On Fixed Income: Talking and Listening to Our Clients
In the third of a four-part video series on real-world fixed income investing, Dave Plecha, Global Head of Fixed Income, explains the importance of listening carefully to discover client needs. He also describes how client input inspired the development of Dimensional’s Short-Duration Real Return strategy, which combines inflation protection with higher expected returns from exposure to the credit premium.
Jake DeKinder, Head of Client Communications, hosts the recording.
“One of the things we talk about is this idea of the feedback loop and working closely with our clients to understand their needs—then seeing if we can design solutions to ultimately meet those needs.”
One of the things at Dimensional Dave
that we talk about all the time
is this idea of the feedback loop,
and working closely with our clients
to understand their needs.
What are they trying to accomplish?
And then seeing if we can design solutions
to ultimately meet those needs.
You know what, Jake?
Conversation's a two-way street,
you know, I think you often think about,
what am I gonna say to the clients,
how am I gonna prepare for this presentation, that,
You know, what am I gonna say?
Others, the other side of that street,
and that is, let's listen to the clients.
And, you know, as I get older,
what I think sometimes is the listening skills
are actually harder.
There are a lot of great speakers out there.
So I think we've really, really tried over the years
to not only talk to our clients,
but listen to our clients.
And, you know, one example I could think of
is of just a great dialogue
and leading to a great solution
was back in 2013,
when we launched a short duration real return.
You know, we launched a TIP strategy in 2006.
We made it market like in duration though.
So you're talking about a duration.
It might be seven or eight years.
In 2013,
real rates start ticking up.
And of course, a seven-year, eight year duration
is going to feel the effects of that.
And I think many of our clients started realizing
that might be more duration than what they would like.
And they start talking to us about,
can you do a shorter duration TIP strategy?
And the answer is,
of course we could do a shorter duration TIP strategy,
but we kept talking.
We kept listening and we start talking about credit.
And we start saying, well, you know,
when you say short term TIPs,
you remember the T and TIP stands for treasury.
And we can do that by treasury securities,
inflation protected securities.
But,
you know, one thing with a treasury,
you don't get a credit premium that comes along with it.
And most of our clients that we're talking to are saying,
well, gee, we'd love a credit premium.
They're all for credit premium,
but it's,
the corporations don't really issue
inflation protected securities in the way
that the US Treasury does.
So the Treasury is the only way
to go get the inflation protection like that.
And we were showing them, look,
you're right, for sure,
that corporations in no meaningful way issue securities,
where the face value of the bond is indexed to CPI
like the Treasury issues.
But there are ways of combining
both the credit premium and inflation protection.
There's a couple of ways of doing it.
And the one that we talked about with them is saying, well,
if we build a portfolio of nominal corporate bonds,
which there are plenty and they're liquid
and transparent markets,
and then overlay that with an inflation swap,
then you could get that inflation protection
from the inflation swap
and still get to the credit premium
that you're getting out of these nominal corporate bonds.
And that combination of the two delivers,
the effect of a corporate inflation protected security.