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Speaker 1: This is mesters in Business with Very Results on Bloomberg Radio.

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Speaker 1: This week on the podcast, I have an extra special guest.

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Speaker 1: Auntie Elmanin is a QRS co head of the Portfolio

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Speaker 1: Solutions Group. He is the author of a new book,

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Speaker 1: Investing amid Low expected Returns, making the most when the

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Speaker 1: markets offer the least. He has an incredible CV full

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Speaker 1: of all sorts of awards and has worked at all

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Speaker 1: sorts of places like Salomon Brothers and Brevin Howard before

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Speaker 1: ending up at a q R. If you're at all

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Speaker 1: interested in value investing, factor investing, understanding how you're starting

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Speaker 1: condition leads to future returns that might be better or

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Speaker 1: worse than historical averages, you're gonna find this to absolutely

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Speaker 1: be a master class in investing. I found it absolutely fascinating,

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Speaker 1: and I think you will as well. With no further ado,

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Speaker 1: my conversation with a u RS Auntie Elmanen. Welcome to Bloomberg. Thanks, Perry.

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Speaker 1: I'm really looking forward to this same here. So so first,

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Speaker 1: I found the book to be quite fascinating, very in depth,

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Speaker 1: and you managed to take some of the more technical

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Speaker 1: arcana and make it very understandable. Will circle back with that.

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Speaker 1: Let's let's start just by talking about your career. You

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Speaker 1: you began as a sang Central Bank portfolio manager in Finland.

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Speaker 1: So yeah, my really first stroke of luck, I think,

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Speaker 1: was getting that job. Before that, I had been nerdy

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Speaker 1: kid with interesting esoteric things like royal family trees or

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Speaker 1: or track and field statistic, not trading, and when I

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Speaker 1: was studying in university economics, I did not really get

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Speaker 1: the passion. The passion came when I went to invest

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Speaker 1: the country's foreign exchange reserves there and it was it

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Speaker 1: was very much global government bond markets, so thinking about

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Speaker 1: macro picture. I never never then then or later had

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Speaker 1: I don't know much much interested on a single stock picking,

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Speaker 1: so so think thinking of the big picture. And there

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Speaker 1: were some lovely, lovely things like I was there in

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Speaker 1: the October eighty seven crash and saw two year yields

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Speaker 1: falling in one one overnight from nine and a half

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Speaker 1: percent to seven and a half percent. You don't see

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Speaker 1: those movements, yeah absolutely, Yeah. So so anyway, so that

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Speaker 1: was that was That was a great, great learning experience.

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Speaker 1: And and then my second related stroke of luckworse that

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Speaker 1: Professor ten French came there. Yeah, he came to educate

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Speaker 1: nine and sort of what we were doing, what we

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Speaker 1: should be doing, and and I was an enthusiastic kid there.

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Speaker 1: Well by that time, I was already almost twenty eight

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Speaker 1: and and he when I was expressing some interest about

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Speaker 1: studying in the US, he was only, you should do

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Speaker 1: it soon. You have yourself old enough to do that.

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Speaker 1: And and and a few months later I was. I

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Speaker 1: was in the US. And it was so lucky in

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Speaker 1: my life because because that year I met then H.

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Speaker 1: Cliff Asnest and John lou who later founded uh a

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Speaker 1: q R so as my fellow students. I met my

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Speaker 1: wife there. She was NBA student from Germany. And it

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Speaker 1: would have left a few months later University of Chicago, Chicago.

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Speaker 1: So all of this, all of this luck sort of

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Speaker 1: was related to my wonderful first jobs. And Gean Farmer

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Speaker 1: teachers there and his research partners Can French. Yeah, both

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Speaker 1: both Cliff, actually all three, Cliff, John and I. We

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Speaker 1: we had Farmer and French as our dissertation chairman. And

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Speaker 1: and that's a small source of pride, a little little intimidating.

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Speaker 1: So so you go from Chicago, is that how you

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Speaker 1: ended up at Salmon Brothers? Yeah? So that that relationship

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Speaker 1: actually already started when I was a portfolio manager, right funnily,

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Speaker 1: in effectually like one of these Michael Lewis's la spoke

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Speaker 1: as good guys was one of my sales sales context. Yeah,

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Speaker 1: he didn't have many good guys, but one was anyway.

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Speaker 1: So so and and and I got to know people

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Speaker 1: like Marty Leebovitz before I went to Chicago, and I

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Speaker 1: think he helped. He may have again had a hand

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Speaker 1: hand somewhere there. And so when I finished my studies,

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Speaker 1: it was pretty clear that I wasn't sort of academic enough.

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Speaker 1: I wanted to go to either by side or sales side.

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Speaker 1: I even talked to them ge some Ware, Cliff and

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Speaker 1: John Ware didn't go there. Uh sort of thought from

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Speaker 1: my eighties experience ad by side, this dust the wrong

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Speaker 1: choice anyway. So so I then went to Salomon Brothers,

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Speaker 1: did bond research for a couple of years on yield

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Speaker 1: curve strategies, then moved to Europe. That was always a

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Speaker 1: deal with my wife to um to be a bond

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Speaker 1: strategist at Salomon for for many years, initially very discretionary,

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Speaker 1: but gradually becoming more and more systematic. And uh, and

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Speaker 1: eventually turned from this customer oriented role to prop trading

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Speaker 1: for a while and then her gender up Brevan Howard. Yes,

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Speaker 1: so I think that from from these times when I

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Speaker 1: was strategist, I was talking to my two great people,

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Speaker 1: but like you know, earlier on some LTCM and then

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Speaker 1: various other people and including Alan who came actually from

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Speaker 1: Salomon and so somewhere all three he sort of invited

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Speaker 1: me to try to be a mini cliff Uh systematic

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Speaker 1: systematic trader with a small team there at Brevan Howard,

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Speaker 1: which was in some sense great, but it is sort

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Speaker 1: of a misfit because it's a very discretionary place, and

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Speaker 1: so trying to do systematic in that environment was harder,

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Speaker 1: and I think none of us were doing extremely well,

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Speaker 1: none of us were doing extremely badly, but it just

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Speaker 1: it just didn't become a um it's not a great

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Speaker 1: third yeah yeah, yeah, but it was. It was. On

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Speaker 1: the other hand, it was just a great place well

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Speaker 1: first to try it. But the second thing is that

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Speaker 1: when two thousand and eight came along, it was one

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Speaker 1: of the few places that we're making money, so it

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Speaker 1: was a very comfortable vantage point for for that environment.

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Speaker 1: How did you go from being a Mini clif firstness

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Speaker 1: to a Maxi Cliff first. Yeah, so so, um, I

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Speaker 1: had stopped that systematic trading, but I had been talking

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Speaker 1: with those guys often possibly um. Joining It was a

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Speaker 1: matter also of them opening European office because that's where

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Speaker 1: I was physically and so so so that that was

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Speaker 1: a coaching. It also helped that I was I basically

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Speaker 1: decided to write this book expected returns, and when I

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Speaker 1: when I wrote it, I asked Cliff to write the

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Speaker 1: foreword for it. And and by the way, like if

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Speaker 1: you if you looked like check some time the first

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Speaker 1: words he has there, like it was, I was sweating

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Speaker 1: when I read read that. Um, it's just by telling

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Speaker 1: that first time I met Anti, I thought he was

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Speaker 1: insane and I was right so so so that that

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Speaker 1: that was a little stressful, but it turns it out

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Speaker 1: very nice. But anyway, so that experience reminded I think

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Speaker 1: both of us how aligned our thinking is based on

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Speaker 1: this common common background, and that's somehow I think motivated

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Speaker 1: them to I think them to offer, and me to

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Speaker 1: me to say yes yes to uh to the idea

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Speaker 1: of joining them. Really, what I would think is getting

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Speaker 1: to my natural home, and it happened in twenty eleven,

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Speaker 1: so you've been there for more than a decade. You're

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Speaker 1: now cohord of Portfolio Solutions. What is that role like?

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Speaker 1: What's your what's your day to day work like at

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Speaker 1: a QR Capital. Yeah, so the Portfolio Solutions group advice

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Speaker 1: is mainly institutional clients on all kinds of challenges that

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Speaker 1: they haven't thinking about expect it, returns, portfolio construction, risk management, etcetera.

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Speaker 1: And then in addition, we write lots of papers, I

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Speaker 1: speak in many conferences. And then in addition to that,

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Speaker 1: I've had a hand in designing and improving some of

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Speaker 1: our strategies, especially related to style premium. That was something

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Speaker 1: I was quite passionate about when I joined. And and

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Speaker 1: by now i'm co head. The guy who has collaborated

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Speaker 1: very closely with me, Dan Bill alone has taken more

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Speaker 1: and more over the day to day running of the thing.

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Speaker 1: And I, you know, I took time to write a

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Speaker 1: second book recently and now I'm talking about it. And

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Speaker 1: I think, with with with my age, I'm happy to

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Speaker 1: sort of moved part time status. I think so. In

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Speaker 1: the book, Cliff Fastness again does the introduction and he says,

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Speaker 1: you overshare a great characteristic for someone research, but he

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Speaker 1: sometimes says he's afraid you're gonna feel the secret sauce.

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Speaker 1: So what explain over sharing of financial research? Yeah, so

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Speaker 1: this is this is related to all of us having

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Speaker 1: this University of Chicago experience where where we were really

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Speaker 1: taught the value of being open and and putting your

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Speaker 1: research out there for public scrutiny too, to improve it

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Speaker 1: and to educate. But of course there are possible downsides

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Speaker 1: to that, and and and that has been always always

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Speaker 1: a question. So so I'm not and we are not

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Speaker 1: writing about all the proprietary proprietary strategies that we have,

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Speaker 1: but we are talking quite openly about some things like

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Speaker 1: against styles, factory investing, alternatively premium things that are relatively

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Speaker 1: widely known. And I have this I don't know, Yeah,

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Speaker 1: I'm sort of leaning that way of being too transparent

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Speaker 1: and and and then somebody may have to control me

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Speaker 1: a little. So so let's just talk a little bit

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Speaker 1: about um. Two of the key themes in the book.

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Speaker 1: The first is alpha. It's the holy grail but also

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Speaker 1: allusive and costly explain. Alpha is something we all aspire for,

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Speaker 1: but in reality the evidence is very limited that that

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Speaker 1: most investors can deliver alpha. Moreover, there's there's a lot

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Speaker 1: of good research by others and us showing that much

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Speaker 1: what people think is alpha can be explained by either

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Speaker 1: you know, heads funds running, taking on lots of equity

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Speaker 1: correlation or then correlation to these various styles that are

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Speaker 1: not quite quite market better. But it's it's certainly not

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Speaker 1: pure alpha either. So somehow this type of demystifying, I

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Speaker 1: think is helpful. But it's it's clear that investors tend

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Speaker 1: to be managers and investors tend to be over confident

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Speaker 1: in their ability to find that. So I'm glad you

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Speaker 1: brought that up, because there's another bullet points in the

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Speaker 1: last chapter the book which strikes me. Let me let

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Speaker 1: me read it. Quote discipline, humility and patience UM as

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Speaker 1: a key to invest in success. That sounds more like

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Speaker 1: behavioral finance than factor investment. Yeah. Yeah. So one other founder,

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Speaker 1: David Cabilt, he's he's always had this very good point

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Speaker 1: that good investment results require good investment strategies and good

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Speaker 1: investors and and so we wrote the paper together almost

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Speaker 1: a decade to go on bad habits and good practices

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Speaker 1: and and really think thinking about those things, and it

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Speaker 1: does definitely get to behavior our advices in general, I

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Speaker 1: think behavioral finance literature focus is way too much on

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Speaker 1: how you can exploit other people's mistakes as opposed to

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Speaker 1: looking in the mirror and reducing your your own own mistakes.

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Speaker 1: So really, really quite interesting. So so let's talk a

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Speaker 1: little bit about UM. Some of the concepts about expected

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Speaker 1: returns UM you mentioned in the beginning of the book,

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Speaker 1: lower asset yields and richer asset prices have pulled forward

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Speaker 1: future returns. In other words, a lot of the games

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Speaker 1: we've seen in the twenty tens and our guess twenty

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Speaker 1: one and twenty two weren't so much based on that

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Speaker 1: multiple and of earnings, but future multiples that were pulled forward.

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Speaker 1: And so that time period explain that it's always good

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Speaker 1: to think of starting deals and valuations sort of as

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Speaker 1: two sides of the same coin. So starting deals of

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Speaker 1: all major assets were coming down in last decade and

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Speaker 1: last decades actually several decades. So something that I try

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Speaker 1: to make investors see that, Uh, they naturally think of

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Speaker 1: this way this way also of expected returns with bonds,

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Speaker 1: but when they think of equities or housing they sort

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Speaker 1: look at the rear view mirror and think of historical

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Speaker 1: libraries returns that can be distorted by this returning or

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Speaker 1: cheapening quite a lot. So I think it's helpful to

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Speaker 1: think that all of these long only investments are priced

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Speaker 1: by thinking of expected cast flows discounted by a common

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Speaker 1: discount right to risk less part and some varius as

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Speaker 1: a specific premier. And now when this common discount rate

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Speaker 1: has been at all time lows and was coming down

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Speaker 1: for a decades, so that was making everything expensive. At

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Speaker 1: the same time, whatever happened to the expected cast flows

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Speaker 1: and other premium and so that that situation has gotten

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Speaker 1: us to this sort of everything bubble less. Some some

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Speaker 1: saying I think it's a bubble is a bit wrong

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Speaker 1: word there in the sense that there is a fundamental

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Speaker 1: story behind it. The low real yields that were influencing

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Speaker 1: all kinds of investments makes a lot of sense. You

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Speaker 1: wrote this book in one or at least finished it

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Speaker 1: in and you describe in the book what you see

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Speaker 1: as an unquote investment winter ahead. I have to say

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Speaker 1: that seems pretty president considering since you handed the book

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Speaker 1: in to be published last year, markets have pretty much

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Speaker 1: done nothing but roll over and head south in two.

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Speaker 1: Was this just lucky timing or were you a little president?

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Speaker 1: I'll put it largely too lucky timing. But so the story,

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Speaker 1: I was always saying that we know that we've got

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Speaker 1: these low expected returns given those low starting deals. And

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Speaker 1: and by the way, related to what you're saying, I

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Speaker 1: really like another statement, we borrowed returns from the future

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Speaker 1: when we were when we were capitalizing everything at those

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Speaker 1: expensive levels, and so that locked in low future returns.

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Speaker 1: We just didn't know whether that's gonna materialized through slow

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Speaker 1: pain staying in this low expected return world, or fast

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Speaker 1: pain cheapening. And so then in the in the book

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Speaker 1: I was I was saying that I don't really have

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Speaker 1: a strong view on this one. But but in conclusions

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Speaker 1: I did put there that that it just seems that

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Speaker 1: stars are aligning for some fast pain. And it wasn't

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Speaker 1: just the high valuations, but there was a catalyst. There

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Speaker 1: was this basically inflation problem was seemingly getting as close

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Speaker 1: to the day when FED finally has to make some

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Speaker 1: hard choices, and so so so that I got got right.

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Speaker 1: But but I would say that I was really lucky

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Speaker 1: because I could have written in six months earlier, and

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Speaker 1: in general I've had other market timing calls. I'm not

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Speaker 1: famous for being good at market. I mean I don't

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Speaker 1: know anybody who is. There are no old gold market

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Speaker 1: timers in France Billionaire list. There's there's old in this bowl,

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Speaker 1: but there's not both. Um, let's let's talk a little

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Speaker 1: bit about the pushback to low expected returns, you know,

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Speaker 1: following the financial crisis and the FED cutting rates economy

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Speaker 1: and the market starts recovering late two thousand nine and

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Speaker 1: then two thousand and ten, and we kept hearing from

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Speaker 1: a lot of different value corners. Hey, everything is richly priced.

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Speaker 1: Bonds are the most expensive they've been in thirty years.

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Speaker 1: Stocks are pricy, lower your return expectations. But yet the

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Speaker 1: tens sore returns and equities and bonds close to double

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Speaker 1: historical averages. How do we explain why that advice took

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Speaker 1: so long before it started to work. So I think

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Speaker 1: there is a fair risk that we anybody who was

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Speaker 1: talking like that, he's thought that's the boy who cried

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Speaker 1: wolf and Lucy losing credibility then by this time, and

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Speaker 1: I think that would be said because I think sometimes

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Speaker 1: it's going to really work, and this year really looks

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Speaker 1: like it can be can be that sometime. And I

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Speaker 1: felt always somewhat good that we were at least we

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Speaker 1: were not pushing for we were not predicting me and

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Speaker 1: reverting valuations that we have made things work. We were

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Speaker 1: saying it, let's be really humble about any market timing

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Speaker 1: use of this stuff. But low starting heels do anchor

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Speaker 1: expected returns lower. But it's true that and and what

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Speaker 1: we saw then in that in that decade, that rich

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Speaker 1: things can get richer, and that doesn't take quite a

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Speaker 1: long time. And so actually my favorite quote is to

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Speaker 1: think about what happened to SMP five shielder p that

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Speaker 1: went from mildly above historical average too empty to double

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Speaker 1: and wildly above average forty in ten years time. And

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Speaker 1: that type of thing gives you well, basically seven percent

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Speaker 1: annual returns pro rated then and so so that's the

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Speaker 1: key reason. And something similar happened. Real yels on bonds

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Speaker 1: were already low, they went even lower. Um rental heels

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Speaker 1: on equities, credit spread, anything you look at had basically

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Speaker 1: tail winds from from these following years, and that repricing

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Speaker 1: then gave high returns. And that there's a danger that

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Speaker 1: people then look at the rear view mirror and become

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Speaker 1: complacent just at the wrong time. So so let's talk

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Speaker 1: a little bit about that. How significant was the ultra

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Speaker 1: low rates of the Fell reserve to making all of

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Speaker 1: these different asset classes richly valued and continuing to generate

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Speaker 1: strong returns right up until the FED started raising rates.

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Speaker 1: So I think so short term what happened this year

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Speaker 1: was really there was a catalyst of inflation and FED tightening.

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Speaker 1: But the long term story was always always about valuations

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Speaker 1: and and the important thing, as I said, is related

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Speaker 1: to this common part low real deals. And should we

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Speaker 1: blame FED for that or should be blaming somehow greedy investors.

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Speaker 1: I buy more the stories that there was this fundamental

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Speaker 1: fundamental effects, most importantly proper probably savings glad excess savings

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Speaker 1: coming from pension savers. Also another story is that that

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Speaker 1: when when the wealthy we're getting a bigger share of

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Speaker 1: the pie, their savings rates are higher. There are there

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Speaker 1: are research on both fronts which which sort of explain

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Speaker 1: why we've gotten this exceptional savings clot which was then

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Speaker 1: pushing all assets yields lower and and creating this and

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Speaker 1: fed them. Investors were basically then responding to that situation

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Speaker 1: rather than driving it. Now, we heard a lot about

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Speaker 1: the savings clout from then chairman Ben Bernanke in the

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Speaker 1: early two thousand's. Is this savings clot qualitatively different than

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Speaker 1: what we saw two decades ago? Yeah, it's it's it's

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Speaker 1: it's the same idea. So always when you think of

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Speaker 1: real years, you think that, okay, there's a there's either

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Speaker 1: an issue with investments or savings, and it's it's a

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Speaker 1: balance between those two. And he was highlighting that this

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Speaker 1: probably is more coming from the savings side, and then

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Speaker 1: he was symphasized this is the this is a China

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Speaker 1: and and often often emerging market foreign reserves, those those

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Speaker 1: types of excess savings where sort the culprit for the

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Speaker 1: conundrum in two thousand five or whatever it was. And

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Speaker 1: and I think that that story still has some legs,

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Speaker 1: but sort of the key culprit then became demographics and

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Speaker 1: retirement savers And the latest story now we center in

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Speaker 1: the sort of one percent. So so the flip side

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Speaker 1: of that, if there's a savings glut, meaning a big

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Speaker 1: uptick in demand for that paper, does that also suggest

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Speaker 1: we have a dearth of high quality sovereign paper of

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Speaker 1: bonds issued by countries like the US or the UK,

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Speaker 1: or is it just whatever. The existing supply of paper

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Speaker 1: is what, Liz, And it's the demand that has spiked. Yeah,

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Speaker 1: I think the demand has been driving things and and

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Speaker 1: and well, the supply has been there like there's there's

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Speaker 1: there's been plenty of plenty of supply as well to

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Speaker 1: to cater for it, and and really really given the

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Speaker 1: need for the to to cover public deficits and so on.

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Speaker 1: But again, I think I think if one thinks of

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Speaker 1: what what sort of started this among fundamental forces, I

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Speaker 1: choose to go with that savings plat That's my best

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Speaker 1: reading of the literaty and it makes some sense. So

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Speaker 1: you wrote the prior book a decade ago, two thousand

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Speaker 1: and eleven, just expected returns in the decade between that

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Speaker 1: book in this book, What have we all learned? What

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Speaker 1: what has the markets taught us? And how did you

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Speaker 1: work that into the new book? Well? I like that.

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Speaker 1: I like the basic framework still still in the book.

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Speaker 1: But I think certainly it was a terrible decade for

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Speaker 1: all kinds of contrarian strategies and and I have become

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Speaker 1: even more humble. It's sort of funny that I I

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Speaker 1: wrote my dissertation four the years ago in duration timing,

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Speaker 1: and I've thought about all kinds of market time. Every

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Speaker 1: decade I become more humble about about the endeavor. And

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Speaker 1: yet even as I told at the end of this

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Speaker 1: latest book, I'm still mentioning star start aligning. And it

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Speaker 1: might be so, so the temptation is there. But I

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Speaker 1: think the main point I want to say is I

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Speaker 1: think what we should really try to think of investing

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Speaker 1: as a strategic effort good diversification and so as opposed

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Speaker 1: to some great tactical timing, because that doesn't do too well.

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Speaker 1: So I think I think that would be and part partly,

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Speaker 1: you know, relearned through the difficulty of contrarian timing strategies.

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Speaker 1: Then then another thing, which which was very important in

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Speaker 1: this decade, was there was a growing interest in these

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Speaker 1: diversifying return sources. But I think by now the most

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Speaker 1: popular one is related to a liquid investments, whereas my

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Speaker 1: favorites where then and are still now more liquid strategies

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Speaker 1: Vario style, premium value investing, trend following, and so on

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Speaker 1: and so so. One of the interesting things to talk

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Speaker 1: about in the book is that we continue to find

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Speaker 1: more data, and not just the decade of data that

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Speaker 1: went by, but historical data, old data going back to

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Speaker 1: the eighteen hundreds. I have to ask, where is this

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Speaker 1: do we call it ancient? Where is this nineteenth century

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Speaker 1: data coming from? And how can you apply it to

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Speaker 1: investing in the twenty one cent Yeah. So the first

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Speaker 1: point is that we accrue out of sample new experience

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Speaker 1: so slowly that that that it's sort of pain painful

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Speaker 1: to do to do that waiting, and and therefore it

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Speaker 1: is helpful supplementary source to get some old data. Most

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Speaker 1: really studies were done with datas in nineteen sixties to nineties,

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Speaker 1: and then it was extended to beginning of CRISP data

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Speaker 1: six and now we've had people going further back and

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Speaker 1: and I am so I haven't been one of those

384
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Speaker 1: in the archives, but but I'm one of those looking

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Speaker 1: at that that data and studying it critically and and

386
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Speaker 1: seeing what what we can learn from there, mainly whether

387
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Speaker 1: you whether you get similar patterns. I do love it

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Speaker 1: when I find that some strategies have worked persistently over

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Speaker 1: different centuries, pervasively across different countries and asset classes and

390
00:21:52,200 --> 00:21:56,560
Speaker 1: robust with different specifications. So that makes me more confident.

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Speaker 1: But I do I have recognized And that's something I

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Speaker 1: say in the book as well, that that when people

393
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Speaker 1: see my hundred and two hundred years of data there

394
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Speaker 1: some just roll their eyes and and and why is that? Why?

395
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Speaker 1: Why do why do I care about two hundred years

396
00:22:10,960 --> 00:22:13,960
Speaker 1: of data? I really care about last three years with

397
00:22:14,000 --> 00:22:18,359
Speaker 1: my old portfolio. Well, obviously that's a very specific example set.

398
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Speaker 1: You want to go away beyond that. But it raises

399
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Speaker 1: people rolling their eyes, raise the question how reliable is

400
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Speaker 1: that data? How accurate is it? Can we have confidence

401
00:22:28,520 --> 00:22:32,919
Speaker 1: that it's been cleanly assembled because the technology of the

402
00:22:32,960 --> 00:22:38,240
Speaker 1: eighteen hundreds a little more manual than today. All fair,

403
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Speaker 1: So I'll just I'll just say, well, first I said,

404
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Speaker 1: you just do the best you can, and I think

405
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Speaker 1: so there's some value in the data. But the problem

406
00:22:44,920 --> 00:22:47,960
Speaker 1: there are data problems, There are investability questions. Even if

407
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Speaker 1: the data verified, maybe you couldn't do for in diversification

408
00:22:51,080 --> 00:22:53,920
Speaker 1: or something like well, actually before first maybe you could.

409
00:22:54,000 --> 00:22:56,520
Speaker 1: That was pretty international era. Um, and then there's a

410
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Speaker 1: whole criticism that the world has structurally changed and that

411
00:22:59,680 --> 00:23:02,719
Speaker 1: creating sim has more bite the further back you go. So,

412
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Speaker 1: I think for all these reasons we should be skeptical,

413
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Speaker 1: but I still like it as a supplementary evidence, not

414
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Speaker 1: as main motivation for anything. So you mentioned the versification earlier.

415
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Speaker 1: In the last section of the book, you write an

416
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Speaker 1: owed to diversification. Tell us about that. Sure, I do

417
00:23:20,600 --> 00:23:25,520
Speaker 1: think you know it's a cliche, but diversification is pretty

418
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Speaker 1: close to a free lunch, and it is a wonderful,

419
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Speaker 1: wonderful aid to improving portfolios. I think it's much easier

420
00:23:33,040 --> 00:23:35,880
Speaker 1: to improve your risk ad justed returns through good risk

421
00:23:35,920 --> 00:23:41,240
Speaker 1: diversification than by getting somehow greater insights in one particular strategy.

422
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Speaker 1: So and and so I write, I write about it

423
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Speaker 1: both both. I don't know that the simple maths about

424
00:23:47,760 --> 00:23:50,840
Speaker 1: it how you can double double sharp ratios with foreign

425
00:23:50,880 --> 00:23:54,080
Speaker 1: uncorrelated strategies, and then remind us it's really difficult to

426
00:23:54,119 --> 00:23:57,520
Speaker 1: find for uncorrelated strategies in long only world. You may

427
00:23:57,560 --> 00:24:00,000
Speaker 1: have to get too long short world to take advance

428
00:24:00,000 --> 00:24:02,160
Speaker 1: at each of those types of opportunities. And then I'm

429
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Speaker 1: the flip side of that. I am saying that diversification

430
00:24:05,400 --> 00:24:08,800
Speaker 1: has got some critics. Of course, there's diversification or the

431
00:24:09,040 --> 00:24:11,479
Speaker 1: or or that diversification fails when most needed and so,

432
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Speaker 1: and I think I can counter those to some extent,

433
00:24:14,480 --> 00:24:17,560
Speaker 1: but I think there are challenges that good frisk diversification

434
00:24:17,680 --> 00:24:20,600
Speaker 1: often then requires you to use some shorting and leverage,

435
00:24:20,600 --> 00:24:22,200
Speaker 1: and there are limits to how much people want to

436
00:24:22,240 --> 00:24:26,159
Speaker 1: do that. There's unconventionality issues. And then this's this what

437
00:24:26,320 --> 00:24:28,480
Speaker 1: what we've highlighted in reacent Yes, that you sort of

438
00:24:28,520 --> 00:24:31,640
Speaker 1: inherently you lack stories and and so it's it's it's

439
00:24:31,720 --> 00:24:36,240
Speaker 1: very sort of math oriented or or algebra oriental type

440
00:24:36,240 --> 00:24:39,120
Speaker 1: of thing as opposed to great stories, which which drive

441
00:24:39,240 --> 00:24:42,080
Speaker 1: most investment passions. Right, that makes a lot of sense.

442
00:24:42,400 --> 00:24:47,240
Speaker 1: You mentioned free launch. You talk about rebalancing arguably another

443
00:24:47,280 --> 00:24:51,560
Speaker 1: free launch. Tell us your thoughts on rebalancing. Yeah, So rebalancing,

444
00:24:51,600 --> 00:24:55,640
Speaker 1: I think is a way of ensuring that you can

445
00:24:55,800 --> 00:24:59,920
Speaker 1: retain your risk targets and you can retain your diversification.

446
00:25:00,040 --> 00:25:02,359
Speaker 1: So I think of it primarily has that there's a

447
00:25:02,359 --> 00:25:05,399
Speaker 1: follow up question whether you whether you can get better

448
00:25:05,440 --> 00:25:07,359
Speaker 1: returns and then how you do it and so and

449
00:25:07,400 --> 00:25:09,679
Speaker 1: I talk a little lightly. I think I wouldn't be

450
00:25:09,800 --> 00:25:12,600
Speaker 1: too strict and rebalancing I think like one one good

451
00:25:12,640 --> 00:25:16,280
Speaker 1: idea is to be somewhat lazy with rebalancing strategy. So

452
00:25:16,400 --> 00:25:20,240
Speaker 1: let me hear something like that or or maybe four

453
00:25:20,280 --> 00:25:24,000
Speaker 1: times a year, but part of the portfolio, so you're everything,

454
00:25:24,040 --> 00:25:26,879
Speaker 1: you don't you you don't get so um dependent on

455
00:25:26,920 --> 00:25:29,720
Speaker 1: when you did it your year, So that that type

456
00:25:29,720 --> 00:25:31,919
Speaker 1: of thing. But but basically, if you if you are

457
00:25:31,920 --> 00:25:34,399
Speaker 1: a little lazy or patient with rebalancing, you let the

458
00:25:34,480 --> 00:25:36,840
Speaker 1: near to momentum play out and you might get closer

459
00:25:36,880 --> 00:25:39,560
Speaker 1: to the time when there's mean reversion advantages. So so

460
00:25:39,600 --> 00:25:42,080
Speaker 1: you're trying to play a little bit these advantages that

461
00:25:42,160 --> 00:25:45,000
Speaker 1: tend to be in financial markets with momentum mean reversion.

462
00:25:45,320 --> 00:25:47,880
Speaker 1: So let's talk a little bit about low expected returns.

463
00:25:47,880 --> 00:25:51,919
Speaker 1: We we already talked about the impacts on FED rates.

464
00:25:52,640 --> 00:25:56,919
Speaker 1: What else goes into driving valuation factors that can lower

465
00:25:57,359 --> 00:26:00,280
Speaker 1: future expected returns. It really depends on what rise on

466
00:26:00,359 --> 00:26:03,560
Speaker 1: we talk about. So monetary policy macro conditions are very

467
00:26:03,560 --> 00:26:05,840
Speaker 1: important for short term but I think I I'd like

468
00:26:05,880 --> 00:26:07,760
Speaker 1: to focus in my focused in the book mainly on

469
00:26:07,800 --> 00:26:11,320
Speaker 1: long term expected returns and then its terms being five, five,

470
00:26:11,400 --> 00:26:13,640
Speaker 1: five to ten years something like that. And yeah, it's

471
00:26:13,640 --> 00:26:16,119
Speaker 1: interesting if you go even further than sort of valuations

472
00:26:16,160 --> 00:26:18,600
Speaker 1: even don't matter, so everything is gets diluted, and then

473
00:26:18,600 --> 00:26:21,200
Speaker 1: you have to think about what's some theoretical long grand return.

474
00:26:21,240 --> 00:26:24,280
Speaker 1: But so so for for ten years ahead, then starting

475
00:26:24,280 --> 00:26:26,840
Speaker 1: ITAs and valuations are essential and and again so I

476
00:26:26,840 --> 00:26:30,920
Speaker 1: think those those are very helpful anchor for thinking about

477
00:26:30,920 --> 00:26:33,240
Speaker 1: those returns. Even though you can get this very ugly

478
00:26:33,720 --> 00:26:36,480
Speaker 1: uh forecast. There ares like what happened in the last

479
00:26:36,640 --> 00:26:39,520
Speaker 1: last decade. But when such setting happens, then it pretty

480
00:26:39,600 --> 00:26:42,320
Speaker 1: much stores problems for the future. So like last decade,

481
00:26:42,480 --> 00:26:44,399
Speaker 1: as it's rich and it's just ment at all, you

482
00:26:44,440 --> 00:26:47,399
Speaker 1: are going to have even more problems in in in

483
00:26:47,440 --> 00:26:49,919
Speaker 1: those future returns. And I think the only way you

484
00:26:49,960 --> 00:26:52,960
Speaker 1: can sort of solve the low expected return problem here

485
00:26:53,119 --> 00:26:56,119
Speaker 1: is at least for risky assets, is that there would

486
00:26:56,119 --> 00:26:59,840
Speaker 1: be this much faster growth, this techno optimism that you

487
00:27:00,119 --> 00:27:02,680
Speaker 1: some quarters and there there could be, but we've had

488
00:27:03,000 --> 00:27:07,879
Speaker 1: we've had wonderful technological advance this last hundred years and

489
00:27:07,880 --> 00:27:10,000
Speaker 1: and two per cent reial growth is pretty much as

490
00:27:10,000 --> 00:27:12,679
Speaker 1: good as it gets. And that's the interesting thing because

491
00:27:13,080 --> 00:27:16,919
Speaker 1: you're talk in the book about very often mom and

492
00:27:16,960 --> 00:27:23,919
Speaker 1: pop investors individual investors tend to confuse uh GDP growth

493
00:27:24,080 --> 00:27:28,840
Speaker 1: with expected returns. Academically, we know there's almost no correlation

494
00:27:28,880 --> 00:27:31,280
Speaker 1: between the two, is there. It's surprising that whether you

495
00:27:31,280 --> 00:27:33,400
Speaker 1: look at our time in one country or you look

496
00:27:33,400 --> 00:27:36,639
Speaker 1: at across countries, the relation is very modest. And my

497
00:27:36,640 --> 00:27:38,800
Speaker 1: my favorite poster boy on that one is China, which

498
00:27:38,840 --> 00:27:44,199
Speaker 1: had this thirty years of very fast for equity investors,

499
00:27:44,760 --> 00:27:47,399
Speaker 1: it was a really sorry story. Yeah no, it was

500
00:27:47,440 --> 00:27:52,159
Speaker 1: a lost opportunity. If you piled into China, you missed

501
00:27:52,160 --> 00:27:55,240
Speaker 1: a lot of opportunity elsewhere in the world. It's quite

502
00:27:55,359 --> 00:27:57,800
Speaker 1: quite amazing, and there are some stories why that's why

503
00:27:57,840 --> 00:28:00,520
Speaker 1: that's the case, Like basically, one on one logic is

504
00:28:00,520 --> 00:28:04,000
Speaker 1: a GDP growth doesn't capture how the pie is shared

505
00:28:04,040 --> 00:28:06,280
Speaker 1: between corporates and so on. And there's there's a different

506
00:28:06,280 --> 00:28:10,840
Speaker 1: sector compositions. There's there's public versus an unlisted sectors, all

507
00:28:10,840 --> 00:28:13,800
Speaker 1: all kinds of questions like this that can then mechanically

508
00:28:13,840 --> 00:28:16,320
Speaker 1: explain why this happens. But it is. It's it's a

509
00:28:16,440 --> 00:28:18,760
Speaker 1: it's a weird result and it's understandable, and I think

510
00:28:18,800 --> 00:28:22,560
Speaker 1: it commonly motivates people to look for those fast growing

511
00:28:22,600 --> 00:28:26,800
Speaker 1: countries and taking it for granted that that's a good investment.

512
00:28:27,119 --> 00:28:30,400
Speaker 1: So when we're thinking about various asset classes, how does

513
00:28:30,520 --> 00:28:34,920
Speaker 1: cash work into that allocation strategy? Is that a legitimate

514
00:28:35,000 --> 00:28:37,440
Speaker 1: as at class or is it just a drug on

515
00:28:37,600 --> 00:28:43,080
Speaker 1: future returns except for years like well even in two Again,

516
00:28:43,120 --> 00:28:45,120
Speaker 1: in relative sense, cash is of course doing fine, but

517
00:28:45,960 --> 00:28:48,760
Speaker 1: real real returning cashes whatever minus pipers and it just

518
00:28:48,800 --> 00:28:51,600
Speaker 1: happens to be better than even more rice various results.

519
00:28:51,600 --> 00:28:54,360
Speaker 1: And so so I think one one interesting uh thing

520
00:28:54,400 --> 00:28:56,239
Speaker 1: is that you sort of you need to have some

521
00:28:56,800 --> 00:29:00,120
Speaker 1: market timing ability, I think, to make cash useful and

522
00:29:00,480 --> 00:29:02,680
Speaker 1: use it almost as an option. And and then it

523
00:29:02,760 --> 00:29:07,120
Speaker 1: matters whether you have got um some interesting yield levels.

524
00:29:07,120 --> 00:29:09,000
Speaker 1: Twenty years ago you had that three or four percent

525
00:29:09,040 --> 00:29:12,280
Speaker 1: three or return. Cash not not around in this situation.

526
00:29:12,320 --> 00:29:14,160
Speaker 1: So I do think that the main story with cash

527
00:29:14,160 --> 00:29:16,480
Speaker 1: c is, like you said, there's there's there's something about

528
00:29:16,480 --> 00:29:19,440
Speaker 1: the dragon. It dilutes. It's not a great diversify or

529
00:29:19,640 --> 00:29:22,080
Speaker 1: dilutesive performance. It would be good if you have got

530
00:29:22,160 --> 00:29:25,880
Speaker 1: some great market timing skills, but let's be humble about it.

531
00:29:25,960 --> 00:29:28,640
Speaker 1: Often I'd even say that cash may be best used

532
00:29:28,640 --> 00:29:30,760
Speaker 1: as a basically on on the other side, like you

533
00:29:30,800 --> 00:29:33,400
Speaker 1: want to use it for leverage for some long shot strategies,

534
00:29:33,480 --> 00:29:36,880
Speaker 1: and so that may be a helpful answer what you

535
00:29:36,920 --> 00:29:39,280
Speaker 1: do with that In the book, I like the way

536
00:29:39,320 --> 00:29:44,880
Speaker 1: you describe certain investor types based on their future liabilities.

537
00:29:44,960 --> 00:29:50,240
Speaker 1: So pensions endow minds to find benefit plans. You point

538
00:29:50,280 --> 00:29:55,840
Speaker 1: out that they're particularly sensitive to low expected returns. Tell

539
00:29:55,920 --> 00:29:59,440
Speaker 1: us what makes them so susceptible? Is it the future

540
00:29:59,440 --> 00:30:03,360
Speaker 1: liability as they have? Why is merely the concept of

541
00:30:03,440 --> 00:30:06,680
Speaker 1: lower expected returns so problematic for them? Yeah? Well, I

542
00:30:06,720 --> 00:30:09,720
Speaker 1: think it is. It is for any investor, But if

543
00:30:09,720 --> 00:30:12,920
Speaker 1: you have made some commitments for the future, then it

544
00:30:13,000 --> 00:30:17,560
Speaker 1: is maybe more legally binding, and and that that makes

545
00:30:17,600 --> 00:30:20,480
Speaker 1: it tougher than for somebody who can who can basically

546
00:30:20,840 --> 00:30:25,320
Speaker 1: adjust expectations um or or try to just live through

547
00:30:25,360 --> 00:30:29,760
Speaker 1: these things without without recognizing the low expected return until

548
00:30:30,160 --> 00:30:33,320
Speaker 1: until somewhere far into the future. So so let's talk

549
00:30:33,320 --> 00:30:36,480
Speaker 1: about for into the future, how long should we expect

550
00:30:36,520 --> 00:30:40,680
Speaker 1: lower returns for? Is this a question of quarters or

551
00:30:40,960 --> 00:30:44,600
Speaker 1: or years and decades? Is the cyclical? Does it eventually

552
00:30:44,640 --> 00:30:47,200
Speaker 1: turn out? And tell us a little bit about duration

553
00:30:47,280 --> 00:30:50,080
Speaker 1: of expected returns? Sure? So the main story of the

554
00:30:50,080 --> 00:30:53,520
Speaker 1: book is about those low starting years, and therefore we

555
00:30:53,520 --> 00:30:56,560
Speaker 1: are talking of long run story. Then I'll sort of

556
00:30:56,600 --> 00:30:59,280
Speaker 1: turn into more speculative pandit here by thinking about the

557
00:30:59,320 --> 00:31:02,360
Speaker 1: current situation soon where I do think that we are

558
00:31:02,400 --> 00:31:05,760
Speaker 1: now in this fast pain situation where we will probably

559
00:31:05,800 --> 00:31:08,960
Speaker 1: get more where we will surely get more monetary policy tightening.

560
00:31:09,000 --> 00:31:12,880
Speaker 1: And I suspect that the latest latest market positive positive

561
00:31:13,000 --> 00:31:15,440
Speaker 1: is on yels is maybe way too optimistic. I think

562
00:31:15,480 --> 00:31:17,720
Speaker 1: I think you will need you will need more tightening

563
00:31:17,720 --> 00:31:19,720
Speaker 1: to control inflation. And again this is this is a

564
00:31:19,840 --> 00:31:23,840
Speaker 1: speculative talk here. So I think fast pain will be

565
00:31:23,960 --> 00:31:29,000
Speaker 1: with us for various risky assets, but I think there

566
00:31:29,000 --> 00:31:32,360
Speaker 1: will be a limit to it because of the structural forces.

567
00:31:32,400 --> 00:31:34,200
Speaker 1: I refer to the savings. But but but I think that's

568
00:31:34,240 --> 00:31:37,400
Speaker 1: not going away anytime soon, and therefore there's going to

569
00:31:37,480 --> 00:31:39,960
Speaker 1: be a lead on how far heels can rise, and

570
00:31:40,200 --> 00:31:43,560
Speaker 1: that and basically those bond deals they have been underwriting

571
00:31:43,640 --> 00:31:46,320
Speaker 1: high valuations and all other on stocks and real estates

572
00:31:46,320 --> 00:31:49,280
Speaker 1: and so on and and and those rising yields have

573
00:31:49,440 --> 00:31:52,320
Speaker 1: been very important in cheapening those other asset classes. And

574
00:31:52,320 --> 00:31:54,080
Speaker 1: so I think there's going to be more pain on

575
00:31:54,120 --> 00:31:57,000
Speaker 1: that front, but not too much. I don't think we

576
00:31:57,040 --> 00:32:00,960
Speaker 1: will get so much higher yields and cheaper asset valuations

577
00:32:00,960 --> 00:32:03,320
Speaker 1: that we would sort of solve the long run problem

578
00:32:03,360 --> 00:32:06,160
Speaker 1: of low expected It turns we will. We will still

579
00:32:06,200 --> 00:32:07,880
Speaker 1: get some pain, but but well, I think the slow

580
00:32:07,920 --> 00:32:10,600
Speaker 1: pain will be with us quite a long time. So

581
00:32:10,600 --> 00:32:12,680
Speaker 1: so let me see if I can explain that. If

582
00:32:12,720 --> 00:32:16,880
Speaker 1: I if I understand that we've had a savings glot

583
00:32:17,040 --> 00:32:20,400
Speaker 1: that has put a cap on interest rates, which means

584
00:32:20,440 --> 00:32:23,920
Speaker 1: that the cost of capital has been very low, and

585
00:32:24,000 --> 00:32:28,200
Speaker 1: therefore that allowed us to speculate in real estate inequity,

586
00:32:28,720 --> 00:32:32,160
Speaker 1: and that allowed valuations to go high. And what's going

587
00:32:32,200 --> 00:32:36,400
Speaker 1: to determine how much those multiples compress is how high

588
00:32:36,480 --> 00:32:39,320
Speaker 1: rates end up going up? Am I oversimplifying that? I

589
00:32:39,440 --> 00:32:41,280
Speaker 1: know that? Is? That is right? And again we have

590
00:32:41,320 --> 00:32:44,520
Speaker 1: got now the cyclical situation where where basically the inflation

591
00:32:44,600 --> 00:32:49,200
Speaker 1: problem forced finally central banks to to act quite aggressively

592
00:32:49,280 --> 00:32:53,880
Speaker 1: then on well anyway, on on the interest right front.

593
00:32:54,400 --> 00:32:57,720
Speaker 1: And and then how much more they have to do

594
00:32:58,240 --> 00:33:00,360
Speaker 1: is going to be important in the near term. But

595
00:33:00,440 --> 00:33:03,160
Speaker 1: I just don't see your scenario where they would race

596
00:33:03,320 --> 00:33:05,640
Speaker 1: rate so much that we would get back to the

597
00:33:05,720 --> 00:33:10,479
Speaker 1: kind of four or five uh expected real return from

598
00:33:10,520 --> 00:33:13,360
Speaker 1: sixty portfolios which used to be there. We are about

599
00:33:13,400 --> 00:33:16,160
Speaker 1: half of that nowadays. We've come from the lows, but

600
00:33:16,240 --> 00:33:18,960
Speaker 1: we are still like, let's say sixty two percent three

601
00:33:19,120 --> 00:33:21,480
Speaker 1: yels roughly the number as opposed to the four plus

602
00:33:21,720 --> 00:33:24,320
Speaker 1: long run. So so we're recording this the first week

603
00:33:24,360 --> 00:33:28,280
Speaker 1: of July. The FED has already raised seventy five basis

604
00:33:28,280 --> 00:33:31,959
Speaker 1: points on top of their previous fifty basis points for

605
00:33:32,000 --> 00:33:35,640
Speaker 1: a while. The consensus is that the end of July,

606
00:33:36,200 --> 00:33:39,440
Speaker 1: I think it's the seven meeting seemed to be seventy

607
00:33:39,440 --> 00:33:44,160
Speaker 1: five basis points. Uh. It sounds like fears of recession

608
00:33:45,040 --> 00:33:48,760
Speaker 1: might drive that down to fifty basis points. But clearly

609
00:33:48,800 --> 00:33:52,280
Speaker 1: there's no consensus there yet. How far do you think

610
00:33:52,280 --> 00:33:55,120
Speaker 1: the Fed's going to go in tightening and do we

611
00:33:55,280 --> 00:33:59,120
Speaker 1: run the risk there were behind the curve in one

612
00:33:59,680 --> 00:34:02,480
Speaker 1: all running the risk that they're getting ahead of themselves.

613
00:34:02,520 --> 00:34:08,160
Speaker 1: And two yeah, First, just a qualifier here that that

614
00:34:08,600 --> 00:34:11,880
Speaker 1: nobody knows. Nobody knows and and and we don't trade

615
00:34:11,920 --> 00:34:15,040
Speaker 1: on my views. We don't like this is this is uh,

616
00:34:15,080 --> 00:34:19,120
Speaker 1: that's that's important, and it is it's incredibly difficult. But

617
00:34:19,120 --> 00:34:21,879
Speaker 1: but yeah, we we certainly do think about those those

618
00:34:22,040 --> 00:34:25,160
Speaker 1: social attempts. And my I'm pretty much in a letty

619
00:34:25,239 --> 00:34:27,520
Speaker 1: Larry Summers came there thinking that it's very hard to

620
00:34:27,520 --> 00:34:32,759
Speaker 1: get immaculate disinflation here and and and you will need FED.

621
00:34:32,960 --> 00:34:36,280
Speaker 1: FED needs to do more to get that inflation into control.

622
00:34:36,440 --> 00:34:39,840
Speaker 1: And if it does, either if it acts more or

623
00:34:39,920 --> 00:34:42,400
Speaker 1: financial markets dropping up, then then there's going to be

624
00:34:42,440 --> 00:34:47,360
Speaker 1: some pretty bad outcomes too risky assets. Without that, I

625
00:34:47,400 --> 00:34:50,319
Speaker 1: think we are we are going to continue to have

626
00:34:50,400 --> 00:34:52,759
Speaker 1: that inflation problem. There's a there's a narrow path how

627
00:34:52,800 --> 00:34:54,879
Speaker 1: it could go in a more benign way, and market

628
00:34:54,920 --> 00:34:58,279
Speaker 1: seems to be clutching that straw right now. So what

629
00:34:58,400 --> 00:35:00,839
Speaker 1: would make you change your mind? Mine? What would lead

630
00:35:00,880 --> 00:35:05,000
Speaker 1: you to say, oh, I've been too cautious about future

631
00:35:05,040 --> 00:35:08,839
Speaker 1: expected returns, and because A, B and C happened, I

632
00:35:08,840 --> 00:35:12,839
Speaker 1: think we could get a little more confident. Yeah, so,

633
00:35:12,880 --> 00:35:19,120
Speaker 1: I think the long horizon estimates are very difficult to change.

634
00:35:19,120 --> 00:35:23,000
Speaker 1: The starting yields are are heavy anchor, so I think

635
00:35:23,040 --> 00:35:26,200
Speaker 1: it would be it would really require the growth environment

636
00:35:26,280 --> 00:35:29,480
Speaker 1: to change. Again, I mentioned earlier technological progress, those types

637
00:35:29,520 --> 00:35:31,719
Speaker 1: of things, So short term anything can happen. But but

638
00:35:31,960 --> 00:35:35,440
Speaker 1: but somehow you have to have this type of idea

639
00:35:35,480 --> 00:35:38,759
Speaker 1: of the greater internet usage globally and all all kinds

640
00:35:38,760 --> 00:35:41,680
Speaker 1: of technological progresses moving us from the two percent to

641
00:35:41,800 --> 00:35:44,759
Speaker 1: three or four, which is hard to do, hard to do,

642
00:35:44,920 --> 00:35:49,560
Speaker 1: has not happened, right, And then you mentioned earlier the cheapening.

643
00:35:49,680 --> 00:35:54,040
Speaker 1: If stocks got much cheaper, that could potentially change the

644
00:35:54,120 --> 00:36:01,040
Speaker 1: starting valuation. But do we really think that's a likely Probably, yeah,

645
00:36:01,280 --> 00:36:03,719
Speaker 1: I I would be surprised that we would get that

646
00:36:03,800 --> 00:36:06,600
Speaker 1: much cheaper. And again, the economic logic I have is

647
00:36:06,680 --> 00:36:09,520
Speaker 1: there the savings somehow that that basically really ills are

648
00:36:09,560 --> 00:36:11,920
Speaker 1: not going to allow that we have to I don't know,

649
00:36:11,920 --> 00:36:15,520
Speaker 1: fragile economy, too, fragile financial markets to to allow that

650
00:36:15,600 --> 00:36:17,680
Speaker 1: much step in we would we might be talking of

651
00:36:19,400 --> 00:36:23,280
Speaker 1: further further market force and that and that that seems

652
00:36:23,320 --> 00:36:25,960
Speaker 1: pretty unlikely from at least with the state of the

653
00:36:25,960 --> 00:36:29,759
Speaker 1: world today. Obviously that can change any any time. That

654
00:36:29,920 --> 00:36:33,040
Speaker 1: that's really that's really quite interesting. So let's talk about

655
00:36:33,280 --> 00:36:37,520
Speaker 1: some things that seem relatively cheap. Cliff Fastness in the

656
00:36:37,560 --> 00:36:41,920
Speaker 1: forward of the book wrote quote value premium seems record

657
00:36:42,040 --> 00:36:46,480
Speaker 1: cheap today, that was the end of one. Is value

658
00:36:46,600 --> 00:36:50,520
Speaker 1: premiums still cheap today? Value premium is still very cheap.

659
00:36:50,560 --> 00:36:52,239
Speaker 1: And it's been a lovely year in the sense that

660
00:36:52,320 --> 00:36:56,360
Speaker 1: we have had positive returns, and yet the value spread,

661
00:36:56,719 --> 00:36:58,960
Speaker 1: this forward looking measure of how cheap value stocks have

662
00:36:59,080 --> 00:37:01,640
Speaker 1: versus growth stocks, has remained wide. And part partly it

663
00:37:01,760 --> 00:37:03,880
Speaker 1: is that you get some pullbacks like we have recently

664
00:37:04,160 --> 00:37:07,879
Speaker 1: recently gotten, but also we are basically rotating into new

665
00:37:07,960 --> 00:37:10,640
Speaker 1: value stocks and growth stocks, and and and the fundamentals

666
00:37:10,719 --> 00:37:15,240
Speaker 1: have actually further had sort of favorable um developments favoring

667
00:37:15,280 --> 00:37:17,720
Speaker 1: values stocks versus growth stocks. So for all these reasons,

668
00:37:17,760 --> 00:37:20,000
Speaker 1: we see that value stocks the way we tend to

669
00:37:20,000 --> 00:37:22,879
Speaker 1: trade them are as cheap or even cheaper than they

670
00:37:22,880 --> 00:37:25,760
Speaker 1: were at the worst times during the dot com bubble.

671
00:37:25,960 --> 00:37:27,879
Speaker 1: And it is important to just distinct with sen Cree

672
00:37:27,920 --> 00:37:30,560
Speaker 1: wrote about this in a in a blog recently that

673
00:37:30,560 --> 00:37:33,600
Speaker 1: that dot com bubble was very much about tech versus

674
00:37:33,600 --> 00:37:36,960
Speaker 1: others and and across sectors. We haven't got into the

675
00:37:36,960 --> 00:37:40,440
Speaker 1: new heighst but we tend to focus on within industry

676
00:37:40,880 --> 00:37:44,480
Speaker 1: um stock selection in our value strategies. And with that,

677
00:37:44,760 --> 00:37:48,400
Speaker 1: the key story of this recent bubble was really markets

678
00:37:48,440 --> 00:37:53,279
Speaker 1: favoring these disruptive, profitless growth companies within every sector, and

679
00:37:53,320 --> 00:37:57,520
Speaker 1: that opportunity remains still very wide. And we we love

680
00:37:57,560 --> 00:38:01,399
Speaker 1: seeing like pretty good performing behind us and then then

681
00:38:01,640 --> 00:38:04,640
Speaker 1: very good runway because those values spreads remained quite right.

682
00:38:04,719 --> 00:38:07,600
Speaker 1: And in the US, I've noticed that small cap value

683
00:38:07,600 --> 00:38:10,960
Speaker 1: has done much better than the larger cap companies and

684
00:38:11,000 --> 00:38:14,840
Speaker 1: then emerging market small cap value. Last I looked, it

685
00:38:14,960 --> 00:38:17,040
Speaker 1: might have even been green for the year, might have

686
00:38:17,080 --> 00:38:20,759
Speaker 1: been positive returns for the year. Why are small cap

687
00:38:20,880 --> 00:38:23,600
Speaker 1: doing so well on the value spaces here? Well, it

688
00:38:23,719 --> 00:38:27,560
Speaker 1: often happens, like you just you just get bigger movements

689
00:38:27,600 --> 00:38:31,880
Speaker 1: in good and bad on the small caps than large caps.

690
00:38:31,920 --> 00:38:35,200
Speaker 1: So so I mentioned the quote from Cliff he's a

691
00:38:35,200 --> 00:38:37,839
Speaker 1: big character. What what's it like working with him? It's

692
00:38:37,880 --> 00:38:42,000
Speaker 1: mainly it's great though if you had him with us

693
00:38:42,040 --> 00:38:45,000
Speaker 1: here on the studio, I think you wouldn't hear much

694
00:38:45,000 --> 00:38:47,920
Speaker 1: of me. And and that's just as well, because he

695
00:38:47,719 --> 00:38:51,120
Speaker 1: is he's uh, he's faster on his feet than he's

696
00:38:51,200 --> 00:38:53,760
Speaker 1: he's with here. So so that's that's in everybody's benefit.

697
00:38:53,960 --> 00:38:58,000
Speaker 1: But it so seriously, it does help that our investment thinking,

698
00:38:58,040 --> 00:39:00,880
Speaker 1: investment beliefs are so similar. So I I really rarely

699
00:39:00,880 --> 00:39:03,800
Speaker 1: have got any any any wish to second guess anything

700
00:39:03,840 --> 00:39:06,439
Speaker 1: he says or does, so so that's great. And then

701
00:39:06,560 --> 00:39:10,120
Speaker 1: most importantly, I do love his ethical antenna and this

702
00:39:10,320 --> 00:39:13,759
Speaker 1: kind of truth telling obsession that he has. I mean

703
00:39:13,800 --> 00:39:17,200
Speaker 1: sometimes there's there are overshoots there, but it's really it's

704
00:39:17,200 --> 00:39:19,400
Speaker 1: it's it's a reason for me why I love it

705
00:39:19,440 --> 00:39:21,000
Speaker 1: to work in a q R more than in any

706
00:39:21,000 --> 00:39:24,200
Speaker 1: other place in financially because of Cliff. You know, usually

707
00:39:24,200 --> 00:39:28,719
Speaker 1: you get a guy who's quantitatively oriented, you tend not

708
00:39:28,800 --> 00:39:33,240
Speaker 1: to get that sort of articulate nous and you also

709
00:39:33,360 --> 00:39:36,720
Speaker 1: tend not to get that sort of um sense of humor,

710
00:39:36,880 --> 00:39:40,200
Speaker 1: which is very very specific to him. He's a very

711
00:39:40,239 --> 00:39:44,160
Speaker 1: funny guy. He's yeah, and and and a bit mixed

712
00:39:44,160 --> 00:39:46,400
Speaker 1: feelings because there's no way to beat him one of

713
00:39:46,400 --> 00:39:50,920
Speaker 1: those things. But that's okay, that's very funny. Um. So

714
00:39:50,920 --> 00:39:53,080
Speaker 1: so let's talk a little bit about the things that

715
00:39:53,120 --> 00:39:57,080
Speaker 1: have changed since you wrote this this book. Um, what's

716
00:39:57,080 --> 00:39:59,839
Speaker 1: going on in the current market. Is it just confirming

717
00:40:00,480 --> 00:40:04,680
Speaker 1: what your expectations were for for future returns? Tell us

718
00:40:04,680 --> 00:40:08,040
Speaker 1: a little bit about how two has now that it's

719
00:40:08,080 --> 00:40:11,640
Speaker 1: half over, How has this impacted um the general premise

720
00:40:11,719 --> 00:40:14,920
Speaker 1: of of the book. Yeah, I think overall, I feel

721
00:40:15,080 --> 00:40:17,759
Speaker 1: totally blessed that that we got The book came out

722
00:40:17,840 --> 00:40:21,440
Speaker 1: at the time when when markets were roughly acting the

723
00:40:21,760 --> 00:40:24,080
Speaker 1: way the title was saying, talking about low expected it

724
00:40:24,120 --> 00:40:26,560
Speaker 1: as we've got low realized returns of that. That sounds

725
00:40:26,719 --> 00:40:28,960
Speaker 1: sounds great. And it also turns out that some of

726
00:40:28,960 --> 00:40:32,640
Speaker 1: our strategies, value strategy trend following these types of strategies

727
00:40:32,680 --> 00:40:35,760
Speaker 1: are doing very well. So so I'm getting like great,

728
00:40:35,960 --> 00:40:39,160
Speaker 1: great response. But of course things have some some things

729
00:40:39,160 --> 00:40:42,400
Speaker 1: have happened as expected related to inflation, central bank tightening.

730
00:40:42,800 --> 00:40:44,960
Speaker 1: But then I had no idea of what you know,

731
00:40:45,000 --> 00:40:49,040
Speaker 1: the geopolitics Russia Russia, U train or or the greater

732
00:40:49,120 --> 00:40:51,040
Speaker 1: split we have between us we are and China and

733
00:40:51,120 --> 00:40:52,839
Speaker 1: so and so, and I don't have I don't have

734
00:40:53,280 --> 00:40:56,160
Speaker 1: great insights to this for us. When I think of

735
00:40:56,200 --> 00:41:00,560
Speaker 1: the longer unexpected returns, the key stories that assets have

736
00:41:00,680 --> 00:41:03,840
Speaker 1: cheapened as one would one would have expected in this situation,

737
00:41:04,000 --> 00:41:06,279
Speaker 1: and and the question is whether there's going to be more.

738
00:41:06,480 --> 00:41:08,399
Speaker 1: I think it's it is interesting that we've had we've

739
00:41:08,400 --> 00:41:11,880
Speaker 1: seen the biggest moves in bonds smaller moves. When I

740
00:41:11,880 --> 00:41:14,719
Speaker 1: think of yield heel space, not not price space, but

741
00:41:14,760 --> 00:41:18,560
Speaker 1: in heal space, equity yields have written uh more, and

742
00:41:18,600 --> 00:41:21,680
Speaker 1: then illiquidy heals have risen so far very little, And

743
00:41:21,719 --> 00:41:24,080
Speaker 1: of course there is a smoothing effect, and so that's

744
00:41:23,560 --> 00:41:26,480
Speaker 1: a but. But I do expect that there's going to

745
00:41:26,560 --> 00:41:29,839
Speaker 1: be an issue. I I saw in March when when

746
00:41:29,840 --> 00:41:35,279
Speaker 1: equities didn't instantly respond to rising years, it reminded me

747
00:41:35,360 --> 00:41:39,000
Speaker 1: of Wiley Coyoity running running over that Cliffland, sort of

748
00:41:39,000 --> 00:41:41,440
Speaker 1: waiting for gravity to hit and and I think something

749
00:41:41,480 --> 00:41:44,319
Speaker 1: like that maybe still happening with the private tesseets, that

750
00:41:44,360 --> 00:41:47,719
Speaker 1: they are sort of waiting, waiting to price things. So

751
00:41:47,719 --> 00:41:49,440
Speaker 1: so let's talk a little bit about that. There's been

752
00:41:49,480 --> 00:41:53,160
Speaker 1: a lot of discussion about private markets and and the

753
00:41:53,400 --> 00:41:58,120
Speaker 1: illequidity premium they get. Um, what what are your thoughts

754
00:41:58,160 --> 00:42:04,200
Speaker 1: on there? Should should now untraded assets get an eloquently premium? Yeah,

755
00:42:04,239 --> 00:42:06,560
Speaker 1: so I've written a lot about it, Cliff of course,

756
00:42:06,760 --> 00:42:10,160
Speaker 1: uh also, and and and more and more weatily on this,

757
00:42:10,320 --> 00:42:13,279
Speaker 1: and I think it is it's dangerous that people I

758
00:42:13,360 --> 00:42:16,440
Speaker 1: think too automatically that if I invest in a liquid investments,

759
00:42:16,440 --> 00:42:18,759
Speaker 1: I'm going to earn an illiquidity premium. I think after

760
00:42:18,800 --> 00:42:22,399
Speaker 1: equity premium. That's probably the second most confident statement people

761
00:42:22,400 --> 00:42:25,480
Speaker 1: would have on longer expectators, and data doesn't really support it.

762
00:42:25,520 --> 00:42:27,719
Speaker 1: So we've done lots of empirical evidence on this, and

763
00:42:27,760 --> 00:42:30,160
Speaker 1: so the logic why why the data is then so

764
00:42:30,640 --> 00:42:34,080
Speaker 1: maybe disappointing is I think that that people somehow confused.

765
00:42:34,360 --> 00:42:38,440
Speaker 1: They think that UM that the I liquidity is the

766
00:42:38,560 --> 00:42:41,719
Speaker 1: only important feature. So so yes, I think it is

767
00:42:41,760 --> 00:42:45,080
Speaker 1: fair to require liquidity premium for locking your money for

768
00:42:45,200 --> 00:42:49,279
Speaker 1: ten years. But then there's this other characteristics lack characteristic,

769
00:42:49,640 --> 00:42:53,440
Speaker 1: lack of market market, the smoothing service service as I

770
00:42:53,480 --> 00:42:57,520
Speaker 1: call it, and that may totally offset the amount of

771
00:42:58,400 --> 00:43:00,640
Speaker 1: access return that you get. So if there's a two

772
00:43:00,719 --> 00:43:04,640
Speaker 1: or three percent require liquidity premium for for looking money UM,

773
00:43:04,680 --> 00:43:07,320
Speaker 1: we might accept the same return for public and private

774
00:43:07,360 --> 00:43:11,680
Speaker 1: equities UM because with the private equities you don't get

775
00:43:11,680 --> 00:43:14,359
Speaker 1: the great que actility that you see. Now. You also

776
00:43:14,440 --> 00:43:18,000
Speaker 1: show a chart in the book that that shows how

777
00:43:18,080 --> 00:43:23,040
Speaker 1: the bottom third of um I liquid markets have you know,

778
00:43:23,120 --> 00:43:27,720
Speaker 1: by definition, they're underperforming the top third, but that gap

779
00:43:27,960 --> 00:43:31,360
Speaker 1: has just been widening and it seems like, in addition

780
00:43:31,400 --> 00:43:35,359
Speaker 1: to whatever I liquidly premium are in private markets, there

781
00:43:35,360 --> 00:43:38,040
Speaker 1: also seems to be a pre substantial I don't know

782
00:43:38,120 --> 00:43:41,319
Speaker 1: if I want to call this quality factor, but the

783
00:43:41,400 --> 00:43:47,640
Speaker 1: best of the liquid investments seem to really dramatically outperform

784
00:43:48,080 --> 00:43:51,080
Speaker 1: the bottom. That spread is much bigger than we might

785
00:43:51,120 --> 00:43:56,520
Speaker 1: have anticipated otherwise. So so, apart from thinking about illiquids overall,

786
00:43:57,040 --> 00:43:59,960
Speaker 1: one of these great selling points there is is why

787
00:44:00,120 --> 00:44:03,960
Speaker 1: this person between our performers and under performers. And to me,

788
00:44:04,080 --> 00:44:08,520
Speaker 1: that's such a lovely example of investor over confidence that

789
00:44:08,600 --> 00:44:11,200
Speaker 1: when people see this this person, they think, oh, the

790
00:44:11,280 --> 00:44:13,720
Speaker 1: upside is for me, the downside is for someone else.

791
00:44:14,120 --> 00:44:17,120
Speaker 1: And so so clearly this opportunity involves some risk as well,

792
00:44:17,200 --> 00:44:19,399
Speaker 1: and and and it is. It's it's just somehow that

793
00:44:19,400 --> 00:44:22,799
Speaker 1: that industry doesn't seem to have anybody getting that that downside.

794
00:44:22,960 --> 00:44:26,960
Speaker 1: So sorry, I I do think that some investors have

795
00:44:27,080 --> 00:44:29,520
Speaker 1: got a decent claim to expect to get those top

796
00:44:29,560 --> 00:44:33,680
Speaker 1: quarter alright, let's say, top half half managers. But but

797
00:44:33,800 --> 00:44:37,680
Speaker 1: for others, I think it's it's somehow it's better to

798
00:44:37,760 --> 00:44:40,000
Speaker 1: just think that, okay, if we get the industry level

799
00:44:40,120 --> 00:44:43,920
Speaker 1: returns that's that's reasonable. So Will Rogers used to always

800
00:44:43,920 --> 00:44:46,400
Speaker 1: advise people only by staffs that go up. If they

801
00:44:46,440 --> 00:44:48,759
Speaker 1: don't go up, don't buy them. Does the same thing

802
00:44:48,800 --> 00:44:52,440
Speaker 1: apply to private markets? Only invest in private markets that

803
00:44:52,480 --> 00:44:55,960
Speaker 1: I'll perform. If they don't now perform, stay away from Yeah,

804
00:44:56,040 --> 00:44:59,000
Speaker 1: it's only example. Hindsight is great, but but it is

805
00:44:59,160 --> 00:45:03,200
Speaker 1: so I would say just positively there. Historically, in particularly

806
00:45:03,200 --> 00:45:05,560
Speaker 1: if we look at private equity, it has a great

807
00:45:05,640 --> 00:45:09,080
Speaker 1: thirty thirty five year history of outperforming smp I five

808
00:45:09,080 --> 00:45:12,239
Speaker 1: foundered by by three percent or something like that. And

809
00:45:12,280 --> 00:45:15,120
Speaker 1: that's after five six percent fees. That gross alpha is

810
00:45:15,200 --> 00:45:19,080
Speaker 1: just mind boggling in some sense. But but looking ahead, um,

811
00:45:19,160 --> 00:45:23,359
Speaker 1: we should be much more com cautious because the gap

812
00:45:23,400 --> 00:45:25,960
Speaker 1: has already been much narrower the last fifteen years, and

813
00:45:26,000 --> 00:45:28,520
Speaker 1: it seems to be narrower because the money was flowing

814
00:45:28,560 --> 00:45:31,480
Speaker 1: in because of the popularization of the Yale model. Since then,

815
00:45:31,560 --> 00:45:35,240
Speaker 1: the forward looking opportunity has been much narrower, and realized

816
00:45:35,280 --> 00:45:38,480
Speaker 1: opportunity has been much more, much more modest, and the

817
00:45:38,600 --> 00:45:41,719
Speaker 1: fees are the good old fees. So I think next

818
00:45:41,719 --> 00:45:44,919
Speaker 1: decade will be more disappointed. And when we look back

819
00:45:44,920 --> 00:45:48,160
Speaker 1: to the early days of that our performance there were

820
00:45:48,200 --> 00:45:51,640
Speaker 1: a tiny fraction of the number of funds. Then what

821
00:45:51,800 --> 00:45:54,560
Speaker 1: is it like ten thousand private equity funds there used

822
00:45:54,560 --> 00:45:58,200
Speaker 1: to be there, used to be numbered in hundreds, not thousands. Yeah. Yeah,

823
00:45:58,800 --> 00:46:01,440
Speaker 1: the same as as the HENE fund and the venture

824
00:46:01,480 --> 00:46:04,680
Speaker 1: capital worlds. Success has attracted a lot of capital, which

825
00:46:04,760 --> 00:46:07,960
Speaker 1: leads to other performance. Yeah. And one further thing is

826
00:46:07,960 --> 00:46:11,799
Speaker 1: that these questions were already relevant a few years ago. Um,

827
00:46:12,040 --> 00:46:14,760
Speaker 1: but private equity did very well the last few years.

828
00:46:14,840 --> 00:46:17,919
Speaker 1: And uh, and I saw Dan Rasmussen wrote quite nicely,

829
00:46:18,000 --> 00:46:20,400
Speaker 1: so recognized. I mean, that's that's rare and probably when

830
00:46:20,440 --> 00:46:23,520
Speaker 1: somebody does it sort of um post mortem on my mistake.

831
00:46:23,600 --> 00:46:25,520
Speaker 1: That's what he did there, And he said he got

832
00:46:25,520 --> 00:46:30,520
Speaker 1: it sort of wrong because, um, because they private equity,

833
00:46:30,719 --> 00:46:33,719
Speaker 1: like hedge funds and especially venture capital, we're pushing a

834
00:46:33,719 --> 00:46:36,600
Speaker 1: lot into the growth sector. And that worked very well

835
00:46:36,640 --> 00:46:39,280
Speaker 1: for a few years. And I think to the extent

836
00:46:39,320 --> 00:46:42,000
Speaker 1: that we write about the value versus growth, that benefit

837
00:46:42,040 --> 00:46:44,960
Speaker 1: will turn into disadvantage I think in the coming years.

838
00:46:44,960 --> 00:46:48,440
Speaker 1: And so it's really interesting. We haven't talked about a

839
00:46:48,480 --> 00:46:54,040
Speaker 1: couple of other um alternatives, credit spreads, commodities, what else

840
00:46:54,080 --> 00:46:56,960
Speaker 1: are you thinking about in the old space. Yeah, I

841
00:46:56,960 --> 00:46:59,799
Speaker 1: think commodities is the most most interesting case, and so

842
00:47:00,080 --> 00:47:02,520
Speaker 1: I bet a double positive story on that one. The

843
00:47:02,560 --> 00:47:04,839
Speaker 1: first one is the obvious one that when we look

844
00:47:04,880 --> 00:47:08,120
Speaker 1: for inflation hedging investments, they are pretty much the best.

845
00:47:08,160 --> 00:47:11,880
Speaker 1: There is also most portfolios that invest most constituents of

846
00:47:12,080 --> 00:47:15,239
Speaker 1: anybody's portfolio stock spons and so on day, they have

847
00:47:15,320 --> 00:47:18,000
Speaker 1: got this inflationary deals that was helpful for a long time,

848
00:47:18,040 --> 00:47:19,840
Speaker 1: but not recently. And so if you want to have

849
00:47:19,920 --> 00:47:22,560
Speaker 1: a pretty neutral portfolio, you should have some some allocation

850
00:47:22,560 --> 00:47:25,880
Speaker 1: to commodities. Then the second point is that many investors

851
00:47:25,920 --> 00:47:27,959
Speaker 1: things that you don't earn a positive long run reward

852
00:47:28,000 --> 00:47:31,319
Speaker 1: and commodities, but the data says otherwise. Basically, really yeah,

853
00:47:31,520 --> 00:47:35,640
Speaker 1: diversified combination of commodity futures has earned something like three

854
00:47:35,719 --> 00:47:38,160
Speaker 1: four percent long run reward. And that's it's it's a

855
00:47:38,200 --> 00:47:42,359
Speaker 1: weird thing, and I focused on it in the commodities

856
00:47:42,520 --> 00:47:45,920
Speaker 1: sector telling that it's part of it is related to

857
00:47:46,000 --> 00:47:49,440
Speaker 1: commodity role maybe, but but important part is related to

858
00:47:49,960 --> 00:47:53,319
Speaker 1: diversification returns. Basically, this is getting very big. But let

859
00:47:53,320 --> 00:47:56,600
Speaker 1: me just try commodities on a single single commodity basis

860
00:47:56,640 --> 00:48:00,239
Speaker 1: have got thirty percent molatility, which means that that that

861
00:48:00,320 --> 00:48:05,200
Speaker 1: type of volatility hurts compound returns a lot. And and

862
00:48:05,239 --> 00:48:10,400
Speaker 1: when you combine lowly correlated commodities together, you can reduce

863
00:48:10,440 --> 00:48:13,719
Speaker 1: that volatility roughly half it, half it, and you can

864
00:48:13,800 --> 00:48:17,319
Speaker 1: get this volatility drag much smaller, and so forth. If if,

865
00:48:17,440 --> 00:48:20,440
Speaker 1: as the evidence suggests that a single commodity has pretty

866
00:48:20,520 --> 00:48:23,680
Speaker 1: much not outperformed cash in the long run, portfolio of

867
00:48:23,760 --> 00:48:27,440
Speaker 1: them has done it because of this saving on this

868
00:48:27,840 --> 00:48:31,400
Speaker 1: volatility drag thanks to diversification. So it's a basket of

869
00:48:31,680 --> 00:48:35,280
Speaker 1: energy and industrial metals and precious metals and food stuff

870
00:48:35,400 --> 00:48:38,680
Speaker 1: and lots of yes and lots of single ones of them,

871
00:48:38,680 --> 00:48:41,600
Speaker 1: and so again you get you commodities. You know, these

872
00:48:41,640 --> 00:48:44,760
Speaker 1: types of effects happen in any investment on your equities,

873
00:48:44,760 --> 00:48:46,560
Speaker 1: on your bonds and so on. It just doesn't matter

874
00:48:46,600 --> 00:48:49,920
Speaker 1: so much with them because the correlations tend to be higher,

875
00:48:50,040 --> 00:48:53,440
Speaker 1: or volatilities lower. Commodities have got this glorious combination of

876
00:48:54,000 --> 00:48:58,560
Speaker 1: high high volatility and local relation that makes this really

877
00:48:58,600 --> 00:49:04,799
Speaker 1: matter very very interesting. Let's talk about E. S g um.

878
00:49:05,040 --> 00:49:08,160
Speaker 1: There have been some estimates that it's now over twenty

879
00:49:08,200 --> 00:49:11,520
Speaker 1: trillion dollars. You talk a little bit about UM E

880
00:49:11,719 --> 00:49:15,839
Speaker 1: S G investing, tell us about your thoughts. Yeah, so

881
00:49:16,040 --> 00:49:20,920
Speaker 1: it is clearly growing force and and I would argue

882
00:49:20,920 --> 00:49:26,800
Speaker 1: also largely a force for good. But expected return impact

883
00:49:27,200 --> 00:49:30,160
Speaker 1: is debatable. And so Cliff Roath already a blog a

884
00:49:30,160 --> 00:49:33,480
Speaker 1: few years ago highlighting this simple logic that well, one

885
00:49:33,520 --> 00:49:35,680
Speaker 1: logic is that constraints always should have a cost. But

886
00:49:35,680 --> 00:49:38,080
Speaker 1: another logic is it, if you want to be virtuous

887
00:49:38,120 --> 00:49:42,360
Speaker 1: and you want to raise the discount rates for sinful companies,

888
00:49:42,840 --> 00:49:45,839
Speaker 1: well you do that by maybe investing let's less in them,

889
00:49:45,920 --> 00:49:47,920
Speaker 1: or even in some cases you could you could short them,

890
00:49:47,920 --> 00:49:50,839
Speaker 1: and so um, if you do that and you raise

891
00:49:50,920 --> 00:49:53,880
Speaker 1: their discount rate, you also raised that discount rate. This

892
00:49:54,360 --> 00:49:57,160
Speaker 1: flip side of expected return makes the more charted. Yeah,

893
00:49:57,280 --> 00:49:59,920
Speaker 1: so somebody else who is willing to basically buy the

894
00:50:00,000 --> 00:50:03,040
Speaker 1: sinful companies, then we'll earn higher return. So that is

895
00:50:03,040 --> 00:50:06,280
Speaker 1: pretty much the long run story that should happen. UM

896
00:50:06,320 --> 00:50:09,960
Speaker 1: when when investors really like something for non monetary reasons,

897
00:50:10,000 --> 00:50:13,359
Speaker 1: and that includes E S G, then the I think

898
00:50:13,360 --> 00:50:16,880
Speaker 1: the reasonable counter argument is that we may be in

899
00:50:16,960 --> 00:50:20,520
Speaker 1: a transition phase here where where we are getting the repricing.

900
00:50:20,600 --> 00:50:22,520
Speaker 1: How do we get to those higher these countries. Well,

901
00:50:22,520 --> 00:50:25,160
Speaker 1: we get it basically by making those those companies cheaper.

902
00:50:25,400 --> 00:50:27,080
Speaker 1: And then we can debate now whether we are in

903
00:50:27,120 --> 00:50:30,200
Speaker 1: early innings or late innings on on that that question.

904
00:50:30,280 --> 00:50:33,319
Speaker 1: So so so in the long run, I think there

905
00:50:33,320 --> 00:50:35,960
Speaker 1: will be some cost, and I think most investors who

906
00:50:36,000 --> 00:50:39,120
Speaker 1: are sc on oriented should be willing to take some

907
00:50:39,320 --> 00:50:43,279
Speaker 1: cost as a flip side of their virtuous investing. But

908
00:50:43,800 --> 00:50:46,400
Speaker 1: but in between they might get sort of the win

909
00:50:46,520 --> 00:50:49,840
Speaker 1: win outcome that day. So now you weren't getting the

910
00:50:49,880 --> 00:50:52,440
Speaker 1: win when outcome in the past six months, especially if

911
00:50:52,480 --> 00:50:56,279
Speaker 1: you were low carb and low oil any of the

912
00:50:56,400 --> 00:50:59,520
Speaker 1: energy stacks have just on spectacle in the past year.

913
00:51:00,640 --> 00:51:03,839
Speaker 1: Is that going to be the long run trade off?

914
00:51:04,000 --> 00:51:06,720
Speaker 1: Is that if you're staying away from some of these,

915
00:51:07,520 --> 00:51:10,680
Speaker 1: you take a chance that there's a big move up

916
00:51:10,760 --> 00:51:14,319
Speaker 1: in a sector that you've reduced your exposure to. Yeah,

917
00:51:14,480 --> 00:51:17,360
Speaker 1: I that that that possibility always exists, and now we

918
00:51:17,719 --> 00:51:19,919
Speaker 1: now that we had it, I think it is gonna

919
00:51:20,400 --> 00:51:24,840
Speaker 1: raise more discussions in some organizations than um how to

920
00:51:24,880 --> 00:51:27,520
Speaker 1: deal with any financial trade of friends. I must say

921
00:51:27,520 --> 00:51:32,279
Speaker 1: that in Europe, I think that investors will largely um

922
00:51:32,520 --> 00:51:34,759
Speaker 1: stay with their E s G beliefs, and there's not

923
00:51:34,800 --> 00:51:37,200
Speaker 1: going to be a question if they if they think

924
00:51:37,200 --> 00:51:40,200
Speaker 1: they there's there's some financial of course that's okay. In

925
00:51:40,440 --> 00:51:42,520
Speaker 1: US there's more doubts, and it has become such a

926
00:51:42,560 --> 00:51:45,360
Speaker 1: political issue that it's going to be I think harder.

927
00:51:45,800 --> 00:51:48,719
Speaker 1: Just I I everything or anything I can say on

928
00:51:48,760 --> 00:51:51,080
Speaker 1: this one, I think is that is that there was

929
00:51:51,120 --> 00:51:54,520
Speaker 1: a sort of easy travel towards more E s C

930
00:51:54,719 --> 00:51:56,560
Speaker 1: for the last few years, and now I think we

931
00:51:56,600 --> 00:51:58,560
Speaker 1: are we are in a in a world where it's

932
00:51:58,560 --> 00:52:00,439
Speaker 1: going to be harder. I think the trade the still

933
00:52:00,480 --> 00:52:03,400
Speaker 1: the same, but it's going to be more jagged going ahead,

934
00:52:03,440 --> 00:52:06,320
Speaker 1: and maybe especially so in the US. And and before

935
00:52:06,360 --> 00:52:08,839
Speaker 1: I get to my favorite questions, I gotta throw a

936
00:52:08,840 --> 00:52:12,160
Speaker 1: curveball at you, Cliff, ask this mentioned you like to

937
00:52:12,200 --> 00:52:14,839
Speaker 1: go in a hundred and twenty degree sauna and then

938
00:52:15,640 --> 00:52:18,880
Speaker 1: jump out and roll around in the snow. Is this

939
00:52:18,960 --> 00:52:22,440
Speaker 1: a Finland finish sort of thing? Tell us tell us

940
00:52:22,480 --> 00:52:26,120
Speaker 1: about your heat and cold habits. That is, that is

941
00:52:26,160 --> 00:52:29,239
Speaker 1: exactly what we do for cheap fun. And sadly there

942
00:52:29,239 --> 00:52:32,080
Speaker 1: are a few opportunities with the global warming. But but yeah,

943
00:52:32,560 --> 00:52:35,440
Speaker 1: so so how hot does the sauna get I was

944
00:52:35,480 --> 00:52:38,719
Speaker 1: thinking whether you're talking fire in you know, we are

945
00:52:38,760 --> 00:52:45,719
Speaker 1: talking with centigrade. Now we do go go closet degrees. No, no,

946
00:52:45,800 --> 00:52:50,759
Speaker 1: we go to degrees centigrade. Yeah. Yeah, so that's like

947
00:52:50,800 --> 00:52:55,680
Speaker 1: a hundred sixty eight. You'll do the translation there. I

948
00:52:56,520 --> 00:52:59,160
Speaker 1: think of you know, the I do my father and

949
00:52:59,239 --> 00:53:03,080
Speaker 1: height and closing that. But still eighty degrees is very

950
00:53:03,280 --> 00:53:06,560
Speaker 1: you're just that's very warm. It's it's it's nice, nice

951
00:53:06,560 --> 00:53:08,800
Speaker 1: to sweat that. And then when you jump into the snow,

952
00:53:09,080 --> 00:53:10,719
Speaker 1: it's not a little bit of a shock to the

953
00:53:10,760 --> 00:53:14,319
Speaker 1: system or or you go to um, you know, call out,

954
00:53:14,800 --> 00:53:16,560
Speaker 1: you go into I see what that shows. That's that's

955
00:53:16,600 --> 00:53:19,200
Speaker 1: even better. But that's that's that's hard. But yeah, no,

956
00:53:19,320 --> 00:53:22,400
Speaker 1: it's it's uh, it's great fun when you can really

957
00:53:22,440 --> 00:53:25,600
Speaker 1: do that. Quite interesting. All right, So let's jump to

958
00:53:25,640 --> 00:53:28,360
Speaker 1: our favorite questions that we ask all of our guests,

959
00:53:28,880 --> 00:53:32,000
Speaker 1: starting with what have you been streaming these days? Tell

960
00:53:32,120 --> 00:53:35,920
Speaker 1: us about your favorite whatever kept you entertained during the

961
00:53:35,960 --> 00:53:39,600
Speaker 1: pandemic or whatever podcast you listened to. Sure, sure, yeah,

962
00:53:39,600 --> 00:53:42,560
Speaker 1: I thought about these in recent months when I have

963
00:53:42,680 --> 00:53:44,440
Speaker 1: heard you ask these questions. And by the way, I've

964
00:53:44,440 --> 00:53:47,560
Speaker 1: gotten some good tips I got, I got the Leboro

965
00:53:47,800 --> 00:53:50,640
Speaker 1: and called my agent the friends once and some Israeli

966
00:53:50,640 --> 00:53:55,239
Speaker 1: shows in from here. So yeah, that's why I ask it,

967
00:53:55,280 --> 00:53:58,040
Speaker 1: because you know, I get to speak to people who

968
00:53:58,080 --> 00:54:01,080
Speaker 1: have interesting sensibilit it is, I want to hear what

969
00:54:01,160 --> 00:54:03,920
Speaker 1: they're seeing and here. Yeah, well so so as the

970
00:54:04,000 --> 00:54:07,719
Speaker 1: first non obvious or non interesting answer, I think, like recently,

971
00:54:07,760 --> 00:54:10,200
Speaker 1: I think we better call soul looking forward to the

972
00:54:10,360 --> 00:54:14,640
Speaker 1: to the last few episodes. But so that's that's been great,

973
00:54:14,640 --> 00:54:17,839
Speaker 1: but I thought that I'd rather highlight than some less

974
00:54:17,880 --> 00:54:20,080
Speaker 1: well known older theories. So my favorites I think in

975
00:54:20,080 --> 00:54:22,960
Speaker 1: the last ten years where sort of slow burn, um,

976
00:54:23,239 --> 00:54:26,520
Speaker 1: the Americans the Russian Spies that that that one or

977
00:54:26,800 --> 00:54:30,359
Speaker 1: or rectify it was a story from southern US, and

978
00:54:30,360 --> 00:54:34,359
Speaker 1: and just just I think I think lovely stories got

979
00:54:34,400 --> 00:54:39,000
Speaker 1: to take time for those. And likewise theny podcasts, um,

980
00:54:39,040 --> 00:54:42,000
Speaker 1: I listen a lot to history and so beyond beyond investing,

981
00:54:42,000 --> 00:54:44,879
Speaker 1: and I'll just leave well on near investing, I would

982
00:54:44,880 --> 00:54:50,399
Speaker 1: say Tim Harford's um Cautionary Tales is fun, and and

983
00:54:51,320 --> 00:54:55,120
Speaker 1: Zingalis and Bethany McLean Capitalism task got very thoughtful topics.

984
00:54:55,120 --> 00:54:56,920
Speaker 1: So I think they are, they are good at but

985
00:54:57,160 --> 00:54:59,480
Speaker 1: I love in his history area. I love Dan Carlin,

986
00:54:59,680 --> 00:55:03,319
Speaker 1: Mike Duncan, Patrick Wiman and this British show called The

987
00:55:03,320 --> 00:55:06,000
Speaker 1: Rest is History, which just always makes me laugh. So

988
00:55:06,000 --> 00:55:11,919
Speaker 1: so that's a good that's good. That's a very interesting list. Um,

989
00:55:12,000 --> 00:55:14,520
Speaker 1: let's talk about some of the mentors who helped to

990
00:55:14,600 --> 00:55:18,840
Speaker 1: shape your career. Sure, so obviously I told the dissertation chairman,

991
00:55:18,840 --> 00:55:22,919
Speaker 1: Farmer and French. So they've been very influential in many ways.

992
00:55:22,960 --> 00:55:25,279
Speaker 1: But but I would especially then highlight Marty lebe of

993
00:55:25,360 --> 00:55:29,160
Speaker 1: it so before, during, and after Salomony yea so and

994
00:55:29,239 --> 00:55:31,839
Speaker 1: he's he's such a such a mention that it's it is,

995
00:55:32,160 --> 00:55:35,400
Speaker 1: it's wonderful to have known him for the case. Uh

996
00:55:35,640 --> 00:55:37,719
Speaker 1: what about books? What are some of your favorites and

997
00:55:37,760 --> 00:55:40,319
Speaker 1: what are you reading right now? Yeah? So I am

998
00:55:40,360 --> 00:55:45,080
Speaker 1: a voracious reader, lots of investing fiction, non fictional, all

999
00:55:45,200 --> 00:55:50,960
Speaker 1: kinds of things. Um, I thought I will highlight from fiction.

1000
00:55:51,680 --> 00:55:56,640
Speaker 1: Um really big one, Hillary Mantell's trilogy on Thomas Cromwell

1001
00:55:56,960 --> 00:55:59,640
Speaker 1: Wolf Wolf Hall. I was thinking, I think maybe I

1002
00:55:59,680 --> 00:56:01,840
Speaker 1: heard in or You're so also the three Body problem

1003
00:56:01,960 --> 00:56:03,960
Speaker 1: very different to sci fi, the Chinese one so I

1004
00:56:03,960 --> 00:56:07,960
Speaker 1: guess that was great, and then on on on nonfiction. Um,

1005
00:56:08,880 --> 00:56:10,560
Speaker 1: I think the most impressive book I read in the

1006
00:56:10,600 --> 00:56:13,920
Speaker 1: last couple of years was Joe Henrich is the Weirdest

1007
00:56:14,040 --> 00:56:17,840
Speaker 1: People in the World. So this is this is weird?

1008
00:56:18,120 --> 00:56:24,399
Speaker 1: Is uh? Western educated? Uh, it's rich, democratic, and it's

1009
00:56:24,440 --> 00:56:28,480
Speaker 1: basically telling telling how different the people who are most

1010
00:56:28,560 --> 00:56:32,280
Speaker 1: often studied in various psychological studies, the Western University students,

1011
00:56:32,280 --> 00:56:34,879
Speaker 1: how different they are from most cultures. And then it's

1012
00:56:34,880 --> 00:56:37,719
Speaker 1: explaining why things went that way, and it's it's it's

1013
00:56:37,760 --> 00:56:39,799
Speaker 1: both parts of the story are very interesting. But but

1014
00:56:39,840 --> 00:56:43,520
Speaker 1: again a very long book, really really intriguing. Yeah, and currently, um,

1015
00:56:44,000 --> 00:56:45,959
Speaker 1: Zach Carter, I think, is your author of the book

1016
00:56:45,960 --> 00:56:51,160
Speaker 1: on Cain's Price Price Price of Peace. Good. That's a

1017
00:56:51,200 --> 00:56:53,439
Speaker 1: good that's pretty good. Lust what sort of advice would

1018
00:56:53,480 --> 00:56:56,600
Speaker 1: you give to a recent college graduate who is interested

1019
00:56:56,680 --> 00:57:02,480
Speaker 1: in a career in either investing finance value quantitative investing.

1020
00:57:03,200 --> 00:57:05,799
Speaker 1: How would you advise them? I'll go with the old

1021
00:57:05,800 --> 00:57:11,120
Speaker 1: fashioned I think, don't sacrifice your ethics. That integrity matters.

1022
00:57:11,640 --> 00:57:15,040
Speaker 1: M hmm. But that's really good advice. And and our

1023
00:57:15,080 --> 00:57:17,680
Speaker 1: final question, what do you know about the world of

1024
00:57:17,720 --> 00:57:21,320
Speaker 1: investing today that you wish you knew thirty years so

1025
00:57:21,520 --> 00:57:24,840
Speaker 1: years ago when you were first getting started. I thought,

1026
00:57:24,880 --> 00:57:28,640
Speaker 1: I'll say this lightly, that bond deals can go negative.

1027
00:57:28,840 --> 00:57:30,600
Speaker 1: You know, I didn't expect that to happen. But the

1028
00:57:30,600 --> 00:57:33,560
Speaker 1: funny thing is that I thought that, really I would

1029
00:57:33,600 --> 00:57:37,120
Speaker 1: have then expected that to coincide with barish equity markets,

1030
00:57:37,160 --> 00:57:40,080
Speaker 1: but into any tenls, it actually happened with with with

1031
00:57:40,120 --> 00:57:44,200
Speaker 1: a big bullmarket. So it wasn't that that equities um

1032
00:57:45,040 --> 00:57:50,280
Speaker 1: pushed equity weakness pushed bond deals down, but it was

1033
00:57:50,320 --> 00:57:53,240
Speaker 1: that low bond deals pushed equities up. So courseality went

1034
00:57:53,480 --> 00:57:56,520
Speaker 1: that way, and and that's surprising. So I think that's

1035
00:57:56,600 --> 00:58:00,320
Speaker 1: that's that's one. And then another serious, serious point is

1036
00:58:00,320 --> 00:58:04,160
Speaker 1: is how important and how hard patience is. So so

1037
00:58:04,280 --> 00:58:07,040
Speaker 1: with all of these ideas I talk about these longer strategies,

1038
00:58:07,080 --> 00:58:10,640
Speaker 1: and you just it doesn't matter too much if you

1039
00:58:10,680 --> 00:58:13,080
Speaker 1: don't have the stickiness. So I think one has to

1040
00:58:13,120 --> 00:58:16,760
Speaker 1: really calibrate one's investment to the amount of patients one

1041
00:58:16,840 --> 00:58:20,680
Speaker 1: one can reasonably expect to have. Huh, really really intriguing.

1042
00:58:21,360 --> 00:58:24,919
Speaker 1: We have been speaking with Auntie il Nannen, co head

1043
00:58:25,040 --> 00:58:28,600
Speaker 1: of Portfolio Solutions at a qu are. If you enjoy

1044
00:58:28,680 --> 00:58:32,320
Speaker 1: this conversation, well, check out any of our previous four

1045
00:58:32,400 --> 00:58:36,480
Speaker 1: hundred or so podcasts. You can find those at iTunes, Spotify,

1046
00:58:36,720 --> 00:58:40,480
Speaker 1: wherever you get your favorite podcasts. We love your comments,

1047
00:58:40,520 --> 00:58:44,960
Speaker 1: feedback and suggestions right to us at m IB podcast

1048
00:58:45,000 --> 00:58:48,200
Speaker 1: at Bloomberg dot net. You can sign up for my

1049
00:58:48,320 --> 00:58:51,640
Speaker 1: daily reading list at Rid Halts dot com. Follow me

1050
00:58:51,680 --> 00:58:54,960
Speaker 1: on Twitter at Rid Halts. I would be remiss if

1051
00:58:54,960 --> 00:58:56,960
Speaker 1: I did not thank the crack team that helps put

1052
00:58:56,960 --> 00:59:02,800
Speaker 1: these conversations together each week. Justin Milliner is my audio engineer.

1053
00:59:02,880 --> 00:59:06,640
Speaker 1: Atico val Bron is my project manager. Sean Russo is

1054
00:59:06,680 --> 00:59:11,160
Speaker 1: my head of research. Paris Ward is my producer. I'm

1055
00:59:11,200 --> 00:59:15,240
Speaker 1: Barry Ritolts. You've been listening to Masters in Business on

1056
00:59:15,400 --> 00:59:16,400
Speaker 1: Bloomberg Radio