Latest / Bloomberg Intelligence / Queen Elizabeth, Bond Market, Compound King ETFs

Transcript

Queen Elizabeth, Bond Market, Compound King ETFs · Bloomberg Intelligence

0:00
Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
0:04
Speaker 1: my co host Matt Miller. Every business day we bring
0:06
Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
0:11
Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast
0:15
Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
0:18
Speaker 1: at Bloomberg dot com slash podcast. Throughout this morning, we've
0:21
Speaker 1: been getting perspective on the life, legacy, and the death
0:25
Speaker 1: of Queen Elizabeth the Second. We want to bring on
0:27
Speaker 1: John Authors this morning. He covers Markets, Forest, Bloomberg News. John,
0:31
Speaker 1: thanks so much for taking the time here give us
0:34
Speaker 1: a sense of how the country will mourn the queen
0:38
Speaker 1: over the coming days and I think weeks. Just explain
0:41
Speaker 1: how the whole process works. Well, yes, this has been
0:45
Speaker 1: a long long planned uh event um like literally from
0:51
Speaker 1: bacts decades place. As I understand, if we have ten
0:57
Speaker 1: days of morning before the funeral takes place, any coronation
1:03
Speaker 1: for childs will be in when Elizabeth's face. He wasn't
1:07
Speaker 1: crowned until from that sixteen months after she succeeded to
1:10
Speaker 1: suffering said, the coronation is still a ways off. In
1:14
Speaker 1: the interim the country basically shut down. So um, that's
1:21
Speaker 1: most dramatically Football is pantils or soccer, which really as
1:25
Speaker 1: American business. Yeah, it's a very big deal, but um,
1:31
Speaker 1: you know, it doesn't feel right to be going out
1:34
Speaker 1: and playing playing soccer this weekend, so that disappears. Um. Similarly,
1:42
Speaker 1: the last night of the Proms, which is this this
1:46
Speaker 1: big music festival in the Albert Hall, um, and the
1:49
Speaker 1: last night is um uh you know, a big display
1:55
Speaker 1: of patriotism. People waved their Union jack's they see land
1:59
Speaker 1: of Hope and glory Jerusalem or that kind of thing
2:02
Speaker 1: that's been canceled or I believe the first time since
2:07
Speaker 1: the shopping World War. I haven't checked that, but I
2:10
Speaker 1: don't think they have. That's another almost imponderable how could
2:14
Speaker 1: you possibly not have the last night of the Proms? Um?
2:18
Speaker 1: So yes, the country it's very strange in this this
2:25
Speaker 1: day and age, because the country still really does close down.
2:30
Speaker 1: Um knots of closed today. So if you wanted to
2:35
Speaker 1: go take advantage of the strong dollar and you're shopping
2:39
Speaker 1: in Region Street, Knox Street, this is not the day
2:41
Speaker 1: to do it. They're not going to stay close to
2:45
Speaker 1: the full ten days. Um. But a lot of stores
2:48
Speaker 1: have just such completely Today, I think the only really
2:52
Speaker 1: significant aspects of life that does continue as normal is
2:56
Speaker 1: is schools. I think primarily because one of the lessons
3:00
Speaker 1: we learned from the pandemic was that of all the
3:03
Speaker 1: different things wanted to to shut down during the pandemic,
3:07
Speaker 1: it was small closes that put the most. So are
3:11
Speaker 1: john are our financial markets expected to be open on
3:14
Speaker 1: as regular I can't actually choked on the day of
3:17
Speaker 1: the Unity. I'm not. I haven't checked us to as
3:22
Speaker 1: do exactly um what the plans are, but you would
3:27
Speaker 1: normally expect um. Britain doesn't have as many national holidays
3:32
Speaker 1: as most other panties, and it's sort of a convention that, um,
3:36
Speaker 1: when there is an event in the royal family, we
3:39
Speaker 1: get a you know, we get a day off for it.
3:41
Speaker 1: When when Harry and um Will got married, that was
3:45
Speaker 1: that was a day off for that, Queen Black and
3:48
Speaker 1: jubilably to see those a day off for that. This
3:50
Speaker 1: will be a day I mean the day and she
3:53
Speaker 1: is actually when when the funeral actually happens, will be
3:56
Speaker 1: a local shutdown and day. Of course you can't I
4:00
Speaker 1: can't imagine, you know, a good subject the queen, well
4:06
Speaker 1: now the king trading through um the Queen's funeral. I'm
4:11
Speaker 1: really interested to know what you expect from King Charles
4:15
Speaker 1: the Third. He's going to give an address I believe
4:18
Speaker 1: in about two and a half hours and um, you know,
4:23
Speaker 1: he's been a very outspoken Prince of Wales. But a
4:27
Speaker 1: lot of people are saying that that could very much
4:29
Speaker 1: change once he's wearing the crown. I suspect it probably
4:35
Speaker 1: has to. He does indeed have a very difficult um
4:40
Speaker 1: financing position because we don't need to rate over it
4:44
Speaker 1: yet again. But certain things we all know about his
4:49
Speaker 1: private life, which have even been dramatized in fantastic Netflix
4:52
Speaker 1: series and so unmediu that that sensible authority, that mystique
4:58
Speaker 1: that his mother had is something that you cannot be
5:01
Speaker 1: retrieved of. Him was a big as a person, uh,
5:05
Speaker 1: and that is a problem. The fact that he has
5:07
Speaker 1: already been around so long um also makes it very
5:12
Speaker 1: difficult still seems extremely straight to even be used of
5:16
Speaker 1: the word is uh. The idea that he is the
5:19
Speaker 1: king now is very difficult for a lot of us
5:22
Speaker 1: the stomach. I think he needs to make clear that um,
5:28
Speaker 1: he's going to take his his mother as a as
5:32
Speaker 1: a as a guiding light that he's he's going to
5:36
Speaker 1: try to do things the same way. And I imagine
5:41
Speaker 1: we do have William will now get to be the
5:43
Speaker 1: Prince of Wales, which will also require zone foreignation ceremony. Uh.
5:49
Speaker 1: If I were Charles, I would um trying to maintain
5:54
Speaker 1: authority by being quite a quiet figure and really put
5:58
Speaker 1: um it's some and he's you know, and his beautiful
6:02
Speaker 1: white forwards as the as the people for the nations
6:06
Speaker 1: who identify with that, that would work very well. One.
6:10
Speaker 1: We only have about thirty seconds left. But I wonder
6:13
Speaker 1: if you think this strengthens the union because the Queen
6:15
Speaker 1: did pass at Balmoral in Scotland and you know there
6:20
Speaker 1: will be a new Prince of Wales. It makes me
6:21
Speaker 1: think of the United Kingdom. Um kind of yes, I
6:25
Speaker 1: felt like it was falling apart. Does that turn around now? No,
6:30
Speaker 1: That's one of the greatest consents for me is that. Uh. Yeah,
6:35
Speaker 1: as an English person and I respect to Scotland, I
6:41
Speaker 1: really hated the idea that they would leave that they're
6:43
Speaker 1: entitled if they want to. I think the sense of
6:47
Speaker 1: total loyalty to the Queen may not be there, but
6:50
Speaker 1: I think I think this makes it easier to leave. Okay,
6:53
Speaker 1: all right, John, great perspective appreciated. John authors. He covers
6:57
Speaker 1: markets for Bloomberg News Bloomberg Opinion, UH, as you can
7:01
Speaker 1: tell by Zac and he is a British so we
7:02
Speaker 1: love getting his perspective here on the news of the
7:05
Speaker 1: passing of Queen Elizabeth. A second, I end go that
7:11
Speaker 1: is a function Matt turning me onto recently. That is
7:13
Speaker 1: a Bloomberg Index browser gives you all the you know,
7:17
Speaker 1: the bond fixed income in disease, uh, gives you kind
7:21
Speaker 1: of a sense of where they're going. And the US aggregate,
7:24
Speaker 1: the Bloomberg US aggregate corporate you know in the index
7:27
Speaker 1: is down eleven point five percent on a global basis.
7:30
Speaker 1: It's not like, I mean, just brutal, brutal returns in
7:35
Speaker 1: the fixed income market. I'm kind of thinking it can't
7:37
Speaker 1: get any worse. I'm gonna go in there and buy
7:39
Speaker 1: some bonds. Adam Coon's portfolio manager went through Capital Management. Adam,
7:42
Speaker 1: what do you think of my call there? I think
7:44
Speaker 1: I might be going in on the bondom mark. I
7:45
Speaker 1: can't get any worse in it. I mean, it can't
7:50
Speaker 1: get worse but from our viewpoint, bonds are the tray
7:54
Speaker 1: for the next year. And when you when you look
7:55
Speaker 1: at um just kind of where markets are right now,
7:59
Speaker 1: we kind see three and a half percent of the
8:01
Speaker 1: ten years the peak for this cycle and rates and
8:06
Speaker 1: in the long term secular bullet trend to continue. This
8:10
Speaker 1: is just kind of a blip and we've gotten pretty
8:13
Speaker 1: used to easy returns and fixed income of the last
8:16
Speaker 1: ten years, so this should be expected to have a
8:19
Speaker 1: sell off. This has definitely been more aggressive than than
8:22
Speaker 1: what we expected. But when we look across the universe
8:25
Speaker 1: of of corporate bonds, specifically higher grade corporate bonds, we
8:31
Speaker 1: we we really like what we see. Um. We've been
8:34
Speaker 1: using the phrase kids kids in the candy store, but
8:37
Speaker 1: I mean when you're looking at a names like Alphabet
8:40
Speaker 1: and Apple trading well but four percent, and then you've
8:43
Speaker 1: got Facebook and Meta bonds trading above five. Um. There's
8:48
Speaker 1: just a lot of opportunities in the corporate world right now. UM,
8:52
Speaker 1: in terms of the indexes or in terms of the
8:58
Speaker 1: rapper what what do you like? Do you've owned by
9:00
Speaker 1: the bonds themselves? Do you buy a tracking fund? You
9:03
Speaker 1: buy e t F? How do you get into that? Trade.
9:06
Speaker 1: So so for us, we're we do buy individual bonds
9:10
Speaker 1: and specifically we are not shying away from duration right now.
9:14
Speaker 1: Uh Over the last several years we have been a
9:18
Speaker 1: shorter duration till to cross our strategies. But right now
9:21
Speaker 1: we are adding to our A and double A rated
9:25
Speaker 1: corporate uh corporate paper by buying individual bonds UM adding
9:29
Speaker 1: to the basis now you can add through e t
9:32
Speaker 1: F carticular like l q d UM just to get
9:35
Speaker 1: corporate exposure is a great way to do it if
9:38
Speaker 1: if you don't want to buy individual bonds. But like
9:40
Speaker 1: I said, we are looking at adding to duration um
9:43
Speaker 1: you know, ten years and now. So when you kind
9:45
Speaker 1: of look at at the landscape from a monetary policy standpoint,
9:50
Speaker 1: we kind of see there two scenarios and both of
9:53
Speaker 1: which we think farewell for interest rates and bonds in general.
9:57
Speaker 1: So let's say they act to aggressively and they break
10:00
Speaker 1: the economy. Ultimately that's going to lead to a decline
10:03
Speaker 1: in interest rates. Or they pivot and say, you know what,
10:07
Speaker 1: we've We've done our job and inflation is waning, so
10:10
Speaker 1: we're going to pull back and and and may even
10:13
Speaker 1: begin to uh cut interrut rates, which the euro are
10:17
Speaker 1: your euro dollar curve is thing. They're going to cut
10:19
Speaker 1: interest rates in the first quarter, So in either of
10:23
Speaker 1: those scenarios, you're going to see interest rates decline. And
10:25
Speaker 1: when you look at balance sheets and just credit in general,
10:29
Speaker 1: it looks fairly firm and stable. So we don't see
10:32
Speaker 1: any credit issues hitting the market, which is why we're
10:35
Speaker 1: adding to credit exposure to not only get the duration
10:38
Speaker 1: but also the credit spread exposure. Adam, some economists are
10:42
Speaker 1: telling me I need to be ready for a recession
10:45
Speaker 1: in the not too distant future. So what does that mean.
10:47
Speaker 1: I have to actually look at leverage ratios and interest coverage.
10:51
Speaker 1: Do I have to be really focused on credit quality?
10:55
Speaker 1: I mean, if you're if you're a fixing income investors,
10:58
Speaker 1: you need you need to understand out of quality. Um.
11:01
Speaker 1: But I think where we're at in the cycle, and
11:04
Speaker 1: when you look at where spreads of actually widened too,
11:08
Speaker 1: you're compensated for that risk right now. So we we
11:10
Speaker 1: view right now an asymmetric return profile where the risk
11:15
Speaker 1: reward is in favor of going along credit versus a
11:19
Speaker 1: year ago when we were if we had this conversation,
11:21
Speaker 1: we were struggling to get three percent and spreads were
11:23
Speaker 1: an all time type, so it was asymmetric in the
11:26
Speaker 1: other direction, where there were in a lot more you
11:28
Speaker 1: could squeeze out of the markets, UM, but a lot
11:30
Speaker 1: more downside. So we we have run through that cycle.
11:33
Speaker 1: Right now, we're looking at the markets, we're seeing that
11:36
Speaker 1: this reward you're you're getting for the risk you're taking,
11:39
Speaker 1: you are being compensated. I have a listener who wants
11:43
Speaker 1: to know what your take is on the volatility we've
11:46
Speaker 1: seen in currency, specifically the yen and the Taiwan dollar
11:50
Speaker 1: UM and foreign investors reducing exposure to US assets. Yeah,
11:56
Speaker 1: I mean I look with the dollar, STRING think that's
12:00
Speaker 1: exactly what we should expect. I think that the US
12:03
Speaker 1: dollar has kind of reached its maximum of evaluation relative
12:08
Speaker 1: to other currencies. So if we see the US economy
12:11
Speaker 1: begin to roll over, which there's plenty of evidence for that,
12:14
Speaker 1: I think we'll start to see the U S Dollar
12:17
Speaker 1: decline on a relative basis, which will move more assets
12:20
Speaker 1: back to the U S. So, so that's that's another
12:23
Speaker 1: case for Bobs. Alright, Adam, good stuff. Appreciate getting your perspective,
12:27
Speaker 1: your thoughts there, Adam Coon's he's a portfolio manager. At
12:30
Speaker 1: Winthrop Capital Management, located in beautiful Carmel, Indiana, just outside
12:34
Speaker 1: of Indianapolis. Carmel's are very nice burb of Indianapolis. Getting
12:39
Speaker 1: his thoughts on fixed income here. Uh, they're pretty bullish here.
12:43
Speaker 1: Interesting to see, all right, that's Adam Coon's portfolio manager
12:46
Speaker 1: with our capitol manager. Nice kind of little rip here
12:51
Speaker 1: to the market. Sharre I wasn't really expecting it. It's
12:53
Speaker 1: interesting as well because we had um uh Bullard come
12:59
Speaker 1: out and say he's leaning towards seventy five basis points
13:02
Speaker 1: to the next meeting that is coming up September twenty one.
13:08
Speaker 1: You can always see when the FED meetings are if
13:11
Speaker 1: you just type f E d GO on your Bloomberg
13:13
Speaker 1: term auld. The same goes for b O E B
13:15
Speaker 1: O j E C b b OC Bank of Canada nice,
13:19
Speaker 1: which we follow closely here of course, Well they're so
13:22
Speaker 1: close exactly. But that is a good one. That's f
13:24
Speaker 1: E D go is a good one in the next
13:26
Speaker 1: right decision. September twenty one, at two pm Wall Street Time,
13:30
Speaker 1: let's check out Ted Oakley, founder and managing partner at
13:32
Speaker 1: Oxbow Advisors and a prod alum of the Texas Tech.
13:36
Speaker 1: I think their long Long Horns, is that, right, Ted Longhorns?
13:39
Speaker 1: The University of Texas Longhorns, University of Texas Long There's
13:42
Speaker 1: a very big difference between the University of Texas Texas Tech.
13:46
Speaker 1: Is Texas tex a great school? And I know what
13:49
Speaker 1: what under God did my undergrad there? It's a it's
13:51
Speaker 1: a right engineering school, right, Actually, it's a it's a
13:55
Speaker 1: real good college. Excellent. Hey, Ted, what do you I mean?
13:58
Speaker 1: You've been around the block a few times here, You've
14:00
Speaker 1: seen markets come and go. Um, what do you make
14:03
Speaker 1: of these equity markets, these fixed income markets at sixty
14:07
Speaker 1: portfolio that a lot of us were kind of brought
14:09
Speaker 1: up on. What do you make of that whole concept?
14:11
Speaker 1: Given what we've seen so far this year? Well, you
14:16
Speaker 1: know what happened on the sixty forty is really it
14:18
Speaker 1: came into play where people really got hooked on it.
14:22
Speaker 1: You know, the last twelve years or so prior to that,
14:25
Speaker 1: you know, you would come and go, but nothing like
14:27
Speaker 1: this last time because they could just plug and play
14:29
Speaker 1: on sixty and it worked. Now you're in a situation
14:32
Speaker 1: where we, like I've seen it many times, where you're
14:34
Speaker 1: in a true bearer market and you can't lean on anything,
14:38
Speaker 1: and necessarily you've got to be able to be reasonably nimble.
14:42
Speaker 1: And you keep going to lower lows and you get
14:44
Speaker 1: good bounces like but in July. Maybe you're getting one
14:46
Speaker 1: right now, But then they go to lower lows, and
14:50
Speaker 1: I think that's what frustrates people the most. And then
14:53
Speaker 1: on the bond side, you know, you can have bonds
14:56
Speaker 1: raids peak and start down like you did, no aid
14:58
Speaker 1: like you did, and no one and the market still
15:01
Speaker 1: goes on down. And I think that's what a lot
15:04
Speaker 1: of the what I should say the novice, the younger
15:06
Speaker 1: players don't understand is that you know, there's a lot
15:09
Speaker 1: of things that happened here, nuances that you've gotta do.
15:12
Speaker 1: You have to know a little bit about what you're
15:13
Speaker 1: doing in this kind of market. What are you expecting
15:17
Speaker 1: um in terms of the US stock market over the
15:21
Speaker 1: next year, you know, into two into three. I guess
15:26
Speaker 1: your FED call is pretty important in that aspect, in
15:30
Speaker 1: that in that respect, isn't it? Well? It is. I
15:34
Speaker 1: think I think what people forget is that if the
15:37
Speaker 1: FIT is serious about keeping you know, the funds rate
15:40
Speaker 1: half a point over the inflation, right, we leave interest
15:43
Speaker 1: drift back to you know, three and a half or
15:45
Speaker 1: four uninflation, you're still you're still well behind on the
15:49
Speaker 1: funds rate at two and a half, and on the
15:51
Speaker 1: market itself, we're thinking, uh, we think we don't get
15:54
Speaker 1: a low in the market until the first or second
15:56
Speaker 1: quarter of twenty three more than likely, because it's just look,
16:01
Speaker 1: we're nine months end of the year and nobody's ahead
16:03
Speaker 1: of the market right now. So there. I don't think
16:06
Speaker 1: they can catch up in ninety days. Maybe we're wrong,
16:08
Speaker 1: but I've seen it before. It gets hard to do,
16:11
Speaker 1: and then they start protecting, and then you go into
16:14
Speaker 1: the new year, we think the earnings will be lower.
16:16
Speaker 1: Companies are just now coming into what's going to be trouble,
16:19
Speaker 1: and then real estate is just now coming into the
16:23
Speaker 1: tough part. And we think both of those will come together.
16:25
Speaker 1: So what do you do? Well, you gotta hold a
16:28
Speaker 1: lot of cash. I mean we hold in our three strategies,
16:31
Speaker 1: we hold on average, we hold more than fifty percent
16:34
Speaker 1: cash all of them right now. And and when I
16:36
Speaker 1: take cash, you know, we're getting on a variable rate treasury,
16:40
Speaker 1: which is a ninety day reset. We get three now,
16:44
Speaker 1: which is pretty good, you know, fully guaranteed we're getting
16:48
Speaker 1: three fifty three sixty on a two year treasury, you know,
16:51
Speaker 1: three and a half on eighteen months. We can hold
16:54
Speaker 1: it in places and make some money. Um, And we
16:57
Speaker 1: don't buy into this idea that well, I don't want
16:59
Speaker 1: to hold cash because I can't make any money three
17:01
Speaker 1: per cents better than a minus twenty the way we
17:04
Speaker 1: look at it, Yeah, exactly, that's where we are. What
17:07
Speaker 1: do you typically hold? Ten? Like, what's what would be
17:09
Speaker 1: your average cash holding relative to what you're doing now? Well,
17:12
Speaker 1: on the stock side, it would be, you know, five
17:14
Speaker 1: to seven uh in m BE ten it was a
17:18
Speaker 1: little higher last year. We started raising cash in twenty one. UM.
17:22
Speaker 1: On the income accounts, we move up and down the
17:24
Speaker 1: yield curve, particularly on the bond accounts, and you know,
17:28
Speaker 1: we have brought a lot of things in short the
17:30
Speaker 1: last two years and now we've actually started just gradually
17:35
Speaker 1: moving back out the yield curve some. So it just
17:38
Speaker 1: depends on what which strategy it is. Really. How are
17:42
Speaker 1: things down in Corpus Christie where you are? Ten, Well,
17:45
Speaker 1: I'm in Austin, Corpus Christie, but I'm in Austin. Austin
17:49
Speaker 1: is different than any other city in Texas. It's sort
17:53
Speaker 1: of like a California city in a way, but for
17:56
Speaker 1: better for worse. You got influx of people like crazy,
18:00
Speaker 1: Yeah it's good or good and bad. Now on the coast,
18:03
Speaker 1: uh you know, they're doing okay because they have a
18:05
Speaker 1: lot of you know, they have ports and they have
18:07
Speaker 1: a lot of the energy is really keeping those sports busy. Houston, Brownsville, Corporus, screw,
18:12
Speaker 1: they all keep the sports busy. So they're they're they're
18:15
Speaker 1: pretty busy right now. And is it still I mean,
18:19
Speaker 1: you know, just being in Texas in general, oil up.
18:22
Speaker 1: You know, oil is eight six dollars a barrel. That's
18:25
Speaker 1: that's a pretty good price historically. How are people feeling
18:27
Speaker 1: about energy down there? They feel okay. I think the
18:31
Speaker 1: energy people, and I've said this before, they're not very
18:33
Speaker 1: good at a sentiment on where they should be. But
18:38
Speaker 1: but I will say this, they're a little surprised. I
18:41
Speaker 1: think that it's at five. But it doesn't you know,
18:44
Speaker 1: I think it's okay. I mean they they can still drill,
18:47
Speaker 1: they can still do projects, um that sort of thing.
18:50
Speaker 1: Uh Um. I know we're getting ready to purst this
18:53
Speaker 1: a personal thing, but I'm getting ready to go into
18:55
Speaker 1: a project that we think we'll do pretty well. But
18:57
Speaker 1: it's you know, it depends on depends on whether it's
19:01
Speaker 1: gas or oil where they are, but generally it's staying
19:04
Speaker 1: fairly steady. Yeah, it looks like that way, all right, Ted,
19:07
Speaker 1: Thanks so much for joining us. Always appreciate getting your
19:10
Speaker 1: thoughts on these markets, your perspective, Ted Oakley. He's a
19:13
Speaker 1: founder and manager part of ox Bow Advise. Great new
19:16
Speaker 1: movie by the way, called Vengeance, which I rented on
19:19
Speaker 1: Apple yesterday, and it's about um kind of you know,
19:24
Speaker 1: like an arrogant New York City hipster who goes down
19:28
Speaker 1: to Texas for a funeral and he thinks he knows
19:31
Speaker 1: everything and they're all country bumpkins. Ye, Robert can't well,
19:36
Speaker 1: Founder and portfolio manager of Upholdings, Robert was, was I right,
19:40
Speaker 1: are you guys the ones behind the first hedge fund
19:42
Speaker 1: to go through a conversion to an e t F structure?
19:45
Speaker 1: And if so, why we were? Uh? You know, the
19:50
Speaker 1: two thousand nineteen et F rule adjustments really open the
19:54
Speaker 1: floodgates for for active managers to bring their strategies inside
19:57
Speaker 1: of e t F s. And the short answer is, um,
20:01
Speaker 1: the e t F is the most efficient vehicle in
20:04
Speaker 1: the world to manage money. You know, the tax efficiency
20:07
Speaker 1: of it, the liquidity and the low fee structure, and
20:09
Speaker 1: the access that you get. It was just a no
20:12
Speaker 1: brainer for us because if your goal is to maximize
20:15
Speaker 1: you know, long term compounded returns to investors, you've got
20:17
Speaker 1: to minimize fees and taxes. And you know, we saw
20:20
Speaker 1: no other vehicle than that that could beat the e
20:22
Speaker 1: t F and doing that, that's not why you run
20:24
Speaker 1: a hedge fund. You run a hedge fund again super
20:27
Speaker 1: super rich. I mean you're giving away two and twenty Uh.
20:32
Speaker 1: You know it makes sense for a buyer of the
20:33
Speaker 1: e t F, But what's what's your motivation? It depends
20:38
Speaker 1: on your time horizon. You know, I I turned thirty
20:40
Speaker 1: nine last week. You know, I've got a thirty year
20:42
Speaker 1: investment career ahead of me. And uh, if you the
20:45
Speaker 1: more you you backload your your earnings and your winnings,
20:49
Speaker 1: that the larger of a firm that you can build.
20:51
Speaker 1: So uh, you know, our focus is not on extracting
20:53
Speaker 1: all the value in the first ten years of running
20:55
Speaker 1: this business. It's it's focusing on, you know, the decades
20:58
Speaker 1: ahead of us. It's a relatively low expense ratio as well.
21:00
Speaker 1: I'm looking at point six here, Um, that's got to
21:04
Speaker 1: be very competitive. How are you doing? So what was
21:09
Speaker 1: interesting is, yeah, we looked at the at the when
21:11
Speaker 1: we did the conversion, we looked at the history of
21:13
Speaker 1: active management, going back to mutual funds in the forties, fifties, sixties, seventies,
21:18
Speaker 1: and over any period of time, the long term average
21:21
Speaker 1: that you know, investors are willing to pay for active
21:23
Speaker 1: management was about sixty basis points. So people were there's
21:27
Speaker 1: discussion out there about you know, race to bottom with
21:29
Speaker 1: indexes that charge zero, indexes strip charge zero. You know,
21:32
Speaker 1: there's no there's no research, there's no management, there's there's
21:35
Speaker 1: nothing that's happening underneath the surface. So we thought that
21:38
Speaker 1: the fair thing to do was was charged What what
21:40
Speaker 1: has been the industry norm now for for almost eighty years.
21:43
Speaker 1: What do you think about Amazon? It's a question. Amazon
21:48
Speaker 1: has clearly built an incredible company. It's a it's a
21:51
Speaker 1: it's a mid size holding in our portfolio right now.
21:54
Speaker 1: But but I gotta be honest that um there, Uh,
21:57
Speaker 1: capital intensity is a real problem and one of the
22:01
Speaker 1: things that we focus really intensely on is what is
22:03
Speaker 1: the return on invested capital that companies are generating. So
22:06
Speaker 1: when a company has new capital expenditures or new operating expenses,
22:11
Speaker 1: what what is the new operating cash flow that has
22:13
Speaker 1: generated off of that incremental spend in the in the
22:16
Speaker 1: coming years. And the problem with Amazon is that if
22:19
Speaker 1: you were to take a Google, every new dollar that
22:21
Speaker 1: Google puts in capex, they're generating sixty more cents of
22:24
Speaker 1: operating cash flow in the subsequent year. For Amazon that
22:27
Speaker 1: numbers about ten cents. And so they are in a
22:30
Speaker 1: structurally lower return on invested capital business. And even the
22:35
Speaker 1: that's always that's always been the case with Bezos. He's buying,
22:39
Speaker 1: he's building these fulfillment centers in all over the country.
22:44
Speaker 1: But the stock kind of works. So I kind of
22:47
Speaker 1: feel like, I kind of I don't disagree with your math.
22:50
Speaker 1: But for some reason Amazon has gotten the benefit of
22:53
Speaker 1: the doubt from shareholders because the strategy they can turn
22:56
Speaker 1: it seems like they can turn on when they want.
22:57
Speaker 1: Don't don't forget. It's not Bezos anymore, right, Jesse. So
23:00
Speaker 1: it's basis to make come on, It's like Alphabet and Google. Please.
23:04
Speaker 1: So I mean, what do you so. I mean, look,
23:07
Speaker 1: I think a lot of investors have have exposure to Amazon,
23:10
Speaker 1: whether they realize it or not. Uh, you know, there's
23:12
Speaker 1: such a huge component of a lot of indices and
23:15
Speaker 1: stock stocks work until they don't. And I think that's
23:18
Speaker 1: been one of the big reckonings this year is it's
23:21
Speaker 1: especially amongst growth investors. They've been shocked at how much
23:24
Speaker 1: a couple of percentage points moved in the tenure treasury
23:27
Speaker 1: resulted in multiple reratings across growth assets. So Amazon is
23:32
Speaker 1: held onto its valuation for now, but eventually the math
23:35
Speaker 1: of return on investor capital catch up to your business
23:38
Speaker 1: and you need to you need to generate the cashual
23:40
Speaker 1: to justify your valuation. And to again, just to pick
23:43
Speaker 1: on Amazon for a second, if you're to look ten
23:45
Speaker 1: years ago, um, I believe the business was was trading
23:49
Speaker 1: for a couple hundred billion dollars and over the last
23:52
Speaker 1: ten years the business generated seventy billion dollars of free
23:56
Speaker 1: cash flow. So that's a cumultive investment of a long
23:59
Speaker 1: period of time. Now they have a one and a
24:01
Speaker 1: half trillion dollar valuation, is Amazon gonna deliver at least
24:07
Speaker 1: a trillion dollars of three cash flow over the next
24:10
Speaker 1: ten years right now, their capital intensity tells you that
24:13
Speaker 1: that's probably not gonna happen. So those are the things
24:16
Speaker 1: that we focus on. What you love, what's something that
24:18
Speaker 1: gets you really excited in the morning, well or all
24:20
Speaker 1: day depending well, So there's yeah, there's a couple of
24:25
Speaker 1: different ways to make money in the market. There's there's
24:27
Speaker 1: investing in the outstanding companies like like an adie end
24:30
Speaker 1: that does ended end payments and has that's plugged in
24:32
Speaker 1: these little APIs and just gets all this growth. You
24:35
Speaker 1: get to be a venture capital investor without having to
24:37
Speaker 1: pick amongst all these individual venture companies. So I'd say
24:40
Speaker 1: a company like that is one that I'm more excited
24:43
Speaker 1: about than just about any company in the world. But
24:45
Speaker 1: it's more expensive and you've got to know that or
24:48
Speaker 1: expect that they're going to grow even faster than than
24:51
Speaker 1: than what the market things. So I'd say that's on
24:53
Speaker 1: just quality of business and growth of the industry and
24:57
Speaker 1: the differentiations. Technology ad is definitely a tough and at
25:00
Speaker 1: the other end of the spectrum, where you know we
25:03
Speaker 1: have a very different view than the market is i'd
25:05
Speaker 1: say meta. I mean, you talking about companies that are
25:08
Speaker 1: considerate more more cash flow than their market cap. It's
25:12
Speaker 1: going to be really easy for Meta to generate more
25:14
Speaker 1: than four hundred billion dollars of pre cash flow. All right,
25:17
Speaker 1: Robert Greig Stuff really appreciated some fascinating discussion near Robert
25:20
Speaker 1: can't well found our portfolio manager of Upholding. Thanks for
25:22
Speaker 1: listening to the Bloomberg Markets podcast. You can subscribe and
25:26
Speaker 1: listen to interviews with Apple Podcasts or whatever podcast platform
25:30
Speaker 1: you prefer. I'm Matt Miller. I'm on Twitter at Matt
25:33
Speaker 1: Miller V three, pt on Faull Sweeney. I'm on Twitter
25:37
Speaker 1: at pt Sweeney Before the podcast. You can always catch
25:40
Speaker 1: us worldwide at Bloomberg Radio