Welcome to our inaugural Piton Podcast where we will review 2023 and share our outlook for 2024.

Mr. Lockwood serves as the Chief Investment Officer of Piton. He also serves as Portfolio Manager of the ClearShares Piton Intermediate Fixed Income ETF (NYSE: PIFI). He has over twenty years’ experience managing Fixed Income portfolios. Prior to joining Piton, Mr. Lockwood was a Senior Portfolio Manager and Head of the Fixed Income Division in the Private Bank Investment Group, Americas at HSBC. There, he served as the global head of discretionary fixed income management for the bank. Mr. Lockwood chaired the Fixed Income Strategy Committee for the US Curve for both local and global investment groups at HSBC, as well as managing commingled and segregated taxable and tax-exempt assets, including HSBC common funds and short and intermediate duration mandates (2.5+ Billion USD).

Prior to HSBC, Mr. Lockwood worked as the Fixed Income Manager at Ramius Capital Group and DLJ/Credit Suisse Asset Management. Mr. Lockwood has a BA from Villanova University and is a Chartered Financial Analyst. He is a member of the CFA Institute, the New York Society of Security Analysts (NYSSA) and is past Treasurer of the Treasury Securities Luncheon Club of New York.

Q: As you reflect back on 2023, what are some key takeaways or highlights that people should be aware of?

First of all, thank you. And on behalf of Piton Investment Management, Happy New Year to everybody. 2023 was a super interesting year, just like 2022 was for fixed-income markets. Had a little bit of a taste of everything throughout the year. If you recall, in March, we had a mini-banking crisis, and then the Fed was behind the curve on inflation. Then, they became okay with where inflation was headed. All of this while we had a robust consumer and a robust labor market all cumulating to the end of the year where we had this great Fed pivot, and that's where we really had a sea change in fixed income markets, which sets up for a very investable market in 2024 with fixed income markets in general.

Q: Following a difficult year in 2022 fixed income markets have largely normalized and rebounded in 2023. Year to date, fixed income returns are positive. What do you see as the primary drivers behind 2023 bond market performance?

It's twofold, depending on which sectors of the marketplace we're talking about.

• Credit sectors and riskier asset classes within fixed income performed significantly better in harmony with equities and general risk markets.

• You saw high yield returning year to date over 12 percent emerging markets up close to 10%.

• But what's interesting about fixed income markets in the IG space is up until October of this year, most asset classes and most fixed income indices were negative for the year, which would have been a really historic figure, knowing that we had such a negative year in 2022.

• But as November and December rolled around, we saw some really historic rebounds in marketplaces.

• And now, when you look at anything from municipal bonds to corporate credit to intermediate, everything's up somewhere in the range of 4 to 5 percent in terms of performance so that's been a really big turnaround in fixed income.

Q: Can you provide context on performance across the different sectors of bond markets?

One thing that we saw that is interesting in terms of how things change throughout the year is the yield curve, other than cash/T-Bills, is very close to where it started the year. So, where you got performance in the safe fixed income markets was really the power of the coupons from having higher yields to start the year. In credit markets and muni markets, a little bit different, we got some premium spread compression that helped those markets outperform.

Q: Piton provides customized fixed income asset management to clients - with strategies ranging from ultra-short cash management to intermediate duration, as well as more yield-oriented strategies. How did Piton’s different strategies perform throughout the year? What drove performance?

Starting the year, I would say cash was king. And then as we saw a sea change in the 4th quarter, markets caught up. And now, whether you had a Piton cash strategy, a short duration strategy or an intermediate strategy, you saw a rebound to somewhere in the range of four to five percent. While cash was king for the better part of the year, there was this big snapback and our Managed Yield approach and our yielder type of strategies also came back and came back in a much bigger way because they both had spread compression with rates coming down towards the end of the year.

Q: What is the current state of the market, and what are the key drivers?

During 2023, I think most people were focused on Fed policy as it relates to inflation and their picture on inflation. What I think is different and starting to change as the Fed has pivoted to a possibility of easing sooner than most people thought, there's going to be a shift towards focusing more on the economic cycle. So still, Fed focused, but we're going to see them focus much more on things like the labor market and the consumer rather than inflation.

Q: How should investors think about the different Piton offerings in the context of today’s market?

In terms of what we're trying to do at Piton is we're really trying to capture the blocking and tackling. So, when you think of Piton products, whether it's Cash Management, Intermediate Taxable or Tax Exempt Management, we want to focus on quality. We want to be that cornerstone fixed income, asset allocation that we think has always been important for asset allocations. But coming into 2024, we think it's going to be really important for folks to have that safe, quality, fixed income portion in your portfolios.

Q: Throughout 2023 the yield curve became further inverted. We’re heading into 2024 (an election year) with higher YoY interest rates, the Fed recently holding rates steady, and markets looking for future cuts – what are your expectations for short-term and long-term rates in 2024?

I think in terms of what's happened just recently with the Fed and the Fed posture, it looks like there's now more of an idea that interest rate cuts will start happening as soon as March. With that, we think there'll be a normalization of the yield curve. The yield curve can somewhat act like a whip where one part of the curve can move pretty quickly, and then it sort of whips into other parts of the curve. We think you'll start to see the front-end of the curve (two years, five years, that kind of area) really holding well, and that will start to normalize the curve. As you mentioned, we've had an inverted curve, we think that curve will start to normalize over the course of 2024, as the Fed starts lowering rates.

Q: What part of the yield curve do you recommend investors focus on and why?

There's a couple of different answers to this question for us at Piton, as asset managers, we want our clients to be in the intermediate space for the sole reason that we think it's less volatile. It's the solution they should want for their fixed income. They don't need the volatility of 30-year bonds and really long bonds when they're looking for fixed income as a safe asset class solution within their portfolio. That being said, we do think moving out duration, having some longer-term securities in your portfolio makes a lot of sense coming into a cycle where (1) the economy slowing and (2) the Fed is going to lower rates and they're done hiking rates. There is a focus on what we love, what we call the "belly of the curve". That's the five-to-seven year area. We think investors should definitely be looking at having longer durations and some more "locked in" yields in their portfolios.

Q: How are you positioning portfolios accordingly?

Over the last half of 2023, the Piton team has been extending portfolio duration a little bit longer. Almost shifting what we've been doing over the last two years, where we had a short conservative duration in all of our portfolios, we're pushing that out. At the same time, our sector rotation is coming. We think there is some real risk to credit spread markets, the same way people would say there's probably some risks and valuation to equity markets. We're adding more government bonds, higher quality to our portfolios and shifting out of some of the riskier bonds in the portfolio.

Q: As you look forward to 2024, anything else we should be considering or thinking about in the fixed income market?

I think there are a few things that will be interesting in 2024. One will be liquidity. People don't focus on liquidity when thinking about fixed income marketplace and where you should be. I think liquidity, meaning higher quality, adding Treasuries or pre-refunded bonds as a safety valve is going to be really important if we start to see a slower economy, Fed that has to ease rates quickly. There's become some good areas where we can invest in bonds with optionality, whether it's mortgage bonds in a broad portfolio or callable Agency bonds in a taxable portfolio or what we call kicker bonds in a Muni portfolio. Those bonds that have some optionality, because volatility has been so big in fixed income marketplaces, those spreads have become kind of wide so you can get some great yield in some safe investments within your fixed income portfolios.

Q: You have been in the fixed income markets for a long time. What about fixed income excites you right now?

What I really think will be interesting to see in the new year is we've had this correlation over the past two years to other markets where it's been everything up or everything down where fixed income markets are positive this year with a really positive equity market. And last year they were negative with the negative market. I think what we're going to start to see is a pivot, not just a Fed pivot, but a pivot in markets where we're going to get back to that correlation when there's bad news in the economy, it's good for bonds and bad for stocks and vice versa. It's going to be really exciting to see how the bond market pivots out of where it's been highly correlated with risk markets to where it comes back to a normalization. And I think that's going to happen in the near term and maybe in 2024. And it'll be exciting to watch as that starts to take form.

Thank you for your continued support in 2023. We look forward to 2024.