Talk Your Book: Income and Momentum

Episode Summary

Executive Summary: This episode features two interviews on income investing. Bill Mann explains why momentum investing is underused despite its behavioral edge, emphasizing a rules-based, quality-screened approach that favors high-quality large caps. Kevin Liniak discusses preferred securities as a tax-advantaged, hybrid income asset, and argues they can offer attractive yield, lower duration, and diversification versus private credit and traditional fixed income.

Main Topics: Momentum investing as an underallocated factor (Priority: 5/5): Bill Mann argues momentum is widely understood but underused relative to value, and that systematic momentum can capture market behavior without discretionary performance chasing. Quality-first momentum process (Priority: 5/5): Motley Fool’s ETF screens for high-quality companies first, then applies momentum within that universe to avoid junky or meme-driven names. Preferred securities as income instruments (Priority: 5/5): Kevin Liniak explains how preferreds sit between debt and equity, offering income, tax advantages, and in many cases lower risk than high yield. Fixed-to-floating structure and duration management (Priority: 4/5): The discussion highlights how many preferreds reset after five years, creating a lower-duration profile and some inflation/rate protection. Private credit’s impact on income markets (Priority: 4/5): The conversation compares preferreds with private credit, noting that private credit has drawn major attention and flows but also raised concerns about liquidity and sector concentration. Regulatory and capital structure arbitrage (Priority: 4/5): Preferred issuance is driven by bank and utility capital needs, with regulatory treatment making preferreds cheaper than equity and useful for balance-sheet management.

Key Arguments: Momentum is underallocated because investors intuitively prefer value, even though momentum can systematically exploit underreaction, overreaction, and delayed reaction in markets. A rules-based momentum strategy is preferable to discretionary performance chasing because it lets the market define what is working rather than relying on subjective judgment. Motley Fool’s momentum ETF avoids low-quality names by starting with a pre-screened universe of high-quality, free-cash-flow-generating companies. Preferred securities can be attractive because they often provide qualified dividend income, which is taxed more favorably than ordinary income. Preferreds are a hybrid asset: they trade like fixed income but can offer yields similar to high-yield debt with potentially less risk. Many preferreds have fixed-to-floating or callable structures that reduce duration and can help investors manage rate risk. Companies issue preferreds because they are cheaper than equity and can count as equity for regulatory or rating purposes, especially for banks and utilities. Private credit has absorbed a lot of investor attention because of high yields, but its illiquidity and sector concentration create risks that are not necessarily systemic. The rise of private credit has pushed some advisors toward barbell portfolios: high-quality bonds on one side and higher-yielding private credit on the other. Active management may be especially useful in preferreds because the market has multiple structures, global variants, and opportunities that passive indices may miss.

Data Points: Momentum ETF position size ceiling: 4.8% - Bill Mann said the ETF caps positions at about 4.8% at recalculation. Largest holding weight after appreciation: Over 6% - Lamb Research grew above its target weight after strong performance. Portfolio turnover target: About 50% per year - MFMO is targeting roughly half the portfolio to turn over annually. Universe size: 100 largest companies by market cap - The momentum strategy starts with the 100 largest companies. Preferred ETF portfolio structure: 90% fixed-to-floating, 10% 25-par market - Kevin Liniak said most of EVPF is in securities with reset structures, with a smaller allocation to retail 25-par preferreds. Preferred ETF global allocation cap: Up to 30% - The fund can own up to 30% in non-U.S. preferred-like securities/AT1s. Preferred ETF current global allocation: Lower than 30% - He said the portfolio is currently below the maximum global allocation. Preferred ETF market size: Around $40 billion - He estimated the preferred ETF market size and noted about half is passive. Passive share of preferred ETFs: About 50% - Kevin said roughly half of preferred ETFs are passive. Utility preferred issuance: $25 billion - He cited last year’s utility preferred issuance as evidence of opportunity. Private credit outflows: North of 5% - He said some private credit vehicles were seeing outflows above 5%, triggering gates. Rate cuts: 175 basis points - He noted rates had been cut 175 bps, affecting floating-rate assets. U.S. debt outstanding: $39 trillion - He referenced the scale of U.S. debt as part of the broader fixed-income risk backdrop. Debt-to-GDP: 100% - He cited U.S. debt-to-GDP as a macro risk factor. Preferred coupon/yield examples: 4%, 6%, 6.5%, 5% - He contrasted older preferred issues around 4% with newer issues around 6% and compared preferred yields to investment-grade corporates and high-yield debt. Bank preferred issuance limit: 1.5% of risk-weighted assets - He said financial institutions can issue preferreds up to this level and count them as equity for regulators.

Pivotal Quotes: "cheating off the market's paper" — Bill Mann: His shorthand for momentum investing as a systematic way to follow what the market is already signaling. "the coupons or dividends in preferred securities, you know, they pay qualified dividend income" — Kevin Liniak: He highlighted the tax advantage of preferred securities for income investors. "there is no free lunch in investing, but diversification gives you the closest thing to it" — Kevin Liniak: He summarized the case for using multiple income sources and structures in portfolios.

Implications: Listeners should view momentum and preferreds as specialized tools: momentum for systematic exposure to market leadership, preferreds for tax-advantaged income and lower-duration yield. The broader message is that income investors need more diversification across structures, not just traditional bonds or private credit.