Ryan Nauman hosts Zephyr’s Adjusted for Risk podcast with Robert Cohen, Director of Global Developed Credit at DoubleLine, to discuss why bonds face bearish sentiment amid elevated Treasury yields and how advisors should think about fixed income today. Cohen frames the macro backdrop as “war and AI,” citing Middle East conflict-driven oil constraints that could push core CPI above 4% and keep inflation above 3%, while massive AI capex supports earnings but raises valuation and concentration risks. He explains how DoubleLine limits AI exposure in credit, argues corporate credit fundamentals remain strong with upgrades outpacing downgrades despite tight spreads, and flags weakness in lower-quality loans/private credit. The conversation covers securitized credit opportunities by underlying assets, emphasizes active, multi-sector management, and recommends lower duration given inflation and deficit risks, while suggesting many investors may be underweight fixed income.

Zephyr can help financial advisors create modern diversified portfolios here.

Learn more about DoubleLine here.

00:00 Welcome and Setup

01:51 Meet Robert Cohen

03:32 Macro War and AI

06:25 Managing AI Exposure

10:00 AI ROI and Bubble Risks

16:19 Markets vs Macro Signals

19:48 Corporate Credit Health

26:32 Securitized Credit Picks

30:52 Duration Strategy Now

33:12 Multi Sector Approach

34:53 Rebalancing to Fixed Income

36:06 Wrap Up and Resources

Connect with Ryan Nauman:

LinkedIn

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Go

2

Ryan Nauman Market Strategist Zephyr:

welcome everyone to Zephyr's

3

Adjusted for Risk podcast

from the shores of Lake Tahoe.

4

This is Brian Nauman, the market

strategist here at Zephyr.

5

Fixed income has come under fire recently

as a lot of strategists have become

6

very bearish on bonds, and this has been

evidenced by elevated treasury yields.

7

I have on the perfect guest to talk

all things fixed income, the current

8

macro environment, and what it all

means for financial advisors as

9

they build investment portfolios.

10

But first, this episode is sponsored

by the award-winning Zephyr, which

11

helps investment professionals

make more informed investment

12

decisions on behalf of their clients.

13

All right.

14

Let's go ahead and get started

and bring on the star of the show.

15

I've already talked enough.

16

Enough from me.

17

I'd like to give a very warm

welcome to Robert Cohen.

18

Robert is the director of Global

Developed Credit at DoubleLine.

19

thank you so much for coming

on the show again second time.

20

It's really an honor to have

you on for a second time.

21

I'm glad I didn't scare you

away after that first episode,

22

so thank you, I appreciate it

23

Robert Cohen: Yeah Thank you Ryan It's

glad to I'm glad to be back here it's

24

good to be a repeat guest now So this has

become a kind of a regular occurrence now

25

Ryan: I love it.

26

I love it.

27

Maybe we can make it a regular

occurrence, like I said earlier, the…

28

Maybe we-- the Fixed Income

Pulse with Robert Cohen.

29

Robert Cohen: Let's do it

30

Ryan: Awesome.

31

Robert Cohen: be great

32

Ryan: Thank you so much.

33

So Robert, let's just go

ahead and get started.

34

Can you tell us a little bit more

about yourself and DoubleLine?

35

Robert Cohen: Yeah So DoubleLine is a $95

billion in assets asset management firm

36

based in Los Angeles We are employee-owned

which I think is an important feature that

37

we have Our all Our interests are aligned

with the clients we're not part of some

38

mega corporation where there could be many

distractions And it's also important to

39

note that we're all investment specialists

so I focus on corporate credit There are

40

other specialists focusing on for example

interest rates mortgages structured

41

credit emerging markets Particularly in

this time the nuances matter so I think

42

being investment specialists is a better

setup than trying to be a generalist and

43

pretend that you can understand everything

So I think that's an important feature

44

of what we have here at DoubleLine

45

Ryan: Yeah, Robert, I couldn't agree

with you more on, especially this,

46

especially on the fixed income side.

47

You- equities, yes, they're complicated,

but fixed income, there's so much at

48

play in fixed income, and the fixed

income market dwarfs equity market.

49

So I feel as if you're a financial

advisor or just an investor, on the

50

fixed income sleeve of your portfolio,

let the professionals handle it.

51

Let the specialists like you, because

when you're trying to manage duration risk

52

and all the other risks that are involved

with fixed income, a lot more to it.

53

So I think it's very important to be

a specialist on the fixed income side

54

versus, like you said, a generalist

who they're just doing it to maybe

55

capture some assets under management

56

Robert Cohen: Yeah I agree completely

57

Ryan: So let's start at the top.

58

We've touched on the macro themes here.

59

Investors are faced

with, conflict in Iran.

60

We've got the national deficit that is the

elephant in the room, uncertainty around

61

monetary policies, a new Fed chairperson.

62

We've got sticky inflation.

63

Can you please tell us your views

on the current macro environment

64

and just what's on play?

65

Maybe add some clarity around it all.

66

Robert Cohen: Yeah if we were to boil

the macro environment down to two words

67

it would be war and AI So we started the

beginning of the year with the market

68

expecting that the Fed was going to

actually lower interest rates at least

69

once if not twice And now fast-forward to

today people are talking about maybe the

70

Fed's gonna hike Certainly seems unlikely

that they're gonna cut So why is that

71

What's changed we have this conflict in

the Middle East which is constraining o

72

flow of Oil went over $100 a barrel and it

caused concerns about inflation around the

73

globe and that's feeding into the treasury

market Our internal estimates suggest

74

that inflation's the core CPI could go

over four percent soon and that it's

75

gonna remain maybe not at four percent

but north of three percent for quite some

76

time It's really hard to say when this

conflict is gonna end I'm not going to

77

make a prediction there but even if it

were e to end tomorrow the energy markets

78

won't resolve themselves immediately and

the inflationary impulse from that oil

79

constraint is not gonna resolve itself

immediately either So I think we're in

80

an environment where the rate market is

correctly assuming that there's a upward

81

bias to inflation so that's the war part

If we look at AI seems to be certainly

82

influencing the equity markets some

peopl peop people say it's all one trade

83

which I think there's an argument for

that There are four or five hyperscalers

84

that are gonna spend almost a trillion

dollars this year and maybe five trillion

85

over the next several years The equity

concentration so the number of stocks in

86

technology so that sector concentration

has never been or to find a period where

87

it's been that concentrated you have to

88

we really have really almost an economy

that's tied to all this capital spending

89

in AI at the moment it's stimulative so

it's driving equity returns it's driving

90

economic growth So that's great but it

also builds risks as valuations get very

91

high We see credit spreads very tight

and so that's the other side of the worry

92

here That's the in the two-word war and

AI that's the AI side that I think you

93

can't ignore And we can talk about how to

manage that in a fixed income portfolio

94

But from a macro perspective I think

those are the two things to worry about

95

Ryan: Yeah.

96

Let's talk about that.

97

I'm glad you brought…

98

Perfect segue, Robert, into how

you manage that AI investment.

99

It's huge.

100

Like you said, trillions of dollars from

these firms that let's, bigger mega tech

101

firms that usually hold a huge amount of

asset or cash on their balance sheets.

102

Now all of a sudden they're

spending all this money on, AI

103

and all these new innovations.

104

Is there…

105

H- how do you handle that in a fixed

income as a portfolio manager in AI?

106

Usually we talk about on the

equity side, but when you talk

107

about all these expenditures, does

that impact your decision-making?

108

Robert Cohen: Yeah I think we start with

a quite simple proposition in trying to

109

understand what do clients come to us

to solve What problem are we solving And

110

I think that we're supposed to be the

ballast in their portfolio Fixed income

111

is the stay rich asset class not the get

rich asset class And so most everyone

112

is overweight equities whether they know

it or not and if you own equities you

113

are long the AI trade whether you know

it or like it or not And so I think your

114

fixed income portfolio is supposed to

s steer clear of that maybe certainly

115

constrain that So when we build portfolios

we measure how much AI risk we have in

116

the portfolio and we wanna keep it quite

limited because if you're coming to us

117

for a fixed income solution we don't want

the clients to find out if the AI if AI

118

starts to underperform if we can talk

about bubbles but if the if there's a

119

bubble that pops that will certainly cause

a major drawdown in equities We don't

120

want our clients to find out that all

of a sudden there's a major drawdown in

121

their fixed income portfolio because we're

just doubling down on AI risk Broadly we

122

think it's better to invest in the AI y

the AI opportunity in the equity markets

123

and use fixed income as a alternative

I don't wanna say a hedge but maybe a

124

something that's uncorrelated And so we

spend a lot of time measuring that there's

125

a lot of I shouldn't say there's a lot

There's growing AI exposure in corporate

126

credit and in securitized because of this

build-out cause these trillions of dollars

127

that are being spent It's not a huge part

of any market at the moment so investment

128

grade corporates high-yield corporates

securitized in terms of asset-backed

129

securities and CMBS I think they're all

about They're all less than ten percent

130

right now but growing And so we measure it

in our portfolio management systems If we

131

buy more let's say we buy some Google or

now called Alphabet we're gonna tag that

132

in our portfolio management system because

that has AI risk Not that I'm worried much

133

about Google but we wanna know what the

exposure is There's also all the companies

134

that are the beneficiaries of all the

spending so you know semiconductors memory

135

even power condu-construction companies

like Caterpillar all of a sudden are

136

getting a AI premium We actually measure

all that so that we know how much of this

137

is in our portfolios Broadly speaking

it's pretty low single-digit exposure

138

So how do we manage it We try to just

avoid it altogether and if we're going

139

to have exposure we're gonna have it

in places that have you know very solid

140

coverage from these hyperscalers or

have gu-guarantees or something directly

141

related to that We can get into exactly

how we do that but the you know the main

142

theme is we try to m-manage the exposure

so it's not a big part of the portfolio

143

Ryan: Yeah, that makes sense.

144

You, we talk a lot about AI being

the re- revolution and all this

145

stuff regarding AI, and it's gonna

drive everything moving forward.

146

But it's still awfully early,

Robert, in the AI ecosystem.

147

so to me, there's still concerns.

148

Are these companies that are

spending these huge sums, are

149

they gonna get the ROI, the return

on investment they're expecting?

150

Does that concern you that maybe

they're a little overdone in

151

their spending, and that those ROI

expectations maybe aren't gonna be met?

152

Robert Cohen: Yes I do worry about it

there are companies that disclose their

153

profitability like Alphabet that we just

mentioned They have a cloud computing

154

segment that they disclose in their

financial statements so you can see the

155

profitability there So that transparency

is quite helpful Many others do not

156

report the profitability and then many

other companies are not yet profitable

157

They're building out So the o the

companies that are actually building

158

out this infrastructure capacity not

the hyperscalers themselves but the ones

159

the off-balance sheet financings and the

separate companies CoreWeave for example

160

the ones building all of this it's yet

to be determined what the return on

161

capital will be you know clearly there's

probably gonna be winners and losers I

162

was an analyst during the dot-com bust

so this isn't the same but as they say

163

rhymes but it's rhyming in quite a similar

way there were darlings back then Cisco

164

Microsoft and so on that are still here

today And then there are there were other

165

financings that were quite aggressive

that wound up not working And I think

166

that's where we're gonna be today I will

say at least so far a major difference

167

is I do not think that there's a bubble

yet in credit And I say yet because

168

you know we're we're doing a lot of

financing But th what y you know what

169

distinguished that era and I think what

you what happens when you have bubbles

170

is you go from aggressive expectations to

transactions that you know are not gonna

171

going to work you know the famous Pets.com

172

back in the 2000 era but even go back

to the energy financings of I don't know

173

was that twenty thirteen fourteen when

we were f financing the shale boom in

174

the US There were rock-solid credits and

then there were credits that you knew

175

on day one wouldn't work So if looking

at the AI deals so far in the credit

176

markets the ones back the one the the

hyperscalers themselves Alphabet Microsoft

177

Amazon they'll be fine Their balance

sheets are still very strong even if they

178

put more debt on the balance sheet Many

of the other hyper Neil clouds and the

179

ones building the infrastructure some

of them are aggressive but it th you can

180

certainly come come up with a forecast

where they work just fine We have yet

181

to see the deals so far where you look

at it and say Oh this is not gonna work

182

So that's why I think we're the credit

markets just speaking about the credit

183

markets not the equity markets the credit

markets look okay for now But we are on

184

watch I'm waiting to see those deals come

where you say Oh this isn't gonna work

185

This is just a bridge too far we're not

there yet Equity markets are starting to

186

trade You know I remember back at back

in the ni l late 90s when people started

187

talking about ARR IPOs that's annualized

recurring revenue and you I remember back

188

then people going on TV saying Valuing

companies based on earnings and cash

189

flow is an old-fashioned that's your dad

and your grandpa's old valuation method

190

There's a new valuation method for this

new internet era and it's it's annualized

191

recurring revenue You look at that and

you look at the total addressable market

192

and that's all you need to know Don't

worry about the earnings They'll come

193

later That was back in 97 98 99 Then

we had the dot-com crash we're starting

194

to talk about that again not with the

hyperscalers They have plenty of earnings

195

and cash flow But all of a sudden we're

starting to talk about IPOs We're talking

196

about companies that we're going to

measure based on a multiple of annualized

197

recurring revenue and a total addressable

market and the earnings and cash flows

198

they'll come later So you know that's

certainly yellow flags I don't know if

199

we're gonna call them red but they're

certainly yellow flags and we're spending

200

a lot of time thinking about that at

DoubleLine as we put portfolios together

201

Ryan: Robert, that's fantastic.

202

And I rem- during the dot com

era I was in Seattle at the time.

203

Robert Cohen: I'm right

in the thick of things

204

Ryan: it was, like, just chaos.

205

And you're right back then

all of a sudden it was…

206

I don't know if there was a day

or a time or a month where all

207

of a sudden, okay, we gotta stop.

208

Now we're getting way our ski tips, and

we're we're going beyond going back.

209

And I don't, like you said, I

don't think we're there yet.

210

I don't think we've seen that in the AI

space where we gotta, take a step back

211

and be like, "What are we doing here?"

212

And a lot

213

Robert Cohen: Yeah

214

Ryan: you have

215

Robert Cohen: the

216

Ryan: that are front and center

that, their balance sheets are

217

strong, fundamentals are strong.

218

Robert Cohen: I think also yeah I think

also the credit markets in particular

219

got walloped back then and there I think

is enough institutional memory for now

220

that can evaporate that particularly

in high yield where obviously that's

221

where the risk sits The market's been

pretty disciplined there's been a

222

credit curve that's been pretty steep

so you see the core weave that's more

223

speculative that has you know it has a

9 coupon It was trading you know wide

224

of nine for a while It's about eight

and a half now and then you have the

225

Metas and so on that are 5 mid 5 yields

So there's a pretty steep credit curve

226

and I think that discipline at least for

now is healthy When all that collapses

227

and everything yields the same whether

you're a total speculative build-out

228

or a hyperscaler then it's time to be

really worried But we're not there yet

229

Ryan: I agree.

230

And I also think too though, now,

maybe last year you could just

231

pick anything that was related

to AI and it would shoot to…

232

You gotta be more selective now.

233

Like you

234

said, there are some

235

Robert Cohen: Yeah

236

Ryan: out there that don't,

they don't have revenue, they

237

don't have earnings, right?

238

Now it's time to be a little bit more

selective and focus, leverage specialists

239

like DoubleLine to select those winners.

240

Robert Cohen: Yep

241

Ryan: So taking it back, had the

macro uncertainty, but though then

242

you have these huge AI investments.

243

You've got credit spreads

that remain tight.

244

Equity valuations remain elevated.

245

But though then you have

these macro uncertainties.

246

Does it seem there's a divergence

there between macro uncertainty risks,

247

yet markets seem to be doing okay?

248

Credit spreads are tight.

249

are these dynamics signaling,

especially on the income side,

250

the investments, credit spreads?

251

What are they signaling, and do you

think there is a divergence between the

252

macro environment and these signals?

253

Robert Cohen: Not necessarily So there's

a couple ways to look at it but quite

254

simply if you're going to shove trillions

of dollars into the economy that's

255

very good for earnings That is just the

stimulus from the AI spending but there's

256

defense spending there's other forms of

government spending that's also liquidity

257

injected in the market That's all strong

for earnings So the markets trade off

258

of earnings expe expectations Earnings

so far have been very good I think the

259

question is Have earnings expectations

become too optimistic that's a question

260

mark but for now the markets in terms of

equity valuations and credit spreads are

261

trading off the fact that earnings are

very good and the outlook is pretty rosy

262

If this liquidity's all gonna be put into

the market in the terms of CapEx spending

263

defense spending other fiscal spending

all that's good for earnings And so at

264

least for what you can see in terms of

forecast it all looks pretty good And

265

how does that flow into rates I mean it's

actually inflationary So in a way those

266

themes are consistent to have higher

rates and more liquidity going into the

267

market and more and ear and more earnings

growth that actually is consistent from a

268

market perspective to have a worry about

inflation I think what was inconsistent is

269

to have an expectation of the Fed cutting

rates and falling Treasury yields in an

270

environment where you have all of the

stimulus going into earnings So I think

271

actually the rate market and the equity

market and credit spreads I think make

272

more sense now today if you think of it

all as of just shoving all this liquidity

273

into the market The question is really

about growth are the growth estimates

274

correct And if they're not correct then

you could see certainly a drawdown You

275

could see volatility in equities and

in in fixed income And I suppose all of

276

this assumes that inflation does not get

out of hand Now the forward curve for

277

oil is coming down to something normal

over time If that's right then maybe all

278

of this calms down and that inflation

expectations don't really get amped up

279

a lot and But if we had a significant

rise in interest rates I think credit

280

spreads could not hold where they are

now They're steady on the assumption that

281

the Middle East conflict will resolve

itself soon enough whatever that means

282

and that oil will start flowing again soon

283

that as soon enough that if we resolve it

this year then the market will be absor

284

able to absorb the shocks associated

with with the kinda energy shock

285

Ryan: Yeah, Robert, that's a great

point, and I'm glad you added that, all

286

this spending is good for the economy

and, so I'm glad you clarified that.

287

Very important.

288

So you're a specialist

in corporate credit.

289

You're the global head of corporate

credit at Global Credit at DoubleLine.

290

So let's get your take on the

current state of corporate credit.

291

You- we talked about AI and its impact,

but like I said, fixed income has come

292

under intense pressure recently, and

people are very bearish on fixed income.

293

Part of me thinks it might be a little

overdone, but what are your thoughts on

294

the current state of corporate credit?

295

people be bearish on it?

296

I know you're a little biased,

but should they be this bearish?

297

Robert Cohen: Again corporate credit

is driven by earnings If you think that

298

earnings are going to be strong you should

be constructive on corporate credit On

299

top of that I think the other element

is you want to ma y-you want to look at

300

borrower behavior Are we getting excessive

lending and excessive risk-taking if we

301

start with investment-grade credit so

far we've been in an upgrade cycle so

302

borrowers are going in the right direction

They're being upgraded from triple A to

303

s to triple B excuse me to single A and

so on And so while that upgrade cycle

304

continues that suggests that borrower

behavior and investor behavior is you know

305

is responsible Put it that way there's

worry in a tight credit sp a t a tight

306

spread environment that borrowers start

to relax their creditworthiness They start

307

to take on more debt which we're seeing

some of in the you know the hyperscalers

308

and the AI spending But it hasn't brought

enough out enough to actually hit the

309

index from a sta you know a broad market

perspective So investment grade looks good

310

if you look at it from the perspective of

that upgrade/downgrade You look at it from

311

the perspective of earnings it you know

it you know nothing really to worry about

312

The thing to worry about is tight credit

spreads give little room for error but so

313

far the earnings are there You can really

say the same thing about high yield Same

314

thing in high yield Upgrades not as strong

but upgrades are outpacing downgrades so

315

we're in a stable market High yield has

the highest credit quality it's had in

316

its lifetime It's mostly a double B index

It used to be mostly a single B index it

317

doesn't have much artificial intelligence

AI risk or technology risk altogether so

318

from that perspective it has high credit

quality So the very tight credit spreads

319

are rational They're not just they don't

come from out of nowhere They're based

320

on on very strong credit fundamentals so

I think that's another thing to look at

321

that's quite positive If you were looking

for an area of weakness It's showing up

322

in the broadly syndicated loan market

and then by extension the private credit

323

market and primarily lower cr credit

quality The CCC area of the bank loan

324

market has been quite weak It's been

po you know a little bit of improvement

325

recently but we're talking about spreads

we're talking about all-in yields that

326

are in you know over twenty percent The

actually the spread itself is around

327

twenty percent then you add the base rate

we're you know well into the twenties

328

And that CCC index trades at around

seventy-five cents So a lot of that is the

329

overhang from the tight spread environment

330

was a boom of M&A and those were weak

credits You knew the boom in private

331

credit So that's the area where you see

weakness and that's something to monitor

332

lower credit quality is not performing

well so s you know B minus whether it's

333

in the bank loan market or high yield but

I think it's that was the excesses from

334

2021 and so we're on alert But broadly

speaking you put that all together all

335

these markets I'd say corporate credit

is in very good health but watch out for

336

the very leveraged transactions that's

always an area to worry about but I think

337

this is an environment with tight credit

spreads and a lot of new issuance that

338

you wanna watch out for that I will point

out though that another thing that I

339

guess makes me feel okay about corporate

credit beyond the overall performance is

340

that credit as a percentage of GDP has

been declining since the pandemic So you

341

generally have excesses build up when you

have growth in an asset class or growth

342

in a sector And since we haven't had much

growth other than maybe private credit

343

which is a whole nother conversation but

for today we can stick to just you know

344

liquid tradable credit those asset classes

have been certainly not growing much and

345

so the risks build when you really grow

and we're not there I remember twenty

346

twenty-four was predicted to be a big

M&A year It didn't materialize Twenty

347

twenty-five was predicted to be a big M&A

year didn't materialize And here we are in

348

twenty twenty-six with the expectation of

a big M&A year and it didn't materialize I

349

think that's probably a function of higher

than expected rates and just general

350

geopolitical volatility But I also think

the private equity sponsors for nearly

351

twenty years now since the financial

crisis have had an advantage because of

352

very low rates an advantage over strategic

buyers I think now we finally see that

353

flip where strategic buyers have a

advantage over the sponsor the M&A buyers

354

excuse me the financial sponsor buyers

And so those strategic buyers tend to use

355

debt less than the financial buyers and

I think maybe that's part of the reason

356

why you see less M&A The M&A expectations

have been now just set aside and now

357

everyone's talking about AI financing

That's been That's really the kinda topic

358

du jour when you're talking about credit

359

Ryan: Yeah, that makes sense, Robert.

360

And on our next episode, we'll

dive deep into private credit.

361

That's a whole conversation in itself.

362

And while you were talking about the

state of corporate credit, it just kept

363

on reinforcing the topic of, it's a

important part segment of investing to

364

take an active approach to it, right?

365

Not a passive approach.

366

Take an active approach because

there's a lot of segments in it,

367

and like you said, that aren't doing

well, but overall, it is doing well.

368

So

369

Robert Cohen: Yeah A absolutely fixed

income is about avoiding losers not

370

picking winners And certainly credit

selection's gonna be very important as we

371

go into this particularly this AI spend

that we're embarking on right now So

372

it's gonna have a lot of issuance across

all of credit whether it's corporate

373

high yield investment grade but also

ABS CMBS private credit It's gonna go

374

sprinkle a little bit everywhere and

credit selection's gonna be very important

375

Ryan: Let's talk real quick

about securitized credit.

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There, do you find that maybe that

segment of fixed income may provide

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better opportunities moving forward, or

what's your take on securitized credit?

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Robert Cohen: Yeah I don't think the I'm

gonna say no to start It really isn't

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the structure it's the underlying assets

So for example what I mean by that is if

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you're worried about AI capital spending

being a significant risk in the corporate

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credit market and you take that same risk

in ABS or C ABS asset-backed securities or

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commercial mortgage-backed securities if

data centers are financed in those markets

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again it's the same risk So if you're

worried about hedging your AI risk and you

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own a portfolio that owns a lot of CMBS

and ABS data center risk well that's not

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diversifying the risk either I think it's

more about finding uncorrelated assets to

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finance whether it be the healthcare space

pharmaceuticals or healthcare in corporate

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credit you can finance in the CMBS space

hospitals it could be other assets like

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warehouses and things that aren't directly

correlated to this big AI trade So I

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wouldn't say all securitized is the place

to be I think picking the right assets

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Mortgages make a lot of sense for a couple

reasons If you look at the non-agency

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so the non-government guaranteed part

of the mortgage market the borrowers

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where the borrower matters If you go into

agency mortgages th there's no credit

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risk But if you go into the non-agency

space credit underwriting has been very

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tight since the financial crisis so the

loose lending standards that you hear

395

about in other areas did not seep into

the mortgage market And because there's

396

been low housing activity the h high

home prices mean there's a lot of equity

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cushion underneath those borrowers So you

have a low loan-to-value because you have

398

equity cushion and you have tight lending

standards That's a pretty good combination

399

CMBS so I think a reason to like CMBS

is that after a calamity an asset class

400

is usually in pretty good shape CMBS got

walloped with the office space problems

401

a post-pandemic and usually when an asset

class gets walloped investors get religion

402

and become very cautious about credit

underwriting And so you've seen that in

403

the CMBS space so that's good But then

there's other accesses that we have to

404

worry about So I think bank loans have a

lot of risk which means by definition CLOs

405

if you're lower in the capital structure

have risk Not that the up in the cap

406

structure AAAs are worrisome but down

in the capital structure you could have

407

risk because of defaults because of the

credit quality in the bank loan market

408

So a again why you need active management

you can't just paint a broad brush and say

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Any securitized or any corporate is fine

You really have to drill down into what's

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happening in these markets the benefit is

if you have a multi-sector strategy like

411

most of what we do at DoubleLine You can

pick and choose the pieces of each market

412

that you think makes sense So we talked

about the quality of investment-grade

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credit and high yield and you pick the

securities in those markets that you think

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make sense in the current environment

That probably doesn't fill out a portfolio

415

completely so you add a little bit of not

agency mortgages or CMBS and CLOs in the

416

right parts that make sense and you build

a portfolio that works given the current

417

environment to switch gears a little bit

I think that the biggest problem that you

418

have when you have single asset investing

is you're forced to pick whatever is there

419

in good times and bad So if you're just

a high yield manager for example credit

420

spreads are tight and high yield quality

is pretty good but there's still some

421

things to worry about There are still some

bad credits there and if you're forced to

422

only invest in that sector you're gonna

pick you're gonna hug quality which the

423

market's doing and you're gonna miss

opportunities to go elsewhere where you

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can get often the same yield but l much

higher credit quality or at least not any

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worse credit quality So it lets you move

around in a way that it lets you build a

426

more robust portfolio that should give you

similar income but less volatility less

427

drawdown when spreads widen and that's

really what we're trying to do every day

428

Ryan: Yeah, that's perfect.

429

So let's talk real quickly about duration

and kind of my last question here, topic

430

regarding just fixed income, what's going

on there in dynamics and you view it.

431

Is low duration still the play right

now, should investors maybe start

432

looking to lock in some of these higher

rates, or are we still too early on

433

those on the rates at these levels?

434

Robert Cohen: Yeah I think our view

continues to be focused on lower duration

435

focused on let's say 10 years and in that

the long end of the market is at risk now

436

of inflation but it also has this risk

of the deficit and overall US debt and so

437

that could cause crowding out that causes

rates on the back end to rise So again

438

it's a question of what are you trying to

achieve with your fixed income portfolio

439

If you're trying to focus on the income

part of your fixed income portfolio you

440

can make you can generate high degrees

of income in different flavors by being

441

short So that works If you're looking

to hedge equity volatility by investing

442

in long duration assets they may not

work the way they have historically They

443

certainly didn't work in twenty twenty-two

Everything was correlated so rates rose

444

and equities sold off there's a chance

that could happen again So if we have

445

some kind of equity correction in the

next several years it's certainly possible

446

it's more than possible that will be

coincident with the rise in rates Maybe

447

it's the fiscal issues coming home to

roost and we finally pay the price of the

448

deficits it could be inflation there's a

variety of reasons why the rate market may

449

not behave as that hedge against equity

volatility So it really comes down to

450

what problem are you trying to solve And

if the problem is or the your interest

451

is to generate income I think the lower

duration just Y-y-you can achieve that You

452

can achieve the lower You can achieve that

income with lower duration so why bother

453

moving out on the curve and exposing

yourself to that interest rate volatility

454

Ryan: Yeah, I completely agree.

455

There's…

456

try and reduce those risks as, as

much as you can because there are

457

risks out there in moving forward.

458

So very good point.

459

So let's bring this all together.

460

Robert, you added such great insight.

461

A lot of information you shared.

462

It's been fant- fantastic.

463

So you mentioned multi-sector.

464

One of the, Is that the play right

now too for this current environment,

465

is you take a multi-sector approach?

466

You mentioned it, the benefits of it.

467

Would that be what you would,

you do for a financial advisor?

468

Robert Cohen: Absolutely I think the

worst thing you can do is be in one bet

469

So if you just have I don't know the S&P

and long duration bonds that doesn't make

470

sense So ma advisors can try to do it

themselves but we just talked about the

471

need to be focused and specialized because

of the nuances in each of these asset

472

classes So I think let your ad let your

manager do it for you that's our mantra

473

Like let us figure out how much how much

exposure you have to mortgages to rates

474

to investment grade corporates to high

yield corporates to all these sectors I

475

think we you know we have teams looking

at this every day It's hard for an advisor

476

to look at all of these markets all the

time and figure out how to move things

477

around We're looking at it every day We

have teams in this and this is all we do

478

And so I think that's the best solution

is let us worry about it We're looking at

479

it every day We talk about these things

every day and we're thinking about what

480

the optimal asset allocation mix should

be and we're changing it on the fly as as

481

conditions change So I think that's the

winning strategy because we're gonna have

482

conditions change pretty rapidly in an

environment with volatility and you have

483

to be able to move your portfolio around

quickly and that's what we're here to do

484

Ryan: Yeah.

485

No, I completely agree.

486

You brought up the optimal fixed

income allocation, asset allocation.

487

I know it, for everyone

it's different, right?

488

What e- everyone has a different asset

allocation that is optimal for them.

489

What do you believe right now

though is a more of an optimal

490

fixed income allocation?

491

Robert Cohen: I'm gonna half pump the

question because it really does matter

492

There's a wide variety of risk tolerance

out there But generally speaking most

493

people are overweight equities in an

environment where valuations are very

494

high We can argue about growth but

you probably overweight more equities

495

than you should be and you're probably

underweight fixed income I think because

496

people have not liked fixed income since

497

speaking you probably wanna have a little

bit more fixed income and a little bit

498

less equities And what that means for

each client portfolio is going to be

499

different but I can I think I can make

that broad generalization that given

500

this ba backdrop of overexposed with

high valuations and underexposed to re

501

fixed income when we finally have income

in fixed income you probably need to do

502

some rebalancing towards fixed income

503

Ryan: Robert, thank you so much.

504

Like I said, it awesome

to have you back on.

505

All the insight, all the information

that you share, it's great.

506

S- I just sit back and listen.

507

I should be taking notes.

508

Thankfully, I can watch this

a couple times over and over.

509

So thank you, it's fantastic.

510

And I love you came on and talked

so much about AI and the risks.

511

We often talk about AI and the

opportunities, a lot of opportunities

512

out there in AI, but also there are some

risks in how it pertains to fixed income.

513

I think it's fantastic.

514

Where can our audience get more

information about DoubleLine?

515

Robert Cohen: Quite simply doubleline.com

516

That is the link to everything

related to DoubleLine so quite

517

easily just go to doubleline.com

518

Ryan: Yep.

519

Fantastic.

520

Awesome, Robert.

521

Thank you so much, and thank you

everyone for listening to this episode

522

of Zephyr's Adjusted for Risk podcast.

523

You can watch all of our other

episodes on the Zephyr YouTube

524

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you catch your favorite podcasts.

525

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channels and give us a follow on LinkedIn.

526

Thank you very much and have

a great rest of your week