WEBVTT - Howard Marks Says to Expect 5% Returns Now If You Start From Scratch 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg p m L Podcast. I'm pim Fox. 0:00:08.760 --> 0:00:11.520 Along with my co host Lisa Bramowitz. Each day we 0:00:11.640 --> 0:00:15.120 bring you the most important, noteworthy, and useful interviews for 0:00:15.200 --> 0:00:17.840 you and your money, whether you're at the grocery store 0:00:17.960 --> 0:00:20.720 or the trading floor. Find the Bloomberg p m L 0:00:20.840 --> 0:00:32.720 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Howard Marks, 0:00:33.400 --> 0:00:36.920 I loved your memo. Thank you for coming in. Howard Marks, 0:00:36.960 --> 0:00:40.159 of course, is a legendary investor in depth markets and 0:00:40.200 --> 0:00:43.760 across all asset classes. Frankly, co founder of oak Tree 0:00:43.880 --> 0:00:48.520 Capital Management. Uh, Howard, in your memo, you really outlined 0:00:48.640 --> 0:00:53.599 conditions that would necessitate being more cautious. Are we setting 0:00:53.720 --> 0:00:57.480 up conditions that are similar to what we saw in 0:00:57.520 --> 0:01:01.640 two thousand six two thousand seven, that are particip precipitating 0:01:01.800 --> 0:01:06.200 a pretty big downturn? Well, Lisa, it's easy to say 0:01:06.440 --> 0:01:12.080 we are seeing risky behavior in kind, but I don't 0:01:12.080 --> 0:01:16.360 think at all in degree. I mean, the conditions of 0:01:16.440 --> 0:01:24.399 oh six seven were uh exceptionally excessive and gave rise to, 0:01:24.680 --> 0:01:31.360 of course, the worst UH financial experience of a lifetime. UM, 0:01:31.400 --> 0:01:36.080 I don't think we're nowhere near in that territory. Now, yes, 0:01:36.800 --> 0:01:40.559 I mean the private sector and especially the financial sector 0:01:40.680 --> 0:01:43.480 is nowhere near as levered as it was at that time. 0:01:43.880 --> 0:01:48.040 And uh they in many cases the leverage where you 0:01:48.360 --> 0:01:54.480 was used to invest in subprime related mortgage backed securities. Uh. 0:01:54.560 --> 0:01:58.600 And I don't think there's an analog to those now. 0:01:59.000 --> 0:02:02.320 So I'm not saying that we're looking at that. All 0:02:02.360 --> 0:02:05.360 I'm saying, and maybe I didn't make it clear enough, 0:02:05.680 --> 0:02:09.960 although I think I did, is that is that there 0:02:10.080 --> 0:02:14.320 is a time for caution and there's a time for aggressiveness, 0:02:14.360 --> 0:02:19.520 and they're different, and it's important for a professional investor 0:02:19.600 --> 0:02:23.960 to make the distinction. And I believe that in relative terms, 0:02:24.040 --> 0:02:28.959 this is a time when one should emphasize caution over aggressiveness. 0:02:29.000 --> 0:02:32.840 And to be clear, even though you are saying caution, 0:02:33.080 --> 0:02:35.120 you're not saying and you specifically said that, you are 0:02:35.160 --> 0:02:38.320 not saying that this is a nonsensical bubble. Uh. It 0:02:38.440 --> 0:02:43.320 just there is high risk and valuations are high. So 0:02:43.400 --> 0:02:45.560 how do you proceed with caution? Can you give us 0:02:45.600 --> 0:02:47.919 an example of a type of asset that would be 0:02:47.960 --> 0:02:53.440 an appropriate by at this time? My point is that 0:02:53.480 --> 0:03:00.000 within each investment strategy, there are aggressive ways to pursue 0:03:00.080 --> 0:03:04.440 it and defensive ways to pursue it. Uh. An example, 0:03:05.320 --> 0:03:11.360 one of our activities is distress debt. The higher you 0:03:11.400 --> 0:03:17.880 are in the capital structure, the more dependably you make money. 0:03:17.919 --> 0:03:20.320 But when things go well, the less money you make. 0:03:21.000 --> 0:03:22.480 So do you want to be high in the capital 0:03:22.520 --> 0:03:25.720 structure and have a very high probability of making money 0:03:25.840 --> 0:03:28.880 or low in the capital structure and maximize the return 0:03:29.360 --> 0:03:33.520 in good outcomes? And I would say that if in 0:03:33.560 --> 0:03:36.600 a time for caution, you would move towards senior securities, 0:03:37.360 --> 0:03:43.200 increase your probability of making money, decrease the absolute payoff 0:03:43.400 --> 0:03:47.480 when things go great. So you're you're willing to pay 0:03:47.760 --> 0:03:53.440 higher prices for better secured assets even though the absolute 0:03:53.440 --> 0:03:57.520 return will be substantially less. Right, Well, what you what 0:03:57.720 --> 0:04:01.480 you call higher prices? I would say, we're willing to 0:04:01.520 --> 0:04:05.760 accept lower prospective returns for for greater safety. That's what 0:04:05.840 --> 0:04:13.560 it's all about. If the conservative investor accepts lower expected 0:04:13.600 --> 0:04:18.120 returns as the price for greater safety. There are times 0:04:18.120 --> 0:04:22.000 when that's highly appropriate. There are times when that's highly inappropriate. 0:04:22.680 --> 0:04:25.359 Our job is to figure out which this is. So. UM, 0:04:25.440 --> 0:04:28.040 I've heard a lot of pension funds in particular say 0:04:28.080 --> 0:04:31.640 that they are seeking returns and safety from this sort 0:04:31.680 --> 0:04:34.680 of a bulliant environment in private debt markets, and there 0:04:34.720 --> 0:04:37.880 seems to be quite a lot of cash flowing into 0:04:38.000 --> 0:04:40.440 private debt. Has it gone too far? And is it 0:04:40.560 --> 0:04:46.280 keeping companies alive that perhaps shouldn't be. I can't say 0:04:46.279 --> 0:04:49.040 too far it's gone far. The point is everybody says, oh, 0:04:49.040 --> 0:04:50.880 you should do this, We were the only ones who 0:04:50.920 --> 0:04:53.200 have thought of that. Every If everybody is saying you 0:04:53.200 --> 0:04:54.920 should do this because we're the only ones who thought 0:04:54.920 --> 0:04:57.040 of it, then it's really obviously not as novel a 0:04:57.120 --> 0:05:00.960 solution as they're suggesting. So so the eye da private 0:05:01.040 --> 0:05:05.000 lending UH is not undiscovered. Money has flowed in. I 0:05:05.040 --> 0:05:08.760 can't tell you whether it's an appropriate amount or too much. Clearly, 0:05:08.800 --> 0:05:11.479 the market is more competitive to make loans than it 0:05:11.600 --> 0:05:14.080 used to be, and when market is more competitive, that 0:05:14.120 --> 0:05:18.680 implies lower prospective returns. UH. I still think, however, that 0:05:18.800 --> 0:05:24.799 private lending is more appropriate today than than buying public 0:05:24.880 --> 0:05:28.920 securities because the public money can't get to the private 0:05:29.080 --> 0:05:34.360 lending opportunities. UH. And I think that the public quest 0:05:34.560 --> 0:05:38.279 for high returns in a low return world has caused 0:05:38.320 --> 0:05:40.800 a lot of money to flow into senior loans and 0:05:40.920 --> 0:05:44.080 hi your bonds and so forth. And that is less 0:05:44.120 --> 0:05:49.760 true about uh, the private dead market. But I'll add 0:05:49.800 --> 0:05:53.400 one thing. When you move away from public markets, which 0:05:54.080 --> 0:05:58.360 nowadays we kind of call beta markets because the return, uh, 0:05:58.400 --> 0:06:00.920 your return is determined by the turn of the market 0:06:00.960 --> 0:06:04.359 in large part. To alpha markets, where your return is 0:06:04.480 --> 0:06:08.120 largely a factor of the skill of the manager, you 0:06:08.240 --> 0:06:13.520 are accepting a new kind of risk which is substantial 0:06:13.600 --> 0:06:16.760 dependence on the skill of the manager, which is different 0:06:16.800 --> 0:06:19.800 than being in public markets, are being in an index fund. Uh. 0:06:19.839 --> 0:06:22.640 You know, talking about index funds, you talked about the 0:06:22.680 --> 0:06:25.280 threat of all of the money that moved in moving 0:06:25.360 --> 0:06:28.640 out in tandem. UM. I hear a lot about cash 0:06:28.720 --> 0:06:31.120 on the sidelines, and I'm not sure exactly what they're 0:06:31.120 --> 0:06:33.520 talking about. I think to a large degree they're talking 0:06:33.520 --> 0:06:35.839 about private equity funds that have all this dry powder 0:06:35.920 --> 0:06:38.719 lying around. To what extent will that cash on the 0:06:38.760 --> 0:06:42.960 sidelines buffer any declines, Well, it depends on where they 0:06:43.000 --> 0:06:47.120 are and whether the cash on the sidelines is so 0:06:47.160 --> 0:06:50.400 always say flexible. For example, we raised money for distress 0:06:50.440 --> 0:06:53.720 debt fund in the expectation that there would be an 0:06:53.720 --> 0:06:58.960 opportunity for distress which has not materialized yet. Admittedly, um, 0:06:59.000 --> 0:07:01.800 and you know, if there is such an opportunity, we're 0:07:01.800 --> 0:07:03.719 gonna swing into actually gonna put that money to work. 0:07:03.760 --> 0:07:05.880 This is something we've done in the past. Well, we 0:07:05.960 --> 0:07:07.719 hope to do it in the future if there's we 0:07:07.760 --> 0:07:09.200 hope there will be an opportunity, and we hope to 0:07:09.200 --> 0:07:12.320 do a good job with it. But given the nature 0:07:12.360 --> 0:07:16.360 of the investment business, if uh, if let's say, uh, 0:07:16.960 --> 0:07:19.960 to follow your argument, money flowed out of e t 0:07:20.160 --> 0:07:23.800 F s and they had to sell the high flyers 0:07:23.840 --> 0:07:25.720 that have done so well based on e t F 0:07:25.800 --> 0:07:27.960 buying and they had to become sellers, and that drove 0:07:28.000 --> 0:07:31.200 them down. We couldn't buy that because we can't take 0:07:31.240 --> 0:07:33.560 the money we raise for distressed debt funds and buy 0:07:33.600 --> 0:07:39.520 public equities. So uh. You know, in in the institutional 0:07:39.520 --> 0:07:43.360 investment business, we talk about something called buckets. Which bucket 0:07:43.720 --> 0:07:47.120 is your money for and our bucket is for private 0:07:47.600 --> 0:07:50.560 distress debt. We can't take that money and buy put 0:07:50.600 --> 0:07:53.520 it into a different bucket, which is public equities. So 0:07:53.840 --> 0:07:57.280 if the if most of the dry powder is in 0:07:57.560 --> 0:08:02.680 private equity and private debt and so forth, anybody who says, oh, 0:08:02.760 --> 0:08:04.640 you know, if the market goes down, those private equity 0:08:04.640 --> 0:08:06.720 guys will just go in and buy them up. It's 0:08:06.760 --> 0:08:09.920 unlikely because people don't step out of their bucket that often. 0:08:10.040 --> 0:08:11.840 So this is fascinating. Does that mean that there's more 0:08:11.840 --> 0:08:14.640 of a floor under prices of private debt, say, or 0:08:15.320 --> 0:08:17.760 distress debt than there is for equities. Well, of course 0:08:17.840 --> 0:08:20.400 the private debt or distressed debt guys would say no, no, 0:08:20.440 --> 0:08:24.000 we're gonna let it drop before we buy. But clearly, 0:08:24.280 --> 0:08:28.440 the more buying power there is on the sidelines, the 0:08:28.480 --> 0:08:32.280 more there's a floor, the less uh things will will 0:08:32.360 --> 0:08:35.719 drop unremittingly, you were talking about how you don't think 0:08:35.720 --> 0:08:39.200 that there is the same degree of leverage at investment 0:08:39.200 --> 0:08:42.120 banks that there was leading up to the two crash. 0:08:42.400 --> 0:08:46.240 I am hearing more about leverage being used by hedge funds, 0:08:46.280 --> 0:08:50.360 in particular to buy equities and investment grade credit. How 0:08:50.400 --> 0:08:52.800 concerned are you about this? Have you been hearing about this? 0:08:55.440 --> 0:08:59.839 The willingness to use more leverage after the market has 0:09:00.040 --> 0:09:05.240 risen making people feel good is indicative of, in my opinion, 0:09:05.760 --> 0:09:10.240 the need for caution. UH. If people are using leverage 0:09:10.280 --> 0:09:14.959 today who didn't use leverage five years ago, well, is 0:09:15.000 --> 0:09:17.440 it is today a better buying opportunity or a worse 0:09:17.520 --> 0:09:20.599 buying opportunity? Is it safer today or risk here? I 0:09:20.640 --> 0:09:22.800 would say it's a worse buying opportunity. It's risk here. 0:09:22.840 --> 0:09:24.800 So why are you using leverage today that you didn't 0:09:24.920 --> 0:09:28.880 use five years ago? The answer is, given the low 0:09:28.920 --> 0:09:32.640 prospective returns in all markets, it's hard to make money today, 0:09:32.840 --> 0:09:35.839 so more and more people resort to leverage. Leverage does 0:09:35.880 --> 0:09:39.200 not make an investment better. It only magnifies the results. 0:09:39.760 --> 0:09:42.360 It magnifies the gains if there are gains, and losses 0:09:42.360 --> 0:09:45.480 if there are losses. And uh So, the question is 0:09:45.520 --> 0:09:48.280 why would you use leverage today that you didn't use 0:09:48.320 --> 0:09:52.720 five years ago. It's by the way, you know, in 0:09:52.840 --> 0:09:56.320 Las Vegas, Lisa, they say the more you bet, the 0:09:56.400 --> 0:09:59.679 more you win when you win. Now, you can't argue 0:09:59.679 --> 0:10:02.600 with that statement, but but any intelligent person should see 0:10:02.640 --> 0:10:09.080 the fallacy. Uh you know you're talking about the private 0:10:09.120 --> 0:10:12.200 equity and then in the cash being raised. I'm wondering, 0:10:12.240 --> 0:10:14.400 you know, we have heard about the record amount of 0:10:14.440 --> 0:10:19.040 money new record funds for buyouts or private debt. Do 0:10:19.080 --> 0:10:21.280 you think that the worst case scenario for these is 0:10:21.320 --> 0:10:23.760 that returns will be much lower, or that it could 0:10:23.800 --> 0:10:29.679 potentially be even worse than that. The most likely negative 0:10:29.760 --> 0:10:35.000 repercussion is that returns will be hard to come by 0:10:35.120 --> 0:10:40.640 and maybe lower than investors have in mind. There's always 0:10:40.640 --> 0:10:47.079 the possibility of negative returns, uh, but that would require uh, 0:10:47.240 --> 0:10:50.720 something nearly cataclysmic, you know. I think that. I think 0:10:50.760 --> 0:10:54.400 that in oh eight, when the global financial crisis was 0:10:54.720 --> 0:10:59.200 raging after the Lehman bankruptcy, I believe that the private 0:10:59.200 --> 0:11:04.840 equity font in general, the funds of oh five, six, seven, 0:11:04.960 --> 0:11:08.959 maybe eight, we're looking at the prospect of losing money. 0:11:09.559 --> 0:11:12.000 It happens that the government did a great job of 0:11:12.080 --> 0:11:16.520 bailing out the financial sector, which reopened the credit window, 0:11:16.600 --> 0:11:20.040 which enabled those companies to refinance their debts and push 0:11:20.120 --> 0:11:23.480 them off. And also, of course, the government's bail out 0:11:23.520 --> 0:11:27.120 brought back the economy and brought an end to the 0:11:27.640 --> 0:11:30.640 to a significant recession. And the combination of those things 0:11:30.720 --> 0:11:34.720 meant that those funds will now have moderate, I believe, 0:11:34.800 --> 0:11:37.800 high single digit returns, and everybody will say, oh, not 0:11:37.840 --> 0:11:41.800 so bad, and the returns on those funds will not 0:11:41.840 --> 0:11:44.400 be bad. I believe they could have been worse, but 0:11:44.640 --> 0:11:48.400 for the things that went right. So talking about returns 0:11:48.440 --> 0:11:50.640 just last day, I want to touch base with you 0:11:50.880 --> 0:11:55.480 on what you expect to be appropriate expectations for returns 0:11:55.480 --> 0:11:59.160 for say, pension funds at this point. What's an appropriate 0:12:00.000 --> 0:12:03.800 market if you if if if you walked into a 0:12:03.840 --> 0:12:07.400 pension fund today which had no investments, and you were 0:12:07.440 --> 0:12:11.720 given a pile of cash, and you invested today intelligently, 0:12:11.840 --> 0:12:18.720 prudently but not shrinking from risk, I think you could 0:12:18.760 --> 0:12:25.160 expect to make something in the vicinity of five in 0:12:25.200 --> 0:12:30.800 the in the in the coming years from today. UM. 0:12:30.840 --> 0:12:33.040 If you take more risk and everything goes right, you'll 0:12:33.040 --> 0:12:36.480 make more, and vice versa. UM. The problem is, most 0:12:36.480 --> 0:12:38.840 pension funds need seven and a half to make the 0:12:38.920 --> 0:12:43.400 math work to make today's assets turn into enough to 0:12:43.440 --> 0:12:47.840 pay tomorrow's benefits. Uh. And I think that making seven 0:12:47.880 --> 0:12:52.199 a half from today will be quite a challenge and 0:12:52.240 --> 0:12:57.800 will necessitate two things substantial risk taking and and good outcomes, 0:12:58.880 --> 0:13:02.439 which means that there is a bigger risk of negative 0:13:02.480 --> 0:13:07.600 outcomes and UH, much lower than even To respond to 0:13:07.640 --> 0:13:10.560 the Las Vegas people, the more you bet, the more 0:13:10.600 --> 0:13:12.760 you lose when you lose, So you can't have it 0:13:12.840 --> 0:13:18.520 both ways. And I think that most investors see that 0:13:18.679 --> 0:13:25.119 today's low return environment necessitates substantial risk taking. But substantial 0:13:25.200 --> 0:13:29.280 risk taking, if it runs into bad outcomes, will will 0:13:29.760 --> 0:13:32.080 lead to disappointment. That's all we can say for sure. 0:13:32.440 --> 0:13:34.679 Poward Marks, thank you so much for joining. Thank you, 0:13:35.240 --> 0:14:05.920 Poward Marks, co founder of oak Tree Capital Management. I 0:14:05.960 --> 0:14:08.920 can hear Chris Salman singing this song. Chris Salman, the 0:14:09.000 --> 0:14:13.280 chief investment officer of the California State Teachers Retirement System. 0:14:13.320 --> 0:14:15.080 I believe he's got a little bit more than two 0:14:15.559 --> 0:14:20.280 eight billion dollars under management. Chris, you're on your bicycle 0:14:20.360 --> 0:14:22.560 now you have one in your office too. I know, 0:14:22.720 --> 0:14:25.880 I wish I was. I actually tore the meniscus in 0:14:25.960 --> 0:14:29.000 my knee dancing at my daughter's wedding. So I am 0:14:29.040 --> 0:14:33.120 off my bike summer, but surgery. I'll be back soon, hopefully. 0:14:33.320 --> 0:14:36.880 Well it was allah. It was all on a good cause, 0:14:36.920 --> 0:14:39.840 as they say, exactly. I was dipping her. I I 0:14:39.880 --> 0:14:42.280 have father daughter dance. I got to dip her and 0:14:42.880 --> 0:14:45.200 boom out with my knee. I didn't drop though, So 0:14:45.240 --> 0:14:47.920 it's okay. It was wonderful. Well good, Yeah, that that's 0:14:48.000 --> 0:14:50.440 that's sort of like the investment philosophy, right, you know, 0:14:50.520 --> 0:14:52.920 you take the risk and then you hope that nothing 0:14:52.960 --> 0:14:56.360 bad happens and you bounce back. Good for you. Agree 0:14:56.480 --> 0:15:00.240 with Howard Marks. But I have a couple of other 0:15:00.280 --> 0:15:02.440 points to raise. Well, I want you to raise them. 0:15:02.440 --> 0:15:04.800 I just want to offer people the context for that 0:15:04.880 --> 0:15:08.200 California State Teachers Retirement System, which of course is the 0:15:08.240 --> 0:15:12.440 second largest US pension fund, you earned thirteen point four 0:15:12.520 --> 0:15:17.880 percent in the fiscal year ended June. Well done, there 0:15:17.880 --> 0:15:19.600 you go. That does that make up for the for 0:15:19.640 --> 0:15:22.840 the bad years? You know? Well, look at this tim 0:15:22.920 --> 0:15:26.880 we made ten percent over five years. We've made just 0:15:27.080 --> 0:15:32.560 about seven percent over the last twenty years net of fees. 0:15:33.160 --> 0:15:37.280 That includes two very nasty recessions. So well, that's that 0:15:37.400 --> 0:15:39.400 seven and a half bogey, right the seven and a 0:15:39.400 --> 0:15:43.200 half percent the hurdle. No, it is below that, but 0:15:43.280 --> 0:15:46.360 it's right out about seven. We're lowering our assumption rate 0:15:46.720 --> 0:15:48.760 from seven and a half seven in the corner last 0:15:48.840 --> 0:15:52.160 year seven percent this coming year. So you said that 0:15:52.200 --> 0:15:56.360 you had some some responses to Howard Marks's comments where 0:15:56.360 --> 0:16:00.440 he basically said that going forward, if pension funds were 0:16:00.520 --> 0:16:03.720 to invest new money today, all of their money knew, 0:16:04.040 --> 0:16:08.240 not including older legacy investments. That they could probably reliably 0:16:08.320 --> 0:16:12.880 get a five percent return without taking excessive risk and 0:16:13.000 --> 0:16:16.440 risking potential losses. Do you agree with that? Let me 0:16:16.520 --> 0:16:19.920 frame the way, and I think for your investor listeners 0:16:19.920 --> 0:16:23.280 that would help to frame that. Think about two thousand, 0:16:23.440 --> 0:16:27.120 sixteen and seventeen as a vintage year. So your IRA 0:16:27.320 --> 0:16:30.880 contribution this year, your money, if you invested it, as 0:16:30.920 --> 0:16:35.040 you're saying, this year new money, what's a realistic expectation 0:16:35.200 --> 0:16:39.280 for that over the near term? Five percent might be 0:16:39.440 --> 0:16:44.440 acceptable The differences I invest every year again and again 0:16:44.600 --> 0:16:47.600 for thirty years. So right now my portfolio, I have 0:16:47.720 --> 0:16:51.240 investments that are over twenty five years old that were 0:16:51.280 --> 0:16:54.120 made in the at the end of the nineties, where 0:16:54.160 --> 0:16:57.120 they're going to have a double digit return, and I 0:16:57.160 --> 0:17:00.320 think seven percent over the next thirty years is a 0:17:00.360 --> 0:17:03.400 realistic number if you use today as a starting date. 0:17:03.440 --> 0:17:09.240 And that's where Howard's coming from. Capital asset prices are expensive, 0:17:09.280 --> 0:17:13.640 whether it's equities, public securities, and private securities are almost 0:17:13.680 --> 0:17:17.760 priced to perfection, and so we recognize that new money 0:17:17.760 --> 0:17:20.120 going to work this year may not have that great 0:17:20.119 --> 0:17:23.159 of our return. This vintage year for private equity, this 0:17:23.359 --> 0:17:26.680 vintage year for real estate, you can't expect to buy 0:17:26.680 --> 0:17:30.080 a building at these prices and have a really high return. 0:17:30.720 --> 0:17:33.760 But as he pointed out, when prices dropped, and that's 0:17:33.800 --> 0:17:37.000 when Howard loves to invest. When when prices go down, 0:17:37.720 --> 0:17:39.800 then he'll come into the market, and so will we. 0:17:40.440 --> 0:17:44.080 I often say we're countercyclical. We have thirty year money. 0:17:44.240 --> 0:17:46.640 We don't have to buy at the top. We can 0:17:46.680 --> 0:17:49.800 wait and be patient and and look for lower prices. 0:17:49.880 --> 0:17:52.679 And that's been a big discussion of my staff. I 0:17:52.800 --> 0:17:54.879 was just with a group of c I O s 0:17:54.960 --> 0:17:58.320 up in Canada last week. That was our key discussion 0:17:58.400 --> 0:18:02.920 was asset prices being perfection. How much dry powder should 0:18:02.960 --> 0:18:07.159 you hold back? How cautious should you be? Are you 0:18:07.160 --> 0:18:10.320 holding back? Well? Right now, we're over two percent in cash, 0:18:10.400 --> 0:18:13.320 and my staff met last week and is talking about 0:18:13.400 --> 0:18:16.840 potentially raising that. We've been taking profits, Lisa, in this 0:18:17.040 --> 0:18:20.240 US equity market since the start of the year. Every 0:18:20.240 --> 0:18:22.200 time it hits the new high, we just shave off 0:18:22.240 --> 0:18:24.719 a little bit of that profit. We've been putting that 0:18:24.800 --> 0:18:27.920 in Europe and in Asia, but also building up our 0:18:28.359 --> 0:18:33.080 our de risking assets, assets that that do better or 0:18:33.119 --> 0:18:36.600 hold value when the markets go down. Um so those 0:18:36.640 --> 0:18:38.840 assets didn't do well last year because the market was 0:18:38.920 --> 0:18:43.159 up so so strong. But we're trying to balance that portfolio. 0:18:43.240 --> 0:18:45.560 You've heard me say a year after year to the 0:18:45.640 --> 0:18:49.480 to the listeners. It's all about rebalancing your asset allocation. 0:18:49.680 --> 0:18:54.080 Don't let your equities run, rebalance into the less risky assets. 0:18:54.320 --> 0:18:57.240 And I think that's what Howard's saying. Well, Chris Alman, 0:18:57.680 --> 0:18:59.719 you know you you spend a lot of time listening 0:18:59.720 --> 0:19:02.119 to hundits and experts, and you know you read all 0:19:02.200 --> 0:19:05.160 the reports. I mean, what you're what you're proposing sounds 0:19:05.200 --> 0:19:08.119 pretty reasonable and you don't necessarily need a PhD to 0:19:08.160 --> 0:19:11.359 figure this out? Or do you? No, you don't. I 0:19:11.400 --> 0:19:14.720 listen to you. You're the pundits expert. Don't do that. 0:19:15.200 --> 0:19:16.720 You know that I listen to you. I ride my 0:19:16.760 --> 0:19:19.160 bike to work sometimes I and I listen to you guys, 0:19:19.640 --> 0:19:23.280 so and I hear and you're right. But my point is, 0:19:23.280 --> 0:19:25.560 every time you ask, Chris, every time you ask someone 0:19:25.720 --> 0:19:29.560 went to sell, no one ever has an answer. Oh exactly. 0:19:29.600 --> 0:19:32.679 But but look at the stage advice from people like 0:19:32.720 --> 0:19:36.800 Warren Buffett. You buy when everybody is nervous, and you 0:19:36.840 --> 0:19:40.040 sell when everybody is greedy. So right now things are 0:19:40.080 --> 0:19:42.840 priced to perfection. But even as Howard, he put out 0:19:42.840 --> 0:19:46.320 a newsletter last week where he said it's it's they're 0:19:46.359 --> 0:19:50.160 at it again again, but he admits he's often early. 0:19:50.240 --> 0:19:52.280 We're at the we're in the late stages of this 0:19:52.359 --> 0:19:55.800 economic expansion. But it could last for another year or 0:19:55.840 --> 0:19:59.000 even two years. You don't know when it will crack. 0:19:59.240 --> 0:20:01.560 So let's talk ab at that. Because we have heard 0:20:01.840 --> 0:20:06.720 from some pensions, particularly in UH in Canada, they have 0:20:06.800 --> 0:20:10.720 been investing directly in companies, buying them directly, basically competing 0:20:10.760 --> 0:20:15.359 with private equity companies. You know that Cowper's is considering 0:20:15.440 --> 0:20:18.879 doing the same. What about Calistas. We're looking at the 0:20:18.920 --> 0:20:20.919 idea of teaming up with people. We don't think we 0:20:20.960 --> 0:20:23.680 want to start from scratch um. We want to team 0:20:23.720 --> 0:20:26.080 up with people that are already in the marketplace. And 0:20:26.119 --> 0:20:29.000 this is part of recognizing as Pen was hitting me 0:20:29.080 --> 0:20:33.040 with lower return environment. We can make or return out 0:20:33.040 --> 0:20:35.600 of private equity, but if we can reduce our costs 0:20:35.880 --> 0:20:38.760 a little bit of investing in private equity, that enhances 0:20:38.800 --> 0:20:41.960 our return. So the idea of going and buying mid 0:20:42.080 --> 0:20:45.399 sized companies directly instead of the old two and twenty 0:20:45.440 --> 0:20:49.520 private equity model is much more attractive, and we've recognized 0:20:49.600 --> 0:20:52.439 the spread and private equity has come down. You're not 0:20:52.480 --> 0:20:57.280 getting three basis points are full three over public stocks, 0:20:57.400 --> 0:20:59.840 probably only getting a hundred and fifty or one and 0:21:00.040 --> 0:21:02.840 half percent over public stocks, but you're still getting a 0:21:02.880 --> 0:21:07.480 premium over public markets. Chris just quickly. Is the investing 0:21:07.560 --> 0:21:11.159 environment for let's say, environmentally friendly companies or companies that 0:21:11.520 --> 0:21:15.280 respect the environment and so on, socially responsible? Is that 0:21:15.359 --> 0:21:17.399 a key theme or is that something that was just 0:21:17.440 --> 0:21:20.400 a buzzword and has gone away PIM I think we're 0:21:20.400 --> 0:21:23.359 going to see today and into the future. I would 0:21:23.359 --> 0:21:27.440 describe it as managements that actually think bigger and broader 0:21:27.440 --> 0:21:30.359 than just the risks that appear in the next ninety days. 0:21:30.800 --> 0:21:33.920 Managements that look out three to five years and think 0:21:33.960 --> 0:21:37.840 about a broad section of material risk to their business. 0:21:37.960 --> 0:21:41.040 Those companies are going to outperform other companies, says the 0:21:41.080 --> 0:21:43.840 man who rides his bike to work. Chris Alman. Always 0:21:43.840 --> 0:21:45.680 a pleasure. We love speaking with you. Chris Alman is 0:21:45.720 --> 0:21:49.159 Chief Investment Officer of the California State Teachers Retirement System, 0:21:49.160 --> 0:21:52.600 with more than two hundred billion dollars under management. It's 0:21:52.640 --> 0:22:08.520 based in Sacramento, California. Now let's turn our attention to Sprint. 0:22:08.560 --> 0:22:10.120 I want to find out what's going on there. We've 0:22:10.119 --> 0:22:12.160 got John Butler. He is an expert when it comes 0:22:12.200 --> 0:22:16.680 to telecom and telecom equipment, and he is joining us now. 0:22:16.720 --> 0:22:19.879 He's of course from Bloomberg Intelligence and John Sprint up 0:22:19.920 --> 0:22:22.760 a ten percent. That's the stock right now. What are 0:22:22.800 --> 0:22:27.520 they doing? What what's causing this big move higher? Well? Sprinted? Okay, 0:22:27.600 --> 0:22:29.960 in the quarter, you know, it was steady as she 0:22:30.080 --> 0:22:34.320 goes um. Frankly, you know, they always do a very 0:22:34.359 --> 0:22:38.639 good job about sort of managing investor expectations and giving 0:22:38.680 --> 0:22:42.000 people the sense that they're writing the ship, and they are, 0:22:42.200 --> 0:22:45.120 but it really is a cost cutting thing for them 0:22:45.119 --> 0:22:48.199 more than a top line story. At this point. What 0:22:48.320 --> 0:22:51.359 I think is driving the stock up is CEO Marcello 0:22:51.480 --> 0:22:59.680 Clare was asked about potential combinations Charter, Yes, and he 0:22:59.720 --> 0:23:04.679 told people to expect something coming soon. Um in the 0:23:04.720 --> 0:23:08.440 near future, I believe was the term he used. Uh, 0:23:08.520 --> 0:23:09.840 what are some of the what are some of the 0:23:09.920 --> 0:23:13.000 possibilities in John Butler's Well, Before I answer that, I'll 0:23:13.040 --> 0:23:15.600 just say I hope he's right, you know, Sprint has 0:23:15.640 --> 0:23:19.320 been on the block for a while. Um Soft Bank 0:23:19.520 --> 0:23:25.160 and in particular CEO uh Massa Yoshi San owns eight 0:23:25.280 --> 0:23:29.560 percent of Sprint and he has really tried to monetize 0:23:29.600 --> 0:23:32.480 that asset for a long time now, so tried to 0:23:32.520 --> 0:23:35.480 sell it. Yeah, and it feels like a house that's 0:23:35.520 --> 0:23:37.879 been on the market a little bit too long. You know, 0:23:38.080 --> 0:23:42.800 it begins to get people wondering as to aging to Yeah, 0:23:42.920 --> 0:23:47.040 what's really wrong there? But you know there's a convergence 0:23:47.080 --> 0:23:51.000 now happening between cable and telecom or it's looming more 0:23:51.080 --> 0:23:54.240 than anything. You see a T and T buying Time 0:23:54.240 --> 0:23:59.800 Warner getting into content. Verizon has shown interest there through 0:24:00.000 --> 0:24:02.320 a O L and Yahoo, both of which you have 0:24:02.359 --> 0:24:05.280 a lot of content, and there's been talk that they're 0:24:05.359 --> 0:24:08.919 kicking the tires and media land. So you know, the 0:24:08.960 --> 0:24:12.479 potential for a cable company to buy Sprint or Sprint 0:24:12.520 --> 0:24:14.800 to buy a cable company has been high on the 0:24:14.880 --> 0:24:20.639 rumor mill um. You know, there's again potential, there's bundling potential. 0:24:20.680 --> 0:24:24.240 They're right where people can buy their wireless, their cable, 0:24:24.280 --> 0:24:27.679 their broadband all from one provider. You know, I have 0:24:27.760 --> 0:24:30.320 to say, John and I this just shows the narrow 0:24:30.440 --> 0:24:33.359 lens with through which I see the world. But here Sprint, 0:24:33.400 --> 0:24:36.040 and I think, wow, They're the biggest issuer in the 0:24:36.119 --> 0:24:38.679 high old bond market and the one point three trillion 0:24:38.720 --> 0:24:42.400 dollar US higher bond market. They have more than twenty 0:24:42.440 --> 0:24:47.080 four billion dollars in the main index that people track, 0:24:47.560 --> 0:24:49.800 And this just makes me wonder. I mean, first of all, 0:24:49.920 --> 0:24:52.960 would any buyer have to assume that date debt? And 0:24:52.960 --> 0:24:56.440 how much of an obstacle is that to purchase? And 0:24:56.800 --> 0:24:59.840 second of all, if it doesn't fall through, is there 0:25:00.080 --> 0:25:02.680 chance that Sprint could go into a spiral and sort 0:25:02.680 --> 0:25:06.320 of fail to pay the mounting UH interest payments that 0:25:06.400 --> 0:25:10.439 it owes. We'll start by saying, thank god, I'm not 0:25:10.520 --> 0:25:14.200 our credit analysts. We have a telecom credit analyst named 0:25:14.240 --> 0:25:17.400