Eric Lutton

Sure. Well, I kind of started off after school studying finance and I moved to Chicago to trade and work on the Chicago Board Options Exchange. So that's why I was introduced to derivative instruments and kind of a fast-paced crowd. First time I ever saw grown men actually throw punches at each other was in the pits of Chicago. After that, I had an opportunity to move closer to back home to Indianapolis and worked at a big insurance company on the money management side, CECO Capital Management. So we managed about $36 billion at the time. This was back in the late 90s. Insurance company money, Taft-Hartley Endowment Foundation money, a lot of pension fund money.

It makes, I definitely want to talk about more the firm and your experience with building fixed income strategies before we kind of go there. What do you like to do, Eric? when you're not working, when you're not, I always like to know, the things that you like to do outside the office.

Yeah. Well, my wife says I'm always working. So I need to work on the life balance, work-life balance a little more. living in South Florida, being based here, it's great. I grew up in the Midwest. So now the fact that I've got palm trees and the beach down the street. So we spend a lot of time with friends and family. probably have kids here before too long or I get too old. But, just enjoying the lifestyle down here, you know?

Yeah, that's great. I'm envious. I'm still in the Northeast in Pittsburgh. I'm not as harsh as a Chicago winner, but still aren't the best. So you talked a little bit about sound income strategies as a firm. You guys are, a pretty large RIA with 100 advisors. how would you describe the core investment philosophy at the firm? Like, what are you guys, I know you're focusing on retirees, but is it, are you really leading? It sounds like with fixed income. And can you just talk about the overall investment philosophy?

Sure. Sure. Well, philosophy is pretty easy. It's in our name, income. So, like I said, we have equities, we have growth strategies as well, but our niche is producing cash flow or income for clients. Because, as as clients get older, a lot of them want to lower their risk and they want that. They want to know that their income needs are going to be met. And the best way, in our opinion, to do that, instead of trying to guess the tops and bottoms of the stock market constantly throughout the retirement is kind of like an insurance company. You're immunizing those liabilities. You're saying, hey, we're going to have these cash outflows in the future. Let's kind of lock in.

So what led to the launch of FXED? what gap in the market were you guys really trying to aim or really aiming to fill with the launch of this product? Because it sounds like you're more of a traditional RIA. I would assume you have some sort of use case for your clients as to why you originally launched it. But given the uniqueness of the product, which we'll talk about, really, can you talk about that gap that you were looking to fill?

Sure. Originally, we were looking, there's a lot of clients would have children with smaller portfolios, maybe, 20,000. And we were looking for smaller portfolios as a way to diversify and put our core plus strategy, a similar strategy into smaller portfolios. Because, with bonds, you don't want to have more than, you don't want to have a one or two lot in your portfolio. If the client ever left them trying to sell that, they'd get very, very poor prices, you know. So it was originally started for smaller portfolios. And we've noticed when we went out in the market to look before, because launching ETFs are pretty expensive and can be time consuming. So we looked in the market and we couldn't find anything like our core plus strategy.

So what makes it, what gives it that your strategy, the uniqueness? it looks like you're blending traditional core bond fixed income with other things like BDCs, REITs, Preferreds, and some other specialty bond ETFs. So like kind of what's the thinking behind that structure and what makes this way of investing in fixed income a little bit more advantageous than just going out and buying, the

Ag? Sure. Well, we kind of aim for about 70, 75%, two actual fixed coupon instruments. As you mentioned, we hold BDCs and REITs, which aren't traditional fixed coupon securities, but I wouldn't call them traditional equities either. They pay, as they pay out 90% of their taxable earnings as dividends to the investor, and therefore they're not doubly taxed like, let's say, traditional common stock or equities. We refer to them as cash flow securities. And so the nice thing about them, like, if you remember in 2015, interest rates were pretty low. we were at basically at zero and our advisors were looking for 5% plus type of yields.

So can you talk about how the, your internal process for kind of evaluating some of these non-core opportunities? I'm sure you have some sort of way of finding, selecting, doing due diligence on them before they're added to the portfolio. Can you talk about that security selection process a little bit? Sure.

Sure. For BDCs, management's very important. Talking, speaking to management, finding out their background, really looking at the pipeline of how they're bringing in loans. Are they doing mostly club deals? Are they bringing their own companies into the market and evaluating them? So obviously we're looking at net interest income. We're looking at their non-accruals. Are they growing? Are they managing those well? What's the payback? if there is, happens to be a loss. We're just looking at the growth of that company. Is their net asset value growing? a lot of people always look at, they'll talk about premiums or discounts and net asset value. And one thing you'll notice is the companies that are a little bit higher that you're paying a premium for, those tend to stay at premiums.

Very traditional, almost analyst type approach you guys are taking. And so when you built this strategy out, what do you, how, how are you thinking about that balance between income generation? And then as you said, the importance of capital preservation. So where does that, what comes first or how do you balance it?

Sure. Well, minimizing risk is great. Whether we like it or not, our global financial system is set up. It's hard coded, if you will, to force us all into some level of risk. Otherwise inflation, if we, if we just sell on the sidelines cash, money, market CDs, inflation is going to eat away our capital over time. So we have to balance capital preservation with earning a positive return over and above inflation. And while there, there's definitely times, things like COVID or 2022 worst fixed income market for four decades, worst government U.S. treasury market ever. There are times where I was like, I'd love to go sit in 30% cash right now and go play golf because this is just going to get bad.

So how are you determining, when to adjust the mix between investment grade and some of this high yield exposure? Is that on a, a weekly basis, a monthly basis, a quarterly basis? Is it fully active where you guys are doing it on the fly? Like, can you kind of talk about when you're adjusting that mix and what's driving that decision?

Yeah, I know a lot of funds will look to do certain calendar rebalances. That's not how we manage in fixed income because fixed income, it's not like, if I'm an equity manager and I've got a lot of NVIDIA, all of a sudden it's up huge. Now I've got to rebalance because I don't want to get too overweight. Well, with fixed income, it kind of, you're not going to get negative yields. So I let the market kind of determine our mix, like the mix between investment grade or high yield bonds. So for instance, when the market turns risk off and spreads start to widen out, we might, I might look a little bit more high yield and saying, hey, these yields are a little too wide.

Yeah, no, it makes sense. And you kind of answered the question there a little bit for me. But what advantages kind of does FXED's active management approach that you guys are taking provide over just, again, back to the, I don't mean to pick on the ag, but just that's how a lot of RIAs kind of put their 60-40s together. That's, they don't care about the fixed income side. They're basically using it as a risk-off bucket. And so can you talk about the advantages? I'm sure there are many of actively doing it the way that you're doing it. Sure.

Well, adding alpha in equity has gotten very hard over the years. Equity markets are extremely efficient. And that's why you don't see too many managers year after year beat the index. With fixed income, it's a little bit easier. You can still add alpha. Like I said, I used the example before, NVIDIA. If a manager is underweight NVIDIA or Mag7 or AI names, they're going to clearly underperform. And if they get too heavy in that, thinking they're going to outperform, the market turns, now they're underperforming. So there's a constant zigging and zagging with equity. With fixed income, like I said, if a company out-earns their, let's say they're a nickel over expected earnings for the quarter, it's not like their bonds are going to rally 10, 20 points.

So if you're kind of talking to an advisor or a client with an already diversified model portfolio, they've got fixed income exposure in there. where does FXED kind of fit in an overall diversified portfolio? Is it going to be your core fixed income exposure or how do you see it?

Yeah, well, you have to consider the investor's target rate of return or income need. what's that need? And back into their allocation, they need from fixed income investments given their stated yield. So the advisor is going to have to sit down with the investor, figure that out. And, if they can reach their target return, obviously, with less weight to fix versus eating up more capital going into a ag-like or passive fixed income fund, obviously, they could buy less of fixed and then take that difference and then either invest in the risk-free rate, potentially lowering, risk further, or maybe potentially using some of that extra capital for growth.

Yeah. So when you're talking, it sounds like your firm talks to like a lot of retirees. What role do you see this ETF in particular playing in their portfolios? you kind of just answered it. You're going to back into it. So it's really at the end of the day, how much income do they need type question. Is that right?

Yeah. Yeah. We don't, we're not competing versus certainly a growth equity or even the S&P. What we're trying to say is, all right, if this client has a target return, let's say their need is 6%. Well, if they were to pick up the ag or a traditional investment grade bond fund, they're not going to get 6% yield. I forget what the ag is yielding right now, pretty low. I want to say two, so I forget. That's how much I follow it now because we're focused on a little more growth than that. But a lot of those traditional funds aren't going to meet that need. But with something like fixed where we're, right now we're in the upper sixes, is what we're projecting.

Well, Eric, we're not too far from the period in time where the only place to get income was in equities. the amount of excess risk retirees were having to take in that, around 2000 area, year 2000, 2020 area, not 2000, 2020 area, where, yields were basically zero. And a lot of clients that we talked to and a lot of advisors were like, the only place we can get income is in, quality dividend paying equities and it's excess risk that retirees just didn't want to take. So a product like FXED, I feel like is a good product for people who are looking for yield now, now that rates are a little bit higher, anything over six is super healthy.

Yeah, we have our, on our equity side, we have another one, Divi, which is a high dividend. Paying equity strategy, value, blue chip type of companies. A lot, our strategy is a lot more boring than, going into, the growth equities and AI, which is pretty hot right now. But anyone that finds, wants to find out more about our firm or our funds can go to our website, soundincomestrategies.com. We have our fact sheets on all of our strategies there. And, access to all of our advisors across the country, if they want to talk to one of our advisors directly, if they don't want to call the headquarters here in Florida. Some people like to do that and they want to get out of the snow and ice and come down, have a good excuse.

Well, Eric, again, thanks so much time for spending. Thank you for spending some time with me. I appreciate it. Good luck as you guys, continue to grow and expand, this particular product. Thank you for having me. Sure. Thank you.