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Argentina Bonds Become Attractive At 40 Cents: Greer · Bloomberg Intelligence

• 0:02
  Speaker 1: Welcome to the Bloomberg Penel Podcast. I'm Paul swing you,
• 0:05
  Speaker 1: along with my co host Lisa Brahma wits. Each day
• 0:07
  Speaker 1: we bring you the most noteworthy and useful interviews for
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  Speaker 1: you and your money. Whether at the grocery store or
• 0:12
  Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
• 0:15
  Speaker 1: podcast or wherever you listen to podcasts, as well as
• 0:17
  Speaker 1: at Bloomberg dot com. The big news of the day
• 0:21
  Speaker 1: certainly China and the US. The other big news is
• 0:24
  Speaker 1: Argentina at the pace so continuing to sell off versus
• 0:28
  Speaker 1: the dollar currently at its lowest weakest level on record,
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  Speaker 1: after the surprise defeat of Mauricio mccli the current president, yesterday,
• 0:39
  Speaker 1: and questions about who will take his place, the fact
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  Speaker 1: that Christina Kirshner could be coming back to power. Joining
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  Speaker 1: us how to talk about how investors have to view
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  Speaker 1: all this is Paul Greer. He's a portfolio manager focusing
• 0:51
  Speaker 1: on emerging markets, debt and fax at Fidelity International. He's
• 0:54
  Speaker 1: joining us from our London studios. Paul, thank you so
• 0:57
  Speaker 1: much for being with me today. The main question is
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  Speaker 1: how much is Argentina a specific story about a country
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  Speaker 1: that has defaulted many times on its debt and how
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  Speaker 1: much does this reflect true risk and emerging markets that
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  Speaker 1: is currently mispriced by debt investors A Lisa and yeah,
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  Speaker 1: I guess with Argentina, you know, clearly it's been that
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  Speaker 1: the story of the week. I think the nature of
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  Speaker 1: the story is quite idiosyncratic in many ways. We had
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  Speaker 1: a very specific primary vote over the weekend, which you
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  Speaker 1: know clearly had an adverse result for investors in Argentinean
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  Speaker 1: debt and currency, and investors have have voted with their feet.
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  Speaker 1: You know, we've seen a pretty sharp sell off in
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  Speaker 1: bonds and in currency markets. I think there's been a
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  Speaker 1: little bit of contusion, certainly yesterday, a little bit today
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  Speaker 1: into the rest of emerging markets. I think it's you know,
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  Speaker 1: maybe quite difficult for investors to exit the Argentinian market
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  Speaker 1: at the moment. It's it's quite a liquid, it's under
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  Speaker 1: a lot of pressure. But I think from here on,
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  Speaker 1: with every passing day, I think for the rest of
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  Speaker 1: emerging markets, in terms of contagion, we'll probably see a
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  Speaker 1: reduced impact in terms of the spill over into the
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  Speaker 1: rest of the market. Clearly, it's going to remain topical
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  Speaker 1: and thematic for Argentina is specifically, but I think we've
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  Speaker 1: probably seen the peak for the rest of EM in
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  Speaker 1: terms of contagion. Well, what is the node of contagion
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  Speaker 1: that we should be looking at? I'm sorry I didn't
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  Speaker 1: In other words, what how how is the contagion expressing itself.
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  Speaker 1: Is it just that investors, if they can't get rid
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  Speaker 1: of Argentinean assets, they're simply selling other high beta emerging
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  Speaker 1: markets securities. Is that sort of the way it's expressed.
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  Speaker 1: Or is it just that you have negative news and
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  Speaker 1: in a big emerging market or one that a lot
• 2:44
  Speaker 1: of people own, and then certain retail investors say, you
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  Speaker 1: know what, I'm not going to go any into EM
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  Speaker 1: or I'm going to yank some funds from my E
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  Speaker 1: M E TF. I think it's exactly that, I mean,
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  Speaker 1: I mean, the two biggest risks with Argentina right throughout
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  Speaker 1: this year have always been politics and positioning, and on
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  Speaker 1: the latter issue, you know, Argentinean dead and currency. You know,
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  Speaker 1: it has been a popular, crowded market in many ways
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  Speaker 1: with investors. Clearly there's been a big draw down in
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  Speaker 1: terms of the performance that's hit you know, investors, funds,
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  Speaker 1: and we've seen a little bit of de risking in
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  Speaker 1: other markets. It's been most acute in Latin America, particularly
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  Speaker 1: on the f X side. I would say, you know,
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  Speaker 1: it's very difficult to sell the Argentinian pesto at the minute.
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  Speaker 1: Liquidity is quite poor. So you know, certainly yesterday we
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  Speaker 1: saw currencies like the Mexican pesso, Brazilian royale, Chile, Columbia,
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  Speaker 1: et cetera come under pressure as investors really look for
• 3:41
  Speaker 1: an option somehow to hedge the risk in Argentina. I
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  Speaker 1: think it worked yesterday, you know, maybe a little bit today.
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  Speaker 1: But with each passing day, I think the Argentinian story
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  Speaker 1: will become increasingly idiosyncratic and it will be harder to
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  Speaker 1: hedge it using, you know, other countries and other markets.
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  Speaker 1: Earlier this year, you wrote a column for the Financial
• 4:01
  Speaker 1: Times where you said that emerging markets are in a
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  Speaker 1: sweet spot, and certainly that came to fruition and returns
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  Speaker 1: with emerging markets debt outperforming us risk of your securities.
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  Speaker 1: I'm wondering, from your perspective, is that sweet spot over?
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  Speaker 1: Have we sort of closed that out? Yeah? I don't
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  Speaker 1: think it's quite over. I mean, if you look at
• 4:21
  Speaker 1: the returns year to did you know sovereign external debt,
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  Speaker 1: you know, we're up twelve and a half percent. Local
• 4:28
  Speaker 1: currency markets were up percent. I think probably the lion's
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  Speaker 1: share of the returns have already come and gone so
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  Speaker 1: far in emerging markets this year, but between nine year end,
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  Speaker 1: we still think there'll be incremental positive returns for for
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  Speaker 1: e M debt investors. I mean, it's it's not a
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  Speaker 1: perfect asset class. We've seen this horrible story in Argentina
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  Speaker 1: over the weekend. You know, em is still suffering from
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  Speaker 1: softening global growth. We've still got the threat of you know,
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  Speaker 1: US trying to cheer trade tarts, etcetera. But you know,
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  Speaker 1: there's there's in lots of parallels with with last year,
• 5:02
  Speaker 1: you know, the big sell off and e M in
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  Speaker 1: summer eighteen, but there are also some notable differences. You know,
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  Speaker 1: the industrate environment globally is a lot more favorable this year,
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  Speaker 1: and we'll be seeing that the Fed and other central
• 5:14
  Speaker 1: banks cut interest rates. So you know, yields have been
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  Speaker 1: falling generally in the G ten world. Investors have been
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  Speaker 1: looking towards emerging markets as summer that has an attractive
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  Speaker 1: yield and a spread that that will offer them them
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  Speaker 1: some returns. So I don't think the sweet story is
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  Speaker 1: that the sweet spot is is quite over. You know,
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  Speaker 1: we're also seeing stimulus from the Chinese authorities as well,
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  Speaker 1: but I think probably most of the returns for nineteen
• 5:41
  Speaker 1: have already been witnessed. Yeah, talking about picking up some
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  Speaker 1: yield and emerging markets. Argentinian A hundred year bonds currently
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  Speaker 1: almost yield fourteen percent. Are you buying? We're not buying now.
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  Speaker 1: We think it pays to be cautious and in the
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  Speaker 1: ear term. As I mentioned earlier, the two biggest risks
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  Speaker 1: this year in argent You for us, we're really politics
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  Speaker 1: and positioning. And politics has clearly played out with the
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  Speaker 1: primary result in Sunday. But the positioning overhang that technical
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  Speaker 1: is it's still quite awkward for investors. It's been crowded,
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  Speaker 1: it's been a popular trade. I think the market still
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  Speaker 1: needs to find a balancing clearing level for for both
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  Speaker 1: bonds and for currencies. So we think that positioning and
• 6:24
  Speaker 1: technical angle will continue to to weigh in Argentina in
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  Speaker 1: the short term and more medium term. It does offer,
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  Speaker 1: you know, an interesting opportunity. The bonds, I guess are done,
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  Speaker 1: you know, points in the last kind of one and
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  Speaker 1: a half days were very quickly moving towards the scenario
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  Speaker 1: where default is you know, getting towards priced in by
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  Speaker 1: the market, with you know, bonds trading below fifty cents
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  Speaker 1: in the dollar today, so you know, a lot of
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  Speaker 1: bad news has been priced in. We think in the
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  Speaker 1: near term bonds are probably at risk of drifting further
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  Speaker 1: lower and by you know, as we get down to
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  Speaker 1: the forties and some of these Argentinean dollar bonds, and
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  Speaker 1: you start to think about recovery values and kind of
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  Speaker 1: the assets that the country has, I think, you know,
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  Speaker 1: over the media in term it could be an interesting opportunity,
• 7:11
  Speaker 1: but but certainly not in the short term. Where else
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  Speaker 1: are you buying just quickly thirty seconds? Yeah, I mean
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  Speaker 1: our highest conviction and e m that at the minute
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  Speaker 1: is on the local currency side. You know, inflation and
• 7:22
  Speaker 1: growth has been falling in a number of countries and
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  Speaker 1: many markets have got you know, steep yield curves and
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  Speaker 1: pretty attractive real yields. So we really like local currency bonds,
• 7:31
  Speaker 1: and you know, countries like China, Russia, Indonesia, Serbia, Peru, etcetera.
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  Speaker 1: Love these countries were expecting to see more interest rate
• 7:40
  Speaker 1: cuts from central banks, and we think the risk premium
• 7:43
  Speaker 1: is is pretty attractive even at these levels. Paul Greer,
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  Speaker 1: thank you so much for spending the time, wonderful speaking
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  Speaker 1: with you. Paul Greers, portfolio manager focusing on emerging markets,
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  Speaker 1: debt and f X for Fidelity International, joining us from
• 7:55
  Speaker 1: our London studios. How do you trade this market? The
• 8:08
  Speaker 1: key question facing so many portfolio managers today. We're going
• 8:12
  Speaker 1: to post that question to Grady Briquette. He's a portfolio
• 8:14
  Speaker 1: manager at diamond Hill Capital Management, joining us here in
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  Speaker 1: our interactive broker studio. So, Grady, one key question here
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  Speaker 1: as markets get whipside, who's trading? Are you out there
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  Speaker 1: actively trading these headlines? Thanks for having me. We're not.
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  Speaker 1: So we take a strategic approach to the portfolio construction.
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  Speaker 1: We my team and I meet on a on a
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  Speaker 1: scheduled basis to decide what we want to buy and
• 8:39
  Speaker 1: what we want to sell, and it's really based on
• 8:40
  Speaker 1: valuation and our expectations for future fundamental fundamentals of each business.
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  Speaker 1: So a day like today, you it's unlikely that you'd
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  Speaker 1: see us make any any big changes, if if any
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  Speaker 1: changes at all. So Diamond Hill Capital Management, overseeing twenty
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  Speaker 1: three billion dollars normally in Columbus, Ohio. Grady, I'm wondering
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  Speaker 1: if you're saying, and so many people are saying, we're
• 9:00
  Speaker 1: not trading this, In fact, we're trading less. Are you
• 9:03
  Speaker 1: trading less due to some of the geopolitical uncertainty and
• 9:07
  Speaker 1: the backdrop of the trade tensions. Well, if we we
• 9:12
  Speaker 1: would trade less if we don't see relative valuation opportunities.
• 9:16
  Speaker 1: If we saw relative evaluation opportunities emerge as a result
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  Speaker 1: of these issues, then we might allocate more. So, for instance,
• 9:23
  Speaker 1: if we saw China become relatively attractive compared to Europe
• 9:27
  Speaker 1: or some of the other markets, we might start to
• 9:29
  Speaker 1: allocate more to China. Right now, we have a larger
• 9:31
  Speaker 1: allocation to the UK because first a couple of years now,
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  Speaker 1: we've we've felt that the valuations in the UK attractive.
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  Speaker 1: But on a day to day basis, we're gonna we're
• 9:39
  Speaker 1: gonna step back and breathe and uh and look and
• 9:42
  Speaker 1: make sure that we're comfortable buying more of the businesses
• 9:44
  Speaker 1: that we own as they get cheaper. So when did
• 9:46
  Speaker 1: you start buying UK? Oh? We started? We we we've
• 9:49
  Speaker 1: We've always allocated the UK since the funds inception. Um,
• 9:53
  Speaker 1: but we we we I'd say we increase the weight
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  Speaker 1: over time right after the initial vote to to leave
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  Speaker 1: the European Union, and how how are you accessing it
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  Speaker 1: with bonds? Stocks? So we're so in the international fund,
• 10:06
  Speaker 1: we're all equity, all equity. And one thing that you
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  Speaker 1: mentioned in a note recently was it's reasonable to expect
• 10:11
  Speaker 1: seven to nine percent annualized returns for global equities over
• 10:16
  Speaker 1: the next ten years. I'm wondering how that can be
• 10:20
  Speaker 1: given the fact that so much of the growth has
• 10:23
  Speaker 1: already been front loaded, priced in, and sort of juiced
• 10:26
  Speaker 1: by the central banks. Do you ever get pushed back
• 10:29
  Speaker 1: on that that that yield target? I just did from
• 10:32
  Speaker 1: one of my colleagues when I presented it to you.
• 10:34
  Speaker 1: All right, so what did you say? Well, so my
• 10:37
  Speaker 1: answer is, right now, when I look at our portfolio,
• 10:39
  Speaker 1: and I'm using our portfolio as a proxy for for
• 10:41
  Speaker 1: global equities because we are global portfolio, the dividend yield
• 10:45
  Speaker 1: right now is about two point six percent. I think
• 10:47
  Speaker 1: the valuations are reasonable now, some some markets are more
• 10:51
  Speaker 1: valuations are more stretched than others. I would argue the
• 10:53
  Speaker 1: US is one of the more stretched markets in terms
• 10:55
  Speaker 1: of just statistical valuation. UM. But I think that you
• 10:58
  Speaker 1: get three percent uh real GDP growth, and you get
• 11:02
  Speaker 1: a couple of percentage points of earnings growth on top
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  Speaker 1: of that through share by backs, that operating efficiencies. So
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  Speaker 1: you've got five percent on the on the earnings growth potential,
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  Speaker 1: and then you've got another two at two point six
• 11:13
  Speaker 1: percent DIVEN yields. That's that's right at eight percent. The
• 11:16
  Speaker 1: idea of predicting out ten years at a time of
• 11:19
  Speaker 1: you know, tweets and things moving uh really quickly depending
• 11:23
  Speaker 1: on the headline of the day is mind boggling. And
• 11:26
  Speaker 1: I wonder how sensitive your returns prediction is to a
• 11:30
  Speaker 1: trade deal or some sort of kind of global order
• 11:34
  Speaker 1: staying the same way that it is right now. So
• 11:36
  Speaker 1: again this is this is my base case, and so
• 11:38
  Speaker 1: there's certain enter tails around that and you can see
• 11:40
  Speaker 1: return and we have seen historical returns be much higher
• 11:43
  Speaker 1: and much lower. UM. I think that if you get
• 11:46
  Speaker 1: a negative sentiment in the market that compresses valuations, than
• 11:48
  Speaker 1: our forward tenure return would be higher. And if you
• 11:51
  Speaker 1: get positive sentiment that causes valuations to stretch further than
• 11:54
  Speaker 1: there are today that I would expect my return expectations
• 11:57
  Speaker 1: to go down, but on a tenure basis, it's more
• 12:00
  Speaker 1: about the current dividend yield and earnings growth expectations. Do
• 12:03
  Speaker 1: you expect a recession anytime soon? I think within the
• 12:06
  Speaker 1: tenure time frame that I mentioned, But in the next
• 12:09
  Speaker 1: and the next day, in the next year, uh, potentially
• 12:13
  Speaker 1: earnings some earnings pressure, but but a true recession, global recession,
• 12:17
  Speaker 1: I don't personally see it. What about emerging markets? I
• 12:19
  Speaker 1: think emerging markets can be attractive. The way that we
• 12:22
  Speaker 1: typically access that is through developed market companies that have
• 12:25
  Speaker 1: strong exposure to emerging markets. So like a b NBEV Ashmore,
• 12:29
  Speaker 1: which is a UK asset manager that's emerging market debt
• 12:32
  Speaker 1: manager UM Diagio and so we understand that we're out
• 12:35
  Speaker 1: on the ground and emerging markets as a team, so
• 12:38
  Speaker 1: we want to access companies with good management teams who
• 12:40
  Speaker 1: have people on the ground to understand those markets well.
• 12:43
  Speaker 1: Any areas you're absolutely avoiding well UM. Fortunately we haven't
• 12:47
  Speaker 1: been allocated to Argentina on a direct basis, although we
• 12:49
  Speaker 1: do have exposure through COPA Airlines. They have seven percent
• 12:52
  Speaker 1: of the revenue from Argentina. UM any market where we
• 12:55
  Speaker 1: see very high inflation and unstable political environments, we tend
• 12:58
  Speaker 1: to tend to avoid. Great cat Thank you so much
• 13:00
  Speaker 1: for being here. Grady brick Hats, portfolio manager at Diamond
• 13:03
  Speaker 1: Hil Capital Management, overseeing twenty three billion dollars, joining us
• 13:08
  Speaker 1: here in New York. Try to check in with Bloomberg Opinion.
• 13:22
  Speaker 1: We're joined by the Bloomberg Opinion Commnst. Max Neeson. Uh.
• 13:25
  Speaker 1: There have been recent proposals out of the Trump administration's
• 13:29
  Speaker 1: headquarters that perhaps the way to lower prices on prescription
• 13:33
  Speaker 1: drugs in the United States is simply to import drugs
• 13:36
  Speaker 1: from Canada. Can you just give us a little bit
• 13:38
  Speaker 1: more about the proposal. Yeah, absolutely so. It's basically a
• 13:42
  Speaker 1: two part proposal, One that that states and wholesalers and
• 13:45
  Speaker 1: pharmacies can apply to HHS to basically give them a
• 13:50
  Speaker 1: proposal for importing certain subsets of drugs from Canada, which
• 13:55
  Speaker 1: has lower prices than we do, if they can prove
• 13:57
  Speaker 1: that it's going to be safe for consumers for them
• 13:59
  Speaker 1: to do so. The other one, which is a little
• 14:01
  Speaker 1: bit more puzzling, is that drug makers would be able
• 14:03
  Speaker 1: to import their own medicines from another country. That part
• 14:07
  Speaker 1: I basically ignore because it doesn't make any sense to me.
• 14:10
  Speaker 1: But um, the issue, as always with drug pricing is
• 14:14
  Speaker 1: that although this sounds good, you know you have lower
• 14:17
  Speaker 1: price in an other country. If you bring those drugs in,
• 14:19
  Speaker 1: it's good for consumers, it brings in competition, it brings
• 14:23
  Speaker 1: the price down. But it's it's more complicated because in
• 14:26
  Speaker 1: order to actually do this, you need Canadian wholesalers and
• 14:29
  Speaker 1: the government of Canada to cooperate, and they have no
• 14:33
  Speaker 1: incentive whatsoever to do So why not more business, more
• 14:36
  Speaker 1: profits because they depend on on drug makers to actually
• 14:39
  Speaker 1: provide those medicines, and the price differential in the US
• 14:45
  Speaker 1: is basically the most valuable thing in the world for
• 14:48
  Speaker 1: the pharmaceutical industry, the fact that they can charge higher
• 14:51
  Speaker 1: prices here. They will do whatever they can to preserve it.
• 14:54
  Speaker 1: And if that means basically cutting off drug supply for
• 14:58
  Speaker 1: Canadian wholesalers that that start importing drugs in the United States,
• 15:02
  Speaker 1: they may very well do so. Um. So you know,
• 15:05
  Speaker 1: they really relies on drug makers to cooperate in a
• 15:08
  Speaker 1: scheme that would cost them money in the long run,
• 15:12
  Speaker 1: and I don't I don't expect them to do that. Yeah, Max,
• 15:15
  Speaker 1: here's what I'm struggling with. We have been talking about
• 15:17
  Speaker 1: prescription drug prices for decades, right, I mean, this has
• 15:20
  Speaker 1: been an issue for a really long time. Why has
• 15:23
  Speaker 1: there been no material progress and coming up with some
• 15:26
  Speaker 1: way to lower drug prices while continuing to encourage uh
• 15:32
  Speaker 1: innovation within the pharmaceutical industry. I think it's because there's
• 15:37
  Speaker 1: such a lobby on the second part of that thing
• 15:40
  Speaker 1: where or it's become sort of this perceived wisdom for
• 15:43
  Speaker 1: for a lot of politicians that anything you do to
• 15:47
  Speaker 1: to bring down drug prices is going to irrevocably and
• 15:50
  Speaker 1: harmfully impact innovation. The reality is is probably something a
• 15:55
  Speaker 1: little bit different, and and the problem is, in order
• 15:57
  Speaker 1: to actually bring prices down, you really do have to
• 15:59
  Speaker 1: make big structural change. You need to do what every
• 16:03
  Speaker 1: other developed country in the world does, which is make
• 16:06
  Speaker 1: drug approval conditional on and pricing conditional on the value
• 16:10
  Speaker 1: it brings to patients, as opposed to the system we
• 16:13
  Speaker 1: have right now where negotiating power is so fragmented that
• 16:16
  Speaker 1: that that sort of fundamental market action that the real
• 16:20
  Speaker 1: competition only happens in limited ways and is specifically prohibited
• 16:25
  Speaker 1: from happening in certain government programs. So it's just a mess,
• 16:28
  Speaker 1: and there has to be a kind of a fundamental
• 16:30
  Speaker 1: shift in in mindset and ambition that's just not happening
• 16:34
  Speaker 1: right now. Max. When I talked to a lot of
• 16:36
  Speaker 1: investment managers right now, they say that because of the
• 16:39
  Speaker 1: trade wars, because of what's going on with geopolitical uncertainty,
• 16:43
  Speaker 1: they are piling into healthcare shares in the United States
• 16:47
  Speaker 1: because they see that as immune to some of these
• 16:50
  Speaker 1: tensions and immune to a potential downturn. People still have
• 16:54
  Speaker 1: to spend on their healthcare. Do you think that the
• 16:57
  Speaker 1: outlook for healthcare companies right now it's pretty positive or
• 17:01
  Speaker 1: do you think that perhaps people are overlooking other issues
• 17:04
  Speaker 1: that are facing some of these companies. I think in
• 17:07
  Speaker 1: the near to midterm, and and kind of in a
• 17:10
  Speaker 1: general macro sense, they're They're probably right in the sense
• 17:13
  Speaker 1: that we're not going to see a significant health reform,
• 17:16
  Speaker 1: which is kind of the health or drug press reform,
• 17:19
  Speaker 1: which is the real only real threat to that sort
• 17:21
  Speaker 1: of thesis, at least until you know, the after the
• 17:25
  Speaker 1: next election, and who knows that how that's going to
• 17:28
  Speaker 1: go in the first place. Um, you know, the things
• 17:30
  Speaker 1: that we're seeing out of the sentence out of Congress
• 17:32
  Speaker 1: right now, would definitely have an impact on on drugmakers
• 17:36
  Speaker 1: and potentially on providers as well. Speaking about UM, basically
• 17:39
  Speaker 1: an effort to reform how Medicare pays for drugs and
• 17:43
  Speaker 1: to crimp surprise bills from from hospitals. But those are
• 17:47
  Speaker 1: all sort of incremental changes, especially when compared to the
• 17:51
  Speaker 1: more ambitious reform efforts you're you're just seeing proposed by
• 17:54
  Speaker 1: by Democrats that are running for president UM. In order
• 17:58
  Speaker 1: to kind of pass those those larger efforts at reform,
• 18:01
  Speaker 1: they basically have to throw put aside any other political
• 18:04
  Speaker 1: priority and also have a very specific outcome in Congress
• 18:10
  Speaker 1: as well in the next year's elections. So they may
• 18:12
  Speaker 1: not be too far off. It's cynical, but but they
• 18:14
  Speaker 1: may be right. And just real quick here in general,
• 18:17
  Speaker 1: is the idea that healthcare companies are somewhat recession immune.
• 18:22
  Speaker 1: Is that accurate? It historically has been the case. You know,
• 18:27
  Speaker 1: as you said, you know, people are going to get
• 18:29
  Speaker 1: sick no matter what. People are going to have to
• 18:31
  Speaker 1: pay for healthcare no matter what. And at the end
• 18:34
  Speaker 1: of the day, there are there are these sort of
• 18:36
  Speaker 1: safety net programs that even if people do lose their
• 18:39
  Speaker 1: jobs or lose some part of discretionary income, they're they're
• 18:43
  Speaker 1: going to fall back on those There there is at
• 18:46
  Speaker 1: the margin an impact. You know, there's more uncompensated care.
• 18:49
  Speaker 1: People choose to you know, not fill prescriptions that they
• 18:53
  Speaker 1: might otherwise feel if they they were seeing you know,
• 18:55
  Speaker 1: they had jobs that they were seeing wage growth. But
• 18:57
  Speaker 1: you know, relative to other parts of the economy, when
• 19:01
  Speaker 1: when things go badly, healthcare does does generally turn out
• 19:04
  Speaker 1: to be a lot safer. Max Neeson, thank you so
• 19:06
  Speaker 1: much for being with us today. Max Neeson is biotech, pharma,
• 19:09
  Speaker 1: and healthcare columnist for Bloomberg Opinion. Read all his columns,
• 19:13
  Speaker 1: They're fantastic. You can read them at O. P I
• 19:15
  Speaker 1: N Go on the Bloomberg or you can read them
• 19:18
  Speaker 1: at Bloomberg dot com Slash Opinion. Right now, we are
• 19:32
  Speaker 1: talking so much about the shift from active fund management
• 19:36
  Speaker 1: to passive fund management at a time of index outperformance,
• 19:41
  Speaker 1: but there really is a more important question, which is
• 19:43
  Speaker 1: what's behind this shift? And joining us now Michelle Sites
• 19:47
  Speaker 1: She's chairman and chief executive officer of Russell Investments, which
• 19:50
  Speaker 1: oversees two hundred and ninety billion dollars of assets. Michelle
• 19:54
  Speaker 1: joins us here in our eleven three oh studios or
• 19:57
  Speaker 1: interactive broker studios. Michelle, I want to pull this to
• 20:00
  Speaker 1: you because I think it's more important to view this
• 20:03
  Speaker 1: shift in light of the drivers than it is the
• 20:06
  Speaker 1: shift itself. So what do you think is behind the move?
• 20:09
  Speaker 1: Right well throughout my career, but also at Russell Investments,
• 20:13
  Speaker 1: you know, the touchstone always is the clients and whatever
• 20:17
  Speaker 1: the client's problems are or where the industry is going
• 20:20
  Speaker 1: to go. And so at the moment, the problem is
• 20:23
  Speaker 1: more people are concerned about going broke than they are dying.
• 20:27
  Speaker 1: We're living longer, and we have a massive underfunding of
• 20:30
  Speaker 1: pension plans. dB plans are being frozen or shut down
• 20:34
  Speaker 1: going to d C. So you have this massive shift
• 20:38
  Speaker 1: from institutions providing for retirements to individuals having to provide
• 20:43
  Speaker 1: for their own retirements. That is driving down in a
• 20:46
  Speaker 1: low return environment, driving down the costs of what we've
• 20:51
  Speaker 1: all we all used to do. And so that is
• 20:54
  Speaker 1: a byproduct passive to active. Active from passive, etcetera. Is
• 20:59
  Speaker 1: a byproduct of really trying to solve a root problem,
• 21:02
  Speaker 1: which is the retirement crisis. So some people would turn
• 21:05
  Speaker 1: that on its head and say, as people get more
• 21:07
  Speaker 1: aware of the income that they get, they become more
• 21:10
  Speaker 1: aware of the fees they're paying out, and because they're
• 21:13
  Speaker 1: not able to necessarily prove outperformance, some of these active
• 21:17
  Speaker 1: funds investors are fleeing. Do you think that that narrative
• 21:21
  Speaker 1: is accurate? That simply put, Yes, as people get more
• 21:24
  Speaker 1: focused on the fact that they've got to make money
• 21:26
  Speaker 1: on their money, they realize that the human managers aren't
• 21:30
  Speaker 1: aren't doing the job. Yeah, no, that's that's a very
• 21:32
  Speaker 1: accurate depiction as well. Uh, the focus is increasingly on
• 21:36
  Speaker 1: the returns that are needed in order for people to
• 21:39
  Speaker 1: be able to retire well. And so as the focus
• 21:42
  Speaker 1: goes on that, as returns are lower, and the percent
• 21:46
  Speaker 1: of the return that we're taking and fees collectively as
• 21:50
  Speaker 1: an as an industry needs to go down. Right, When
• 21:53
  Speaker 1: you have double digit returns and the average fee is
• 21:56
  Speaker 1: one percent or whatever it might be, that's one thing.
• 21:59
  Speaker 1: When you have a goal digit returns and it's still
• 22:01
  Speaker 1: one percent, that's a very different thing. So what do
• 22:04
  Speaker 1: you advise clients as the sort of risk reward factor
• 22:08
  Speaker 1: becomes so tenuous where people are less worried about dying
• 22:12
  Speaker 1: than they are about just making enough money to survive
• 22:15
  Speaker 1: for the thirty years after the retirement. How do you
• 22:17
  Speaker 1: advise clients this late in the credit cycle, right, Well, well,
• 22:21
  Speaker 1: there's a structural change going on in the industry, which
• 22:25
  Speaker 1: is this gap uh and the need to be focused
• 22:28
  Speaker 1: on outcomes and solutions that are tailored to individuals. And
• 22:31
  Speaker 1: then there's the amplification of the cyclical, which is what
• 22:35
  Speaker 1: you're talking about, which which is the this long in
• 22:38
  Speaker 1: the cycle, there's going to be risk two returns as well,
• 22:41
  Speaker 1: So that's an amplification, but the structural problem will still
• 22:45
  Speaker 1: be here, and so focus is first and foremost on
• 22:49
  Speaker 1: the liability that you're trying to cover, and so our
• 22:53
  Speaker 1: work with our clients, through intermediaries and through advisors is
• 22:57
  Speaker 1: to make sure that people understand the liability, how to
• 23:00
  Speaker 1: get their cost effectively, and how to make sure that
• 23:03
  Speaker 1: they measure not a benchmark relative performance. You can't retire
• 23:08
  Speaker 1: on a benchmark. You have to retire on absolute returns.
• 23:11
  Speaker 1: That's the key focus. We're speaking with Michelle Sites, chairman
• 23:14
  Speaker 1: and CEO of Russell Investments over seeing two billion dollars
• 23:18
  Speaker 1: in assets. We were talking about the expected return rate
• 23:22
  Speaker 1: that individual investors should target. And I think it's important
• 23:25
  Speaker 1: when you talk about the mix between stocks and bonds
• 23:27
  Speaker 1: and how much risk to take on, what is appropriate
• 23:30
  Speaker 1: for individuals to expect over the next ten years? Right, Well,
• 23:33
  Speaker 1: I love this question because we're all different. And target
• 23:38
  Speaker 1: date funds, which were a great invention and have been
• 23:42
  Speaker 1: a great default option, assumed that everyone at the same
• 23:45
  Speaker 1: age as exactly the same and should have the same
• 23:48
  Speaker 1: target return. We believe that that's not not effective, not enough.
• 23:53
  Speaker 1: It's effective, but not enough. And so what we're espousing
• 23:59
  Speaker 1: and really put in and implementation mode is personalized retirement
• 24:03
  Speaker 1: accounts where we take every data point that we can
• 24:05
  Speaker 1: for you and virtually create many define benefit plans for
• 24:10
  Speaker 1: each individual, how how old you are, how long you're
• 24:13
  Speaker 1: going to work, what your gender is, what your salary is,
• 24:16
  Speaker 1: what your income needs are, and so that it's less
• 24:19
  Speaker 1: about a target return, it's more about customizing around your
• 24:23
  Speaker 1: unique your unique attributes and what the outcome is that
• 24:27
  Speaker 1: you need. How far are we in this shift from
• 24:29
  Speaker 1: active to passive? I mean, how far in the transformation? Um? Well,
• 24:35
  Speaker 1: first of all, we we do believe that active is
• 24:37
  Speaker 1: a critical part of the ecosystem of capital markets. So
• 24:41
  Speaker 1: we believe in active, UM, we do need to deliver
• 24:44
  Speaker 1: active more consistent for a value price point that's uh
• 24:48
  Speaker 1: in line with the value derived for the clients. So
• 24:52
  Speaker 1: agreed on all of that. But but I would say
• 24:55
  Speaker 1: there have been a lot of studies. I don't know
• 24:56
  Speaker 1: that fifty fifty is uh the exact right talents. It
• 25:00
  Speaker 1: could be uh that the majority of investing is done
• 25:05
  Speaker 1: through index and systematic and factor investing UM, but it's not.
• 25:09
  Speaker 1: It's not ever going to stamp out the value that
• 25:12
  Speaker 1: active brings to the equation. Just real quick here, I'm
• 25:15
  Speaker 1: just trying to understand going forward with the next step
• 25:19
  Speaker 1: is in terms of the evolution of the asset management industry.
• 25:23
  Speaker 1: I mean, what's sort of the next thing we should
• 25:24
  Speaker 1: be talking about. Yeah, so I think absolutely the next shift.
• 25:28
  Speaker 1: It's a major pivot. The pivot is from managing money
• 25:32
  Speaker 1: primarily for institutions to making sure that we're managing money
• 25:36
  Speaker 1: for the end individual so that we can do mass
• 25:39
  Speaker 1: customization at scale and it's much more tailored. The second
• 25:44
  Speaker 1: major pivot is to alternative asset classes. Michelle Sides, Chairman
• 25:47
  Speaker 1: and CEO of Russell Investments, Thank you so much for
• 25:50
  Speaker 1: being with us. Thanks for listening to the Bloomberg P
• 25:53
  Speaker 1: and L podcast. You can subscribe and listen to interviews
• 25:56
  Speaker 1: at Apple Podcasts or whatever podcast platform you prefer. Paulse Sweeney,
• 26:00
  Speaker 1: I'm on Twitter at pt Sweeney. I'm Lisa Abram Wohits.
• 26:03
  Speaker 1: I'm on Twitter at Lisa Abram Wohits. One before the podcast,
• 26:06
  Speaker 1: you can always catch us worldwide on Bloomberg Radio