WEBVTT - CalSTRS CIO Christopher Ailman Talks Fed Rate Cut Expectations

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news. Christopher Ayleman. He's a

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<v Speaker 1>CIO over at Colsters, overseeing more than three hundred billion

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<v Speaker 1>dollars in assets under the portfolio. And Chris, let's start

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<v Speaker 1>off with those rate cut expectations, because, as you know,

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<v Speaker 1>a lot has changed over the past three or four months.

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<v Speaker 1>When everybody thought we were getting four or five, maybe

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<v Speaker 1>six cuts this year, the market right now only pricing

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<v Speaker 1>in one, though the Fed still has three on its

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<v Speaker 1>dot PT.

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<v Speaker 2>Well, and what man, you've got to look You hear

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<v Speaker 2>him head back in December that we were looking for six,

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<v Speaker 2>then three, now two and one. Market has to readjust

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<v Speaker 2>so this has been a huge change in the shift.

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<v Speaker 2>It's actually taken it in stride. I'm not surprised April's

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<v Speaker 2>been so tough because strong January, February and March we're

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<v Speaker 2>in the market. It almost got ahead of itself. So

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<v Speaker 2>you know, the Fed's going to be data dependent. I

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<v Speaker 2>think we've adjusted to five percent interest rates up here

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<v Speaker 2>and the economy is doing okay, so I bet they're

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<v Speaker 2>going to continue to hold for a while. That's news

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<v Speaker 2>to the market. It's got to adjust to that.

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<v Speaker 1>Well, what is the psychology in the market. I mean,

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<v Speaker 1>there's been a lot of discussion here about that. Some

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<v Speaker 1>of the sell off that we saw in April was

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<v Speaker 1>really a lot of folks just kind of protecting their

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<v Speaker 1>profits from the first quarter. And then of course there's

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<v Speaker 1>a seasonal factors. If you believe in the whole, you know,

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<v Speaker 1>selling may and go away idea that we could see

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<v Speaker 1>maybe the price action get even worse over the next

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<v Speaker 1>couple of months.

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<v Speaker 2>Well, I think you hit it on the head. Old

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<v Speaker 2>adages still hold true. Romaine and selling may go away

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<v Speaker 2>because the market is kind of choppy, it's gotten ahead

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<v Speaker 2>of itself. We have to see earnings. I mean, like

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<v Speaker 2>you said, we're waiting for Amazon in a few minutes,

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<v Speaker 2>and the earnings have been okay but not spectacular. AI

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<v Speaker 2>is expensive as they build it up, and so far

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<v Speaker 2>none of us are paying a lot for it. So

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<v Speaker 2>the revenues will come. But it's the market reassessing its expectations.

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<v Speaker 2>I think we're in a good place, but I think

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<v Speaker 2>the market's going to go sideways. You can easily have

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<v Speaker 2>a ten to thirteen percent sell off in a bowl

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<v Speaker 2>market year, so people after be ready. This market could

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<v Speaker 2>be choppy during the summer, we've got the election. The

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<v Speaker 2>Fed's going to be data dependent.

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<v Speaker 3>Chris I asked this question on radio. Cameron Christ writes

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<v Speaker 3>great stuff for m Live. You write to call him

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<v Speaker 3>every day, and his first line today was one of

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<v Speaker 3>the basic principles of successfully navigating financial markets is that

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<v Speaker 3>you should only date, not marry, your positions. And the

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<v Speaker 3>question I was asking is what positions should you date

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<v Speaker 3>right now and which one should you marry?

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<v Speaker 2>You know, Alex, I actually heard you this morning driving

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<v Speaker 2>and listening to the radio, and that was a very

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<v Speaker 2>interesting discussion because I'm going to make a shout out

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<v Speaker 2>to my wife Robin forty years this month of May.

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<v Speaker 2>So commitment, I think you stay married, and I think

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<v Speaker 2>I'm a long term investor, Alex. So I'm going to

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<v Speaker 2>buy the beta of the market and hold it, and

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<v Speaker 2>I'm okay being married to positions. I don't necessarily believe

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<v Speaker 2>in trading and trying to time the market, and I've

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<v Speaker 2>learned that the hard way my set and for our

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<v Speaker 2>fund here, we've done very well by being invested through

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<v Speaker 2>thick and thin. Maybe you up you flow a little bit,

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<v Speaker 2>but you diversify the portfolio. Seventy thirty you hold for

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<v Speaker 2>the long term and you stay married to your acid allocation. Oh,

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<v Speaker 2>don't worry about individual stocks.

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<v Speaker 3>Seventy thirty Okay, what happened is sixty forty or what

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<v Speaker 3>happened to like sixty thirty ten?

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<v Speaker 2>Hey, sixty forty went out as interest rates went down

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<v Speaker 2>below seven percent, down to five, down to two, down

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<v Speaker 2>to zero. Now we're back up to five. So I

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<v Speaker 2>think you can be a seventy thirty. And I think

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<v Speaker 2>more people need to look at that. The baby boom

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<v Speaker 2>has to start diverse flying their portfolio. Finally, they're all

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<v Speaker 2>in their sixties and yet they love equities. So I

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<v Speaker 2>think you've got to really see that fixed income has

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<v Speaker 2>a return. But sixty forty is in the past. It's

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<v Speaker 2>seventy thirty. Eighty twenty is what the typical pension plan is,

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<v Speaker 2>and then a typical endowment is ninety ten.

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<v Speaker 1>I'm sure, Well, let's fold in also a private capital

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<v Speaker 1>into that. Chris, I mean, Calis, there's a US was

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<v Speaker 1>one of the at least one of the bigger penches

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<v Speaker 1>funds out there to kind of gravitate into the private

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<v Speaker 1>equity space as an allocation. As a proper allocation here,

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<v Speaker 1>and we've seen those allocations go up pretty significantly, not

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<v Speaker 1>just at counsels, but as some of your peers as well.

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<v Speaker 1>What is the role of that right now, particularly given

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<v Speaker 1>the lockouts and particularly given some of the concerns that

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<v Speaker 1>the last vintages that we saw at least for right

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<v Speaker 1>now haven't delivered.

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<v Speaker 2>Yeah, remain that market is absolutely frozen. I still think

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<v Speaker 2>there's a place for private investments in a diversified mega

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<v Speaker 2>and I'll call U a mega fund at three hundred

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<v Speaker 2>billion portfolio. You know, when I got here twenty five

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<v Speaker 2>years ago, we were in the single digits in private

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<v Speaker 2>equity real estate. Now we're at about fifteen percent, so

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<v Speaker 2>let's call it thirty five forty percent in private markets.

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<v Speaker 2>And I think that's the right place for us. But

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<v Speaker 2>you're right, they've been very slow. Real estate's got to

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<v Speaker 2>adjust to whatever is going on in the office market

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<v Speaker 2>and to this new level of interest rates, and I

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<v Speaker 2>think it is. You're starting to see some transactions, but boy,

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<v Speaker 2>our private equity is just frozen in here. We're not

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<v Speaker 2>having a merger Monday. I need you guys to be

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<v Speaker 2>hitting the airwaves on Monday with merger acquisitions. Companies selling

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<v Speaker 2>their divisions, then that market will unthaw. It's not so

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<v Speaker 2>much interest rates. I think it really is a hangover

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<v Speaker 2>of the economic shutdown from the pandemic, and we just

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<v Speaker 2>haven't seen a lot of transactions. But they'll come back,

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<v Speaker 2>and those markets I think still offer a premium over

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<v Speaker 2>public markets for long term institutional investors.

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<v Speaker 1>All Right, Chris, always great to talk to.

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<v Speaker 2>You have to leave it there.

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<v Speaker 1>Christopher Allman, the CIO over at Colter's