Speaker 1: Hello, Odd Lots listeners.
Speaker 2: I'm Jill Wisenthal and I'm Tracy Alloway Tracy. We're doing
Speaker 2: another live show and it's right here in New York City.
Speaker 3: Yeah, this one should be our biggest yet, and we're
Speaker 3: going to have a bunch of Odd Lots favorites and
Speaker 3: do something maybe a little different to some of our
Speaker 3: previous live podcast recordings.
Speaker 2: When the guests are revealed, the show is going to
Speaker 2: sell out right away, so you should really just go
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Speaker 2: at Recket, NYC, and you can find a ticket link
Speaker 2: at Bloomberg dot com slash odd Lots or Bloomberg Events
Speaker 2: dot com slash odd Lots Live and.
Speaker 3: Why we hope to see you there.
Speaker 4: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Hello and welcome to another episode of the Odd Lots Podcast.
Speaker 3: I'm Jill Wisenthal and I'm Tracy Tracy.
Speaker 2: This has come up a few times on the podcast
Speaker 2: over the years, but you know, you.
Speaker 1: Really feel dumb there. You could really feel.
Speaker 2: Dumb as an investor over the last i don't know,
Speaker 2: fifteen twenty years if you literally bought anything else besides
Speaker 2: big tech.
Speaker 3: Stocks, big US text, Yeah, big US text docks. Yeah,
Speaker 3: that's exactly right. And the funny thing is investors have
Speaker 3: been encouraged to diversify, right, Like this is the mantra
Speaker 3: of markets is that you shouldn't put all your eggs
Speaker 3: in one basket, et cetera, et cetera. And so you've
Speaker 3: heard for the past ten or fifteen years that you
Speaker 3: should diversify into international stocks, you should diversify into small caps. Yeah,
Speaker 3: sixty forty and a lot of those things have turned
Speaker 3: out to be duds, or at least sixty forty was
Speaker 3: a dud for like a couple of years, kind of
Speaker 3: kind of.
Speaker 2: I mean, it mostly did well, but like, yeah, then
Speaker 2: it had some it had some rough years, particularly out
Speaker 2: of the pandemic.
Speaker 3: But certainly you would have been missing out on big
Speaker 3: gains if you put money into small caps or international
Speaker 3: stocks versus the big US techtoks.
Speaker 2: Right, And you know, we've gotten a little bit. You know,
Speaker 2: when deep Seat came out, that raised some questions about
Speaker 2: big tech stocks. Obviously with the policy volatility in the US,
Speaker 2: which is one way to put it, there have been
Speaker 2: some questions about, Okay, is now the time to diversify abroad. Yeah, okay,
Speaker 2: you could have bought money buying Ryan Mattal or one
Speaker 2: of the beneficiaries of German defense spending. But so far,
Speaker 2: you know, it's still not obvious that like there's some
Speaker 2: other big moneymaker out there for investors besides big tech.
Speaker 1: But this is but we may be at a juncture.
Speaker 5: Well.
Speaker 3: I think the other unappreciated aspect is the importance of
Speaker 3: the benchmarks in all of this. And I think investors
Speaker 3: tend to think of benchmark index providers as these very
Speaker 3: neutral entities that are like holding out a mirror to
Speaker 3: the market and just reflecting what's already there. But actually
Speaker 3: a lot of their decisions are very active and have
Speaker 3: very very big implications for investors. So you know, if
Speaker 3: MSCI says that the all World index is going to
Speaker 3: have small caps and big caps in it, then investors
Speaker 3: are you know, they're forced to buy small cap exposure.
Speaker 2: That's totally correct, and this is core finance theory that
Speaker 2: the optical portfolio is more or less the global portfolio.
Speaker 2: We've talked about that with the dimensional guys, you really
Speaker 2: should have awaited allocation somehow, if possible, to every bond,
Speaker 2: stock and piece of real estate out there and that's
Speaker 2: the best you can do, and that clearly has not
Speaker 2: been the best you can do for a long time.
Speaker 2: And so we want to talk about the tortured pain
Speaker 2: of the poor diverse byed allocator and.
Speaker 3: The tyranny of the benchmark index providers.
Speaker 2: Yeah, very shaped, very Shakespearean. Anyway, I'm really excited. I
Speaker 2: think we do, in fact have the perfect guest, someone
Speaker 2: who I've been a big fan of for a long time,
Speaker 2: someone I've wanted to have on the show for a
Speaker 2: long time. He's probably one of my top five favorite
Speaker 2: posters on Twitter, although he's quite a down a little
Speaker 2: bit lately, but I think he's addicted like the rest
Speaker 2: of us. We're going to be speaking with Krishna Mamani.
Speaker 2: He is currently the Chief Investment Officer of the Lafayette
Speaker 2: College Endowments. Previously, he was the CIO at the Oppenheimer Funds,
Speaker 2: which was bought by Invesco. So a long storied career,
Speaker 2: someone who knows about all of this stuff. So, Krishna,
Speaker 2: thank you so much for coming on the podcast. Thrilled
Speaker 2: we can finally make it happen.
Speaker 5: Thank you, thanks for having me.
Speaker 2: Absolutely what do they teach you in school about diversification.
Speaker 2: What is when they you know, when you're training to
Speaker 2: be an investor and asset allocator, what are they actually
Speaker 2: What do they tell you?
Speaker 5: Diversification is the biggest free lunch available in the investment world,
Speaker 5: and I think from a longer term perspective that is
Speaker 5: absolutely true and probably something that we are to think about.
Speaker 5: But as you mentioned, the results over the it's not
Speaker 5: just last fifteen twenty years.
Speaker 1: The results over the.
Speaker 5: Last thirty years forty years have been very very, very
Speaker 5: very different than what you would have expected if you
Speaker 5: had gone down this path. Doesn't mean that the basic
Speaker 5: principle isn't invalidated. It just simply means that you have
Speaker 5: to think about it and acknowledge the fact that it
Speaker 5: hasn't worked out according to plan.
Speaker 3: Where did the diversification thesis actually come from.
Speaker 5: Well, diversification thesis basically says that if you have security
Speaker 5: specific risks in individual securities, you should if you can
Speaker 5: find a way of diversifying that away, then that is
Speaker 5: something that you should do because it reduces your overall
Speaker 5: risk profile without sacrificing too much in return terms. So
Speaker 5: that's what that's where the theory comes from.
Speaker 3: And the like who propagated it. It must have had, like,
Speaker 3: you know, an endorser, or it must have made its
Speaker 3: way into the market in one way or another.
Speaker 5: I think it came from cap M and William Sharp
Speaker 5: and you know that quarterie of academicians who basically did
Speaker 5: the pioneering research in this field in the let's say
Speaker 5: seventy and early nineties.
Speaker 2: Yeah. In my four to one K, I have like
Speaker 2: a very conservative I've diversified fund. It has not kept
Speaker 2: up with the S and P five hundred, I don't think.
Speaker 2: But every once in a while, such as the first
Speaker 2: couple weeks of April twenty twenty five or the first
Speaker 2: couple of weeks of March twenty twenty, I take a
Speaker 2: look at it and I'm like, oh, I pat myself
Speaker 2: on the back for those moments of diversification.
Speaker 1: Is it worthwhile? Just for those reasons?
Speaker 2: Every once in a while you're like, okay, you know what,
Speaker 2: this makes me feel good. I'm not going to panic last,
Speaker 2: I'm actually my port. You know that four one K
Speaker 2: it actually stays close to all the time highs. I keep,
Speaker 2: you know, allocating it a little bit. How much is
Speaker 2: that worth in terms of that comfort that I get
Speaker 2: for like five minutes every twenty years, and relative to
Speaker 2: the cost of underperforming a simple S and P five hundred,
Speaker 2: paying a.
Speaker 3: Price for a peace of mind?
Speaker 5: Yeah, well so I Again, my argument isn't that diversification
Speaker 5: is a bad thing. I think from an economic principles,
Speaker 5: from financial principles, diversification is a good thing. And if
Speaker 5: you can find a way of dis or mitigating your
Speaker 5: overall security specific risk, you are to do that. The
Speaker 5: point I'm trying to I would like to make is
Speaker 5: the fact that it hasn't worked, and therefore, kind of
Speaker 5: relying on thirty years or forty years or one hundred
Speaker 5: years of history to come to some sort of investment
Speaker 5: principles that people follow very religiously, you know, hasn't worked.
Speaker 5: So shouldn't we kind of think about that and try
Speaker 5: to delve into what are the drivers? And it opens
Speaker 5: up a new research field because I would argue that
Speaker 5: the overall research in financial kind of investing is basically
Speaker 5: hasn't evolved a lot since the nineties. It's basically redoing
Speaker 5: the same papers with a little bit of changes here
Speaker 5: and there, but the core thinking cap im core thinking
Speaker 5: really has not changed. So I think the right way
Speaker 5: to use this period of underperformance, whether it will sustain
Speaker 5: itself or whether you know, twenty twenty five change the
Speaker 5: paradigm altogether or not, is kind of kind of irrelevant.
Speaker 5: The key point is, let's kind of look at this period.
Speaker 5: Let's look at it a little in a little bit
Speaker 5: more detail, rather than being extraordinarily Doctornaire about things, which is,
Speaker 5: you know, anytime you post on Twitter that while my
Speaker 5: international funds haven't really worked for me, I get schooled
Speaker 5: by all sorts of people. But the fact is they
Speaker 5: haven't worked for me, and I continue to do that.
Speaker 5: I mean, I have a very diversified portfolio, and I
Speaker 5: will probably stick with it. But I think it is
Speaker 5: also fair to recognize that it hasn't worked, and therefore
Speaker 5: we should look at it in a little bit more
Speaker 5: detail and kind of not take the mantra of diversification
Speaker 5: as religious, which is what it is right now.
Speaker 3: So in your opinion, what are the drivers or the
Speaker 3: reasons why it hasn't worked, because I imagine, you know,
Speaker 3: you could tell a story that the big tech stocks
Speaker 3: in the US have just been phenomenal companies that continue
Speaker 3: to throw off cash. You could maybe tell a story
Speaker 3: about the benchmark indices, which we spoke about in the intro.
Speaker 3: You could tell a story about flows and investors crowding
Speaker 3: into stocks. Why hasn't diversification worked well?
Speaker 5: So again, let's just kind of narrow it down. When
Speaker 5: we are talking about this level of diversification, what we
Speaker 5: are talking about is US stocks not working or US
Speaker 5: stocks doing better than international stocks. So that's what we
Speaker 5: are talking about. I think there are several drivers. I
Speaker 5: think the kind of the tech supremacy of s and
Speaker 5: P five hundred is certainly one of them. The profitability
Speaker 5: of the tech franchise is another one. Low interest rates
Speaker 5: in the US, where growth was higher than interest rates,
Speaker 5: certainly was a factor in driving returns. So and and
Speaker 5: kind of the existence of private equity which got multiples high.
Speaker 5: So there are a plethora of reasons as to why
Speaker 5: things haven't performed, and therefore, you know, it is it
Speaker 5: is worthwhile spending a little You know, these are speculations
Speaker 5: on my part, but this is worthwhile spending a little
Speaker 5: bit of time figuring this out in a little bit
Speaker 5: more rigorous way than we have done so far, because
Speaker 5: you know, right now, again, if anybody puts up a
Speaker 5: notion that diversification is bad, they'll get schooled. But I
Speaker 5: think given the length of time that it hasn't worked,
Speaker 5: and given the length of the magnitude of how it
Speaker 5: hasn't worked, I think it is worthwhile spending a little
Speaker 5: bit of research focused to analyze what the drivers were,
Speaker 5: as you say, and see if there are there are
Speaker 5: some other things that we can divine out of this
Speaker 5: thirty year episode.
Speaker 3: So I totally appreciate the need for additional research and
Speaker 3: I would agree with you on that. But is saying
Speaker 3: that diversification hasn't worked the same as saying that investors
Speaker 3: should only buy winners and avoid all the losers.
Speaker 5: Well, so I think there's an element of that in
Speaker 5: for sure. That is, international markets have done poorly relative
Speaker 5: to US markets. One anecdote here, I used to be
Speaker 5: the spokesperson for Oppenheimer Funds with respect to globalize your
Speaker 5: thinking in twenty eleven when the campaign came out.
Speaker 3: Oh so you were a messenger.
Speaker 5: I was the messenger of this thing, and I kind
Speaker 5: of diversified my portfolio based on that thinking. The idea
Speaker 5: about portfolio construction with respect to diversification, isn't that diversification
Speaker 5: is a bad thing. I think that's a right approach.
Speaker 5: I think given the history over the last thirty forty years,
Speaker 5: we are to think a bit more about are there
Speaker 5: other drivers, rather than just simply believing in the historical
Speaker 5: track record and the volatility context of that historical track record.
Speaker 2: So I am very partial to the idea that a
Speaker 2: big part of the story is the unique profitability of large.
Speaker 1: Tech companies in the US.
Speaker 2: But that is clearly not the only story, because it's
Speaker 2: not just that global stocks have underperformed in many instances,
Speaker 2: They've just performed badly against anything. I'm looking at a
Speaker 2: chart of EWZ, a popular ETF to exposure to Brazil.
Speaker 2: It's basically flat for twenty years. I assume the Brazilian
Speaker 2: economy has grown quite a bit in the last twenty years,
Speaker 2: but it has not redounded apparently to the benefit of
Speaker 2: an American shareholder investing in Brazilian.
Speaker 1: Stocks at all.
Speaker 2: So obviously this can't be the entire st story that
Speaker 2: it's just about US outperformance. It's actually that global stocks
Speaker 2: have done bad.
Speaker 1: What's going on?
Speaker 2: Why in a world in which the economy is generally,
Speaker 2: you know, more or less growing elsewhere, have international equities
Speaker 2: actually just done bad on an objective basis.
Speaker 5: The old adage is the economy is not the equity market. Yeah, yeah,
Speaker 5: and that is that is absolutely true. I think the
Speaker 5: period from let's say twenty ten onwards in the US
Speaker 5: is especially galling. And I think if I had to
Speaker 5: come up with a reason as to why that has
Speaker 5: kind of worked out, the way it has worked out
Speaker 5: is basically because of dollar related global flows.
Speaker 1: Okay, that is I.
Speaker 5: Think the profitability basically attracted a whole lot of things
Speaker 5: that were going to come to a whole lot of
Speaker 5: flows that were going to come to the US because
Speaker 5: of the perceived strength of the dollar during that period.
Speaker 5: Because as I said before, growth was higher than interest
Speaker 5: rates in the US, so it was a natural kind
Speaker 5: of place for those flows to kind of arrive at.
Speaker 2: But like again another one, Mexico, it's just flat for
Speaker 2: twenty years, so in your story, it's not quite flat
Speaker 2: for two Yeah, it's where it was in two thousand
Speaker 2: and seven, so it flat for like eighteen years. Like
Speaker 2: there's a bit The flows are a big part of
Speaker 2: the story. For the fact that these stocks can't deliver
Speaker 2: anything over a decade time horizon.
Speaker 5: Well, so I think domestic flows relative to international flows
Speaker 5: are really very important in determining the state of the
Speaker 5: equity market.
Speaker 1: Okay.
Speaker 5: And the best example counterpoint to what you're talking about
Speaker 5: that I can give you.
Speaker 1: Is really India. Okay.
Speaker 5: So India used to be a market that was supported
Speaker 5: entirely by foreign flows and foreign flows, and when there
Speaker 5: was a panic in New York, all sorts of money
Speaker 5: would leave India and come here and the stock market
Speaker 5: would create. Over the last let's say ten years, as
Speaker 5: the Indian economy took off, and financialization and the saving
Speaker 5: vehicle in India change, and the equity market as opposed
Speaker 5: to land and property became the primary source of savings
Speaker 5: and deployment of those savings. I think the characteristic capital depth, yes,
Speaker 5: capital get financialization of the economy, and right now, the
Speaker 5: drivers in the Indian equity market, at least for the
Speaker 5: last five years, really has been the domestic investors as
Speaker 5: opposed to foreign investors. So I think that is really
Speaker 5: the from a flow standpoint, that is the difference.
Speaker 3: Yeah, And if you look at the MSCI India Index,
Speaker 3: it's like.
Speaker 1: The exact act looks like it's done well.
Speaker 3: Mexico and Brazil Joe, you know what I always say
Speaker 3: I do. Are you going to say it?
Speaker 2: I want you to say it flows before pros.
Speaker 3: Yeah, he did it, all right. That makes me happy.
Speaker 2: By the way, I stole Tracy's joke in the intro,
Speaker 2: She's not happy about that. I said that thing about
Speaker 2: how Shakespeare. Tracy said that right before we went on air.
Speaker 2: I want to give her credit.
Speaker 3: Oh thank you, Joe. But now I feel petty. I
Speaker 3: didn't expect you to, Okay, going back to the conversation.
Speaker 2: I'm trying to make you feel petty. You made me
Speaker 2: feel bad, so now I'm trying to make you feel petty.
Speaker 3: All right, all right, fair, going back to the conversation.
Speaker 3: Can you talk a little bit more about the role
Speaker 3: of the benchmark index providers in all of this.
Speaker 5: The thinking in this world is always benchmarks are terrible,
Speaker 5: but they're terrible, but better than anything.
Speaker 1: Else that we have.
Speaker 5: So I think there is a role for benchmarks, and
Speaker 5: benchmark providers are important participants in the market. And you know,
Speaker 5: the market capitalization of companies like MSCI and SMT Global
Speaker 5: kind of tell you as to how valuable that those
Speaker 5: franchises are. The way, as an investor, you know, if
Speaker 5: you are an asset manager or if you are kind
Speaker 5: of an asset allocator, you know, how you are doing
Speaker 5: has to be evaluated in some sort of a rigorous framework,
Speaker 5: and that's where benchmarks come in. And that's why we
Speaker 5: need benchmarks, because otherwise it'll be free for all. You know,
Speaker 5: I can as a asset allocator, I can you know
Speaker 5: my returns were ten percent. Let's say I can always
Speaker 5: claim that I did a fabulous job when my benchmark
Speaker 5: outperformed by you know, a thousand basis points. So it's
Speaker 5: a you know, there is tyranny of benchmark, but this
Speaker 5: is a necessary tool that we need. I think a
Speaker 5: separate question is the extent of the kind of the
Speaker 5: diversification of the of the benchmarks. So you talked about
Speaker 5: MSCI AQUI and even things like Russell three thousand, things
Speaker 5: like that, So there are issues with diversification. I think
Speaker 5: S and P five hundred. On the other hand, for
Speaker 5: the large gap US market is a very very solid benchmark.
Speaker 5: I mean there are peculiarities with respect to additions and
Speaker 5: taking out of the index, but I think that is
Speaker 5: to be expected in a dynamic market, and I think
Speaker 5: for most, for the most part, it has worked out
Speaker 5: reasonably well.
Speaker 2: You are an employed person. You have had a career
Speaker 2: despite imbibing the gospel of diversification. You have had a
Speaker 2: successful career.
Speaker 1: In the markets.
Speaker 2: Talk to us though about like your peers and career risk,
Speaker 2: et cetera. Because you know, at some point, like you
Speaker 2: keep making less money than you could have by buying
Speaker 2: the US What does that do and what have you seen?
Speaker 2: You know, when you look across the industry, do you
Speaker 2: see an evolution whereby people who were taught the same
Speaker 2: thing as you about diversification have increasingly felt pressure to
Speaker 2: not be diversification or to disguise their diversification in some
Speaker 2: way that they could tell their investment committee, we're diversified,
Speaker 2: but actually, like we just found a way to like
Speaker 2: go extra long Nvidia.
Speaker 5: I think in the institutional world as opposed to retail war, yeah,
Speaker 5: I think diversification is still the matter. And again to
Speaker 5: emphasize that it is the right thing to do.
Speaker 1: But why do you keep saying that.
Speaker 5: If you think about it in statistical terms, you know
Speaker 5: there is a way to diversify the tail risk. But
Speaker 5: what I'm saying is we need to evaluate that and
Speaker 5: see or re evaluate that and see if there are
Speaker 5: some other techniques and methodologies that we can use where
Speaker 5: this doesn't become the only way for you to mitigate
Speaker 5: your overall risk in the portfolio.
Speaker 3: So what would be another technique methodology?
Speaker 5: Evaluating from a track record standpoint, let's say, or from
Speaker 5: a performance standpoint, let's say, does adding emerging markets to
Speaker 5: a globally diversified portfolio? Does that really add a lot
Speaker 5: of value to the process. Does just a let's say
Speaker 5: development market index both the US and Europe and perhaps Japan?
Speaker 5: Can that deliver some level of correlation to the overall
Speaker 5: index without you being stuck in places like China for
Speaker 5: a long period of time, or Brazil or Mexico for
Speaker 5: that matter. So I haven't found the solution. If I
Speaker 5: had found the solution, I would have implemented that in
Speaker 5: my personal portfolio. My point is we ought to think
Speaker 5: about that, and we don't really think about it because
Speaker 5: diversification on a global basis has been the mantra and
Speaker 5: the accepted doctrine forever.
Speaker 1: But say more about the careerrisk.
Speaker 2: Okay, at the institutional level, they're fine, It's like, oh yeah, diversification,
Speaker 2: But you know, for example, I'm always a big fan
Speaker 2: of reading the Bank of America Fund Manager survey every month,
Speaker 2: and these are discretionary fund managers that could do everything
Speaker 2: and for like ten years with a few exceptions, and
Speaker 2: there they say long textocks is the most crowded trade,
Speaker 2: but also it's the trade that continues to work. Talk
Speaker 2: about this effect, this sort of the anti diversification success
Speaker 2: on the sort of thinking of a fund manager who
Speaker 2: probably doesn't love being in a crowded trade, but also
Speaker 2: doesn't want to underperform well.
Speaker 5: So I think an active manager is a kind of
Speaker 5: caught in a way. Right On the one hand, you know,
Speaker 5: you have to outperform your peers. On the other you
Speaker 5: have to outperform the benchmark, and that is a challenge,
Speaker 5: and that challenge leads to the sort of things that
Speaker 5: you are talking about. That is, well, they may do
Speaker 5: very well relative to the benchmark without crowding into the
Speaker 5: most crowded trades, but if their competitors are crowded in
Speaker 5: there and do much much better than them, that's an
Speaker 5: issue for them. So you know, that's their way of
Speaker 5: solving that particular challenge. I think the the the crowded
Speaker 5: trades are have been there for a long period of time.
Speaker 5: But I think the way I would evaluate that is
Speaker 5: how much of a portfolio manager's performance is really driven by,
Speaker 5: you know, the core views that they express as to
Speaker 5: what their edge is, Right, I don't understand so what
Speaker 5: that You know, every portfolio manager would tell you that
Speaker 5: their stra is we look at roc and that's what
Speaker 5: we focus on, and therefore that's how we kind of
Speaker 5: structure our portfolio to pick companies individually.
Speaker 2: Yeah.
Speaker 5: Now if they say that thing and they are kind
Speaker 5: of focused on and that's how I hired them, Yeah,
Speaker 5: and instead they focus on getting into let's say crowded
Speaker 5: trades because they are going up, then that's really a
Speaker 5: red flag from analogat.
Speaker 3: So Joe alluded to this in the intro. But you know,
Speaker 3: if you were diversified into international stocks, there was well,
Speaker 3: there were a couple moments this year where you actually
Speaker 3: looked really smart and you did get a little bit
Speaker 3: of peace of mind as the S and P five
Speaker 3: hundred was selling off. You know, European equities were surging
Speaker 3: earlier in the year. But what do you need to
Speaker 3: see for a durable change in international versus US stocks
Speaker 3: and specifically US tech stocks?
Speaker 5: Well, so I think the underlying economic environment has to
Speaker 5: change for that dynamic. Actually underlying economic and industrial environment
Speaker 5: has to change dramatically for that to kind of play out.
Speaker 5: So if you look at the world from a capitalization standpoint,
Speaker 5: what we are talking about is US on one side,
Speaker 5: and Europe, you know, Japan, India, and China, Brazil, those
Speaker 5: are really the places that we.
Speaker 1: Are talking about.
Speaker 5: So structurally, you know, US economy has done better. The
Speaker 5: dollar is the reserve currency, and the growth outlook over
Speaker 5: the last ten years have been much better in the
Speaker 5: US than it has been, so the flows coming into
Speaker 5: the US ought not to be a surprise in that environment, okay, right,
Speaker 5: And for flows to go the other way, you know, basically,
Speaker 5: the fiscal expansion in Europe has to get going in
Speaker 5: a massive way, and that fiscal expansion has to lead
Speaker 5: to companies and the institutions that can take advantage of
Speaker 5: that fiscal expansion and and therefore deliver superior returns to
Speaker 5: their shareholders. And therefore I've been interested in buying those companies.
Speaker 2: Tracy, do you know how much without looking the decks
Speaker 2: Germany's benchmark index, do you know how much it's up
Speaker 2: in dollar terms?
Speaker 1: This year.
Speaker 3: I do not, although I will confess I have a
Speaker 3: chart of the MSCI all world versus the S and
Speaker 3: P five hundred.
Speaker 1: Yes, but take a guest.
Speaker 3: I have no idea.
Speaker 2: Tell me, Wow, the German stocks in dollar terms of
Speaker 2: forty two percent this year, France up seventeen and a
Speaker 2: half percent dollar terms, neurostocks fifty up twenty two percent.
Speaker 2: I mean, this is serious, and this is like, these
Speaker 2: are numbers that we're really not used to seeing in
Speaker 2: me and Tracy's entire career, this kind of divergence because
Speaker 2: as of the time we're talking about, the US benchmarks
Speaker 2: are actually flat on the air, which is pretty impressive actually,
Speaker 2: given where they were a month ago. Like, at what
Speaker 2: point you're like, this is a seed change?
Speaker 1: What would it take?
Speaker 2: Not from an economic standpoint, but like, you know, what
Speaker 2: does it take for the other fund managers around the
Speaker 2: world to like, oh I believe in I mean, I
Speaker 2: don't start with is this the seed change here or not?
Speaker 1: In your view?
Speaker 5: Well, so you know, again these are spectacular returns, yeah,
Speaker 5: and definitely spectacular relative returns.
Speaker 2: Yeah, it almost to give some spectacular objective returns.
Speaker 1: It's only may. But anyway, keep going.
Speaker 5: And you know, a lot of these returns are dollar
Speaker 5: driven as well. Yeah, so significant portion is really the thing,
Speaker 5: and a lot of it is because of the upcoming
Speaker 5: fiscal expansion in Germany.
Speaker 1: Yeah okay, So for this to.
Speaker 5: Be sustainable in the long run, I think the economic
Speaker 5: picture for the for the CONTINENTAH has to change.
Speaker 4: Men.
Speaker 2: You know, by the way, just the Bovespa, the Brazilian
Speaker 2: stock market is up twenty five percent in dollar terms.
Speaker 2: Chilean stocks, which have never looked at it, but it's
Speaker 2: right here when I go to the WI page on
Speaker 2: the terminal, that's thirty two percent. It's not even I
Speaker 2: actually hadn't quite realized this. It's not even just a
Speaker 2: Europe story. Later Am too is actually in dollar terms
Speaker 2: having a phenomenal year.
Speaker 5: The confluence of dollar weakness, tariffs, Yeah, you know, those
Speaker 5: are really the things that have kind of had an
Speaker 5: impact on dollarized returns.
Speaker 1: Yeah.
Speaker 5: If they remain sustainable, then it will be worthwhile looking
Speaker 5: into those markets and the.
Speaker 1: Thesis would be proven.
Speaker 5: But we have also had episodes where we have had
Speaker 5: these types of moves and pretty soon in six months,
Speaker 5: a couple of years, you give back all of these
Speaker 5: spectacular relative returns.
Speaker 3: But if the argument is diversification is good for protecting
Speaker 3: you from tail risks, then you know, what's been happening
Speaker 3: this year, specifically in April, seems like a pretty big
Speaker 3: tail risk, and diversification worked.
Speaker 5: In this case. Absolutely diversification worked. The question is, is
Speaker 5: the diversification or the relative performance of European markets and
Speaker 5: the rest of the world. Is it all concentrated in,
Speaker 5: you know, in a very short period of time?
Speaker 1: What do I mean by that?
Speaker 5: I think the if the expectation is that the US,
Speaker 5: because of tariffs and all sorts of policy responses, the
Speaker 5: things that drove the dollar and the flows into the
Speaker 5: US go away on a sustained basis, the trend will
Speaker 5: probably persist. I would posit that that probably isn't, or
Speaker 5: at least that probably isn't a very realistic scenario at
Speaker 5: this point.
Speaker 3: What time frame should you be judging diversification success on?
Speaker 5: Actually, that's a really good question. So successive diversification, from
Speaker 5: my mind, has to be evaluated over a reasonably long
Speaker 5: period of time, So five, ten years, even twenty thirty years,
Speaker 5: I think those are the timeframes that you have to
Speaker 5: evaluate it on, so that everything that has you know,
Speaker 5: everything economically has had an opportunity to play itself out,
Speaker 5: and all we are talking about is the security specific
Speaker 5: volatility for individual securities that benefits from this diversification. So
Speaker 5: I think it has to be evaluated over a long
Speaker 5: period of time. And that's why when it hasn't really
Speaker 5: performed for as long period as it has not, despite
Speaker 5: their recent perform moments, the point I would make is,
Speaker 5: let's kind of think about that a little bit and
Speaker 5: look at why that has been the case.
Speaker 2: Wait, I want to make a counter argument, why shouldn't
Speaker 2: we evaluate a tail risk hedge, which implicitly is what
Speaker 2: diversification seems to offer in just very short term, because
Speaker 2: like in March twenty twenty, there was a possibility, you know,
Speaker 2: the economy could have unraveled further, I could have lost
Speaker 2: my job, I would have been on the hook for
Speaker 2: paying for my own health insurance and so forth. I
Speaker 2: was very excited in that moment that RACH went to
Speaker 2: zero and the bond portion of my poor one K
Speaker 2: or whatever shot up, right, that actually helped me in
Speaker 2: an acute moment. There's obviously, you know, we haven't hit
Speaker 2: a recession yet in the US. In those acute moments
Speaker 2: where there's suddenly a risk and your sort of your
Speaker 2: career is correlated to your portfolio. Can't it be enough
Speaker 2: for diversification just to pay off in the short term.
Speaker 5: Okay, So let's kind of make sure that we are
Speaker 5: talking about the same diversification. Okay, so you know, diversification
Speaker 5: between equities and bonds. I think that from a risk
Speaker 5: management perspective, because of different volatility characteristics of the two instruments,
Speaker 5: that is still very much valid.
Speaker 1: Okay.
Speaker 5: You know, one has you know, double digit volatility, the
Speaker 5: other has five six percent, and they react in the
Speaker 5: you know, in different economic environments, you know, very very differently,
Speaker 5: So that is that is valid. I think what we
Speaker 5: are talking about is really international diversifity. Yes, And if
Speaker 5: you look at the correlations of international equities relative to
Speaker 5: US domestic equities, correlation is very very high. So it's
Speaker 5: it's giving you, it's giving you some diversification benefit, but
Speaker 5: it is not giving you the level of diversification benefit
Speaker 5: that you think you are getting.
Speaker 3: Have you done anything in your own portfolios to take
Speaker 3: into account some of these thoughts over diversification.
Speaker 5: So I've been a victim of this diversification because I
Speaker 5: constructed my portfolio and I have posted this on Twitter
Speaker 5: for everyone to see, which is you know, I have
Speaker 5: bought you know, international small cap, and I bought US
Speaker 5: small cap, and I bought developing markets, and so I
Speaker 5: have constructed a portfolio in a very diversified way. It
Speaker 5: has worked out fine, but it could have worked out
Speaker 5: a lot better. For that, am I doing something relative
Speaker 5: to you know that? I think the thinking with respect
Speaker 5: to that has to be about some valuation context in
Speaker 5: the environment. So if you were going after sticking with
Speaker 5: it for thirty years, if you were going to flip
Speaker 5: that switch, doing it when US markets are the most
Speaker 5: expensive probably isn't the right thing to do, But that
Speaker 5: doesn't take away us thinking about what the drivers of
Speaker 5: that when that is.
Speaker 1: Not the case.
Speaker 3: I see, so that.
Speaker 5: When the opportunity comes back, we are kind of thinking
Speaker 5: about it the right way rather than just sticking to
Speaker 5: the mantra that we have thought about for the last
Speaker 5: thirty years.
Speaker 2: If you flip and suddenly you're like, you know what,
Speaker 2: everything I was taught I was wrong and I'm going
Speaker 2: to lean more heavily into the US. Will you let
Speaker 2: everyone know so that then we can then diversify exposure, Like,
Speaker 2: will you put out that alert I've finally caved. I've
Speaker 2: finally caved. I finally don't believe anything I learned in
Speaker 2: school because maybe the rest of us can use that
Speaker 2: as an opportunity to go heavy into EEM.
Speaker 5: Sounds like a good idea. I'll be I'll be again,
Speaker 5: as I said school on whichever platform I kind of
Speaker 5: put that out, you know, as an investor who has
Speaker 5: kind of stuck with this for almost forty years, Yeah,
Speaker 5: it has been a challenge, and what I am doing
Speaker 5: is acknowledging that challenge. That is, the lack of correlation
Speaker 5: that we were expecting from international aquities hasn't worked out.
Speaker 1: That's it.
Speaker 2: But just on this point, and you've been in a
Speaker 2: few different seats, how do you you know, what do
Speaker 2: you have to do career wise to maintain that discipline
Speaker 2: because this is a big thing, right, career risk in
Speaker 2: any seat and they're different. You know, some people are
Speaker 2: on a very short leache at a big institution that
Speaker 2: has longevity of over a century, maybe of long leash,
Speaker 2: et cetera. What is you know, how does career risk
Speaker 2: and career longevity play into this type of thing?
Speaker 5: Well, so you know, again you have to distinguish between
Speaker 5: the type of investors you are. So if you are
Speaker 5: an asset class investor and your mandate is international investing,
Speaker 5: international may not have done well relative to domestic investing,
Speaker 5: but somebody allocated money to you and they're looking for
Speaker 5: you to do better than international benchmarks, and your peers
Speaker 5: in doing the same thing, so they're career risk is
Speaker 5: really not direct. The career risk is in terms of flows.
Speaker 5: That is, if if you had a global mandate or
Speaker 5: an international mandate.
Speaker 2: You know the the So it's not like you're getting
Speaker 2: fired from nder performance.
Speaker 1: It's just that no one allocates, no one allocated, got it.
Speaker 5: If you are an allocator, then you know it's it's
Speaker 5: kind of the performance is relative to your benchmark, and
Speaker 5: your benchmark that's how you are evaluated, and your benchmark
Speaker 5: is for the for most institutional portfolios, it's still very
Speaker 5: much MSCI acued for the equity component.
Speaker 2: Christian MoManI, that seems like a really key point. As
Speaker 2: long as that the benchmark, some institutional allocation will survive.
Speaker 2: Really appreciate you coming on odd lots. We're all going
Speaker 2: to be looking out for that tweet when you decide
Speaker 2: to go into meg seven.
Speaker 1: Yeah sounds good.
Speaker 2: You know what I really appreciate. Krishna is probably the
Speaker 2: only person on social.
Speaker 1: Media I knew you were going to say this.
Speaker 2: We will admit that they didn't time the market perfectly,
Speaker 2: and we're all in techtoks. Over the last ten years,
Speaker 2: everybody else timed them. Oh I went to cash, you know,
Speaker 2: blah blahlah. Oh, you know whatever. I'm glad someone admits
Speaker 2: the truth, which is that most people have just been,
Speaker 2: at least in recent years, overly diversified.
Speaker 3: Well, it's also interesting to me to see a big
Speaker 3: institutional investor tweet at all.
Speaker 1: Oh yeah, well that's true.
Speaker 3: All right, So that was really interesting. One thing I
Speaker 3: am coming to really appreciate is that peace of mind
Speaker 3: point and the idea that there is a price to
Speaker 3: pay for peace of mind. It's not necessarily free, but
Speaker 3: every once in a while maybe it does actually help
Speaker 3: you in acute moments of stress.
Speaker 1: Well totally.
Speaker 2: And look, if the markets are going down, if you're
Speaker 2: let's say you're employed in America and you have a
Speaker 2: lot of this is something I think about a lot.
Speaker 2: If you're employed at an American company and you have
Speaker 2: a heavily exposed American Index. When markets are tanking, that
Speaker 2: is often associated with recession, right, and that is associated
Speaker 2: with an increased probability of losing your job. And an
Speaker 2: increased probability of losing your job is associated with having
Speaker 2: to sell your investments, maybe even take a tax hit
Speaker 2: at a time when you can least afford to pay it,
Speaker 2: sell your investments to literally continue your life, which is
Speaker 2: sort of like the worst correlation you could, you know,
Speaker 2: the worst confluence events. So the idea that like, okay,
Speaker 2: like if you lose your job and you have to
Speaker 2: dig into your savings, at least you're not selling at
Speaker 2: a local bottom in the market. That seems like one
Speaker 2: benefit to diversified allocation.
Speaker 3: Yeah, so you're not so invested in basically America squared
Speaker 3: and you won't panic.
Speaker 2: I mean, this is the other thing, right, Like people,
Speaker 2: we're all we're animals, and you see the line go
Speaker 2: down and you sell and so forth. Perhaps if the
Speaker 2: line is a little bit more stable, then you know
Speaker 2: you're overall top line, then you don't you know, then
Speaker 2: you don't make rash emotional decisions as quickly, which I
Speaker 2: think there's a lot of benefit to not doing.
Speaker 3: Do you think there's a difference between how much diversification
Speaker 3: helps the retail investor versus big institutional investors.
Speaker 2: That's a really good question. I mean, the nice thing
Speaker 2: about the big institutions, right is they have longevity themselves.
Speaker 2: And yeah, it's a good question. But I don't think
Speaker 2: any American retail investors diversify anymore. I think that, you know,
Speaker 2: most it seems like retail investors in America, like, you know,
Speaker 2: it's not enough to go long mag seven. You have
Speaker 2: to sell puts on mag seven, Right, that's right, like
Speaker 2: and like hyper whatever. The opposite of diversification.
Speaker 3: Is hyper concentration.
Speaker 1: Hyper concentration.
Speaker 3: Yeah, all right, shall we leave it there.
Speaker 1: Let's leave it there.
Speaker 5: This has been.
Speaker 3: Another episode of the Audlots podcast. I'm Tracy Alloway. You
Speaker 3: can follow me at Tracy.
Speaker 2: Alloway and I'm Jill Wisenthal. You can follow me at
Speaker 2: the Stalwart. Follow our guest Krishna Mamani. He's at Krishna Mamani.
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