Talk Your Book: Income and Momentum

In this episode of Animal Spirits, Michael Batnick and Ben Carlson dive deep into two underappreciated yet powerful investment strategies: momentum investing and preferred securities. The first half features Bill Mann from Motley Fool Asset Management, who explains the overlooked potential of momentum as a systematic, rules-based factor that aligns with market behavior rather than chasing performance. Mann emphasizes that momentum isn't about buying hot stocks blindly, but about identifying high-quality companies with strong free cash flow that are currently in favor, using a disciplined, monthly lookback and quarterly rebalancing process. The ETF MFMO, which he discusses, is designed to capture this momentum while filtering out low-quality or volatile companies. The second half brings Kevin Liniak from Morgan Stanley to demystify preferred securities—an often misunderstood hybrid of debt and equity that offers tax-advantaged, high-yield income. Liniak highlights their unique fixed-to-floating rate structure, regulatory benefits for issuers like banks and utilities, and growing appeal in a low-rate environment. He contrasts them with private credit, cautioning about sector concentration and liquidity risks while noting that preferreds offer a more transparent, liquid alternative with inflation protection. Both segments underscore the importance of diversification, disciplined processes, and understanding structural shifts in the market. Key takeaways include: 1) Momentum investing is not performance chasing but a systematic way to follow market trends with quality filters; 2) Preferred securities offer tax-efficient, high-yield income with unique interest rate features; 3) Diversification across income sources—like preferreds, floating rate debt, and CLOs—is essential in today’s complex fixed income landscape; 4) Active management in preferred securities can outperform passive ETFs due to access to better-structured, floating-rate instruments; 5) The rise of private credit has created both opportunities and risks, particularly around liquidity and sector concentration; 6) Regulatory changes like Dodd-Frank and Basel III have reshaped how financial institutions issue capital, creating new investment avenues; 7) Investors should not assume safety in fixed income—risk exists across all segments, including treasuries and corporates; 8) The future of income investing lies in understanding hybrid instruments and structural advantages, not just chasing yield.