00:00Joining me now, Jake Schirmeier, Portfolio Manager, Head of Fixed Income, Currencies and Commodities, Multi-Asset Solutions Team at Harbour Capital Advisors.
00:08Jake, thanks so much for joining us.
00:10Thanks for having me, Caroline.
00:11All right.
00:12So I think given your title, there's a lot to hit here.
00:15And I think portfolio construction is a good place to start.
00:20Does 6040 still work in this environment or do investors need to consider a different playbook?
00:27Yeah, I mean, I think generally it still does.
00:29You know, you still have your exposure to growth, kind of the U.S. economy, kind of the long-term prospects of equity.
00:35So, you know, you need to keep that ballast.
00:37You know, fixed income is the part that's a little challenge going forward.
00:40We're going to have higher inflation over the next year, and we expect it to be higher and more volatile going forward.
00:45And so in that environment, you need something that diversifies a bit more, whether that's commodities, whether that's kind of market-neutral strategies,
00:53other kind of true alternatives that can diversify for those environments where inflation is very high.
00:58So on that note, when you look across equities, bonds, currencies, commodities, what's really driving your investment decisions right now?
01:07We think commodities look the most attractive to us right now.
01:10So gold is a big portion of that, you know, making a play against kind of the weaker dollar, kind of concerns about U.S. institutions, inflation.
01:19And then more broadly, you know, there's a secular kind of demand for commodities going forward, whether it's building out AI data centers, whether it's electrification, EVs.
01:29All of those things are going to take a lot more copper, aluminum, silver, all of these things to conduct electricity, to build concrete, to build steel, things like that.
01:37So we think there's a secular demand for commodities going forward as well.
01:40Okay, so on that note, you mentioned the fact that gold is at record highs right now.
01:45Is it too late to get into gold or what commodities actually look attractive to you right now?
01:50We don't think it's too late.
01:52So, you know, on a real inflation-adjusted basis, we're kind of at all-time highs.
01:55But there's reasons for that.
01:56You know, we've had the U.S.-led institutions for the last 80 years, and those are unraveling in many different ways, whether that's tariffs, whether it's kind of decisions around NATO, things like that.
02:06And so in that environment, you're just going to have more geopolitical volatility, more inflation volatility, and you want something that, you know, has a 6,000-year track record of protecting against that.
02:15Do you have a price target for gold?
02:17No, we don't.
02:18And in terms of using it or other commodities as a hedge against inflation, how much of that is driving your investment decisions in terms of even putting commodities in your portfolio?
02:30We think that's a big part of it.
02:32Inflation risk, not only to be higher, but just more volatile going forward.
02:35And so there's just going to be more volatility across, you know, broader assets.
02:39So that's a big portion of it.
02:41But we do think dollar weakness, kind of this institutional, anti-institutional play, we think that's a big part of the commodity story as well.
02:47Okay, so we can put the checkmark next to commodities.
02:50Let's shift to fixed income and where you're finding opportunities there.
02:53You mentioned it's a bit tougher of an environment.
02:56Yeah, so the curve's obviously been steepening for the last few weeks.
02:59You know, we're thinking about Fed cuts.
03:01You know, they're likely to cut 25 basis points tomorrow.
03:04Some descents in favor of 50 basis points.
03:06But obviously there's some politics around that.
03:09It's pretty fraught going forward.
03:11And so we do think the curve steepener still has a little bit more room to run here.
03:15It's people kind of pricing more inflation risks.
03:17But, you know, we think credit, yeah, spreads are very tight.
03:20But, you know, in an environment where growth is slowing but not slow, you're going to be fine kind of clipping that carry and continuing to have some equity beta in there.
03:28So the 40% of the portfolio in that kind of generalized portfolio should be in what?
03:35I think in like 30%, you know, 32%.
03:38And so you're going to want to have high quality.
03:40We like MBS in favor instead of kind of treasuries for that core kind of AAA rated exposure.
03:46We still like EM debt.
03:49We think you can kind of play the weaker dollar that way.
03:52So that's another thing where we have an overweight, you know, call it 4% or 5% of that basket.
03:57And then the bulk of it's going to be, you know, IG credit by and large.
04:01So if investors want to protect their portfolio using things like bonds and treasuries, what should they avoid?
04:09Yeah, if you're worried about inflation, you want to be shorter on the curve.
04:12So you want to avoid duration.
04:14Tips, we think, are pretty attractive.
04:16You know, kind of market implied inflation is, you know, 2%, 2.5% when you kind of look further out.
04:22We think there's clear upside risk to that.
04:25So tips are another area where you can get some of that inflation protection.
04:28Okay.
04:29So put the check mark next to fixed income.
04:32And then, of course, we want to focus on growth.
04:34Where are you finding growth opportunities right now?
04:36Because we've seen this huge move higher in, of course, big tech.
04:40Do you expect that to continue or are you finding growth in other areas?
04:44Yeah, I mean, the AI trends.
04:46I mean, Oracle last week were, you know, pretty phenomenal earnings.
04:49And so there's clearly a secular boom going on.
04:53I think you have to probably start getting a little more selective.
04:55You know, NVIDIA is kind of treading water here while other companies are thinking about, you know, less, you know, making their own chips, diversifying across their chip stack.
05:04So we still think there's some value in the enablers, whether that's on the energy side, turbines, things like that.
05:10But I think you just have to be a little more selective because, you know, valuations are quite rich there.
05:14But the secular trend is still intact.
05:17Dig into what it means to be more selective because I'm sure there are investors out there that are worried about buying at the top, right?
05:25So how do you balance, you know, innovation with also discipline?
05:30Yeah, I mean, it's, you know, quality growth.
05:32It's so, you know, that Garby exposure, you want to think growth at a reasonable price.
05:36You want to think more about that.
05:37And so, you know, active management is something we believe deeply in.
05:40And so you want to have fine managers who have had kind of a long-term track record in finding and uncovering these opportunities, especially when valuations are as rich as they are for many of the kind of large cap, you know, highest concentration names.
05:53So final advice for investors who want a diversified portfolio, you know, a balance of growth, but also protection to the downside, because we do know that the market doesn't only go higher, even though lately it's been in this uptrend.
06:10I think it's to just be open to the idea that the next 10 years could be very different from the last decade.
06:16Granted, the last decade was pretty extreme.
06:18You know, we had the highest inflation in 40 years.
06:20We had a pandemic.
06:21Hopefully we don't see either of those in the rest of our lifetimes.
06:24But just be open to the idea that, you know, international could come storming back if the dollar continues to weaken.
06:30Be open to kind of commodities being on a secular kind of bull run akin to what we saw in the 2000s.
06:36Be open to the idea that AI is going to move beyond the chip names, the infrastructure names, to software, other enablers, and the kind of real economy as we think about it.
06:44All right.
06:45We'll leave it there.
06:45Jake, really appreciate your insights.
06:47Thanks so much.
06:47Thank you so much.
06:48That's Jake Schirmeyer, Portfolio Manager, Head of Fixed Income Currencies and Commodities, Multi-Asset Solutions Team at Harbor Capital Advisors.
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