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Stimulus has 'bolstered household balance sheets': DoubleLine Portfolio Manager

DoubleLine Structured Products Portfolio Manager Andrew Hsu joins Yahoo Finance’s Julia La Roche to discuss housing, mortgage rates, infrastructure, and emerging markets.

Video transcript

ZACK GUZMAN: Well, it is day two of two of our exclusive coverage out at DoubleLine Capital's Investor Day. So for the latest in our series there, I want to send it out to Yahoo Finance's Julia La Roche in Los Angeles. Julia.

JULIA LA ROCHE: Well, thank you so much, Zack. And I'm pleased to be joined with Andrew Hsu. He is a portfolio manager for structured products here at DoubleLine Capital, also a co-portfolio manager on the DoubleLine Total Return Bond Fund, which is the flagship fund here, ticker symbol, DBLTX. Andrew, great to have you, and thanks for having us here. Let's talk about the asset class that you look after structured products in, a lot of impacts in this area from stimulus. So what are you seeing in the space as it relates to the stimulus?

ANDREW HSU: Yeah, so we're seeing some pretty amazing things in structured finance. Namely, coming out of the pandemic, a lot of people expected high delinquencies, high defaults within structured finance. And just to lay the groundwork, within structured finance, a lot of the underlying assets are consumer-related. It could be housing. It could be auto loans or even student loans. What we're seeing is exactly the opposite. Stimulus has really bolstered household balance sheets. And because of that, we're seeing, really, record lows in terms of delinquencies and defaults in that space. So very, very stellar performance.

JULIA LA ROCHE: So what we can glean from that is when folks were getting the stimulus, they were paying down their debts-- is that right-- versus going out and consuming? Is that what the insight you can glean from that?

ANDREW HSU: Well, the first two stimulus programs, we did see consumption starting to pick up. But it's very interesting to see. And it's very recent data points, so I can't draw any trend yet. But the last stimulus program that was just released, we didn't see really an uptick in consumption. But what we did see is significant paydowns of debt. So household balance sheets appear to be getting stronger. And, you know, these recipients are being very pragmatic with their newfound cash.

JULIA LA ROCHE: So let's talk about opportunities in your space. You know, in this kind of low yield, low spread environment, what asset classes do you favor?

ANDREW HSU: Yeah, within structured finance in particular, the housing market has been really, really strong. So we still are very positive about the housing market. Now some of the other areas within structured finance that had some issues, namely commercial real estate. A lot us were working from home, not traveling and such. And because of that, commercial real estate really had a pretty significant drawdown during the pandemic. But as you're starting to see this recovery take place, those assets or the utilization of those assets are picking up in a meaningful way. So we do think there's significant upside appreciation in some of those asset classes and then a lot of the other areas that could be poised to recover in a return to normal type economy, such as travel or leisure.

JULIA LA ROCHE: Well, you mentioned real estate. Let's talk about the housing market, which, kind of, it's been a huge topic of late. I live in Miami, so I'm definitely seeing a lot of activity there. What's your view on housing going forward? And is there anything that you think might start to bring some of these prices back down to Earth?

ANDREW HSU: Yeah, the housing market is exceptionally strong. We really didn't see any weakness even during the depths of COVID. And the reason being is because we really had a supply and demand imbalance. The other issue that we had was really extremely low interest rates. And that made affordability relatively high, even though prices were so high. To answer your question about bringing prices back to normal, I think it's going to take some time. We are starting to see some new builds coming into the market. And at the same time, interest rates are starting to rise. So those two factors coupled together-- supply and demand balance, plus higher lending rates-- that should bring prices back down to Earth. But it's going to take some time for that to happen.

JULIA LA ROCHE: Another big topic of late is infrastructure. I know this is an area that you focus on here at DoubleLine. What's your view on the infrastructure bill or what's going on those conversations in DC? And how might that affect the space that you operate in?

ANDREW HSU: Yeah, in terms of the infrastructure plan, I mean, it's a $4 trillion plan at this point in time. And there are some disagreements between the Republicans and Democrats on how it should be laid out and also how it should be funded. My longer term view is this, is that whether or not that plan comes to fruition, infrastructure spending at the private sector has been occurring for years.

And there's more and more interest to do so. And we're seeing a lot of interesting areas, whether it's transportation related, whether it's this move towards sustainable energy, battery storage, a lot of interesting developments coming out in the infrastructure space. And the private markets are coming in. So it would be great if the federal government could agree on a plan and roll something out. And I think that would be a catalyst for that market. But absent that, this market is going to move because the private market is really interested in developing this market.

JULIA LA ROCHE: I think sometimes people might not be fully aware of the private market opportunity. How did that first get on your radar? And what was the opportunity that really caught your attention?

ANDREW HSU: Well, we were involved in renewable energy very early on before it was really, I would say, an asset class a lot of people focused on. So that was probably one of the first areas. The other area that we really focused on was in transportation. And within transportation, the focus was on a lot of air travel. So we do have airport type transactions that we're involved in, but also the physical assets, aviation type investments where we have the first lien on the asset itself, which is something we would pride ourselves on now, especially in the wake of a very challenging market, where secured assets clearly outperform unsecured assets.

JULIA LA ROCHE: Do you think there's more opportunity within the space on the private side? Because sometimes there's all this focus on, you know, what's going on in DC, but I mean, frankly, I wasn't fully aware of what was going on with the infrastructure on the private side. So do you see if that's going to be a catalyst for that market?

ANDREW HSU: I do. And again, I mean, the federal funding would help immensely. But absent that, the market is still going to develop. So areas such as transportation, renewable energy, data and telecom, they're all very, very large. And private institutions are coming into this space. And there's something, really, for everyone. If you're an equity buyer, there is exposure that you can get. And if you're a dead buyer, there is a lot of debt funding that's needed because these projects are of such huge size.

JULIA LA ROCHE: Well, Andrew Hsu, portfolio manager here at DoubleLine Capital looking after structured products, also co-portfolio manager of the DoubleLine Total Return Bond Fund, thank you so much for your time. And please stay with us all day. We will have exclusive coverage here from DoubleLine Capital, including a sit-down with Jeffrey Gundlach, DoubleLine Capital CEO and founder, at 4:15 PM Eastern. I'm going to send it now back to Zack. Zack?

ZACK GUZMAN: Thanks, Julia. Appreciate that. We look forward to that interview coming up later today, again, at 4:00 PM Eastern time.