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P&L: Deals Mania With GE-Baker Hughes And CenturyLink-Level 3 · Bloomberg Intelligence

• 0:04
  Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm Pim
• 0:07
  Speaker 1: Fox along with my co host Lisa Abramowitz. Each day
• 0:11
  Speaker 1: we bring you the most important, noteworthy, and useful interviews
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  Speaker 1: for you and your money, whether at the grocery store
• 0:16
  Speaker 1: or the trading floor. Find the Bloomberg P L Podcast
• 0:20
  Speaker 1: on iTunes, SoundCloud and at Bloomberg dot com. We want
• 0:29
  Speaker 1: to break down a little bit more the merger with
• 0:32
  Speaker 1: the g E unit, the oil unit, and Baker Hughes.
• 0:35
  Speaker 1: And here we have with us Rick Clough, Industrials reporter
• 0:39
  Speaker 1: for UH for Bloomberg. UM, I want to talk about
• 0:43
  Speaker 1: just the mechanics of this because I know that we
• 0:45
  Speaker 1: kind of got an explanation earlier, but I really haven't
• 0:48
  Speaker 1: wrapped my head around the entity that they're creating and
• 0:51
  Speaker 1: what that's going to give them going forward. You know,
• 0:54
  Speaker 1: I think we're all still kind of trying to figure
• 0:57
  Speaker 1: this out because I didn't get it at all. It
• 1:00
  Speaker 1: was yeah, it'll be a new publicly traded company. Um,
• 1:04
  Speaker 1: it'll be sixty two point five percent owned by g E.
• 1:07
  Speaker 1: And and the way that they're characterizing it is, UH,
• 1:11
  Speaker 1: it will be the new Baker Hughes. They've also called
• 1:13
  Speaker 1: it Baker Hughes a g company, So UM in a
• 1:16
  Speaker 1: sense it's a it's a subsidiary, but will UM function
• 1:20
  Speaker 1: as as a standalone company. And it really combines UM
• 1:24
  Speaker 1: the operations UM gees oil and gas business along with
• 1:28
  Speaker 1: Baker Hughes and and creates a bigger player in in
• 1:31
  Speaker 1: the oil market and one with a real broad range
• 1:34
  Speaker 1: of product and service offerings. Hey Brick, can you explain
• 1:38
  Speaker 1: who is going to own that piece of Baker Hughes
• 1:42
  Speaker 1: And why wouldn't they just sell the whole thing to
• 1:45
  Speaker 1: ge if she is going to be in over six owner.
• 1:48
  Speaker 1: You know, I I can't entirely explain it, but but
• 1:51
  Speaker 1: you know, I think part of it had to do
• 1:53
  Speaker 1: with gees appetite here too. UM. You know they they
• 1:57
  Speaker 1: I think we're reluctant to do a full acquisition. They
• 2:00
  Speaker 1: they said recently that that was never on the table.
• 2:03
  Speaker 1: And UM, you know for them, they while they could
• 2:06
  Speaker 1: do a really big deal, UM, I think they're they're
• 2:09
  Speaker 1: trying to be really disciplined with M and A. And
• 2:11
  Speaker 1: you know they've got an activist shareholder in Nelson Peltz's
• 2:15
  Speaker 1: Trium Fund fund Management in there. UM so and you
• 2:18
  Speaker 1: know that helps keep them disciplined. But but you know,
• 2:21
  Speaker 1: Jeff Emil, earlier in his his tenure as CEO of
• 2:25
  Speaker 1: of ge UM took some criticism for UM, some of
• 2:28
  Speaker 1: the lack of discipline that some investors saw with UH,
• 2:31
  Speaker 1: with their M and A strategy and so UM. You know,
• 2:35
  Speaker 1: I think lately they've been trying to just be a
• 2:38
  Speaker 1: little better about that. Well. I mean, ge sort of
• 2:41
  Speaker 1: has had an identity issue for a while, right, and
• 2:43
  Speaker 1: it's trying to rebrand itself as the future and more
• 2:47
  Speaker 1: of a tech company. I mean, how does this allow
• 2:50
  Speaker 1: them to do that or does this factor in to
• 2:52
  Speaker 1: sort of that strategy. Absolutely, they're they're trying very hard
• 2:55
  Speaker 1: to rebrand themselves and into their credit. There really does
• 2:57
  Speaker 1: seem to be some substance behind this. UM. They want
• 3:00
  Speaker 1: to become the digital industrial company, as they describe it
• 3:04
  Speaker 1: and UH, and that's been a transformation that's been underway
• 3:07
  Speaker 1: for a number of years now. They've been UM on
• 3:10
  Speaker 1: the one hand, really focusing on building heavy duty industrial equipment,
• 3:16
  Speaker 1: you know, getting rid of some UM finance businesses and
• 3:19
  Speaker 1: consumer focus ones and focusing on things like like jet
• 3:23
  Speaker 1: engines and gas turbines. And then at the same time,
• 3:26
  Speaker 1: they've been building a software business, and uh, that's really
• 3:30
  Speaker 1: to enhance the the equipment that they sell, putting sensors
• 3:33
  Speaker 1: and that kind of thing on it and helping improve
• 3:37
  Speaker 1: productivity and efficiency. And so this really fits into that.
• 3:41
  Speaker 1: I just want to note that Tryan Capital Tryan Fund Management,
• 3:45
  Speaker 1: which is the Nelson Pelts investment in the vehicle, has
• 3:49
  Speaker 1: over seventy four and a half million shares of GE
• 3:54
  Speaker 1: and that equals about an eight tenths of a percent
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  Speaker 1: stake in the company. And that's a pretty big stay
• 4:01
  Speaker 1: when you're talking about a company as big as GE
• 4:03
  Speaker 1: and number number eleven, Yeah, you know on the on
• 4:06
  Speaker 1: the Bloomberg Hts there you go. And we actually just
• 4:08
  Speaker 1: reached out to them, um just before I walked in here,
• 4:11
  Speaker 1: and and they are on board with this this move,
• 4:14
  Speaker 1: They support it, and they said they applaud gee. Is
• 4:17
  Speaker 1: that because the Baker Hughes will then trade or the
• 4:20
  Speaker 1: new company that will then trade acts almost like a
• 4:25
  Speaker 1: stub or a proxy for the old Baker Hughes because
• 4:27
  Speaker 1: they thought maybe they could actually get more of the market.
• 4:29
  Speaker 1: Wasn't so terrible, you know, that could be part of it?
• 4:32
  Speaker 1: And uh, and really I think too. This is this
• 4:34
  Speaker 1: is a way for g E to play a possible
• 4:37
  Speaker 1: rebound in the market without having to do a full
• 4:40
  Speaker 1: acquisition and and put all that cash on the line.
• 4:42
  Speaker 1: What is this stew for Baker Hughes, You know, for
• 4:45
  Speaker 1: Baker Hughes, this this allows them, much like ge allows
• 4:48
  Speaker 1: them to broaden their product offerings. They the way that
• 4:52
  Speaker 1: this is really being UM described is a way for
• 4:55
  Speaker 1: them to UM take advantage of gees growing a software
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  Speaker 1: business and UM they've got what they call predicts, they're
• 5:02
  Speaker 1: operating system that they're trying to roll out across all
• 5:05
  Speaker 1: kinds of different machines. But uh UM, but that's something
• 5:09
  Speaker 1: that they really want to incorporate into UM, the products
• 5:12
  Speaker 1: and the service offerings, and so that will allow them
• 5:15
  Speaker 1: to really compete on on on a more level footing
• 5:18
  Speaker 1: with the companies like Haliburton and schlumberj. G E is
• 5:23
  Speaker 1: going to contribute seven point four billion dollars to fund
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  Speaker 1: a special dividend that will go to the Baker Hughes stockholders.
• 5:30
  Speaker 1: That dividend is worth seventeen and a half dollars to share.
• 5:33
  Speaker 1: What happens to the g shareholder? Do we know? Uh,
• 5:37
  Speaker 1: you know, I don't know if all the all of
• 5:39
  Speaker 1: that has been announced yet, but um, you know, if
• 5:42
  Speaker 1: it's any indication that the stocks stock was up a
• 5:44
  Speaker 1: bit uh um this morning. Um, I think about four
• 5:48
  Speaker 1: tents of a percent right now. And you know for
• 5:50
  Speaker 1: GE that that's not bad. Uh even a one percent
• 5:54
  Speaker 1: changes pretty unusual. Well, I should just point out that
• 5:58
  Speaker 1: GE shares have are down at out almost four percent
• 6:01
  Speaker 1: on the year, whereas Baker Hughes shares, thank you to
• 6:05
  Speaker 1: the rally in oil prices, they're up more than twenty
• 6:09
  Speaker 1: seven So they're dipping a little bit, is showing a
• 6:14
  Speaker 1: notable jump. Yeah, and actually with G shares, a lot
• 6:18
  Speaker 1: of the decline has come into the last quarter or so.
• 6:21
  Speaker 1: I want to thank you very much. Rick Cleff, Industrials
• 6:24
  Speaker 1: reporter for Bloomberg News. I'm him Fox Alone with Pisa Abramo.
• 6:28
  Speaker 1: It's this is Bloomberg, Another day, another group of deals
• 6:41
  Speaker 1: for Alex Sherman our Technology, media and telecom mergers and
• 6:45
  Speaker 1: acquisitions reporter for Bloomberg News, and Alex can be followed
• 6:50
  Speaker 1: on Twitter at Sherman four nine four nine stags under
• 6:55
  Speaker 1: his live You know the results of many many big
• 7:00
  Speaker 1: or having a three year old than a seven month Alright, alright,
• 7:04
  Speaker 1: so Strman four nine four nine, let's start with Level
• 7:08
  Speaker 1: three and century Link. That's the go there first. Yeah. Sure,
• 7:12
  Speaker 1: so this is a it's a big deal. These are
• 7:13
  Speaker 1: big companies. Um century Link is buying Slash merging with
• 7:17
  Speaker 1: Level three. It's a cash stock deal. The total value
• 7:21
  Speaker 1: of this, if you include dead is about thirty four
• 7:23
  Speaker 1: billion dollars. So this is yet another large deal in
• 7:26
  Speaker 1: the telecom industry. What I think is interesting about this one, PAM,
• 7:29
  Speaker 1: is that it comes on the heels of the two
• 7:33
  Speaker 1: biggest players in the world of telecommunications, at least sort
• 7:37
  Speaker 1: of the the world of let's say telephonic telecommunications, meaning
• 7:42
  Speaker 1: A T and T and Verizon. They both did notable
• 7:44
  Speaker 1: deals this year Verizon buying Yahoo, a T and T
• 7:48
  Speaker 1: just recently buying Time Warner, and now century Link and
• 7:51
  Speaker 1: Level Three not going in the same direction there of
• 7:54
  Speaker 1: buying sort of the flashy consumer facing media business. Instead.
• 7:58
  Speaker 1: This is very much sort of a boring, routine business
• 8:02
  Speaker 1: to business business services type deal where these two companies
• 8:06
  Speaker 1: are going to combine and basically what it allows them
• 8:09
  Speaker 1: to do is sell their products that they sell the
• 8:11
  Speaker 1: other businesses, whether they're sort of security products or uh,
• 8:15
  Speaker 1: you know, almost like internet infrastructure type products to each other.
• 8:20
  Speaker 1: So it makes their customer bases much larger. And really
• 8:23
  Speaker 1: this deal is all about taxes. Each company comes with
• 8:26
  Speaker 1: enormous net operating losses. Century Link about six billion and
• 8:30
  Speaker 1: net operating losses. Level three Communications about ten billion and
• 8:33
  Speaker 1: net operating losses. Why do they have so many n
• 8:36
  Speaker 1: O l s. Well, if you've been following Donald Trump,
• 8:37
  Speaker 1: you might know this. Uh. If if you do bad business,
• 8:40
  Speaker 1: you get n O l's. They laid a lot of
• 8:42
  Speaker 1: fiber uh many years ago. They lost a lot of
• 8:45
  Speaker 1: money on it. But the benefit, of course is that
• 8:47
  Speaker 1: you get tax benefits. So shareholders for both of these
• 8:50
  Speaker 1: companies should be happy today to some degree at least
• 8:54
  Speaker 1: in that they get to put their n O l
• 8:56
  Speaker 1: s to use with this merger. Man you really get
• 8:58
  Speaker 1: my heart pumping, you know, with the boring business deal
• 9:00
  Speaker 1: and all about taxes. I'm just you know, over here hyperventilating.
• 9:04
  Speaker 1: I will say, there was a story, uh in the
• 9:06
  Speaker 1: New York Post that I thought was really compelling about
• 9:09
  Speaker 1: different companies. But but you know, it has to do
• 9:11
  Speaker 1: with merger. So we're gonna throw it at you Uh,
• 9:14
  Speaker 1: the story is saying that Goldman Sachs is trying to
• 9:16
  Speaker 1: persuade Apple to come in and make a rival bid
• 9:19
  Speaker 1: for Time. Now we're talking now, we're not talking boring
• 9:23
  Speaker 1: business deals exactly. So you know, as we recall, A
• 9:27
  Speaker 1: T and T has a bid uh billion dollar agreement
• 9:31
  Speaker 1: already to acquire Time Warner. Okay, first of all, do
• 9:34
  Speaker 1: you believe this story? And second of all, uh, why
• 9:37
  Speaker 1: would they? What's why? So? I love this story because
• 9:41
  Speaker 1: I mean this story is like writing dog bites man. Yes,
• 9:46
  Speaker 1: Goldman Sax is pitching Apple. Goldman Sax missed out on
• 9:48
  Speaker 1: the deal. This is a little inside baseball he supposed
• 9:51
  Speaker 1: for people that don't follow this very closely, meaning the
• 9:54
  Speaker 1: world of deals. But Goldman Sachs was not an advisor
• 9:57
  Speaker 1: on the A T and T Time Warner deal, the
• 9:59
  Speaker 1: biggest deal of the year. So that is bad news
• 10:01
  Speaker 1: for Goldman Sachs. So they're trying to figure out is
• 10:04
  Speaker 1: there any possible way we can interrupt this deal because
• 10:07
  Speaker 1: if they convince Apple to make a bid for Time Warner,
• 10:09
  Speaker 1: that means they get paid. That's how Goldman does business.
• 10:12
  Speaker 1: So yes, I'm sure they're pitching Apple to buy Time Warner.
• 10:16
  Speaker 1: They're probably also pitching Apple to buy Disney. They're probably
• 10:19
  Speaker 1: also pitching Apple to buy Netflix. They want Apple to
• 10:21
  Speaker 1: buy something because they are very close to Apple. So
• 10:24
  Speaker 1: I don't know exactly what the news value of this
• 10:26
  Speaker 1: story is. We do not know that Apple is actually
• 10:29
  Speaker 1: making a bid for Time Warner. They have long shied
• 10:31
  Speaker 1: away from buying content. I can tell you that the
• 10:34
  Speaker 1: advisors and people at Time Warner do not expect Apple
• 10:38
  Speaker 1: to bid for Time Warner. Uh So, as far as
• 10:40
  Speaker 1: we can tell, uh, you know, don't get your hopes
• 10:43
  Speaker 1: up on this one. I absolutely love the quote in
• 10:45
  Speaker 1: this story. They are freaking out trying to convince Apple
• 10:49
  Speaker 1: to come in. Well, Alex, once you, once you frame
• 10:51
  Speaker 1: it the way you just did, I can understand why,
• 10:53
  Speaker 1: because they are freaking out about their bonuses and justifying
• 10:56
  Speaker 1: why they did not get this. And look, this has
• 10:57
  Speaker 1: been a little bit of a rocky run for Goldman,
• 10:59
  Speaker 1: say Actus. They weren't on the century Link Level three
• 11:02
  Speaker 1: deal either, which is another big deal in sort of
• 11:04
  Speaker 1: that broader world. They were, however, on Qualcom XP which
• 11:07
  Speaker 1: was announced last week, which was a forty seven billion
• 11:10
  Speaker 1: dollar deal. So in in in my world of tech,
• 11:13
  Speaker 1: media telecom call it one for three for Goldman, which
• 11:16
  Speaker 1: to their standards is definitely not up to their standards. Wow,
• 11:21
  Speaker 1: that was a lot of information right there. I was
• 11:23
  Speaker 1: just getting on the century Link a level three. You
• 11:27
  Speaker 1: wanted to go to the boring business story and taxes,
• 11:31
  Speaker 1: you know, I just wanted I looked at how much
• 11:33
  Speaker 1: debt both companies have, and uh, you know, I'm looking
• 11:37
  Speaker 1: at this deal and as Alex says, you know, combining
• 11:40
  Speaker 1: two businesses that have a lot of sixteen billion in
• 11:45
  Speaker 1: tax loss carry forwards. Correct, correct, Yeah, and you're talking
• 11:49
  Speaker 1: about century Link is about an eighteen billion dollar a
• 11:53
  Speaker 1: year company Level three excluding debt, right yeah, yeah, and
• 11:59
  Speaker 1: the level three is about an eight billion dollar company.
• 12:02
  Speaker 1: Just wanted to get the perspective here. That's a lot
• 12:04
  Speaker 1: of debt, but we'll see what happens. Exactly a ton
• 12:06
  Speaker 1: of debt. And look, it's not that uncommon for a
• 12:09
  Speaker 1: lot of these sort of legacy telecom companies to have
• 12:11
  Speaker 1: a lot of debt. As I mentioned, they laid a
• 12:13
  Speaker 1: lot of fiber down earlier on and that costs a
• 12:15
  Speaker 1: lot of money. Alex Sherman, it is always a pleasure
• 12:19
  Speaker 1: when you join us. Thank you so much. Alex Sherman,
• 12:21
  Speaker 1: our crack Ace fabulous deals mergers reporter, thank you for
• 12:26
  Speaker 1: joining us. Should Janet Yellen keep her job after a
• 12:39
  Speaker 1: new president is elected? Perhaps some people say yes, but
• 12:43
  Speaker 1: our guest Brendan Brown, who's the chief economist and head
• 12:46
  Speaker 1: of economic research at Mitsubishi ufj A Securities, doesn't think
• 12:51
  Speaker 1: that she will retain her job. He is here to
• 12:54
  Speaker 1: explain why. Thank you for being with us. Well, it
• 12:58
  Speaker 1: lot's going to tend on how the bubble in asset
• 13:02
  Speaker 1: markets go. Whoever's president in January next year will be
• 13:07
  Speaker 1: inheriting bubble across the whole range of asset markets for
• 13:11
  Speaker 1: the first time since Herbert Hoover in coming into part
• 13:18
  Speaker 1: inheriting the big asset price inflation from the previous administration.
• 13:23
  Speaker 1: Now likelihood is for asset price inflation UM goes into
• 13:28
  Speaker 1: its final stage of deflation at some point who can
• 13:31
  Speaker 1: tell in the next year or two, and I think
• 13:33
  Speaker 1: that's when the key political choices have to be made.
• 13:36
  Speaker 1: Does the next administration then just do the same as
• 13:40
  Speaker 1: the last time, reinflating negative interest rates trying to create
• 13:44
  Speaker 1: another big asset price inflation, or do they take fair
• 13:48
  Speaker 1: copybook from what happened with Paul Volca being brought into
• 13:51
  Speaker 1: a fight by by Carter. Okay, just going back a
• 13:55
  Speaker 1: little bit. I mean you said that there's been a
• 13:57
  Speaker 1: bubble in assets, and a lot of people would have
• 14:00
  Speaker 1: with you when you say that, what are you referring
• 14:03
  Speaker 1: to and what are you looking at? And how much
• 14:05
  Speaker 1: does it have to deflate what I'm talking about when
• 14:08
  Speaker 1: when I speak about asset price inflation is an not
• 14:12
  Speaker 1: as a pre inflation bubbles bubbles, okay, as an empowerment
• 14:16
  Speaker 1: of irrational forces by an extreme form of monetary experimentation,
• 14:21
  Speaker 1: such as we've had in the last few years. That
• 14:23
  Speaker 1: empowerment of irrational forces, whether it comes under a so
• 14:26
  Speaker 1: called hunt for yield in confamine a lot of speculative storytelling,
• 14:32
  Speaker 1: huge carry trades in a whole range of assets, whether
• 14:36
  Speaker 1: from into credit or into currencies or into liquid assets.
• 14:40
  Speaker 1: I think we can see that across a whole span
• 14:42
  Speaker 1: of asset markets at this point. Brendan brand I, I
• 14:47
  Speaker 1: just want to give people a little bit of your background,
• 14:49
  Speaker 1: because it is extensive. You've written about currency and credit
• 14:55
  Speaker 1: as well as bubbles. I believe the euro crash, the
• 15:00
  Speaker 1: locations of monetary failure in Europe that's also your author
• 15:04
  Speaker 1: of and you've got monetary chaos in Europe fourteen to
• 15:09
  Speaker 1: nineteen thirty one. Do you think that we're repeating patterns?
• 15:14
  Speaker 1: Is this rhyming with anything that you've studied in the past,
• 15:18
  Speaker 1: I would come I would combine two statements here in
• 15:21
  Speaker 1: financial history, there's nothing new under the sun. But also
• 15:24
  Speaker 1: a sample size of history is very small, so yes,
• 15:28
  Speaker 1: I can point to similar situations in the past, but
• 15:32
  Speaker 1: for sample size is small, so I would never make
• 15:35
  Speaker 1: a prediction of the past repeating itself. But we can't
• 15:39
  Speaker 1: learn from the past. And there are lots of episodes
• 15:42
  Speaker 1: of a surprise inflation. And what I would say with
• 15:45
  Speaker 1: all of these is that the deflation goes through a
• 15:50
  Speaker 1: mid late phase and then a final phase. In the
• 15:53
  Speaker 1: mid late phase, what you get is froth continues to
• 15:57
  Speaker 1: build up in some markets whilst it was same time,
• 16:00
  Speaker 1: it's drained away from others, and the central bank tries
• 16:04
  Speaker 1: to keep things going by making a new injection. And
• 16:07
  Speaker 1: I think that's the stage we're at. So we've had
• 16:09
  Speaker 1: the implosion of the oil energy asset bubble, We've had
• 16:13
  Speaker 1: an implosion of some of the emerging market currencies, the
• 16:16
  Speaker 1: fed at the beginning of this year, took out the
• 16:18
  Speaker 1: yell in put, took out a selling yell, took out
• 16:21
  Speaker 1: a second yell and put at the time of the
• 16:23
  Speaker 1: eu Brexit. So it's it's had for luck of Napoleon's
• 16:27
  Speaker 1: Napoleon looked for in his generals. It's managed to keep
• 16:30
  Speaker 1: the asset price inflation going in a key election year
• 16:33
  Speaker 1: and hope, hopefully from that point I view, would get
• 16:36
  Speaker 1: Hillary Clinton re elected. But that luck, from what we
• 16:40
  Speaker 1: can see in history, is not going to continue forever. Well,
• 16:42
  Speaker 1: so what assets specifically do you think is the most
• 16:45
  Speaker 1: inflated and the most ripe for a precipitous fall at
• 16:49
  Speaker 1: this point. Well, clearly, we've had a lot of the
• 16:52
  Speaker 1: carry trade into long government bonds, that that is where
• 16:58
  Speaker 1: we've seen a lot of this search or hunt for yield.
• 17:02
  Speaker 1: We've had it into the investment grade corporate bond market,
• 17:06
  Speaker 1: including a lot of emerging market paper um. And we
• 17:10
  Speaker 1: we've had it into some areas of real estate, whether
• 17:13
  Speaker 1: it's commercial real estate and in some hot hot spots
• 17:15
  Speaker 1: around the world. But what triggers the decline, the precipitous decline,
• 17:20
  Speaker 1: not this three loss and global buds into so what
• 17:24
  Speaker 1: triggers are precipitous decline. It could be a credit event um.
• 17:30
  Speaker 1: It could be some surprise slow down in economic activity um.
• 17:38
  Speaker 1: And it could be the unwinding of the government bond
• 17:43
  Speaker 1: bubble in itself with more more speculation that was going
• 17:47
  Speaker 1: to be a very significant rise in rates UM. And
• 17:50
  Speaker 1: then you can look at the exogenous factors and the
• 17:53
  Speaker 1: chance factors. It's it's it's it's a whole. It's a whole.
• 17:55
  Speaker 1: It's a whole range of possibilities. You know. I feel
• 17:57
  Speaker 1: if I was just to take one example, and it's
• 17:59
  Speaker 1: a it's a long way back in history, um, but
• 18:03
  Speaker 1: it's a very similar monetary experiment to today with the
• 18:06
  Speaker 1: thirty four to thirty six period under Roosevelt, with a
• 18:09
  Speaker 1: big monetary expansion, similar monetary based interest rate, stock at zero,
• 18:12
  Speaker 1: long term interest rate manipulation, very strong asset markets, and
• 18:16
  Speaker 1: then suddenly from summer thirty seven to autumn you get
• 18:20
  Speaker 1: a precipitous four in the market and the onset of
• 18:24
  Speaker 1: a recession which is even more severe than so very
• 18:27
  Speaker 1: very is a precedent for that. There's also a precedent
• 18:30
  Speaker 1: for what comes after that, which is why I asked
• 18:34
  Speaker 1: you at the very beginning, do you see or hear
• 18:37
  Speaker 1: rather rhymes to history as to global conflicts and what
• 18:42
  Speaker 1: people can do to protect themselves. I think by the
• 18:44
  Speaker 1: biggest question I have about all of this is the
• 18:47
  Speaker 1: politics central bankers. Essentially, I put there by the politicians
• 18:50
  Speaker 1: to run a particular policy which is to their liking.
• 18:53
  Speaker 1: We now have the Obama fed essentially, with everyone appointed
• 18:56
  Speaker 1: by Obama running a particular monetary philosophy. The question is
• 19:00
  Speaker 1: and when this experiment is seen to fail. And I
• 19:04
  Speaker 1: know there's a lot of central bankers around to say
• 19:05
  Speaker 1: that policy has been successful, but really I think it's
• 19:07
  Speaker 1: a joke to say what policy has been successful? And
• 19:09
  Speaker 1: we haven't even seen the end of one business cycle
• 19:11
  Speaker 1: to know how it all ends up, and whether the
• 19:14
  Speaker 1: lower income people suffer eventually a huge erosion and our pensions.
• 19:17
  Speaker 1: You know, all these people saying that the lower income
• 19:20
  Speaker 1: people have gained because we're employed for leaving out as
• 19:23
  Speaker 1: altogether what their pensions are going to be. But there
• 19:26
  Speaker 1: will be a big political choice when this experiment fails
• 19:32
  Speaker 1: as to what comes next. The best outcome would be
• 19:35
  Speaker 1: if a's a car to there who brings in a
• 19:39
  Speaker 1: new head of a fed um who would follow a
• 19:44
  Speaker 1: return to a sound money policy. But I don't know whether,
• 19:48
  Speaker 1: but the alternative would be somebody coming in who just
• 19:51
  Speaker 1: wants and appointing somebody who just intensified the present. I
• 19:54
  Speaker 1: want to thank you very much for putting us into
• 19:56
  Speaker 1: perspective for us. Brentan Brown as executive Director, chief of
• 19:59
  Speaker 1: carna Is m u f G Securities. This is Bloomberg,
• 20:18
  Speaker 1: all right, let's solve the issue of understanding passive versus
• 20:22
  Speaker 1: active investment strategies. Mark Levin joins us. He's the chairman
• 20:25
  Speaker 1: of the Illinois State Board of Investment, and he joins
• 20:29
  Speaker 1: us from the windy city of Chicago. Mark, thank you
• 20:31
  Speaker 1: very much for being with us. Thank you for having me.
• 20:34
  Speaker 1: Just tell us a little bit about the Illinois State
• 20:36
  Speaker 1: Board of Investment, how big it is, your role in it,
• 20:39
  Speaker 1: and how many people are recipients of your work, and
• 20:42
  Speaker 1: just give us some context. Sure, of course, um, we are.
• 20:48
  Speaker 1: We're one of the three. Uh. We manage money for
• 20:51
  Speaker 1: one of the three sort of the big three. Um,
• 20:54
  Speaker 1: Illinois state pension funds. So there is a pension fund
• 20:58
  Speaker 1: for teachers Illinois teachers. There's a pension fund for state
• 21:02
  Speaker 1: university workers. We don't manage that money. UM. That's and
• 21:06
  Speaker 1: those those are thirty five and roughly sixteen seventeen billion
• 21:09
  Speaker 1: dollars in assets. Those two funds our fund. We manage
• 21:13
  Speaker 1: assets for the state employees, the legislators, and the judges.
• 21:18
  Speaker 1: And um UH and our assets in our defined benefit
• 21:23
  Speaker 1: pension plan, our sixteen billion dollars, there's a hundred and
• 21:27
  Speaker 1: twenty thousand UM both retired and current workers who are
• 21:33
  Speaker 1: beneficiaries of our pension. We also UM it's actually got
• 21:38
  Speaker 1: got some press more recently. UM we also manage a
• 21:41
  Speaker 1: four billion dollar deferred comp plan, which is really you know,
• 21:47
  Speaker 1: quite similar to a four O one KUM which you
• 21:49
  Speaker 1: know your your listeners would be more familiar with. UM.
• 21:53
  Speaker 1: So there's about four four billion dollars of assets in
• 21:56
  Speaker 1: that and we've got about fifty I believe the numbers
• 22:00
  Speaker 1: fifty two of our dwod UH of the unred beneficiaries
• 22:06
  Speaker 1: of our pageanceys, fifty two of them participate in our
• 22:10
  Speaker 1: DC plan. Okay, well, let's let's get right into this.
• 22:13
  Speaker 1: I am so glad you hear, Mark Levine. Let me
• 22:15
  Speaker 1: tell you, I think that it is so interesting what
• 22:17
  Speaker 1: you did. You voted on September five to convert the
• 22:20
  Speaker 1: four O one K type of plan to an all
• 22:22
  Speaker 1: index fund UH lineups. So in other words, that's the
• 22:26
  Speaker 1: four billion dollars for one case ile plan. This is
• 22:28
  Speaker 1: a big shift, especially at a time when a lot
• 22:31
  Speaker 1: of people say, you know, yeah, maybe active management has underperformed,
• 22:34
  Speaker 1: but going forward they could potentially outperform, given if there
• 22:38
  Speaker 1: is a rising rate situation, or given how crowded some
• 22:40
  Speaker 1: of the bets have gotten. So so justify it. Why
• 22:43
  Speaker 1: do you think passive is the way to go going forward? Sure? Sure, um,
• 22:49
  Speaker 1: what you know, we went we we we were not.
• 22:53
  Speaker 1: We were far from the most complicated, sort of worst
• 22:56
  Speaker 1: run um DC plan going in. Okay, we had a
• 23:01
  Speaker 1: we had about I believe it was seventeen seventeen or
• 23:04
  Speaker 1: eighteen choices for the participants and um, but let me
• 23:08
  Speaker 1: tell you what. That's a lot of complexity right there.
• 23:10
  Speaker 1: And our view, Look, we have one goal at the
• 23:13
  Speaker 1: only State Board investment and that's investment excellence. Okay. Our
• 23:17
  Speaker 1: view is that complexity is an obstacle to excellence, and
• 23:22
  Speaker 1: so everything we do, whether it's in that the DC
• 23:26
  Speaker 1: plan that you just asked about or our pension plan,
• 23:28
  Speaker 1: we're always striving to simplify. We're always striving to simplify.
• 23:33
  Speaker 1: Now it's particularly true on the DC side where UM,
• 23:38
  Speaker 1: where participants get to pick and choose what they invest in, right,
• 23:42
  Speaker 1: and so there's a lot of risk. There's you have
• 23:44
  Speaker 1: so many choices that they're gonna particularly like chase returns.
• 23:48
  Speaker 1: You know, whoever performed best last year. There's always tendency
• 23:52
  Speaker 1: to revert to the mean. Of course with active management.
• 23:54
  Speaker 1: So you know, we kind of decided, let's let's really
• 23:58
  Speaker 1: take all of the complexity or as much as we
• 24:02
  Speaker 1: possibly can, and so we took out active management. UM.
• 24:06
  Speaker 1: Now it's also true that the active managers that we
• 24:08
  Speaker 1: had there weren't adding value. I mean they were you know,
• 24:11
  Speaker 1: charging fees and underperforming benchmarks over you know, sort of
• 24:14
  Speaker 1: lengthy time periods. Can you tell us who they were?
• 24:17
  Speaker 1: Which ones? Uh? I mean I can. Yeah, we had
• 24:22
  Speaker 1: the zero price was was the largest they actually managed
• 24:24
  Speaker 1: a a life cycle um option for for our participants.
• 24:30
  Speaker 1: Fidelity manage a Bella's Index fund Um and so was
• 24:35
  Speaker 1: names like that, William Blair, um invest Goo uh and
• 24:41
  Speaker 1: and a few others. But so in other words, this
• 24:42
  Speaker 1: wasn't this wasn't like the hedge fund complex, and the
• 24:44
  Speaker 1: fees weren't that crazily high? This is so is it?
• 24:47
  Speaker 1: It's it more about simplifying the portfolio and less about
• 24:51
  Speaker 1: the fees or is it sort of equal? Yeah? And
• 24:54
  Speaker 1: you might be aware that about seven eight months ago
• 24:58
  Speaker 1: we took a hatchet to our um to a hedge
• 25:00
  Speaker 1: fund portfolio on the pension side. Now you're you're exactly right.
• 25:06
  Speaker 1: I mean, you know that the two percent of assets
• 25:09
  Speaker 1: of all returns uh compensation model of the hedge funds
• 25:14
  Speaker 1: UM fortunately hasn't come anywhere near the DC side, and
• 25:17
  Speaker 1: I believe that's really pretty much across the industry. Um.
• 25:21
  Speaker 1: So these were more modest these but the problem was,
• 25:25
  Speaker 1: you know, look the fees you know, in a zero
• 25:27
  Speaker 1: interest rate environment, there are you know, we can't expect
• 25:32
  Speaker 1: you know, massive returns out of equities, right so um right,
• 25:37
  Speaker 1: So basis points of fees is quite material, But that
• 25:42
  Speaker 1: wasn't the driving force. The driving force was to make
• 25:46
  Speaker 1: the lives of our participants easier by getting fewer choices
• 25:50
  Speaker 1: is actually better than more choices. Mark. Having said that,
• 25:55
  Speaker 1: I'm wondering if you could give us a glimpse of
• 25:57
  Speaker 1: what it was like to go through the process of
• 26:01
  Speaker 1: simplifying your investment strategy as you've done. Okay, Um, so
• 26:06
  Speaker 1: initially there, yeah, actually, if you don't mind sort of
• 26:11
  Speaker 1: shift over just for a sect to the to the
• 26:14
  Speaker 1: to the pension side. Initially, Look, pension funds are political animals, right.
• 26:20
  Speaker 1: The trustees that that governed pension funds tend to be
• 26:26
  Speaker 1: you know, elected by unions or state office wide holders, um,
• 26:30
  Speaker 1: governor appointments, which is actually how how you know, how
• 26:33
  Speaker 1: I got on the board. So there is a political
• 26:36
  Speaker 1: element to it. And when we and we our board
• 26:38
  Speaker 1: had a lot of turnover last year. So when we
• 26:42
  Speaker 1: and I was elected chairman in September, and the first
• 26:46
  Speaker 1: thing that I did once I was elected chairman was
• 26:50
  Speaker 1: start to try to simplify the portfolio by you know,
• 26:55
  Speaker 1: by removing or you know by sort of you know,
• 26:59
  Speaker 1: ask staff to to to look at removing our active
• 27:04
  Speaker 1: managers that weren't adding value. Okay, So now the guys
• 27:09
  Speaker 1: who let's say we're on the board before I got there,
• 27:12
  Speaker 1: they you know, kind of looked askance at what we
• 27:14
  Speaker 1: were doing. It's like, you know, are you just did
• 27:16
  Speaker 1: did they give you ten seconds? Because that's all I'm
• 27:18
  Speaker 1: going to give you sorry, you got ten seconds to
• 27:21
  Speaker 1: rapid Okay, okay, okay, sorry. So it's sort of this
• 27:25
  Speaker 1: view of replacing our guys with your guys. And once
• 27:28
  Speaker 1: they saw what we were really bringing, passive managers and
• 27:31
  Speaker 1: so we weren't bringing. There was no our guys. There
• 27:34
  Speaker 1: was just good basic kind of management where we get
• 27:37
  Speaker 1: market returns. There aren't investment managers these. It's really better
• 27:40
  Speaker 1: for anyone. The hostility level really went down. Mark Levine,
• 27:43
  Speaker 1: Thank you very much, Chairman, Illinois State Board of Investment.
• 27:47
  Speaker 1: This is Bloomberg. Thanks for listening to the Bloomberg P
• 27:59
  Speaker 1: and L pot Cast. You can subscribe and listen to
• 28:02
  Speaker 1: interviews at iTunes, SoundCloud, or whatever podcast platform you prefer.
• 28:07
  Speaker 1: I'm Pim Fox. I'm out there on Twitter at Pim Fox.
• 28:11
  Speaker 1: I'm out there on Twitter at Lisa Abramo. It's one
• 28:14
  Speaker 1: before the podcast. You can always catch us worldwide on
• 28:17
  Speaker 1: Bloomberg Radio.