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53 minutes, 15 seconds to watch by  BlueBay Fixed Income teamM.Dowding Jul 15, 2025

In today’s volatile market environment, many institutional investors find themselves facing concentrated credit exposure and outdated portfolio structures. With rising uncertainty and shifting macroeconomic conditions, investors need to modernize fixed income allocations to enhance portfolio durability and long-term resilience.

Mark Dowding, BlueBay Chief Investment Officer at RBC GAM, joined Pensions & Investments for a webinar on June 25 discussing the changing market landscape, the opportunities and risk this presents and the evolving role of alternative credit in institutional portfolios in this environment.

Key Themes

  • Navigating Uncertainty in Market Conditions: Macroeconomic uncertainty, geopolitical risks, and unpredictable economic cycles pose challenges, emphasizing the need for strategic investment decisions.

  • Modernizing Credit Allocation and Portfolio Diversification: Incorporating alternative investment strategies such as emerging market illiquid credit and European special situations may reduce concentrated credit exposure and improve portfolio resilience.

  • Customization and Client-Centric Investment Solutions: Investors should look to managers that cater to bespoke client needs, offer tailored investment strategies, and address unique challenges faced by different allocator segments, including public pensions, endowments, and corporate pensions.

Watch time: 53 minutes, 15 seconds

View transcript

Josh Scott

Hello everyone, and welcome. Thank you for joining us. I’m Josh Scott, Senior Director at Pensions and Investments, coming to you live from Midtown Manhattan. So, apologies for any background noise you might hear.

I’d like to welcome you all to this webinar, ‘Rethinking Credit Allocation: Building Resilient Institutional Portfolios’. And it couldn’t come at a better time. In today’s volatile market environment, many institutional investors find themselves facing concentrated credit exposure and outdated portfolio structures.

In today’s webinar, we will be discussing how alternative investments can help modernize an investor’s fixed income allocations to enhance portfolio durability and long-term resilience in a world of rising uncertainty and shifting macroeconomic conditions.

To help me out in that discussion, I’m going to be joined by Mark Dowding, who is the Chief Investment Officer of BlueBay at RBC Global Asset Management—the asset management division of Royal Bank of Canada, managing more than $468 billion US dollars in assets.

A little bit of background on BlueBay: it was established as a long-short credit fund manager more than two decades ago and has built a suite of sophisticated alternative solutions spanning funds with the ability to short, follow a hedge fund strategy, or invest in illiquid credit. The BlueBay investment platform manages more than $133 billion in fixed income securities.

A little bit about Mark: he has over 30 years of investment experience as a macro fixed income investor and has been a senior BlueBay portfolio manager since he joined in August 2010. As a macro investor, and key to his work, Mark is engaged in open dialogue with policymakers and industry experts to conduct proprietary research, which informs his market insights. Prior to joining the firm, Mark was Head of Fixed Income in Europe for Deutsche Asset Management—a role he previously occupied at Invesco. He started his career as a fixed income portfolio manager at Morgan Grenfell in 1993 and holds a Bachelor of Science with honors in Economics from the University of Warwick.

Mark, thank you so much for joining us.

Mark Dowding

Well, thanks very much for the intro, and thanks to everyone joining today. It’s great to be here online on a lovely sunny evening here in London. So good afternoon to you all across the pond.

Josh Scott

Yeah, it’s great to have you here again. And, you know, like you said, a very warm and sunny day here in New York as well, so we have that in common.

Before we jump into the Q&A, I just want to make a quick housekeeping note to the audience: you may type in any questions you have into the question box on the left-hand side of your screen, and, time permitting, we’ll get to them at the end of our discussion.

So, with that, Mark, I’ll go ahead and jump into our first question here, which I feel like we could probably take the whole hour discussing, but I’m going to ask you to boil something down into key themes. What are the key themes that you expect will shape asset performance over the next 12 to 18 months?

Mark Dowding

Well, thanks. I think I’d begin by saying that the prevalent theme, if you had to bottle it at the moment, is one of uncertainty, certainly from a macro perspective.

Having recently spent time in the White House and also with the Federal Reserve, I think it’s pretty clear that many policymakers are very unclear exactly what’s going to be going on in the course of the US economy six months out, 12 months out. So, when it comes to making a call on the economic cycle, when it comes to trying to forecast variables, I think we’re at a time where we’re trying to accurately predict where we’re going to be 12 months hence is especially challenging at the moment.

And so, from that perspective, I guess where we are in terms of the economic cycle—whether we see recession risk—that’s going to be a big question that’s going to be influencing and driving market outcomes. As, of course, will potential risks around political risks, geopolitical risks. I mean, we’ve just had this 12-day war, haven’t we? Who would have predicted that just a couple of months ago? So, it does feel like we’re living in these unpredictable times.

Josh Scott

You can definitely say that again. I think, you know, with the allocators I’ve talked to, “uncertainty” is the buzzword that comes up in every single conversation.

So, given what you shared on some of those overarching issues, how are they impacting strategic investment decisions, especially when it comes to alternative investments, if you could boil that down?

Mark Dowding

Yeah, so here, I think that you could say that one of the clearer macro themes we would have thought would have been a theme towards yield curve steepening. But this kind of manifests in two different worlds.

One could be a world where we actually see a relatively benign environment for the US economy—growth continues to proceed on a respectable path, and we have low levels of inflation. Against that sort of backdrop, and with the Federal Reserve cutting, we think that this will be a pretty constructive environment for owning strategies that have market beta attached. So, owning strategies, including in the alternative space, which are exposed to market beta and indeed exposed to leverage, can perform in that sort of environment.

Alternatively, we could see a world where it’s characterized by a move towards maybe higher inflation as a result of tariffs. It could also be a world in which concerns build around US indebtedness. This could actually take longer-dated yields higher, and this could be a world which is more disruptive in terms of broader market beta performance.

I would say that in this sort of space, if you’re looking at alternatives, it would probably be more macro-based strategies, also long-short strategies, which would be offering more defensive characteristics in those more challenged market circumstances.

And so, I think that, depending on the market outcomes, there’ll be different strategies that work in different areas. But intrinsic within all of this, I would suggest, is that we should be in an environment that does deliver some amount of volatility. So, for managers who have skill, there should always be opportunities to actually monetize that volatility in terms of delivering active returns.

Josh Scott

You outlined two different scenarios there. And I guess, you know, when I’m thinking—putting myself in an allocator’s or an investor’s seat—approaching the current market with all the uncertainty, and given those two scenarios you outlined, how should investors be approaching portfolio construction to adapt to today’s market environment? Is there a silver bullet? Is it going to be a combination of things? What are your thoughts there?

Mark Dowding

Yeah, look, I wish there was a simple answer to that question. I think what we would be conveying is that we’ll be in a world, I think, where, for the time being, adopting a relatively cautious stance may not be a bad idea. If you think that volatility could pick up around the corner, leaving yourself with some firepower so that you can actually add risk if we do see more adverse market situations makes sense.

Otherwise, I’d say operating in a way in which allocators or investors are running portfolios with a degree of diversification—not having all your eggs in one basket, not being over-allocated in any one particular area. Also, I think, be aware that there was a time, perhaps, when you could use interest rate duration—you could hide behind the defensive characteristics of government bonds and owning duration as a bit of a risk-off balance to a long-only equity portfolio.

I do think, I mean, of course that works if all we need to contend with is growth shocks. But in this world where we have other shocks around debt, other shocks around inflation perhaps, I don’t think that owning duration in such a way is such a natural risk hedge. You could see asset classes correlate positively together, as we did in 2022, right?

So, from that perspective, I do think that you would be advising investors to think about owning more alternatives in the context of their overall allocation. But within that, obviously, looking to make sure that they leave themselves in a position where they can add risk if markets do have a tough time.

Josh Scott

Yeah, I think that’s been a theme of folks that I’ve talked to too over the past five years. In the credit space, I think the breadth of tools at an allocator’s disposal has grown. It’s given folks a lot more options to work with within their fixed income and credit portfolios.

I want to dig a little bit deeper on a particular type of asset because, you know, allocations to and interest in hedge funds have grown over the past 5 to 10 years as well. Should investors be thinking differently about hedge fund investing in the current environment?

Mark Dowding

Yeah, so I would say that, in terms of allocations to alternatives more broadly, we have seen a lot of money rushing towards private markets and private assets. I think the one thing I would say there is that some of the strategies we see in the private space may be rather dependent on running a lot of leverage, which was obviously a very attractive strategy during the 2010s.

We remain, for the time being, in a higher interest rate environment, so I would be more wary of those strategies that are running too much leverage. More specifically, when it comes to hedge fund allocations, we think that owning multi-strategy hedge funds, but also looking to move towards strategies in illiquid markets—owning things like special situations in European stressed and distressed credit or emerging market illiquid credit—are spaces that we think are potentially interesting against a market backdrop where a lot of assets today are looking fully priced.

Josh Scott

To go back to your point about the money that’s moving into these alternative strategies more broadly, how have you seen the demand for these types of strategies change over the past few years and so far this year?

Mark Dowding

Yeah, so I think one of the more interesting recent themes has been an increase in interest around non-US strategies. Global investors, for sure, are certainly looking at opportunities in strategies in emerging markets and Europe.

For example, if we look at the CLO (Collateralized Loan Obligation) space, we’ve actually got double the number of open CLO warehouses in Europe today compared to two or three years ago. There’s suddenly a sense in which there is demand from Japanese investors for European AAA paper. So, we’re seeing some regional shifts into non-US strategies.

Otherwise, in terms of hedge funds more specifically, I think you’re seeing interest in a whole range of different strategies. Where there was perhaps an overconcentration in hedge fund allocations to a small number of funds and a few managers over the past few years—perhaps with the returns from some of those big mega funds starting to disappoint at the margin—we’re actually seeing more demand for a larger bench of managers. That’s certainly been keeping us busy this year.

Josh Scott

To elaborate a little bit more on those non-US credit opportunities, you mentioned emerging markets and the European CLO market. Are there any additional markets or segments that allocators can consider outside the US? I think it’s become a more attractive space for folks over the past few months, to your point earlier, so I’d be interested to know if there are any other spaces you’re looking at.

Mark Dowding

Yeah, I mean, here I’d say that personally one of my favorite spaces to actually be invested in at the moment is special situations—that is, stressed and distressed debt in Europe.

If you think about the US, the economy has been doing so well, it hasn’t had a big default cycle. But although the European economy is doing much better more recently on the back of the fiscal boost that’s coming from the big defense spending we’re just seeing, the reality is that a number of European companies—particularly in the mid-market—have been struggling over the last few years against the backdrop of a weak economy.

With companies struggling with too much debt and having had a tough time during COVID, we’ve seen more of a stressed cycle in terms of European credits. However, there are some great European companies, and we don’t see a lot of depth of capital to take advantage of some of these opportunities. Particularly in the mid-market space—not in the big mega caps, but maybe in some of the smaller opportunities—I think this is a space that looks particularly interesting to me.

If I contrast this with traditional private debt and direct lending funds, here’s where I get concerned: ultimately, you’re giving money to strategies that are investing in loans from companies that are very highly levered—maybe seven, eight, or nine times levered on balance sheet. When you’ve got so much leverage and such high interest rates as we see today, my concern is that you end up losing all of your free cash flow to debt servicing costs. That’s effectively eating all of your return, which is why you’re seeing a very depressed IPO pipeline when it comes to private equity.

Not much needs to go wrong in private debt before you end up with credit impairments, and it’s a space where we’re seeing defaults rising. So, if I’m more cautious there, I would say I like European stressed and distressed debt because this is a much more attractive opportunity set in the here and now.

I also like emerging market illiquid credit. Although it might sound risky to call it “emerging markets” and “illiquid” at the same time, the truth is you’re actually investing in loans from entities operating on very low levels of balance sheet leverage. Oftentimes, these are performing loans that banks want to shed because they don’t want the capital charge on their balance sheet. We’re able to pick up some very attractive loans at very interesting yields.

These are the spaces where, in the fixed income world, I’d contend that good managers have more of an ability to achieve 15–20% returns on an annualized basis. Meanwhile, a lot of other more traditional strategies—particularly in the private debt space—could be more challenged going forward from here.

Josh Scott

I’d like to get back to the growth of private credit at some point, hopefully. But when you bring up investing outside of the US or internationally, for any investor, the first question that often comes up is currency risk. How do you have discussions regarding that risk with clients, especially those that are US-based and looking to move abroad for opportunities?

Mark Dowding

Yeah, so here, I think most US investors naturally tend to look for—if they are investing overseas in fixed income—share classes offering a dollar-hedged share class when investing in non-US denominated assets.

That said, with global investors, the appetite for owning dollars seems to be on the wane. I’ve recently met with some of the largest funds in the world—very large allocators—who are all expressing the idea that maybe they’ve ended up overallocating to the dollar. During a period of US growth exceptionalism, this was understandable, as it went hand in hand with a strengthening dollar.

We also saw a situation where the dollar almost acted as a bit of a risk hedge. When equity markets went down and there was a flight to quality, the dollar tended to rally. So, overseas investors were quite happy to own US assets on an unhedged basis.

But now that the dollar is starting to behave in a more volatile fashion and isn’t performing as well in risk-off markets, I think this is causing a lot of overseas investors to rethink their allocation to the dollar to a degree. In that context, what we’ve been seeing over the course of recent months is more demand coming into euro share classes and Japanese yen share classes, particularly from Japanese-based clients.

I know I’m addressing a US audience today, but you might take the view, perhaps, that some of the asset allocation trends that have favored a strong dollar for a time could start to unwind and move into reverse. I would share with you that whenever I come stateside, I find myself moaning and shocked at how expensive everything is. Conversely, if you’re a tourist coming to my part of the world over the summer, or if you’re traveling to Japan this year, you’re going to find things incredibly cheap. There’s a bit of a sense that the dollar may have been overvalued.

Of course, globally, we’ve operated with what we thought was the TINA investment philosophy— “There Is No Alternative.” We all ended up buying US stocks, even though we knew, and continue to know, that they’re overvalued because you didn’t want to buy anything else. It has been interesting over the last few months how that paradigm seems to have shifted a bit.

From that point of view, maybe there’s a case for some US investors to start thinking about taking some overseas unhedged currency exposure again, as a bit of a risk diversifier to their own currency.

Josh Scott

It’s fascinating. I want to dig a little deeper into some of the implementation aspects of this. My next question is more around what investors should be looking for when considering an alternatives fixed income or hedge fund manager. On the flip side, what should investors be wary of when considering the same type of manager?

Mark Dowding

Yeah, look, interesting question. Changing gears here, I think that if I were looking to invest in a hedge fund, I’d certainly consider the performance, the people, and the process—the “three Ps,” if you like. But I’d also want to get a clear sense of the culture and the integrity of the firm I was investing with.

Sometimes, I find that this space can be filled with a lot of hubris—people full of pride—and I always default to the idea that pride comes before a fall. I think I read that in the Bible somewhere. Personally, I’m much more attracted to managers who come across with a sense of humility, who are better grounded, and who have more of an understanding of both the potential downsides and upsides of their strategies. Those would be some of the traits I’d look for in a manager I wanted to invest with.

On the flip side, what would I avoid? I think I’d be wary of firms that seem driven by greed. Are they prioritizing the assets they can grab relative to the returns they can deliver to investors? Are the firms you’re investing with providing the appropriate alignment of interests?

In this greed-based culture, we’ve seen some hedge fund firms get away with charging exorbitant fees and passing on additional costs to investors. In the worst situations, investors end up losing half of their returns to the underlying manager. This misalignment of interests does not sit well with me.

I feel that we always need to remember in this industry, when we’re managing someone’s money, we’re managing their hard-earned, hard-worked-for savings that I’ve been entrusted with in managing. Remembering to have that in mind, keeping yourself a bit more humble when thinking about yourself as a steward of capital, is important. For me, that would be a red flag, as would any firm with shaky risk management processes or an overly short-termist culture.

Josh Scott

It’s interesting how there are so many quantitative elements that go into these decisions when talking to allocators about assessing managers, but there’s also a lot of qualitative information involved. Something you mentioned reminded me of alignment—are they sticking to the strategy you hired them for? Are they sticking to their guns if there is a market event? I’ve heard allocators mention that if a manager strays from their strategy during a market event, that can be an issue as well. It’s not just about the initial assessment but also the ongoing relationship that would develop over time. I’m sure you’d agree with that, as well.

Mark Dowding

Most definitely. That would absolutely be a red flag. It’s also important to bear in mind that sometimes there’s a temptation to deploy quantitative analysis to infer who has delivered skill over the past 10 years and to extrapolate that going forward. But I think it’s always right to ask yourself whether the manager or fund has worked because of a particular set of market circumstances. Are we still in the same world today? Is that strategy going to continue to be successful on a go-forward basis?

Josh Scott

I think that’s a challenge for many investors—sifting through short-term noise to identify long-term trends. Many of the folks we’re talking to today are long-term investors, and it’s essential to keep that perspective in mind. Recognizing trends that will prove to be longer-term considerations for folks without getting caught up in day-to-day news is key. On that point, you mentioned earlier the overconcentration of credit risk and how allocators might not be fully accounting for it. How are you helping clients reduce the concentration within their credit portfolios?

Mark Dowding

Here, I think diversification is key. I’d also advocate for globalization. US investors tend to have a significant home bias, but there’s a place for adding more global exposure. There’s also a place for adding assets in emerging markets, inasmuch as in doing so you can end up improving your efficient frontier and end up having more non-correlated returns.

Another point we’d make is that if people are moving away from private markets, they can look at more liquid alternatives. Or, if they continue to invest in locked-up capital, it shouldn’t just be about direct lending. There are many other private asset classes within fixed income that can look quite interesting.

I’ve already mentioned ideas like special situations and emerging market illiquid credit. There are other sub-asset classes in the private space that may offer a more attractive illiquidity premium if that’s your particular area of interest.

Josh Scott

While we’re on the topic of risk and opportunity, as you look across your alternatives platform, where do you see additional opportunities and risks over the long term? This ties back to the short-term versus long-term discussion.

Mark Dowding

Here, I think in terms of the long term you’d want to focus on what’s cheap today. Honestly, I can tell you, hand on heart, there’s not a lot in credit markets that looks incredibly cheap at the moment. In direct lending strategies and private debt, you’ve effectively lost any illiquidity premium.

Yes, it’s true that investors are being overcompensated for taking credit default risk in their portfolios over the long term. But when you look at where spreads stand in a lot of markets today, spreads look pretty compressed, and it’s hard to get excited about too many valuations. However, I think we can become more excited about the idea of dispersion—dispersion under volatility, at a sector level, at an issuer level, and at a global level. This theme of dispersion looks interesting.

Otherwise, if you ask me where I really see value in beta today, I will say European financials. European financials are in a much better position than many US financials, particularly the US regional banks. We particularly like, and have for some time, the junior debt and CoCos in Europe.

Josh Scott

Moving back to the discussion about portfolio construction and implementation, as well as some of the things that come up a lot in the conversations that I have a lot are around the correlation between fixed income and equity, how those have been moving more in tandem in recent years, which has spooked some investors regarding diversification. To dig a little deeper, what roles can alternative credit play in a portfolio, and how does it make sense right now given the current market conditions? Could you expand on that?

Mark Dowding

Indeed. You asked about the role alternative credit can play. I think there are two primary roles.

The first is as a diversifier in a portfolio—something that delivers non-correlated returns relative to traditional asset classes. This is a really important reason why many people make the case for investing in alternatives, as it can improve their effective efficient frontier in terms of potential returns.

The second area to highlight is the outright return opportunity. A few years ago, a lot of things in fixed income were delivering very little yield. But in today’s world of higher interest rates and higher yields, there’s more value in fixed income. There are parts of the fixed income universe, which I’ve already touched on, that I believe can deliver returns that will stand up very well to equity-like returns.

I think that these are the two merits to be highlighting. You'd certainly be noting the ability to deliver risk adjusted returns from these sorts of strategies, again, which is a very strong facet of why a lot of people will be looking in this direction.

Josh Scott

It’s definitely become a much more interesting space—the debt and fixed income space—over the past five years. I wanted to ask about the decision-making process allocators face when constructing portfolios. They have a certain amount of dollars and an asset allocation framework they want to fit into. If they’re looking at a long-short credit fund versus a long-short equity fund, what’s the advantage of credit versus equity fund for that type of strategy?

Mark Dowding

That’s a good question. I’m not here to beat up on long-short equity strategies, but I would say that, at the margin, fixed income as an asset class tends to be easier to deliver returns through active management and skill.

This is partly because fixed income markets are more inefficient. There’s more issuance of new securities, and you have term premia, credit premia, liquidity premia, and volatility premia. If you have skill, you’ll tend to win in fixed income. Additionally, many fixed income investors, such as central banks and liability matchers, are not return maximizing, which creates structurally inefficient markets.

Obviously, I think that the markets are more difficult. In the long-only equity space, you’ll often see that not many active equity managers beat the benchmark on a routine basis. Sometimes, the benchmark beats the median manager. But in fixed income, it does tend to be different. So, I do think it’s a bit easier to generate returns in fixed income.

Also, in fixed income long-short strategies, effectively you’re trying to identify things like left-tail risk—the idea that bond prices can go to zero. Picking the losers in this way is intrinsically easier than doing the job where you’re trying to go against right-tail risk in equities, because you go short something that ends up trebling or quadrupling in price and you’re killed pretty quickly, even if you think it’s a pretty awful company like GameStop. You can get wiped out by someone posting on Reddit or the latest chat board. So, I do think it is in a way more challenging.

I don’t have to compete against the chat boards when it comes to running a fixed income strategy in the same way.  So, I would infer that credit long-short strategies are more likely to deliver better risk-adjusted returns largely because it’s a slightly easier space to get things right.

Josh Scott

That makes a lot of sense. I want to ask more specifically about RBC’s approach to credit allocation. How does your approach differ from others in the space? Could you walk us through your investment thesis and credit allocation process?

Mark Dowding

Sure. I don’t want to lose the audience here with a long chat or a long explanation. I think the one thing I'd say that is different about us is that we're running these assets—$150 billion with 130 investors—but all of our investors, both in traditional fixed income, as well as in alternatives, are working on one integrated investment platform with one process, one technology, and we're sharing all of those insights together. We’ve built a lot of proprietary technology to support our human risk-takers and talent. I feel the way we’ve built our platform is certainly different from many peer shops.

The other thing that I would say is different about us is we are very focused on proprietary research. As a macro guy, I don’t read research that comes from investment banks or the Street, except to inform myself about consensus views. I want to go in to see the Fed. I want to be in the White House, meet with the Bank of Japan in Tokyo or speak with the ECB (European Central Bank). I want to be meeting with policymakers and test where policy views diverge from market-embedded views, as this creates opportunities to make money through the lens of policy and politics.

That’s my own edge as an investor, but I want to ask every investor on our platform: what is your edge? For example, my colleague, who runs emerging markets, recently flew to Lebanon in the middle of the conflict. RBC was understandably concerned, but she went to meet with the Prime Minister and representatives to talk through ideas around debt restructuring in Lebanon.

We think that this is a super interesting idea on the view that if you look beyond what's happening in the Middle East in the here and now, today, and you look ahead, you think that Iran will be less involved in a country like Lebanon. Actually, the bonds have been trading at around 15 cents. We think you can have some upside there, but you need to unpack some of this through your proprietary research.

So that's what I think is different about us. We're prepared to be a bit edgy, we're prepared to take risks, and we've got a very stable platform with low turnover. We're more of a family than a firm in many respects. We've all worked together for a long time, so that's a bit about who we are and what we do a bit differently. If anyone on the call wants to learn more about us, I’m sure they can get in touch.

Josh Scott

I would agree that flying into Lebanon in the current environment is definitely dedication to the role and the strategy. I appreciate that, and I love those anecdotal stories about how internal collaboration can help identify risks and opportunities. Do you have any other stories to share, or could you provide insights from recent visits to the White House? I’m sure folks on the call would love to hear about that.

Mark Dowding

Well, there have been some great examples. For instance, we were one of the very few shops that was utterly convinced—through our contacts in Moscow—that Russia was going to invade Ukraine. As a result, we had no exposure to Russia across our entire platform. In fact, some of our hedge funds made money—not that you like making money on sad events—but we were positioned correctly for that particular conflict because we saw something others may have missed.

We’ve also had moments during the European sovereign crisis where understanding the sovereigns, meeting with leaders and regulators helped inform our views on European banks. We made money during Brexit, and there’s been a litany of examples I could talk through.

More recently, bringing things closer to home, I was in the US last September. It was absolutely obvious to me that Trump was going to win the election. At the time, everyone was saying the race was going to be close, but I was in Washington, DC and attended a dinner just outside of town. What struck me was the sheer number of Trump placards everywhere. You wouldn’t expect to see that level of support in the neighborhoods we were in.

And we could see that things for Kamala were going a bit wrong. At the dinner was one of the people who was involved in running some of Kamala's campaigns, which hadn't been as well attended as he'd been hoping. And you could see that there was a narrative here that Trump was going to win. The question was, were they going to win the triple sweep of the House, the Senate, as well as the presidency. On the back of that we put on a lot of risk because we thought markets would be responding positively to that particular outcome.

Now, I’m not a Trump supporter, nor am I advocating for the current US president. But certainly, this is the way the markets were thinking at that particular time.

One thing I’d say at the moment from having recently been to the White House is that when you meet with people that are really close to the top of the administration, you get the sense that they don’t really know what’s happening. You ask them what’s going to be happening when it comes to the July 9th deadline, there is bit of a sense of uncertainty— “we don’t know yet.” My overriding takeaway from my latest visit was this: if they don’t know, and the Fed doesn’t know, how am I meant to know?

This is a moment where you need to be honest in identifying the things that you don’t know, that you’re guessing about. I don’t know where the economy will be 12 months from now, but I’m confident about certain things. For example, there’s no way the US deficit is coming down. They’re not going to be seriously raising taxes or cutting spending. Unless you end up with benign inflation and interest rates coming down, that would reduce the deficit.

Otherwise, it's just politically expedient. It wins elections—delivering tax cuts and delivering spending. You'll only end up changing this in the US when voters demand something different. And maybe you need the bond market to inflict a little bit of pain in order to drive a change in terms of the political narrative, because otherwise things are going to stay as they are.

So, when the president today is telling you that the deficit's coming down by trillions and trillions of dollars, I'm sorry, but not on his watch.

Josh Scott

Your comment takes me back to anecdotal information coming out, like it was the Treasury market that freaked everyone out back in April and made those moves happen. What a lot of your stories here remind me of is the importance of what we discussed earlier around a) humility: knowing what you know and admitting what you don't know; but then also, b) the importance of having boots on the ground—having folks out in the field understanding this stuff in a part of the world that we've talked about before. I always hear that part is increasingly and always important and that is emerging markets.

We had a question come in from the audience. I wanted to go ahead and ask specifically on emerging markets, and I will encourage folks as well if you do have questions, you can still submit them. We are going to get to them shortly.

This question here on emerging markets just asks: what factors are you prioritizing as key alpha drivers? For example, industry versus country weighting, or bottom up versus top down approaches?

Mark Dowding

When it comes to emerging markets, almost by definition, country risk tends to be the dominant factor. Ultimately, if things go wrong at a sovereign level, they’ll tend to go wrong at the corporate level as well. That’s almost the definition of what constitutes an emerging market.

The other thing I would say is that I don’t like the name “emerging markets” because it conveys the wrong idea—that all these countries are going to emerge into a bright, beautiful, sunny future. That’s not necessarily true. At any point in time, there will be a number of countries that are submerging more than emerging. Getting the country calls right—identifying winners versus losers—is incredibly important.

Otherwise, if you’re investing in corporate credit within emerging markets, then of course getting the call right on the individual credit issuer is incredibly important to our corporate strategies in EM. Another factor that’s been top of mind this year is emerging market currency risk.

Bluntly, who would have thought at the beginning of the year—with Trump going into the White House, launching trade wars and imposing tariffs—that the best-performing asset class year-to-date would be EM local currency debt? Go figure that out. But actually, that’s been a pretty interesting move.

All these areas of risk—sovereign, corporate, and currency—need to be analyzed and looked through. Again, a lot of this comes back to having the resources to conduct proprietary research, visit countries, and get close to the dynamic of what’s going on.

Josh Scott

That makes a lot of sense. I want to stick with a couple of these audience questions here. Another one that came in looks at evergreen funds and asks: do they present an attractive opportunity for institutional investors? This ties into a lot of what we discussed earlier around illiquid markets. Any thoughts?

Mark Dowding

Yeah, so I’d begin by saying that some funds being sold or mentioned today as “evergreens” are actually in areas like private debt and direct lending, where they’ve become evergreen because they can’t give investors their money back. That’s the blunt and honest truth.

That said, I think the idea of having open-ended vehicles is very attractive. For example, we quite like the idea of interval funds. We’ve been using interval funds for investors who need more of a guarantee of liquidity when investing in illiquid assets. That particular format is particularly interesting and likely to catch on.

So yes, there will be strategies in this space that make sense. But again, be aware of why something is evergreen. Was it designed as evergreen in the first place, or has it become evergreen because of credit impairment and an inability to return money to investors on the original schedule?

Josh Scott

I think those are all fantastic points, and it underlines a lot of conversations about allocators being overallocated to private equity and the liquidity they’re not getting back from disbursements, which they need in other places. I think this is a topic that is on a lot of folks’ minds. This next question is on US real estate credit. Any thoughts on upcoming trends in that space?

Mark Dowding

In this space, again, I’m not an expert, but when you look at the subsectors, like CMBS (commercial mortgage-backed securities), there will be assets you want to own and assets you want to avoid. This will be based on geography, the type of building, and the tenants.

It’s a space with plenty of landmines, so it’s all about being careful and owning the right assets at the right price. For me, speaking generically, REITs aren’t a sector we love at the moment. I don’t see mortgage debt as especially attractive right now.

That said, there will be mortgage assets and other securitized assets, including commercial mortgage-backed (CMBS) assets, which represent interesting plays because you’ve identified a mispricing. But I’m not sure its somewhere where I’d get generically too excited about beta, just here, just now.

Partly because, my mindset is that interest rates will stay relatively high compared to where they were in the 2010s. Against that, you could see some ongoing impairment in areas where leverage has been higher than it should have been.

Josh Scott

I have a couple more questions for you, Mark, before we wrap up as we’re approaching the top of the hour. I want to get back to some of the more specific applications of alternative credit, especially as it relates to different types of allocators. When you look at different client segments—public pensions, endowments, foundations, corporate pensions—each group has its own priorities, each individual has its own priorities. What are some of the specific challenges for each, and what types of solutions can address those challenges?

Mark Dowding

Yeah, so I think we’ve seen some allocators—like some of the endowments you’ve seen in the press—who’ve been overallocated and are looking to reduce allocations in private credit and private markets more generally.

For these allocators, the conversations have tended to focus on more liquid strategies. There’s still an appetite for taking investment risk, but they want to do so in formats that can deliver greater liquidity.

For other investors still looking to allocate to private markets, I’d refer back to what I said earlier: think beyond direct lending. If you’re investing in private debt, don’t just think about private lending. Look at other areas within the space that offer more attractive beta opportunities. I’ve mentioned it before, and I’ll say it again: the EM illiquid space and the European special situations space these are two areas that stand out where the ability to achieve attractive yields with relatively low risk is, to me, the most compelling.

Josh Scott

Finally, I want to touch on something we discussed earlier about the types of conversations you have internally and the work that you all do to source ideas and opportunities. I mentioned this earlier as well - this increasing move with allocators towards customization, wanting things a little bit more fit to purpose for each of their different objectives.

You talked about that a little bit in the last question, but as they continue to seek more granular and precise investment strategies to meet those unique portfolio objectives, what type of capabilities do you think asset managers will need and will become even more significant in winning mandates in the future?

Mark Dowding

I think we’re in the job of meeting client needs. It’s not just about pushing products off a shelf. It’s about delivering to bespoke requirements. If you can set yourself up with a way of running an investment platform, running an investment process, that is able to cater to bespoke product designs, you’ll be well positioned. That reflects the way in which we’ve thought about what we’ve been building at BlueBay.

There will be ongoing evolution. Even if I dare mention those dreaded letters in America—ESG—even within your country, there will be haters and lovers of the idea. Thinking that one client group fits into a one-size-fits-all model is an outdated way of thinking.

I like to think that if I were running a restaurant, we’d be able to serve you lots of different dishes on the menu, including ones that are vegetarian perhaps. Even perhaps the meat dishes might include some vegetables on the side. Similarly, in asset management, to win, we need to be here to cater to the investor needs and hopefully delight them with the returns we can deliver. And deliver what it says on the tin, to your earlier point, Josh. If we do so, then hopefully we’ll have a strong franchise for years to come.

Josh Scott

Mark, I think that’s a fantastic place to leave the conversation for today. It was great chatting with you and learning more about what you’re doing at BlueBay. The unique and specific opportunities there in the market for investors in this truly uncertain time.

I just want to thank everyone for joining us today. I want to encourage you all, if you liked what you heard today, you can subscribe to Mark’s weekly commentary or the monthly podcast on the RBC website at RBCGAM.com. Mark, thank you again for joining today and for all your insights.

Mark Dowding

Thanks to you, and thanks to everyone who joined. Thanks for sharing your time with us. We’d love to hear your thoughts and feedback on today’s call. Again, all the best to all of you. Now, I think it’s time to get in the garden and have a beer—it’s a bit warm here in London. With that, have a great day ahead!

Josh Scott

That sounds fantastic, Mark, hope you enjoy that. Thank you to everyone for joining. Don’t forget to share your thoughts, and you can access the recording of today’s webinar through the registration link. No matter where you’re dialing in from, I hope you have a fantastic rest of your day. Thanks!

BlueBay Fixed Income Alternatives: Embrace the tailwinds of volatility.

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