EM Corporates with Elisabeth Colleran of Loomis Sayles

Stewart: Welcome to another edition of the InsuranceAUM.com podcast. My name's Stewart Foley, I'll be your host. Welcome back. It's so nice to have you. Thanks for joining us. We're joined today by Elisabeth Colleran, who's a vice president of Loomis Sayles and a portfolio manager for the emerging market debt portfolios. So that is today's topic, EMD and EM corporates in particular. Elisabeth, thanks for taking the time.Elisabeth: Great to be here, Stewart. Thanks for having me.Stewart: So we start this one, like we start them all. What town did you grow up in? What was your high school mascot and what makes insurance asset management so cool?Elisabeth: Oh, wow. Okay, so this is a little embarrassing. You've already announced that I'm an EM investor. I live in the town I grew up in, which is a suburb of Boston: Concord, Massachusetts. And the reason I say it's embarrassing is that when you're in emerging markets, you meet the most fascinating people. Some of my colleagues here, obviously the companies we meet with, even investors I meet at conferences, they're all from somewhere interesting. And I am basically in a suburb of Boston, and that's where I've lived my whole life. So Concord, Massachusetts, is it. I love it. And that's where I am. When I think about high school mascot, well, it goes right along with being from Concord, Massachusetts. I don't know if this rung a bell with you, but it is actually the birthplace where the Revolutionary War started here, and our high school mascot are the Patriots. So there you go.Stewart: There you go.Elisabeth: And then what makes insurance so cool. I love the way you put that. I think it's, the thing that I find interesting working with insurance clients is that you really get a feel for what are they doing. You're part of the business, right? I love running money, total return money. You're worried about people's pensions, you're always trying to drive value for the client and try to think about what the problem is they're trying to solve. But when we talk with our insurance clients, you really, you're part of like how they're making money. You can hear how they're trying to drive the value. And I just find that to be very rewarding. It's like part of the whole team or something with the client.Stewart: So I'm only going to take issue with one thing you said, which is that you somehow implied that you are not an interesting person. And I strongly disagree. I am super excited to have you on, and I can't wait to hear about this because you didn't start off on the asset management side, you started off as a credit analyst for a large life insurer. So can you talk a little bit about where your career started? Because I mean, this is a term of endearment for me, right? You're an insurance geek and I am too. And it, I don't know, I just, this is our audience. This is who we are. So let's your insurance flag fly here.Elisabeth: Okay, Stewart. So the honest answer, I really started my career in economics. So my moving to the public bonds group at a large life insurance was like a little bit of a reinvention. And I think the economics really, really helped with all this. But being at this, really my first job in public bonds, I covered a variety of sectors that levered off, I guess you could say what I did in economics, a lot of energy, some telecom. But being at an insurance company, I got to learn a lot about what they're looking at. And of course, even at this company there was the total return money that they ran and then there was the insurance money that they ran. And you really got to be very aware of what the different constraints and objectives were, whether it was gain loss considerations, to meet various requirements, quality targets, duration targets, book yield targets. So it was just a very, it was a new language and it was really something that I found really, really interesting. That said, I did take the advantage to move to Loomis, which is not an insurance company as you know, and that was an opportunity that I saw as really a way to get more deeply into credit research.Stewart: That's so cool. And we've had a number of guests on from Loomis and I have to say, you have big shoes to fill because the podcast traffic and page views are always off the charts. And the last one we did was about some of the proprietary technology that Loomis uses. So can you refresh us a little bit on what some of that proprietary technology looks like for a portfolio manager at Loomis Sayles?Elisabeth: Yeah, I can. As you were saying, I know you talked to John Gidman on one of your recent shows and, he talked all things technology at Loomis and really talked, I guess I would say, as a portfolio manager and I'm lucky that the, I guess what this word ethos of the firm is really to get the best analytics, data, tools possible on into the, the hands of the people working on the portfolios. So that's been something that I guess maybe we're spoiled and we're used to it, but it gives us really this flexible platform and it's dynamic. It evolves as, as we have different needs, different types of clients, and we have these technology partners that work with us so and they understand what we're trying to do and they can go back to the technology folks. So that really makes it a very efficient kind of process. So as a portfolio manager, and I should probably even say you, that was I into the portfolio manager role, as I mentioned, I came here as an analyst, and I'm an emerging market portfolio manager now. And that transition was sort of this nice organic, it's a path that followed the growth of the sector, right? There never used to be a lot of emerging market companies and they've just, that whole sector has really grown. And so, I guess I came up with it and so as that evolution took place, I moved into the PM role when we actually decided to have a dedicated strategy for that. So as a PM you're looking at what you have as an opportunity set. You're looking at what your clients want, you're looking at benchmarks, you're looking at the variety of constraints that you have. And so really the way the technology platform, it comes to us with these partners is how do we want to look at it? What do we think is important? What are the risk measures that my team might be interested in that some other team might not even care about? We have far fewer sectors. We're not using this real detailed sector kind of classification that more developed markets have. We have this country component that more developed markets maybe don't have so many to look at. So there's just a lot that goes into thinking about how we look at what we're doing versus how other teams look at what they're doing. And the whole process is set up to help us with that. And it's not as though somebody says, here's the canned version, is there anything you'd want to change? It's just very much, how do you think about what you're going to do or what you're trying to do? Or are you having a problem or somebody change something? So I think that's really, when you say the access to proprietary technology, it's that the technology itself is so - it's alive and it changes and it changes to meet our needs.Stewart: That's really nice. When I was running money, I worked for a firm that had a pretty solid commitment to technology as well. And it made my life a whole lot easier. I've had a whole lot better understanding of the risks in the portfolio and so forth. And I know that it's something, not only that, I mean if, I'm not, correct me if I'm wrong here, but you put some of that technology in the hands of your clients as well, yeah?Elisabeth: Yes. I mean, that has been something that in particular insurance companies have been interested in. So a way to look at portfolios that, you know, they're probably not as accustomed to looking at, the various country breakdowns, the regions, often depending on the strategy the client is looking for, EM often goes across quality. It's not just investment grade or high yield you have, depending on the country. So there's just different ways of slicing and dicing the data and the metrics. And so that's been something that we have been able to offer to the clients to also be able to look at their portfolios.Stewart: So, it's interesting. So when, one of the things that, one of the aspects of this technology, I believe is an EM relative value tool. Can you talk a little bit about, and I mean the integration of technology professionals in with the PMs, I think is a very progressive way to do things, right? Because it's translating what you need as a portfolio manager to someone who's adept to technology and to make it that all work. So can you talk us through the journey of building that EM relative value tool?Elisabeth: Yeah, and I would just add right from the beginning to that you have like a, I guess it's not a two-legged stool or it would fall over, but the third leg in the stool would be our quant resources. So that's really what also brings this whole ability to put together these kind of analyses to support us. So I guess our EM relative value tool, my time has a weird aspect when you have the pandemic in the middle there, but I think it's been actually live for four years now. And it really is a good example of how technology that Loomis supports and drives really the decision making process. So the idea behind this tool was somewhat simple. So as the EM corporate debt universe was growing and becoming more diversified, it really also led to there being more dedicated investors. So when you think about it, there's always been people and this is what happened when I came to Loomis, I came as a, to be a telecom analyst, and I walked in the door and found out that our second largest position was in a phone company in the Philippines. So to some extent that was the original crossover investor, right? It was like they were running other portfolios, but here was an interesting story. We have the ability to analyze it, we're going to add that incremental yield to the portfolio. So there'd always been these kind of crossover investors, not so much a dedicated investor base. And so a lot of times for crossover investors, the big question was, what do you get to be in a corporate over the sovereign spread, right? That was pretty much your valuation. So you'd spend, the sovereign strategist and macro experts would spend much more time on whether the sovereign was the right spread, and then you would layer on a corporate. But that was sort of the simple technique. But as this became more of its own dedicated asset class and you had more dedicated investors and you still had the crossover investors, what happened was you started to see that was too simple of an approach. Sure. That's still one thing to consider. You're spread to the sovereign in any given country because the sovereign has risks already baked into it. And you want to have that in the corporate. But what we really started doing is wanting to look at different ways of thinking about the universe slicing and dicing the universe and doing this relative value. And the original genesis was actually working with a Bloomberg expert, and it was very interesting, a great resource coming up with different screens. We would download stuff into Excel, we would make graphs. It was all very, you know, we thought we were so cool. But the problem was that did not factor in any of our Loomis knowledge. I mean, we have this solid, sizable, knowledgeable analyst team, and they assign credit ratings to everything that we buy. And so when we are using Bloomberg, we're really reliant on the rating agencies and we also don't have the ability to put in comments or whatever. So this became something that we wanted to overcome and we basically were able to have a quant come to work with us. And it was the added, assigned to our team that benefit was he's from Brazil, so he also brought that expertise, but with, I didn't tell you, the Bloomberg person, we ended up bringing in house. So she joined our team and is now an expert on emerging market corporates and a strategist on our team. But with her and this quant that was assigned, we really took this approach that we were already doing and made it much more dynamic. And really what our quant expert came up with was this idea of developing a representative, duration, a fixed duration bond across every issuer. So we could really, it would be apples to apples, it was not a duration factor. And then we can change the universe that we want to do the analysis. So maybe we're trying to decide we really like Brazil, what can we buy in Brazil? But we don't want to be in banks. We can look at the sectors in Brazil and that's our relative value universe. Or maybe we're just really bullish on energy. And so the appropriate universe is all the energy companies. So there's different questions you're asking that you want to, on the fly, be able to change the universe. And he came up with this way of doing it. I won't even try to explain the, the background of how he does the representative bond, but it also then feeds into portfolio construction, sizing of positions and risk metrics. So it's just an amazing tool.Stewart: That's very cool. You were talking about how it used to be that people thought about EM corporates versus US high yield, and that that's no longer the case. And EM corporates have gotten, I mean, that market's developed so much. So how has this tool that you've developed led to better outcomes for insurance clients in particular, who is a predominant audience?Elisabeth: Yeah, so I guess when you think about it, it's a great tool to demonstrate the value in the asset class. So where we're able to put US curves in there and show different types of comparisons to really, I guess to offer evidence that you don't want to think of this as just a risky asset class. And that's not necessarily the decision to be made. I think it also shows that there is enough of an asset class that you are able to build this robust tool and that you're able to really capture this kind of premium. So this is really a grownup asset class now, right? And if you actually even just look at the indices that are out there in the universe, they're primarily investment grade. So you do have maybe a 65 or 70% of the universe that's investment grade. And so with this tool to be able to prove the value of the opportunity set, and then to show that there is enough of a robust universe to drive value for the insurance clients, and that they see that there's enough opportunity to build the types of portfolios they want, I think it's been very valuable. We usually bring in a demo, I wish I could show you the tool today, but this is a podcast. And so I think it's something that becomes very powerful in their decision making. And also it's clearly driving our decisions and we think it makes our decisions more powerful.Stewart: You do have the ability to provide demos for folks who are interested in knowing, right? I mean, it sounds like a remarkable tool. And when we spoke a little while ago, we talked about bespoke solutions, and if there's one thing that I've [learned], during my zillion years of doing this is that insurance companies typically want some constraints or specificity around their exposures. So for example, if I said, "I want investment grade only, I don't want financials, blah, blah", you have the technology to accommodate that sort of analysis at your fingertips. Yeah?Elisabeth: Yeah. So that would be, we could go back to one of your earlier questions. The tools that we have for the portfolios, just looking at them and lining them up and looking at the different metrics, very simple. I mean, not all insurance companies want a benchmark, but the ones that have a benchmark, one of the things that we do is we work with them for what are the characteristics you're looking for? And that could be ratings, it's often duration. So we can mix and match different types of benchmarks. For example, the sovereign benchmark is longer duration. So we may take a slice of that, the long end of the sovereign space and, and bolt it on to the CEMBI or the corporate space IG, and then they get a high quality, longer benchmark. So we can build that and we can put it in our systems. And that's something that informs us about the universe, not necessarily what they're looking to outperform it, but that also would lead into, I know you had a discussion with Erik Troutman and when he was talking about bench snapping, that type of building a custom benchmark is something that can then be used in that snapping, but it allows us to tailor what we're doing. Then if you bring in the valuation tool, we actually have a portfolio construction tab that brings in the valuation work that we do with the analysts and this five year representative issuer, and you can actually look at the portfolio relative to the universe that the clients, the insurance company, has told you they're interested in. And it gives you the idea of maybe where your next purchases will be, how you're exposed, what your risks are. So it's very, very capable of addressing these bespoke types of mandates.Stewart: Yeah, that's terrific. And I mean, just for whatever it's worth, if that podcast with Erik Troutman is one of the most interesting ones I've ever done. I mean, he's an interesting guy. He is very easy to listen to and the benchmark snapping, if you don't know what that means, I would just say, take a moment and listen to the Erik Troutman podcast on benchmark snapping. It's really interesting because benchmarking is a challenge for insurance companies for a myriad of reasons. And I thought that the way that Erik explained it made tons of sense. So as we sit here today, I look out my window, what is the future of EM investing in your mind? So I think that covers where do you see opportunities? Where do you see risks? What do you like?What are you avoiding?Elisabeth: Oh, that's such a great question. I can go on forever, but I think...Stewart: That's why I get paid the big bucks over here, is for those kinds of questions Elisabeth.Elisabeth: I think at the 50,000 foot level, I think emerging markets, believe it or not, are somewhat in a sweet spot right now. And just within the global growth, when you look at it, they're in a better position going forward. And this is for next year, but even in the medium term, let's talk about that. Better growth, you've had central banks and emerging markets that were quick and aggressive in dealing with inflation and they've pretty much hammered it away. And you have countries that are almost ready to start cutting, and that's very good for their domestic economies, right? So that's something that we're looking at, whereas we know the developed market at this point is: when is the downturn coming, is sort of what people are talking about. That's what we're playing with here. So this near term, maybe medium term, but it's also a space where we're having companies that have issued in this market, this dollar hard currency market, that now have a much longer track record of credibility. These aren't companies coming out of nowhere that nobody's heard of, but companies that, people like me that have been analysts, have now they've been following them for 10 years or maybe 15 years. They have track records, they've been through cycles. We've seen them invest, maybe lever up, delever. So this is something that we see is really bringing validity to this asset class. And that's not to say that every company's a good actor, but that's, you have the skillset. That's the job that we have is to do that work. And the other thing I always like to talk about with emerging markets, when you think of, what is the trajectory, what are the opportunities? These are countries that are investing in infrastructure for the most part. They need the infrastructure. And you have to compare that to developed market investing in infrastructure. So if you think about a country like India, they're building highways, right? They're building highways where there haven't been highways. They're building a highway from scratch with the best idea of how to build a highway, right? So these are enormously efficient infrastructure projects. Whether it's a port, whether it's a utility or a renewable, they're from scratch this technology. Whereas, I told you, I live in Boston, we are now doing a lot of work on our tunnels and road system. Our, we have a hundred, more than a hundred year old subway system. Whatever you're doing for investment there, maybe you're extending a line or something, but what is there? You're fixing an old clunky thing, right? So the amount of productivity you get out of infrastructure, investing in a lot of emerging markets is just amazing. And that's like a long-term driver of growth. So we see this validity of track record, we've seen central banks get better. We've seen just really a more credible type of, I guess you could say leadership in many countries, not all countries. And so we see this as something that there is a runway for improving situation, more companies coming to market. And so it's a valid opportunity set. So that would be how we see the future. Now, we always have to worry about whether it's very specific political risk within a country. I will say, on that measure though, it used to be, I would say 10 years ago, if you had an issue in one country, say, I don't know, a coup, something like that, you would see huge correlation, right? There would just be, you would see emerging markets sell off. That is no longer the case. Really, as this asset class has grown and you have more investors that are really dedicated looking at the space, you see much more nuanced response. Even when we had the horrible situation start last year with Russia invading Ukraine, there was not a massive one-way movement in emerging markets any more so than there was in developed markets. So that's something that we see as very different, but it's a risk. You have to think about each country, and then you also have to think about broader geopolitical factors. Of course, we have different types of flashpoints in different parts of the world, but a lot of those are also going to impact developed markets. But that's something that, we really feel we have to spend a lot of time thinking about with our strategy teams and everything.Stewart: That is really insightful and I have learned a great deal on this podcast. So thanks for being on. I've got one more question for you in closing. And actually, there's two questions. You can choose both, one or you can just, let's say Uh-uh. So here we go.Elisabeth: I'm afraid.Stewart: Who would you most like to have lunch with - alive or dead and/or what's the best piece of advice you ever got?Elisabeth: Hmm. Okay, so the lunch question, well, very simple and timely answer to that. So this morning we had a meeting with our analysts out of Singapore, and we were talking about Indonesia. So someone that comes to mind comes right out of that meeting is the president of Indonesia. So you might say that's a little odd, but here's somebody who, he's finishing up his second five-year term and he has an approval rating in the 70% something, I mean, very unusual. I mean, very unusual.Stewart: Wow. Absolutely.Elisabeth: And really, we were talking about it, so about what has gone on in the country and really the bottom line is he's been a reformist and he has this popularity rating, not because he's a populist, he hasn't been throwing money at the population or pandering to specific groups or anything. He's really been a reformist. And one of the things he's done is he's moved the country, he's really tried to move them up the value chain. So if I could have lunch with someone just coming out of that meeting, I'd like to hear his thoughts on, you know, this is it. He can only have these two terms at this point. And so what does he see for the future? And how did he get through COVID and the various cycles that have hit the global markets in the last 10 years? I think it would be an interesting lunch.Stewart: Wow, that's terrific. That is. I didn't know that. I appreciate that. I appreciate that education as well.Elisabeth: The other question of the advice, oh, the one that I always tell people, which I think you're probably going to laugh at, but I had a boss early on in my career and he would not let up with advising me to start putting money in my 401K. And I, of course was a new, I finally have a salary, you know, I had loans, whatever. And I'm like, this is just not that important to me. And he just, "so, have you started yet? Have you have you set up the paperwork?" And so I think that was really something that now I look back and I give him a lot of credit. It was not apparent to me it was important and it is important. And I would give the same advice now to anyone who's starting work, including my kids that are now hitting the workplace. So very important piece of advice.Stewart: Wow. Great advice. Good stuff. Thank you so much. We've been joined today by Elisabeth Colleran, vice president of Loomis, Sayles & Company and portfolio management for emerging market debt portfolios. Thanks for taking the time and stopping by today.Elisabeth: It was great, Stewart. Thanks a lot.Stewart: Thanks for listening. If you have ideas for podcasts, please shoot us a note at podcast@insuranceaum.com. Please rate us, like us and review us on Apple Podcast or wherever you listen to podcasts. My name's Stewart Foley and this is the InsuranceAUM.com podcast.This podcast was recorded 20 July 2023.This material is provided for informational purposes only and should not be construed as investment advice. Any opinions or forecasts contained herein, reflect the subjective judgments and assumptions of the authors only, and do not necessarily reflect the views of Loomis, Sayles & Company, L.P. Investment recommendations may be inconsistent with these opinions. 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