Justin: Welcome to TDAM Talks. I'm Justin Flowerday, Chief Investment Officer at TD Asset Management, and I'm joined by Jennifer Hartviksen as our new head of global fixed income. Jennifer, welcome. This is your inaugural edition and we're really, really happy to have you on here for your first TDAM Talks, particularly given the fact you've been here for two months and you're willing to jump in the deep end with us before we get started.
I would love the audience to learn a little bit more about you. Maybe just start by telling us about yourself.
Jennifer: First of all, thank you, Justin, for having me here today. I'm thrilled to be joining for my inaugural TDAM Talks. So, a bit about me. I was born, raised and educated here in Toronto, spent many years living outside of Toronto in both South America and the U.S., but born and bred here. Like many Canadian parents, I can say proudly today that I am a retired hockey parent who spent many years with our two daughters at rinks early in the morning, late at night, driving all over southern Ontario and the northeast of the United States.
Justin: It was all worth it, I believe, because your daughters went on to play varsity hockey in the United States.
Jennifer: That is correct, yes. It was a good upfront investment that they both played in in college and in the U.S. and it has given them a life of discipline and a sport that they love. So definitely all worth it. And I was able to learn that icing is something that just doesn't go on cupcakes.
Justin: Outside of your personal life. You are a very seasoned, fixed income investor. What drew you to fixed income at from the beginning?
Jennifer: So, my first introduction to fixed income actually came through credit in the late 1990s, I found myself living and working in Brazil. One of those roles was as a publishing sell side analysts covering Brazilian corporate credit, and that required an understanding not just of the credits and the fundamental work, but also the need to really understand the macroeconomic environment that was Brazil at that time.
Right, Because the company were located in Brazil and were subject to the macroeconomic policy. And I found that very compelling, that mixture of the macro understanding that environment and also the bottom-up fundamentals of the company putting them together. It was fascinating.
Justin: Yeah. I mean I think you know nineties Brazil credit I mean to start a career really baptism by fire and you clearly have seen a few different cycles globally economic cycles and different environments. Tell us about some of your learnings about the fixed income environment through cycles over time.
Jennifer: So, as you said, baptism by fire, starting out my fixed income and credit investing career in the late 1990s in an emerging market where very in quick succession we experienced the Asian currency, the Russian ruble crisis, followed by the Brazilian devaluation. And there was also the failure of long-term capital management there. Each one of those years in terms of the experience is probably best measured, more like dog years.
So, one year of experience was really equal to seven years of experience. Just with respect to what I learned about volatility, the need to really understand the investments that you're making, it's important to know what it is you own.
Justin: Yeah, simple, but not always that easy. Correct. Particularly when the information flow isn't as transparent in some of these markets.
Jennifer: Absolutely. And so, the importance of really doing good, solid, fundamental credit research was really hit home. And those were experiences that I was able to take with me when I moved on to work in the US at a large institutional fixed income manager on the high yield desk where we had the dotcom burst, where we had the GFC.
Those learnings early on were really formative in helping me understand the need to really know what it is you do own it - and what it is you don't own. So that deep analysis and consideration of the companies.
Justin: You've had a long journey in fixed income, you've seen a whole bunch of different markets. You're now joining a franchise which has a huge legacy in investment excellence. And as you join and think about the platform you're joining, maybe talk to us a little bit about your investment philosophy coming in.
Jennifer: So, my investment philosophy is premised on a disciplined approach that is deeply team oriented, research driven, but all rooted in humility. The one thing I've learned throughout my career and that I keep coming back to is the importance of the team.
Justin: Something I have learned is probably the most important thing, and it's only come as I've gotten older. The understanding that team is critical.
Jennifer: Absolutely, because one person cannot understand and bring together all of the in the case of fixed income macroeconomic factors with the company fundamentals. The team approach is very important because a team approach brings a better investment decision, creating an environment for a team that is able to do their deep research in their own area of individual responsibility that can come together to constructively challenge each other's investment assumptions, produces a better investment outcome.
And that's the one thing, as you said, that I've learned with age over my career. When I look back at the various roles and positions I've held in Canada, the U.S., in Brazil, it is the team that I have worked with, built or mentored over the course of my career that are the proudest moments and really have allowed the best investment outcomes.
Justin: Now, that's terrific, and I couldn't agree more when thinking about fixed income today and its place along some of the other asset classes. We have equities which have been having an incredible journey over the last several years in terms of the earnings growth and the performance of the sector in general. When you think about fixed income, which seems to have gotten a little bit overlooked in recent years, is there something that you believe that investors are overlooking and what would be an argument for investors to be drawn to fixed income today?
Jennifer: So fixed income, like all asset classes, is constantly evolving. What makes fixed income very interesting today is the fact that we are in a regime of interest rates that we have not seen for well over a decade. And going back to the GFC, the great financial crisis, we saw a zero-rate interest regime for a very long period of time.
Jennifer: We saw a lot of policy participation in the market that kept interest rates and yield curves flat and ended at near zero for a very long time. In 2022 we saw the shift back to a more normalized interest rate environment where interest rates became non-zero, policy rates went up very quickly and we returned to a yield curve that had some term structure of interest rates.
So that has really changed the paradigm and made investing in fixed income once again an important asset class to consider. Prior to 2022, it was a struggle to generate real yields for investors without going very far out the risk spectrum. We're now in a more normalized environment where there is an array of different sectors in the fixed income asset class, be it government rates, short-term, long-term investment grade credit, high yield credit, emerging market credit structure credit.
There are a lot of different aspects of fixed income that investors can look at to build portfolios for different, different needs. Income generation, diversification. That's a very important component of building a portfolio that is robust over the longer term for our clients is something that does have diversification away from just a straight equity portfolio. So, the 6040 is dead.
That was much of the mantra for a large period after the GFC is now shifting to let's focus on what role you want fixed income to play in your portfolio. Diversification, income generation. There's a lot of liquidity, there's a lot of reasons to have it in your portfolio, and I think it's a very different environment today than it's been in many years.
And it is a compelling opportunity for our investors. Terrific. If I could throw it back to you now, when you mentioned what role does fixed income play as CIO from your vantage point, what do you think are some of the misconceptions about fixed income?
Justin: Yeah, look, fixed income is very, very different than it was when I first joined the industry, where it was a very much a plain vanilla sector and again played that role in the 6040 portfolio, but in a bit of a one dimensional manner, I think it's very different today. Fixed income still has a very important role to play.
You mentioned a few things around income generation. We finally have income generation. Again, we're back to yield levels which can be quite attractive to somebody who's looking to replace some income in retirement and wants that stable, steady source of income. Diversification, downside protection in case we do see a bit of a growth scare. And so, lots of things that fixed income can provide.
When it comes to the Wealth Asset Allocation Committee, we are underweight fixed income relative to the strategic benchmark. And really, it's a matter of how that asset class compares to some of the other asset classes, such as equities and other risk assets. And when you think about equities and the earnings growth rate that they've been able to generate in recent years and even looking ahead, another 25% expected earnings growth going forward for the S&P 500.
There have been a lot of opportunities to deploy capital in other asset classes, but it doesn't mean that fixed income at all doesn't have a role and will play a bigger role, I believe, in the future than it has in the last several years. When you think about some of the push back to fixed income, a lot of it stems from the notion that we are in a higher inflation regime and that if inflation isn't dead, as it was for a long period of time, when you think about inflation, maybe talk a little bit about your views of inflation going forward over the next 1, 2, 3 years.
Jennifer: As we look at our allocations to fixed income and investors think about what that experience in ‘22 was like when inflation spiked very quickly and policy rates moved accordingly. We're in a different world today because back in that environment we were moving from a very low and zero rate interest rate regime into a normalized one. Investors would have seen a lot of negatives in their fixed income allocation because at that time rates were so low.
And if you'll let me get into some real fixed income talk here, it's a reflection of the dollar value of a basis point or the deviant one. So, interest rates moved up very quickly, but because they were moving up from a very low point, there was really no coupon protection to allow some positive total return. In today's environment, we're looking at inflation that is taking longer to get back to target rates in some countries.
But it's really important for investors and for fixed income managers to realize that the experience in a rising rate environment will be a little bit different today than it was in 2022. So, I had some numbers on just before we stepped in here and if you look at the ten-year Treasury, ten-year U.S. Treasury, it's up about 35 basis points year to date.
But that same Treasury delivered a positive return year to date in 2026. Now, if we were to go back to 2022 when we were moving off the zero rate base, if you were to have that move happen at that time, you would have been down 3%, not having a positive return.
Justin: Said base effect of the starting point of where rates are correct.
Jennifer: Yes. And the fact that now we do have the buffer of the coupons.
Justin: So, we're at an absolute level of rates, which is a better starting point. That's not the only aspect that dictates the returns. Obviously, credit spreads are a component of this, and credit spreads have been quite tight as investors in the fixed income landscape have looked for to take on a little bit more risk. And tell us about your views on credit spreads.
Jennifer: Credit spreads are across the board, be it investment grade credit, high yield credit, levered loan structure credit. They're nearing their all-time historical types, and that's largely been supported over the past several quarters by very strong fundamentals, also very strong market technicals. We are seeing a lot of inflows into the fixed income asset class. We're seeing a lot of new issuances in the fixed income asset class.
So, it's been very supportive of tightening credit spreads both fundamentally and technically. That means that the beta market is over and it's actually quite exciting for us here at TDAM on the fixed income side because, you know, the focus we have on credit, we really focus on generating alpha for our investors through credit spreads and the deep legacy of credit research that we have.
Justin: Selection is really, really important, correct?
Jennifer: We have now moved into the credit picker's market and going forward, really understanding in a tight spread environment what you own and what you don't know is very important. So, we'll see the benefit of active selection supported by that deep research franchise that is part of TDAM fixed income going forward. That actually excites me because it's not just what we own, but also what we don't own at this point in the cycle is very important and that will be reflected through security selection over the next couple of quarters.
Justin: What are some of the other trends outside of credit, outside of the absolute, absolute level of yields that you're seeing that you believe will play a role in fixed income markets in the years to come? That we haven't chatted about.
Jennifer: A couple of things. One is volatility. Reasonable to assume that volatility is going to increase. We have gone through a period of stability over the past several years despite all of the headline risks and we it's reasonable to assume where rates and spreads are that we can expect to see an increase in volatility going forward. What I would say is important to think about is once again understanding what you do own what you don't own.
And going back to where we started the conversation with my experience working in emerging markets in Brazil is the appreciation and understanding that that volatility can create opportunities. So, for example, let me tell you about one of the memories that is seared in my mind from the volatility I experienced in Brazil in 1999, Brazil floated their currency for the first time.
Right. That injected an awful lot of volatility into the market. And Brazilian bonds corporates initially sold off pretty indiscriminately. Everything was down. There was a lot of volatility. There was a lot of uncertainty. What I learned was that that volatility, uncertainty created opportunities. As long as you've done your homework and really knew what you owned, there was a pulp and paper company that I followed that the bond sold off significantly with that initial indiscriminate sell off.
Going back and revisiting the analysis, the fundamentals, it quickly became apparent that the devaluation of the currency was a very big positive for this credit because their revenue is denominated in US dollars. Yeah, they had local now very devalued input cost, right? So, their margins were going to go up. It was going to be a very positive for the company's fundamentals.
Justin: And the cash flow and covering their interest payments.
Jennifer: Yeah, absolutely. They had the liquidity to see them through a rough period of time. That was the volatility. And so to answer your question, what I see going forward is the potential for increased volatility coming from something geopolitical, even from something that we don't see coming, knowing that that volatility can create opportunities, but it creates opportunities for the fixed income investor who has really done their deep research, understands what they own, understands what they don't own, and where the opportunities are.
And in a team that is high functioning and has the ability to constantly challenge each other, work together to come up with the best investment outcomes. I feel very confident that the future holds a good opportunity for that, the team and our investors.
Justin: Any last thoughts you want to leave investors with before we go?
Jennifer: Yes, Justin, I think there's two things I would like to leave with our listeners here. First, that active fixed income management is very important. And number two, that fixed income plays an important role in a diversified portfolio. Be at 6040 or an income generating portfolio, active management will see us through volatility, active management premised in deep credit research is crucial and the role that it will then allow fixed income to play is important to investors, be it for diversity in a portfolio, income generation, liquidity, whatever the need of the investor is an active, well-managed fixed income allocation is important.
Justin: Okay, great. Well, listen, thank you very much for joining us for your inaugural 10 a.m. talks. Jennifer, it's great to have you on board and look forward to doing more of these in the future.
Jennifer: Thank you. This has been a great conversation and looking forward to continuing to have these discussions.
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