In below investment grade corporate credit, credit selection is paramount to driving long-term performance. ETFs and other passive products typically are buying when things are rich and selling when things are cheap. Active managers are able to take advantage of those flows and the indiscriminate selling that's really driven by the need to get liquidity as opposed to selling the names that actually have credit issues. We believe performance over a long period of time, from an active management perspective, will outperform that of passive investment opportunities.
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.
Chris Mathewson is a portfolio manager of the Touchstone Credit Opportunities II Fund. Ares Capital Management serves as sub-advisor to the Funds.
Ben Alge:
Hi, I'm Ben Alge, divisional vice president here at Touchstone Investments. Our guest today is Chris Mathewson of Ares Management. Chris is a partner and portfolio manager of U.S. Liquid Credit, in the Ares Credit Group, where he is primarily responsible for managing Ares' U.S. high yield credit strategies. Chris, where are you from and how did you find yourself entering the investment business?
Chris Mathewson:
I was born in Orlando, Florida, 1982, feeling a bit old here at 38 now. Lived there for the first, about 12 years of my life, and then we relocated to Wichita, Kansas. Went to middle school there and then finished up high school as well. Followed that up with Dartmouth, played football there for four years, it was a great experience. Following that, moved to New York. It's been great being in multiple parts of this country. Now that I live in Los Angeles, I've seen and experienced a whole bunch of different cultures and places within the country, and I definitely think that's provided me with a lot of perspective that I use in my day-to-day investment experiences.
From a how did I get into the investment world perspective, that was really one of those things I had never even thought about, whether it's investment banking, which is where I started as well as an asset manager now, until getting to college. Lots of conversations with friends that were a year or two older than me, either on the football team or in my fraternity, and it just seemed really interesting. I had always been interested in economics and this was just a way for me to take that knowledge and experience and put it into real world use. That's really my background and where I come from.
Ben Alge:
Being involved in the investment business, do you happen to remember your first investment?
Chris Mathewson:
I do. It actually ended up playing out in two different ways. I'm not going to recall some of my first investments, I had lots of high school jobs, I worked for my dad and his factory and all that other stuff so I had a little bit of money saved up and bought some stocks, whatever. But my first real investment I would actually say was Freescale Semiconductors. Bought it in 2005 area, had a friend that was working at a hedge fund at the time and we were sharing ideas when I was an analyst, and thought that they would actually get taken out. It was a leader in the space, Razor flip phones, that sort of stuff, ended up working out really well, the company got bought and taken private via an LBO1.
Now, fast forward a couple of years when I moved to Ares, I was actually the tech analyst before I became a portfolio manager and ended up making an investment in Freescale, both at new issue, and then when I became a senior analyst, we actually ended up buying over $250 million of their debt at 60 cents on the dollar and made a whole bunch of money on that one via... It didn't end up restructuring, but just the markets snapped back in 2009. It was really an interesting dichotomy. Made money as a 24 year old person in the equity markets, and then took that knowledge of the company and put that to work in a distressed way as a senior analyst at Ares.
Right after Dartmouth, I started out at Lehman Brothers doing CLO2 structuring actually, and then after about a year of that, I moved over to investment banking within Lehman in the communications and media group. Did that for about a year and then moved over to Ares. Graduated college in 2004 and then joined Ares in late fall of 2006. As I just mentioned, I started out doing CLO structuring and I actually worked on a couple of Ares deals helping to structure their CLOs. We're one of the largest CLO managers out there. I knew the firm really well, knew the people, knew the culture, knew how great of a place it was.
Then after I moved up to investment banking, just to get that corporate finance background, because I felt like that would be something that would help me down the road from a business perspective. One of my really good friends that I had started training with at Lehman had actually accepted a job at Ares. He later became the portfolio manager and partner as well. I was just talking to him and he recommended, said they were looking for an analyst, so I gave my resume. Next thing I knew, I'm moving out to Los Angeles after a couple of interviews and never looked back. I never thought I'd be a west coast person as someone that's lived on the east coast or the Midwest my entire life. But now it'll be really hard to leave 70 and sunny every day.
Ben Alge:
Chris, for those people that are not familiar with Ares Management, can you describe Ares in a nutshell?
Chris Mathewson:
Ares is a roughly $150 billion alternative asset manager split between three distinct but integrated business units across real estate, private equity and credit. I sit within our liquid credit business, which is approximately $30 billion. We've been doing this since 1997. We were founded as a credit business and we've added private equity as well as real estate. Really, we believe our competitive advantage is what we call the power of the platform. That really is sharing information across all the various business units. What does that really mean? Obviously, with the current economic environment that we have today, we're making sure that the senior leaders across real estate, private equity, direct lending, liquid credit, and our alternative credit business are sharing all the things that they're seeing across the various markets that they participate in. Whether it's rent payments, whether it's interest deferrals, just to make sure that we're using all this information to make the best investment decisions possible.
The other thing I would add is we really help ourselves out from a allocation perspective on the liquid side, just given the breadth of our overall business. We're a huge fee payer to the street across private equity, across our CLO franchise. When the street is looking at us, they're not looking at it as a $30 billion liquid credit business, they're looking at us as a, call it $150 billion asset manager. The Ares edge versus its competitors, I would say is twofold. It is this sharing of information across all the various business groups, and it is unique to us. Everybody says they do it, but we really do. We're making sure real estate and direct lending and liquid and private equity are all sharing best practices, best ideas, so that we really know what's going on across all the various sectors of the business, as well as the economy.
That's one. The second is a convergence between direct lending and liquid credit. Our credit business is just over a hundred billion today, roughly 70 billion direct lending, roughly 30 billion liquid credit. What you've seen is as the direct lending business has grown up and moved up market, they're moving into the more liquid syndicated loan space of the market. What we're able to do on the liquid side is to partner with them, do larger transactions where we're getting either preferential allocations, we're benefiting from incremental fees as they underwrite deals, and we also get unique insights into the businesses. Because in most instances, these direct lending businesses that grow up, we've got a long history of knowledge with them. We've been lending to them for 10 years so we have unique insights for management, we have good relationships and we're just able to hit the ground running faster than a lot of our competitors when a new deal comes to market.
Ben Alge:
How would you describe the Touchstone Credit Opportunities II Fund that is sub-advised by Ares?
Chris Mathewson:
The Touchstone Fund is truly a go anywhere, best ideas from Ares fund, in a daily liquidity 40-act vehicle. This goes anywhere from par, bank loans and high yield, to stressed, distressed, which we then leverage our special situations group, to structure credit, which we leverage our alternative credit business. We're able to give our investors the best of Ares within a daily liquidity fund. At its core, this fund is predominantly high yield and bank loans, and they're more on the performing side. Obviously, as the market environment changes, we will tactically allocate between stressed, distressed and structured credit, all based on relative value. Over the last year, we've really been moving up in quality and not having much in the way of distressed because we didn't feel like that was the time in the market. But as levels have traded off, we've definitely rotated more into the stressed and structured products part of the market.
This fund is able to tactically allocate across all these various asset classes based on where we see the best value in the market. Over the last decade, you have seen a convergence between high yield and bank loans, but the key difference between the two asset classes is bank loans are predominantly secured, so you have a security interest in the assets of a company. High yield is predominantly an unsecured asset class that is junior to the bank loan. Bank loans are typically pre-payable at par versus high yield having call protection. You have more upside in high yield if spreads compress and the bond trades above par, but having that upside you lack in security interests like a bank loan.
Ben Alge:
Why does Ares think credit makes sense today, given everything that's been going on in the market and the broader economy?
Chris Mathewson:
That's a question we've been getting a lot over the last couple of months. Clearly there's a significant amount of stress in the overall economy right now with everybody sheltered in. We view the loan, high yield and structured credit markets as attractive today because you've seen a significant movement in spreads to compensate you for the increased risk from a default perspective. That, alongside a very accommodative fed and government that's basically said, "We're going to do whatever is necessary to take care of the U.S. as well as the global economy."
You have spreads in high yield and loans around 800 over, that compensates you for a lot of default risk. There's a significant amount of history, and I'm just going to quote high yield for a second, where when spreads are at 800 or better, forward returns over the next 12 and 24 months are in the high teens annually. We feel like this is a good opportunity to be invested in credit relative to other asset classes that we're seeing out there.
Ben Alge:
In your career, you've been through the tech bubble, the financial crisis, and now the coronavirus. What are the biggest changes you've seen in your career?
Chris Mathewson:
I'd say the biggest change, they go hand in hand, I would say, two of them. One, passive investing has become a much bigger part of our market, obviously, say very large within equities, but it's become a bigger part within bank loans as well as high yield. What does that do? That leads to a significant amount of buying and selling, not driven by credit, but just simply driven by flows. This matters more today because of some of the regulatory changes that have impacted bank balance sheets and their unwillingness to hold inventory. Now you have more flow driven, non-credit related movements in loans and bonds, and you have the street that’s not willing to take inventory. It's led to more volatility within the markets, both to the upside, as well as the downside. I would say that's been the biggest change and that's really been exacerbated over the last three, four years.
Ben Alge:
How does Ares incorporate ESG3 into its investment process?
Chris Mathewson:
ESG's definitely a much bigger part of the process today than it was five years ago. Our investment process utilizes MSCI4 rankings, but we also recognize the need to provide capital to the good actors within all the various ESG classes. Data supports that investing in higher quality ESG, higher rated ESG businesses leads to higher returns, and we also recognize we need to be good actors within the world. We're all seeing the environmental change, we want to take care of people from a social perspective and we want our companies to be good corporate citizens from a G perspective.
Ben Alge:
Chris, over the next 10 years, what does Ares believe will be the biggest trends that are going to drive market performance?
Chris Mathewson:
I think there's a couple of things that we should highlight. Private credit has become a very large part of the leveraged finance market and the other thing I would say, over the next 10 years, is passive is going to continue to be a bigger part of our market, but I believe that that's going to lead to more inefficiencies and the need for credit selection because certain companies in a more passive driven market are going to be given capital that shouldn't be getting it. That's why it's paramount to have a deep bench of credit analysts to make sure that you're picking the right credits to put into your portfolio.
Ben Alge:
Why does Ares think that active management matters in credit going forward?
Chris Mathewson:
In below investment grade corporate credit, credit selection is paramount to driving long-term performance. ETFs and other passive products typically are buying when things are rich and selling when things are cheap. Active managers are able to take advantage of those flows and the indiscriminate selling that's really driven by the need to get liquidity as opposed to selling the names that actually have credit issues. We believe performance over a long period of time, from an active management perspective, will outperform that of passive investment opportunities.
Ben Alge:
What's the best career advice you ever received?
Chris Mathewson:
Sell energy and buy Amazon. I'm kind of kidding, although that would have been a great trade. Really, it's stay true to your process. This sounds corny, but work hard and be kind to people. I think that that goes a long way in terms of your career, in terms of good performance, as well as just being a good co-worker and friend to the people you're around.
Ben Alge:
Chris, who is your investment mentor and why are they your mentor?
Chris Mathewson:
His name's John Leupp. He was the former PM of the Touchstone Fund alongside me, until his retirement about a year and a half ago. He took me under his wing and helped me to become a better portfolio manager. He challenged every assumption I ever made and while it could be annoying at certain times, it definitely made me a better investor when he would just constantly take the other side and help me think through things. How is this going to impact X, Y, and Z investment? How is this going to impact the economy? Just really helped me think through how I should be positioning the portfolio.
Ben Alge:
What keeps you up at night work-wise?
Chris Mathewson:
Outperforming. I say this to a lot of people. As a PM, there's now three numbers on a page. Your performance, the benchmark and the delta. There's really nowhere to hide. The buck stops with you. Every night I'm thinking through are we positioned correctly? What are the changes in the economy going to do to how we're positioned? What changes I need to make to make sure that we're in the best position to perform well? That's something that I think through every single night.
Ben Alge:
Chris, what are your hobbies outside of work?
Chris Mathewson:
Used to be golf, but with a one and three-year-old, not doing that so much these days. Also with the shelter-in-place. But golf's been something I've done since I was four years old. Love it, and it's just good way to get out outside, get a little exercise and take your mind off stuff for four or five hours. I also like the fact that there's nobody to blame but yourself. I do like team sports, as I mentioned earlier, I played football in college, but I do like the aspect of you control your own destiny in golf.
Ben Alge:
If you weren't in the investment business, what do you think you'd be doing?
Chris Mathewson:
I think it'd be really interesting to run a small business. My dad started a manufacturing business after he got back from Vietnam, basically out of his mom's garage. It was a sign and decal business in Wichita, Kansas. It was just himself. Before he sold it, they had nearly 100 employees. He had to work really hard, he worked long hours, but there's something really rewarding about building something up yourself and then taking that all the way down the road and employing people. He was really close with all of his employees and clients, and I think that would be something that's really interesting to do if I wasn't doing investment management right now.
Ben Alge:
Lots of leaders have daily routines to keep them at their best and stay focused. Do you have anything like that in your daily routine?
Chris Mathewson:
Obviously, every day in the office is very intense, so when I leave the office, I try to at least get a run in, try to get to the gym, give myself just maybe an hour to decompress. I do have a one and three-year-old, so the moment I get home after that it's dinner time, bath time, book time, bedtime. Just having that one hour or so, just to get away from it all really does, I think, help me recharge for the next day.
Ben Alge:
Chris, what is the most interesting place in the world that you've been to?
Chris Mathewson:
South Africa, without a doubt. Safari is incredible. The people you meet there, the animals, you get to see how close you get to them. Words and pictures cannot describe it. I loved every part of that country. Obviously there are some lingering issues with respect to race and poverty, but everything that I saw and the people that I met, it was just a great experience across the board.
Ben Alge:
Thanks to Chris for sharing his insights today into Ares investment process, as well as his personal interest and background. Until next time, I'm Ben Alge.
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/podcast. 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 Credit Opportunities II Fund.
1 LBO is an acronym for the term Leveraged Buyout which is the purchase of a controlling share in a company by its management using outside capital.
2 CLO is an acronym for the term Collateralized Loan Obligation which is a type of mortgage-backed security that contains a pool of mortgages bundled together and sold as an investment.
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 MSCI ESG Ratings aim to measure a company's resilience to long-term, financially relevant ESG risks.
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.
