WEBVTT - Krishna Memani on Wall Street's Very Expensive "Free Lunch" 0:00:00.080 --> 0:00:01.280 Hello, Odd Lots listeners. 0:00:01.360 --> 0:00:04.520 I'm Jill Wisenthal and I'm Tracy Alloway Tracy. We're doing 0:00:04.600 --> 0:00:06.880 another live show and it's right here in New York City. 0:00:07.080 --> 0:00:10.080 Yeah, this one should be our biggest yet, and we're 0:00:10.080 --> 0:00:12.480 going to have a bunch of Odd Lots favorites and 0:00:13.160 --> 0:00:15.880 do something maybe a little different to some of our 0:00:15.960 --> 0:00:18.200 previous live podcast recordings. 0:00:18.280 --> 0:00:21.079 When the guests are revealed, the show is going to 0:00:21.120 --> 0:00:22.840 sell out right away, so you should really just go 0:00:22.840 --> 0:00:25.960 get your ticket right now. It's June twenty sixth. It's 0:00:25.960 --> 0:00:28.560 at Recket, NYC, and you can find a ticket link 0:00:28.600 --> 0:00:31.800 at Bloomberg dot com slash odd Lots or Bloomberg Events 0:00:31.840 --> 0:00:34.040 dot com slash odd Lots Live and. 0:00:33.960 --> 0:00:35.440 Why we hope to see you there. 0:00:38.680 --> 0:00:52.520 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:54.000 --> 0:00:57.880 Hello and welcome to another episode of the Odd Lots Podcast. 0:00:57.960 --> 0:01:00.960 I'm Jill Wisenthal and I'm Tracy Tracy. 0:01:01.040 --> 0:01:03.960 This has come up a few times on the podcast 0:01:04.000 --> 0:01:06.280 over the years, but you know, you. 0:01:06.240 --> 0:01:08.720 Really feel dumb there. You could really feel. 0:01:08.600 --> 0:01:10.760 Dumb as an investor over the last i don't know, 0:01:10.840 --> 0:01:14.560 fifteen twenty years if you literally bought anything else besides 0:01:14.560 --> 0:01:15.160 big tech. 0:01:15.040 --> 0:01:18.080 Stocks, big US text, Yeah, big US text docks. Yeah, 0:01:18.080 --> 0:01:21.080 that's exactly right. And the funny thing is investors have 0:01:21.120 --> 0:01:24.920 been encouraged to diversify, right, Like this is the mantra 0:01:25.440 --> 0:01:27.680 of markets is that you shouldn't put all your eggs 0:01:27.760 --> 0:01:30.520 in one basket, et cetera, et cetera. And so you've 0:01:30.560 --> 0:01:33.319 heard for the past ten or fifteen years that you 0:01:33.319 --> 0:01:39.120 should diversify into international stocks, you should diversify into small caps. Yeah, 0:01:39.200 --> 0:01:42.680 sixty forty and a lot of those things have turned 0:01:42.680 --> 0:01:45.120 out to be duds, or at least sixty forty was 0:01:45.120 --> 0:01:47.520 a dud for like a couple of years, kind of 0:01:47.840 --> 0:01:48.120 kind of. 0:01:48.200 --> 0:01:50.480 I mean, it mostly did well, but like, yeah, then 0:01:50.520 --> 0:01:52.800 it had some it had some rough years, particularly out 0:01:52.800 --> 0:01:53.360 of the pandemic. 0:01:53.440 --> 0:01:55.960 But certainly you would have been missing out on big 0:01:56.000 --> 0:01:59.600 gains if you put money into small caps or international 0:01:59.680 --> 0:02:02.160 stocks versus the big US techtoks. 0:02:02.440 --> 0:02:05.800 Right, And you know, we've gotten a little bit. You know, 0:02:05.920 --> 0:02:08.480 when deep Seat came out, that raised some questions about 0:02:08.520 --> 0:02:13.720 big tech stocks. Obviously with the policy volatility in the US, 0:02:13.800 --> 0:02:15.359 which is one way to put it, there have been 0:02:15.360 --> 0:02:19.480 some questions about, Okay, is now the time to diversify abroad. Yeah, okay, 0:02:19.560 --> 0:02:23.240 you could have bought money buying Ryan Mattal or one 0:02:23.320 --> 0:02:27.480 of the beneficiaries of German defense spending. But so far, 0:02:28.280 --> 0:02:31.600 you know, it's still not obvious that like there's some 0:02:31.760 --> 0:02:35.720 other big moneymaker out there for investors besides big tech. 0:02:35.800 --> 0:02:38.040 But this is but we may be at a juncture. 0:02:38.200 --> 0:02:38.399 Well. 0:02:38.440 --> 0:02:41.760 I think the other unappreciated aspect is the importance of 0:02:41.800 --> 0:02:45.120 the benchmarks in all of this. And I think investors 0:02:45.120 --> 0:02:49.040 tend to think of benchmark index providers as these very 0:02:49.120 --> 0:02:52.560 neutral entities that are like holding out a mirror to 0:02:52.639 --> 0:02:57.000 the market and just reflecting what's already there. But actually 0:02:57.120 --> 0:03:00.200 a lot of their decisions are very active and have 0:03:00.400 --> 0:03:03.640 very very big implications for investors. So you know, if 0:03:03.760 --> 0:03:07.400 MSCI says that the all World index is going to 0:03:07.480 --> 0:03:10.880 have small caps and big caps in it, then investors 0:03:10.919 --> 0:03:13.880 are you know, they're forced to buy small cap exposure. 0:03:14.240 --> 0:03:17.240 That's totally correct, and this is core finance theory that 0:03:17.240 --> 0:03:20.519 the optical portfolio is more or less the global portfolio. 0:03:20.639 --> 0:03:23.280 We've talked about that with the dimensional guys, you really 0:03:23.360 --> 0:03:27.600 should have awaited allocation somehow, if possible, to every bond, 0:03:27.880 --> 0:03:30.000 stock and piece of real estate out there and that's 0:03:30.000 --> 0:03:32.280 the best you can do, and that clearly has not 0:03:32.360 --> 0:03:33.960 been the best you can do for a long time. 0:03:34.360 --> 0:03:36.960 And so we want to talk about the tortured pain 0:03:37.120 --> 0:03:39.400 of the poor diverse byed allocator and. 0:03:39.320 --> 0:03:41.920 The tyranny of the benchmark index providers. 0:03:42.000 --> 0:03:46.080 Yeah, very shaped, very Shakespearean. Anyway, I'm really excited. I 0:03:46.080 --> 0:03:49.080 think we do, in fact have the perfect guest, someone 0:03:49.120 --> 0:03:51.000 who I've been a big fan of for a long time, 0:03:51.040 --> 0:03:52.760 someone I've wanted to have on the show for a 0:03:52.800 --> 0:03:56.320 long time. He's probably one of my top five favorite 0:03:56.320 --> 0:03:58.960 posters on Twitter, although he's quite a down a little 0:03:59.000 --> 0:04:01.240 bit lately, but I think he's addicted like the rest 0:04:01.280 --> 0:04:04.080 of us. We're going to be speaking with Krishna Mamani. 0:04:04.080 --> 0:04:07.200 He is currently the Chief Investment Officer of the Lafayette 0:04:07.200 --> 0:04:11.320 College Endowments. Previously, he was the CIO at the Oppenheimer Funds, 0:04:11.320 --> 0:04:15.040 which was bought by Invesco. So a long storied career, 0:04:15.080 --> 0:04:17.000 someone who knows about all of this stuff. So, Krishna, 0:04:17.040 --> 0:04:19.600 thank you so much for coming on the podcast. Thrilled 0:04:19.600 --> 0:04:20.760 we can finally make it happen. 0:04:21.160 --> 0:04:22.360 Thank you, thanks for having me. 0:04:22.680 --> 0:04:26.640 Absolutely what do they teach you in school about diversification. 0:04:26.760 --> 0:04:29.240 What is when they you know, when you're training to 0:04:29.320 --> 0:04:32.400 be an investor and asset allocator, what are they actually 0:04:32.480 --> 0:04:33.200 What do they tell you? 0:04:34.360 --> 0:04:38.719 Diversification is the biggest free lunch available in the investment world, 0:04:39.520 --> 0:04:42.760 and I think from a longer term perspective that is 0:04:42.839 --> 0:04:48.359 absolutely true and probably something that we are to think about. 0:04:48.400 --> 0:04:52.600 But as you mentioned, the results over the it's not 0:04:52.680 --> 0:04:54.280 just last fifteen twenty years. 0:04:54.320 --> 0:04:55.200 The results over the. 0:04:55.240 --> 0:04:59.400 Last thirty years forty years have been very very, very 0:04:59.480 --> 0:05:02.599 very different than what you would have expected if you 0:05:02.640 --> 0:05:05.680 had gone down this path. Doesn't mean that the basic 0:05:05.760 --> 0:05:09.720 principle isn't invalidated. It just simply means that you have 0:05:09.760 --> 0:05:11.919 to think about it and acknowledge the fact that it 0:05:11.960 --> 0:05:13.440 hasn't worked out according to plan. 0:05:13.760 --> 0:05:17.080 Where did the diversification thesis actually come from. 0:05:17.600 --> 0:05:22.080 Well, diversification thesis basically says that if you have security 0:05:22.120 --> 0:05:26.640 specific risks in individual securities, you should if you can 0:05:26.680 --> 0:05:30.159 find a way of diversifying that away, then that is 0:05:30.200 --> 0:05:33.040 something that you should do because it reduces your overall 0:05:33.160 --> 0:05:37.080 risk profile without sacrificing too much in return terms. So 0:05:37.279 --> 0:05:39.000 that's what that's where the theory comes from. 0:05:39.080 --> 0:05:42.719 And the like who propagated it. It must have had, like, 0:05:42.920 --> 0:05:45.480 you know, an endorser, or it must have made its 0:05:45.480 --> 0:05:47.719 way into the market in one way or another. 0:05:48.040 --> 0:05:51.200 I think it came from cap M and William Sharp 0:05:51.279 --> 0:05:55.400 and you know that quarterie of academicians who basically did 0:05:55.400 --> 0:05:59.560 the pioneering research in this field in the let's say 0:05:59.600 --> 0:06:01.400 seventy and early nineties. 0:06:01.480 --> 0:06:03.920 Yeah. In my four to one K, I have like 0:06:04.040 --> 0:06:09.359 a very conservative I've diversified fund. It has not kept 0:06:09.440 --> 0:06:12.599 up with the S and P five hundred, I don't think. 0:06:12.720 --> 0:06:16.200 But every once in a while, such as the first 0:06:16.200 --> 0:06:19.960 couple weeks of April twenty twenty five or the first 0:06:20.000 --> 0:06:22.960 couple of weeks of March twenty twenty, I take a 0:06:23.000 --> 0:06:24.880 look at it and I'm like, oh, I pat myself 0:06:24.880 --> 0:06:27.320 on the back for those moments of diversification. 0:06:28.200 --> 0:06:30.040 Is it worthwhile? Just for those reasons? 0:06:30.520 --> 0:06:33.000 Every once in a while you're like, okay, you know what, 0:06:33.360 --> 0:06:35.720 this makes me feel good. I'm not going to panic last, 0:06:35.800 --> 0:06:37.920 I'm actually my port. You know that four one K 0:06:38.000 --> 0:06:41.080 it actually stays close to all the time highs. I keep, 0:06:41.080 --> 0:06:43.560 you know, allocating it a little bit. How much is 0:06:43.600 --> 0:06:46.440 that worth in terms of that comfort that I get 0:06:46.480 --> 0:06:50.400 for like five minutes every twenty years, and relative to 0:06:50.440 --> 0:06:53.640 the cost of underperforming a simple S and P five hundred, 0:06:53.760 --> 0:06:54.240 paying a. 0:06:54.200 --> 0:06:55.520 Price for a peace of mind? 0:06:55.600 --> 0:07:01.840 Yeah, well so I Again, my argument isn't that diversification 0:07:02.120 --> 0:07:05.360 is a bad thing. I think from an economic principles, 0:07:05.360 --> 0:07:09.200 from financial principles, diversification is a good thing. And if 0:07:09.200 --> 0:07:12.160 you can find a way of dis or mitigating your 0:07:12.280 --> 0:07:16.000 overall security specific risk, you are to do that. The 0:07:16.080 --> 0:07:19.040 point I'm trying to I would like to make is 0:07:19.080 --> 0:07:23.840 the fact that it hasn't worked, and therefore, kind of 0:07:23.920 --> 0:07:27.640 relying on thirty years or forty years or one hundred 0:07:27.720 --> 0:07:31.000 years of history to come to some sort of investment 0:07:31.080 --> 0:07:35.720 principles that people follow very religiously, you know, hasn't worked. 0:07:36.040 --> 0:07:39.200 So shouldn't we kind of think about that and try 0:07:39.240 --> 0:07:42.320 to delve into what are the drivers? And it opens 0:07:42.400 --> 0:07:45.440 up a new research field because I would argue that 0:07:45.520 --> 0:07:49.560 the overall research in financial kind of investing is basically 0:07:49.680 --> 0:07:53.480 hasn't evolved a lot since the nineties. It's basically redoing 0:07:53.480 --> 0:07:57.520 the same papers with a little bit of changes here 0:07:57.560 --> 0:08:00.800 and there, but the core thinking cap im core thinking 0:08:01.040 --> 0:08:04.120 really has not changed. So I think the right way 0:08:04.160 --> 0:08:08.480 to use this period of underperformance, whether it will sustain 0:08:08.520 --> 0:08:13.240 itself or whether you know, twenty twenty five change the 0:08:13.280 --> 0:08:16.200 paradigm altogether or not, is kind of kind of irrelevant. 0:08:16.560 --> 0:08:19.600 The key point is, let's kind of look at this period. 0:08:20.120 --> 0:08:22.040 Let's look at it a little in a little bit 0:08:22.080 --> 0:08:27.480 more detail, rather than being extraordinarily Doctornaire about things, which is, 0:08:27.720 --> 0:08:31.960 you know, anytime you post on Twitter that while my 0:08:32.040 --> 0:08:34.920 international funds haven't really worked for me, I get schooled 0:08:34.960 --> 0:08:37.839 by all sorts of people. But the fact is they 0:08:37.880 --> 0:08:41.480 haven't worked for me, and I continue to do that. 0:08:41.520 --> 0:08:44.520 I mean, I have a very diversified portfolio, and I 0:08:44.600 --> 0:08:47.760 will probably stick with it. But I think it is 0:08:47.840 --> 0:08:50.840 also fair to recognize that it hasn't worked, and therefore 0:08:51.040 --> 0:08:52.880 we should look at it in a little bit more 0:08:52.920 --> 0:08:59.200 detail and kind of not take the mantra of diversification 0:08:59.360 --> 0:09:01.960 as religious, which is what it is right now. 0:09:02.600 --> 0:09:05.600 So in your opinion, what are the drivers or the 0:09:05.640 --> 0:09:08.320 reasons why it hasn't worked, because I imagine, you know, 0:09:08.360 --> 0:09:11.040 you could tell a story that the big tech stocks 0:09:11.040 --> 0:09:14.680 in the US have just been phenomenal companies that continue 0:09:14.720 --> 0:09:18.560 to throw off cash. You could maybe tell a story 0:09:18.760 --> 0:09:22.280 about the benchmark indices, which we spoke about in the intro. 0:09:22.640 --> 0:09:25.560 You could tell a story about flows and investors crowding 0:09:25.600 --> 0:09:29.320 into stocks. Why hasn't diversification worked well? 0:09:29.360 --> 0:09:31.319 So again, let's just kind of narrow it down. When 0:09:31.360 --> 0:09:33.760 we are talking about this level of diversification, what we 0:09:33.800 --> 0:09:37.400 are talking about is US stocks not working or US 0:09:37.440 --> 0:09:40.400 stocks doing better than international stocks. So that's what we 0:09:40.440 --> 0:09:43.679 are talking about. I think there are several drivers. I 0:09:43.679 --> 0:09:46.720 think the kind of the tech supremacy of s and 0:09:46.720 --> 0:09:49.960 P five hundred is certainly one of them. The profitability 0:09:49.960 --> 0:09:53.600 of the tech franchise is another one. Low interest rates 0:09:53.640 --> 0:09:56.600 in the US, where growth was higher than interest rates, 0:09:56.840 --> 0:10:02.000 certainly was a factor in driving returns. So and and 0:10:02.080 --> 0:10:05.880 kind of the existence of private equity which got multiples high. 0:10:06.040 --> 0:10:10.000 So there are a plethora of reasons as to why 0:10:10.080 --> 0:10:15.840 things haven't performed, and therefore, you know, it is it 0:10:15.920 --> 0:10:19.079 is worthwhile spending a little You know, these are speculations 0:10:19.160 --> 0:10:21.880 on my part, but this is worthwhile spending a little 0:10:21.880 --> 0:10:24.000 bit of time figuring this out in a little bit 0:10:24.000 --> 0:10:27.160 more rigorous way than we have done so far, because 0:10:27.400 --> 0:10:31.200 you know, right now, again, if anybody puts up a 0:10:31.320 --> 0:10:35.800 notion that diversification is bad, they'll get schooled. But I 0:10:35.840 --> 0:10:39.360 think given the length of time that it hasn't worked, 0:10:39.360 --> 0:10:42.320 and given the length of the magnitude of how it 0:10:42.360 --> 0:10:45.040 hasn't worked, I think it is worthwhile spending a little 0:10:45.040 --> 0:10:48.960 bit of research focused to analyze what the drivers were, 0:10:49.000 --> 0:10:51.560 as you say, and see if there are there are 0:10:51.600 --> 0:10:54.840 some other things that we can divine out of this 0:10:55.160 --> 0:10:56.439 thirty year episode. 0:10:56.679 --> 0:11:00.120 So I totally appreciate the need for additional research and 0:11:00.120 --> 0:11:02.480 I would agree with you on that. But is saying 0:11:02.480 --> 0:11:06.240 that diversification hasn't worked the same as saying that investors 0:11:06.280 --> 0:11:09.080 should only buy winners and avoid all the losers. 0:11:09.840 --> 0:11:12.880 Well, so I think there's an element of that in 0:11:13.240 --> 0:11:17.120 for sure. That is, international markets have done poorly relative 0:11:17.200 --> 0:11:21.640 to US markets. One anecdote here, I used to be 0:11:21.760 --> 0:11:26.000 the spokesperson for Oppenheimer Funds with respect to globalize your 0:11:26.040 --> 0:11:30.360 thinking in twenty eleven when the campaign came out. 0:11:31.000 --> 0:11:32.280 Oh so you were a messenger. 0:11:32.400 --> 0:11:35.120 I was the messenger of this thing, and I kind 0:11:35.120 --> 0:11:38.800 of diversified my portfolio based on that thinking. The idea 0:11:38.920 --> 0:11:44.200 about portfolio construction with respect to diversification, isn't that diversification 0:11:44.400 --> 0:11:47.400 is a bad thing. I think that's a right approach. 0:11:48.320 --> 0:11:53.040 I think given the history over the last thirty forty years, 0:11:53.600 --> 0:11:56.280 we are to think a bit more about are there 0:11:56.360 --> 0:11:59.960 other drivers, rather than just simply believing in the historical 0:12:00.080 --> 0:12:03.800 track record and the volatility context of that historical track record. 0:12:18.440 --> 0:12:20.920 So I am very partial to the idea that a 0:12:20.920 --> 0:12:25.599 big part of the story is the unique profitability of large. 0:12:25.360 --> 0:12:26.440 Tech companies in the US. 0:12:26.679 --> 0:12:29.240 But that is clearly not the only story, because it's 0:12:29.280 --> 0:12:34.000 not just that global stocks have underperformed in many instances, 0:12:34.400 --> 0:12:37.720 They've just performed badly against anything. I'm looking at a 0:12:37.920 --> 0:12:42.520 chart of EWZ, a popular ETF to exposure to Brazil. 0:12:43.000 --> 0:12:47.319 It's basically flat for twenty years. I assume the Brazilian 0:12:47.320 --> 0:12:50.120 economy has grown quite a bit in the last twenty years, 0:12:50.360 --> 0:12:53.720 but it has not redounded apparently to the benefit of 0:12:53.960 --> 0:12:57.120 an American shareholder investing in Brazilian. 0:12:56.679 --> 0:12:57.439 Stocks at all. 0:12:57.760 --> 0:13:00.440 So obviously this can't be the entire st story that 0:13:00.520 --> 0:13:04.160 it's just about US outperformance. It's actually that global stocks 0:13:04.160 --> 0:13:04.640 have done bad. 0:13:04.679 --> 0:13:05.280 What's going on? 0:13:05.320 --> 0:13:08.760 Why in a world in which the economy is generally, 0:13:08.840 --> 0:13:12.480 you know, more or less growing elsewhere, have international equities 0:13:12.480 --> 0:13:14.600 actually just done bad on an objective basis. 0:13:14.840 --> 0:13:18.320 The old adage is the economy is not the equity market. Yeah, yeah, 0:13:18.480 --> 0:13:21.839 and that is that is absolutely true. I think the 0:13:22.720 --> 0:13:26.360 period from let's say twenty ten onwards in the US 0:13:26.559 --> 0:13:29.400 is especially galling. And I think if I had to 0:13:29.679 --> 0:13:32.040 come up with a reason as to why that has 0:13:32.840 --> 0:13:34.680 kind of worked out, the way it has worked out 0:13:35.160 --> 0:13:38.880 is basically because of dollar related global flows. 0:13:39.080 --> 0:13:40.400 Okay, that is I. 0:13:40.320 --> 0:13:44.800 Think the profitability basically attracted a whole lot of things 0:13:44.800 --> 0:13:47.160 that were going to come to a whole lot of 0:13:47.400 --> 0:13:49.720 flows that were going to come to the US because 0:13:49.760 --> 0:13:52.600 of the perceived strength of the dollar during that period. 0:13:52.640 --> 0:13:57.000 Because as I said before, growth was higher than interest 0:13:57.040 --> 0:13:59.839 rates in the US, so it was a natural kind 0:13:59.840 --> 0:14:02.560 of place for those flows to kind of arrive at. 0:14:02.640 --> 0:14:05.280 But like again another one, Mexico, it's just flat for 0:14:05.320 --> 0:14:08.560 twenty years, so in your story, it's not quite flat 0:14:08.600 --> 0:14:10.280 for two Yeah, it's where it was in two thousand 0:14:10.280 --> 0:14:12.840 and seven, so it flat for like eighteen years. Like 0:14:12.920 --> 0:14:15.000 there's a bit The flows are a big part of 0:14:15.000 --> 0:14:17.560 the story. For the fact that these stocks can't deliver 0:14:17.640 --> 0:14:19.560 anything over a decade time horizon. 0:14:19.920 --> 0:14:24.520 Well, so I think domestic flows relative to international flows 0:14:25.120 --> 0:14:30.040 are really very important in determining the state of the 0:14:30.160 --> 0:14:30.920 equity market. 0:14:31.040 --> 0:14:31.280 Okay. 0:14:31.400 --> 0:14:34.440 And the best example counterpoint to what you're talking about 0:14:34.480 --> 0:14:35.440 that I can give you. 0:14:35.720 --> 0:14:37.360 Is really India. Okay. 0:14:37.960 --> 0:14:40.960 So India used to be a market that was supported 0:14:41.200 --> 0:14:46.840 entirely by foreign flows and foreign flows, and when there 0:14:46.920 --> 0:14:49.400 was a panic in New York, all sorts of money 0:14:49.440 --> 0:14:51.480 would leave India and come here and the stock market 0:14:51.480 --> 0:14:55.120 would create. Over the last let's say ten years, as 0:14:55.200 --> 0:14:59.520 the Indian economy took off, and financialization and the saving 0:14:59.640 --> 0:15:03.480 vehicle in India change, and the equity market as opposed 0:15:03.480 --> 0:15:08.200 to land and property became the primary source of savings 0:15:08.200 --> 0:15:12.480 and deployment of those savings. I think the characteristic capital depth, yes, 0:15:12.560 --> 0:15:15.880 capital get financialization of the economy, and right now, the 0:15:16.040 --> 0:15:18.200 drivers in the Indian equity market, at least for the 0:15:18.280 --> 0:15:22.440 last five years, really has been the domestic investors as 0:15:22.520 --> 0:15:25.640 opposed to foreign investors. So I think that is really 0:15:25.680 --> 0:15:29.200 the from a flow standpoint, that is the difference. 0:15:29.480 --> 0:15:31.760 Yeah, And if you look at the MSCI India Index, 0:15:31.800 --> 0:15:32.240 it's like. 0:15:32.360 --> 0:15:34.520 The exact act looks like it's done well. 0:15:35.000 --> 0:15:37.600 Mexico and Brazil Joe, you know what I always say 0:15:38.320 --> 0:15:40.280 I do. Are you going to say it? 0:15:40.400 --> 0:15:43.440 I want you to say it flows before pros. 0:15:43.560 --> 0:15:46.120 Yeah, he did it, all right. That makes me happy. 0:15:46.120 --> 0:15:48.360 By the way, I stole Tracy's joke in the intro, 0:15:48.720 --> 0:15:50.920 She's not happy about that. I said that thing about 0:15:50.960 --> 0:15:55.200 how Shakespeare. Tracy said that right before we went on air. 0:15:55.240 --> 0:15:56.120 I want to give her credit. 0:15:56.200 --> 0:15:59.080 Oh thank you, Joe. But now I feel petty. I 0:15:59.080 --> 0:16:02.600 didn't expect you to, Okay, going back to the conversation. 0:16:02.840 --> 0:16:04.840 I'm trying to make you feel petty. You made me 0:16:04.880 --> 0:16:06.880 feel bad, so now I'm trying to make you feel petty. 0:16:07.240 --> 0:16:09.720 All right, all right, fair, going back to the conversation. 0:16:10.200 --> 0:16:12.080 Can you talk a little bit more about the role 0:16:12.120 --> 0:16:14.440 of the benchmark index providers in all of this. 0:16:14.960 --> 0:16:19.240 The thinking in this world is always benchmarks are terrible, 0:16:20.120 --> 0:16:23.360 but they're terrible, but better than anything. 0:16:23.080 --> 0:16:23.720 Else that we have. 0:16:24.320 --> 0:16:27.280 So I think there is a role for benchmarks, and 0:16:27.320 --> 0:16:31.120 benchmark providers are important participants in the market. And you know, 0:16:31.240 --> 0:16:35.640 the market capitalization of companies like MSCI and SMT Global 0:16:36.040 --> 0:16:38.480 kind of tell you as to how valuable that those 0:16:38.480 --> 0:16:42.600 franchises are. The way, as an investor, you know, if 0:16:42.640 --> 0:16:45.760 you are an asset manager or if you are kind 0:16:45.800 --> 0:16:49.360 of an asset allocator, you know, how you are doing 0:16:49.640 --> 0:16:52.840 has to be evaluated in some sort of a rigorous framework, 0:16:53.520 --> 0:16:56.240 and that's where benchmarks come in. And that's why we 0:16:56.320 --> 0:16:58.760 need benchmarks, because otherwise it'll be free for all. You know, 0:16:59.120 --> 0:17:01.680 I can as a asset allocator, I can you know 0:17:01.920 --> 0:17:05.159 my returns were ten percent. Let's say I can always 0:17:05.200 --> 0:17:07.639 claim that I did a fabulous job when my benchmark 0:17:08.600 --> 0:17:12.480 outperformed by you know, a thousand basis points. So it's 0:17:12.480 --> 0:17:16.000 a you know, there is tyranny of benchmark, but this 0:17:16.080 --> 0:17:19.560 is a necessary tool that we need. I think a 0:17:19.640 --> 0:17:24.440 separate question is the extent of the kind of the 0:17:24.480 --> 0:17:29.280 diversification of the of the benchmarks. So you talked about 0:17:29.440 --> 0:17:35.119 MSCI AQUI and even things like Russell three thousand, things 0:17:35.200 --> 0:17:38.359 like that, So there are issues with diversification. I think 0:17:38.920 --> 0:17:40.840 S and P five hundred. On the other hand, for 0:17:40.880 --> 0:17:44.159 the large gap US market is a very very solid benchmark. 0:17:44.240 --> 0:17:47.800 I mean there are peculiarities with respect to additions and 0:17:47.960 --> 0:17:50.119 taking out of the index, but I think that is 0:17:50.160 --> 0:17:52.840 to be expected in a dynamic market, and I think 0:17:53.320 --> 0:17:56.520 for most, for the most part, it has worked out 0:17:56.840 --> 0:17:57.640 reasonably well. 0:17:57.880 --> 0:18:00.719 You are an employed person. You have had a career 0:18:01.080 --> 0:18:05.479 despite imbibing the gospel of diversification. You have had a 0:18:05.600 --> 0:18:07.200 successful career. 0:18:07.000 --> 0:18:07.720 In the markets. 0:18:07.960 --> 0:18:11.760 Talk to us though about like your peers and career risk, 0:18:12.000 --> 0:18:15.280 et cetera. Because you know, at some point, like you 0:18:15.480 --> 0:18:18.200 keep making less money than you could have by buying 0:18:18.480 --> 0:18:21.080 the US What does that do and what have you seen? 0:18:21.280 --> 0:18:24.359 You know, when you look across the industry, do you 0:18:24.480 --> 0:18:28.080 see an evolution whereby people who were taught the same 0:18:28.080 --> 0:18:32.720 thing as you about diversification have increasingly felt pressure to 0:18:32.800 --> 0:18:36.359 not be diversification or to disguise their diversification in some 0:18:36.359 --> 0:18:39.119 way that they could tell their investment committee, we're diversified, 0:18:39.160 --> 0:18:41.159 but actually, like we just found a way to like 0:18:41.240 --> 0:18:42.280 go extra long Nvidia. 0:18:42.840 --> 0:18:46.960 I think in the institutional world as opposed to retail war, yeah, 0:18:47.320 --> 0:18:50.520 I think diversification is still the matter. And again to 0:18:50.680 --> 0:18:53.040 emphasize that it is the right thing to do. 0:18:53.119 --> 0:18:54.159 But why do you keep saying that. 0:18:54.320 --> 0:18:57.239 If you think about it in statistical terms, you know 0:18:57.359 --> 0:19:01.439 there is a way to diversify the tail risk. But 0:19:01.560 --> 0:19:04.520 what I'm saying is we need to evaluate that and 0:19:04.600 --> 0:19:07.480 see or re evaluate that and see if there are 0:19:07.560 --> 0:19:10.920 some other techniques and methodologies that we can use where 0:19:11.240 --> 0:19:14.840 this doesn't become the only way for you to mitigate 0:19:14.880 --> 0:19:16.520 your overall risk in the portfolio. 0:19:16.760 --> 0:19:19.560 So what would be another technique methodology? 0:19:20.000 --> 0:19:23.920 Evaluating from a track record standpoint, let's say, or from 0:19:23.920 --> 0:19:28.359 a performance standpoint, let's say, does adding emerging markets to 0:19:29.240 --> 0:19:33.280 a globally diversified portfolio? Does that really add a lot 0:19:33.320 --> 0:19:37.320 of value to the process. Does just a let's say 0:19:37.720 --> 0:19:41.800 development market index both the US and Europe and perhaps Japan? 0:19:42.200 --> 0:19:46.120 Can that deliver some level of correlation to the overall 0:19:46.160 --> 0:19:49.960 index without you being stuck in places like China for 0:19:50.000 --> 0:19:52.560 a long period of time, or Brazil or Mexico for 0:19:53.560 --> 0:19:57.119 that matter. So I haven't found the solution. If I 0:19:57.119 --> 0:20:00.320 had found the solution, I would have implemented that in 0:20:00.320 --> 0:20:03.280 my personal portfolio. My point is we ought to think 0:20:03.280 --> 0:20:06.200 about that, and we don't really think about it because 0:20:06.400 --> 0:20:10.399 diversification on a global basis has been the mantra and 0:20:10.600 --> 0:20:12.440 the accepted doctrine forever. 0:20:13.280 --> 0:20:15.280 But say more about the careerrisk. 0:20:15.320 --> 0:20:20.160 Okay, at the institutional level, they're fine, It's like, oh yeah, diversification, 0:20:20.760 --> 0:20:23.600 But you know, for example, I'm always a big fan 0:20:23.760 --> 0:20:26.760 of reading the Bank of America Fund Manager survey every month, 0:20:26.880 --> 0:20:30.040 and these are discretionary fund managers that could do everything 0:20:30.160 --> 0:20:33.320 and for like ten years with a few exceptions, and 0:20:33.440 --> 0:20:36.879 there they say long textocks is the most crowded trade, 0:20:37.440 --> 0:20:40.440 but also it's the trade that continues to work. Talk 0:20:40.480 --> 0:20:44.440 about this effect, this sort of the anti diversification success 0:20:45.040 --> 0:20:48.680 on the sort of thinking of a fund manager who 0:20:48.680 --> 0:20:51.440 probably doesn't love being in a crowded trade, but also 0:20:51.520 --> 0:20:53.040 doesn't want to underperform well. 0:20:53.119 --> 0:20:59.000 So I think an active manager is a kind of 0:20:59.280 --> 0:21:02.359 caught in a way. Right On the one hand, you know, 0:21:02.400 --> 0:21:05.879 you have to outperform your peers. On the other you 0:21:05.960 --> 0:21:10.360 have to outperform the benchmark, and that is a challenge, 0:21:10.680 --> 0:21:13.600 and that challenge leads to the sort of things that 0:21:13.680 --> 0:21:16.280 you are talking about. That is, well, they may do 0:21:16.640 --> 0:21:20.520 very well relative to the benchmark without crowding into the 0:21:20.520 --> 0:21:24.239 most crowded trades, but if their competitors are crowded in 0:21:24.280 --> 0:21:27.119 there and do much much better than them, that's an 0:21:27.240 --> 0:21:29.760 issue for them. So you know, that's their way of 0:21:29.880 --> 0:21:36.000 solving that particular challenge. I think the the the crowded 0:21:36.119 --> 0:21:39.760 trades are have been there for a long period of time. 0:21:39.800 --> 0:21:42.639 But I think the way I would evaluate that is 0:21:43.119 --> 0:21:47.680 how much of a portfolio manager's performance is really driven by, 0:21:48.440 --> 0:21:52.879 you know, the core views that they express as to 0:21:52.920 --> 0:21:56.920 what their edge is, Right, I don't understand so what 0:21:56.960 --> 0:21:59.359