Episode 98

December 12, 2023

David Hamlin on fundamental credit research

David Hamlin, Senior Managing Director, Global Head of Credit Research at SLC Management, discusses his team’s fundamental credit research process, including determining where we are in the credit cycle and the use of AI.

Steve Peacher: Hi, everybody, Steve Peacher, President of SLC Management. Thanks for dialing into this episode of “Three in Five.” I'm very excited to be joined by David Hamlin, who is the senior managing director and head of research for us at SLC. You know David's it’s interesting, fun for me, because David and I've worked together for a long time, not just here, but at Putnam years ago. And so David, thank you for taking some time.

David Hamlin: Thanks, Steve. It's great to be here.

Steve Peacher: So we wanna talk about credit research from a couple of different angles today. So I wanna start with artificial intelligence, AI, and that's you know, making its way into many aspects of a lot of businesses. It'll be interesting to see how it evolves in the world of investment management. And, from a research standpoint, from a fundamental credit research standpoint, is your team starting to make use of AI? And if so, how? And how do you think that's gonna evolve going forward?

David Hamlin: Yeah, so it's a great question, and we've been exploring at SLC AI tools in the investment process for many years, really attempting to harness better information you know, more quickly and more broadly. We currently incorporate an internal AI model utilizing machine learning to help determine which companies are more likely to have movement in their credit rating. So we've been working on that for many years. We also use a third-party tool or third-party tools that help scrape data and gain insights for earnings calls, financial statements and other documents. Currently, we're also experimenting using Gen AI in our investment process and excited about the possibilities. Initially, we see Gen AI as a more of an efficiency tool that can help us work faster and smarter. But ultimately it could be much more than that.

Steve Peacher: Well, just a side question here. Do you think we're at the point where, based on our usage today, you've seen examples where the use of AI has given us insights, or maybe allowed us to reach conclusions quicker? Have you seen tangible benefits yet?

David Hamlin: Yeah, so I would say, yes, we have seen tangible benefits, and it's really more in speed of processing and accessing a variety of information sources. That's where we're seeing the, the biggest gains from a research standpoint Steve.

Steve Peacher: Let's shift gears, one of the key things in credit is not just, there's the individual analysis of a situation and then there's the backdrop against which you're analyzing that, where we are in the credit cycle is a big determinant. You know, you can do lots of great research on a particular company but if you're in the right part of the credit cycle you have a tailwind that can sometimes help you out, and if you're in the wrong part of the credit cycle that can be a headwind that becomes overwhelming, no matter how good your individual credit research is. So I know you think a lot about that, so what inputs do you use to help make a determination of where we are in the credit cycle? And then, where do you and the team think we are today?

David Hamlin: Yeah. So it's a great question. And we do, we have a very robust process to think about where we are in the credit cycle to help us as a foundation or a top-down view as we think about fundamental research. So broadly I would classify the inputs as corporate fundamentals, macro conditions, and market conditions. So for corporate fundamentals we look at indicators like profit margins, revenue and earnings growth, leverage, interest coverage, rating agency trends, those sorts of things. For macro conditions we look at the shape of the yield curves in various countries, consumer sentiment, labor markets, manufacturing and service indices. And then for market conditions, it's corporate spreads, market risk, appetite, equity valuations. And we go through this process, we have a very robust set of indices that we look at, and currently we feel that, as you said, headwinds/tailwind, it's really headwinds. We're in what we would classify as the unfavorable part of the credit cycle where earnings are declining as global macro conditions are weakening.

Steve Peacher: Let's talk about 2023, maybe looking backward a little bit as opposed to forward. You know, I think, if I think about what people were talking about in conventional wisdom a year ago at this time, I think we're in a very different place than a lot of people would have expected. I think a lot of people would have expected we'd be in a recession right now in the U.S. at least, and a lot has happened. When you look back at the year, it's almost over, what has surprised you the most about how things have transpired in 2023?

David Hamlin: Yeah. So 2023 has been a very surprising year in many respects. So first of all, seems like a bit ago, but early in the year we had the regional banking crisis leading to the failure of three banks and that we that was certainly not on our radar screen. Fortunately, we navigated that very successfully. So that's number one. Number two is how little issuer fundamentals mattered in a weakening economy, I mean, spreads are very tight, and yet you have a weakening macro economy. I'd also say the consumer held in better than expected from a willingness to spend and from a credit health perspective. And then finally against the backdrop where the FTC and the DOJ was really scrutinizing M&A. There was a fair amount of M&A that was completed during the year.

Steve Peacher: You know, it's interesting that you mentioned you know the some of the bank failures earlier this year. You're right, you know, I think people were thinking, Jesus, this is gonna be a financial crisis redux kind of thing, you know, and we don't even, it seems like a long time ago wasn’t hat many months ago. And so it is interesting that that was maybe more contained than people thought it would be. Well, listen, let me let me end with one final question. This is kind of part business, part personal. But, as I mentioned at the beginning, you know, we've worked together for a lot of years and if you think back to you know, eighties, nineties and what it was, what it was like working in investment management then versus what it's like today. Obviously, you know, there's a pandemic overlay and the way we all work together. But you know there are other changes, too. What's different in you from your perspective? How is the experience of working within investment management different today than it was? If you look back to the, you know, mid late eighties, early nineties.

David Hamlin: Yeah, yeah. So it, a lot has changed. That's for sure. What comes to mind is the availability of information and the sources of information are so much more deep and broad as we think about investment management. And that's exciting, right? You know, Bloomberg's were just beginning to come into availability back then. So, that's one. Number two is flexible workspace. Right? So we have the ability to work flexibly, which people like. But it also, there's a very important benefit to that in that it increases our candidate pool. When we're recruiting, we're not limited to recruiting someone who lives in the Boston area or the Toronto area. That's number two. And number three, I don't put on a tie anymore. When I when I go into the office, it's a business casual lifestyle, and as you think back, we all wore suits and ties.

Steve Peacher: Well, it's interesting, you know I can remember when we had to put together spreadsheets, I was in Boston. I would have to fly to New York and pull the microfiche with 10K's and 10Q’s because there was no Internet to go to. There's no, and we didn't have Bloomberg. We had Quotrons, and I remember, you would remember this, but we had Monroe Bond calculators on desks. Nobody has a Monroe Bond calculator. So, anyway. Well, listen, David, thank you for taking the time and thanks everybody for listening to this episode of “Three in Five.”

David Hamlin: Thank you, Steve, take care.


This content is intended for institutional investors. The information in this podcast is not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not constitute a specific offer to buy and/or sell securities, insurance, or investment services. Investors should consult with their professional advisors before acting upon any information contained in this podcast. Any statements that reflect expectations or forecasts of future events are speculative in nature and may be subject to risks, uncertainties and assumptions and actual results which could differ significantly from the statements. As such, do not place undue reliance upon such forward-looking statements. All opinions and commentary are subject to change without notice and are provided in good faith without legal responsibility.