Scott A. Mather, CIO U.S. Core Strategies: So you look at this episode, and things sort of, you know, the markets began to dysfunction early, but one of the things that was quite clear—and we've been talking about this for some time—is particularly in the lower quality and in the credit sectors of the market, there was a mirage of liquidity. And we've sort of been warning about this for some time that we've seen small episodes that basically the corporate market sort of stopped functioning. They shut down, and each time there hasn't been a real turn in the credit cycle, not a real turn in the growth dynamic.
It's fair to say this is going to be a true credit cycle. How bad it is, what the default rates ultimately go to. Certainly, we're going to be going through a major downgrade and default cycle with so many different sectors of the economy, particularly those that are more levered or exposed to the obvious problem areas, so that makes this turn very different. And because it's been so long since the market's gone through a credit cycle, we think that there's a good chance for some more overshooting, especially in an environment of less liquidity.
Definitely, there's some opportunity. We've been nibbling away at some of the higher quality offerings that are coming to the marketplace. We think in this environment no reason to really rush. This is going to take a while to really work through this credit cycle.
I think it's useful to emphasize that we haven't changed our view of what Core should be—or Core Plus should be. It's a focus on quality. It's a focus on liquidity, focus on diversification.
We think Total Return will continue to have that negative correlation with risky assets.
Our strategy, say, we don't want it to be really dominated by any particular beta. It's trying to take a balanced approach using all the tools we have and realize that at any given moment in time some of them are not going to be working. But if we're sizing things correctly and thinking about things correctly, then we'll set ourselves up for outperformance.
We have the liquidity and the flexibility in the strategy to start to take advantage of some of these dislocations as they occur throughout the cycle. And we think there will be a lot. And so it's a much better alpha environment than we've had for the past several years.
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