Art DeGaetano:
At Bramshill, we have very high intellectual capital. I have known my three co-PMs for 14, 17, and 18 years, and my two partners for over 35 years.
Blake Moore:
Welcome to Distinctively Active Investing: Profiles and Perspectives, presented by Touchstone Investments. I'm Blake Moore, President and Chief Executive Officer of Touchstone. On this show, you'll find out what makes Touchstone, and its portfolio managers distinctive. We share in-depth interviews with people who are actively engaged in leading and managing the Touchstone funds and you will hear from other industry professionals, as well.
Disclosure:
Art DeGaetano, is co-portfolio manager of the Touchstone Flexible Income Fund. Bramshill Investments serves as sub-advisor to the Fund.
Mary Mock:
Hi, I'm Mary Mock, Divisional Vice President for Touchstone Investments. Our guest today is Art DeGaetano, CIO and Founder of Bramshill Investments. We’ll be talking about his career journey as well as his investment philosophy at Bramshill. First, I asked Art about his background.
Art DeGaetano:
I grew up in Northern New Jersey, about 20 minutes outside of New York City. My parents had been from New Jersey, and I remain there today with my children. I have three kids. I went to Don Bosco High School in Ramsey, New Jersey, and played football and tennis there, and then went on to Colgate University. I continued on as a tennis player, I was not division one football material, although I definitely liked the competition. I played four years of division one tennis at Colgate, had a very good experience there, great school, and made some very good friends. When I graduated, I was in that 1991 graduation class, if you remember there was a very bad recession, so the only job I could get was at Bear Stearns, and that's where I started my career.
Art DeGaetano:
To be frank, it was either going to Colgate-Palmolive, where I had a job offer, or the back office of Bear Stearns. I just happened to want to move to Hoboken and be around my family in Northern New Jersey, and Bear Stearns allowed forme to do that opportunity. Then from there, I worked my way onto the trading floor in about a year, and stayed at the firm for 14 years, and when I had left, I was a partner, Senior Managing Director.
Art DeGaetano:
At Bear Stearns, I did investment grade debt in the mid-nineties, post the Russia period, I was profitable, so the firm moved me to high yield, and then I ran the high yield trading effort from 2000 to 2004. Had about a billion dollars in capital to invest with, had two PM's in London reporting to me, two in New York with me, and one in Asia. I left Bear Stearns in 04.
Art DeGaetano:
I had a son, one of my sons had a health issue, and frankly, best thing I've ever done, I took a year off. We got him all better. He's playing sports in college as we speak. I came back to the business in 2005 and I joined RBS. I ran their credit trading for the America's Division. That was about four billion, roughly, in capital, investment grade, down to distressed, as well as bespoke credit derivatives, portfolios. Mostly, though, investment grade and crossover as a business mandate.
Art DeGaetano:
After two years at RBS, I moved to the buy-side. I went to a large hedge fund called GLG partners. At the time they were based out of London, they were 25 billion global macro. I joined the New York office to manage a credit portfolio for one of the larger equity funds. Needless to say, a year later come December ‘08, which was a very difficult period, my portfolio was up about 3.6%, gentleman who ran GLG, seeded me with a hundred million of his own capital to start what's today called our Income Performance Strategy. That strategy looks across not just credit, which is my background, but also preferreds and municipals. Those are the three areas that I have core competency in, as well as my team does. It was originated in Jan 09 at GLG.
Mary Mock:
Art, do you remember your first investment?
Art DeGaetano:
Yes, it was in 1992, the latter part. I bought some Norsk Hydro debt, and at the time, this was what was called a Yankee Bond. There were foreign issuers that issue in US dollars. That's my first trade while I was on the trading floor, and just so happened that the trader who was responsible for that portfolio was sick that week, so they asked me to cover for him, and I did a profitable trade. Then a few weeks later, he actually left the firm and I took over the portfolio.
Mary Mock:
Let's talk a little bit about your investment strategy. How has Bramshill constructed the portfolio for the Touchstone Flexible Income Fund?
Art DeGaetano:
There are five asset classes that we invest in, that we have core competency in, and we avoid anything we don't have a core competency in. Those asset classes are investment grade corporate debt, high yield, but I would preface it to say, we don't do distressed or triple C's, so when we're talking high yield, it's more double B or secured single A's, preferreds, municipals and treasuries. In the portfolio, there is no emerging markets, there is no foreign currency exposure, there's no real estate type of private loans, things like that. We're very concentrated on where we have core expertise. We think about investments, every core part of our process is based on a probability of loss analysis. We're always thinking, when we make an investment, what are the chances or probability of a loss, and how much can we lose? So it's allowed our strategy, which again, that originated at GLG in January 09, it's allowed us to be very opportunistic around opportunities in the marketplace.
Art DeGaetano:
You'll have seen in the history, in 09, we were buying more triple B corporate debt at 70 cents on the dollar. In 2011, we positioned into AA municipals, when municipals were under severe pressure. Post '14, 2014, taper tantrum, preferreds were down 25% peak to trough, so we went through our process and then allocated to preferreds. Heading into 2016, we had moved significantly to short-term treasuries, about 50% of the portfolio, and were able to avoid that entire draw down. And then March of 16, allocated to credit, so I think we bought Apple bonds at 83 cents on the dollar, Hess paper at low seventies, Natal Steel in the sixties. In other words, the probability of loss on these securities, when you went through your analysis was so low that even though the world felt toxic, those were low drawdown investments for us when we got through our analysis.
Art DeGaetano:
We're very opportunistic, very disciplined. We don't use any leverage in the portfolio. We can maintain an investment grade rating that has been since inception of Jan 09. We keep a bullpen of securities, and I like to call it a bullpen because we look at it the way professional athlete would, where you're always practicing your skills and then you're prepared for, let's say something that's a play you haven't seen, or a situation. Currently we have about 74 items in our bullpen. What it allows you to do is be prepared to buy something where you think there's a value or a lower drawdown price.
Art DeGaetano:
For example, a little less than two years ago, the retail space in the United States was under pressure, and the equity side of the balance sheet was under duress. We did work on about five or six corporate credits from the retail side. In those credits, the debt didn't come down enough to where we thought there was a low draw down, so those names go into our bullpen. Then every month or every quarter, the team will update the file on our shared drive and we'll review where they are. So in times of dislocation, we're prepared to buy a Kohl's, or a Walmart, or a JC Penney, whatever the flavor is.
Mary Mock:
You mentioned treasuries as one of the five core asset classes. How does Bramshill use treasuries in the portfolio?
Art DeGaetano:
We look at treasuries as a position, and unless we are looking to buy long duration, we consider them our liquidity. The past few years, we have been running inside of a two and a half year duration and have had pretty significant returns, simply from proper credit positioning, as well as positioning in structure. If you think about a 10 non-qualified high yield bond versus a fixed rate that swaps the floating rate preferred, or a 20 year municipal, they're all going to act differently depending on what happens with interest rates. We use treasuries more so to manage our liquidity, and we're not looking to really use them to subsidize a duration exposure. We do similar, however, we usually are very short on the treasury curve, three, six month type of allocation, which allows us quickly to reallocate when we see an opportunity in those three core asset classes of credit, preferred, or muni.
Mary Mock:
Can you talk a bit about what makes Bramshill different from its competitors and what you think is your investment edge?
Art DeGaetano:
At Bramshill, we have very high intellectual capital. I have known my three co-PMs for 14, 17, and 18 years, and my two partners for over 35 years. There's a high debate every day on every aspect of our portfolio, and out of 23 employees, the 14 that are on the investment team, everyone from the lowest person on the totem pole to me takes ownership of the portfolio. We try and manage in a very flat structure, just the way I would manage prior trading desks in my career. It allows for very good idea generation. It allows for very few mistakes because everyone is working together. We've also set it up where the firm compensation is based purely on how the firm performs, so there are no guaranteed contracts, there are just base salaries. Again, it creates an environment of a team effort.
Art DeGaetano:
We encourage everyone, from young staff to older, more seasoned staff, to voice ideas. We have idea roundtables regularly. We're definitely set up from a risk management standpoint, where there are officers in the firm that are risk managers, as well as compliance managers that see the portfolios daily, which also is another channel check on just our portfolio management.
Art DeGaetano:
Our competitive edge, if I had to say, is also the fact that we do not look at a benchmark. If clients said to us what their benchmark was, we would be paying attention to that all day long, and it would be distracting to what we are trying to do, which is make money in all different environments and make sure that you are committing your capital properly. Without a benchmark, it's a very clean way to look at the world, at least in our securities, and it doesn't force you to do things that you would be uncomfortable with your own personal capital doing.
Mary Mock:
What do you think other money managers fail to recognize within these income generating asset classes?
Art DeGaetano:
We have clients that hear the word unconstrained and they hang up the telephone. It has been a very difficult, let's say, area in the fixed income markets, where people are selling these funds where they can go anywhere for income. In our humble view, it's tough to be the expert on mortgages, structured products, emerging markets, corporate credit, MLPs1, REITs2, high yield, distressed, convertible bonds, very tough to do that. Our team works very well in a process that I've used ever since 2002, when I was managing at Bramshill where we have a risk grid. We use stop-losses, we use concentration limits, et cetera, but also our team works very well where we can make an allocation shift, quickly without going through a large committee.
Mary Mock:
When does the investment style tend to work? And when will you face headwinds?
Art DeGaetano:
Personally, in my career, I've done better in times of dislocation and duress. I was positive in 98, in 01- 02, in 08, in 11, in 15, in December 18, periods where there's been dislocation. My team is an extension of myself, and they've also been with me, and we've run things together, during those times of dislocation. We tend to, as a group, get very focused in down markets. I don't know that anyone fires us in an up market, we participate, but we're very good and we've made about 75 to 80% of our return in times of dislocation. That's where our core skill set is, tend to not get shaken or worried or nervous, those are actually good environments for us and what we do. We're not buying distressed securities and getting on creditor committees, more so we're buying higher quality assets when they're under duress, and we tend to have a very clean thought process towards those.
Mary Mock:
How does Bramshill incorporate ESG3 into its investment process?
Art DeGaetano:
In a number of ways. One, we use a Bloomberg coded format where all of our investments are based along a Bloomberg score. Bloomberg does a very good job with this. A score of 50 is considered conservative. We're actually north of that, from an ESG standpoint, where we require even a higher score to be an appropriate investment. We also apply to the UN ESG4 policies. We are in that, let's say, grid, where you have to hit certain metrics. By definition, some of our asset classes are always ESG, significantly ESG compatible. There's others that we're conscious that we avoid. We don't do tobacco. We don't do alcohol. We're not doing coal. We could go down the list, but there is definitely a list that we avoid, and then there's an approved list, which we're allowed to do.
Art DeGaetano:
We try and be very efficient on being compatible with ESG because we're conscious of not just corporate governance, but we're conscious of the environment. We're conscious of activists, of how active management is, so even something like the big banks and financial institutions, there are a number of them that do a very good job of being ESG compliant.
Mary Mock:
Thinking back over the last decades of your career, what are the biggest changes that you've seen in the investment business over that period of time?
Art DeGaetano:
There's been a clear move, over the years, to a shrinking of liquidity in the marketplace around dealers, traders, market makers. There's been, just specific to fixed income, a large increase in debt, both in the credit markets and the government markets or sovereign markets. There's a lack of experience trading price gaps for quicker dislocations. People who are experienced, tends to be they move from the sell side to the buy side, and some of the end users on the buy side are experienced or older in tenure, but there definitely is a shift where there's been less liquidity and capital commitment. There's much more debt, in general, to trade, and there's a lack of learned history in some of these asset classes that we're discussing.
Mary Mock:
If you think about the next 10 years, what are the biggest trends that you believe will drive market performance?
Art DeGaetano:
One trend that I think will drive performance is all the algorithmic trading that's going on. There is definitely a trend in fixed income to migrate towards more of that. It's going to be very interesting to see how those systems and programs adapt to nuances in the credit markets, which are still conducted over the counter in negotiation styles, as well as relative value relationships that might not be as picked up quickly as they would be from one stock to another. That is one trend that we see, and we're, as a firm, continuing to engage in that. We've actually hired some outside firms to build us different sort of analytical models, as well as execution systems that we use.
Art DeGaetano:
That being said, it's still a people business, and our humble view is that it will be the man or woman behind the program that knows how to use that program to extract the best investment knowledge.
Art DeGaetano:
The other trend will be towards ETFs5, closed-end funds, mutual funds, more fund format. Seems that more and more advisors, as well as investors, are comfortable or getting more comfortable with buying funds instead of individual securities. That's from both a perceived better liquidity area, as well as a diversification tool, instead of owning single name exposure. Those are two trends that we think will continue.
Mary Mock:
Lots of leaders have daily routines to help them stay focused. Do you do anything from a daily routine perspective to help you stay motivated throughout the day?
Art DeGaetano:
I do. It's more so driven in my morning routine. I'm very much an early riser. I will work out for a half hour, four or five days a week, but during that time I'm typically listening to something investment-wise, either a podcast or an interview or a video. My mind is always working. I also tend to think very clearly in the mornings, so I would say between 5:30 and 8:30, there is just a lot that gets done where I set up my day. I typically try and focus on tackling something that might be, not pressure filled, but that's very important, or that is on my mental docket that I need to get done. I try and get that out of the way early in the day so it frees me up the rest of the day to interact with my team, with different things in the market, with my family, whatever life would bring you.
Art DeGaetano:
It's very much based on a morning routine and morning focus where you're not distracted, and it's comforting being in a routine. Even when I go on vacation, I have a trading system that's sent ahead so I'm very in sync with everything that I'm doing and that my firm is doing, without not being able to take downtime. But that morning routine is very important for me.
Mary Mock:
So, Art, what's the best career advice you've ever received?
Art DeGaetano:
Always be trading, and know where your positions are. When I say that, in times of duress, even high quality securities, because nothing, for the most part, trades on a screen the way an equity does. You have to do price discovery, or have to know where your liquidity is. The best piece of advice I've gotten is always be liquid, always be trading, always be aware of where your positions are. When that occurs, you'll find yourself as well, always remaining humble because none of us are bigger than the market. You want to be respectful of the market so it allows you to, every day, grade yourself, and answer to yourself, as well as I'm sure everyone has bosses. Whether you have investors or you have senior bosses above you, everyone's reporting somewhere, but that's one thing that keeps you, as a portfolio manager, very true to your positions.
Mary Mock:
Thanks to Art for sharing his insights today into his investment process, as well as his personal interests and background. Until next time, I'm Mary Mock.
Blake Moore:
Thank you for listening to Distinctively Active Investing. You can find the resources mentioned in the episode, and learn all about Touchstone at www.touchstoneinvestments.com. If you like the show, please share it with someone you know. We appreciate when you subscribe to the show and take the time to leave us a rating and review. Find our podcast on Apple Podcasts, Spotify, or your favorite podcast app. I'm Blake Moore and from all of us at Touchstone Investments, thank you for listening.
The companies mentioned in this interview are not held in the Touchstone Flexible Income Fund.
Bramshill Investments, LLC became the sub-advisor to the Touchstone Flexible Income Fund in November 2018.
1 MLPs is an acronym for master limited partnership which is a company organized as a publicly traded partnership. MLPs combine a private partnership's tax advantages with a stock's liquidity and have two types of partners, the general managers and the limited investors. Investors receive tax-sheltered distributions from the MLP.
2 REITs is an acronym for real estate investment trusts which are companies that own or finance income-producing real estate across a range of property sectors. These real estate companies have to meet a number of requirements to qualify as REITs. Most REITs trade on major stock exchanges.
3 ESG is an acronym for Environmental, Social and Corporate Governance, which refers to the three central factors used in measuring the sustainability and societal impact of an investment in a company or business.
4 UN ESG is in reference to The UN Principles for Responsible Investment (PRI) - an international organization that works to promote the incorporation of environmental, social, and corporate governance factors (ESG) into investment decision-making.
5 ETF is an acronym for exchange-traded fund (ETF) which is a basket of securities bought or sold through a brokerage firm on a stock exchange.
Investment return and principal value of an investment in a Fund will fluctuate so that investor's shares, when redeemed, may be worth more or less than their original cost. All investing involves risk.
Performance data quoted is past performance which is no guarantee of future results.
The information provided is for general information purposes and is not investment advice. Opinions may change without notice based on economic, market, business, and other conditions. Please consider the investment objectives, risks, charges and expenses of the Fund carefully before investing. The prospectus and the summary prospectus contain this and other information about the Fund. To obtain a prospectus or a summary prospectus, contact your financial professional or download and/or request one at TouchstoneInvestments.com/resources or call Touchstone at 800.638.8194. Please read the prospectus and/or summary prospectus carefully before investing.
Touchstone funds are distributed by Touchstone Securities, Inc. a member FINRA and SIPC.
