Watch the full video interview here or read the transcript below.
Maddi Heckman
Hello. This is Maddi Heckman with Markets Group and I'm joined today by Bob Fontana who is the Chief Investment Officer at Investors Trust Company. Bob, thanks so much for joining us.
Bob Fontana
Absolutely. Thank you.
Maddi Heckman
So Bob, let's start with you giving a little bit of background and a quick intro on yourself.
Bob Fontana
Sure. Well as you said, I'm Bob Fontana. I have been the Chief Investment Officer at Investors Trust for going on 11 years now. Investors Trust is a wealth management firm. We also have trust capabilities, obviously as our name implies. We have been in business for 20 years. We are actually owned by Investors title insurance company, which is publicly traded. We have about a billion dollars give or take under management and we primarily serve high net worth individuals, foundations, endowments, 401Ks, we do have some corporate assets in there as well. We're a little bit different I guess from a typical money management firm just in that we run our own SMA strategy, separately managed account, equity strategies with individual securities in them and we buy individual bonds as well and then we compliment that with exposure to other asset classes via funds and ETFs. So that's what we do.
Maddi Heckman
Okay. Great. So Bob, what is your outlook for the 2024 markets?
Bob Fontana
Well as we sit today, the equity markets at least have done very well so far. I mean, we're up over 6% year to date. The markets have basically gone straight up since their lows in October. So I guess on a short-term basis, we're probably due, if not overdue, for a little pullback in the equity markets, but on a longer term basis I would characterize us as hopeful, but cautious or nervous on the equity markets. Hopeful in the sense that the economy has been much stronger than we in the street expected and that the US consumer frankly has been stronger than we expected. And with a backdrop that unemployment's low, 3.7%, wage growth is over 4%, that lends to a pretty healthy consumer that's clearly indicated a willingness to spend. So we're hopeful in that regard. We're nervous in the sense that earnings expectations are pretty high for this year.
The street consensus right now is calling for about 11% earnings growth. That's down from 12% a few weeks ago, but it's roughly twice the historical norm. And so if we have an economy that is still growing, but less so, that could be a tough bogey to hit. We're certainly worried about inflation. That has been stubborn. We do think interest [00:03:00] rates are probably going to be higher for longer than folks expect. And of course it's a presidential election year, which I don't think the market has really started to focus on that right now. So we're hopeful that the economy can stay healthy, but nervous given those things I said.
Maddi Heckman
Yep. Okay. So how have you changed your allocations for the year ahead, given some of those maybe macroeconomic factors playing into your strategy?
Bob Fontana
Yeah. Well as we sit today, we've recently gone to slightly underweight equities. Again, given the nice run we have had. We do like fixed income. We're overweight fixed income in large part just because for such an extended period of time you couldn't get any yield to maturity. Now you can at least get some decent yield to maturity. We like that. With that said though, we are keeping our bond portfolio short because we are concerned about upward pressure on rates, not just for inflation purposes and again, we're having this healthy economy, but what's not being talked about all that much is the amount of debt the US Treasury is going to have to issue, not just to support our normal spending, which our politicians are very good at doing, but just the interest costs on our debt now is much higher given higher rates.
And so all that could put upward pressure on rates. So we like fixed income, but we are keeping durations fairly short. And we're also overweight alternatives as well, which alternatives, it means different things to different people. For us, alternatives are master limited partnerships. Those have been great and generate a nice income. We've recently added exposure to some commodities. We were out of commodities most of last year, but we've recently added exposure again with the economy being better and inflation perhaps a little more persistent and stubborn. So we've recently added some exposure there, but we are overweight alternatives as well.
Maddi Heckman
Okay. Bob, what is your take on a potential tech boom looming, and if that were the case, how would that impact your portfolio?
Bob Fontana
Yeah. You could almost make the case that the tech boom is already here I guess. Certainly some of the stocks in the market would suggest that. I know artificial intelligence is all the rage right now and whatnot and as we look at that, the demand for, let's call it AI infrastructure, has really come from a narrow area. It's come from data centers, it's come from hyperscalers, it's come from cloud service providers and whatnot. We're just starting to see demand for AI related stuff for enterprises, for companies, that are embarking on their own AI projects.
And so I think the question is really just how sustainable are some of these things going to be. With more AI comes greater need for security. And so it's not that cybersecurity wasn't important beforehand, but it's gotten that much more important or will get that much more important. And so really I think we could make the case that we're already here. In terms of impacting our strategies, I would say certainly we just have to make sure we have exposure to those areas, but I think it's always important to remember your risk management disciplines because I think it's easy to get complacent and that, "Hey. It's artificial intelligence and that's just going to be great." So I do think it's important to, hey, if you've got big gains or too much exposure, go ahead and trim that exposure. All these stocks that have been up big the last year to 15 months, well they got killed in 2022. So we're quick to forget that. So I would say just make sure you don't forget your risk management disciplines along the way.
Maddi Heckman
Okay. In a previous conversation, you and I had spoke about disruptive healthcare. I would love to dive into that a bit. So how are you leveraging disruptive healthcare to balance your portfolio?
Bob Fontana
Well with our conversation, we really like, you can call it disruptive, you can call it emerging healthcare or whatever it is. We like it for a host of different reasons. One is the growth profile is different from technology. And so there's long-term growth potential with it and it tends to be slower steadier kind of growth as opposed to everybody gets all excited about being in the hot tech stock. It tends to be less that. So we think that helps balance out the growth profile of portfolio so we do like that. With that said, how we've chosen to play it, I canvassed the landscape of funds. I wanted to play it via fund of some kind and whatnot, but the stuff that's out there that calls themselves, whether it's emerging healthcare or disruptive healthcare, you lift up the hood on what they actually own and it's Eli Lilly, which yeah, they've got a weight loss, a GLP one drug and whatnot. But we can own that in our individual SMA strategies. It's got stuff that we could already own.
Maddi Heckman
Okay.
Bob Fontana
So in that sense, I was disappointed. So we just built our own emerging healthcare portfolio that we are actually in the process of putting into client accounts where it's appropriate to do so. One thing that's nice, I think the timing is nice now because unless you were Eli Lilly basically last year, if you were healthcare last year, your performance stunk. Healthcare stocks really had poor 2023s. And so unlike tech that had really good runs last year, healthcare didn't. And so it's so far, knock on wood, so far healthcare is doing okay this year, but I think it's just better entry points for that area.
Maddi Heckman
Okay. So Bob, there's a great deal of movement as we've discussed around private credit right now, a lot of interest there. Why are you steering clear of that industry segment?
Bob Fontana
I know we had that conversation. I guess it's less an indictment about private credit itself. I mean, look, I guess private credit right now, you can get low double-digit returns in and that's certainly attractive. Well, yeah, there's transparency issues. Yes, there's lockup issues and things like that. Those are concerns. But really it's more about the fact that everybody and their brother now has a private credit offering. And so our experience has very much been when everybody and their brother is pushing something, the returns are below expectations if not outright bad. And in the case of private credit, maybe it's even more concerning because a lot of people pushing private credit right now, they may have credit experience but not private credit experience. And so what happens in a downturn where there will be a downdraft in private credit, what's going to happen there? Do they have workout situations and whatnot?
And then frankly they can sometimes, the less seasoned can screw up pricing that the more seasoned players would typically get. Maybe a seasoned fund would get outbid for example by somebody who is less experienced and therefore the returns won't be as good and whatnot. So for us, we can get high single digit returns in transparent public fixed income. So yeah. We're sacrificing a little bit with the low double-digit returns of private credit by not participating in it, but I don't know if when all is said and done we'll actually sacrifice that. I mean, we might, but I don't know. So for us, we're just like, "We'll let everybody else, I guess, play in that space I think." So again, less about private credit itself and more about the actual managers and the dynamics or the structure if you will of the market itself right now.
Maddi Heckman
Okay. Great. Well, Bob, thank you so much for taking the time to chat with us today. Thank you for lending your expertise to our listeners.
Bob Fontana
Alrighty. Happy to do so. Thanks so much, Maddi.
