Clip coupon income and concentrate the upside

Markets trade on stories. Portfolios compound on math. Lately the loudest story has been artificial intelligence, yet the force that actually moves margins is productivity. Better tools, smoother operations, lower unit costs, and more cash to reinvest. You can see it now, consumption has cooled from very strong levels while capital spending on cloud, data infrastructure, and software keeps advancing. Hours worked have softened a touch, yet labor income remains resilient. That is productivity in real time.

The transmission is visible: fewer bottlenecks, tighter inventory turns, and cleaner SG&A lines that translate into steadier margins. More of today’s capex is funded out of free cash flow rather than leverage, which in our view makes the growth mix less rate-sensitive and more repeatable. As efficiency compounds, companies can do more with the same workforce, and the cash they free up supports reinvestment, buybacks, and stronger balance sheets.

The stickier parts of inflation are behaving better. Tariff effects are likely to be a one-off boost, most of which has already been filtered through. Shelter pressures have moderated, and energy swings are less disruptive than a year ago. That gives the Fed room to calibrate as efficiency improves. If the cutting cycle continues and mortgage rates drift toward the five to six percent zone, housing turnover should re-accelerate and affordability can improve without reigniting broad inflation.

Bonds: make a little money a lot of times

Fixed income is about getting paid back over and over again, with breadth being more important than bravado. Over the past three years the ten-year Treasury has completed a round-trip in a contained range. At this stage in the cycle, coupon income, roll, and sensible duration do more of the lifting than heroic rate calls. The discipline that matters most is to stay invested and keep clipping income.

Use the breadth of global fixed income

Unlike equities, fixed-income isn’t a single market story. We like keeping the US as an anchor and using the breadth of developed markets to help improve the mix. On a currency-hedged basis, all-in yields in Europe and the United Kingdom compare well with Treasuries. Canada and Australia also offer convincing trades out the curve for those with the ability to go abroad. The goal is straightforward: pair attractive hedge-adjusted yield with the added push from roll-down and correlations that are meaningfully below one, so the same dollar of duration does more for total portfolio stability. European credit also remains attractive on a currency-hedged basis; carry is supported by the swap while a stable, if slower-growth, backdrop keeps fundamentals orderly.

What we prefer now

Quality core, intermediate duration: Forward returns in bonds are highly correlated to starting yields, so we anchor in paper that is still trading at elevated yields for the quality of the counterparty. The aim is a durable core that seeks to compound while keeping drawdowns contained.

Securitized as diversified spread: Agency MBS remains a core alpha driver with spreads that sit above prior cycle norms and ample room to compress further. In ABS, senior AAA tranches offer efficient front-end income where structure and liquidity are strong. Many pockets of the securitized markets screen as very attractive compared to Investment Grade Credit.

Investment grade (IG) credit: In our view, US IG is not a primary alpha or carry engine from here. We prefer to use it as a liquid ballast and be selective to keep risk tidy at intermediate maturities. For incremental carry and excess return, agency MBS and hedged European IG screen as more attractive.

High yield (HY): There continues to be a strong technical in High Yield markets as an increasing pool of money chases a relatively small pool of assets. We keep a quality tilt and broad industry mix, and we treat HY as two-way—constructive carry with room for modest spread compression if growth holds, but still sensitive to refinancing windows and lower-quality dispersion. Sizing, liquidity, and security selection matter more than beta.

Emerging markets (EM) as a complement: A softer dollar and easier financial conditions have supported EM this year. Treat it as an additive income sleeve, sized to the overall risk budget rather than as a portfolio pillar.

Equities: swim in the fast rivers of cash flow

When productivity improves, not every company participates equally. Concentrate equity risk where free cash flow compounds and reinvestment runways are long. Balance sheets that can fund investment and buybacks out of cash generation earn time as a friend. In a market with wide dispersion, return on equity and cash conversion explain more about forward outcomes than a single valuation multiple.

One clear marker is profit per employee. When that line rises, the same workforce is generating more cash, which supports reinvestment, buybacks, and stronger balance sheets without leaning on more leverage. We focus on businesses that pair rising profit per employee with durable moats and disciplined capital returns. That is where equity risk belongs. Pair that concentration with the fixed income ballast above so total portfolio risk behaves well in a broad scope of outcomes.

Private and bespoke opportunities

Alongside public markets, we continue to find targeted opportunities in private and bespoke markets, but with a higher bar for what we own. We favor senior, first lien structures in later-stage companies. Prioritizing tangible collateral, cash pay terms, clear covenants and reporting, and experienced sponsors. Position sizes stay modest and matched to liquidity. The role is complementary: enhance carry, with control over your protections, and avoid over-reliance on any single macro outcome.

Process over prediction

A bold call on the ten year isn't necessary to make this work. The bond market’s range-bound reality, together with steady coupons and sensible duration, has rewarded investors who avoid over-trading the headline cycle. The lesson is consistent across regimes. Stay invested. Let income do its quiet compounding. Attach equity risk to businesses that turn efficiency into cash.

Positioning, summarized. Our views:

• Core bonds: We like high quality, with intermediate duration; let carry and roll do the work and keep drawdowns contained.
• Global rates: We favor United States duration, then consider selective, hedge-adjusted developed market exposure when yield, roll, and diversification line up.
• Securitized: agency mortgage-backed as a key source of spread; consider senior AAA asset-backed securities where structure and liquidity are strong; consider selective AAA CLOs to lift carry.
• Investment grade credit: We like US IG mainly as a ballast, not the primary alpha/carry engine; factor in quality developed market credit for incremental spread.
• High yield: higher octane sleeve with a quality tilt and balanced industry mix; size to the risk budget and leverage coupon as the engine.
• Emerging markets: complementary income, not the centerpiece; size with an eye to overall risk.
• Equities: concentrated exposure to cash-generative platforms with rising profit per employee, strong ROE, and long reinvestment runways.
• Private/bespoke: targeted positions in secured structures with tight documentation to enhance carry while ensuring strong control over outcomes.

Bottom line

Artificial intelligence is an exciting chapter. Productivity is the book. It explains why we think growth can hold up as inflation settles and why policy can calibrate rather than shock. It also explains why in our view a balanced mix works today. Concentrate equity risk in the strongest cash-flow rivers. Consider high-quality fixed income as the liquid ballast that keeps you in the game. Stay invested and let compounding do the heavy lifting.

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