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Speaker 1: Please to say.

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Speaker 2: Joining us right now in studio is David Hunt is

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Speaker 2: the CEO over at PGUM.

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Speaker 1: Thanks for being here, David, Thanks for having me back.

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Speaker 2: This has been a year in twenty twenty three that

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Speaker 2: I think defied a lot of expectations. I'm sure you

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Speaker 2: remember we came into this year expecting in recession. We

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Speaker 2: came into this year expecting a lot of pain and

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Speaker 2: equity markets, and we kind of got the exact opposite.

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Speaker 2: And the big question everyone wants to know is whatever

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Speaker 2: led to that this year to the upside? Is that

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Speaker 2: going to continue into twenty twenty four and.

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Speaker 1: It's so why?

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Speaker 3: No, It's a great point, and I think all people

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Speaker 3: in the prediction business were led to a lot of humility,

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Speaker 3: I think over the last year, and so I think

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Speaker 3: that the most important thing for long term investors is

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Speaker 3: to focus on what's really changed in the regime. And

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Speaker 3: for us, we believe that over the next few years

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Speaker 3: we will have somewhat higher inflation and somewhat higher rates

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Speaker 3: than we've had kind of in the previous decade. And

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Speaker 3: I think that that's really important because we had a

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Speaker 3: decade before the pandemic when savers were effectively penalized around

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Speaker 3: the world, and it led to this enormous hunt for yield,

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Speaker 3: and it pushed a lot of assets into much riskier things,

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Speaker 3: probably than they had business being. My real hope is

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Speaker 3: that we are now returning to what I think is

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Speaker 3: going to be a healthier balance between savers and investors.

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Speaker 3: Actually retirees and pension funds will do better. And in

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Speaker 3: that higher for longer view, you are going to see

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Speaker 3: a big rotation into credit, and we can already see

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Speaker 3: that beginning to play out in the institutional market. Is

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Speaker 3: we're starting to see some signs of it in the

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Speaker 3: retail market, and I think that's going to be a

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Speaker 3: big theme for next year.

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Speaker 2: That rotation into credit. What does it come at the

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Speaker 2: expense of.

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Speaker 3: So in the initial days, a lot of people actually

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Speaker 3: used their public bond portfolio for liquidity and a lot

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Speaker 3: of the money that came out of that because there

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Speaker 3: was a lot of pain obviously as interest rates rose

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Speaker 3: fast when into money market funds, and that's where it's

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Speaker 3: been for the majority of this year.

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Speaker 1: So what we're seeing now is money is coming.

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Speaker 3: Out of money market and we expect that to be

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Speaker 3: at a much higher level next year.

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Speaker 1: People are going to draw down on that.

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Speaker 3: Excess savings, and institutions are going to draw down on

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Speaker 3: the liquid that they've had, and they're going to be

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Speaker 3: putting that money to work in the public fixed income

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Speaker 3: markets in levels that we haven't seen in a number

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Speaker 3: of years.

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Speaker 4: And of course, watching just money pile into money market

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Speaker 4: funds while we're at five point nine trillion dollars right now,

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Speaker 4: it's truly one of the more stunning stories it is

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Speaker 4: of twenty twenty three. But let's talk a little bit

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Speaker 4: about that rotation back into credit. You mentioned the public

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Speaker 4: fixed income markets, what about the private credit markets in

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Speaker 4: private markets in general.

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Speaker 3: Well, I'm really glad you raised that because obviously private

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Speaker 3: credit is a really really important part of certainly our business.

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Speaker 3: I mean, our private alternatives businesses are one of the

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Speaker 3: largest in the world, and we have about three hundred

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Speaker 3: billion that we invest in that and private credit has

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Speaker 3: been probably our fastest growing business. And the reason for

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Speaker 3: that is not only the rate environment, but it's also

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Speaker 3: been that the banks have continued to really be very

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Speaker 3: difficult lenders into this market. They following the gfc's had

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Speaker 3: a lot of capital restrictions put on, and people are

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Speaker 3: expecting those restrictions to get even more punitive over the

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Speaker 3: next year. And so we are seeing that many, many

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Speaker 3: middle market companies are looking for private credit opportunities, and

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Speaker 3: many investors would like to have that in part of

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Speaker 3: their portfolio. And so I think we're kind of only

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Speaker 3: halfway through the real development of a big shift of

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Speaker 3: much more investment by institutional investors into private credit, large

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Speaker 3: across all sorts of strategies.

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Speaker 4: And it's really interesting to hear that that's your fastest

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Speaker 4: growing business, A question I keep coming back to around

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Speaker 4: conversations around private credit. The growth has been fantastic, But

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Speaker 4: you think about from the investors standpoint, you can have

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Speaker 4: pretty good returns in the public market right now, you

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Speaker 4: think about the high yields in the public fixed income markets,

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Speaker 4: you have a lot more transparency as well. What necessarily

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Speaker 4: is the pitch for private credit over public credit?

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Speaker 3: Well, as I said, I think the big rotation for

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Speaker 3: the next year is going to be actually into public

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Speaker 3: fixed income. As one of the largest fixed income managers

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Speaker 3: in the world, we really see that across our strategies.

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Speaker 1: And when you can be paid well.

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Speaker 3: And people are now comfortable taking some a duration risk,

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Speaker 3: I think you're going to see that rotate very clearly.

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Speaker 3: In in private credit, what you're getting is, at least

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Speaker 3: in our model, you're getting a directly originated product. So

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Speaker 3: we're out calling on middle market companies. We know the companies,

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Speaker 3: and we're able to get covenants and other forms of

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Speaker 3: protection that mean that we are a little bit of

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Speaker 3: a higher return than the public markets, and when things

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Speaker 3: go south, as they inevitably will, we actually have excellent

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Speaker 3: protections for our investors, so our total return over the

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Speaker 3: cycle will clearly be higher.

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Speaker 2: All right, Well, this could be a big structural change

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Speaker 2: in how people invest going forward.

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Speaker 1: I am curious about.

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Speaker 2: I think what I think is probably another big structural

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Speaker 2: change going on, and that's actually in Japan going on

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Speaker 2: with its economy, with its fiscal policy and with its

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Speaker 2: monetary policy, and investors really seem to be trying to

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Speaker 2: front run this right now.

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Speaker 1: You know.

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Speaker 3: It's a great point, and I think I think that

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Speaker 3: one of the bright spots around economically has been the

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Speaker 3: story of Japan. I wish I could tell you that

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Speaker 3: they have kind of fully implemented a lot of the

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Speaker 3: governance reforms that many institutional investors have been pressing them for.

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Speaker 1: But they have made good progress.

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Speaker 3: The economy itself is in better shape, and they are

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Speaker 3: starting to see some movement on prices, which is you know,

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Speaker 3: for many years they were not able to do so.

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Speaker 3: I do think the story in Japan is more positive

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Speaker 3: than we that we've seen, and at least for US

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Speaker 3: and we have a big business there, that's been extremely

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Speaker 3: good news for our investors.

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Speaker 2: Is the sense here that the decisions that the government

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Speaker 2: is going to have to make and the monetary policy

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Speaker 2: makers have to make, is that going to draw more

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Speaker 2: people off the sidelines, meaning more born investment coming in

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Speaker 2: or the other fear that a lot of people have

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Speaker 2: had is that the domestic investors there will actually pull

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Speaker 2: back retrench from places like the US and elsewhere.

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Speaker 3: No. I think you will see more capital going into Japan, absolutely.

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Speaker 3: I mean one of the interesting things that's happening, and

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Speaker 3: I was just there two weeks ago, is that you

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Speaker 3: can feel this pivot globally away from China and toward

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Speaker 3: you know, Korea, Japan, Australia, and you can feel that

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Speaker 3: from a security perspective, You feel that when you talk

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Speaker 3: to a lot of the diplomats, and you feel it

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Speaker 3: from an investor perspective, I want.

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Speaker 4: To go back to the US. I want to talk

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Speaker 4: about one of the other big stories of this year,

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Speaker 4: which of course has been a commercial real estate, especially

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Speaker 4: coming out of the banking crisis that we saw in March.

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Speaker 4: You said in June that you see sixty percent of

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Speaker 4: the office real estate market in purgatory, that you're going

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Speaker 4: to see a big workout over the next twenty four months.

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Speaker 4: Where are we in that timeline.

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Speaker 3: I mean, regrettably, we're still in the rather early days

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Speaker 3: of that. I would still hold to my sentiment that

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Speaker 3: a lot of office buildings that were built more than

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Speaker 3: ten years ago are really not fit for purpose, and

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Speaker 3: if they don't have great locations, I think they're going

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Speaker 3: to have a bit of a hard time. But I

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Speaker 3: would also emphasize that real estate is not the same

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Speaker 3: as office. There are many other spaces within real estate

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Speaker 3: that are actually doing pretty well for US. Multifamily has

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Speaker 3: held up better than we would have hoped and has

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Speaker 3: actually been doing well. Specialty real estate, by which I

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Speaker 3: mean senior housing, data center funds, infrastructure has actually all done.

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Speaker 1: Really well through this.

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Speaker 3: So I don't want everything to be painted with the

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Speaker 3: same brush as we do in office, which has a

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Speaker 3: long way to work way itself out.

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Speaker 4: A long way to work itself out. Well, let's talk

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Speaker 4: a little bit more about real estate, bringing it back

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Speaker 4: to the bank and conversation. Banks obviously have a lot

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Speaker 4: tied up in commercial real estate. Have we seen them

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Speaker 4: draw out of the real estate market more broadly and

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Speaker 4: has that created opportunities for you?

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Speaker 1: It has.

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Speaker 3: So there's no question that the pressure they've had on capital,

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Speaker 3: as well as the fact that they've had to take

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Speaker 3: some reserves against their holdings, has meant that there's much

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Speaker 3: less money that they're willing to put out into new

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Speaker 3: projects and new developments, and so private capital has really

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Speaker 3: stepped into that. And we're one of the largest private

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Speaker 3: real estate debt providers in the US, increasingly in Europe.

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Speaker 3: And I think that we are absolutely provided we adhere

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Speaker 3: to our underwriting standards and we keep leverage at a

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Speaker 3: reasonable level.

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Speaker 1: We like the risks that we can take in there.

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Speaker 4: All right, Well, that's a good place to end at. David,

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Speaker 4: It's really great to see you, especially on set that

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Speaker 4: is PG and CEO. David Hunt