WEBVTT - Big Bank Earnings Are Back 0:00:02.520 --> 0:00:07.000 Bloomberg Audio Studios, Podcasts, radio News. 0:00:08.640 --> 0:00:12.640 This is Bloomberg Business Week Insight from the reporters and 0:00:12.800 --> 0:00:16.800 editors that bring you America's most trusted business magazine, plus 0:00:17.000 --> 0:00:20.799 global business finance and tech news. The Bloomberg Business Week 0:00:20.840 --> 0:00:25.760 Podcast with Carol Masser and Tim Stenovek on Bloomberg Radio. 0:00:27.040 --> 0:00:28.880 The rally that we're seeing in the big bank stocks 0:00:28.920 --> 0:00:30.720 really up as a whole. If you look at the 0:00:30.760 --> 0:00:35.040 KBW Bank Index, JP Morgan, Goldman, City, Wells, the KBW 0:00:35.080 --> 0:00:37.080 Bank index is up about four percent. 0:00:37.280 --> 0:00:39.960 All the names have been higher in the index. 0:00:40.000 --> 0:00:42.080 City and Wells up more than six percent, Goldman up 0:00:42.120 --> 0:00:45.479 around five percent, JP Morgan a gate of nearly two percent. Tim, 0:00:45.560 --> 0:00:48.919 we have definitely seen this group just outperforming here, all right, 0:00:48.960 --> 0:00:51.479 as somebody who has certainly been all over the stories. 0:00:51.479 --> 0:00:54.000 Bloomberg News Finance reporter Cat Toorty. She joins us here 0:00:54.040 --> 0:00:57.200 in the studio. First Upcat, as Carol mentioned that group 0:00:57.240 --> 0:01:00.360 of bank stocks absolutely rallying today, many of the names 0:01:00.360 --> 0:01:03.400 outperforming the broader equity trade. Even that we're seeing as 0:01:03.600 --> 0:01:06.720 markets are higher across the board as a whole, a 0:01:06.880 --> 0:01:08.479 very strong quarter for the banks. 0:01:09.000 --> 0:01:09.720 Absolutely. 0:01:09.840 --> 0:01:13.720 I would say that this is their second most profitable year, 0:01:13.840 --> 0:01:16.760 twenty twenty four, and that's compared to twenty twenty one, 0:01:16.800 --> 0:01:20.240 which is the most profitable. So we're ending on a 0:01:20.280 --> 0:01:24.160 high note. And what's also interesting is the commentary around 0:01:24.240 --> 0:01:28.800 the year ahead. There's just so much positive momentum that 0:01:28.840 --> 0:01:30.440 the executives. 0:01:29.800 --> 0:01:31.880 Were referencing on the earnings calls today. 0:01:32.160 --> 0:01:34.880 So not only is it a look back and kind 0:01:34.920 --> 0:01:38.360 of a nice bow on twenty twenty four, but it's. 0:01:38.319 --> 0:01:39.800 A lot of full steam ahead. 0:01:40.240 --> 0:01:44.240 We're expecting more deals, We're expecting a lot more volatility 0:01:44.240 --> 0:01:47.920 in the markets, and if twenty twenty five can look, 0:01:48.000 --> 0:01:50.640 it's going to be tough. But twenty twenty four was 0:01:51.000 --> 0:01:52.720 certainly a positive end. 0:01:52.800 --> 0:01:54.920 Was there any common narratives, I mean, every bank is 0:01:54.960 --> 0:01:57.440 a little bit different, right in terms of exposure and 0:01:57.480 --> 0:01:59.480 so on and so forth. Was it volatility and trading like, 0:01:59.520 --> 0:02:01.880 was there any kind of common themes that you could 0:02:01.960 --> 0:02:03.240 kind of string across all of them. 0:02:03.360 --> 0:02:06.000 So with trading the volatility, it has to do with 0:02:06.240 --> 0:02:09.359 both the rate cuts, so there's a lot of repositioning. 0:02:10.040 --> 0:02:13.080 There was a lot of repositioning also around the US election, 0:02:13.680 --> 0:02:16.600 So those two things really benefited the fourth quarter. 0:02:16.680 --> 0:02:18.000 The last three months of the year. 0:02:18.320 --> 0:02:21.519 Then when you look at investment banking, deals are coming 0:02:21.560 --> 0:02:23.720 back in a more meaningful way. But this is compared 0:02:23.760 --> 0:02:27.480 to a pretty muted twenty twenty three, So I wouldn't 0:02:27.520 --> 0:02:30.920 say that this is every the floodgates have opened and 0:02:30.960 --> 0:02:34.480 we've seen a significant when you compare it to let's 0:02:34.480 --> 0:02:36.600 say twenty twenty one or twenty twenty two, when there 0:02:36.600 --> 0:02:40.239 really was a peak in deal activity. But there is momentum, 0:02:40.360 --> 0:02:43.200 and that was the common narrative across the board. 0:02:43.240 --> 0:02:44.960 Okay, one more momentum and then we're going to get 0:02:44.960 --> 0:02:47.120 into the particulars of some of the banks, because we 0:02:47.160 --> 0:02:51.079 got quite a few results earlier today. Kat momentum is 0:02:51.120 --> 0:02:56.000 it as a result of optimism over regulatory changes? What's the momentum, 0:02:56.000 --> 0:02:57.239 what's the optimism coming from? 0:02:57.280 --> 0:03:00.639 I would say that was the phrase that is repeated 0:03:00.720 --> 0:03:05.639 the most this morning, was that there's an expected easing 0:03:05.880 --> 0:03:10.280 of regulatory burdens that these bank executives have been complaining. 0:03:09.840 --> 0:03:10.680 About for years. 0:03:10.760 --> 0:03:14.320 For example, so the capital rules, the capital requirements that 0:03:14.360 --> 0:03:17.680 they were anticipating having to put aside more money to 0:03:17.840 --> 0:03:21.119 abide by those capital rules. Now the expectation is those 0:03:21.200 --> 0:03:22.919 rules will not be as stringent. 0:03:22.639 --> 0:03:26.399 And yet they've done okay, if not okay. 0:03:26.320 --> 0:03:29.040 And they've always said that they are in an okay position. 0:03:29.160 --> 0:03:31.239 That was, there was never a question of whether or 0:03:31.320 --> 0:03:33.040 not they were going to be able to abide by 0:03:33.280 --> 0:03:36.080 higher capital rules. It's just that when you have the 0:03:36.160 --> 0:03:38.720 higher capital rules, there's less that they can do, there's 0:03:38.760 --> 0:03:39.600 less wiggle rules. 0:03:39.640 --> 0:03:41.320 They've done well, and they've. 0:03:41.080 --> 0:03:44.360 Done quite well, really well, but they haven't also faced 0:03:44.480 --> 0:03:46.320 You know, these capital rules are meant to be in 0:03:46.320 --> 0:03:48.960 the times of highest stress. So I wouldn't say there 0:03:49.000 --> 0:03:51.720 were times of stress. You had the regional banking crisis. 0:03:51.720 --> 0:03:54.440 We've had a lot of geopolitical tensions, so there's been 0:03:54.440 --> 0:03:57.000 a lot of volatility, and the banks have held up. 0:03:57.040 --> 0:04:00.160 But I don't think that we've reached let's say the 0:04:00.640 --> 0:04:04.160 highest point of stress that these stress tests are are. 0:04:04.240 --> 0:04:07.720 Really they're prepared preparing these banks for. 0:04:07.720 --> 0:04:10.480 Okay, but remind everyone why those capital requirements are in place. 0:04:10.520 --> 0:04:12.480 I mean, like you said, during times of stress, they 0:04:12.480 --> 0:04:15.360 need to make sure that these banks remain operable. 0:04:15.400 --> 0:04:17.080 We're waiting for all the emails to come and say, well, 0:04:17.160 --> 0:04:19.360 remember when we bailed them out exactly. 0:04:19.520 --> 0:04:22.840 No, this is after the financial crisis two thousand and eight, 0:04:22.839 --> 0:04:24.520 two thousand and nine. This is the These have been 0:04:24.560 --> 0:04:28.040 the rebuilding years. But what's been interesting it's this is 0:04:28.200 --> 0:04:31.080 way past rebuilding. Now we're in the full on growth 0:04:31.080 --> 0:04:34.000 stage and you're seeing that. I mean, JP Morgan passed 0:04:34.080 --> 0:04:36.280 their fifty billion annual profit. 0:04:36.440 --> 0:04:37.560 That's huge. 0:04:37.880 --> 0:04:42.039 Yeah, and so they're in a different those capital requirements. 0:04:42.160 --> 0:04:45.680 Even with those capital requirements, but again, the capital requirements 0:04:45.720 --> 0:04:48.800 that they were complaining about were the next phase, so. 0:04:48.760 --> 0:04:50.320 It was going to be even higher. 0:04:50.560 --> 0:04:53.280 Now they've been able to handle their capital requirements that 0:04:53.320 --> 0:04:56.960 they currently have, the question was will they get worse? 0:04:57.040 --> 0:04:59.800 And now the expectation, going back to this theme of 0:05:00.120 --> 0:05:04.960 regulatory burdens, is that they don't expect those capital requirements 0:05:04.960 --> 0:05:07.520 to be as high as they originally were proposed. 0:05:07.839 --> 0:05:10.039 Before you go, because I feel like we should mention City. 0:05:10.120 --> 0:05:12.000 That's a twenty billion dollars buy back, which is I 0:05:12.000 --> 0:05:14.440 feel like they're still going through a transformation, right, and 0:05:15.120 --> 0:05:16.320 what do we need to know about City? 0:05:16.400 --> 0:05:21.039 They are They lowered one of their profit, their expected 0:05:21.080 --> 0:05:24.040 profits that they have been guiding to. 0:05:24.360 --> 0:05:26.920 So I know that in tangible common equity, right, tangible 0:05:26.920 --> 0:05:28.040 common equity. 0:05:27.760 --> 0:05:33.280 The profitability. But I would say that their performance today 0:05:33.480 --> 0:05:35.040 was it was positive. 0:05:35.080 --> 0:05:35.640 I three. 0:05:35.680 --> 0:05:37.920 I think the stats were three of their four or 0:05:38.000 --> 0:05:44.680 five business lines were records or higher than expected. And 0:05:44.800 --> 0:05:47.520 so I think that when there's this question of can 0:05:47.640 --> 0:05:52.280 Jane Fraser turn around this bank into a growth stage, 0:05:52.360 --> 0:05:55.320 that that's still very much an open question. But we 0:05:55.360 --> 0:05:58.680 didn't see, for example, the shares react in a super 0:05:58.680 --> 0:06:01.800 negative way to that profit metric being brought down. 0:06:01.800 --> 0:06:04.400 They're up seven percent of this second performer in the 0:06:04.440 --> 0:06:05.440 KBW Bank Index. 0:06:05.440 --> 0:06:06.679 It is gonna be one of your gainers today. 0:06:06.800 --> 0:06:08.239 It is the whole group. 0:06:08.279 --> 0:06:11.000 Okay, when you can't choose one, you choose them all. 0:06:11.080 --> 0:06:13.200 Cap before we let you go, give us one highlight 0:06:13.240 --> 0:06:14.640 from Goldman and one from Wells. 0:06:15.040 --> 0:06:19.279 Uh Goldman, I would say it's it was like the 0:06:19.279 --> 0:06:22.280 the Trump Parade. It was a very raw raw here 0:06:22.320 --> 0:06:26.039 we go. We're expecting twenty twenty five to be our year. 0:06:26.680 --> 0:06:29.280 And that was a lot of what Solomon said JP 0:06:29.400 --> 0:06:33.080 Morgan was a lot about their strength and trading and continuing. 0:06:33.839 --> 0:06:37.960 But there were some questions too about leadership under Diamond 0:06:37.960 --> 0:06:39.400 and what happens next that was. 0:06:39.400 --> 0:06:40.600 Five more years. 0:06:40.920 --> 0:06:42.600 I don't think it's going to be five more years, 0:06:42.600 --> 0:06:45.080 and he's he's basically he has been saying that, and 0:06:45.080 --> 0:06:48.000 that was reiterated on today's call. There will be a transition. 0:06:48.360 --> 0:06:51.440 It's just a matter of what happens. Is that transition 0:06:51.480 --> 0:06:54.600 a year, two three, it's definitely not five, but definitely 0:06:54.640 --> 0:06:55.440 there's still the question. 0:06:55.520 --> 0:06:57.000 It was some of the news this week in terms 0:06:57.040 --> 0:07:00.960 of the suite over JP Morgan, great rundown, great overview. 0:07:01.040 --> 0:07:03.320 Cat Dougherty, she's finance reporter at Bloomberg News. Be sure 0:07:03.360 --> 0:07:05.280 to check out all of her stuff at Bloomberg Dot. 0:07:05.279 --> 0:07:07.240 Comment on the Bloomberg All right. 0:07:07.120 --> 0:07:09.520 Well stick in with a bank earnings. I want to 0:07:09.520 --> 0:07:13.080 bring in Cheryl Paid, senior portfolio manager angel Oakcapital Advisors. 0:07:13.160 --> 0:07:16.520 They've got eighteen point seven billion dollars in assets under management. 0:07:16.640 --> 0:07:20.440 Cheryl is portfolio manager and the Dynamic Financial Strategies Income 0:07:20.480 --> 0:07:23.600 Team Trust. It's a closed in fund that invests Carol 0:07:23.680 --> 0:07:25.960 in debts issued by finance firm. 0:07:26.040 --> 0:07:28.120 She joins us this afternoon from Atlanta. 0:07:28.240 --> 0:07:30.760 All right, Cheryl, so pick up the baton from Cat Dougherty, 0:07:30.840 --> 0:07:33.160 who just laid out kind of that great overview on 0:07:33.240 --> 0:07:35.160 the big banks today, and it seems like they are 0:07:35.200 --> 0:07:39.840 firing on pretty much all cylinders. Anything in the results 0:07:39.840 --> 0:07:41.520 that really stood out for you and that you think 0:07:41.560 --> 0:07:44.640 should be maybe a catalyst for a buy or sell 0:07:44.840 --> 0:07:47.800 or hold or whatever in today's environment. 0:07:49.040 --> 0:07:51.080 Yeah, no, I think I agree with a lot of 0:07:51.120 --> 0:07:53.880 what Kat said. You know, we're pretty bold up on 0:07:53.960 --> 0:07:56.560 banks here as well. I think twenty twenty five is 0:07:56.560 --> 0:07:59.840 setting up to be one of the best opportunities that 0:07:59.840 --> 0:08:03.000 we seen in recent years, and there's a lot of 0:08:03.040 --> 0:08:05.200 things that are that are going right. I think we 0:08:05.240 --> 0:08:09.240 saw that with earnings this morning, not just strong beats 0:08:09.280 --> 0:08:14.040 across the board, but also better guidance as expected. But 0:08:14.480 --> 0:08:16.640 where that really plays in, I think is if you've 0:08:16.680 --> 0:08:21.400 got margin expansion starting to happen. We do expect lone 0:08:21.400 --> 0:08:24.440 growth will tick up over the year. Credit is holding 0:08:24.520 --> 0:08:27.760 in well, and valuations are still cheap. We've given up 0:08:27.760 --> 0:08:30.520 a lot of the games we saw that came out 0:08:30.600 --> 0:08:35.439 of the new administration in November, and so I think 0:08:35.600 --> 0:08:40.360 that reset, coupled with the CPI numbers this morning, really 0:08:40.400 --> 0:08:43.400 sets the stage nicely for not just earnings growth, but 0:08:43.480 --> 0:08:45.520 multiple expansion over the coming year. 0:08:45.880 --> 0:08:47.959 I know it's hard to pick your favorite child, but 0:08:48.000 --> 0:08:50.240 if you were to take the companies that reported today, 0:08:50.280 --> 0:08:54.040 including Wells, Fargo, JP Morgan, Goldman, Sachs, and City, Which 0:08:54.040 --> 0:08:56.600 one would you say was the was the standout of 0:08:56.640 --> 0:08:57.080 the group? 0:08:58.920 --> 0:09:01.520 I think City is really what we're doing as the 0:09:01.559 --> 0:09:06.280 best positioned relative to expectations, and so we sort of 0:09:06.320 --> 0:09:09.840 think about it, you know, two different lenses. Number one, 0:09:10.760 --> 0:09:13.280 you know, what did they report, what did they. 0:09:13.160 --> 0:09:14.520 Beat on guidance? 0:09:14.600 --> 0:09:18.680 Moving up? I think the buy back authorization is a 0:09:18.679 --> 0:09:21.240 big part of the outperformance today. If we look at 0:09:21.280 --> 0:09:26.199 City sitting on roughly seventeen billion of excess capital, it's 0:09:26.320 --> 0:09:29.520 highly accretive for them to be buying back below book 0:09:29.640 --> 0:09:32.680 value in this environment, so that I think, you know, 0:09:32.760 --> 0:09:36.160 given where their valuation is, drives the biggest change at 0:09:36.160 --> 0:09:42.040 the margin in terms of you know, outperformance relative analysts 0:09:42.080 --> 0:09:45.320 expectations and the new guidance. I think there's probably the 0:09:45.360 --> 0:09:48.320 most upside to estimates to come out of Wells. We 0:09:48.400 --> 0:09:51.400 think there's probably about seven percent upside coming, you know, 0:09:51.480 --> 0:09:55.080 based on results today and forward guidance, but sort of 0:09:55.120 --> 0:09:58.800 two to seven percent upside you know, across the board 0:09:59.480 --> 0:10:01.320 sets up. I think pretty nicely. 0:10:01.640 --> 0:10:03.960 What about JP Morgan, right, I feel like, you know, 0:10:04.000 --> 0:10:06.880 when they report they're the kickoff to so much, and 0:10:06.920 --> 0:10:08.800 they are I think it's safe to say the closely 0:10:09.000 --> 0:10:12.560 or most closely watched bank across the United States and 0:10:12.600 --> 0:10:13.640 certainly on Wall Street. 0:10:13.960 --> 0:10:15.200 Anything from them. 0:10:15.040 --> 0:10:17.680 That gives you kind of broader clues about not just 0:10:17.720 --> 0:10:20.920 their business, but also what's going on in the overall economy. 0:10:20.960 --> 0:10:23.000 And and you know, I am curious if you have 0:10:23.000 --> 0:10:24.840 any thoughts about succession for them as well. 0:10:26.280 --> 0:10:29.120 Yeah, No, I think Number one Capital Markets. I think 0:10:29.160 --> 0:10:31.200 that's one of our key themes that we're looking at 0:10:31.240 --> 0:10:33.360 for the next year. We think there'll be a strong rebound. 0:10:33.400 --> 0:10:36.960 I think that was very clearly seen today, especially at 0:10:37.040 --> 0:10:41.840 JP Morgan Expenses. We've been looking for some moderation there 0:10:41.880 --> 0:10:45.120 as inflation comes down, you know, over the course of 0:10:45.160 --> 0:10:47.760 the year. I think there's a read through on credit 0:10:47.800 --> 0:10:51.319 card that we saw at JP Morgan. We saw acceleration 0:10:51.440 --> 0:10:55.040 and debit card and credit card spending charge offs or 0:10:55.080 --> 0:10:58.480 holding in well, a little bit of an uptick and guidance, 0:10:58.480 --> 0:11:01.199 but nothing more than normal as a that we would expect. 0:11:02.080 --> 0:11:04.360 And then on commercial real estate, you know, I think 0:11:04.360 --> 0:11:07.240 it was nice that that was not really a theme today. 0:11:07.760 --> 0:11:10.240 Again points to I think that the credit environment is 0:11:10.280 --> 0:11:13.120 getting better with rates coming down. But I think that's 0:11:13.120 --> 0:11:16.360 a good read through for a lot of the you know, 0:11:16.520 --> 0:11:19.640 super regional regional space as well. So we always look 0:11:19.720 --> 0:11:21.839 to JP Morgan as sort of the bell weather and 0:11:22.080 --> 0:11:24.040 the read through that we see to sort of the 0:11:24.040 --> 0:11:27.800 broader group there. In terms of succession planning, I think, 0:11:28.960 --> 0:11:31.320 you know, I don't think it's a next year or 0:11:31.360 --> 0:11:32.160 this year problem. 0:11:32.280 --> 0:11:32.480 Again. 0:11:32.520 --> 0:11:34.520 I don't think we go out as five years, is 0:11:34.559 --> 0:11:37.280 it two years, is it three years? I think there 0:11:37.320 --> 0:11:42.080 are you know, the three potential CEO candidates that have 0:11:42.120 --> 0:11:47.640 been highlighted numerous places, but could there be other ones? 0:11:47.679 --> 0:11:49.960 I think that was alluded to on the call this morning, 0:11:50.080 --> 0:11:53.840 so you know, probably still some work to be done there, 0:11:53.880 --> 0:11:57.480 but I think they typically do a great job of 0:11:57.840 --> 0:12:00.000 handling that, and you know, I think we'll get more 0:12:00.200 --> 0:12:03.439 clarity as we go potentially through this year, but maybe 0:12:03.480 --> 0:12:04.360 more of twenty six. 0:12:04.520 --> 0:12:06.640 Yeah, that's definitely the question that's going to be asked, 0:12:06.679 --> 0:12:08.920 I think quite a bit over the next stuff few quarters. 0:12:09.160 --> 0:12:11.160 At this point, Hey, we only have about a minute left, 0:12:11.160 --> 0:12:14.440 but you mentioned JP Morgan's read through with on the 0:12:14.440 --> 0:12:17.079 credit side and on the consumer side, we get Bank 0:12:17.120 --> 0:12:19.840 of America tomorrow. Help us look forward to what we 0:12:19.840 --> 0:12:22.040 could see from Bank of America and what we could expect. 0:12:23.200 --> 0:12:26.079 Yeah, I think what we've seen and what we're sort 0:12:26.120 --> 0:12:29.800 of looking for here again the commentary around where credit 0:12:30.120 --> 0:12:33.640 goes and particularly areas like credit card and auto finance. 0:12:34.400 --> 0:12:36.760 I think what we've seen obviously with rates coming down, 0:12:36.800 --> 0:12:40.560 that puts the consumer in a better position, and spending 0:12:40.600 --> 0:12:43.160 seems to be holding in quite well. So I would 0:12:43.160 --> 0:12:46.840 look for similar type trends in that acceleration of spending 0:12:47.200 --> 0:12:51.920 to hit velocity of credit card, but also guidance. We're 0:12:51.960 --> 0:12:56.120 not looking for significant shift upwards on credit card delinquencies 0:12:56.200 --> 0:12:58.480 or charge offs. I think it'll be a little bit 0:12:58.520 --> 0:13:00.560 more of the same as what we expec You're instant 0:13:00.559 --> 0:13:03.560 twenty four, maybe towards the higher end of the range 0:13:03.880 --> 0:13:05.920 on the front half of the year, and then improving 0:13:06.480 --> 0:13:08.120 as we move through twenty twenty five. 0:13:08.240 --> 0:13:11.000 All right, great stuff, so appreciated, Cheryl Page. She's senior 0:13:11.000 --> 0:13:14.680 portfolio manager at angel Oak Capital Advisors. That bank group 0:13:14.720 --> 0:13:16.280 continuing to rally Today. 0:13:17.040 --> 0:13:20.720 You're listening to the Bloomberg Business Week podcast. Catch us 0:13:20.800 --> 0:13:23.319 live weekday afternoons from two to five these during this 0:13:23.520 --> 0:13:27.400 listen on Applecarplay and Android Auto with the Bloomberg Business app, 0:13:27.559 --> 0:13:29.320 or watch us live on YouTube. 0:13:30.520 --> 0:13:32.000 I got to say there was a Stuart tim and 0:13:32.040 --> 0:13:33.839 I it was kind of on our radar yesterday. It 0:13:33.880 --> 0:13:36.960 was by Bloomberg opinion columnist Alison Schrager, and she wrote 0:13:36.960 --> 0:13:39.520 in a recent column that private equity does not belong 0:13:39.559 --> 0:13:41.640 in your four oh one k, noting that the risk 0:13:41.679 --> 0:13:44.680 involved in private assets and the lack of liquidity and 0:13:44.720 --> 0:13:48.280 transparency means they are safe for more transparent ways for 0:13:48.360 --> 0:13:50.560 the vast majority of investors to invest in. 0:13:50.559 --> 0:13:54.400 Tim Well next guest in the alternative alternative investment space 0:13:54.480 --> 0:13:56.480 and is here to make the case for including them 0:13:56.480 --> 0:13:59.720 in your portfolio, with focus on private real estate and 0:14:00.240 --> 0:14:03.680 state debt. Let's get to Tony david Ou, Senior Alternatives 0:14:03.679 --> 0:14:06.720 Investment Strategies at Franklin Templeton Institute. It's the research arm 0:14:06.760 --> 0:14:09.680 of one of the world's largest asset managers, Franklin Templeton, 0:14:10.000 --> 0:14:13.280 about one point five trillion dollars in assets under management. 0:14:13.320 --> 0:14:16.439 Tony joins us here in the Bloomberg Business Week Studio. Tony, 0:14:16.480 --> 0:14:19.480 good to see you, Welcome back to New York. The 0:14:19.520 --> 0:14:23.640 base case for having alternatives in your portfolio. Why do 0:14:23.720 --> 0:14:25.120 you think it belongs. 0:14:25.320 --> 0:14:28.320 Yeah, I would just say broadly, private markets, private equity, 0:14:28.360 --> 0:14:31.960 private credit, private real estate have historically delivered access, return, 0:14:32.280 --> 0:14:36.000 higher income, diversification, all the attributes that you would want 0:14:36.040 --> 0:14:38.080 to have in a diversified portfolio. 0:14:37.760 --> 0:14:39.560 But at a price. And that price is a lack 0:14:39.600 --> 0:14:42.400 of liquidity. Lack of liquidity absolutely. 0:14:42.280 --> 0:14:43.720 And a lack of transparency and. 0:14:43.920 --> 0:14:46.080 A lack of transparency. But you know, in the long run, 0:14:46.120 --> 0:14:48.480 I think you're handsomely rewarded for it, So why would 0:14:48.480 --> 0:14:50.800 you exclude it? And if you think of the largest 0:14:51.520 --> 0:14:55.440 defined benefit planned, you see large allocations to those investments 0:14:55.480 --> 0:14:58.440 because they see the best opportunities in the private market. 0:14:58.560 --> 0:15:00.480 So again, I think it's kind of a we're looking 0:15:00.520 --> 0:15:02.880 view to think about should they have a place in 0:15:02.920 --> 0:15:05.480 four one K plans and target date funds? And I'd 0:15:05.600 --> 0:15:08.160 argue they should, But I think to your point, we 0:15:08.200 --> 0:15:10.640 want to make sure that people understand the risk associated 0:15:10.640 --> 0:15:12.320 with them. We want to make sure they understand that 0:15:12.360 --> 0:15:15.680 these are long term investments. But I think a small 0:15:15.720 --> 0:15:19.080 portion of your portfolio allocated to private markets absolutely makes sense. 0:15:19.160 --> 0:15:20.800 Is it akin to what if you say a small 0:15:20.840 --> 0:15:22.760 portion like give us an idea. You know, we all 0:15:22.760 --> 0:15:25.360 know the traditional sixty forty in terms of the equity 0:15:25.360 --> 0:15:27.280 bond mix or our fixed income mixed. 0:15:27.320 --> 0:15:29.960 So what would you say, How small a portion. 0:15:29.680 --> 0:15:32.840 Would you say that people should allocate? Yeah, it's certainly 0:15:32.880 --> 0:15:35.920 and you're saying for everybody, every retail investor could do this. 0:15:36.440 --> 0:15:39.080 No, I think we should definitely slow down on that. 0:15:39.200 --> 0:15:41.400 I think the reality is what we want to do 0:15:41.440 --> 0:15:43.160 is we want to make sure that people make better 0:15:43.200 --> 0:15:46.360 informed decisions about allocating to things that they're unfamiliar with 0:15:46.440 --> 0:15:49.800 private markets in particular, and then determine what is the 0:15:49.800 --> 0:15:53.040 appropriate amount of investment that can afford to be illiquid. 0:15:53.160 --> 0:15:55.560 We're invested for the long run, and I think depending 0:15:55.560 --> 0:15:57.920 on the individual, it might be a five percent allocation. 0:15:58.280 --> 0:16:00.520 It might be for high net worth or alterra high 0:16:00.520 --> 0:16:02.800 in it worth families. It could be thirty percent. But 0:16:02.840 --> 0:16:05.400 it's really understanding the role that it plays, understanding some 0:16:05.400 --> 0:16:07.640 of the structural trade offs. They are long term in nature, 0:16:07.960 --> 0:16:11.120 they're illiquid, and we should think of them as illoquid investments. 0:16:11.240 --> 0:16:13.800 But I think if we can get individual investors and 0:16:13.840 --> 0:16:16.520 advisors comfortable with it, they absolutely have a role in 0:16:16.520 --> 0:16:17.640 cline portfolios, but. 0:16:17.640 --> 0:16:20.080 Stick with a credit investor, so people of a certain 0:16:20.120 --> 0:16:22.040 net worth, if you will correct. 0:16:22.200 --> 0:16:25.440 I think they're generally available to credit investors. Some are 0:16:25.480 --> 0:16:28.640 available below that threshold. I think the discussion of four 0:16:28.680 --> 0:16:31.160 o one K plans is taking a bit farther, and 0:16:31.240 --> 0:16:33.160 I think that is one of the challenges I think 0:16:33.200 --> 0:16:36.560 for the regulators. They want to get comfortable that individual investors, 0:16:36.600 --> 0:16:39.040 who may make these decisions on their own, are making 0:16:39.120 --> 0:16:41.000 it in an inform way, and I'm all for that. 0:16:41.160 --> 0:16:42.920 I think that's the right way to think about it. 0:16:43.320 --> 0:16:48.120 When you say, you know, alternatives are a huge umbrella. 0:16:48.640 --> 0:16:51.400 We could talk private credit, we could talk real estate, 0:16:51.600 --> 0:16:55.920 we could talk venture capital, private equity. How are you 0:16:55.960 --> 0:17:00.000 thinking about which of those or others belonging portfolio? 0:17:00.200 --> 0:17:03.520 Is so broadly the way we think about alternative investments. 0:17:03.520 --> 0:17:06.560 We think of private markets, private equity, private credit, private 0:17:06.600 --> 0:17:09.720 real state infrastructure. Those are private markets. We think they 0:17:09.760 --> 0:17:14.120 make sense. Alternatives could also include things like hedge fund strategies, 0:17:14.280 --> 0:17:17.800 but we don't view alternatives that catch all for everything. Again, 0:17:17.840 --> 0:17:19.600 maybe just taking a little bit of a step back, 0:17:19.720 --> 0:17:24.359 you know, my role is really focused on educating advisors 0:17:24.400 --> 0:17:27.399 and underlying investors about the merits of these strategies, so 0:17:27.800 --> 0:17:29.720 we don't say just buy it blindly. We want to 0:17:29.720 --> 0:17:32.240 make sure they understand what the underlying investment is designed 0:17:32.280 --> 0:17:34.879 to do, how it works in client portfolios, with the 0:17:35.000 --> 0:17:37.919 historical data has shown us, and then ultimately, if we 0:17:37.960 --> 0:17:40.600 think about adding it, what should we expect to achieve 0:17:40.680 --> 0:17:43.199 by adding it to our portfolio. I would say the 0:17:43.280 --> 0:17:46.119 biggest interest in the market today is around private markets, 0:17:46.160 --> 0:17:48.399 and that's where we spend most of our time. I 0:17:48.400 --> 0:17:51.600 think those are relatively new to the advisor community and 0:17:51.640 --> 0:17:53.200 to the individual investor community. 0:17:53.359 --> 0:17:56.120 So when investors okay, so all right, we just kind 0:17:56.119 --> 0:17:59.280 of did the umbrella private markets. Is there a certain 0:17:59.359 --> 0:18:02.520 aspect of it that you think it's a really opportune 0:18:02.600 --> 0:18:05.199 time for certain investors to be looking at within the 0:18:05.200 --> 0:18:06.159 private market space? 0:18:06.800 --> 0:18:10.960 We do. We do from an investment perspective. Looking forward, 0:18:11.040 --> 0:18:14.040 we think the most attractive opportunities are private equity, secondaries, 0:18:14.560 --> 0:18:18.399 real estate broadly recognizing there's some challenges in the office sector, 0:18:18.640 --> 0:18:20.600 and then real estate debt kind of a different way 0:18:20.640 --> 0:18:23.119 of playing the real estate space, being a lender of 0:18:23.240 --> 0:18:25.600 choice rather than owning the underlying asset. We think those 0:18:25.600 --> 0:18:28.800 three investments look really attractive on a going forward basis. 0:18:28.840 --> 0:18:33.960 Why secondaries are a direct beneficiary of some of the 0:18:34.040 --> 0:18:36.400 concern that has happened with so much money going into 0:18:36.440 --> 0:18:40.680 the private equity space. Secondary managers provide liquidity and diversification. 0:18:40.800 --> 0:18:44.440 They actually help the institutions provide that liquidity. The underlying 0:18:44.440 --> 0:18:46.960 investor benefits from the fact that you shorten the J 0:18:47.200 --> 0:18:49.639 curve the way that assets are invested over time. 0:18:49.760 --> 0:18:52.399 But isn't it also speaking to private equity having a 0:18:52.400 --> 0:18:55.280 hard time kind of cashing out right, you know, returning 0:18:55.320 --> 0:18:58.560 money to investors. So the secondary market certainly helps out, 0:18:58.840 --> 0:19:01.159 but I do wonder does it help prop up some 0:19:01.280 --> 0:19:03.320 valuations that maybe shouldn't be propped up. 0:19:03.640 --> 0:19:06.879 Well, the reality is secondaries are typically available at a discount, 0:19:06.880 --> 0:19:09.479 So you think about that concern in the private equity 0:19:09.480 --> 0:19:12.080 market with so much money going in there. Secondary managers 0:19:12.119 --> 0:19:14.760 are able to step in negotiate favorable pricing, your buying 0:19:14.800 --> 0:19:18.360 assets at a discount, right, and then the underlying investor 0:19:18.600 --> 0:19:21.879 ultimately benefits because they get a really prized asset that 0:19:22.000 --> 0:19:24.280 is matured a litle bit, they get it at a discount. 0:19:24.359 --> 0:19:27.160 It's in a diversified portfolio. So I'm not making a 0:19:27.200 --> 0:19:31.280 single bet. I'm actually diversifying my holdings across the GPS, 0:19:31.640 --> 0:19:33.840 the vintage geography and partnership. 0:19:33.960 --> 0:19:34.160