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Luis Maizel Discusses Diversity in Finance · Masters in Business

0:02
Speaker 1: This is Masters in Business with Barry Ridholts on Boomberg Radio.
0:09
Speaker 1: This week on the podcast, I have a special guest.
0:12
Speaker 1: His name is Louise Mazel, and if you are at
0:15
Speaker 1: all interested in a couple of areas of asset management
0:20
Speaker 1: and allocation, you're gonna find this to be really quite intriguing.
0:24
Speaker 1: He set up a firm thirty years ago to make
0:28
Speaker 1: emerging market fixed income investments and LM Capital Group has
0:33
Speaker 1: been doing that for the past three decades. Uh. They
0:37
Speaker 1: basically do their own due diligence. They check out all
0:40
Speaker 1: of the various bonds that they buy on behalf of clients, uh,
0:45
Speaker 1: not relying on the traditional rating agencies, and um, they're
0:50
Speaker 1: essentially owned by their employees. It's a very interesting shop.
0:54
Speaker 1: And Louise does a wonderful job explaining why emerging market
1:00
Speaker 1: yet has really become an asset class and to itself,
1:04
Speaker 1: given how soft um actual yields are, and that half
1:09
Speaker 1: of the sovereign wealth debt these days, over nine trillion dollars,
1:14
Speaker 1: is actually holding a negative yield. Uh, he thinks e
1:19
Speaker 1: M debt is going to be a not only a
1:21
Speaker 1: distinct asset class, but it's going to attract a lot
1:24
Speaker 1: of capital over the next decade, and he's very bullsh
1:28
Speaker 1: So with no further ado, here's my conversation with LM
1:32
Speaker 1: Capital Groups Louise Mazel. My special guest this week is
1:40
Speaker 1: Louise Maizel. He is the co founder and senior managing
1:44
Speaker 1: director at LM Capital Group, an emerging market fixed income
1:48
Speaker 1: shop managing over four point two billion dollars in assets.
1:52
Speaker 1: The firm was founded in and is privately held. It
1:56
Speaker 1: is employee owned and provide It's a fixed income active
2:02
Speaker 1: management approach with a global macro overlay. Louise Mazel, Welcome
2:08
Speaker 1: to Bloomberg. Thank you very much. Berry, so you will
2:12
Speaker 1: launched this firm in nine nine. You're pretty much in
2:15
Speaker 1: the middle of a giant bullmarket. What made you decide
2:19
Speaker 1: to go into bonds instead of stocks? I started a
2:24
Speaker 1: second firm very actually, the first firm, Element Advisors, which
2:29
Speaker 1: was managing money for high net worth individuals. Four July
2:33
Speaker 1: eighteenth eighty four, the US eliminates the thirty percent withholding.
2:37
Speaker 1: Up to then, foreign nationals could only invest tax free
2:41
Speaker 1: in T bills or in bank CDs. All of a sudden,
2:45
Speaker 1: they opened up the market. A lot of US brokers
2:49
Speaker 1: fly out to Mexico City and try to grab some
2:52
Speaker 1: of that money. And my friends started to call me saying,
2:55
Speaker 1: you're in the States. We know you quite don't you
2:57
Speaker 1: help us serve through these new way new market? So
3:01
Speaker 1: we did. For five years we were managing high net
3:04
Speaker 1: worth individuals, but they were being managed like pensure plants
3:09
Speaker 1: because they were mostly taxed THEMPT And from there we
3:12
Speaker 1: jumped into the institutional market. So that was um But
3:18
Speaker 1: you bring a very different perspective to the management of assets.
3:23
Speaker 1: How did growing up outside of the United States shape
3:27
Speaker 1: your view of the world, be it developed or emerging markets?
3:31
Speaker 1: Think of it as planets. People in the US thing
3:35
Speaker 1: that they're sitting in the sun. The US is the
3:38
Speaker 1: center of the universe. For US foreigners. We see the
3:41
Speaker 1: US as the biggest planet, but it's part of a system.
3:45
Speaker 1: So it's very interesting to see the impact of the
3:47
Speaker 1: US on the other planets. But it's not the center
3:50
Speaker 1: of the universe. It's just the biggest planet in the universe.
3:53
Speaker 1: And now we have China becoming another very large planet.
3:57
Speaker 1: How is that going to impact the way the US
4:00
Speaker 1: is perceived? I think the US is still by far
4:04
Speaker 1: the most important country in the world. The Chinese, just
4:07
Speaker 1: because of the sheer size of population over four times
4:11
Speaker 1: bigger than the US, will be very big. But in
4:14
Speaker 1: the incompart capita they're still very small compared to the US,
4:19
Speaker 1: and the model of growth, which was export to the
4:23
Speaker 1: US makes them smaller. When you are gearing to become
4:27
Speaker 1: the big one, you're far away from it. Quite quite interesting.
4:32
Speaker 1: So academic studies have shown that passive management of stocks
4:35
Speaker 1: has a tendency to outperform active over long periods of time.
4:40
Speaker 1: But the opposite seems to be true in the fixed
4:42
Speaker 1: income department. Active uh fixed income strategies outperformed passive. Why
4:48
Speaker 1: is that, Well, you have a choice on what bonds
4:53
Speaker 1: you buy. The bond market basically is like a landmine.
4:56
Speaker 1: If you don't step on your mind, you're gonna do okay,
4:59
Speaker 1: and the move along the yield curve will allow you
5:03
Speaker 1: to react faster to what's happening in the economy. The
5:07
Speaker 1: passive in the index does not take into account the
5:12
Speaker 1: macro impact that's happening in the bond market. So how
5:16
Speaker 1: do you go about creating a macro overlay for fixed
5:21
Speaker 1: income investing? That has always been our approach. Verry we analyze.
5:26
Speaker 1: For us, money is a commodity. When it's scarce, it's expensive.
5:31
Speaker 1: When it's plentiful, it's cheap. So we analyze. We developed
5:36
Speaker 1: the matrix. You know, going from a qualitative process to
5:40
Speaker 1: a quantitative way of processing. It's not easy. If you
5:43
Speaker 1: put three economies in the room, they're going to come
5:46
Speaker 1: out with four different theories, probably all of them wrong.
5:49
Speaker 1: So what we try to do is doing our macro analysis,
5:53
Speaker 1: studying the growth of the company, of the country's growing,
5:58
Speaker 1: understanding the inflation economic indicators. We assigned a value to
6:03
Speaker 1: each of them. We created a matrix which gives us
6:06
Speaker 1: a point count and we call it the trendscore, which
6:10
Speaker 1: allows us then to go into the benchmark we're using,
6:15
Speaker 1: which the client is requesting us to use, and the
6:19
Speaker 1: trendscore will give us how long or short the benjamark
6:23
Speaker 1: do we want to be. So when you say trends,
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Speaker 1: I tend to think of equity trends, where a market
6:29
Speaker 1: or a stock is trending either higher for a long
6:31
Speaker 1: period of time or trending lower for a long period
6:34
Speaker 1: of time. Do you have the same meaning of the
6:37
Speaker 1: word trend in fixed income or does it have a
6:39
Speaker 1: slightly different. I think it's pretty similar. But what you're
6:43
Speaker 1: trying to understand is the current and future needs of money.
6:48
Speaker 1: If a country is growing very fast, you know there's
6:51
Speaker 1: going to be competition for money. If the deficity of
6:55
Speaker 1: the country is big, you know that the government is
6:57
Speaker 1: going to place bonds and it's gonna cipher now money
7:00
Speaker 1: from the economy. If unemployment is very high, then you
7:04
Speaker 1: know that there's not gonna be a lot of need.
7:07
Speaker 1: There's not gonna be a brick and mortar investment, so
7:10
Speaker 1: money will be plentiful. In rates are going to come down.
7:13
Speaker 1: So there is a trend on what's happened in the
7:16
Speaker 1: past twelve months that will impact what will happen in
7:19
Speaker 1: the next six or twelve. So when we look at
7:22
Speaker 1: the great bullmarket in bonds in the US from the
7:26
Speaker 1: days of Paul Vulker breaking the back of inflation in
7:30
Speaker 1: the late seventies early eighties, we've enjoyed a I don't know,
7:34
Speaker 1: let's call it thirty three thirty five year ballmarketing bonds.
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Speaker 1: Is that still in an effect? And second, how does
7:42
Speaker 1: that ballmarket and bonds in the US affect the rest
7:45
Speaker 1: of the UH world? We were in a secular trend
7:49
Speaker 1: or slower rates. There was an enormous addition of liquidity
7:52
Speaker 1: into the system, coming not only from these states, but
7:55
Speaker 1: from all central banks. The European Union was placing in
8:00
Speaker 1: enormous amount of money in the system, so was the
8:02
Speaker 1: Bank of Japan, so was China. A couple of years
8:05
Speaker 1: ago we saw a reversal in the trend. The announcement
8:09
Speaker 1: of the reverse of the easing, the quantitative easing, and
8:16
Speaker 1: the announcement by the fend that they were going to
8:18
Speaker 1: start raising rates created a mentality that we had hit
8:22
Speaker 1: bottom and we were starting to trend upwards. But now
8:26
Speaker 1: we've seen that stopped. I think that the issue of
8:31
Speaker 1: an upcoming recession, I don't believe it's coming. It's a
8:35
Speaker 1: little bit like the wolf. You know, everybody keeps crying
8:38
Speaker 1: the wolf is coming. We are not accustomed to a
8:41
Speaker 1: long period without a recession. But ever since globalization started
8:46
Speaker 1: in the world, the whole theory change. The formula of
8:51
Speaker 1: the past is no longer appliable. So would you say
8:54
Speaker 1: um tales of the death of the bundble market have
8:58
Speaker 1: been greatly exaggerated. I think that we're gonna stay with
9:03
Speaker 1: low interest rates, especially we have big deficits. If we
9:08
Speaker 1: have an easy faith, I think we can go on
9:12
Speaker 1: for several more years without a major increase in rates.
9:16
Speaker 1: Quite quite fascinating. Let's go back to you have this
9:20
Speaker 1: big set of tax changes. How much of a game
9:23
Speaker 1: changer was that for launching affixed income firm. Actually, the
9:28
Speaker 1: game changer for LM Capital was the growth of pension
9:34
Speaker 1: plans wanting minority money managers. You know, the change in
9:41
Speaker 1: Maxine Waters was at that time already you know, pushing
9:45
Speaker 1: for it. She's still in the in the in Congress
9:48
Speaker 1: and she's still doing the same the changing loss game
9:52
Speaker 1: for the high networth individuals or foreigners, not for pension plans.
9:55
Speaker 1: But there was this big push for hiring my minority
10:00
Speaker 1: money managers. Actually, they were carving out small pieces from
10:04
Speaker 1: the bigger locations, from the big rfpiece. The big funds
10:09
Speaker 1: always have been very biased towards using the pimp costs
10:13
Speaker 1: and one cost of the world. Sure black rocks, but
10:16
Speaker 1: there was an desire to use African American Asian Hispanic companies.
10:22
Speaker 1: So we saw an opportunity there being a Hispanic firm
10:26
Speaker 1: to pick up some of that money. So that's the
10:29
Speaker 1: way we started. Nowadays, it's emerging managers. It's no longer minority.
10:33
Speaker 1: There was court case that stopped the use of minorities
10:38
Speaker 1: as discriminatory, and by now we're a little bit too
10:41
Speaker 1: big to be considered emerging, so we have to compete
10:44
Speaker 1: on performance. So well, that's that's not the worst thing
10:47
Speaker 1: in the world. So when you say ur fps by
10:49
Speaker 1: big institutions, your clients and potential clients are these giant funds.
10:55
Speaker 1: They put out a request for proposal and you respond
10:58
Speaker 1: with a proposal, and that's the basis of either winning
11:01
Speaker 1: the business or not. Is that a fair way to
11:03
Speaker 1: describe it. That's correct. They will get probably thirty to
11:06
Speaker 1: four responses. They will pick up five or six finalists,
11:10
Speaker 1: and then you they visit you, and then they pick
11:13
Speaker 1: up three or four that present to the boards, and
11:15
Speaker 1: then the board decides who gets the money. So what
11:18
Speaker 1: are those beauty contests as they've been called. What are
11:21
Speaker 1: they like when when a firm comes in and starts
11:24
Speaker 1: kicking the tires and looking around your shop, what's that
11:28
Speaker 1: experience like? It's an interesting experience because you have the
11:31
Speaker 1: numbers to show for performance, but they want to understand
11:35
Speaker 1: the process. They want to understand the people. They want
11:38
Speaker 1: to make sure you have the back office to support it.
11:41
Speaker 1: Compliance has become so important. The most interesting part for
11:46
Speaker 1: me has been that almost all the teams look identical.
11:50
Speaker 1: Three men, one woman, everybody six one weighs two hundred
11:54
Speaker 1: and three pounds, whereas Brooks brothers suits and in our
12:00
Speaker 1: is where different. First, my accent doesn't well, it helps.
12:03
Speaker 1: I don't think it hinders anything, but I'm not the
12:06
Speaker 1: typical presenter that they normally have, and I tend to
12:10
Speaker 1: joke with the boards and try to be more casual.
12:15
Speaker 1: Probably when you are a smaller firm and your own
12:18
Speaker 1: the firm, you feel that you don't have to explain
12:23
Speaker 1: to anybody who you made it or you didn't make
12:25
Speaker 1: the cut, or did you win the business or not.
12:28
Speaker 1: So I like to enjoy this competition. I like to
12:32
Speaker 1: I enjoy to to be fighting against the big boys
12:36
Speaker 1: and hopefully sometimes winning. So is that an advantage to
12:40
Speaker 1: be relaxed and casual and informal and joke around with
12:43
Speaker 1: these people who are used to much more formal stiff
12:48
Speaker 1: The group that you described sounds like they're all manufactured
12:53
Speaker 1: in the same factory, and maybe that factory is Wharton
12:56
Speaker 1: or Harvard Business School. But the fact that they all
12:58
Speaker 1: look so similar and so similarly, does this give you
13:02
Speaker 1: a tactical advantage when you're presenting. I think that in
13:05
Speaker 1: many cases he does. In others, they expect to have
13:08
Speaker 1: that and they want that traditional present presenter. I'm also
13:13
Speaker 1: product of the same school, you know, part results. But
13:19
Speaker 1: so there, my partner in the business went to the
13:23
Speaker 1: to Annapolis. So you have the square American six one
13:28
Speaker 1: blah blah blah, and you have this crazy Mexican coming
13:31
Speaker 1: in and joking with the board. So I think the
13:34
Speaker 1: combination makes them laugh and it makes you. It makes
13:38
Speaker 1: you different in their eyes, and they remember you more memorable. Right.
13:44
Speaker 1: So I have a friend who's at PIMCO, and uh,
13:46
Speaker 1: he always he's now retired, but he used to complain
13:50
Speaker 1: that he doesn't have time to um, to do anything,
13:54
Speaker 1: or go to conferences or what have you, because they're
13:57
Speaker 1: so busy managing a trillion dollars in fixed income. And
14:01
Speaker 1: I used to bust his chops by saying, yeah, but
14:05
Speaker 1: it's not stocks, it's bond that's that stuff practically manages itself,
14:09
Speaker 1: which is a joke in the middle of a giant
14:12
Speaker 1: bonds bull market. But the little tiny bit of truth
14:16
Speaker 1: in that is how how much was it like shooting
14:20
Speaker 1: fish in a barrel during the fat part of that
14:23
Speaker 1: bull market you had rates coming down from what down
14:28
Speaker 1: to practically zero? How challenging was it operating during that
14:34
Speaker 1: giant long term trend. There are two problems managing fixed inco.
14:40
Speaker 1: One is making sure you don't step on the mind.
14:43
Speaker 1: As I said before, that you don't buy a world
14:46
Speaker 1: Come bond or an end run bond or a Pacific
14:49
Speaker 1: as an electric bond. On the other side, you have
14:55
Speaker 1: the matter of liquid it the incise. It's not easy
15:00
Speaker 1: to be a pimcoke when you have When you decide
15:03
Speaker 1: to move and you have to sell five million or
15:06
Speaker 1: a billion dollars worth of a bond, you have to
15:09
Speaker 1: find another piece, another buyer on the other side. It
15:13
Speaker 1: takes two to tango, and for them to find the
15:16
Speaker 1: counterparty is very hard. For a firmlike Hours that you
15:20
Speaker 1: move with ten or twenty million dollars, you can always
15:23
Speaker 1: find the other side in a transaction. And after the
15:27
Speaker 1: crisis in oh nine, they allocated much less capital to
15:32
Speaker 1: the desks, so they don't have inventory. So when you
15:36
Speaker 1: want to do a transaction, you have to go out
15:38
Speaker 1: and beat it in the market, and it's very hard
15:42
Speaker 1: to find a big chunk of of the same product.
15:46
Speaker 1: If you want to be have commonality in your portfolios,
15:49
Speaker 1: if you if you're a buyer, what about if you're
15:51
Speaker 1: a seller. Story Like, my assumption is if I have
15:54
Speaker 1: a ton of bonds to sell, I pick up the
15:56
Speaker 1: phone like called black rock, and they buy whatever whatever
15:59
Speaker 1: is out there. They will not. The thing is, they
16:02
Speaker 1: don't want to allocate money to bonds, they don't want
16:05
Speaker 1: to park money in bonds, so they will only do
16:09
Speaker 1: the transaction if they want them at that precise moment,
16:13
Speaker 1: and the broker dealers will only do them if they
16:15
Speaker 1: find the buyer immediately. If not, they'll just tell you
16:19
Speaker 1: there is no market for your bonds right now, and
16:22
Speaker 1: I will keep you in mind, and that might take
16:24
Speaker 1: three days or three weeks. So there's a little bit
16:28
Speaker 1: of an illusion of liquidity in bonds when it's actually
16:32
Speaker 1: harder to sell them than we tend to think. If
16:35
Speaker 1: I go to sell a stock, there's a bid and
16:38
Speaker 1: an ask. I can see the spread I know other
16:41
Speaker 1: than giant size. I can move pretty much any stock
16:44
Speaker 1: in my portfolio. But if I have a very specific
16:47
Speaker 1: bond from a specific whether it's a corporate or a
16:51
Speaker 1: sovereign or a state and local bonds. You're saying it's
16:55
Speaker 1: not quite as easy to to hit that bid as
16:58
Speaker 1: it is with a stock. You're absolutely clear, right, I mean,
17:01
Speaker 1: that's why there are no time in sales in bonds.
17:04
Speaker 1: You'll never see in stocks. You can say, I put
17:07
Speaker 1: in my order the eleven fourteen in the morning, give
17:10
Speaker 1: me all the transactions between eleven fourteen and eleven fifteen,
17:13
Speaker 1: and your order has to be there. No time stamping.
17:16
Speaker 1: No time stamping bonds. You know it might be three
17:19
Speaker 1: days or three minutes later when the transaction is done,
17:24
Speaker 1: and you want to have basically the same price if
17:28
Speaker 1: you're selling or buying for different clients, so you cannot
17:32
Speaker 1: buy little pieces and added up because it becomes very
17:36
Speaker 1: complicated to allocate in the right way the different transactions.
17:42
Speaker 1: Quite quite interesting. So let's talk a little bit about
17:46
Speaker 1: that lack of liquidly. I'm I'm intrigued by your description
17:51
Speaker 1: of the bond market. Um, is this something that's relatively new?
17:56
Speaker 1: Was there always this much lack of liquidly? How as
18:00
Speaker 1: the market changed over the past thirty years since you
18:03
Speaker 1: launched LM Capital. I think that up to two thousand
18:08
Speaker 1: and nine, the market was pretty stable and there was
18:11
Speaker 1: enough money in the different broker dealers to make a market.
18:16
Speaker 1: You know, they would buy the bond to keep it
18:18
Speaker 1: there and wait for somebody to come up, meaning meaning
18:21
Speaker 1: holding an inventory, and then when a buyer comes along,
18:24
Speaker 1: they would now so much anymore, it's gone gone, you know,
18:29
Speaker 1: probably went from Mary Lynch went from eight or ten
18:34
Speaker 1: billion dollars to maybe a couple of hundred million. Is
18:37
Speaker 1: that a risk management tool or they still suffering a
18:40
Speaker 1: little post traumatic stress disorder after the crisis. Is this
18:44
Speaker 1: is this smart of them or is this problematic by them?
18:47
Speaker 1: I think that they're being smarter and the way they
18:49
Speaker 1: allocate their capital. I think that the spreads in bonds
18:54
Speaker 1: are not that high for them to make sense to
18:57
Speaker 1: keep them in inventory and being much tighter with the
19:01
Speaker 1: way they handle their money. Very very interesting. What about
19:05
Speaker 1: the rise of e t f s, which are clearly
19:07
Speaker 1: not just stocks, they're giant bondy tfs. How is that
19:11
Speaker 1: affecting both the way you run LM capital and and
19:15
Speaker 1: the way liquidity for specific bonds behaves in the in
19:20
Speaker 1: the market. I think the tfs are not the right
19:23
Speaker 1: way to play the bond market. I think that they
19:26
Speaker 1: are very big, but I don't think they impact the
19:28
Speaker 1: market that much. The problem is when it becomes a
19:32
Speaker 1: herd mentality. If everybody is selling, you magnify the problem. Again.
19:38
Speaker 1: When there's a trend to get out of the bonds
19:41
Speaker 1: you need, you don't find the buyers. When there's a
19:44
Speaker 1: trend to buy the bonds, it's hard to find these sellers.
19:47
Speaker 1: So the e t fs magnify the problem instead of
19:51
Speaker 1: making it less problematic. So I have a couple of
19:55
Speaker 1: questions on that. That's really really intriguing. So first, when
20:00
Speaker 1: there's that herd mentality like we saw in O eight
20:03
Speaker 1: oh nine, isn't everything being sold regardless when when, when,
20:08
Speaker 1: when the herd stampedes, everything seems to get run over.
20:13
Speaker 1: Is that any different for bond stocks or ETF No,
20:16
Speaker 1: it works the same way, but you don't have the
20:18
Speaker 1: dramatic cratches they do. So in stokes, the bargain hunters
20:23
Speaker 1: are probably not going to jump in because the bond
20:26
Speaker 1: dropped two or three points. Two or three points is
20:29
Speaker 1: huge in bonds. In stocks, you can see moves of
20:32
Speaker 1: ten or twenty two or three points is a Tuesday.
20:34
Speaker 1: Nothing's exactly. Here's the question that pops into my head.
20:38
Speaker 1: Knowing that there's no guarantee of liquidly in the future,
20:42
Speaker 1: how does that affect your process for selecting what bonds
20:47
Speaker 1: you want to put into your portfolio. You you obviously
20:50
Speaker 1: have an awareness, Hey, when the time comes, there may
20:54
Speaker 1: not be the liquidly I'm hoping for if I have
20:57
Speaker 1: to move these in a emergency. That's a very good question.
21:02
Speaker 1: Very What we tried to do is buy global issues,
21:05
Speaker 1: very big issues that a lot of people holding their portfolios.
21:10
Speaker 1: You know, at one time you would find a good
21:12
Speaker 1: issue of a hundred a couple of hundred million dollars.
21:15
Speaker 1: We go for the billion dollar issues at least, and
21:18
Speaker 1: we want the names that people want to hold in
21:21
Speaker 1: their portfolio. There are some managers that try to create
21:25
Speaker 1: alpha from buying smaller issues because the issue is forced
21:29
Speaker 1: to pay a bit more because of the smaller sizes
21:31
Speaker 1: of the issue. We don't like that. We want to
21:34
Speaker 1: have the ability to get out whenever we want. So
21:39
Speaker 1: the liquidly premium isn't worth the risk to you. It's
21:42
Speaker 1: not quite quite interesting. So I've had this little personal
21:47
Speaker 1: theory for the past couple of years that part of
21:50
Speaker 1: the reason yields or as low as they are, is
21:53
Speaker 1: that there's a shortage of quality sovereign bonds. We haven't
21:58
Speaker 1: been running the usual and old deficits over the past
22:01
Speaker 1: ten years, although clearly they've started to tick up post
22:04
Speaker 1: crisis and and most recently, And that there's so much
22:08
Speaker 1: capital around and such a demand for quality fixed income
22:13
Speaker 1: that it gets hoovered up by all the buyers and
22:17
Speaker 1: that helps to keep a lid on on rates. And
22:21
Speaker 1: am I remotely accurate or is that crackpot theory? You
22:24
Speaker 1: are accurate even though deficits have not been shrinking on
22:27
Speaker 1: the country that have been growing bigger. Over half of
22:31
Speaker 1: the sovereign bonds now have negative yields. Nine point seven
22:35
Speaker 1: trillion dollars, mostly European bonds are negative, and we see
22:40
Speaker 1: Japan frequently dips into So by negative yield you mean here,
22:45
Speaker 1: I'm going to give you a pile of money, and
22:48
Speaker 1: you're gonna give me most of it back, but not
22:51
Speaker 1: all of it, because the yield is actually I'm gonna
22:54
Speaker 1: I'm gonna pay you to hold my money, which makes
22:58
Speaker 1: no sense. At one time, many years ago, the only
23:01
Speaker 1: country that had This was Switzerland that showed that they
23:05
Speaker 1: wanted to sell the concept of safety, and they said,
23:09
Speaker 1: this is like a vault. Money that comes in here
23:12
Speaker 1: is totally protected, So I'm going to charge you for
23:15
Speaker 1: the use of my vault. Nowadays, it's Germany, it's Japan,
23:20
Speaker 1: it's Northern Europe. It's nine point seven trillion dollars. So
23:25
Speaker 1: the only play there if you're an investor, is hoping
23:29
Speaker 1: that the currency. Because you're investing in the local currency,
23:34
Speaker 1: it's mostly euros or yends. Your hope is that the
23:38
Speaker 1: euro gains against the dollar, or the end gains against
23:41
Speaker 1: the dollar. But there are much better ways to play
23:44
Speaker 1: currencies than to buy bonds. You know, to invest a
23:47
Speaker 1: million dollars in bonds hoping for an increase in the
23:50
Speaker 1: value of the currency. You can do a fraction of
23:53
Speaker 1: that investment and do futures and you're in the same game,
23:57
Speaker 1: so with far less risk. Absolutely. Another interesting situation is
24:03
Speaker 1: the l d I, the long duration management of pension plans.
24:08
Speaker 1: They are buying bonds with the maturity that matches their liabilities,
24:16
Speaker 1: but with bonds that are not growing in value, it's
24:19
Speaker 1: incredibly expensive to match. I mean, because they're not growing
24:24
Speaker 1: so you're going to pay a million dollars a year
24:28
Speaker 1: thirty years from now, or a million euros. You have
24:31
Speaker 1: to buy a million thirty thousand euros in order to
24:35
Speaker 1: have a million back. So it's very hard to manage
24:39
Speaker 1: money against with l d I when you have negative deals.
24:44
Speaker 1: Quite quite fascinating. So your firm uses something called scenario
24:49
Speaker 1: planning to mitigate against global event risk. Explain what that
24:55
Speaker 1: is and how can you actually reduce risk about events overseas.
25:00
Speaker 1: We think of all the weird things that could happen,
25:03
Speaker 1: very all the weird things that could happen. I mean,
25:06
Speaker 1: we have a scenario hopefully well it will never happen.
25:09
Speaker 1: But for another we have a scenario for the bankruptcy
25:17
Speaker 1: of a money center bank. We have a scenario for
25:20
Speaker 1: oil going down to twenty or over a hundred. We
25:23
Speaker 1: have a scenario of North Korea throwing the bomb, and
25:29
Speaker 1: we tried to play through what our reaction would be
25:32
Speaker 1: to that event, so we're not caught by surprise if
25:37
Speaker 1: God forbid they happen. So we know that if X
25:42
Speaker 1: or Y happens, we're gonna be selling or buying the
25:46
Speaker 1: bonds or whether we're going to be shortening or lengthening
25:49
Speaker 1: our duration, and we replay scenarios almost I mean formally
25:56
Speaker 1: once a quarter. Informally it can be any you're driving
26:01
Speaker 1: in and you hearing news in the radio and you say, well,
26:05
Speaker 1: that might cause a change in the environment. What would
26:10
Speaker 1: we do? So we go into the conference room, everybody participates,
26:14
Speaker 1: we use the blackboard, and we try to develop a
26:17
Speaker 1: response to the event. Mhm. So so you mentioned, um
26:22
Speaker 1: that that's really quite interesting. So so you mentioned the
26:26
Speaker 1: nine plus trillion dollars in negative yielding sovereign debt. Given
26:32
Speaker 1: those liabilities that pension funds and really just retirement accounts
26:37
Speaker 1: are going to have, where can people go to find
26:40
Speaker 1: yields without adding leverage or adding a whole lot of
26:44
Speaker 1: risk to their portfolios. That is something that's keeping a
26:49
Speaker 1: lot of people awake at night. Pension plans have if
26:53
Speaker 1: you do share responsibility, that grows at about eight percent
26:57
Speaker 1: per year, and they're not getting those learns from their portfolios.
27:02
Speaker 1: They need to have fixed income. It's like the retaining
27:06
Speaker 1: world in the portfolio and the source of liquidity if needed.
27:10
Speaker 1: But if that fixed income is yielding, say they have
27:14
Speaker 1: in fixed income, if the yield there is two or
27:17
Speaker 1: two and a half percent. The other eighty would have
27:20
Speaker 1: to generate in order to make up for whether they're
27:24
Speaker 1: not making in fixed income. So they're going more and
27:28
Speaker 1: more to private equity, to venture capital areas that are
27:33
Speaker 1: definitely much riskier. And we can see what happened in No.
27:37
Speaker 1: Nine that the dropping value of individual accounts or pension
27:41
Speaker 1: plants was dramatic. They're looking for alternatives in fixed income,
27:48
Speaker 1: for example, bank loans, which in reality is just high yield.
27:51
Speaker 1: With the floating rate, they're doing more and more high
27:55
Speaker 1: yield and moving down in the rating two towards disease,
27:59
Speaker 1: which again is very dangerous. Or an USA class that
28:03
Speaker 1: has become much more interesting, which is emerging market debt.
28:07
Speaker 1: At one time, these sovereign bonds in the emerging countries,
28:12
Speaker 1: countries like Mexico, Colombia, Brazil, China, South Korea, we're paying
28:18
Speaker 1: three to four hundred basis more than comparable risks in
28:22
Speaker 1: the US. It has come down a lot, but you
28:27
Speaker 1: can still find very very good corporate names in the
28:31
Speaker 1: emerging world, both in local currency and daughter they nominated.
28:36
Speaker 1: They can give you a very sizeable pickup and allow
28:39
Speaker 1: your fixed income portfolio to be closer to your needs
28:44
Speaker 1: in terms of growth than what you get out from
28:47
Speaker 1: the traditional US based core fixed So if I'm a
28:52
Speaker 1: US investor and I'm not happy with two and a
28:54
Speaker 1: half percent yield on traditional treasuries, how much additional risk
29:01
Speaker 1: am I assuming going to either emerging market bonds on
29:04
Speaker 1: a sovereign basis or e M bonds on a corporate
29:07
Speaker 1: basis to pick up another two D basis points? Is
29:11
Speaker 1: that a fair amount? At least? To be honest, if
29:14
Speaker 1: you ask me, I don't think you're picking any additional risk.
29:18
Speaker 1: I think that if you buy a company that's solid
29:21
Speaker 1: investment grade in their own country and that generates let's
29:27
Speaker 1: say you bought daughter the nominated bonds and they generate
29:31
Speaker 1: the dollars to pay you back, both interesting principle, so
29:37
Speaker 1: they don't have to buy them in a tough time
29:39
Speaker 1: when their currency could have the valued You are taking
29:42
Speaker 1: no additional risk. Let me give an example. Bimbo, the
29:46
Speaker 1: Mexican bread company. Almost sixty of their sales are abroad.
29:52
Speaker 1: You know, they're the largest producer in fourteen countries and
29:55
Speaker 1: they're present in about fifty five countries where they sell bread.
30:00
Speaker 1: It's a staple, it's a company that's been in the
30:02
Speaker 1: market for a hundred years. They are double A plus
30:06
Speaker 1: in Mexico. Their paper is yielding almost five that if
30:12
Speaker 1: I took away the name and showed you the financials,
30:15
Speaker 1: you would say this is a double A company in
30:18
Speaker 1: the US, and it would be paying maybe three ten,
30:21
Speaker 1: three twenty. So you're picking up two hundred plus over
30:27
Speaker 1: against a credit paper in the US and almost three
30:32
Speaker 1: hundred over against a US equivalent from a Treasury bond.
30:37
Speaker 1: So you really are gaining a lot in a company
30:41
Speaker 1: that basically has no risk. So how much of this
30:44
Speaker 1: is just the home country bias? If you live in
30:47
Speaker 1: the US, you tend to buy US stocks and bonds,
30:50
Speaker 1: If you live in Germany you tend to buy German
30:52
Speaker 1: stocks and bonds, and the same as true in Australia
30:55
Speaker 1: or wherever. How significant is that to that gap between
31:01
Speaker 1: domestic and emerging market yields? That pride of national product
31:07
Speaker 1: it used to be very prevalent, it's no longer there.
31:10
Speaker 1: The markets have become so global that buyers in Singapore
31:14
Speaker 1: or Berlin or New York are are buying from everywhere.
31:18
Speaker 1: So so what accounts for that two hundred and fifty
31:21
Speaker 1: basis point difference in yields. It's the perception of things
31:25
Speaker 1: that happened in the late nineties and the beginning of
31:28
Speaker 1: the two thousand's, where one country got in trouble and
31:31
Speaker 1: all the other countries got in trouble. It has to
31:35
Speaker 1: have more work done to understand what you're buying in
31:40
Speaker 1: the US. And even the credibility of the rating agencies
31:43
Speaker 1: in the US has dropped a lot after all. Nine
31:46
Speaker 1: But here you see an A rated bond and you
31:48
Speaker 1: don't get too much into analyzing whether they will pay
31:51
Speaker 1: you back or not. You believe if standard important movies
31:55
Speaker 1: said it's good to take it for granted, well I'm
31:58
Speaker 1: I'm assuming or I'm saying that you don't put a
32:01
Speaker 1: lot of stock. And with the credit rating agencies say
32:04
Speaker 1: you guys do your own due diligence and all these absolutely,
32:08
Speaker 1: and remember that emerging just taken back into crediting emerging countries.
32:14
Speaker 1: Eight of the companies are still run by the founding family.
32:19
Speaker 1: They took them public in order to create liquidity and
32:22
Speaker 1: the state for state purposes. Go back a second. I
32:26
Speaker 1: want to make sure I caught that statistic right. In
32:29
Speaker 1: Emerging market nations eighty percent of the um businesses or
32:36
Speaker 1: of the publicly traded businesses. The publicly traded businesses are
32:40
Speaker 1: still run by the founding family. That's amazing, it's incredible.
32:44
Speaker 1: There was a radio company that went public here in
32:47
Speaker 1: the NYC and governance, I mean the eleven board members
32:52
Speaker 1: last name was usually it was all brothers, nephews and nieces.
32:58
Speaker 1: And the New York Stock Seans did not like it.
33:01
Speaker 1: They said, you know, this is not good e s
33:04
Speaker 1: g Y S is horrible governance when the whole families
33:07
Speaker 1: in the board does not work. But that's pretty typical
33:10
Speaker 1: you're saying it is. So what you have to understand
33:13
Speaker 1: besides the financials is who those families are. So you
33:18
Speaker 1: need to do social analysis. You have to understand whether
33:22
Speaker 1: you're funding a new plant or you're funding a new
33:25
Speaker 1: G five that the that the chair, you know, if
33:30
Speaker 1: a new girls stream versus a new exact making plants.
33:33
Speaker 1: You want to understand that they're investing your money into
33:38
Speaker 1: something that will be productive and create more wealth for
33:42
Speaker 1: the shareholders or the bond holders. And that's something that
33:46
Speaker 1: will bring more satisfaction to the founding family. That that
33:49
Speaker 1: is that is really um fascinating. I had no idea.
33:54
Speaker 1: I'm learning a lot today. So I think people have
33:58
Speaker 1: changed the way they view and and think about debt
34:02
Speaker 1: over the past thirty years. Um, how do you see that? Well,
34:07
Speaker 1: first of all, do you do you agree? Do you
34:09
Speaker 1: see the perception of debt having changed in society? And
34:14
Speaker 1: how does that affect building a bond portfolio. At some time,
34:19
Speaker 1: dead was seen as a bad thing, and now some
34:22
Speaker 1: of that's a little bit of a holdover from the
34:25
Speaker 1: Great Depression generation who never wanted to risk having a
34:30
Speaker 1: bank call something away from them. Exactly having debt meant
34:33
Speaker 1: that you were at risk. Nowadays debt makes sense for corporations.
34:40
Speaker 1: They don't delude their shareholders. Their EPs are higher and
34:46
Speaker 1: management is basically paid by the Their bonuses are based
34:50
Speaker 1: on the value of their stock. So if you can
34:53
Speaker 1: borrow cheaply and buy back stock or do things without
34:57
Speaker 1: selling more equity, the performance of your equity will probably
35:01
Speaker 1: be better. So it's become a tool of growth without delusion.
35:07
Speaker 1: And I so once the CFO of Mark being interviewed,
35:12
Speaker 1: and he said they asked him why did he borrow
35:16
Speaker 1: two billion dollars when he had in cash almost eleven billion,
35:22
Speaker 1: And he said, you know, at two thirty for three
35:26
Speaker 1: year paper, I couldn't and being a taxi doctor, I
35:30
Speaker 1: could not sleep if I didn't take out that money. So,
35:32
Speaker 1: in other words, the way the tax laws are set
35:35
Speaker 1: up around debt versus equity, corporate management is incentivized to
35:40
Speaker 1: borrow versus using exactly, I mean it makes a lot
35:43
Speaker 1: of sense to borrow in them. Buy backstock dividends are
35:46
Speaker 1: not tax deductible. Companies were borrowing or are borrowing below
35:51
Speaker 1: when they're paying dividends, so if they retire that stock,
35:55
Speaker 1: then they're making money in the spread that That is
35:58
Speaker 1: quite fascinating. Can you still around a little bit? I
36:00
Speaker 1: have some more questions for you. We have been speaking
36:03
Speaker 1: with Louise Mazel of LM Capital Group. If you enjoy
36:07
Speaker 1: this conversation, well be sure and come back for the
36:09
Speaker 1: podcast extras, where we keep the tape rolling and continue
36:13
Speaker 1: discussing all things fixed income and emerging market related. You
36:17
Speaker 1: can find that wherever Finder podcasts are sold, Apple, iTunes,
36:21
Speaker 1: Bloomberg dot Com, Stitcher, Overcast, et cetera. We love your comments,
36:27
Speaker 1: feedback and suggestions right to us at m IB podcast
36:31
Speaker 1: at Bloomberg dot net. You can follow my daily column
36:35
Speaker 1: at Bloomberg dot com slash Opinion, or check me out
36:38
Speaker 1: on Twitter at rit Holts. I'm Barry Ridlts. You're listening
36:42
Speaker 1: to Masters and Business on Bloomberg Radio. Welcome to the podcast, Louise,
36:59
Speaker 1: Thank you so much for doing this. This is really
37:00
Speaker 1: an interesting conversation. I sometimes will chat with people, Um,
37:05
Speaker 1: who do you have on the show this week? Oh,
37:07
Speaker 1: I have Louise Mozelle. He's a you know, emerging market
37:10
Speaker 1: bond manager, and I'll get that yawn back from them,
37:14
Speaker 1: and it's like, well, tell me when you have somebody
37:15
Speaker 1: interesting on. But this is really fascinating stuff. There is
37:19
Speaker 1: so much more to emerging market bond analysis than I
37:24
Speaker 1: think the average UM stock jockey really appreciates. UM, and
37:29
Speaker 1: you you are expressing it in a way that I
37:31
Speaker 1: find intriguing. Um. There are a few questions I did
37:36
Speaker 1: not get to during the broadcast portion that I have
37:39
Speaker 1: to run through. Let me let me run through those
37:41
Speaker 1: before we get to our favorite questions. UM. I've heard
37:46
Speaker 1: over the years that bond investors are the smart money,
37:50
Speaker 1: that's where the bond vigilantes come from. Why is that?
37:54
Speaker 1: Why is bond investing considered quote unquote the smart money.
37:59
Speaker 1: I would not say smart money. It's the safe money.
38:02
Speaker 1: It should be the save money. Nowadays, with leverage and
38:07
Speaker 1: with what's happening in the markets, you need to have
38:10
Speaker 1: a portion of your portfolio ready for events that might
38:14
Speaker 1: alter the value of the whole portfolio. I mean you
38:17
Speaker 1: have situations like the unicorns that the more money they lose,
38:21
Speaker 1: the more valuable they are. That's literally true. There was
38:24
Speaker 1: a column in Bloomberg that of all the past eighteen
38:28
Speaker 1: months of I p o s, the worst the financials
38:32
Speaker 1: were the better the first day I p O Pop was.
38:36
Speaker 1: What you need to see is that bonds, bonds have
38:40
Speaker 1: much more meat in them. It's less hope and it's
38:44
Speaker 1: more reality. So when you say smart money, it means
38:49
Speaker 1: people have to analyze that you are lending to somebody
38:53
Speaker 1: that will pay you back. I mean, let's take Lift
38:56
Speaker 1: for for example. We don't know what's gonna happen with
38:59
Speaker 1: Lift five years from now. I would not buy a
39:02
Speaker 1: bond from leaft a five year paper because as I
39:05
Speaker 1: didn't buy a test LA bond, you know, if I
39:08
Speaker 1: buy a test last talk, I'm betting the electric cars
39:11
Speaker 1: or self driving cars are going to do very well.
39:14
Speaker 1: Their bonds did very poorly. You know, they came out
39:17
Speaker 1: a part. They're not trading at eighty eight cents on
39:20
Speaker 1: the dollar. So it's a situation where leverage is dangerous
39:26
Speaker 1: when you're not making any money. Bond analysis requires much
39:31
Speaker 1: more substance than stock and alliss. So what about m
39:36
Speaker 1: risk mitigation? What sort of tools do you use to
39:39
Speaker 1: to control the risk you have? Well, we stress the
39:43
Speaker 1: portfolio based on if rates move up a hundred peers
39:48
Speaker 1: two hundred peers. We do it in either direction. We
39:53
Speaker 1: try not to concentrate in one industry. We personally impose
39:57
Speaker 1: some restrictions to our portfolio. We don't do casualty insurance
40:01
Speaker 1: for example. Why not. We don't want to read about
40:04
Speaker 1: the tsunami and all of a sudden it turned out
40:07
Speaker 1: that the bonds of the company we hold, we're insuring
40:10
Speaker 1: every single house that was destroyed by the tsunami. So
40:14
Speaker 1: that's pretty much just a straightforward geographical diversification approach. We
40:20
Speaker 1: don't do newly deregulated industries that saved us from and
40:23
Speaker 1: run from World com We never did the airlines, for example.
40:28
Speaker 1: Newly deregulated industries are a higher risk bond than as
40:33
Speaker 1: widely perceived management. Let me give you an example. Pacific
40:38
Speaker 1: Gas and Electric, or that the Pacific companies. They were
40:43
Speaker 1: running a utility, they were selling power, and all of
40:46
Speaker 1: a sudden they were deregulated. They went out and bought
40:50
Speaker 1: the thrifty chain of drug stores. Wait, so when when
40:54
Speaker 1: was PGN and California Utilities deregulated in the nineties and
40:59
Speaker 1: the found out that selling crests toothpaste was not the
41:02
Speaker 1: same as selling power to Two years later they sold
41:06
Speaker 1: the company at a loss of one and a half
41:08
Speaker 1: billion dollars and they had their bonds downgraded because of it.
41:13
Speaker 1: If a manager was running an airline and he had
41:17
Speaker 1: specific routes, he could not move from them. All of
41:20
Speaker 1: a sudden he's competing with Joe and his brother who
41:23
Speaker 1: both three planes and are doing the small cities. It
41:28
Speaker 1: became very dangerous to compete in that market. We saw
41:31
Speaker 1: every major airline go through bankruptcy. Communications you had the
41:37
Speaker 1: Big I mean Big Mabel. You knew the Big Mobil
41:41
Speaker 1: was the safest company in the world. Stuff. So when
41:45
Speaker 1: when they broke them up, you know, they ended up.
41:49
Speaker 1: I mean the world comes came up in the world
41:51
Speaker 1: and the Worlcome ended up going broke, So that's another
41:55
Speaker 1: one of the areas we don't do. And the third
41:58
Speaker 1: one is nuclear power, and it's not for environmental reasons.
42:04
Speaker 1: It's if some idiot forgot to close about the plant
42:08
Speaker 1: might end up in a different state, so whoops, the
42:13
Speaker 1: Washington State utility had a major problem with a nuclear plant.
42:19
Speaker 1: Three my Leland is another example. We don't want to
42:23
Speaker 1: take the risk of an error creating a situation where
42:28
Speaker 1: our bonds would dramatically change in races. So if I
42:31
Speaker 1: were to go around the country and look at the
42:33
Speaker 1: utilities that have nuclear power plants on their books, their
42:38
Speaker 1: bonds are going to be trading at a at a
42:40
Speaker 1: discount to what non nuclear utilities or is this just
42:44
Speaker 1: specifically specific to l M. Does anybody else do that?
42:48
Speaker 1: I don't know, But for us that risk mitigation is
42:51
Speaker 1: very important, and then we overlay our scenario planning so
42:56
Speaker 1: we try to avoid anything that we have to get
43:00
Speaker 1: out very quickly if something happened. I don't think you're
43:04
Speaker 1: paid enough to take a little bit of an additional risk.
43:08
Speaker 1: If you were paying me another three d beeps, I
43:12
Speaker 1: mean three more in interest to taking to take additional risk,
43:17
Speaker 1: I would consider it. If you pay me five beeps
43:21
Speaker 1: point oh five of a percent more, it's not worth it.
43:24
Speaker 1: Not worth it. So so you had mentioned the rating agencies.
43:28
Speaker 1: Clearly they did a terrible job during the financial crisis.
43:32
Speaker 1: We later learned that their whole business model had shifted
43:36
Speaker 1: from the bond buyers paying their fees to the issuers
43:41
Speaker 1: paying their fees, and it became a payola, pay for
43:44
Speaker 1: play sort of situation. And if I walk into one
43:48
Speaker 1: of them, if I walk into SMP and they don't
43:50
Speaker 1: give me the double A rating I want, I'll just
43:53
Speaker 1: say no thanks, and I'll go across the street to
43:55
Speaker 1: Moody's and I will be able to purchase whatever rating
43:59
Speaker 1: I I want. So given that, do you put any
44:03
Speaker 1: consideration and to what the rating agencies do, either either
44:07
Speaker 1: whether they cover a bond or a country or an industry,
44:11
Speaker 1: or a specific upgrade or downgrade. How how important is that? Well,
44:16
Speaker 1: we do follow them, we do read what they print,
44:19
Speaker 1: and we do take into account their rating because they
44:22
Speaker 1: have good analysis. After on nine, they've strengthened their their analysis.
44:28
Speaker 1: I think that in the case of the mortgages, they
44:31
Speaker 1: just did not understand the product so it was not
44:34
Speaker 1: only the paid to play, but it was also a
44:36
Speaker 1: lack of understanding how the different trenches would behave in
44:39
Speaker 1: a crisis. But first of all, the change in rating
44:44
Speaker 1: is not that impactful anymore. Now. When you went from
44:48
Speaker 1: a triple B to a triple B minus, the bond
44:52
Speaker 1: at one time would drop three points. Now it might
44:55
Speaker 1: drop a quarter of a point. How much of that
44:58
Speaker 1: is due to the fact that they did such a
45:00
Speaker 1: terrible job when they were needed in the last last crisis.
45:05
Speaker 1: It does impact what's happening, but the perception of whether
45:10
Speaker 1: you cover your needs three point two times or three
45:13
Speaker 1: times or two point nine does not make that big
45:17
Speaker 1: a difference, even in the case of I mean and now,
45:20
Speaker 1: triple beasts are the vast majority of bonds, you know,
45:24
Speaker 1: their borderline between investment grade and high yield or low
45:28
Speaker 1: investment grade, that's the nicest way of saying junk, you know,
45:33
Speaker 1: But they're still considered an investment grade. They're investable for
45:36
Speaker 1: anyone who's um charter or portfolio policy statement says only
45:43
Speaker 1: investment grade exactly. But most pension plans, for example, today,
45:49
Speaker 1: have a bunch of non investment grade bonds in their books.
45:53
Speaker 1: At one time, you would think that that change would
45:58
Speaker 1: eliminate basically who could by those bonds. And ever since
46:02
Speaker 1: Michael Milken in the eighties the he created an industry
46:08
Speaker 1: for non investment grade bonds. I mean, he did not
46:11
Speaker 1: invent the hi yield bonds. He just invented who could
46:15
Speaker 1: buy them. He went to the thrifties, thrifts, he went
46:19
Speaker 1: to the savings and loans, he went to the insurance companies,
46:23
Speaker 1: and then the patient plan said, well, let's make that
46:26
Speaker 1: also an asset class in which we can invest. So
46:30
Speaker 1: so let's talk about those pension funds for a moment.
46:33
Speaker 1: You mentioned during the broadcast portion that their allocation has
46:38
Speaker 1: been gearing more towards alternatives like venture capital and private
46:43
Speaker 1: equity and hedge funds because they're looking for a higher
46:48
Speaker 1: total expected return, which they're not just they apparently you're
46:53
Speaker 1: not getting from stocks and bonds, but they also haven't
46:57
Speaker 1: been getting them from the alternatives they've been They're expensive.
47:01
Speaker 1: I like to jokingly say, come, come for the high fees,
47:05
Speaker 1: stay for the under performance. But in all seriousness, they
47:09
Speaker 1: have built out ten thirty sometimes even of their total
47:13
Speaker 1: portfolios with these alternatives, and they've slapped a very high
47:20
Speaker 1: expected return six eight, ten on these. Why is that?
47:25
Speaker 1: How can they just say, even though we have decades
47:29
Speaker 1: of data showing that these are not going to get
47:32
Speaker 1: eight percent, we're still going to put an expected return
47:35
Speaker 1: of eight percent on this. What? What does that due
47:37
Speaker 1: to the allocations? They were getting those results years ago
47:41
Speaker 1: in the eighties and nineties because there wasn't that much competition.
47:45
Speaker 1: There's been so much money that has gone into alternatives
47:49
Speaker 1: that now they're competing for deals and the yields are
47:52
Speaker 1: are lower. It's just that's just market efficiency, isn't it.
47:56
Speaker 1: You can't you can't have these big fat margins without
47:59
Speaker 1: attracting other people to say I'd like a little bit
48:01
Speaker 1: of that. I tend to joke saying that hope is
48:05
Speaker 1: not a strategy, and a lot of the buying of
48:11
Speaker 1: private equity adventure is hoping that in the future that
48:17
Speaker 1: will be worth much more. If you own stocks or
48:20
Speaker 1: your own bonds, the value is there every day you know,
48:24
Speaker 1: you run a statement, you check what the value of
48:27
Speaker 1: your stocks are. You can find out the value of
48:29
Speaker 1: your portfolio every day. If you have private equity, you
48:33
Speaker 1: have no clue how much is it worth when it
48:36
Speaker 1: goes public when there's a liquidity event, then it's when
48:40
Speaker 1: you know what happens. But it might take five or
48:43
Speaker 1: ten years, and you never know the real value of
48:46
Speaker 1: your investment. And you can always put any increased value
48:50
Speaker 1: you want and it will show us though you're doing well,
48:55
Speaker 1: and you might or might not get that value that
48:58
Speaker 1: you put it down in your state. So the non
49:00
Speaker 1: publicly traded assets give people the ability to mark, to
49:06
Speaker 1: not mark the market, but mark two what hopes and
49:09
Speaker 1: dreams is that what you suggest that it's not that bad.
49:12
Speaker 1: But the answer is yes, you know, it's we used
49:15
Speaker 1: to call it mark to make believe in the middle
49:17
Speaker 1: of the crisis, but it's not. You know, we're not
49:19
Speaker 1: suggesting that. You're saying it gives them a little bit
49:22
Speaker 1: of accounting flexibility, exactly. I think that things are worth
49:26
Speaker 1: what the buyer is willing to pay. I mean, I
49:29
Speaker 1: think that if you ask them people who their house
49:31
Speaker 1: is worth, you're going to get tent responses that are
49:34
Speaker 1: higher than the actual market. But that's an emotional bias
49:39
Speaker 1: that that makes some sense. It makes It's the same
49:42
Speaker 1: as when they're valuing companies. Endowment effect is is certainly present.
49:46
Speaker 1: You know, you want to believe that everybody is going
49:52
Speaker 1: to see the same that you are seeing, and the buyer,
49:55
Speaker 1: even if they perceive that the value is the same
49:57
Speaker 1: as you do, they're going to fight to get a
50:00
Speaker 1: They still want a discount of absolutely. You know, nobody
50:03
Speaker 1: likes to pay retail sure, So you are really thinking
50:08
Speaker 1: hoping that you're going to get the values you're putting
50:10
Speaker 1: down in this statement, and that does not necessarily going
50:14
Speaker 1: to happen. Sometimes you're going to be very pleasantly surprised,
50:18
Speaker 1: but most of the time you won't. So I used
50:20
Speaker 1: to joke with a friend who is at a pension
50:22
Speaker 1: funds about what I perceived as their absurd expected returns
50:28
Speaker 1: on their alternatives, and the response was, we need seven
50:32
Speaker 1: or eight percent. So I used to say, well, let's
50:36
Speaker 1: assume you get two and a half percent from your
50:38
Speaker 1: bond portfolio and you get five percent from your equities,
50:41
Speaker 1: and I'm up, there's your seven a half percent. And
50:44
Speaker 1: it took him a moment to realize, well, that's not
50:46
Speaker 1: how you do a blended portfolio. But it's every bit
50:49
Speaker 1: as ridiculous as expecting ten percent from asset classes that
50:53
Speaker 1: haven't returned. That sort of number for twenty or thirty years.
50:58
Speaker 1: You're right, but you always kicking the can a little
51:01
Speaker 1: bit further away. So probably by the time the pension
51:05
Speaker 1: plan runs out of money, you will not be there, right,
51:09
Speaker 1: So I mean that you say that half jokingly, but
51:12
Speaker 1: we know that's true. Governments, state and local governments have
51:15
Speaker 1: done that with their police pension funds and their fire
51:19
Speaker 1: pension funds and their teacher funds that by the time
51:22
Speaker 1: it's really problematic, the politicians responsible for that they're long
51:27
Speaker 1: out of office. That someone else's headache. How can we
51:30
Speaker 1: realign the incentives so that we're not just kicking the
51:33
Speaker 1: can down the road or is that just human nature?
51:36
Speaker 1: And this is what's going to happen. Look at the
51:38
Speaker 1: state of Illinois. They have excellent managers managing the money
51:42
Speaker 1: at the pension plans, and they're underfunded by I mean,
51:45
Speaker 1: they probably are funded for thirty five it's politicians that
51:49
Speaker 1: have not wanted to raise the contributions that are trying
51:53
Speaker 1: to be re elected, so they don't pressure the public
51:57
Speaker 1: workers to give more of their salary to their pension plan.
52:01
Speaker 1: And you know, it's now a huge problem because they're
52:04
Speaker 1: running out of money. So there are certain states that
52:07
Speaker 1: have high taxes and big state spending, but seem to
52:13
Speaker 1: have their budgets and their pension plans more under control.
52:16
Speaker 1: California comes to mind, New York comes to mind. Amongst
52:20
Speaker 1: the states a little better or or a lot better.
52:23
Speaker 1: Clearly Chicago and Illinois have problems. I hear about problems
52:27
Speaker 1: in New Jersey and Connecticut both have pension issues. How
52:31
Speaker 1: significant is this going to be for funding UM in
52:35
Speaker 1: the next twenty to thirty years. It's a huge problem,
52:39
Speaker 1: huge huge Look at Detroit. Detroit had to file for
52:42
Speaker 1: bankruptcy because of the pension place. So now what happens.
52:45
Speaker 1: So now, if you're a company and you file for bankruptcy,
52:50
Speaker 1: judges have a tendency. Courts have a tendency to say,
52:55
Speaker 1: before you even get to the creditors, employee compensation, salary
52:59
Speaker 1: and pensions is sacrosanct. We don't touch that. What happened
53:03
Speaker 1: in Detroit with the the employee pensions post bankruptcy, some
53:09
Speaker 1: of it were cut down. Cities can go bankrupt, states
53:12
Speaker 1: cannot by law, right, But you know, they got to
53:16
Speaker 1: the point where they were about to sell the paintings
53:19
Speaker 1: from the museum in Detroit in order to pay pension plans.
53:23
Speaker 1: The city is being revitalized, and they hope that eventually
53:28
Speaker 1: they're gonna pull out, But again I hope. To me,
53:32
Speaker 1: hope is not a strategy. Right, So, we know that
53:35
Speaker 1: post hurricane, Puerto Rico has had or let's let's phrase
53:39
Speaker 1: that a little differently. Post hurricane, it was revealed the
53:43
Speaker 1: precarious state of Puerto Rico's finances, sort of like Greece
53:48
Speaker 1: to the EU, Puerto Rico managed to borrow it rates
53:51
Speaker 1: that were more suitable for the US than for Puerto Rico.
53:56
Speaker 1: They're not a state, they're not a city, They're they're
53:59
Speaker 1: a territory. What happens with that situation? Are they going
54:03
Speaker 1: to be able to get a refinancing? Is bankruptcy even
54:07
Speaker 1: an option for a non state, non city territory. Well,
54:11
Speaker 1: first they can go to bankruptcy with the state owned enterprises,
54:16
Speaker 1: but Puerto Rico had a big problem even before the hurricane,
54:20
Speaker 1: and you know, the electric company had been in trouble
54:23
Speaker 1: paying back even before the hurricane. So they are still
54:29
Speaker 1: fighting it. They're still fighting with bond holders and the pain.
54:34
Speaker 1: The public workers are crossing their fingers that their pension
54:38
Speaker 1: will be there when they need. They were suffering a
54:40
Speaker 1: brain drain before the hurricane. Because if you're in Puerto
54:44
Speaker 1: Rico and you're making X, and you could just take
54:48
Speaker 1: a plane to Florida or Texas or wherever you want
54:50
Speaker 1: to go, because you're a US citizen, you could get
54:54
Speaker 1: a job with that skill and make one and half
54:57
Speaker 1: or two X. They seem to have lost a lot
54:59
Speaker 1: of really talented people. They have, even though they created
55:02
Speaker 1: a lot of incentives for people to go leave in
55:05
Speaker 1: Puerto Rica. Very low taxes, very low taxes. The first
55:08
Speaker 1: year you pay I think three percent income taxes. That's
55:13
Speaker 1: not too shabby. A lot of big big money managers.
55:16
Speaker 1: That's federal income tax, not state. So instead of a
55:20
Speaker 1: top rate of thirty seven, your top rate is three. Yeah.
55:23
Speaker 1: H fund managers have moved to Puerto Rico. Weather is
55:26
Speaker 1: not too bad. It's not too bad. Good beaches. Huh.
55:29
Speaker 1: So I only have you for a limited amount of time.
55:34
Speaker 1: Let me get to some of my favorite questions I
55:36
Speaker 1: asked all of my guests. It adds a little bit
55:39
Speaker 1: of a sort of cinema verity when I move off
55:42
Speaker 1: Mike and people can tell that I'm doing that. I
55:45
Speaker 1: kind of like that especially at the end, not during
55:47
Speaker 1: the broadcast portion. Um, but let's jump to these questions.
55:51
Speaker 1: We'll call this our speed round. So what was the
55:54
Speaker 1: first car you ever owned? Year make and model six
56:00
Speaker 1: dog Dart dodged. They were My sister had one of those.
56:05
Speaker 1: It was a sixty six or sixty seven. Those cars
56:08
Speaker 1: could not be killed. They were three thousand mile cars
56:11
Speaker 1: from the sixties. I wish it had been my sisters
56:14
Speaker 1: in that mind. So you had a problem with it.
56:16
Speaker 1: I did not like it, but because when my father
56:19
Speaker 1: gave me it wasn't the prettiest car, but they were
56:21
Speaker 1: kind of indestructible for that they were, Um tell us
56:25
Speaker 1: the most important thing that your friends and family don't
56:28
Speaker 1: know about you. I love red wine. That's my passion,
56:34
Speaker 1: and I'm a collector. Very interesting. Who were some of
56:37
Speaker 1: your early mentors who helped shape your view of the
56:40
Speaker 1: fixed income markets and investing? A Nobel Prize winner professor
56:46
Speaker 1: at Harvard before I really got to know him, Bill Gross,
56:55
Speaker 1: before you got to know him, not after, not after,
56:58
Speaker 1: And I would say that the mentor was my father,
57:03
Speaker 1: not in terms of investing, but in terms of values.
57:06
Speaker 1: Hard work is the only thing that makes you do
57:09
Speaker 1: well makes it makes a lot of sense. Um, tell
57:13
Speaker 1: us about your favorite books. What are you reading? What,
57:15
Speaker 1: what do you recommend other people read? Fiction, nonfiction, investing
57:19
Speaker 1: related whatever. In fiction, I love the Mill Nelson, The Mill,
57:25
Speaker 1: I love the series by ken fall It. And in
57:30
Speaker 1: nonfiction I'm reading now a great book of the woman
57:34
Speaker 1: that ran the Spye Network for the French in the
57:37
Speaker 1: Second World War, Madame for God, And I love Harari's
57:42
Speaker 1: the Israeli guy that's part historian, part philosopher. The one
57:47
Speaker 1: Questions for the twenty one Centuries an amazing book. Really.
57:51
Speaker 1: I read same guy who wrote Sapiens Schapions, and then
57:54
Speaker 1: Homo which was a little darker than say, and now
57:58
Speaker 1: The Questions in Tours a great book. I'm gonna I'm
58:01
Speaker 1: gonna put that one on my list. The the ken
58:04
Speaker 1: Fileted series, He's had a number of different series, which
58:07
Speaker 1: one you were find both the Piers of the Earth
58:09
Speaker 1: they went about the building of the Cathedral, and then
58:11
Speaker 1: the one that takes him through the Three Wars. I mean,
58:15
Speaker 1: his writing is amazing. I love historic novels. That's really
58:20
Speaker 1: quite interesting. Tell us about a time you failed and
58:23
Speaker 1: what you learned from the experience When I was living
58:26
Speaker 1: in Mexico. I found the smoking withdrawal system from water Peak,
58:33
Speaker 1: so I flew to Fort Collins and negotiated with them.
58:37
Speaker 1: The representation in Mexico brought it to Mexico, and then
58:40
Speaker 1: found out that Mexicans did not want to stop smoking,
58:44
Speaker 1: so it was not a good business. I just thought
58:47
Speaker 1: that I could carry over what was happening in the
58:49
Speaker 1: US new Mexico. And you have to understand local mentality
58:53
Speaker 1: and local desires. Is that still true or Mexicans still
58:57
Speaker 1: big tobacco smokers relative to what it was like thirty
59:00
Speaker 1: years ago. It's lower, but it's much bigger than in
59:03
Speaker 1: the U. S. I mean it's fallen. I grew up
59:05
Speaker 1: in a I've never been a smoker. My parents were smokers.
59:08
Speaker 1: They eventually stopped. But in the United States it's fallen
59:12
Speaker 1: off a cliff like it's like it's almost noteworthy when
59:16
Speaker 1: you see someone in the street with a cigarette. I'm
59:19
Speaker 1: not even talking about vaping an actual tobacco cigarette. It's
59:23
Speaker 1: almost like, you know, a rarity. It's like spotting a
59:26
Speaker 1: wild unicorn. In Mexico, you cannot open your restaurant without it.
59:30
Speaker 1: Darris for smokers, but they're not allowed to smoke in
59:33
Speaker 1: the restaurant proper. That's a smaller part of the restaurant.
59:36
Speaker 1: That's that's amazing. Um. What do you do for fun?
59:39
Speaker 1: You mentioned red wine? What else do you do to
59:41
Speaker 1: stay busy out of the office, traveling, reading, watching sports
59:45
Speaker 1: on TV, and playing some golf? What what sports do
59:48
Speaker 1: you watch? I watch basketball and I watch golf, and
59:54
Speaker 1: my wife says I would watch Jackson if they show
59:57
Speaker 1: the tournament. Um, what has you most excited about the
1:00:02
Speaker 1: bond market these days? What? What are you enthusiastic about.
1:00:05
Speaker 1: I love the idea that emerging market that has become
1:00:08
Speaker 1: an asset class, and almost everybody is not pursuing it.
1:00:12
Speaker 1: We've been at it for thirty years and I think
1:00:14
Speaker 1: one of the stronger firms in the country. On So,
1:00:17
Speaker 1: if a young college grad or millennial came up to
1:00:20
Speaker 1: you and said they were interested in a career in
1:00:23
Speaker 1: fixed income, what sort of advice would you give them?
1:00:27
Speaker 1: Try to go beyond what you're reading the in the financials.
1:00:30
Speaker 1: I mean, reading financials is one thing. Understanding what the
1:00:34
Speaker 1: company does or who runs it is probably more important
1:00:37
Speaker 1: than anything. And our final question, what do you know
1:00:41
Speaker 1: about the world of bond investing today that you wish
1:00:44
Speaker 1: you knew thirty years ago when you first launched the firm,
1:00:49
Speaker 1: that the trend torch lower rates was gonna last thirty years.
1:00:53
Speaker 1: I would have made a ton of money. I would
1:00:55
Speaker 1: have bought only thirty year paper. It wasn't obvious back
1:00:59
Speaker 1: then that this was the start of a three decade
1:01:01
Speaker 1: long bullmarket. No, we were coming out, I mean from
1:01:06
Speaker 1: the Jimmy Carter days with big inflation and globalization had
1:01:12
Speaker 1: not taken over yet, so boom and bust was still
1:01:16
Speaker 1: part of the story of the economy in the US.
1:01:19
Speaker 1: The economy in the US has changed so much, you know,
1:01:21
Speaker 1: it's no longer that globalization. If there's a crisis, all
1:01:26
Speaker 1: you do is called your supplier and say in China
1:01:30
Speaker 1: or in Mexico, and you tell them those ship the
1:01:32
Speaker 1: next six months. You don't have to shut down the plant. Huh.
1:01:35
Speaker 1: Quite quite interesting. We have been speaking to Louise Mazelle
1:01:39
Speaker 1: of LM Capital Group. If you enjoy this conversation, well,
1:01:43
Speaker 1: be sure to look Up an Inch or down an
1:01:45
Speaker 1: Inch on Apple iTunes or wherever you have access to
1:01:49
Speaker 1: this podcast, and you could check out any of the
1:01:51
Speaker 1: other two hundred and fifty podcasts we have broadcast over
1:01:56
Speaker 1: the past five years. We love your comments, feedback and
1:01:59
Speaker 1: SIGG questions right to us at m IB podcast at
1:02:04
Speaker 1: Bloomberg dot net. I would be remiss if I did
1:02:07
Speaker 1: not thank the Crack staff who helps put these conversations
1:02:11
Speaker 1: together each week. My producer slash audio engineer is Medina Parwanna.
1:02:17
Speaker 1: Taylor Riggs and Michael Boyle are our bookers. Attica val
1:02:22
Speaker 1: Brunn is our project manager. Michael Batnick is our head
1:02:25
Speaker 1: of research. I'm Barry Results. You've been listening to Masters
1:02:29
Speaker 1: in Business on Bloomberg Radio