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Speaker 1: Bloomberg Audio Studios, podcasts, radio News.

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Speaker 2: This week on the podcast Another Banger.

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Speaker 1: Lori Heinel is executive vice president and Global Chief Investment Officer at State Street Investment Management. She oversees five point seven trillion dollars in assets and that's as of the end of.

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Speaker 2: Twenty twenty five.

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Speaker 1: It's obviously market has appreciated since then. She oversees index funds, ETFs, active strategies, alternatives, multi asset solutions, and really drives an incredible organization. I thought this conversation was fascinating and I think you will also with no further ado, my interview with State Streets Lori Heinel. Lori Heinel, Welcome Bloomberg.

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Speaker 3: Thanks for having me.

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Speaker 1: So let's start out with your early career and your academic background. You study religion at Princeton before getting your MBA at Carnegie Mellon. What was the career plan with religious studies.

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Speaker 4: Well, that's a long story, but I'll try to keep it short. Bottom line is I went to Princeton because I wanted to get more of a liberal arts education. And what I realized pretty quickly is it didn't really matter what I majored in. I could major in economics, I could major in history, and I happened to take a religious studies course, which I just absolutely adored. And from a personal standpoint, I had a number of people in my family who were incredibly staunch practicing Catholics or other kinds of Christian religions, and they would do things that to me were quite odd at times, and so I thought.

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Speaker 3: From a personal perspective.

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Speaker 4: It would be an interesting way to get more insight into what was going on with some of these family members. So short answer is that I decided to pursue that as an academic undertaking. And then I got to a place where I needed to think about a career and my first thought was, well, geez, maybe I'll go to law school. Well, then I realized I needed to make some money. So my second thought was, well, geez, you know there's this analyst program thing that they have on Wall Street. Surely you know they recruited fine institutions like Princeton and Lo and Behold. That catapulted me into what became a really long career in finance by just moving from an institution like Princeton into an analyst program.

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Speaker 2: So let's move forward.

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Speaker 1: You started credit Swiss First Boston, where you ran equity.

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Speaker 2: And fixed income sales.

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Speaker 1: Then you ended up working on with trading at Parker Hunter in Pittsburgh.

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Speaker 2: Am I getting.

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Speaker 4: These Well, I didn't start by running anything, So I started out as a two year grunt right. I think most of your listeners know what these analyst programs look like. I was effectively in investment banking for public finance, worked with hospitals, airports, municipal authorities. But I did all the kind of grunt work, if you will, all the numbers crunching behind the scenes and helping to run the deal models and things of that nature.

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Speaker 3: And I just found that fascinating.

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Speaker 4: I thought it was really amazing to connect both you know what's going on in the world with you know how finance supports that. And so I did that for a couple of years. And then at the end of the two year program, you're typically expected to go back to business school.

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Speaker 3: Well, I still.

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Speaker 4: Needed to make money because I had student loans to pay off. So I decided I wanted to stay and that me led me to an opportunity on the trading desk at First Boston, which really was an incredible opportunity because that was my first real introduction to markets.

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Speaker 2: So what did working on the trading floor teach you about markets?

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Speaker 3: So many things.

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Speaker 4: I think the first and most important thing is I was there during the eighty seven Black Monday crash, and I happened to be working in fixed income. So it was a really interesting day because, of course that time, the first Boston trading floor was on two different levels, so you had all the fixed income was on one level, all the equities was on a different level. And we went dead silent in the first part of the day, and suddenly people were starting to realize what was happening in the market, crashing you know, twenty plus percent over the course of you know, a day, which of course today we've got calibrators that don't let that happen anymore. But then all of a sudden, towards the end of the day, things on the fixed income markets started going crazy because now you had the FED coming out alan Greenspan saying, you know, we're going to go ahead and provide liquidity. We're going to make sure that there's you know, active engagement to forestall any further you know, recessions or other things that might be caused by this kind of major crash. So I guess the first lesson I learned was that there are winners and there are losers in every market event, and it's better.

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Speaker 3: To be on the winning side.

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Speaker 4: So I happened to be at that time on the bond side, which was the big winner that day. But then I think the other thing that I learned was that you have to be really careful about things like moral hazard, because we became accustomed in that moment to this idea of the fed put and I think many years later, we are still wondering about what that really does mean in terms of the reaction function.

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Speaker 1: So take me back to nineteen eighty seven for a second. I was in grad school at the time, but I can only imagine the fixed income trading floor. Were people sitting around their feet on their desk, sipping lattes like or did anyone say let's go down to the equity floor and look at the chaos and carnate.

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Speaker 4: Well, the first thing we were doing, we were sitting there doing the Crossford puzzles. There were lots of days, and I was in unibond trading, so it was a little bit of trade by appointment, very sleepy very sleepy at times. Obviously, fixing come markets got a lot more interesting throughout my career, but at that time it was not uncommon. In the early morning we do a few trades and then we'd have a little break, we'd go get some lunch, we'd do a little crossboard puzzle.

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Speaker 3: So that day was different, right, So we had.

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Speaker 4: Our normal morning, but by the time you got to the early afternoon, it's like, wow, something's really happening here, and you started to see major moves in bond markets, including in the MENI market, and so suddenly it was a very different, more chaotic even on our floor.

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Speaker 1: So money was flying out of equities, did it roll right into just safe harbor and body.

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Speaker 4: Well, cash was the big place, right, So we had these variable rate demand notes offerings which were seven day resets and so they acted like a form of cash. So we saw massive demand almost immediately in that particular market because it was a cash substitute. But with the tax advantages, when.

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Speaker 2: Was the yield in eighty seven, Well.

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Speaker 4: On those it would have been in the sevens, probably because you look at the spread and on a tax free.

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Speaker 1: Oh man, that's twelve exactly, exactly amazing Yeah, So before after Credit Swiss, but before State Street, you had a couple of really interesting positions. You were head of investments at City Private Bank, You ran global investment products for Sei, You led new business development at Melon Financial, and you were chief investment strategist in Oppenheim Are Funds.

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Speaker 2: What's the throughput?

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Speaker 1: What's the common thread in all of those?

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Speaker 4: Well, some of those were personal. So at the time that I was in New York, I met my then to become a husband, where since divorced, but at the time we were engaged and we ended up moving to Pittsburgh. He got a job there and so I followed him there. So the Parker hunter was really you know, personal reasons, needed to find something to do totally different city. I had grown up in Pittsburgh, so in some ways it was a real blessing because that's where we ended up having our two children, and so it was great to have that support network at a time where I wanted to continue to work through my early child childbearing years, if you will. And then I think after that we consolidated on the East Coast because we both realized and he was in finance as well. He stated in Investment banking that we wanted to have more opportunities in Pittsburgh's a great city for many many reasons, but it's not a place where you have a lot of opportunities in finance.

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Speaker 3: So we ended up settling then in Philadelphia.

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Speaker 4: So once again I was on the prow for a role, and that led me to first Mail in Financial, where I did business development and started from scratch, built a book over a couple of years, and then got very fortunate recruited by a head hunter to go to Sei Investments, and I would say that that was where I really got the bug in asset management. So Sei has two primary business lines. At least at the time, they were a back office outsourcing firm, and then they also had a pretty meaningful investment management arm, which was an outgrowth of their early consulting days. And so I was hired to basically build the asset management franchise for their community and regional banking division. And so I would travel around the you know, meeting with trust officers and financial advisors and other kinds of practitioners at these small regional and community banks and encouraging them to transition their business from you know, do it themselves buying individual stocks and.

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Speaker 3: Bonds into a platform like SEI.

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Speaker 4: So for me that was a really eye opening experience. One it just really opened up my eyes to all of America. I traveled literally around the around the country, but also just looking at the different needs that these types of clients had and how we could serve them.

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Speaker 1: So you starting with the client's objectives and perhaps there are future liabilities, you have to determine what's the most efficient combination of vehicles, risk exposure, what's that process like and is that sort of the through line of all these different positions.

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Speaker 4: So the major through line of all the positions is that focusing on the client first. So maybe if I can regress just a half a beat. One of my most formative experiences was when I was an investment banker at First Boston. We were working on a deal for the Arlington Airport Authority and at the time they were doing what was called a pre refunding where they were basically, you know, issuing new debt to pay for old debt and tried to reduce their debt servicing costs over time. So pretty common activity, and at the time, we kept running all these numbers and we kept showing the director these amazing discounted net present value savings that she was getting from the deal, and every time she would leave the room and say, this is not what I expected, This is not what I wanted, this is not the deal that I need to have happen.

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Speaker 3: And you know, I'm the most junior person running the numbers.

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Speaker 4: We've got the vps, the mds and everybody else around the room, and they're all men. Turns out and they're like, she's crazy. You know what's wrong with this woman. We're delivering amazing net present value savings. So I happened to run into her in the ladies room and said, you know, it really helped me if I understood better why this isn't working for you. And it turned out that statutorially that they could only keep the savings in the first year for the authority, and then every subsequent years of savings would basically reduce the tax leans against all the or or the fees that they were collecting at the airport, so they didn't actually get savings from anything after.

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Speaker 3: The first year.

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Speaker 4: I was like, okay, got that, we're going to frolload it off we go, right, So that told me a lot of lessons around one, Listen to the client.

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Speaker 3: Don't just think.

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Speaker 4: Because you're the expert, you know all the answers. They might need something different that you haven't thought of. And it also taught me that it doesn't have to be the most experienced person in the room that's going to have that insight, because it took me five minutes to figure out what we'd spent meeting after meeting trying to gel through. Nobody asked that question right because they just thought they knew better because every other client wanted max net present value savings period full stop. One of the I think the big threads that went throughout my entire career that sort of you got to really listen. Sometimes the problem is not what you thought the problem was. And sometimes the answer, even though it's not optimal, it's the best answer.

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Speaker 1: So how did you find your way to global CIO at State Street?

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Speaker 4: Yeah, Well, the good news is I once again sort of another theme in my career once I sort of got to more of a senior level was I mostly got recruited because I would have, you know, exposure, and I'd get sort of known in the industry, and so I got a call out of the blue from a headhunter, and at the time I was very happy I was living in New York City. I was actually had gotten divorced by that point in time, was living in Jersey City and working in Lower Manhattan. So I had a fabulous, you know, six minute commute across the Ferry.

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Speaker 3: Which I relished.

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Speaker 4: But I felt like maybe I didn't have the next step available to me at Oppenheimer Funds, which.

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Speaker 3: Of course is now part of Invesco.

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Speaker 4: And so I got a call and they were looking for someone who would run their investment professionals more from the sales and commercial side. The people that they called like portfolio strategists, so some people know these people as client portfolio managers. But they also wanted somebody who could be groomed for other opportunities within the investment organization. And you know, one thing led to another. I did a little flyer to Boston, had a couple of conversations, and what I really liked about, you know, what State Street had to offer at that point in time was it was a very broad platform. They covered all asset classes. State Street, as you know, had a prime position in ETFs and indexing, which you know, this would have been you know, twenty fourteen, and while certainly those instruments were very widely available and adopted by investors, nothing like that ramp up in terms of growth that we've seen over the last decade plus. And so what I saw was a place where I could have the ultimate toolkit working with the ultimate global client base to solve problems for those clients using my expertise.

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Speaker 1: And just as a point, State Street has the Spiders, the Spy which is the biggest institutional ETF for the S and P five hundred, and the Gold Spiders GLD which obviously gold is way off its highs, but that's another giant ETF. What is it like overseeing what really has become the standard bearers for both index funds and ETFs.

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Speaker 4: Yeah, well, look, there's a lot of complexity as you well know to running ETFs, but one of the benefits is that it's one large pool of capital, so you can run it as a single proposition if you will, you have one account. So there's definitely complexity there, but in some ways that's more straightforward than the separate accounts book of business that we manage for institutional clients.

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Speaker 3: Literally every.

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Speaker 4: SMP exposure Russell exposure BARAG exposure is going to be customized to that particular client. So what's really interesting about our platform is that we have both these you know, large scale funds if you will, ETFs, but we also have this massive separate account separate account management business which we can deliver to institut institutional clients at a very price competitive and very customized way.

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Speaker 2: Really interesting.

00:15:30
Speaker 1: Coming up, we continue our conversation with Lori Heinel, executive vice president at State Street, discussing a day in the life of a global CIO helping to oversee five point seven trillion dollars in client assets.

00:15:45
Speaker 2: I'm Barry Results. You're listening to Masters in Business on Bloomberg Radio.

00:15:50
Speaker 1: I'm Barry Redults. You're listening to Masters in Business on Bloomberg Radio. My extra special guest today is Lori Heinel. She is executive vice president and global Chief Investment Officer at State Street, where she helps to oversee five point seven trillion dollars in assets. So let's talk a little bit about State Street. I recall way back when they launched Spy I want to say that was thirty years a something like that, the first US ETF, and they've been a pioneer of indexing and ETFs. You know, ever since, how do you look at the role of indexing in portfolios? How has this changed not only over your tenure at State Street, but over your entire career.

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Speaker 4: Yeah, well, I think the first thing I would say is that once upon a time, it wasn't really possible for people to get index replication, right. So that was the great innovation of something like spy, where suddenly every individual investor could buy one security and effectively get the market. And for much of my career, particularly in the early part of my career, it was all about beating the market. Let's get the best active managers who could beat that index. And what you find in for decades now is in many markets, especially large cap us, it's.

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Speaker 3: Really challenging to do that net of fees.

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Speaker 4: And so I've thought for many decades now that this combination of index exposure where it was really hard to find managers who could consistently outperformed, coupled with maybe some satellite managers or specialist managers or managers and other parts of the market, think emerging markets, small cap adding your risk budget and your active management budget there just made a lot of sense So when I think about portfolio construction, it really is I want to accomplish some sort of outcome, some sort of risk based outcome for that client, but I also want to do it in a way that covers fees, provides opportunities for alpha or outperformance, but does so in a kind of measured way.

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Speaker 1: So stage treats or record inflows in twenty twenty five into I think this is the ETF and index business. One hundred and eighty billion net inflows, management fees up thirteen percent, and engross growth.

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Speaker 2: Where do you see the growth.

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Speaker 1: Coming from in the space I keep hearing indexing is over. ETFs have had their day, and yet year after year it seems to be the big winner.

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Speaker 4: Well, I think there's still lots of room for indexing to run, because if you think about places like fixed income, we've only started to scratch the surface relative to what you see on the equity side of things. So increasingly or even seeing quote unquote exotic fixed income things like emerging debt, things like high yield, which we've had index products for quite a long time, become much more adopted by clients globally because they see that as a great way to get access again to a market in a way that they can really understand the risk and manage it within the portfolio context. So I think there's still plenty of room for indexing to run. I think the other thing is we've seen a major shift in terms of the client segmentation, if you will. So once upon time, the big investors were the large institutional investors, you know, the defined benefit plans, sovereign wealth funds. Those investors are still important, but increasingly the net incremental dollar is coming from the retail client, whether it's through defined contribution or rollovers or you know, other kinds of assets that they might have, And that's happening globally, and those investors are really early to the ETF if you will, journey and have lots of opportunity there. And then most recently you'll have seen that we were selected for the Trump accounts as the default investment. So that's another vector of investor that we think comes online into the indexing platforms.

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Speaker 1: Really really interesting. I want to I want you to push back on my understanding of indexing in equity and indexing in fixed income. So here's what I have been led to believe over many, many years of acad study and research and lots and lots of great academic analysis. It's really really hard to beat the market through active management of equities. It's relatively easy to beat the market through reducing risk, changing duration, reduced improving credit quality through active management of fixed income. How accurate or inaccurate are those statements.

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Speaker 4: So this is a classic of it depends on how you think about the problem, right, So first, it is absolutely empirically true that in many spaces and equities, the average manager just does not outperform. We have all those studies from all the various you know, research that that substantiate's at in fixed income. To your point, there is more evidence that active managers can add value. But what's been interesting over the last decade or so is this rise of better understanding of factor based investing at a lot of fixed income factors. As I mean, factor investing has been around for a long time decades, but within fixed income in particular, I think we've gotten more and more sophisticated models that help us to disaggregate where those returns are coming from. And what we found is that a lot of those active alphas, if you will, out of fixed income managers are really one of two things. They go down in credit quality or the extenduration, and when you actually neutralize for those two things, suddenly the active fixed income managers don't look quite as heroic as they did before you adjust for those things. So one of the big trends that we're really leaning into in fixed income is that applying that factor based lens to fixed income to be able to more stylize the portfolio, but do so at a very competitive feed level and deliver alpha, but alpha through indexing plus some factor exposures versus kind of just classic fundamental bottoms up kind of secure selection.

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Speaker 2: Really interesting.

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Speaker 1: So what's kind of fascinating about your role is much of the capital you oversee is deliberately designed to not take an active view.

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Speaker 2: What does it mean to be a CIO at a firm like that? Where do your views show up?

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Speaker 3: Yeah?

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Speaker 4: Well, the first thing I need to just make sure everybody understands is that we.

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Speaker 3: Do have active capabilities as well.

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Speaker 4: They're certainly not the massive amount of the assets that we oversee, but if you look at our fixed income, equity and multi asset class strategies that are active in some way, that's a couple hundred billion dollars, so it's not tiny. It would still make us a pretty significant player in this market even if that's all we did. So we do believe that there are opportunities for active managers to outperform. It's just one of those things where you need to understand, you know, how much to allocate to those active managers, make sure you're picking the very best, because obviously there are some that cannot perform. But I think from a view perspective, it's actually very valuable having all the different perspectives at the table. We have a chief economists and chief geopolitical analyst. They really help us with what are the expected growth rates around different economies in the world, what are inflation expectations going to look like, what's the sort of backdrop against which we're against which we're trying to invest, so that we have some sense of our rates likely to move up or down? You know, our is growth likely to be supportive for earnings? Some of those sort of macro factor setting types of things. And then I think within our active teams, and we have a multi asset class team in particular, they're deploying capital. They're deploying capital indequities, fixed income, sub sectors, commodities, gold, cash, and so they have a view on which of those areas are going to do best. And obviously we have lots of discussion amongst ourselves about whether, you know, I personally agree with those views or don't agree with those views, But ultimately it really is a committee that gets together and makes those macro calls. And then within our individual active capabilities we've got fundamental and quantitative equity and fixed income. Those portfolio managers are basically charged with doing the hard work to figure out how they are going to generate alpha, and we've been quite successful. About sixty five percent of our strategies are out performing on a trailing one three year basis really interesting.

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Speaker 1: You mentioned a variety of different colleagues and portfolio managers and economists and strategists, but really it's just the tip of the iceberg. You lead a team of over six hundred investment professionals and they're located around the world. How do you keep an investment organization that large and that dispersed, all on the same page, all coherent, all moving together.

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Speaker 4: Well, I have a lot of help, So I think any manager will appreciate that the most important job. You do it once you're in a leadership position like mine, as you hire well right, and you let your good people do their work, and you pressure test their thesis, and you make sure, as you said, that everybody's singing from the same hymn book where they need to be, or that they're doing their own thing when that's appropriate, and you provide a sort of guidance and oversight opportunities to collaborate all those good things.

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Speaker 3: You know, our.

00:25:21
Speaker 4: Business in one sense is a simple business. We're here to serve our clients. We have all the tools at our disposal to serve our clients. We you know, gather together routinely to develop thematics and market outlooks and other kinds of collateral that both myself and the other senior executives can take to our clients as ways to engage with them and demonstrate our facility with markets and our capabilities and insights. And then you know, basically, I let the team do what it does best, which is deliver the results.

00:25:50
Speaker 1: So walk us through a day in the life of a global CIO with five point seven trillion dollars. I would imagine that day to day of fans are just so overwhelming.

00:26:02
Speaker 2: No, two days really look exactly alike.

00:26:05
Speaker 4: No, it's a bit of a crazy day. It's one of the things I love about the job. But I would say the first thing is I spend a lot of time with clients. So in the first quarter of twenty twenty six, I was on forty five planes traveling around the globe Middle East luckily before the war started, Asia, Europe, multiple times across the US as well. So I spend a lot of time talking to clients of all types. So we have, as I mentioned earlier, a large institutional base of business that some of the largest central banks, sovereign wealth funds across the globe. But we also have a lot of private clients. We have private banks that we work with, you know, large broker dealers that we work with. Sometimes I'll even meet directly with end clients depending upon the forum. So's I would say that's probably a good chunk of my time. I do a lot of time, or spend a lot of I'm rather on things like strategy. So we have an executive management team which gets together and talks about from a business standpoint, where do we want to emphasize, what does that require all of us to do so for investments, one of our big efforts at the last couple of years.

00:27:15
Speaker 3: Has been innovation.

00:27:17
Speaker 4: Since Ya Shin Hung joined us as CEO in twenty twenty two, we've been very aggressive in terms of launching new products in new spaces, including partnerships with firms like Bridgewater and Apollo. So a lot of the strategy for what do we want to do to be relevant to our clients globally, Ultimately it comes from the investment team's ability to execute against those mandates, and so we spend a lot of time talking about what kind of resources do we need, what kind of research can we do that addresses the client problem we're trying to solve. How do we partner effectively with these third parties where they might contribute some content, we ultimately own the portfolio construction, and we might have our own own research that we want to bring into the mix. And so one plus one equals three, but ultimately we're accountable to that for our clients. And then talent. I mentioned earlier that you know, you need to have really good people. So we just came off of our annual talent reviews where I get all my CIOs in a room we work with our HR business partner, we go through our top talent succession planning. What kind of vectors do we see coming on the horizon? AI right now is a huge theme. So how are we readying our teams to be good stewards and users of AI and adopt that in ways that we can you know, make better efficiencies and better judgments. And then the last part of it is there's a lot of reading, listening, consuming information. Again, I am expected to, you know, be the face of State Street investment management from a client standpoint, and so I didn't know what's going on in the world, and as you know, the world's been a really crazy place this year.

00:29:00
Speaker 1: It certainly has. You mentioned Apollo and Bridgewater. The criticism about privates and things like four oh one k's or target date products is they're expensive, all right, so you don't have the liquidity issue, but they're complex. What's the case for putting private assets into a four oh one k?

00:29:22
Speaker 4: I think there are a couple of things, you know, first and foremost, if you look at the equity side of the ledger, more and more capital creation is happening in private markets, meaning pre ipopah I mean back in my early part of my career, and I'm sure yours as well. If a company came public at one hundred million, that was a big number, let alone like a billion, that was a well now yeah, so so fast forward, you know, and now we're talking literally in hundreds of not you know, hundreds of billions or even a trillion dollars. So if you think about just that magnitude of opportunity that's lost if you can't participate in as mark, it's just incredible. So that's number one. If you look on the fixed income side, I think you know, we've launched Prive, which is a collaboration with Apollo, and there again, this is investment grade credit that just happens to be issued in private markets instead of public markets for all manner of reasons. It could be that the company wanted to move quickly, or they didn't want to go through the you know, the filing process, or there might be some specific assets that they want to collateralize with the loan. And so those are really high quality investment grade assets, but they collect a premium for an investor because they're done through the private.

00:30:39
Speaker 3: Markets instead of the public markets.

00:30:40
Speaker 4: So to us those are just natural extensions of what clients should have access to.

00:30:45
Speaker 1: It makes a lot of sense. And we mentioned earlier GLD what an incredible run gold had in the twenty tens, pretty much right up through last year. It's since so off on about twenty twenty three percent something like that. When you were thinking about equity and fixed income and alternatives, and you see a medal which has been widely traded for thousands of years, can I say ten thousand years that some people have been called barbaric? How do you contextualize how GLD trades and what is driving the psychology of those investors versus all these other asset classes.

00:31:30
Speaker 4: Yeah, So again I want to take us back a little while, because we were advocating for a position in gold and client portfolios for six seven years, so long before we had this run up to five thousand and plus. And the basis at the time obviously, interest rates were very low, so you didn't have an opportunity cost. Today that's different, but what we were seeing was that fixed income wasn't likely to play the role if historically played or supplying portfolios. You had no income, you likely didn't have a lot of diversification. Benefit from fixed income, because how much lower could rates go, you know, if the market crashed, and we weren't even sure it was going to provide capital preservation, and we were right if you fast forward a couple of years. That turned out to be a bit of a challenge as well, and so we were looking for other ways or other exposures to put into the portfolio that would provide some of that cocktail of diversification benefit that fixed income just wasn't likely to provide. And so we set on gold for lots of reasons. And oh, by the way, we were also writing a lot at that point in time about concerns with fiscal profligacy and the fact that the US dept Burden was getting large, and this is you know, several years ago. Now it's obviously much bigger now, and gold, to us was kind of an interesting asset that would benefit from any kind of debasement concerns or any of these other sort of issues. So we advocated clients to add it many years ago. Of course, very few of those clients did so until it went up to you know, three thousand, then suddenly started to see more interests, and then four thousand, you start to see a bit more interest. But I would say gold still plays an important role in a portfolio.

00:33:16
Speaker 3: It doesn't have to be a huge exposure.

00:33:20
Speaker 4: It protects against a number of different tail risks in a portfolio. Yes, it's expensive from a carry cost standpoint right now, given the give up and fixed income, but we still have in our strategic allocation portfolios, you know, a couple percent allocated gold because we do think that it provides very distinctive benefits in certain kinds of crises.

00:33:41
Speaker 1: So today we have bitcoin cut in half from the high and a lot of the narrative around crypto sounds like sort of a digital refresh of the historic narratives around gold.

00:33:55
Speaker 2: How do you think about crypto?

00:33:57
Speaker 1: Some of your competitors have aggressively pushed into it, others have very much steered clear. It might be a little early to declare which side is winning, although anything that gets cut in half kind of comes with a little bit of a black mark on it. How do you think about crypto these days?

00:34:17
Speaker 4: Yeah, So I want to just first share a story. So back in twenty twelve, so this is many years ago now, my daughter and her boyfriend started mining bitcoin, and of course being in this industry.

00:34:32
Speaker 3: I thought they were crazy.

00:34:33
Speaker 2: Like, you can't just was it one hundred bucks?

00:34:35
Speaker 4: It was, It was under a thousand. I think it might have been five or six hundred, so it wasn't quite as low.

00:34:39
Speaker 3: But it was still very, very low.

00:34:41
Speaker 4: And I thought, you can't, just like manufacturer money doesn't grow on trees, you can't just manufacture it, you know, on a computer.

00:34:48
Speaker 2: But at the time you can.

00:34:49
Speaker 3: It turns out you can. So it's very skeptical.

00:34:52
Speaker 4: But I kicked myself for not having at least bought a couple because at the time I could have put ten thousand dollars into it and I'd be, you know, ten million. We might not even be having this conversation today.

00:35:01
Speaker 2: Who knows we would. It would just be on your yacht off, well you.

00:35:05
Speaker 4: Go, which wouldn't be half bad, right, It wouldn't be half bad. So in an event, I've never really understood the case. Now, what I will acknowledge is that over the years I did learn of a couple use cases that made sense to me. So I can remember seeing a woman from Pakistan present and she was talking about like why bitcoin is so popular in Pakistan. It was because at least they had a stable currency because it was pegged to the dollar effectively, and so people preferred being paid in bitcoin instead of getting paid in Pakistani. So so I thought, okay, well that's interesting, but that's a you know, a tiny little use case.

00:35:44
Speaker 3: But I never really.

00:35:45
Speaker 4: Understood because you don't have anybody who's got the taxing authority or the backing of it, whereas even with gold, it's sort of got the central bankers as a collective in some sense back gold. Sure, there's still massive buyers of gold. In fact, that's U S. Treasury holdings. So I never really got it. But you know, you fast forward and suddenly you've got an asset that's up to thirty thousand, forty thousand, you know, over one hundred thousand at one point in time, and you're like, am I wrong? Like what am I missing? So I don't know, the jury's out. We do believe in the sort of the digital ecosystem very much. We're trying to, you know, work on tokenization, and we're working on all kinds of other sort of digital finance types of endeavors.

00:36:28
Speaker 3: So there's something.

00:36:29
Speaker 4: About the digital that is very compelling, and in a weird way, it may be that once that digital infrastructure gets more evolved, it'll make bitcoin even less important, right because now suddenly you'll get all the benefits of bitcoin in terms of the tradeability and all those kinds of things without having to have the exposure to an asset that I don't know how to price that asset.

00:36:52
Speaker 1: Wildly volatile to say the very really really interesting. Coming up, we continue our conversation with Lori final Global CIO at State Street talking about the current market environment.

00:37:04
Speaker 2: I'm Barry Ridults.

00:37:06
Speaker 1: You're listening to Masters in Business.

00:37:08
Speaker 2: On Bloomberg Radio. I'm Barry Ridults.

00:37:11
Speaker 1: You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Lori Heinel. She is executive vice president and Global Chief Investment Officer at State Street Investment Management, the asset management arm of State Street with five point seven trillion, with a t trillion in assets, and that says of year end twenty twenty five, and we're up ten twelve percent since then in the market.

00:37:37
Speaker 2: So do the math. I'm going to say over six trillion.

00:37:41
Speaker 1: Let's talk a little bit about the current market environment. Your global market outlook was titled Forward with Focus that sounds like you were constructive on risk assets. I always put a question mark where I see but you must stay agile.

00:38:00
Speaker 2: Explain what that means.

00:38:01
Speaker 4: Yeah, well, so to your point, we did see twenty twenty six as being still a pretty good year for investors. We thought that earnings were going to continue to do well. We thought that inflation, while not quite back to the two percent target that the Fed had set, was marching in that direction, would possibly give some more room for rate cuts in twenty twenty six. And so when we talk about being agile, it was focus on equities over fixed income, but do so in a bit more broad based way, like don't just put all your eggs into the large cap US trade. Look at small caps, maybe even look at things like emerging markets, places where you might get a bit of broadening out of the market as we saw maturation in twenty twenty six. Of course, the altercation war with Iran turned out a bit on its head, and so for a short moment we were revisiting.

00:38:55
Speaker 3: Whether that was going to be true.

00:38:57
Speaker 4: Obviously, inflation became a bigger sticking point one again or a bigger concern once again. Concerns about whether you're going to get that broadening out, or whether investors would just sort of go back to the trades that they knew and loved and had, you know, more security. And but I think as we get into the middle of the year, we're seeing that our views were largely rewarded that sort of moving to small cap and other parts of the market certainly have done quite well on a year date basis. And you know, we obviously are still worried about fixed income and rates and what that might mean as inflation remains a bit more tricky. But you know, the prints that we're having every month are all over the place. Just as we're speaking, we're having a good CPI print, right So while we think that the FED is likely on hold for the balance of the year, we don't see rate hikes in the offing.

00:39:46
Speaker 2: Huh.

00:39:47
Speaker 1: Kind of interest, And we'll talk a little bit about CPI and PPI in a bit. You mentioned something that I want to explore because it's so interesting. So the Magnificent seven and twenty twenty five, I've only two of the seven outperformed the S and P five hundred. I think it was nvidiaan Google and this year, if you're looking at small cap or MidCap, you're looking at growth or value. You're looking at Europe, you're looking at developed x US, you're looking at em Everything seems to be outperforming large cap US growth. Is this just the reason to have a diversified portfolio or is it indicating is this a cyclical shift, or is this suggesting something else?

00:40:32
Speaker 4: Yeah, well, our view is generally to have a diversified portfolio. At the margin, we might favor large cap, or favor Europe, or favor emerging markets at different points in time based on relative value trading, but we do think that it's incredibly difficult to time those inflection points perfectly. And as you noted, coming into this year, you still had a lot of momentum and flows into the things that have done well in the past, including some of those large cap names that you mentioned. So, you know, I'm kind of a traditionalist in that way. I do believe you want to be diversified and have exposures to multiple places.

00:41:08
Speaker 3: But I do think that this AI enthusiasm.

00:41:13
Speaker 4: I believe in it in terms of a technology. But when you look at the massive amount of spending that is now being undertaken by some of these companies, you know they've gone from leveraging balance sheet cash to make those investments to now accessing fixed income markets in a massive way and even in some cases issuing equities. So you do have to sort of wonder whether that you know that vein alone is going to be where the money is going to be made going forward. I'm not saying that you know they can't still generate good earnings, but there are plenty of other places.

00:41:47
Speaker 3: If you think about energy, if you think.

00:41:49
Speaker 4: About utilities, you think about all the ecosystem required to enable that AI transformation, and then perhaps most importantly, you know the real economy and how sectors like finance or healthcare or other things are going to benefit from these technologies.

00:42:06
Speaker 3: I think we're just.

00:42:06
Speaker 4: At the tip of the iceberg in terms of what that will mean for innovation of productivity.

00:42:11
Speaker 1: So, when you're looking at this enormous capital spend that you referenced, and we didn't even bring up all the private credit that's been pouring hundreds of billions dollars into that, how do you judge when the spending is productive in producing sufficient returns. Given how the fire hose of capital, there has to be some misallocation and there are going to be some winners and losers. But when does the next incremental dollar become bad money after good?

00:42:41
Speaker 2: How can we tell.

00:42:42
Speaker 4: We're watching for when does that capex not translate into incremental earnings?

00:42:49
Speaker 1: So let's stay with the idea of artificial intelligence. You work at a very large asset manager. I would imagine the biggest shops have a little bit of an lasting advantage in deploying AI, not only looking at their own language models that they've created internally, just the ability to deploy that capital way that makes them more to deploy that technology in a way that makes their capital more efficient, more productive.

00:43:19
Speaker 2: How are you.

00:43:20
Speaker 1: Looking at AI from the perspective of the finance set?

00:43:27
Speaker 4: This is a whole podcast in its own right, but let me just I guess share a couple of thoughts. First and foremost, we've been on the AI journey for over a decade. We've been using machine learning and natural language processing and other types of technology in our active.

00:43:45
Speaker 3: Strategies for over a decade.

00:43:47
Speaker 4: And I think it's important to also know as a GCIFI, we're a highly regulated institution, so we've also spent many, many years on the infrastructure, governance other things deploy these types of tools, being mindful of cybersecurity threats, privacy, all the other things that you would expect a large bank to be worried about.

00:44:11
Speaker 3: So where we are.

00:44:12
Speaker 4: Now, I would say the biggest places that we're seeing AI support our business are in more things that are operational in nature, that are repeatable processes, where we can deploy some technology and free up people to do other more interesting things. If you think about some of the marketing elements, things like r FPS or commentary writing or other kinds of client servicing elements, they lend themselves beautifully to leveraging this technology. Because you have a database of information, the question might get asked in a slightly different way, and the AI can actually feedback the most relevant answers. And then you have a human in the loop, always in our environment today that ultimately owns the final product. But those are I think the sort of early wins for us is that kind of of efficiency gain leveraging people to do more higher order things down the road. Will this get more integrated into our investment process. In philosophy, we're experimenting with a lot of things. We've got the concept of a research copilot, which let's a portfolio manager you know, survey hundreds, dozens whatever, you know, research reports and do so very efficiently using an AI.

00:45:25
Speaker 3: Type of a tool.

00:45:26
Speaker 4: They still have to you know, pressure tests, whether the results are getting back makes sense, and they still ultimately make the decision about what they're going to do with that information from a portfolio standpoint. But we see lots of opportunities for that kind of augmentation of the human as well.

00:45:41
Speaker 1: Let's talk a little bit about inflation. We've had a series of things that have contributed to it.

00:45:48
Speaker 2: Tariffs, war in the Middle East, et cetera.

00:45:50
Speaker 1: Here we got the best CPI print we've had in five years, but that's primarily been because we briefly thought the war was over. An oil price is plummeted now the war is back on, and I track things like the producer price index is six and a half percent. We know that's just going to push into final prices over.

00:46:12
Speaker 2: The next few quarters.

00:46:14
Speaker 1: So how do you think about inflation and fixed income and specifically, and has macroeconomic forecasting in this environment just become I don't want to say impossible, but so challenging.

00:46:30
Speaker 4: Well, macroeconomic forecasting is always difficult, and I would say what we've also seen over the last several years is data revisions coming in at a massive level too, So what you see in a print one day, whether it's the payroll data or the DDP or whatever, a quarter or later, might be changed pretty dramatically. So you have to be a bit humble in this kind of environment when you're making any kind.

00:46:53
Speaker 3: Of bold calls.

00:46:55
Speaker 4: But I would say our core view is that inflation will still trend lower over time. We think it might not get back to the two percent level, but we aren't necessarily thinking that six percent is something that's sustainable. Good and the bad news here is that when you have inflation shock coming from things like commodity prices, they rebase, so you get that one time shock and then you're done unless there's another shock on top of that. So at some point that sort of recalibrates in its own right. I think the thing that we've been most surprised by this year is the underlying resilience of the US economy. In particular, we were thinking that labor markets were going to be under a lot more pressure than they ultimately have been, at least so far. We thought that the inflation coming from the war would filter into other places like fertilizer and food and other things which may still happen. Right, we haven't gotten through the farming cycle here in the US, but we're not seeing the consumer while they're stretched.

00:47:56
Speaker 3: We're not seeing the consumer.

00:47:57
Speaker 4: Necessarily pull back the way that we thought that they might. So, you know, the second half will be a very interesting second half.

00:48:04
Speaker 1: To say the least. Let's stay with the consumer. There's a couple of things that I've noticed that's kind of interesting. If we look at the second quarter sector breakdown, consumer discretionary worst performer of the group, essentially flat. If you look at consumer spending, there's a greater reliance on short term credit and credit cards. Then just salary increases, and then consumer sentiment, and I think we can all agree the University of Michigan sentiment measure has become broken over the past few years. But still, what whether you call it the vibes, the sentiment, whatever, seems to be shockingly negative. I don't disagree with you about the resilience of the economy, but how do we figure out what's going on with the consumer and their importance to the ongoing resilient economy.

00:48:59
Speaker 4: Well, I think the first thing is that I agree with everything you're saying, but they are also offsets. So people are getting tax refunds, You've got, you know, other benefits coming through from the one big beautiful bill, so you do have some other things that are still propping up the consumer at the margin.

00:49:14
Speaker 3: And employment still is.

00:49:17
Speaker 4: Is pretty strong here in the USA, so you still have pretty good sort of underpinnings, if you will. But it's clear that the average consumer is feeling like they're losing ground right there. Been you know, lots of articles about even couples that are making over one hundred thousand dollars feeling like they have food insecurity. Well, that's a problem for sure, and it probably means they're going to pull back somewhere else. But my point is that in the aggregate, whether it's from Capex and other corporate spending, the sort of K shaped consumer economy where the upper echelon, if you will, is being benefited by housing prices, which, while they're plateauing, have come up a lot, but outset prices that are going up a lot, still, there's still a lot of resiliency there.

00:49:58
Speaker 2: So I'm glad you work both of those up.

00:50:01
Speaker 1: The pushback I get from bearish colleagues are A, Yeah, the economy looks good, but it's almost all driven by the upper quarter, and I think that's being generous on the quartel side. But the other criticism is, hey, all of this AI related cap x is masking underlying weakness, although I don't see that weakness in much of the data. What's your response to those sort of criticisms.

00:50:29
Speaker 4: Look, I think that the good and the bad news is that you don't need one hundred percent of the consumers to participate to have the consumer economy.

00:50:36
Speaker 3: Doing just fine.

00:50:37
Speaker 4: So that's a sad thing in a lot of ways, but it's just the reality. And by the way, companies are generating productivity from things like the deployment of AI already, and we think that that's very constructive.

00:50:52
Speaker 1: And then speaking of productivity, we really haven't talked about you know, everybody talks about the Magnificent seven. What about the other for NAT ninety three companies in spy that are becoming more efficient, more productive, more profitable. How do we contextualize that.

00:51:09
Speaker 3: Well, we think we're in the very very early in things.

00:51:11
Speaker 4: So I mentioned earlier, we've got active teams, right, and this is their domain. Right. So these are people who are in the tech sector, in the healthcare sector, in the finance sector, doing the hard work to understand.

00:51:21
Speaker 3: Who the winners and losers are going to be.

00:51:23
Speaker 4: And the mantra over and over again is that the companies that adopt technology for efficiency, gain for innovation, to create competitive modes are going to have a really good runway from that deployment. So we are quite optimistic in terms of what that means for long term prospects.

00:51:39
Speaker 1: So before I get to my favorite questions, there were a couple of items I had to talk to you ask you about that are a little more off the beaten path. You were chosen to lead State Streets Fearless Girl campaign. Explain what that is and why you were chosen to take that role.

00:52:02
Speaker 3: Yeah, so this is true serendipity, right.

00:52:06
Speaker 4: So, as with anything, these things take a village, right. And so we had this placement of what is now the iconic statue of the Fearless Girl, initially down on Bowling Green facing off against the bull. And I had been one of several people who had been involved in that effort and got a call the night before the statue was going to be placed and somebody said, can you go to.

00:52:29
Speaker 3: New York like now and be there when.

00:52:31
Speaker 4: We place this statue, just in case there's a tension, just in case some of the networks pick it.

00:52:37
Speaker 2: Up, and just to just to flesh that out a little bit.

00:52:42
Speaker 1: Everybody knows the Wall Street Charging Bull is actually not on Wall Street. It's on Lower Broadway. It's a massive twenty five ton statue. The Fearless Girl is proportional real life. A little girl just standing up to the bull, their little hands on our hips, so almost like a big goulp exactly staring down the bull.

00:53:09
Speaker 2: So tell us what happened with Yeah, to New York.

00:53:11
Speaker 4: So I fly down, I you know, show up the next morning, bright and early, and you know, there's a little bit of milling around. Happened to be a rainy day, so there weren't too many people out and about. But suddenly it started to get a little bit of interest, and so we had a couple of reporters, you know, come by and say what's happening. We explained to them that this was a moment where we were trying to advocate for everybody's future and used it as an opportunity given it was international Women's Day specifically that that was the timing of the placement, and so one thing led to another, and before you know it, I'm booked on three or four or five news programs over the next forty eight hours and telling the story about how the Fearless Girl came about and why we did it, and how important it was to stand up for those who perhaps couldn't stand up for themselves.

00:53:59
Speaker 1: So very successful campaign. And where's the Feeliss Girl today?

00:54:03
Speaker 4: Well, she is now opposite the New York Stock Exchange. So one of the things that happened is that she started to attract so much attention that they were worried about the safety risk because as you know where the bull is that it's a very narrow street there, and people were milling onto the street. So we got a permanent or semi permanent at least for now placement in front of the New York Stock Exchange.

00:54:25
Speaker 3: And that's where she's been sent.

00:54:26
Speaker 1: That makes a lot of sense, that's a good location for that. So I know, you serve on a couple of boards. The one that really jumped out at me the Boston Ballet tell us a little bit about what that's like.

00:54:38
Speaker 4: Yeah, So I've always been a great fan of the arts. I was a gymnast as a child. I wasn't a ballerina, but I think there's a lot of rhyming there. And I've always been a fan of ballet as an art form, and the Boston Ballet is very interesting because they are trying to consolidate both the legacy classical repertoire with a lot of more modern, contemporary, avant garde kinds of repertoire. And so they did a collaboration with the Rolling Stones, for example, where we did a ballet set to some of the Rolling Stones music.

00:55:10
Speaker 3: And so it's just been a great way to.

00:55:11
Speaker 4: Meet people in the cultural community in Boston but also be part of art making that you know, I find just fascinating.

00:55:19
Speaker 1: Huh, really really interesting. So I only have you for a few more minutes. Let me jump to my favorite questions, starting with who were your early mentors?

00:55:27
Speaker 2: Tell us about who helped shape your career.

00:55:29
Speaker 4: Yeah, so I would say I didn't really think about mentors when I was younger. I would say my bosses were my mentors in the sense that they stretched me, they gave me opportunities. I talked earlier about that situation at first Boston where we were in front of the airport authority, and you know, I would not have had the opportunity to be in a room like that in a lot of companies. But I think my boss felt that I'd done the work and I deserved a place at the table. So throughout, particularly my early career, I would say it was my bosses who stretched me, gave me opportunities. And then I would say about mid career, with another colleague created this group called Connected Women. It was a very informal type of a thing where a number of women and sort of similar vintages got together regularly and we became vintages. We drank a lot of wine, so I could use the word vantages, so it was really a wine drinking club. But there was a benefit that we got to know each other well our professional and our personal stories, and so we could help each other out. So when we were, you know, looking at career situations, it was a good circle of friends that I could turn to who were in similar states in their careers and trying to make it on the corporate ladder, that I could lean on.

00:56:42
Speaker 2: Really really interesting.

00:56:44
Speaker 1: Let's talk about books. Are what are some of your favorites. What are you reading currently?

00:56:47
Speaker 4: Yeah, so, you know, I tend to like biographies. Read a bunch of the you know, Churnou and you know Titan and House of Morgan and the Walter Isaacs and you know, Steven Jobs. And I like biographies because they meld history with leadership, with whatever.

00:57:07
Speaker 3: The you know topic is.

00:57:09
Speaker 4: So obviously, with the you know, the Titan and House of Morgan, it's a finance centric kind of a story, and with Jobs it was a technology centric. But seeing how those leaders navigated you know, innovation, their time, the people around them, I just find that fascinating much better than reality TV in my opinion.

00:57:29
Speaker 3: Well is reality TV?

00:57:31
Speaker 2: Speaking about TV?

00:57:33
Speaker 1: Are you streaming any Netflix or Amazon Prime type? Yeah?

00:57:37
Speaker 4: Yeah, So right now I am on a bit of a hiatus. I've been trying to read some fiction, so I'm doing some Tony Morrison right now. I went to Princeton, as you probably remember, and so I've been trying to do a bit more reading in my spare time.

00:57:54
Speaker 1: Our final two questions, what sort of advice would you give to a recent college grad in a career in either investing or asset management.

00:58:04
Speaker 4: Well, the first thing I would say is it's a fantastic career.

00:58:07
Speaker 3: You can do so many different things.

00:58:09
Speaker 4: You get access to technical acumen, you have the interpersonal piece of things. You have to solve problems. I love the problem solving aspect of it, and I think it's something where no matter what your preferences are, you can find your vein right. You know, I happen to make my way to global Chief Investment officer, but there are people in marketing, or people in distribution, or people in processing, and all of those are just absolutely fascinating careers.

00:58:31
Speaker 3: It's never a dull moment.

00:58:34
Speaker 1: And our final question, what do you know about the world of investing in asset management today? Might have been useful back in the nineties when you first getting started.

00:58:44
Speaker 4: Yeah, well, I wish I had started investing earlier and more often. I was a net creditor for many, many, many years because I wanted to.

00:58:52
Speaker 3: Have nice clothes and jewelry.

00:58:54
Speaker 1: I can't tell you how often I hear that, which is really just a backdoor ad mission of the power of compounding.

00:59:01
Speaker 4: And maybe that bitcoin that was my other thing. I probably should have done well twelve if you had.

00:59:05
Speaker 1: A crystal ball, But what's the big insight that that would have been useful to know generally about marketing.

00:59:12
Speaker 4: You know, I'm not joking about the early and often, and truth be told, I'm one hundred percent equity invested even now, so.

00:59:20
Speaker 2: You know I'm a big fan back in my day.

00:59:23
Speaker 4: You know, it was the one hundred minus your age, which would put me squarely not in one hundred percent equity category if I followed that rubric. But I think a lot of people would just be served by being in equities, you know, for the long term, unless you only have a couple of years and who knows, uh, that's where the money is.

00:59:41
Speaker 1: This is a little hindsight biased, but I am always shocked. It's literally a chapter in the book of people who are twenty thirty, forty years old that have a substantial fixed income. I understand it's ballast that offsets the volatility of equity, but really, until you're over fifty, maybe even over sixty, do you and getting closer and closer retirement, do you really need to have forty percent of your portfolio in bonds. It doesn't make a whole lot of sense.

01:00:09
Speaker 4: Well, look, I mean for a lot of institutional clients, it makes perfect sense. They're liability matching right, and they need that fixed income. And I think if you need liquidity, or you're going to have your children's college education or weddings or things like that in a couple of years, absolutely fixed in come plays a role. But if you have the ability to not touch that investment capital, I think equities.

01:00:29
Speaker 3: Is a way to go.

01:00:30
Speaker 1: Thank you, Laurie for being so generous with your time. If you enjoy this conversation, well check out any of the six hundred and forty nine podcasts we've done over the past fourteen years. You can find those at Apple Podcasts, Spotify, Bloomberg YouTube, wherever you get your favorite podcasts. I would be remiss if I didn't thank our correct team that helps put these conversations.

01:00:54
Speaker 2: Together each week.

01:00:56
Speaker 1: Alexis Noriega is my video producer. Sean Russo is my researcher. Anna Luke is my producer. I'm Barry Ritolts. You've been listening to Master's in Business on Bloomberg Radio