FOCUS 2025: Income in action – Adam Kramer and Scott Mensi

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Okay, we're not going to talk about robots.

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Tactical High Income, is that the right name for the fund considering

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rates are ... is it really relevant anymore?

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Adam, Tactical high income, tell us about it.

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Tactical High Income definitely is tactical, and you can look at the history of

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the fund and what we've been doing.

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The fund is an alternative to a traditional 50/50 fund, an alternative 40/60

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fund, 60/40 fund. We're giving you a balanced approach

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to investing but with some really interesting mispriced securities

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in there, our best ideas from Fidelity, from across the entire spectrum,

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from Treasury bonds on one end to dividend paying socks on the other, and

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everything in the middle. That everything in the middle are things that are our

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competitive advantage of Fidelity with our analysts in

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the High Income Alternatives group that are looking from a bottoms-up

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perspective, preferred shares, convertible bonds, high yield bonds,

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loans, emerging market debt, floating rate debt, investment grade corporates.

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When you look at the performance of all these trillions

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of dollars of assets that are in our universe, they all take turns as the best

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and worst performing asset class in any given year.

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The market has a tendency to rightly or wrongly price in risks only to get

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adjusted the following year when the actual events occur.

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We just wait for the opportunities to come our way and find our best ideas.

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The raison d'être of this fund is that the difference between the best and the

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worst performing asset class in any given year can be thousands of basis

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points. A majority of the time over the last 25 years it's

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been something other than investment grade bonds or S&P 500 stocks

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that have been the best performing asset class.

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If we can regularly and consistently look at all these other asset classes

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that our peers are not we can really deliver an

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attractive risk-reward.

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many different income oriented asset classes.

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We have a duplicable and repeatable process that we'll

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talk about today.

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Even with reducing interest rates you're able to find yield because

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you've got capital growth but you've also got that high income component as

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well. That's because of all these different asset classes that you can explore.

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Talk about the risk controls.

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Our risk controls are that we can't be less than 30% in stocks,

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we can't have more than 60% in stock.

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Think about us as having through a full investment cycle 45% in stocks.

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The proof is in the pudding, Glen. We've only been overweight equities one

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year, and overweight equites would be over 50%.

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Now, after the COVID crisis in 2021

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we've been averaging in the 40s on equity.

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That's number one, that's bucket number one. That means that we can have 40 to

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60% in fixed income.

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The mix of the fixed income, whether it's a preferred share or a loan, a

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high yield bond, investment grade corporate, we'll talk about that in a second,

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relative to ...

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there's no benchmark on this fund but we're sort of modelling, we've got to

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wiggle around the traditional 50% S&P 500, 50%

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Barclays Aggregate Index, which is the U.S.

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Index. That's a three-year duration so relative to that three-year duration,

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investment grade duration, we can't be more or less than 1 1/2 year overweight

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or underweight. We can do that through different ways.

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That's rule number two.

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Number three is that we want to have a big premium yield.

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We want to have a premium yield, hundreds of basis points, 150,

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200 basis points on average, more than what you'd get in a traditional balanced

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fund.

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That is a really key component.

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We want to be very tax aware as well.

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If you look at us on an after-tax basis you'll see a very tax efficient

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strategy. We have the flexibility, we want to have very tax-efficient

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turnover, and that is key.

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A couple of minutes ago you talked about increasing your equity exposure after,

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I think you said the financial crisis or situations like that.

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Scott, talk about ... I forgot the phrase you used, jumping into the fire in

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the past, but the opportunity that presents itself you're

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there.

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Exactly.

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We say walking into the fire, mopping up the floor maybe is a little bit less

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crazy, I guess, sounding.

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As Adam said, we've been underweight equities for most of the life of the

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strategy with the exception of one year.

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When you get a situation like we had in April, and if you look at our

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portfolio we'd been under weight some of the largest names in the S&P 500, a

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lot of the names that you've heard folks talk about today, the Nvidia's of the

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world, et cetera.

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Again, they don't have a lot of income but we have them in the fund because we

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want to give the experience of that 50/50 index.

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In order to do that you're going to have to own some of them.

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When you see these episodic sell-offs like we saw in April

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... we were out in Vancouver during that period of time but there were a bunch

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of analysts and portfolio managers that were actually on their way to Seattle

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to talk to a lot these companies about what was going on with

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AI and those sorts of things. As we were getting the information real time from

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one of our co-portfolio managers who was there, we said, okay, this is still

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happening. These stocks have sold off, let's close or

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reduce these underweights a little bit.

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That has been great, obviously, for our fund over the

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last six months or so.

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The other things we're doing, a lot of people have talked about the valuations

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being very rich and everything's priced for perfection.

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We're style agnostic.

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You'll see growth stocks in here, you'll see small-cap stocks, you'll see some

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foreign stocks, you'll see value stocks.

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We don't really care what type of label that gets put on it.

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If there's value and there's good downside protection we'll go after it.

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What we have been saying for a while, and where we started to add more was in

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small and mid-cap stocks, while the rest of the market has recovered and

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priced at very high levels from an evaluation perspective there's parts of

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the small and mid-cap stocks that still are pricing in a recession.

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That's where we started to look as well, in some of those small and mid-cap

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names. They've done quite well, we can talk about those.

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We also started looking at some of the financials too.

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This is an area where everybody forgot about banking deregulation as part of

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the Trump plan when he came in last November.

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We're starting to see that happen and playing out in some of those companies

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as well. Those are some of the different areas that we kind of looked at from a

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new perspective post that kind of crisis.

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When you have these periods of volatility and you have positions that are

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in the top of the portfolio you want to know, should I buy more?

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Will was talking about that a little bit earlier.

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If there's a stock that you like and it goes down, well, you should buy more of

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it. What we did during that period, too, is we met with a lot of these

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companies. We met with some of the utility companies in

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Alberta that we have positions in.

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We talked with some of the tanker companies, those have been big positions

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within our portfolio. Gaining the conviction and saying, okay, nothing has

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changed as a result of this volatility we'll either add here or maintain our

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position. Those are the types of things we were doing during that volatile

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period in April, even if it was a little short period of time.

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Adam, what's with tanker stocks?

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That's a long time thing for you?

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Tanker stocks have been in the portfolio since we started.

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Like you say, I've been covering this industry for 25 years.

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That was my first industry that I covered at Fidelity.

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When you were an analyst you covered tankers, among other things, and it stuck

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with you.

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Yeah, and back then it was a horrendously badly managed industry.

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It was always boom-bust, a lot of debt, free cash flow breakevens.

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and a lot of these names have found religion.

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I think the key thing that you'll hear from us today, we just

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like to wait for the opportunities to come our way.

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Is there a cyclical story where we think we're in mid or late

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cycle but a lot of these bonds or stocks, whatever it is, is pricing in a

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recession? Is there a secular story?

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The industry just has a bad rap from years ago, decades ago.

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Now, with the tankers, the oil tankers are refined product tankers.

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I've spoken to the channel about this many times over the last number of years.

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These are basically floating pipelines.

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They transport oil or refined product from point A to point B.

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Whenever there's disruptions in the world  it causes the supply to come out of

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the system. Of course, demand is driven by oil demand and what

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OPEC is doing.

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Now, what's secularly changed with these names is that a lot of them have paid

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down their debt to below scrap values.

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They've brought their free cash flow breakeven rates to below cycle trough

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so they actually can generate free cash flow at the trough.

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That's just something you didn't have before.

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Now because there's been so many ships that are older that are being operated

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in what they call the shadow fleet by Iran or Russia

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there's a good 14% or so of the supply that could eventually come out of the

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system if there ever was peace.

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That's what's now priced in as well.

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In the meantime these companies have changed their dividend policies.

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They're paying out either 75 or 100% of their dividends to the

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shareholders. What a great thing to have in the fund for an income perspective.

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They do well when there's geopolitical risk.

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For example, today there was a headline that

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India is no longer going to be importing oil from Russia.

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That's very good for the tankers. OPEC's increased production, very good for

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the tankers. When you look at how much they can pay out through a full cycle

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t could be anywhere from 4 to 20% in dividends.

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What a great way to win in multiple scenarios, a secular story that's

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still not figured out by the industry. If you look the cumulative returns

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of the U.S.

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traded oil tanker names, many of which are in the fund, one or

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two are in the top 10, you'll see that they're not only beating the NASDAQ in

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some periods but definitely has been the place to be in

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the energy space over the last number of years.

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Can you, Scott, talk about the team that you work with as far as award winner

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Ford O'Neil and award winner Ramona Persaud helping on the fixed income and

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the equity side?

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It's a little bit of a unique structure the way we have things set up for this

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fund. Adam is the lead portfolio manager and makes all the buy and sell

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decisions in the strategy in terms of what goes in, what comes out.

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The way we lean on Ford and Ramona is to get their insights into the

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asset classes that they are focused on.

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Ramona with dividend paying equities, Adam and

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Ramona have a relationship outside of this fund within what we call the

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Strategic Dividend Income Fund in the U.S.

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where she manages actually a sleeve of dividend paying stocks for us.

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She gives us ideas there. Some of the ideas that have made it into the

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portfolio from her recently have been some of the non-U.S.,

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the London based pharmaceutical companies, really attractive valuations

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relative to some of the other things out in the market.

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She'll kind of inform us on what her views are of the market, where she's

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finding opportunities. We'll comb through those ideas and try to plug them in.

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On Ford's side, we talked about the middle part, the high-yield bonds, the

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loans, convertibles, preferreds, that's our area of expertise, but

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investment-grade bonds and emerging market debt to some degree, maybe not our

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bailiwick, that's where we rely on Ford.

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Ford will tell us, hey guys, I'm looking at XYZ company

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today, it's a really good value, I think it's a good something that we should

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consider for Tactical High Income.

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He'll give us his views on the market.

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Anything you see happening on the investment grade side of the portfolio,

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there's usually some sort of Ford O'Neil

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fingerprints on it.

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Today, for example, whenever credit spreads within the IG space get really

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tight, and there's not much to do there, we'd rather just

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take the least amount of capital to build out our investment grade duration.

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What he's been saying is, hey, guys, investment grade spreads are at historical

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tights, it probably makes the most sense to just ... let's just use 15% of the

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portfolio, buy 30-year Treasuries, we get the investment grade generation that

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we need and then we can use the balance, that other ...

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if you think of a traditional balanced fund 50% is in the Aggregate Bond Index,

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here we're only using 15, let's take that 35 and we can invest

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it in things like high yield credit, loans, convertibles, preferreds,

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et cetera.

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The way I think about it is when you put the four of us in a room, Adam,

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myself, Ford, and Ramona, you have the full spectrum of income-oriented

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asset classes of folks that are looking at it on a day in and day out basis.

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Some other funds out there, they might allocate to these areas of the

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market but they don't have that full spectrum represented from a portfolio

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management team. We have these regular ongoing discussions

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systematically, every quarter we have to meet.

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There's things happening every day back and forth to give us these insights on

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where we think there's good value and income.

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So you're analyzing a company from all levels of the capital structure.

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Exactly.

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When a company comes in to speak with you and your team they're getting

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questioned from all angles of the capital structure.

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It must be pretty intense.

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It can be. The way I

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think about it, the simplistic way I think about, Will and his

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team, they talked about earnings, stock prices follow earnings.

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They're really interested in earnings growth, what's happening with earnings.

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From our perspective as debt investors primarily it's are we going to get our

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money back? We could have a company that is maybe not growing as

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fast as maybe Will would like but it's still generating enough free

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cash flow to pay its debt down, that might be something that's attractive to

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us. There's different kind of focuses of the analyst team.

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When you get a management team in-house, I often say they're some of

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the best salespeople out there.

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They're not going to lie to you but they're going to tilt their discussion

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towards the audience.

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For example, you could have a situation where an equity analyst

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is asking questions about potential acquisitions and all of a sudden the

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management team says, oh yeah, we're thinking about doing X or Y, maybe buying

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this company. The debt folks are saying, whoa, whoa whoa, I thought that cash

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was going to delever, are you sure that's something you want to do?

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You get this more balanced discussion and there's less ways for the management

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teams to wiggle around questions.

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There's very few places in the market from an asset management

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perspective where you can get both sides of the balance sheet, and even

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sometimes you can get an investment grade analyst, a high yield analyst, an

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equity analyst having this active discussion with the

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portfolio management team which we think gives us a lot of different

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perspective and gets more information out of that meeting than if you just had

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the equity analyst sitting down with the management team.

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I'll just add one more thing on that just to synthesize it.

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A bond can go up in value just like a stock, you can get principal

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appreciation. I always like to say, what is the company's ability plus

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intent to improve the credit metrics of the company?

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The ability would be what are the 12 to 36-month fundamentals?

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That's what you can get out of sitting in on the equity meetings.

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What is their ability to generate free cash flow, and

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what is their intent? Are they going to pay down

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debt, are they going to make acquisitions?

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Those are the type of things that can really differentiate a stock versus a

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bond.

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That's the main ingredient for trying to find what we like to call

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the sweet spot in the capital structure.

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What part of the capital has the best risk-reward?

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I mentioned at the beginning of the initial question that you had,

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all these asset classes take turns as the best and worst performing asset class

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in any given year. You could have a stock versus a bond in the same company's

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capital structure that are performing very differently.

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That's what we're trying to find.

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If I visualize your fund, Tactical High Income Fund, it's connected

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to a balanced fund, which you've talked about before, but it's way more

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diverse. It's around 40% or so equities right now but

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the remaining is diversified beyond what many people can

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imagine because of all the resources that you have, and

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it's run with great risk controls.

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One of the aspects of it, which you apparently are the king of,

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are convertibles.

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I don't know if you drive a convertible but you should if you don't.

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You've been a convertible aficionado for your whole career.

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Why?

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Convertibles and I go back a long way.

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Going back to the oil tankers, back in 2002 I think there was an oil

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tanker company that did a convertible and that's how I sort of got

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to know the convertible bond market. For anybody who's not familiar with a

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convertible bond, it's a bond so you're promised to be paid back at a 100 cents

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on the dollar at maturity. Unlike other bonds it's the only

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type of bond where you can double, triple, quintuple, or as the case

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with Tessa, or now a company called Rocket Lab

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... Rocket Lab is a 14-bagger.

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It's in the index today. It's one of the largest [crosstalk] convertible index.

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They make rockets?

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It's a competitor to SpaceX, basically. They issued a convertible at 100 cents

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on the dollar trading around 1,400.

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Eventually, it will just get converted into equity and leave the index.

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For us the convertible bonds are the secret sauce of the fund.

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With convertibles we like to buy it because your downside

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is capped because eventually you just become a bond, but if you participate in

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the equity you can eventually become equity and you could participate with the

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equity eventually.

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What our competitive advantage is, I manage the convertible bond fund with

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another co-manager named Rick Gandy in the United States.

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The Fidelity Convertible Securities Fund that's sold in the United States

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We look at every single new

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convertible bond deal that comes to the market. We like to look at the

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convertible bonds as like a basket of kittens.

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The kittens come to us, it's always a different narrative every

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year, what's the theme going to be?

[00:17:33.986]

The kittens, one-third of them historically have become what we call these

[00:17:37.723]

lions. Those Teslas, the Nvidias, the Rocket Labs, the multi-baggers.

[00:17:42.995]

We're just trying to find the best ideas that we have in our Convertible

[00:17:45.564]

Securities Fund and if we like that name, risk-reward perspective, upside

[00:17:49.334]

potential, and now overweight in the Convertible Securities Fund, will find its

[00:17:53.138]

way into this portfolio. That's a way for us to toggle the equity risk above

[00:17:57.209]

50% without taking on that equity.

[00:18:00.779]

We would not have been able to predict it but year-to date the convertible

[00:18:04.817]

bond market is the best performing asset class.

[00:18:08.420]

The last time it was beating the S&P 500 was 2020

[00:18:13.692]

when it was 2 1/2 to 1. The reason why it's doing so well is that we've

[00:18:17.896]

actually had a lot of companies, they were Bitcoin miners

[00:18:22.134]

that had electricity locked in in

[00:18:26.171]

the United States.

[00:18:27.906]

These Bitcoin miners had this hidden asset, electricity, and

[00:18:31.977]

they eventually said, we want to change our business model from

[00:18:36.148]

a Bitcoin miner to becoming a data centre for artificial

[00:18:40.552]

intelligence. When they came to the market in November of last year,

[00:18:44.957]

September of last year, these names were trading at 3 or 4

[00:18:48.961]

times enterprise value to EBITDA because nobody believed that they can execute.

[00:18:52.598]

If you look at some of the data centre REITs in the United States they're

[00:18:55.000]

trading at 20 times. We've had this revision, multiple revision.

[00:18:59.138]

Oil tankers, multiple revisions.

[00:19:01.306]

We'll talk about Alberta, IPPs, multiple revision.

[00:19:05.077]

Bitcoin miners, multiple revision.

[00:19:07.713]

A lot of these secular themes find their way to the convertible market for

[00:19:11.183]

whatever reason. It's always a different theme year in, year out.

[00:19:14.887]

Because we're looking at this on a regular and

[00:19:18.891]

consistent basis, this makes this duplicable and repeatable.

[00:19:21.593]

We're going to make mistakes, we're not always going to

[00:19:25.564]

get the winners but this is a great tool to have.

[00:19:28.667]

Hello, investors. We'll be back to the show in just a moment.

[00:19:31.870]

I wanted to share that here at Fidelity, we value your opinion.

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Please take a few minutes to help us shape the future of Fidelity Connects

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And don't forget to listen to Fidelity Connects, the Upside, and French

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DialoguesFidelity podcasts available on Apple, Spotify, YouTube, or wherever

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else you get your podcasts. Now back to today's show.

[00:19:59.731]

Adam mentioned Alberta, do you want to talk about what's going on there?

[00:20:03.502]

Yeah, sure. We mentioned a little bit of what's

[00:20:07.873]

happened in the U.S. and the demand for electricity and why a lot of these

[00:20:10.842]

Bitcoin miners have done really well because they're transitioning

[00:20:14.880]

to data centres. As you've heard today there's a short shortage of

[00:20:19.184]

electricity in North America and the United States.

[00:20:21.587]

One of the areas where there is the ability

[00:20:25.757]

to generate more electricity is in Alberta.

[00:20:28.393]

They have the commodity up there, you have unregulated utilities, you have

[00:20:32.030]

power plants that are underutilized

[00:20:36.168]

and mothballed in many instances, and they have the

[00:20:40.138]

transmission lines, not across Canada but even down into the States.

[00:20:42.441]

This is an area that if there was ever to be some

[00:20:46.378]

deal signed we would see a rerating of these multiples for these

[00:20:50.449]

stocks in Alberta.

[00:20:51.316]

We started to see that happen as there's been more news around potential deals

[00:20:55.220]

being struck up there as it relates to

[00:20:59.625]

data centre. That's why we went in and have created

[00:21:04.429]

these large positions.

[00:21:05.530]

The way we found out about it, Glen, was when they were issuing preferred and

[00:21:09.167]

high yield bonds in U.S.

[00:21:11.470]

dollars. That's when our analyst, Gavin, who covers these for us was like,

[00:21:15.507]

hey, these look pretty interesting.

[00:21:17.542]

He had covered the ones in the U.S.

[00:21:19.711]

and saw exactly what I'm talking about, the rerating of some of these Texas

[00:21:23.915]

independent power producers.

[00:21:26.485]

He said, look, we've got this very similar story here.

[00:21:29.021]

The market was still viewing Capital Power and TransAlta as very

[00:21:33.458]

highly levered businesses but they had done a lot of the same things that Adam

[00:21:37.496]

was talking about with the tankers.

[00:21:39.831]

They had reduced debt, had very flexible balance

[00:21:43.835]

sheets so the market was viewing them as highly levering

[00:21:47.939]

in a not great market because the spot market has been pretty soft up there.

[00:21:52.444]

We put all these things together. Great valuation, our analyst understands

[00:21:56.515]

where these things could go based on what he's seen in the similar industry in

[00:21:59.718]

the U.S. so we started to add to those.

[00:22:02.087]

As I said, when we were in Calgary in April, went out

[00:22:06.024]

and visited them, just popped in, got to know the management team a little

[00:22:09.961]

bit and said, okay, this makes sense.

[00:22:12.097]

Let's buy some more of this and we'll see what happens, because we could just

[00:22:15.600]

get paid to wait. At that point there was the dollar blowout.

[00:22:19.204]

We had some Canadian dollar exposure there that looked really attractive.

[00:22:23.375]

The company itself was doing fine because it had delevered, as I'd mentioned.

[00:22:27.346]

Then we have this catalyst of the data centres which is starting to play out.

[00:22:31.049]

That's kind of how we found those companies, was through the issuance of

[00:22:35.053]

high yield bonds. Again, we wouldn't have found these companies if we weren't

[00:22:37.889]

sitting in our group.

[00:22:38.957]

We have a great analyst in our group, Gavin, as Scott was mentioning, who

[00:22:42.661]

covered the IPPs in Texas, the unregulated utilities in Texas.

[00:22:47.899]

Whatever he learned with the utility companies in Texas moving on

[00:22:51.970]

to data centres he was able to translate it into what

[00:22:55.974]

was happening in the convertible market, and then Alberta which is an

[00:22:58.777]

unregulated market as well.

[00:23:00.479]

To what Scott's saying, the spot market in Alberta was very

[00:23:04.516]

depressed, the capitalization of these plants was very depressed, they had a

[00:23:08.286]

lot of land and eventually they could sign long term deals.

[00:23:11.623]

That's secular changes, if any of that happens, not priced in at the

[00:23:15.560]

time. We still hold these and we're waiting for something to happen if it does.

[00:23:20.932]

Even if it doesn't our entry point was a good level as well.

[00:23:26.405]

Good stuff. The 30-year, Adam, that's been in the portfolio for quite a while.

[00:23:29.908]

Yeah. This is where Ford O'Neil, my co-manager, and I work with Ford

[00:23:33.879]

O' Neil on a bunch of other asset allocation funds in the United States, 25 to

[00:23:38.784]

30 billion dollars' worth of asset allocations where we allocate money to

[00:23:41.853]

different fund managers within Fidelity in 18 different asset classes.

[00:23:45.157]

That's where I get a lot of my ideas as well from REITs or international

[00:23:49.361]

equities or whatever, international bonds.

[00:23:51.897]

Ford O'Neil, for anybody who doesn't know, he's one

[00:23:55.867]

of the most successful bond managers in the United

[00:23:59.938]

States. He managed a lot of money, the Fidelity Total Bond Fund, an

[00:24:03.408]

award-winning fund. I think he was Fixed Income Manager of the Year for

[00:24:06.445]

Morningstar a couple years ago. Being able to work with Ford O'Neil was like

[00:24:12.951]

hearing Nidhi and Matthew talking about Will.

[00:24:16.421]

Ford O'Neil is just an unbelievable Investor, a mentor, and

[00:24:20.392]

has so many different playbooks. One of the playbooks that we have

[00:24:24.329]

in this fund that you might hear about from Mike Plage tomorrow, because Mike

[00:24:27.732]

Plage works with Ford O'Neil as well, is that [audio cuts out]

[00:24:31.036]

[Subtitles coming soon]

[00:25:43.575]

corporates are

[00:25:45.210]

very rich from a spread perspective.

[00:25:47.979]

That's why we have the 30-year.

[00:25:49.848]

I'd say we're probably a quarter of a year underweight investment grade

[00:25:53.218]

duration and then we're probably three-quarters of a year overweight credit,

[00:25:57.188]

so half a year overweight duration on

[00:26:01.960]

the margin.

[00:26:03.862]

Scott, collateralized loan obligations.

[00:26:06.131]

That's one of the other tools.

[00:26:07.532]

CLOs is much easier to say.

[00:26:09.034]

Yeah, CLOs, much easier to say. Again, they're not a huge piece of what we do

[00:26:12.037]

but I think it goes to the depth and the resources that we have at Fidelity.

[00:26:16.575]

For those that don't know, CLOs are a huge part of the leveraged loan

[00:26:20.645]

market in the United States, 70% of all leveraged loans in the United States

[00:26:24.616]

are owned by CLOs. CLOs is a structured credit product

[00:26:29.621]

and what's interesting about it is that when we look at the

[00:26:33.725]

CLOs they're investing in the same loans that our loan

[00:26:37.796]

funds are investing in but what they do is they create options for investors to

[00:26:41.967]

buy different credit tiers. The CLO structure will have triple A notes,

[00:26:46.171]

double A notes, single A notes, double B notes, et cetera.

[00:26:49.174]

What we found is that in many of these CLOs the double B rated

[00:26:53.345]

notes, so these are higher quality than the broader high yield market and

[00:26:57.782]

the loan market, actually trade at a 200 to

[00:27:01.720]

250 basis point yield premium versus those asset classes.

[00:27:05.523]

For us this is just another tool. Not a huge piece of what we do but when

[00:27:09.327]

you're getting a 10% yield and it's only 40 or 50 basis points of the fund

[00:27:13.431]

any incremental income can help us.

[00:27:15.533]

We've got an analyst, Michelle, who has been in that market for many,

[00:27:19.471]

many years. We actually within the group issue CLOs ourselves so we understand

[00:27:23.241]

those markets. Michelle meets with these different managers, makes sure she

[00:27:27.078]

understands their style, understands the risks that they're taking in the

[00:27:30.715]

portfolio. We get comfortable with that and then we can put them in and add

[00:27:34.219]

that incremental yield into the fund.

[00:27:36.187]

That's what we're trying to do, use that full spectrum of opportunities

[00:27:40.458]

at Fidelity to get the best ideas in the fund.

[00:27:43.995]

CLOs, the focus on the best idea is in the loan portfolio, emerging market

[00:27:48.199]

debt, all of these pieces, it's really just finding the sweet spots within

[00:27:52.270]

those asset classes to make things work.

[00:27:54.773]

I'll just say a couple of things, in terms of preferred stock,

[00:27:58.777]

very rich part of the market now. I think it's the worst performing asset

[00:28:02.781]

class year-to-date. We've really brought that down.

[00:28:04.983]

One of the things where we've been investing in is the strategy of

[00:28:09.120]

perpetual preferreds.

[00:28:11.022]

A company strategy.

[00:28:12.657]

The sweet spot in that cap structure is the perpetual preferred because you're

[00:28:15.393]

able to get 10.5% yields for

[00:28:19.564]

a perpetual preferred that is backed by Bitcoin.

[00:28:25.236]

There's probably a loan-to-value of 15% so very well covered.

[00:28:28.273]

What's interesting about ...

[00:28:31.910]

we have to check to see what the tax taxation is in Canada but in the United

[00:28:35.980]

States this is not taxable as a dividend.

[00:28:38.083]

It's a return on capital, sort of like MOP.

[00:28:40.118]

When you get the income it actually, just back to your cost base, a very, very

[00:28:43.955]

attractive way to beat the preferred index.

[00:28:46.591]

That's sort of where we focused on that.

[00:28:48.359]

Small-caps is an area, like we were saying, has

[00:28:52.297]

had a lot of bad news priced in.

[00:28:54.165]

I sprinkle the portfolio with a lot of 10, 15 basis point positions

[00:28:58.369]

that can become multi-baggers.

[00:29:00.739]

One of our top attributes year-to-date was a retail company in Canada that was

[00:29:04.743]

a 5-bagger. I was basically sitting in a store

[00:29:08.880]

with my daughter and that's how I came up with the idea.

[00:29:12.383]

Some of these things just fall on your lap.

[00:29:14.686]

There's a lot  of seats in the portfolio.

[00:29:16.087]

That's like a Peter Lynch story.

[00:29:18.256]

Yes, exactly.

[00:29:20.592]

We like to sprinkle the portfolio with a lot of interesting ideas.

[00:29:24.496]

Some have dividends, some don't but with small-caps I have found that

[00:29:28.600]

interest rate and all these risks get priced in to the small-caps.

[00:29:31.770]

They're sort of the whipping area of the market.

[00:29:35.006]

That's where we can find a lot of interesting ideas now.

[00:29:37.642]

I like what you said about sprinkling lots in.

[00:29:39.611]

The thing is it's not finite, there's lots more that can still go

[00:29:43.615]

into the portfolio. There are other asset classes we didn't talk about today,

[00:29:47.418]

it's extremely diversified, it's an

[00:29:49.287]

award-winner because of the risk controls and the tax controls too.

[00:29:52.223]

It just sounds like a wonderful compliment to most,

[00:29:56.394]

well, pretty much any portfolio, especially those that are quite levered

[00:30:00.365]

a certain direction.

[00:30:01.699]

Exactly.

[00:30:02.233]

I'm supposed to go through five quick questions but I don't know that we have

[00:30:04.903]

time. Not sure if I'll lose my job if we don't go through them but I should

[00:30:07.839]

wrap. Thank you so much for being here, Adam and Scott, Tactical High Income.

[00:30:13.378]

Thanks for watching or listening to the Fidelity Connects

[00:30:17.315]

podcast. Now if you haven't done so already, please subscribe to Fidelity

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We'll end today's show with a short disclaimer.

[00:30:50.982]

The views and opinions expressed on this podcast are those of the participants,

[00:30:54.819]

and do not necessarily reflect those of Fidelity Investments Canada ULC or

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[00:31:02.760]

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[00:31:05.296]

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[00:31:07.599]

Or an endorsement, recommendation, or sponsorship of any entity or securities

[00:31:11.936]

cited. Read a fund's prospectus before investing, funds are not guaranteed.

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Their values change frequently, and past performance may not be repeated.

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Fees, expenses, and commissions are all associated with fund investments.

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Thanks again. We'll see you next time.