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Fiduciary's Sanchez on Investing in a Tortoise Economy (Audio) · Bloomberg Intelligence

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  Speaker 1: I'm Charlie Pullett. Stocks are holding close to a record
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  Speaker 1: I'm Charlie Pellett. As a bloom Bird Business flash. This
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  Speaker 1: is taking stock with Kathleen Hayes and Pim Fox on
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  Speaker 1: Bloomberg Radio. A tortoise economy. That's the description from our
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  Speaker 1: next guest, Ron Sanchez. He is the chief investment officer
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  Speaker 1: for a fiduciary trust company, international Wealth Management unit of
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  Speaker 1: Franklin Templeton, helping to manage more than seventy four billion
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  Speaker 1: dollars of customer assets. And Ron joins me here in
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  Speaker 1: the studio. Ron, thanks for being with me. Thank you.
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  Speaker 1: Why do you call it a tortoise economy? This has
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  Speaker 1: been an unusual recovery since the credit crisis. We've seen
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  Speaker 1: overall the U S economic data has generated about a
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  Speaker 1: two GDP since the Great Recession, and so my historical standards, UM,
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  Speaker 1: it's been slow, UM, and it's been somewhat uneven, and
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  Speaker 1: we think it's actually quite sustainable and actually will be
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  Speaker 1: one of the longest UM economic recoveries on record. Quite frankly,
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  Speaker 1: if it is an anomaly, this tortoise economy, does that
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  Speaker 1: mean that we're going to have investment returns that are
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  Speaker 1: also tortoise like? I think that's correct if we look
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  Speaker 1: back over the last UM a couple of years. Not note,
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  Speaker 1: but the end returns have been very very strong. UH
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  Speaker 1: and and financial assets has prospered in this recovery, even
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  Speaker 1: though it's been a tortoise recovery UM, and I would
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  Speaker 1: say that's all kinds of financial assets, both bonds, stocks,
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  Speaker 1: real estate, art. But I think as we move forward here,
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  Speaker 1: with valuations as full as they are and interest rates
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  Speaker 1: as low as they are, and monetary policy that has
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  Speaker 1: um coming to an end um in terms of its
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  Speaker 1: extreme measures, I think as we move forward, returns are
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  Speaker 1: gonna be quite muted UM and most likely accompanied by
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  Speaker 1: elevated volatility. And that's certainly been been the case of
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  Speaker 1: the last twelve months. If you look at the return
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  Speaker 1: and the volatility, both have been low return, high volatility.
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  Speaker 1: Is it possible to be selective and intelligent about money
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  Speaker 1: management so that you don't end up with a tortoise
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  Speaker 1: like portfolio? It's true you have to be quite discipline here.
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  Speaker 1: I would describe the landscape from a financial standpoint as challenging. UM.
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  Speaker 1: Certainly almost by definition low returns and high volatilities of
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  Speaker 1: challenging landscape. Having said that, though, I think there are
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  Speaker 1: opportunities in a in a tortoise economy, and we endeavor
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  Speaker 1: to look for those companies UM that can generate a
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  Speaker 1: solid return both when you include a dividend of of
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  Speaker 1: two and a half to three percent and a reasonable
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  Speaker 1: price valuation. We think there are opportunities in those sectors
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  Speaker 1: to generate a reasonable return in this environment. Tell us
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  Speaker 1: some of those sectors. I think some of those sectors
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  Speaker 1: include healthcare, consumer discretionary, and technology. Other sectors that have
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  Speaker 1: performed particularly well in the last six months that are
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  Speaker 1: really predicated on low interest rates. Extreme interest rates, actually
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  Speaker 1: interest rates that are below zero UM. Those types of
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  Speaker 1: securities or sectors have done exceptionally well. UM. Those are utilities, UM,
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  Speaker 1: consumer staple companies that don't grow overly fast. Is that
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  Speaker 1: a relative trade meaning that it's got an investment group
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  Speaker 1: that says, I can't live on those negative interest rates.
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  Speaker 1: I've got to go find something else, that's right. Investors
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  Speaker 1: have been concerned about two things about the high degree
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  Speaker 1: of uncertainty, which has led to a safe haven trade
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  Speaker 1: or perceived safety around bonds and utilities UM and also
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  Speaker 1: a carry trade, meaning that given how low interest rates are,
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  Speaker 1: and I think if he went back two weeks ago,
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  Speaker 1: sixteen trillion dollars of sovereign debt traded below the zero bound,
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  Speaker 1: and so there is an insatiable appetite for yield, and
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  Speaker 1: it has led investors to pursue yield or those sectors
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  Speaker 1: that generate or distribute above average yield. Having said that, though,
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  Speaker 1: I think we're moving to a situation where I'm not
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  Speaker 1: so sure there's safety in safe haven assets. Well, I'm
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  Speaker 1: glad you brought this up, because there's a certain irony
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  Speaker 1: in the fact that you have, as you described, historically
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  Speaker 1: low interest rates and lots of liquidity, both courtesy of
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  Speaker 1: central banks around the world. But what you've described is
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  Speaker 1: that people have gotten more risk averse rather than what
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  Speaker 1: the central banks wanted in the first place, which is
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  Speaker 1: to promote the investment into riskier assets. That's right, um
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  Speaker 1: and so, and also into credit creation and job creation.
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  Speaker 1: And we've seen a little bit of that, but a
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  Speaker 1: lot of the liquidity has found itself into into a
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  Speaker 1: into company's share value, as opposed to infrastructure and capital
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  Speaker 1: expenditures and and other financing that generated additional economic activity
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  Speaker 1: instead of financial engineering. All right, So those domestic utilities,
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  Speaker 1: as well as as you describe consumer staples, tell me
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  Speaker 1: a little bit more about healthcare, because as there's healthcare,
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  Speaker 1: there's insurance, there is biotechnology there's big pharma. Do you
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  Speaker 1: want to mix of all those or how do you
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  Speaker 1: go about determining you do want to mix of those?
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  Speaker 1: We think the overall sector as well as certain industries
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  Speaker 1: of subsectors that you've just described, are quite attractive as
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  Speaker 1: we look out over the next couple of years. Certainly
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  Speaker 1: from a demographic standpoint, it's very compelling. Also, technology will
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  Speaker 1: play a huge UM integral inpart input, I should say,
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  Speaker 1: into some of these healthcare companies that will be able
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  Speaker 1: to lower their cost and deliver better services based on
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  Speaker 1: innovation and technology, and we think there'll be cost savings
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  Speaker 1: in those companies. UM will profit both from increasing revenue
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  Speaker 1: and widening profit margin and cheaper technology and cheaper technolog
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  Speaker 1: cheaper computing power, cheaper storage. That is agreeable as far
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  Speaker 1: as your understanding of the mindset of investors right now,
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  Speaker 1: are they doing smart things or are they just getting
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  Speaker 1: ready to dump large amounts of money into the stock
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  Speaker 1: market when it hits record Actually, what's interesting when you
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  Speaker 1: look at the return profile, not only recently, but all
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  Speaker 1: the way back to to to the early days of
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  Speaker 1: the credit crisis. UM investors have have been particularly cautious here,
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  Speaker 1: and so have c e O S and UM. You
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  Speaker 1: have not seen a lot of flows into the into
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  Speaker 1: the equity market UM. If anything, UM, you continue to
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  Speaker 1: see flows into safe haven assets such as such as bonds,
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  Speaker 1: and so a lot of investors actually are missing out
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  Speaker 1: on it towards economy because it just hasn't been evident
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  Speaker 1: that we were ever in a robust economic backdrop. You
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  Speaker 1: look abroad and it continues to be a rolling debt
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  Speaker 1: crisis from Greece on. We had our fiscal cliff here, UM,
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  Speaker 1: the economy had a good quarter, bad quarter, and so
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  Speaker 1: there really wasn't an environment where investors truly got comfortable
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  Speaker 1: UM that the return profile UM and the reward UM
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  Speaker 1: was worth it. But when you look back, it certainly
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  Speaker 1: has UM, and so unfortunately, I think there are some
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  Speaker 1: UM that have missed out on pretty good returns for
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  Speaker 1: the last couple of years. Based on your experience, does
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  Speaker 1: this have as much to do with the age profile
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  Speaker 1: of the group that has the money to invest rather
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  Speaker 1: than the actual investments themselves. That's a good question. Certainly,
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  Speaker 1: demographics would argue for a transition from risk assets equities
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  Speaker 1: into into bonds, both for the income as well as safety.
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  Speaker 1: As one gets older and one moves into retirement. So
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  Speaker 1: demographics certainly have played a role, but I think the
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  Speaker 1: high degree of uncertainty and the economic backdrop has led also,
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  Speaker 1: UM for investors to move into fixed income perhaps prematurely.
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  Speaker 1: Do you think it's going to end badly for people
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  Speaker 1: that have moved into fixed income with yields right now?
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  Speaker 1: The tenure at one point five eight, the thirty year
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  Speaker 1: at two point three. So I do think that we're
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  Speaker 1: most likely have bottomed in instrates. And I say that globally,
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  Speaker 1: not just here in the U S where you side
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  Speaker 1: of those two rates. UM. I think for those investors
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  Speaker 1: that have not each for you and have both a
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  Speaker 1: five year and accepted low nominal returns, I think they'll
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  Speaker 1: they'll be okay and they'll be able to ride through that.
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  Speaker 1: I think for those that have reached out and have
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  Speaker 1: invested in thirty years securities and in some instances actually
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  Speaker 1: fifty year maturities, I do think it ends mainly as
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  Speaker 1: far as commodities go, that can be both positive and negative.
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  Speaker 1: We've been looking at oil prices. You say, well, oil
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  Speaker 1: prices go up, the dollar goes down, oil prices go up,
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  Speaker 1: stocks go up. Uh, Those correlations work until they don't.
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  Speaker 1: Are there any specific market indicators that you watch to
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  Speaker 1: tell you a little bit more about the direction or
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  Speaker 1: the composition of the market. Well, I think one of
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  Speaker 1: the things that we're focused on is is commodities in
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  Speaker 1: relation to to fettle reserve um and whether they'll when
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  Speaker 1: they'll start to move on a path of normalization, and
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  Speaker 1: so commodities are part of that equation. Also, financial condition
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  Speaker 1: is more broadly speaking, the dollar, which as you mentioned
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  Speaker 1: is highly correlated to commaity prices as well as credit spreads,
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  Speaker 1: and so far all three of those are are well behaved, um,
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  Speaker 1: and so they should be supportive of economic activity and
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  Speaker 1: I think supportive of the Fed being patient here for
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  Speaker 1: for the better part of the year. You said better
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  Speaker 1: part of the year. Do you expect one interest rate
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  Speaker 1: increases by yurin mostly in December and just quickly if
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  Speaker 1: that happens, Will that change your strategy in any radical way? No,
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  Speaker 1: not at all, UM. I think we have a couple
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  Speaker 1: of more years of decent economic growth and a modest
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  Speaker 1: twenty five basis point boo by year end would not
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  Speaker 1: alter our view. Thank you very much, Ron Sanchez. He
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  Speaker 1: is the chief investment officer for for Fiduciary Trust Company International.
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  Speaker 1: There the wealth management unit of Franklin Templeton, helping to
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  Speaker 1: manage more than seventy four billion dollars of customer assets.
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  Speaker 1: You're listening to taking stock, I'm pim Fox will take
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  Speaker 1: you through to the close on Wall Street. That's all
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  Speaker 1: coming up right here on Bloomberg