Episode summary
Cracking the Agg: How active fixed income can beat the benchmark
Capital Ideas Podcast
· · Hosts: Mike Gitlin · Guests: Ritchie Tuazon
Summary
Ritchie Tuazon argues that short-term signals are most useful when they are used to build a long-term fixed income view, not to chase the next move in yields. He says the rates team watches weekly Fed communication, inflation data and other market signals to understand what is being priced in, while still focusing on what will matter over several years in portfolios.
He also makes the case that fixed income is more attractive now because yields are higher and real yields are over 2%, giving investors more income and ballast than in the zero-rate era. On his view, a status-quo environment could deliver about 5% annualized returns over the next five years, while TIPS could do better if inflation spikes again.
Tuazon says Capital Group can beat the Bloomberg Agg through security selection plus rate positioning, using duration, curve and inflation instruments rather than simply betting on 10-year yields. He emphasizes the firm’s Portfolio Strategy Group process, which combines sector views into a shared directional framework, and says his own edge comes from asking lots of questions and having conviction without slipping into hubris.
Key takeaways
- Tuazon says short-term market data helps form long-term fixed income views, especially around the Fed and inflation.
- He expects roughly 5% annualized returns in fixed income over five years if conditions are mostly unchanged, with better outcomes if growth weakens.
- Tuazon says active managers can add value in the rates market through duration, curve and inflation relative value, not just by predicting 10-year yields.
- He says Capital Group’s fixed income process works because sector teams feed the Portfolio Strategy Group, which aligns the portfolio around a common direction.
- His personal edge, in his words, is asking a lot of questions and then acting decisively once conviction is built.
Notable quotes
“understanding what's happening over the short term is very informative for forming a long term view”
“we need to have a TIPS, Treasury Inflation-Protected Security TIPS fund”
“the fixed income part of a portfolio needs to be the ballast when times are tough”
“you can get your cake and eat it too right now with that capital preservation and capital appreciation”
“There are other ways to use interest rates to generate excess returns in portfolios”
How the episode opens
- Welcome to another episode of our Capital Ideas podcast. We get to know the people behind the portfolios, spend some time with portfolio managers and analysts, get to know some lessons learned, some ideas a bit more about Capital Group. Today I am joined by Ritchie Tuazon.
Ritchie is a portfolio manager for fixed income based in LA, has been in Capital Group for 14 years. Ritchie, welcome. - Thanks for having me.
- Very few of our portfolio managers have started out as traders. You did, you've been super successful, talk about that transition. - Sure.
So, yeah, out of school, I started in investment banking and knew nothing about trading. Once I learned about what trading was, and what the markets entailed, I instantly fell in love. I instantly fell in love with putting together the pieces of the market puzzle.
And so after business school, I went into trading and loved it. When we had our first child in 2010, my wife and I both knew we wanted to come back to Los Angeles. I was living in New York with Goldman Sachs.
And luckily there was a trading seat here at Capital open and that started my Capital journey. - And so talk about that. How do you take what's core to trading and translate that into long-term portfolio management?
Because they're very different. And so talk about that. Because you know, the quantitative outcomes for portfolio managers, the number one driver is the eight year number.
The number two is five year, then three year, then one year. So literally the inverse of short-term trading. When you're thinking of constructing portfolios and you're thinking of those five year and eight year results, how do you think of short-term opportunities and then just long term themes?
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- active fixed income
- benchmark beating
- tips
- credit and duration
- portfolio diversification
Companies and tickers mentioned
- Capital Group
Watch the episode
Watch “Cracking the Agg: How active fixed income can beat the benchmark” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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