Steve Peacher: Hi everybody, this is Steve Peacher at SLC Management and thanks for dialing in to this episode of “Three in Five.” Today Tom Murphy's with us. Tom has been heading our institutional business at SLC Management, but has now been named to a new role, which is President of SLC Fixed Income, which is our investment grade fixed income business within SLC. So, Tom thanks for joining and congratulations.
Tom Murphy: Thanks very much Steve, great to be here again.
Steve Peacher: So you're taking on this new role at a time that is interesting in markets, I just glanced at Bloomberg and the three-year treasury is just under 3%[1] but it's been above the last couple days and that's a big rise of last couple months. And that's what led to market volatility across markets, so how has this recent volatility impacted our business and our clients from your point?
Tom Murphy: There's certainly lots going on in the macro environment. There's the war in Ukraine, the world is suffocated by supply constraints, we've got raging inflation and, as you say, we got rising rates, in fact, if you look at the credit markets the long credit yield has gone from somewhere around 3% to about 5%[2] over the last number of months, and so a nominal value actually long credits fallen by about 20%2 and in that short period of time. I saw a statistic recently that said we haven't had a drop down like that in the credit markets, since 1788[3], so I’m not quite sure who's been keeping the books that long but it comes it comes with good pedigree behind it. It's certainly an interesting time take on a new role, we won't be bored and the existing kind of volatile environment. From a client perspective, having said all of that, I would say it’s actually relatively reasonable news from a client perspective. If I look at pension clients, most pension plans are underhedged relative to rates and so when rates go up obviously the asset value has fallen for the fixed income portfolio, but their liabilities have fallen by more. And so from a funded status perspective they're actually relatively healthy. I just looked this morning, we publish funded status estimates on a monthly basis and the funded status for typical a plan was about 90% at the start of 2021[4], it's now at about 108%3. So as a kind of result of rising rates that's really helped funded status. So many pension plans, I think, are relatively speaking, healthy and I think they're using this as an opportunity to rebalance back into fixed income at higher rates and as they kind of execute their glidepaths and get closer to fully funded status or even beyond that using it as again rebalancing mechanism back in at higher rates. And if I look at insurers just briefly. Insurer I think also see this as a reasonable opportunity, they can now reinvest at higher yields and therefore create higher income and on balance that should be good for their business. So in that environment, our role is to help our clients understand the big picture, obviously help them to navigate volatile markets in terms of mitigating risks, but also to help seek and grasp opportunities that present themselves.
Steve Peacher: You know I think the best asset managers are growing businesses, because it creates energy, it creates opportunity for employees, it creates opportunities for clients. And growth will be one of your areas of focus in this role, what do you see as future growth opportunities?
Tom Murphy: I think we have a myriad of growth opportunities across the business, but I’ll make it simple, which is that as long as we support and focus on our client’s I think our business will grow. And so, if I use clients at the context to talk about growth opportunities, from an insurance perspective we know that our clients are looking for partners who can help them from an asset/liability modeling from an overall strategic perspective, who can help them with regulatory capital, who can help them with access to alternatives, particularly in the existing environment. So we know we can manage fixed income, but we can also bring a whole myriad of capabilities to the table to help clients from an insurance perspective in a much more holistic way. So I think we have permission to play in the insurance space, we already have about 100 insurance clients and I think we can grow that part of our business, as you say it'll be fantastic to bring additional value to our clients but that also helps our people and helps them grow their careers. A couple of other ones I will highlight, in the investment grade private fixed income space we've had remarkable success. Grown that business very, very nicely over the past number of years in Canada and also more recently in the U.S. In fact, it's been so successful that we're now coming up against some I’ll call them capacity constraints. And so as clients look to invest investment grade privates, they're looking for additional diversification, looking for enhanced deals, they get backed by collateral in the private marketplace, so we'd like to bring more of that to the table so we're looking for additional capacity in the U.S., but we're also looking for additional capacity in international markets. And then the last one I’ll touch on just briefly is sustainability. Obviously, that's a trend and a wave that's unstoppable on a global basis and different parts of the world are in different phases in their adoption of ESG and sustainability, but we have a lot of clients who signed up to Net Zero by 2050, including our parent company, who is our client. And so they're going to need help and support and getting there. We've invested a lot of money in technology and in people and in data to help us run our portfolios on a more sustainable basis, so I’m hoping that as clients go on that journey we can be there right beside them supporting them and growing our business.
Steve Peacher: Let me ask the next question from a slightly broader perspective, I know you and your team have been spending time talking to large global institutions about a broader strategic relationship across our broader platform involving the various specialty managers that SLC Management is partnered with. So, can you give us some insight into those discussions and what is the benefit of that type of arrangement to an institutional client?
Tom Murphy: think this is a trend that we've seen for a number of years across clients who are looking to reduce the number of managers that they're working with on a day-to-day basis. They're looking to kind of streamline relationships and also to gain some forms of economies of scale. And as they do that they're looking for partners with broad global capabilities who can help them solve problems in a myriad of ways, problems that they're facing today in terms of market volatility, but also problems or even opportunities that might come to play in the future. And so they're looking for a partner who is good for today, but also is to some extent future proof and can work with them as the markets and as time evolves. And doing that, I don't think they have any interesting compromising on quality, so they like streamlined relationships but they clearly want to have stellar investment performance and excellent performance right through that suite of capabilities. I think that all leads very well into, as you say, our specialty manager structure. Clients can work with us on a global basis, whether it's in public or private fixed income, real estate equity, real estate debt, or indeed infrastructure, and by working with our specialty managers they get focused investment teams, focused on the rest of classes, with a significant level of employee ownership. And I think that all aligns interest between ourselves and our clients as we grow those relationships. And to give you a sense of the benefits, obviously those streamlining of relationships is one thing that they're looking for, but also large clients are looking for opportunities to coinvest, they're looking for opportunities to kind of reserve capacity in some parts of the alternative markets which are capacity constrained. They're looking for access to our research, they're looking for access from a peer-to-peer perspective. Obviously, people who listened to your podcast will know that we're an asset owner as well as an asset manager, and so as an asset owner we know how to manage long term financial obligations because we've been doing that for over 150 years. And so from a peer-to-peer perspective we can engage with many of our clients on that basis, and then clearly they're looking for economies of scale in terms of financials and that's something that we can bring to the table. So a whole a whole lot of reasons Steve why clients are, I think, engaging with us right across the platform and for us to connect the dots across that platform such that we add value in a kind of a seamless way.
Steve Peacher: So one personal question before we end. So, I know that your favorite sport is soccer, but if you turn on TV in the U.S. and you can't find the Premier League on the on the box and you gotta watch something in the U.S. what's the next choice?
Tom Murphy: Well, the great news in this day and age is I very rarely turn on the box because I’ve got a subscriptions to about 10 different streaming services, and so I can find soccer 24 hours of the day if I really wanted to. But if I can't find I can't find soccer on TV, I suppose it's a bit seasonal so right now watching the Celtics, based in Boston it's hard to not watch the Celtics, particularly when playoffs. And then, when it's football season I watch football, this is probably sacrilege but I supported the New England Patriots and watch Tom Brady for many years and then we went to Tampa Bay, so I watched more of Tom Brady than I did at the New England Patriots. but I’ve adapted I’ve adapted the American sports they're not quite number one for me, but they're very close number two and number three.
Steve Peacher: Well it's a good time of year to be in Boston with the Celtics competitive in the playoffs and the Bruins as well. This year may not be the year for the Red Sox, but at least we got two out of three going. Thanks for taking the time, congrats on the new role, and thanks to everybody for listening to this episode of “Three in Five.”
Tom Murphy: Thank you very much Steve.
[1] MarketWatch data
[2] Bloomberg, 2022
[3] GFD, Deutsche Bank
[4] Milliman, 2022
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