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Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene

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Speaker 1: Jay Ley. We bring you insight from the best in economics, finance, investment,

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Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,

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Speaker 1: Bloomberg dot Com, and of course, on the Bloomberg yea

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Speaker 1: in global markets are raising a loss of as much

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Speaker 1: as two percent on the S and P five hundred

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Speaker 1: for only the fifth time since this bullmark is started

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Speaker 1: back in two thousand and nine. Wangan Steve Widing City

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Speaker 1: Private Bank chief investment strategist, Good mornitor Steve, your thoughts

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Speaker 1: on the swings through this week? Wow, So, look, I

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Speaker 1: think this is the residual effect of the trade war

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Speaker 1: heating up the counter measures and the currency markets. Uh,

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Speaker 1: the fact that markets who had fixated on a seven

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Speaker 1: read being some magical number for the Chinese currency for examples,

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Speaker 1: trying to get used to it, and just looking back

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Speaker 1: to other market events where we've had turmoil and currency

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Speaker 1: markets spill over to other asset classes. So there may

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Speaker 1: not be a lot of news at the moment on this,

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Speaker 1: and markets have calmed down a bit, but we're still

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Speaker 1: sort of in the aftermath of that big surgeon volatility

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Speaker 1: and perhaps not as fixated with the Chinese currency fix

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Speaker 1: night by night by night, I mean last night, everyone's

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Speaker 1: standing by waiting for something. We've got a seven handle

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Speaker 1: on the fix for the first time since two thousd

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Speaker 1: and night. Maybe that was the headline for about five minutes,

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Speaker 1: but ready the story. It's tracking the spot right quite tightly.

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Speaker 1: It is stronger than pretty much every single analyst that

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Speaker 1: we serve a here at Bloomberg. And I think the

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Speaker 1: signal coming from the Chinese at the moment is that

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Speaker 1: we want to stable currency. And let's be clear here

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Speaker 1: that's very much a selfish motive. That is what the

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Speaker 1: Chinese want. Well, that's absolutely right. This is not a

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Speaker 1: situation of China sort of seeing we will no longer

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Speaker 1: control our currency. We will completely subject this to market forces,

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Speaker 1: come what may. Uh, And if the trade war takes

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Speaker 1: us to a remarkable outflow of savings from from China,

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Speaker 1: that's not where they're going to go on this. That's

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Speaker 1: not the immediate outlook. But I do think that you

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Speaker 1: do have some depreciation pressures, and China has signaled in

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Speaker 1: fact that its currency will adjust as one of the

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Speaker 1: ways in which if you want to call a retaliation

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Speaker 1: or adjustment, you know, for this particular pressure on on

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Speaker 1: on the Tarer front. You know it's Thursday, John, and

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Speaker 1: you know I was off on Monday, was my first

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Speaker 1: vacation day of the year. And um, you know you

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Speaker 1: were here holding the fort down on Monday and you

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Speaker 1: got to Jamaica this year. I did. Actually, it's good.

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Speaker 1: It's been a company vacations. It's no, it's all gonna ja.

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Speaker 1: Queen's Yeah, long Island. Um. After seeing the mets Um lose.

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Speaker 1: Now they're all winning. Um. But John, what's so important here? Monday, Tuesday, Wednesday, Thursday.

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Speaker 1: The note of the morning for me is Greg Valier,

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Speaker 1: a g F who says, look, everybody, including in Steve

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Speaker 1: Whiting's world, is waiting to see what the White House

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Speaker 1: will do. And Greg's entire note is on is the

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Speaker 1: somebody quoted last night brilliantly the Navarro recession, the idea

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Speaker 1: of what we're doing on trade, Steve, how does city

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Speaker 1: group fold in everybody waiting to see what the president

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Speaker 1: does next into the sweat you face of what do

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Speaker 1: I do with my equity investment? This this is really important.

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Speaker 1: We were trying to say on the television earlier, for example,

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Speaker 1: that whatever the political pressure there may be on the FED,

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Speaker 1: Chairman Powell has said, we are the takers of trade policy,

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Speaker 1: and I doubt that they have any great insight at

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Speaker 1: the Federal Reserve. What's next? Will they do something because

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Speaker 1: they expect the trade situation to worsen or not? No,

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Speaker 1: they won't. They won't do anything. And the reality is

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Speaker 1: that we have to build an asset allocation around the

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Speaker 1: view that there are larger trade risks that we would

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Speaker 1: have had in previous years. That's why again we've taken

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Speaker 1: some evasive action and both fixed income in equities markets,

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Speaker 1: but we'll also have to fold when that is priced

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Speaker 1: into markets into that the opportunities when Johnet's classic Steve

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Speaker 1: Whiting the keyword takers, which is out of derivatives and swaps,

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Speaker 1: and that nobody has a choice here. The FED is

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Speaker 1: a taker of what we see from the White We

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Speaker 1: had a bit of pushback earlier this week, though, we

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Speaker 1: had that pushback from Bullet of St. Louis when he

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Speaker 1: said he did not want to get drawn in for

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Speaker 1: the tip fitat in trade. I didn't hear that from

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Speaker 1: Evans of Chicago, just yesterday. So there seems to be

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Speaker 1: a bit of a difference emerging on the fo m

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Speaker 1: C on how we should respond to the recent escalation.

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Speaker 1: It's early days. We still have Jackson Hall, we will

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Speaker 1: hear from a lot of FED speakers, Steve, But just

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Speaker 1: your base case right now as to how the fo

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Speaker 1: m C will respond or won't respond to the gyrations

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Speaker 1: in this trade dispute. I think Chairman Powell was pretty

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Speaker 1: clear on this aspect in the press conference, and that

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Speaker 1: might have disappointed markets. They're not going to just simply

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Speaker 1: ease unconditionally, preemptively creating all you know, first of all,

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Speaker 1: I don't think that the ability for the FED to

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Speaker 1: create an economic boom independently of all of this is

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Speaker 1: really there. But they're not going to say that we're

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Speaker 1: going to just load up with all sorts of ammunition

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Speaker 1: power up the economy so that we can absorb a

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Speaker 1: larger trade issue. No, it's not that um that they will.

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Speaker 1: In essence, though, if they place deflationary macro circumstances external shocks,

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Speaker 1: and they consider trade policy and external shock, they will

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Speaker 1: react to it. That's what Powell said. What is your

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Speaker 1: waiting or change in waiting of US domestic versus global

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Speaker 1: equity investment right now. Um, there's been some minor changes.

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Speaker 1: For example, for US, have you know, reduced a bit

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Speaker 1: of a First of all, we've been a little bit

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Speaker 1: cautious because of UH anticipated trade friction and that so

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Speaker 1: took us in June UM to expect things to be

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Speaker 1: a bit worse. Um, we thought, for example, that we

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Speaker 1: would have tariffs in place when these additional tariffs now

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Speaker 1: in place when Trump and She met, But now they've

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Speaker 1: come in a delayed fashion, So we were a little

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Speaker 1: bit early in terms of putting a bit of caution

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Speaker 1: in on that. What we did, though, I would say,

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Speaker 1: just giving all of that, is that take up small caps,

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Speaker 1: slightly reduce our underweight in U S domestic small caps.

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Speaker 1: But you know, this is a situation again like we

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Speaker 1: were talking about earlier on the television, where there's pervasive

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Speaker 1: effects across all financial markets. This is not a view

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Speaker 1: of a surgical strike here. If this was about very

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Speaker 1: very specific Chinese commercial policies on the trade front, we

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Speaker 1: might have seen a different market response around the world.

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Speaker 1: But the view that there is ultimately a trade war

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Speaker 1: with your up, there's UH issues with all sorts of

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Speaker 1: other trade patterns. There are other skummishes, new ones coming

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Speaker 1: exactly going to established some parameters to try and work

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Speaker 1: through and make some decisions a range of probabilities. I

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Speaker 1: would send a consensus for you right now. As the

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Speaker 1: wheat grows older, it is a twel risk that on

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Speaker 1: it lets the currency go. That is the tail risk.

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Speaker 1: The base case is that the trade risk don't diminish

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Speaker 1: for a lot of people. That's the consensus view. Is

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Speaker 1: that your view as well, statement that the parameters that

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Speaker 1: you operate in right now? I think that that's very close.

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Speaker 1: That we have to think about the base case. And

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Speaker 1: then again within your asset allocation, you must have, you know,

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Speaker 1: some room for things to not go as you plan.

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Speaker 1: So what are the securities? What are the asset classes

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Speaker 1: that you want to allocate capital to that retain the

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Speaker 1: risk mitigating characteristics that you need if things don't go

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Speaker 1: to plan? So very clearly US investment grade debt or

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Speaker 1: US dollar investment grade debt because you can allocate across

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Speaker 1: some higher and lower risk assets. Within that, you can

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Speaker 1: have some thirty year U S treasuries, but yes, you

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Speaker 1: can in fact also have uh some higher quality emerging

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Speaker 1: markets long term US dollar bonds, but at a lower weighting.

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Speaker 1: Um so. But the other side of this, which is interesting,

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Speaker 1: is that we've always said, well, you know, an asset

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Speaker 1: like gold or right has the problem that it doesn't

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Speaker 1: give you yield, and you be for going the income

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Speaker 1: uh for the if you own this asset. And yet

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Speaker 1: you take a look at Europe where you have negative

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Speaker 1: yield bonds uh, and you have to say, well, wait

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Speaker 1: a second, I can actually improve my my relative income

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Speaker 1: position with gold. This is really important. The opportunity cost

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Speaker 1: of owning gold has diminished massively through is that the

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Speaker 1: basic document. Well that's a basic argument. And and look,

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Speaker 1: you know this is a more volatile asset class. But

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Speaker 1: when you've had things like thirty year European negative yield

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Speaker 1: bonds have a sort of a ten percent price jump

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Speaker 1: in the month, you know you must have to consider

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Speaker 1: that again. You know, gold does not have that move.

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Speaker 1: And again that's one currency pair. This is not a

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Speaker 1: story necessary for US dollar investors. You know, the environment

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Speaker 1: for gold if the US currency were crashing, would be

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Speaker 1: much stronger, which is not the expectation. We're gonna let

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Speaker 1: you go Before we ask if bitcoins of gold proxy

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Speaker 1: people walking the door, John that we think are unexpected.

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Speaker 1: It would be good. He's got check here, he's got

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Speaker 1: his He's got his Goldman Sex deck House, which is

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Speaker 1: deck it's about a hundred and forty brought a hundred

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Speaker 1: and forty two pages. Abbey shows up with the back

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Speaker 1: of an envelope, you know, and some pen scratch on it.

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Speaker 1: I saw his name in the rundown. I didn't actually

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Speaker 1: think he'd turned up. But he's here, and I'm pleased

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Speaker 1: to say. David custom is with us. Goldman Sacks, chief

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Speaker 1: equity strategist. Good morning to David, and gentlemen, Let's talk

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Speaker 1: about earnings just quickly, shall we. A lot of people

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Speaker 1: said Q one worst is behind us, and then they

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Speaker 1: start to look at Q two and said maybe it isn't.

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Speaker 1: Then there were the fears of an earnings recession. Just

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Speaker 1: where are we frame that for us, David? Where are

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Speaker 1: we right now? The earnings realized and the earnings you

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Speaker 1: expect are still to come. So we have the earnings

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Speaker 1: for the second quarter, which are pretty much finished. Radar

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Speaker 1: About of the companies in the market have reported flat

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Speaker 1: or the year year on year second quarter last year.

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Speaker 1: For the second quarter this year, flat earnings, and that's

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Speaker 1: a little bit better than expected expectation going in to

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Speaker 1: the quarter results were were probably down one But if

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Speaker 1: you really focus on what's going forward, we're looking for

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Speaker 1: around three percent earnest growth for this year two thousand

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Speaker 1: and UH nineteen compared with two thousand, so about three

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Speaker 1: percent earnest growth this year. That will accelerate to around

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Speaker 1: six percent next year. You have been a COLN voice

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Speaker 1: for decades saying you have to participate in the markets.

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Speaker 1: Here's a way to do it with courage. What I

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Speaker 1: see on the screen and this is with great respects

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Speaker 1: for some of the catharsis Monday is SPX is down

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Speaker 1: all of four point one percent from the recent peak.

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Speaker 1: Have we forgotten David Cousten how to take losses? No?

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Speaker 1: I think we have to think about the concept that

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Speaker 1: valuation has been the principal driver of the market for

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Speaker 1: this year. So the earnings for the market of pretty

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Speaker 1: much coming in as expected and pers up and uh

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Speaker 1: and the multiple has gone from fourteen times to eighteen

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Speaker 1: times at the peak which you doesk reference, which is

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Speaker 1: less than a month ago at three thousand five, and

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Speaker 1: now we're down from that from those levels So here's

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Speaker 1: how you want to think about it. You want to

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Speaker 1: think about it in the sense that bond yields are

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Speaker 1: like one flip the reciprocal okay, flip, the reciprocal. The

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Speaker 1: earnings yield is six percent six percent right now, and

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Speaker 1: so that yield gap, that difference between the earnings yield

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Speaker 1: and the bond yield is one of the widest it's

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Speaker 1: been in years at northup does it close? What's the

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Speaker 1: partial differential? How you close bond yield and equity yield. So,

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Speaker 1: if we want to think about it, we're about four

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Speaker 1: hundred and twenty five basis points yield gap right now,

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Speaker 1: and the long term averages about two thirty. So that

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Speaker 1: well above that, we're closer to where we've been in

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Speaker 1: the peak of the financial crisis in terms of the

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Speaker 1: five hundred basis points kind of a yield gap. So

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Speaker 1: that's the number one issue to think about in the

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Speaker 1: sense of valuation of various asset classes, and bond yields

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Speaker 1: are so low. Clearly the issues on trade our front

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Speaker 1: and UH and center for for so many portfolio managers

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Speaker 1: inappropriately so, and so the way you want to think

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Speaker 1: about this is to own the services companies, companies that

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Speaker 1: are services providing as opposed to goods producing. So goods

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Speaker 1: producing your subject to tariffs, your subject to retaliatory tariffs.

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Speaker 1: You have higher input costs. You've got concerns about that.

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Speaker 1: As an investor, you own services based companies, they are

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Speaker 1: less sensitive to that. They have more stable gross margins,

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Speaker 1: higher higher margins. So we should know type the one

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Speaker 1: thing the Federals of A really worried about, and central

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Speaker 1: banks seemingly worldwide, including the CBS, that the weakness you

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Speaker 1: see in manufacturing the goods providing companies bleeds across the

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Speaker 1: services anyway, are you saying that's unlikely to happen all

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Speaker 1: the effects of it will be limited. Well, the effects,

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Speaker 1: I would argue, we'll be somewhat more limited principally because

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Speaker 1: of the U S economy and services and that is

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Speaker 1: driving its domestically facing and concern is certainly relevant to

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Speaker 1: think about what's happening with h with manufacturing in this country,

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Speaker 1: but the services real ways driving the economy. You've made

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Speaker 1: a little headlines in the last couple of weeks. You

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Speaker 1: came out with a year forecast, and I recall you

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Speaker 1: dropped your EPs forecast, but raised your price target, and

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Speaker 1: you believe that we could get some multiple expansion through

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Speaker 1: makes sense of that for the people who don't believe

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Speaker 1: in that story, that we could get some multiple expansion

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Speaker 1: from the P five hundred still through next year. So

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Speaker 1: we're to think about this is as I said, the

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Speaker 1: start of two thousand and nineteen, Margaret multiple was fourteen

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Speaker 1: times forward earnings, peaked at around eighteen times a month

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Speaker 1: ago around sixteen and a half sixteen point five times

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Speaker 1: forward earnings. And the Fed is likely to cut interest

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Speaker 1: rates at least twice two more times this year, once

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Speaker 1: in September, once in October, so the rates and bonds

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Speaker 1: are liking to go lower and uh in my view,

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Speaker 1: and then we look into next year, the idea of

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Speaker 1: multiple expanding to maybe uh sixteen and a half to

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Speaker 1: eighteen times, kind of going back to where we were before.

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Speaker 1: Let's get it up then on your call, inequities and

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Speaker 1: also Goldman Sex fixed income, Jan Lowe's at JP Morgan headlines,

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Speaker 1: yacolm Fells at Pimco headlines, Steve Major HSBC with a

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Speaker 1: shocking boon call of a negative point eight one percent,

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Speaker 1: what's the Goldman sex adjustment towards zero bound in the

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Speaker 1: United States. Do we get to a zero percent tenure? No,

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Speaker 1: The expectation is somewhere between around one seventy five at

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Speaker 1: the end of this year, one of one of three quarters,

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Speaker 1: perhaps a little bit lower if the Fed cuts rates

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Speaker 1: two more times and we're expecting but not significantly lower

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Speaker 1: than we are currently, what do you do? Expectation is

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Speaker 1: we're unlikely to have a recession and basically think about

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Speaker 1: unemployment rate below four percent, which is real wage growth

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Speaker 1: is happening for the first time in twenty years. Uh,

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Speaker 1: and that's not as consistent with a recession. And where

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Speaker 1: are the imbalances? I know, David custom your minimum account

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Speaker 1: is four hundred million dollars. Talk to one of our

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Speaker 1: listeners now with a smaller account. They're sweating, particularly after Monday.

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Speaker 1: Do you adjust a re kill four oh one k account? Here?

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Speaker 1: In equities? Is this an opportunistic moment? Is it a

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Speaker 1: moment to be in the markets with courage or do

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Speaker 1: you enjoy being in cash? No? The idea the answer

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Speaker 1: would be to still be in the equity market at

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Speaker 1: this at this juncture, given that the economy is likely

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Speaker 1: to continue to grow, it's growing in part because the

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Speaker 1: Fed's mandate is to keep it growing, and it's likely

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Speaker 1: to be cutting interest rates a couple more times to

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Speaker 1: maintain an expansion, and that's more consistent with art his

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Speaker 1: growth than positive ear his growth is which generally leads

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Speaker 1: the market higher. John my head spinning. This is too optimistic.

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Speaker 1: It's very constructive, very constructive. But he has been through

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Speaker 1: the year and the year has been good so far.

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Speaker 1: David Couston, I think we gotta let go because understand

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Speaker 1: you've got to go into another studio. Is that rather property?

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Speaker 1: That's why I didn't think he was going to drop by.

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Speaker 1: So I'm very happy Kavis some of his time. David Couston,

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Speaker 1: Thank you, gentlemen, like very healthy, looks great right now.

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Speaker 1: We are thrilled to bring you, Sonya Meskin, US economist

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Speaker 1: Standard Charter. Sonya, you have a huge standard charter advantage

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Speaker 1: and that you get to walk in every day and

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Speaker 1: talk to Stephen Englander. He is a giant of foreign

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Speaker 1: exchange dynamics. How do you dovetail your US economics work

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Speaker 1: with the foreign exchange analysis of Mr Englander in the

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Speaker 1: last five days? Well, um, it's really very true. It's

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Speaker 1: really been very much about the foreign exchange. But you know,

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Speaker 1: the US is actually quite an isolated economy, and I

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Speaker 1: think that the labor market, for one, shows that very clearly.

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Speaker 1: We see UH definitely signs of weakness and ongoing weakening

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Speaker 1: both globally in Europe, in Asia, but we don't really

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Speaker 1: see it so much in the US except in the

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Speaker 1: manufacturing actually related sectors. Um so, I think it's very

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Speaker 1: important contact. You know, in the dollar. Of course, UM

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Speaker 1: plays a role in the sense reaction function, but it's

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Speaker 1: really not even amongst the first three UH key elements.

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Speaker 1: I think that they look at suddenly, do you see

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Speaker 1: any sign at all that the witness in manufacturing though,

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Speaker 1: is starting to come across lay through to the other

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Speaker 1: parts of the economy. It's a question that we keep

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Speaker 1: asking on this program, and so far a very very

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Speaker 1: very limited, limited amount of people turn around and say, yes,

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Speaker 1: I'm seeing a signed sonya do you that's true? I

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Speaker 1: would agree with that, because even in the latest sist

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Speaker 1: the report, manufacturing game jobs more so than in the

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Speaker 1: previous month. Um So, I think we see it in

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Speaker 1: some of the sentiment indicators, and that's been the consistent

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Speaker 1: theme throughout the last nine months. But the sentiment indicator

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Speaker 1: data has not been as strongly correlated with what's actually

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Speaker 1: going on on the ground, is maybe in some of

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Speaker 1: the previous periods. This goes back to a question we

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Speaker 1: often ask Sonya, which is whether the fear that something

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Speaker 1: is about to get worse can translate into the very

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Speaker 1: your idea that it will happen, so it becomes reality

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Speaker 1: the prospect of something, So the soft data becomes the

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Speaker 1: heart data sort of speaks on here, is that what

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Speaker 1: you anticipate? UM. I think the U S economy is

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Speaker 1: very resilient, but I do think that there are certain

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Speaker 1: cross currents now that we have an experience before. China

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Speaker 1: is obviously much bigger part of the global economy than

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Speaker 1: it was even a decade ago. UM. Of course, what's

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Speaker 1: going on in the foreign exchange markets UM, as you

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Speaker 1: can see, is somewhat unprecedented. UM. And I think the

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Speaker 1: impact on money markets, for example, is um evident already. UM.

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Speaker 1: So there are definitely elements I think within the market

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Speaker 1: to pay attention to that are sort of critical, But

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Speaker 1: the chances of those spilling over into the real economy UM.

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Speaker 1: In short order, I don't think I'm necessarily very high well,

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Speaker 1: the rate cuts, I mean the Standard Charter's expertise and UM,

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Speaker 1: well the rate cuts we see from E M central

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Speaker 1: banks affect US central bank policy. Well, I think it's

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Speaker 1: really the other way around. If I really opened the

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Speaker 1: door for them to cut UM. And while there's, of course,

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Speaker 1: in UM an outstanding argument as to whether if I

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Speaker 1: needed to cut it all and you fell two descents

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Speaker 1: UM on the committee following that decision, UM, I think

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Speaker 1: for the emerging markets, UM, in terms of the economics, UM,

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Speaker 1: it's something that is needed. Of course, it also introduces

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Speaker 1: uh um, you know uh issues to the capital flight

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Speaker 1: account potentially down the road. But so far, I think

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Speaker 1: we really opened the door for them. Wonderful son, and

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Speaker 1: thank you so much. With Standard Charter in our studios

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Speaker 1: right now, is any mass who goes to the coolest

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Speaker 1: French major in America Advance or French and frank or Studies.

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Speaker 1: It's like this totally cruel program. When when I was

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Speaker 1: a kidding, it was like a big deal. What is

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Speaker 1: it like doing French and Francophone studies at Vassar College. Well,

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Speaker 1: it was just an obvious step in my career path

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Speaker 1: towards becoming a business. Did you feel like you walked

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Speaker 1: in dumbest French speaker in the class. It was a

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Speaker 1: great program. I've got to tell you. I spent uh

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Speaker 1: semester in Paris. Yeah, I lived it up. It's I

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Speaker 1: don't have enough good things to say about that program. Yeah,

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Speaker 1: so it's very cool. I mean, we get all these

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Speaker 1: kids in here with the academic backgrounds, you've got a

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Speaker 1: home run. Here was Susie Waite and Christopher Cannon on

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Speaker 1: the state of asset management. Abby Johnson came out and said,

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Speaker 1: we're gonna give away certain funds. You mentioned Will dan

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Speaker 1: Off counter Fund, Fidelity counter Fund, and even the sainted

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Speaker 1: Will dan Off is having outflows. It's that grim, right,

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Speaker 1: that's right. So we took a look at the seventy

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Speaker 1: four trillion dollar global asset management industry and some of

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Speaker 1: the challenges that are that the biggest asset the biggest

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Speaker 1: change right now facing So the biggest challenge is really

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Speaker 1: for active managers. There's a bit of a crisis of

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Speaker 1: confidence as you see these outflows from actively managed funds,

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Speaker 1: even from those that are beating their benchmarks. Um, so

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Speaker 1: it's a real watershed. Well, it's I totally agree with.

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Speaker 1: The point is that watershed moment we saw in Davos

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Speaker 1: this year with active managers, they've gone through this plan

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Speaker 1: Plan B, Plan C, Plan D. What's the plan into

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Speaker 1: autumn and into two thousand twenty to staunch the flows? Well,

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Speaker 1: I think one plan that asset managers are rapidly realizing

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Speaker 1: UM that they have to take on is you have

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Speaker 1: to figure out what your Raisin detra is seeing French

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Speaker 1: major um. So I would I would have pronounced it rich,

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Speaker 1: I would have said, Raisin, that's what I would have said,

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Speaker 1: that's what my very expensive education kind of timing. So

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Speaker 1: you've got to be on one end of the spectrum

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Speaker 1: or the other. You've got to, um really either have

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Speaker 1: a full comprehensive offering or you've got to be a niche, focus,

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Speaker 1: boutique player. And for those in the middle, it's really

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Speaker 1: a difficult moment. So give us a sense of the

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Speaker 1: flows into the asset management business kind of where the

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Speaker 1: money's going, active passes, all that kind of trends. Sure,

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Speaker 1: So as we trace in our data is for years

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Speaker 1: you've seen outflows from active mutual funds and you've seen

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Speaker 1: inflows into passive indexed products. So this is one of

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Speaker 1: the major um trends of the past decade or management industry,

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Speaker 1: it hasn't so far, and so you're seeing this scramble

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Speaker 1: to figure out, Okay, what can you know? What can

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Speaker 1: we offer? Does it mean getting into E t F?

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Speaker 1: Does it mean getting into factor driven products? But are

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Speaker 1: they going to merge? I mean everything standard over in

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Speaker 1: your You've got a beautiful Europe and over the Monday

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Speaker 1: in the article as well. This is in Bloomberg Business Week.

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Speaker 1: Folks asset manager with seventy four trillion on brink of

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Speaker 1: historic shakeout? Okay, great, what's the plan? That's what I

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00:23:06,200 --> 00:23:10,000
Speaker 1: don't get. So that's a good question. So, uh, consolidation

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Speaker 1: is definitely part of the plan for many of these firms.

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Speaker 1: You saw Investco and Oppenheimer Funds merge for and that

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Speaker 1: has combined a very passive business within a more actively

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Speaker 1: focused business. So that's one that's for sure interesting to watch. Okay,

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Speaker 1: but what's the gossip on a transaction like that? Forget

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Speaker 1: you come on, nobody's listening, Okay, what's the gossip? Okay? Well,

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Speaker 1: so one other thing that we mentioned in this story

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Speaker 1: on on the consolidation front is you look at Janice

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Speaker 1: Henderson and Standard Life Aberdeen, and you're actually seeing outflows

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Speaker 1: in the wake of those mergers. So it's not a

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Speaker 1: sure thing that just merging to survive is going to

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00:23:49,560 --> 00:23:53,919
Speaker 1: you know, lead you down the path towards um salvation.

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Speaker 1: So is are we going to eventually get what percentage

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00:23:57,800 --> 00:24:00,280
Speaker 1: let's start to what percentage of money today roughly is

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00:24:00,320 --> 00:24:03,440
Speaker 1: actively managed versus passive? So it depends and we have

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00:24:03,560 --> 00:24:06,560
Speaker 1: got a chart that breaks it down. So the US

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00:24:06,840 --> 00:24:12,840
Speaker 1: is the sorry, guys, this is better. So in the

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00:24:12,920 --> 00:24:16,399
Speaker 1: US you've got thirty three per cent of UM in

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00:24:16,560 --> 00:24:19,879
Speaker 1: passive funds and that's where it's largest. So that and

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00:24:19,960 --> 00:24:22,399
Speaker 1: that's growing, right, and that's growing. Is there is the

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00:24:22,480 --> 00:24:25,399
Speaker 1: bear case scenario where that goes, where the active manage

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00:24:25,480 --> 00:24:28,040
Speaker 1: goes to zero. Is anybody, I mean, why wouldn't it?

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00:24:28,240 --> 00:24:31,119
Speaker 1: Why would I pay a fee for performance that's not

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00:24:31,240 --> 00:24:33,200
Speaker 1: materially better than what I can get into passive. That's

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00:24:33,200 --> 00:24:35,520
Speaker 1: a good question. I mean, I think an active manager

443
00:24:35,520 --> 00:24:38,480
Speaker 1: would tell you at a certain point, if everyone's an

444
00:24:38,480 --> 00:24:42,320
Speaker 1: index products, it will make it. You know, people logically say, hey, wait,

445
00:24:42,359 --> 00:24:46,280
Speaker 1: it should be easier to outperform with an active manager,

446
00:24:46,640 --> 00:24:48,520
Speaker 1: so maybe you won't see it go to zero. But

447
00:24:48,640 --> 00:24:52,640
Speaker 1: at this point the trend um isn't really abating. This

448
00:24:52,720 --> 00:24:55,040
Speaker 1: is so cool. Yeah, and not it's not cool if

449
00:24:55,040 --> 00:24:57,560
Speaker 1: you're up in Boston or in this big mutual fund complexes.

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00:24:58,080 --> 00:25:01,359
Speaker 1: I don't the economics. The fee pressure just must be extraordinary.

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00:25:01,480 --> 00:25:06,159
Speaker 1: Giom sends it an email from Paris listening and you've

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00:25:06,160 --> 00:25:08,760
Speaker 1: got a global audience happen to this. He's I'm gonna

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00:25:08,760 --> 00:25:11,960
Speaker 1: butcher this. I'm gonna try. Should I tell him? Ave

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00:25:12,200 --> 00:25:27,040
Speaker 1: de Frey Leva? Okay, I was not Montreal today, but seriously,

455
00:25:27,080 --> 00:25:29,119
Speaker 1: I believe what he's saying is I'm so done with

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00:25:29,200 --> 00:25:32,040
Speaker 1: high fees. That's all this debate comes down to. Right,

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00:25:32,880 --> 00:25:35,560
Speaker 1: That's right. So yeah. Part of the reason that you've

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00:25:35,560 --> 00:25:39,680
Speaker 1: seen this interest in index products, particularly in the aftermath

459
00:25:39,800 --> 00:25:42,320
Speaker 1: of the financial crisis in two thousand and eight, is

460
00:25:42,359 --> 00:25:45,240
Speaker 1: investors are reassessing, Okay, how much am I just paying

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00:25:45,240 --> 00:25:49,080
Speaker 1: in fees and is it worth it instead to go

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00:25:49,240 --> 00:25:52,600
Speaker 1: for an index product that will charge less. So if

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00:25:52,640 --> 00:25:56,639
Speaker 1: I'm fidelity, um, you know this huge mutual fun complex,

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00:25:57,320 --> 00:26:00,560
Speaker 1: what is the stated strategy of of a fidelity? For example?

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00:26:00,600 --> 00:26:02,879
Speaker 1: What are these big companies that are had such great

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00:26:02,880 --> 00:26:05,840
Speaker 1: brand names. I've got such a tradition. Um what is

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00:26:05,880 --> 00:26:09,400
Speaker 1: their strategy? Fidelity is an interesting one. They are definitely

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00:26:09,440 --> 00:26:12,080
Speaker 1: trying to catch people's attention in a couple of ways.

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00:26:12,200 --> 00:26:15,719
Speaker 1: So last year Fidelity kind of causes splash by introducing

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00:26:15,760 --> 00:26:22,480
Speaker 1: these zero fee um index products and well it totally

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00:26:22,880 --> 00:26:25,600
Speaker 1: I think shook the market up a little bit. What

472
00:26:25,720 --> 00:26:29,440
Speaker 1: their competitors say is, Okay, if they're not if they're

473
00:26:29,480 --> 00:26:33,280
Speaker 1: charging zero for these funds, where else are they making

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00:26:33,320 --> 00:26:36,080
Speaker 1: that up? Because it doesn't cost, you know, zero dollars

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00:26:36,240 --> 00:26:39,600
Speaker 1: to run a fund? Where are they so, im that's

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00:26:39,600 --> 00:26:42,240
Speaker 1: the question. That's what we don't know that we don't know. Yeah,

477
00:26:42,240 --> 00:26:44,720
Speaker 1: so in various other ways, but not on the fees.

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00:26:44,840 --> 00:26:46,520
Speaker 1: What do you see in four one case? I mean,

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00:26:46,560 --> 00:26:49,399
Speaker 1: I mean John Bogan was a huge friend of the show.

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00:26:49,480 --> 00:26:52,440
Speaker 1: He gave us immense support on Bloomberg on the economy

481
00:26:52,440 --> 00:26:57,640
Speaker 1: and Bloomberg said always comes back to underfunded America. Yeah,

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00:26:57,720 --> 00:27:01,600
Speaker 1: I mean he he was really a visionary in this area.

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00:27:01,760 --> 00:27:06,760
Speaker 1: He was Beeps visionary exactly. I mean, he was a

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00:27:06,800 --> 00:27:10,520
Speaker 1: pioneer in this idea that you can save investors all

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00:27:10,600 --> 00:27:13,640
Speaker 1: kinds of money by offering them index products. And you know,

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00:27:13,760 --> 00:27:17,160
Speaker 1: you know, he would say that active managers are very

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00:27:17,200 --> 00:27:19,359
Speaker 1: often not worth the fare, and they'd always say, no,

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00:27:19,480 --> 00:27:22,120
Speaker 1: it's gonna change, it's gonna change. And you're the lead

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00:27:22,160 --> 00:27:25,600
Speaker 1: of your story in Bloomberg Business Week. Is it hasn't changed?

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00:27:25,840 --> 00:27:28,840
Speaker 1: Am I right? It's accelerated. That's right. It's been a

491
00:27:28,880 --> 00:27:32,320
Speaker 1: trend that's accelerating. So it's an environment where you really

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00:27:32,359 --> 00:27:35,840
Speaker 1: have to either prove yourself, figure out a new strategy,

493
00:27:36,000 --> 00:27:39,119
Speaker 1: maybe merged to survive. But um, it's looking bleaker and

494
00:27:39,160 --> 00:27:41,840
Speaker 1: bleaker for active managers, especially the ones that can't beat

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00:27:41,880 --> 00:27:44,080
Speaker 1: their benchmarks. And thank you so much any mass It

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00:27:44,160 --> 00:27:49,240
Speaker 1: was Susie Waite and Christopher Cannon. It's a real nice

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00:27:49,320 --> 00:27:52,560
Speaker 1: summary step off to all the work we're gonna see

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00:27:52,560 --> 00:27:57,000
Speaker 1: Paul in the fall in this year on this struggle

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00:27:57,119 --> 00:28:03,800
Speaker 1: of asset management. It's tangible. M Thanks for listening to

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00:28:03,880 --> 00:28:08,399
Speaker 1: the Bloomberg Surveillance podcast. Subscribe and listen to interviews on

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00:28:08,440 --> 00:28:14,280
Speaker 1: Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm

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00:28:14,320 --> 00:28:17,640
Speaker 1: on Twitter at Tom Keene before the podcast, you can

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Speaker 1: always catch us worldwide. I'm Bloomberg Radio