

• 45:40Speaker 04

  And that could be the debt maturity wall, or access to capital and liquidity to ultimately deal with debt as it comes due.

• 45:49Barry Ritholtz?

  How do you think about systemic risk relative to what the central bank is doing and the Treasury Department is doing? Treasury Department, when, when we look at, we had the financial crisis, we had the pandemic, we had the flash crash, we had that little hiccup with Silicon Valley Bank and some of the other banks that, that.

• 46:14Barry Ritholtz?

  In reality, were contained as opposed to what we saw during the financial crisis. Do investors look at these institutions as providing a put, providing a ready rescue plan, or is it more, less about specific companies and more about we're not going to let the system collapse?

• 46:38Speaker 04

  Yeah, that's a good question. You know, I think we've been through a lot over the last 20 years.

• 46:43Barry Ritholtz?

  A lot, right? A hundred years' worth of stuff in a decade and a half.

• 46:47Speaker 04

  Yeah, I think if you look at some of the policy measures, maybe not, you know, initially out of the gate following the financial crisis, but, you know, the long tooth that some of those policies had and the distortion ultimately that was created in markets, I think there's a different view of maybe the appropriateness of some of the policy today than there certainly was at the time. You look, ultimately, the fear of systemic risk does create opportunity for us. I think being in a highly diversified strategy, not just from an asset class standpoint, but investing across the range of fixed income sectors and the range of sectors within the equity market certainly helps lend a bit of resilience to the strategy in the case

• 47:28Speaker 04

  where markets become a little bit more concerned about systemic risks. You know, I think one of the probably more interesting things that is happening today that I'm sure you've talked to other guests about is the private credit space, where we've just seen tremendous growth, tremendous amount of capital being committed there and ultimately needs to be deployed. And I think some of this doesn't have quite the same level of transparency that it would have had if it was in the public credit markets. So I think that's something that, you know, we're certainly close to and both looking at potential opportunities because we can play in private assets within our Franklin Income strategies, but, you know, if there were something that, you know, we would want

• 48:10Speaker 04

  to keep very much on the radar is what is happening in that space in terms of credit quality.

• 48:16Barry Ritholtz?

  The criticism that has come up about privates is that it's a form of volatility washing, you're not getting marks on the regular that are market-based, it's, all right, we think it's worth about this, here's what the peers are worth, so let's sort of... Ballpark this, how do you think about that? Is that a fair criticism of that space? And, you know, the main appeal seems to be, hey, it's non-correlated, it's potentially better returns. How do you look at the pitch from the private credit side?

• 48:53Speaker 04

  I think it's evolved in a healthy way. I think using volatility measures is somewhat debunked. I think, you know, leading with a sharp ratio when you're comparing public and private assets is not something investors should be focusing on. You know, I think the, ultimately, it has a meaningful place. The definition of public credit can be extraordinarily, of private credit, sorry, can be extraordinarily wide. And I think as that capital has come in, it has started to look at a lot of different places to ultimately have its role in financial markets. So, we certainly think it's a viable asset. We just, in any, and really, this goes kind of across any asset.

• 49:37Speaker 04

  When you see the kind of capital moving into a certain area, there's just a greater risk of maybe less disciplined things happening. And that's something that, you know, we think could become, you know, a little bit more apparent here as we move forward.

• 49:51Barry Ritholtz?

  Huh, really, really super interesting. So, we've talked about various asset classes, we've talked about privates versus publics. What do you think the average income investor, yield investor, doesn't understand about either the SMA they own or the mutual fund or ETF they own? I know fixed income is not quite as intuitive as equities. You must hear from a lot of different clients. What's out there amongst Main Street yield investors?

• 50:24Speaker 04

  I think one of the biggest things that we come across is there's just a natural view that if you're an income investor, you own a certain type of stock or have a certain type of equity exposure. And maybe that's rooted in the concept of, you know, like, utility stocks, right? Bond-like surrogates. It's within the equity market. That's what you must invest in as an as an income investor. And the reality is is much broader than that. Even in the component, say, of the S and P 500, nearly 40% not paying a dividend or paying a very low dividend, that's still something, whether it's through convertible securities, going back to that kind of earlier part of my career, or using structured equity,

• 51:07Speaker 04

  where we can create a security that we can own for a year or two years that can replicate that kind of profile in our strategy. So that opens up the opportunity to own, and we do in our strategy today, convertible-like instruments in Amazon, in Microsoft, in Meta. So we really have a much broader cross-section in the equity markets to pursue investments.

• 51:29Barry Ritholtz?

  Huh, really, really interesting. Sticking with dividends, the S and P 500 dividend yield, under 2%, way back when it was 3.5%, 4%. How do you look at dividend stocks as a whole? How attractive they are, the valuations there? How do you think about that group as a source of yield?

• 51:55Speaker 04

  Yeah, I think it's a group that you want to consider. I think back to the, just the profile we've had in equity markets, the dominance of mostly non-dividend paying stocks, the mega-cap tech companies in particular, and not to say that they can't continue to be decent investments, but there is that whole cohort that still focuses on dividends, not just dividends, but consistent growth of dividends. I mentioned utility companies several times. One stock that we've actually held in the portfolio the entire time that I've been a portfolio manager is Southern Company. And what probably very few people would would expect, if you go back to 2002, since that time period, Southern Company has actually matched the return of the S and P 500.

• 52:41Barry Ritholtz?

  Really, really interesting. We're seeing signs of the market broadening out. My favorite data point from 2025, everybody talks about the concentration on the magnificent seven, outperforming, only two of the mag seven beat the S and P 500 last year. Amazing data point. How are you looking at the rest of the S and P 500? How are you looking at the value sector? Can we reasonably expect to see this broadening continue in the future?

• 53:12Speaker 04

  Yeah, we do think there is some interesting value in parts of the equity market. And maybe they are companies that have been a little bit out of the spotlight. We do have a pretty good amount of sector diversification, so we're finding opportunities in these different areas. It'll be healthcare, it'll be industrials, energy, utilities, even in materials. Some of these trends, let's take globalization and really this move that is still evolving into maybe hemisphere controls and nearshoring of supply chains, some things that came out of the pandemic. All of that has pretty significant implications.

• 53:52Speaker 04

  So finding companies that have that, a play on a select theme that you identify and want to play, we think there's a lot of that opportunity in the equity market.

• 54:02Barry Ritholtz?

  I've been mostly thinking about and talking about U.S. equities. Last year was the first year where MSCI developed and even emerging markets, just wherever you looked overseas, thumped the U.S. And the U.S. was up almost 18%. Nasdaq up a little over 20%. How do you look at the rest of the world when it comes to either fixed income or equities?

• 54:29Speaker 04

  Yeah, I certainly think that made a great storyline for 2025. Reason being, if we go back and look at '23 and '24, though, U.S. stocks had outperformed so massively.

• 54:41Barry Ritholtz?

  Or the past 15 years or so.

• 54:43Speaker 04

  At some level, we do think it was primed for a little bit of a reallocation towards non-U.S. markets. And then you add on some of the policy dynamics around tariffs and...

• 54:53Barry Ritholtz?

  And the dollar dropping almost 10% last year.

• 54:56Speaker 04

  Exactly. And that really led to some of that reallocation. A lot of the outperformance of non-U.S. equity markets in '25 did happen during that period of time. So if you were to take a look at more of the second half, a little bit more balance between the markets.

• 55:09Barry Ritholtz?

  And then our last question before we get to my favorite questions I ask all my guests. What do you think investors and traders are not talking about, thinking about, that perhaps they should be? And you're a go-anywhere investor, so you go anywhere with this. What assets, geography, policies, data points are getting overlooked but shouldn't?

• 55:33Speaker 04

  Yeah, I think we're going to keep coming back to right now, we really feel like policy's paramount. So really focusing on where policy will ultimately take the market. Midterm elections are going to continue to be a very significant overhang in markets. Maybe one of the things that concerns me that investors are not talking about is if we were to think about the level of uncertainty that some of these dynamics naturally create and how that right now really does not translate to the kind of expected volatility that might be there in markets. So just looking this morning at something like the VIX index, which a lot of investors will go to when they want to see implied volatility back

• 56:14Speaker 04

  to the levels it was at in February of 2025. So we did see a very substantial.

• 56:19Barry Ritholtz?

  Very low, right?

• 56:20Speaker 04

  And that tends to be, you know, a point where, you know, we want to be a little bit more cautious when naturally there's not a lot of volatility expected to be coming in markets. You know, for us, that means we can stay invested, we can focus on areas that deliver attractive income and really maintaining that nimbleness in the portfolio and the strategy that we have.

• 56:42Barry Ritholtz?

  Really, really interesting, Ed. Let's jump to my favorite questions that I ask all of my guests. Starting with, tell us about your mentors. Who helped shape your career?

• 56:53Speaker 04

  Yeah, I'd certainly first and foremost on that list is Charles Johnson. Joining Charlie in 2002 as a member of the Franklin Income Portfolio Management Team and really being able to understand his approach to investing and hearing the tremendous, you know, experiences that he had over time. But I think more importantly, him really enabling me to become a bit of the investor that I am today and as we went through that transition and then went through difficult times, particularly the financial crisis, that awareness that, look, we're not going to get every situation right, we're not going to make every perfect investment.

• 57:38Speaker 04

  But really how you handle it and how you stay focused on the people That have entrusted their money to us is just paramount importance. And, you know, one of the first things that Charlie asked me to do in 2002 was a difficult time, interest rates were coming down, there was a modest dividend cut for Franklin Income Fund, which is not a very common occurrence, certainly not something that we enjoy doing. And getting a handwritten letter from an investor, a woman in Tennessee, that was a little concerned that her dividend check had gone down. And here he is, the chairman and CEO of Franklin and portfolio manager still, and he gave me that handwritten note from the investor and asked me to respond directly to her.

• 58:21Barry Ritholtz?

  Really?

• 58:22Speaker 04

  And that was just something-

• 58:23Barry Ritholtz?

  Did you write a letter or did you pick up the phone?

• 58:25Speaker 04

  No, we wrote a letter. And that was something, I don't recall having the phone number, but we did write a letter and really kind of laid it out and tried to help her understand just the dynamic. But to me, that really resonated, that wow, this is so important to him. This is really, we need to stay connected to just the role we are playing in individuals' lives, and I think that's something that I've really tried to not only carry on in my career, but certainly instill in the broader team that helps manage Franklin Income.

• 58:55Barry Ritholtz?

  Easy to lose sight of that, right? So, so let's talk about books. What are some of your favorites? What are you reading right now?

• 59:01Speaker 04

  Well, I'll start with maybe what I'm reading right now, and this is something I've always enjoyed, history and geography. The end of last year, I picked up a place called Yellowstone because I was planning a siblings' trip to Yellowstone, and it was just really fascinating, the history. I'm now reading A Daunted Courage by Samuel Ambrose, which is more of the Lewis and Clark expedition, so maybe this summer I'll be out in Glacier or in the Bitterroot Mountains on a trail somewhere. But I really enjoy, you know, reading, so I'm more of a nonfiction, you know, kind of guy. Occasionally, I'll pick up something else. Probably my favorite of all time is the Hemingway classic from The Belt Holes, where, you know,

• 59:46Speaker 04

  you're reading a-

• 59:49Speaker 04

  Something that plays out over seventy-two or so hours and just something like that that really can let your mind kind of go and the imagination take hold is always something that I've enjoyed too. I did just pick up a new copy. I think it's probably something that as an American, we should all read and certainly Walter Isaacson is not somebody that that needs a plug of any of any sort. He wrote more of a pamphlet called The Greatest Sentence Ever Written.

• 1:00:20Barry Ritholtz?

  Really?

• 1:00:21Speaker 04

  And that's something that I think with America 250.

• 1:00:23Barry Ritholtz?

  Cause his books are giant.

• 1:00:25Speaker 04

  I think this is around fifty pages.

• 1:00:27Barry Ritholtz?

  No kidding.

• 1:00:28Speaker 04

  So it's the greatest sentence ever written and I haven't gone through it yet, but I've heard him speak about it and it's just very inspiring. Like I said, it's something that second sentence of the Declaration of Independence with America 250 is maybe something that we should all step back and make sure we read this year.

• 1:00:48Barry Ritholtz?

  I have For Whom the Bell Tolls on my list and I just read on vacation last month, The Sun Also Rises, but nothing beats The Old Man and the Sea. That book just always speaks to me, not just as a fisherman, but his prose is just so compact and tight and powerful, really very impressive. You mentioned Yellowstone, so I have to ask, what are you streaming these days? What's keeping you entertained?

• 1:01:16Speaker 04

  Haven't started Landman 2 yet, but that's probably next. You know, I really kind of like to, and maybe there is a sci-fi element. Growing up, my sci-fi of choice was probably something like Stargate SG-1 or something where you can really detach and I think that's an important component, let the mind rest and be transported a little bit.

• 1:01:41Barry Ritholtz?

  Let's jump to our final two questions. What sort of advice would you give to a recent college grad interested in a career in fixed income, portfolio management, or just investing?

• 1:01:57Speaker 04

  In a way, it would be just that. I see far too many college students, recent grads, that think they've already decided what they want to do.

• 1:02:06Barry Ritholtz?

  Specializing early.

• 1:02:07Speaker 04

  Yes, or are having a definitive, "I need to find the job in this." And I just reflect on my own path that it evolves quickly. Get in a seat somewhere in an industry that you think is interesting and see where it takes you. And don't be afraid to put your hand up when opportunities arise. You have plenty of time. You have nothing but time.

• 1:02:30Barry Ritholtz?

  Don't assume that first gig is where you're going to spend the next 40 years of your career. Is that your advice?

• 1:02:37Speaker 04

  You know, it can happen.

• 1:02:39Barry Ritholtz?

  It certainly can. And our final question, what do you know about the world of investing today you wish you knew 30-plus years ago when you were first getting started?

• 1:02:50Speaker 04

  Oh, it's such a good question. I mean, in a lot of ways, you know, you almost wouldn't want things to be entirely different. You know, I was fortunate in that I found that role relatively early on that really solidified the kind of investor I think I am. What is that inherent DNA that I have as an investor? So I think the sooner you can kind of tap into that and then explore ways to follow your investing based upon that. Don't try to be somebody that you're not, you know? And I have colleagues that manage pure growth funds that follow momentum strategies, and I think they do a phenomenal job. I also very much know that's not a job that I would have ever excelled at.

• 1:03:30Barry Ritholtz?

  What's the old joke, "Wall Street is an expensive place to figure out who you are"? Absolutely. Ed, thank you so much for being so generous with your time. This has been really quite fascinating. We have been speaking with Ed Perks. He's CIO of Franklin Income Fund, as well as member of the Executive Committee and PM for a number of different funds. If you enjoy this conversation, check out any of the 600 we've done over the prior 12 years. You can find those at Bloomberg, iTunes, Spotify, YouTube, wherever you get your favorite podcasts at. I would be remiss if I didn't thank our crack team that helps put these conversations together each week. I'm Barry Ritholtz. You've been listening

• 1:04:15Barry Ritholtz?

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