Bloomberg Businessweek Weekend - September 20th, 2024

This is Bloomberg Business Week inside from the reporters and editors who bring you America's most trusted business magazine, plus global business, finance and tech news. As it happened this Bloomberg Business Week with Carol Messer and Tim Stenebeck on Bloomberg Radio.

Hi, everyone, Welcome to the weekend edition of Bloomberg Business Week. Tim is off this week, and just before the FED decided to cut rates by fifty basis points, I headed out west to Huntington Beach, California for the future Proof Festival. It's a gathering of the wealth management ecosystem, so financial advisors, wealth management execs, and limited partners talking about trends impacting

So we are all we're all definitely thinking about the elections. It's a big election. It's a very close election. But I'll make a couple of points. You know, the presidency is clearly extremely important, but Congress is very important to get a lot of things done, you know, or not done, because the twenty seventeen tax cuts are likely to expire if Congress doesn't do anything. So beyond the presidency, we're looking at the Senate races, the House races, So the

So there's a lot. But I would Saylely.

Did say for independence, you really are concerned.

I am a little concerned.

I mean, we've seen this little bit before, and I think now with the fact that the FED was late in hiking rates, are they going to be late in cutting rates? They're about to embark on a cutting cycle. And if we have the President or Congress talk too much about what about FED policy. It's not great to inspire conference in the US capal markets, and we need we need foreign investments. And as the FED cut rates, I actually think foreigners will look at US fixed income,

So the FED has taken rates high enough that money market funds are yielding over five percent. They now stand over six trillion dollars. That's a lot of money. What happens as the FED begins to cut rates, where does that capital go looking for yield?

Sure?

And that's the question I would say every asset management person, every wealth manager, is salivating at the.

Thought of that six trillion.

Historically, that money does move once the FED starts to cut rates, starts to move first into fixed income and then into risky assets. But here's the catch. We're in a soft landing, and soft landing rate cuts are rare, So can we apply the Historically the FED is cutting in a recession, so the money moves into fixed income because well, equities might look a little scary this time around if the soft landing is maintained, and that's a that's an if. I think there's a case we're in

We have a chance.

It's a narrow path, but I think there's a chance we stay there. I think that money moves into different asset classes, not all of it. There is a reason people own cash, liquidity, cash management, but a certain portion of it, especially as you realize that there's reinvestment risk. That money is not going to stay at five percent. As the FED cut rates and forwards are arguing for a little below three percent, that cash is going to

If the FED is starting on a longer cycle of rate cuts, and some people have talked about high three low four percent, is where they end up, what do you do with your duration? Where do you want to have your bonds? What sort of longevity you're looking for in the whole things.

Sure, I think bonds finally give you income. So I joke that fixed income finally has income in it, which.

Is good real income.

You know, not only are you getting that nominal income, but net of inflation, you're actually earning real returns. The other thing bonds are giving you is diversification, which you talked about twenty two is the opposite of diversification. Because risk assets struggled and bond struggled. That's changed. And actually

That was Priamsra, portfolio manager of Global fixed Income, Currency and Commodities at JP Morgan Asset Management. We got another take on the investing environment from Sarah Mallik. She's chief investment officer and head of Equities and fixed Income of Nuveen Asset Management, one of the world's largest investment managers with one point two trillion dollars in assets under management. She is also president of Nouveene Equities and Fixed Income and a member of the executive management team.

Let's start with technology.

I think July tenth was an important day for tech stocks acts where in second quarter earnings people decided they weren't good enough. So even with Nvidia and there are one hundred and twenty two percent revenue growth in this second quarter, these socks had gotten crowded.

And it just wasn't good enough and stock started.

Sound crazy in your view, Well, it just you know, it's tough to say what's really priced in in terms of artificial intelligence. And I think what people are really waiting for, though, is some signs of return on investment or monetization from all these huge AI investments that companies have may and in any cycle where we're in this ultra growth cycle, you're not just going to see that immediately.

No more delays from Blackwell.

And also, you know, the stock is not incredibly expensive, so I think that could also be another reason why Video does eventually bounce off the bottom and go up. But in the meantime, probably training range of one hundred, one hundred and forty.

Okay, you know, we're almost done with September. We're coming up on you know, Q three earnings. By every estimate that looks like we're going to be at or near record earnings. Isn't that what's going to drive stock prices high?

Well, before we get to those third quarter earnings, let's talk about being almost done with September, because it is the middle of September. For the past four years in a row, the second half of September has seasonally.

Been the worst two weeks of the year for the stock market.

Earnings have been strong.

And even if a recession is coming, and we are in that camp, but the recession east to camp, as Bob was talking about earlier today on my panel, you know, the earnings are not showing that yet employment markets are still reasonably strong, consumer's showing some signs of cracking. So I think we're okay for now, but we do have the last two weeks of September to contend with.

I got to ask a question because every time someone says the FED knows something we don't know. The FED didn't know inflation was coming they were eight. The FED didn't know inflation was peaked. They were eight. What do

Well, I agree with you on the FED being cautious. Economy is slowing, but it's not on the precipice of a recession. But on the second part of you know, I guess it has a little bit more to do with if the Fed sneezes of the rest of us catch a cold. It's not necessarily do they know a recession is coming. It's that if they're so concerned about it, should the rest of the world be concerned about it? You have an SMP that's trading around fifty six hundred.

So my favorite question anytime we're talking about the FED is what's the terminal rate? Where did they end up when everything is said and done.

I think that's the challenge.

So, first of all, this year, so intellection, your FED tends to do more rather than less, So that's another reason I think they start slowly. You might get one or two more rate cuts by the end of this year. Then it just depends on are we going to get that recession that we've now talked about for two years straight or not. I think that we are. If we get to that, then I think we get multiple rate cuts next year.

So our view is they start.

Off a little bit slow, maybe more slowly than.

The market expects, but then they start to accelerate as employment markets really crack and the consumer continues to slow, and then you know, we get to a level where you know, depending on the level of the recession. You know, then we'll sort of see where the FED finally ends up in terms of its terminal rate.

Is there a trade that we should be talking about.

I think we should first of all, Okay, so fixed income tends to outperform equities into twelve months after rate cuts, so we should be talking about fixed income. Secondarily, I think we should be talking about quality overall, if we are going into this recession, companies with strong balance sheet, companies with the ability to continue to grow their dividends.

And provide income for investors.

Also, rate sensitive sectors like reats, which tend to have lagged for the two years as a FED raise rates, reach should outperform as a FED cuts rates. So looking for this is a little different than what we've been thinking about last years has been about who can survive rate hikes, who can survive ultra high inflation. Now we're thinking about who performs well during rate cuts, Which companies might will be able to survive some form of a recession.

So you mentioned some consumers are showing signs of cracking. A lot of the bottom half of the economy is reliant on credit cards. If we see rate cuts, does that start to alleviate some of that pain.

I think it could.

Already we're seeing we are seeing consumer delinquencies pick up. Second quarter earnings companies were not super optimistic on the consumer rate cuts I think.

Will help, But the question will be will it be enough? Is it too little?

Too late?

I think given what you already, what we've experienced in terms of rate hikes for the last couple of years, and the fact that we think the FED starts slowly, I'm not sure that a couple of rate cuts is enough to get us into the soft landing camp that we all hope for.

All Right, I was going to ask you what's the big risk that we have to worry about? Five seconds? What's the big risk?

Probably geopolitics, one that we're not talking about as much anymore, and you know, will that bubble up in any of the you know, unfortunately where it's happening. I think, you know, non US markets are something that people aren't talking that much about right now.

That's Sarah Malak, chief investment officer and head of Equities and fixed Income of New Veen Asset Management. You're listening to a special edition of Bloomberg Business Week featuring our favorite conversations from the future Proof Festival coming up. What happens when you focus on academic research, often drawn from Nobel laureates, and plow that into investment strategy. We find out from a firm that does just that. That's next on Bloomberg BusinessWeek.

Question please see is Bloomberg Business Week with Carol Messer and Tim Stenebek Bloomberg Radio.

I'm Carol Master along with Barry Ripholtz in for Tim this week. He of course is the host of the Masters in Business broadcast and podcast on Bloomberg. Our coverage of the future Proof Festival this past week in Huntington Beach, California continues. We were both there with Marlena Lee, global head of Investment Solutions at the registered investment advisor Dimensional Investing, which has seven hundred and forty billion dollars in firm

Of mind from the very beginning.

Our founders were actually folks who worked on some of the very first index funds and they kind of really liked some of the ideas that were coming out of the academic research around different drivers of expected return, but also just that flexibility has value. So from our very beginning we had these ideas that, hey, you want really low cost diversified portfolios that an index fund would give you, but you do leave money on the table when you

So we have I think five Nobel.

Laureates that are associated in some way with the firm, either through as academic consultants, advisors to the firm, or on the fun board, so representing our investors in the fund. And they all joined and got involved before they want their Nobel laureates, so really deep academic ties. Yes, absolutely right, Barry. That our very first fund was focused on this small cap premium that was well before smart beta or factory investing.

Was your original smart beta so well.

I like to call it pioneers of factor based investing. You know, we're absolutely the first value came on the scene. Of course, right as Fama and French were writing their three factor model paper. These days we're looking at profitability adding that to the lineup. Profitability is a fantastic compliment for value because those premiums tend not to show up at the same times. So we do think that when you build a portfolio that focus on both, you can help smooth out the ride.

You are a teaching assistant, right for Eugene Fama, I was tell us at how did that shape you? Or tell us a little bit about that experience.

Oh my gosh, it was the best experience. I would have done it for free. Yeah, I was a Belle laureate.

He wasn't at the time, right, but he did become so.

Before arriving at Dimensional, I was doing my PhD at the University of Chicago, studied under Professor Fama, and then became his teaching assistant. And when I told him, he was also on my dissertation committee. And when I told him I didn't really want to do the academic thing, he was so kind because my other advisors they tried

You an environment where trades move so quickly and react to day to day news events, whether it's company stock specific or just macro specific, that when you really understand the deep research behind something right, you can have a lot more conviction behind an investment, whether to buy or sell.

Yeah.

Absolutely, I think that we are most investors are investing for decades. Yeah, and we should have a decade long investment horizon.

And the research speaks to dec its long of.

Patterns and data as opposed to like what's going to happen tomorrow or what's going to happen in the you know, in the next few months.

You're essentially an academic at heart. What's the most interesting new research you're finding that might eventually become some form of real life application of theory.

Well, there's always little improvements that we can make, but I would say profitability was the last really big one. Some people might think of it as quality, and once you capture profitability, a lot of those other variables, they're not important.

For explaining it over revenue growth.

Well, revenue growth, so we it's just so funny we talk so much about the importance of like growing your business because profitability great profits you can play around with.

Well, let's let's back it up and just talk about why profitability should help explain returns in the first place.

When you invest in a company, you.

Get future cash flows and it's all discounted back to a price today.

That's the stock price.

That discount rate is the expected return.

So what we want is we don't get to look up the expected return in Bloomberg.

Instead, we have.

To infer it from two variables that we can sort of see. We definitely get to see price today, but we don't get a perfect view.

Of those expected future cash flows.

But it turns out today's profitability just levels our pretty dang good predictor of those profits several.

Years out into the future.

The most the most profitable companies today tend to stay the most profitable companies for many years now. Profitability growth is another aspect that does help a little bit, but the most important one to capture is the level of profits. And then the challenge with profitability growth is it does introduce a lot of additional turnover. So it's something that

Yeah, so I want to unpack why profitability has persistence into the future and what's so different from just profits because most people think of pe as their measure, but profitability means it's a company that sometimes has a moat and a strategic advantage that they're not carrying a lot of debt that can eventually eat into future profits. What other elements are you looking at that explain why profitability tends to persist out into the distance.

That's a fantastic question, Barry, because actually, across a lot of different measures of profitability, you see that companies with higher profitability have higher returns than companies with low profitability. That's you can look at a very top line number like revenues, you can look at net income, so at the very bottom it all helps create spreads and returns. So that's really important because it gives you a better

That is something that is stable enough where.

We can run a portfolio that focuses on high profitability. Names in a portfolio without a lot of turnover.

Is there an overlap between profitability and momentum or is that just something completely different?

It turns out to be different.

The thing that's more related to momentum or price momentum, which is what we usually think of as momentum, is earning's momentum is related.

So Robert Novemarks.

Did have a paper a few years back where he showed that those two things are quite related.

We do take account momentum in.

The portfolios as well.

But the thing with momentum, just like I was saying with profitability growth, is that it does tend to have high turnover.

If you try to pursue it directly.

So a better way to take advantage of momentum is if you're already managing a portfolio. Let's just say that's pursuing size, value profitability. You want to trade a little bit every day in order to make sure you're focused on those premiums, not introducing style drift into the portfolios. But you can take into account something like price momentum

Just I just want to follow up with that because I understand the way we use dimensional funds in our shop. I understand the way they operate. But I want you to clarify something because I don't want people to misunderstand what you say. What you said, It's not that you think you have to trade every day for the sake of trading. You what I The way I know the way you guys have run various funds are you are opportunistically looking for your time and place to pick up

Am I? Am I doing that?

Any justice?

So great?

That's absolutely right. When I say we look to trade every day.

The turnover in our portfolios are is very low, So a core portfolio might have something in the high single digits. A higher, more narrow portfolio like a small value portfolio, for example, might be somewhere between twenty to thirty percent turnover.

But the daily rebalancing.

Also just gives us a lot of flexibility.

So those are index like levels of turnover, like passive indices like level of turnover right, But whereas an index might try to drive all of that turnover into defined reconstitution dates once to four times per year, we can spread it across two hundred and twenty trading days a year, which makes it really easy to control training costs.

More.

Does the macro play into this?

You know, I would love to be able to say here's when the premiums are going to be higher or lower, but the data is just too noisy. So we view, at least in these equity portfolios, we want to be focused on these premiums day and day out, and macro environments don't really change that view. And it goes back to that idea for why we see these premiums in the first it's low prices combined with good future cash flows, and that should always indicate higher expector returns than something

Of recession, long recession, doesn't matter.

Those premiums are not correlated with all of these macroeconomic variables. And we would love to be able to figure out to crack the nut of how to focus on these premiums during certain times, but we think it's best to do it every day.

Really interesting, very cool stuff in a nutshell ten seconds, the market environment an interesting one, a hard one, a complex one.

How would you describe it?

It's always complex, it's always changing.

It is easy.

But I do think that when you have a long term.

View right now today, it doesn't matter or what.

It doesn't matter, like we're going to be positioned on these premiums regardless of and that's part of why our clients like this because they know what to expect from us.

That was Marlena Lee, global head of investment Solutions at the registered investment advisor Dimensional Investing. Our coverage of the future Proof Investival this past week continues still to come, the often cited and fast growing one point seven trillion dollar private credit market and what cracks, if any are showing up. We'll check in with Alona Gornik at Churchill

This is Bloomberg Business Week and inside from the reporters and editors who bring you America's most trusted business magazine plus global business, finance and tech news. As it happened this Bloomberg Business Week with Kroo Messer and Tim Stenebek on Bloomberg.

I'm Kel Masser, along with Barry Ridholts, of course, the host of the Master's in Business broadcast and podcast on Bloomberg. Our coverage of the future Proof Festival held this past week in California, continuing with another voice well known to the Bloomberg community and audience. We are talking about David Kelly, who has been JP Morgan Asset Management's chief Global market strategists for more than sixteen and a half years. By the way, JP Morgan Asset Management is a partner in

Mean, it's been a very good year for markets, you know, the S and p FO. I found that it's up eighteen percent year today. Bondiels are down. The economy is doing fine. I mean, it's slowing down, but it was supposed to slow down, you know, but unemployment slow, inflations come down, so the backdrop is good. I think the financial industry is doing very well right now, and I just think that there's a little nervousness that the FED might somehow scare people.

Bill Dudley, former head of the New York FED, you know, think the Fed should be more aggressive.

I think that he should have done that. They should have done it probably already.

Well.

I agree that they should have started cutting earlier. Yes, but bringing interest rates down is like lowering a piano down from the fourth.

Floor of a building.

You need to do it slowly and carefully. And what I think the FED misses is the fact that initially you cut rates, you hurt the economy.

Why is that?

Because you know you talk about long and variable ags.

What happen?

There are three very bad things that happen with the FED cuts. And first of all, you squeeze the interest income of all those American consumers have got money in money market funds, particularly older Americans. Second of all, the thing is going to immediately happen is on programs like this, and all over all over American people say, what are.

They so scared about it?

They must see a recesion. They're gonna get all these numbers. So if I'm going to hire somebody, maybe I wait a while. I was going to buy a car, Maybe I should put that off. That's what people want to wait and see. The third thing that happens, which is terrible, is that you know you're thinking about taking out a mortgage.

You're gonna take it a mortage day, you want to.

Wait a while?

I think I wait a while, right. The problem is they don't get this. I wish I could get people to understand this. There is a J curve effect. You actually hurt the economy before you help. But and that's what Frankly Bill Dudley doesn't get that's what all the people are calling for. Aggressive cutting. Don't get this economy is fine, don't mess with it. Take rates down slowly, nothing going.

On over here, don't take great adjustment.

Just take it down.

It's a fine economy.

When you're working on somebody's back, right, you know, just it's you.

They're like, you know, it's like medieval medicine. I mean, you know, the most dangerous thing is when you're told the doctor is going to come to cure you, because they'll probably kill you.

I mean, just just amputation. So let's let's take this down a couple of months. It feels like they're way behind the curve. Where do they end up? Where do you see this going by the first quarter of next year.

Well, there is I mean, I don't think they're way behind the curve. I don't think they should have pushed rates up high as high as they did. I think they should have started earlier. But let's not overestimate the importance of all this for the economy. The rates are too high because the economy is basically good place, and you need to gradually bring rates down to a normal level. And I think normal is probably three and a half to four percent of the federal funds. So you need

Recession off the table at this point, David.

Recession is never off the table. What I say is we're not going to get an indulgenous recession. In other words, it's not something that's built in the system right now.

An external shock.

It's got to be an external shock.

I mean, I'm looking at.

So do you rule at external shocks?

No, of course we're going to know.

The history of the twenty first century is nothing but external shocks. I mean, that's what happens, and eventually that'll get us. But it is important to realize that the traditional business cycle, that stress is already behind us. The point at which high interest rates cause a collapse in investments, there has been no collapse in investments spending. There's been no collaps in GDP growth either. By the way, you know, GDP is up three point one percent a year of

That's David Kelly, chief Global market Strategist at JP Morgan Asset Management. Well, you know, we talk a lot about private credit here at Bloomberg. Just last month, Bloomberg News out with a story noting how the one point seven trillion dollar private credit industry has grown rapidly in the past few years as higher rates forced buyout firms to look further afield for funding, while traditional lenders pulled back. Banks have become more competitive in recent months as they

Sure, it's been a really interesting competitive landscape as we think about the different segments of the middle market. I feel like they are individually, each facing this sort of bank pressure in a very different way. I think a lot of the activity you're talking about is largely hitting that upper middle market segment, which makes a lot of sense for corporate barers of the size that banks.

Really want to attract.

In the core middle market, where Churchill's focus, we generally see a little bit less of that bank interaction or bank threat if you will, in that same traditional sense.

Covenants to no covenants.

Coming down in market in terms of the size of the business is really where we want to stay away from. So private credit has generally been very focused on the institutional market. It really makes a lot of sense to have committed capital locked up where you can draw it down over time as a manager.

But what'll be seen has.

Been incredible opportunity set in the wealth market that is just tapping the surface right of starting to explore private markets, private equity, private credit. But in size the wealth market is equal in terms of the institutional market. So think about going from zero percent effectively up to five percent. When you think about institutions and their exposure private credit,

Do you think investors are ready for the possibility of it having higher risk as an investment or also having their money maybe locked up and not as liquid in these kinds of deals.

I'd say the top three concerns or at least hesitation points that advisors have when I'm on the road are number one, the liquidity risk, Number two default risk in the asset class that they're not very familiar with, and number three it would generally be accessibility, like how am I going to get access to this product and comfortably get it if in fact we are in a rate

Right.

We're putting it in a wrapper that affords you potentially some liquidity and a quarterly redemption, but underneath it, the assets aren't really meant to trade. So you really have to educate the client and thinking if this is something your portfolio that you will not touch for a very long time, enjoy current income along the way. That's what you want to really think about and diversify the portfolio with an enhanced return.

I think that's what's really resonating.

What's the typical lockup period?

So we don't have one in these funds and a non traded BDC, you're actually first twelve months, you'll have a soft lock at ninety eight, but then after that you can really read your entire amount up to a cap where we as a manager would cap it at five percent of the enemy of the fund.

For three years, five years, seven years. What sort of expectation do you have.

I think what's great with advisors is really trying to help them educate their clients about a very long term hold here. I think what's really resonating in terms of benefits about private credit are one that income generation. It's incredible to think about income generation in terms of a predictable path to retirement. So if it's on your way or when you're in retirement, that is a multi year potential investment addition to your portfolio.

But if you think.

About the income component of that, it's very similar to fixed income and public credit, but with a really nice yield premium to it.

And you were talking about this earlier.

Historically, the yield premium for private credit, particularly direct lending versus the upper kind of large corporate credit has been anywhere between one hundred and fifty to two hundred and fifty basis points. That's pretty historically kind of where the average has been around two hundred. Right now we're actually seeing it widen out to about two fifty two sixty five, which has been beca because of that really that.

Comeback in the bank market.

When things come back, activity picks up, spreads tighten out, but not as much in that middle market.

So our premium is actually increasing.

So current income is really going to be really attractive for advisors when they think about multi year in terms of at three, is it, five, is it seven.

Is it for the long haul?

Is there any stress that you guys are seeing. I mean, I do think that there was, you know, milk in the last couple of years and milk in this year. Like the concerns about stresses in the private credit area because we feel like that there isn't enough transparency.

You know, you know the arguments, but I'm just.

Curious, you know, re renegotiating the terms of deals to make sure that you know there's no defaults and that you can kind of see the deal through.

What are you seeing on that front?

I think that there are pockets of stress or distress happening in the market, and I think it's going to be vintage specific still, yes, and actually showing it's it's it's ugly head a little bit more so when you think about the most aggressive deals we're generally done in our around the time where we saw massive recovery post COVID Alah twenty twenty one, valuations were really high, really fantastic software healthcare services businesses were getting bought from double

If you had any.

Issue before COVID and now in an interest rate environment that's been twice as high as it was two years ago, you're going to feel a little bit of pain right now. So we're starting to see a little bit of that unfold. So that stress that those cracks. But I'd say it isn't broad based across all of private credit. I'd say it's sort of isolated to vintages and then even certain parts of the market where you took a little too much leverage than the business should be able to handle.

That's a load of Gornick, Managing Director, senior investment strategist at Churchill Acid Management. And that wraps up our first hour of the weekend edition of Bloomberg Business Week from Bloomberg Radio. Ahead in our next hour, more from the future Proof Festival, including a financial advisor oversees some three hundred billion dollars in investor assets. Also Joe Anne Bradford, president at Domain Money. You know that's the company that

This is Bloomberg Business Week inside from the reporters and editors who bring you America's most trusted business magazine plus global business, finance and tech news as it happens. Bloomberg Business Week with Carol Messer and Tim Stenebeck on Bloomberg Radio.

Hi, everyone, welcome to the second hour of the weekend edition of Bloomberg Business Week. Tim is off this week. As you know, we are highlighting our coverage of the future Proof Festival that was held early in the week in Huntington Beach, California. The event brings together financial advisors, wealth managers, and the company executives all involved in the wealth ecosystem to talk about the future of the business and the factors impacting investor money. With me at Futureproof.

Years in a row.

And a residential real estate play by one fintech entrepreneur who left London for the sunny West coast of the United States. Let's get it going though with joe Ann Bradford. She is President and Chief Money Officer at Domain Money, which was founded in twenty twenty two by Adam Dell, former head of Product at Marcus by Goldman Sachs. The financial advisory firm handles everything from real estate and retirement planning,

I do two things here. I advise a company called wealth dot Com and they announced a thirty million dollars Series A led by Google Ventures and City Congratulations, which was exciting and it shows you that like, hey, look, it's time for some automation and some technology and for some AI to be applied to this category because it's sort of the last one to break, you know. I was in the advertising business, which they said will always be sold over Martini's people to people, and this business

You know.

So those are the two sort of camps, and I think it sort of happens in every industry, but it's clear it's playing out here, Joanne.

Are those two very different generations? Is it philosophical or is it the fifty and older group is like, I'm just going to run out the clock, and the thirty forty somethings are like, no, it's got to be digital. It's got to be technology. That's what our clients want.

I think it's both the providers and the customers right, because you know, I think the last conference we were at they said, you know, in the next ten years, a third of this industry is going to retire. And then you know, I worked at so Far and we built a digital first tool right where everybody wants to do everything on a device, wants to have it done, and then they still do want to know that there's human and a person that understands their values on the other side of it.

I think it's happened.

Everywhere in life except in personal wealth management. So it's finally going to show up here, but it's not. We're not quite ready for it yet.

But how does it change?

How do you see the transformation in terms of it becoming more digital or digital, you know, and embracing of technology.

Yeah, I mean I literally I have a private wealth manager. I don't really want to talk to them. I just open up my schwab every day and look.

At it and we'll first stop opening it every day.

Please every No, I like it once a week.

It makes me feel good.

Just had a conversation about long term investing.

Every day is too much.

Every day? I look at my AMEX bill every day. You want to show me your AMEX bill on the credit card?

Like, what did I buy?

Well, my husband says, let's look at the AMEX bill.

I'm like, my husband calls it the BOD and he's not talking about Board of directors box of the day.

So he's like a box of the day showed up for you.

But what does it mean for estate planning and tax planning and educational planning?

Like, how do you guys think about because that's your world.

Yeah, so when we want to let's talk about domain money for a second. So our average customer is thirty nine years old, makes two hundred and fifty thousand dollars a year, and doesn't really want to put their money into aum. They have made some money, they're trying to figure it out. They might have some stock, they get a bonus, and they just don't know what to do. They're overwhelmed. They may have gotten married, may have gotten divorced, and they want some professional help. So it's a flat

Your to dos and follow ups.

Well, actually log into Zoom your Schwab account on Zoom with you and help you change, like move that there, because that's really where people freak out is they don't know how to do that. Our NPS score is ten out of ten. Its NPS Net Promoter score. It means would you recommend it? And we use it again? And on a one out of ten that's unheard of, get it, we get a ten.

That's a perfect score.

It is a perfect score because everybody at the end of it is like, Wow, you helped me, you heard me, I got value and I know what to do. We have a twenty five hundred dollars version of forty five hundred dollars version, and that's seventy five hundred dollars version. Most people end up taking forty five hundred because they want actually a year or one time plenty and then they can come back to us for three to five hundred dollars an hour to be like, hey, I want to check to get is.

That How long do people stay with you guys?

Well, I mean, you know, it's they come back a little bit every couple of years. But I think it should be like the dentist you you know, right, you you know, if you're using a sonic toothbrush, maybe you don't go every year, right, you know, you know, the dental industry came up with you need to go every six months.

That's three times a year. They want cleaning three times a year.

That's really But I.

Wonder if you can tell there's a trajectory of somebody who comes to you when they first get married, and then maybe they go through a divorce, they come back, and then they get married again, and then they have kids and they have to think about college planning, and then they have to think about, you know, retirement.

So do you see that trajectory.

There's four there's four personas.

There's the twenty nine year old that's like, hey, I need some help here. I have a good paying job and I just I like to be prepared. I call them like sharp pencil people, you know. They're like, I want help. I'm going to hire a trainer, I'm going to go to a therapist. I'm going to have the best to check check. Then the next group is like a thirty nine year old that's like, I didn't do anything, and please help me catch up very fast so we

And there's really not anybody that serves that right.

So real, So like scrip you know, and I've talked, I've I listened to every conversation. I know this audience from my time at so far, and there's nobody really serving that market, right. We don't tell them what products you use. We're like, use Fidelity, U Schwab, do whatever. In my entire your sort of mission in life is I don't care who you use for your financial plan. I just want you to actually have one. I don't

A friend of mine the.

Other day she works at Apple, she has worked there for thirteen years, never sold a sheriff's stock. I said, how do you manage your money? And she said, oh, I'm taking a course on the weekend. Yes, And I said, okay, great. And you know, she's mother of three. She's like, I got a safe for college. I have to do these things.

Da da da dah.

And I'm like, well, I'm glad you have a plan, right, And she paid three thousand dollars for that course, and I'm like, well, you could have just paid someone to do it for you and not spent your sundays and a course. But like whatever, you know, I'm just happy that people are doing it doing something because you and I know the power of compounding the power of starting it off and it just really matters. And so at SOFI,

So, Joanne, you started out by discussing how it's digital first, there's technology driven. But what I'm really hearing from you with these four different categories of people are that they want somebody, a live human to talk to yes and hear what their issues are. How do you marry technology with live human advice.

Well, we do it all on Zoom.

We have an app where they upload all their documents, makes it easy for them. We give them the report and the action items. Afterwards, we let them schedule all their meetings and times via technology. We follow up with them. So everything that is possible to take out of the process of friction of humans, we do accept that conversation and the review of the plan and the input and really understanding your values. Some people are like, I want adventures.

What's the most common mistake? Is it just people not having a plan.

It is just not knowing the number, not ever looking at the numbers.

What do you mean just everything?

Yeah, it's in their head.

It's sort of juggled, like what's your checking balance? I don't know, it's around this.

I'll give you a perfect example.

I was talking to a and just got about forty seconds.

Yeah, a Bloomberg reporter one day and she said, not me, I have student loans And I said, how much do you owe? What's your interest rate? And when will you be done? And she said, I don't know. I just know one day it'll be gone. Okay, so I don't care who you are.

You got to look at the number.

Really interesting me.

If you don't know what you have, how do you figure out?

No, And most people don't. Yeah, they just don't.

Really cool stuff, so fun, really cool.

Stuff, really really cool stuff.

I'm kind of taking note. It's going to share, folks.

I told you before. That's where she came on. She's a fascinating person with an amazing background, and I love how she's combined technology and human advice into one and bringing so far in with the student loans on top of it.

It is pretty cool, Like how all the stuff you did led up to where you are.

Honey coupon code, one click coupon code. We sold it for four billion dollars. There's always a tech solution there. There you go.

That's Joanne Bradford, President, Chief money Officer at Domain Money. You're listening to a special edition of Bloomberg Business Week featuring our favorite conversations from the future Proof Festival. Coming up Betterman CEO Sarah Levy on the next generation of investors.

This is Bloomberg.

This is Bloomberg Business Week inside from the reporters and editors who bring you America's most trusted business magazine, plus global business, finance and tech news as it happens. Bloomberg Business Week with Carol Messer and Tim Stenebeck on Bloomberg Radio.

I'm Carol Masser, back with Barry Ride, host of the Masters in Business podcast and broadcast on Bloomberg. Throughout the day at the future Proof Festival, there were various panels and discussions, including well with Jeff Goodlock of Double Lime. He was one of the key speakers, which was timely ahead of the FED meeting this past week. For full coverage of the fed's half a point cut, be sure to check out Bloomberg dot com or head to the

Let's talk a little bit about how you look at the world. You're relatively young compared to old timers like me. Do you what is the lens that optimistic Cali the name of your regular publication, How do you see the world?

Yeah, well it's in the name Barry I like to call myself. I would say I'm an optimist. Of course, I have those risks that I see around me, and I think it's I think it's naive to be blind to risk. But in my letter that you mentioned, Verry Optimistically, I try to focus on the context that investors need to understand this rapid fire of information that they're reading every day, looking back to how markets work, have they worked in the past, what really matters for the economy,

How do you wead through the information then, I mean, there is so much information out there, but then you've got to weed through and kind of figure out what really matters.

Well, I'm going to go back to my Bloomberg days.

Bloomberg taught me how to do size and scope, which was if there's a number or if there's a move in markets that hasn't happened in a while, it's probably important. It's probably news and there's a story behind it. So that was the nugget that got me started, and I've essentially built my analysis off of that. Of course, I've learned the fundamentals of stock the stock market. I've you know, learned the fundamentals of you know, the time value of

So let's let's talk about size and scope. You recently had a piece that I really liked talking about one percent days, and you dug into the data of how often we get these half a percent, one percent, three percent days. Tell us what your research found.

Well, first of all, most days in the stock market are pretty boring, which is kind of crazy to think about, because the news is screaming at you every day about how important it is. I believe I think it was more than half of days where twenty five basis points or excuse me, fifty bases point point.

Sure, data is fifty three percent of the days is fifty half of fifty BIPs of half a percent.

Or less correct, which is kind of crazy.

More than half the day is like nothing's really going on.

Exactly, and stock market math is a little weird, right. I mean when I think about percents, I think about sales, like going to a clothing store and seeing a sale, and if I saw one percent off, a one percent drop in prices, I'd be like, Okay, see you tomorrow. Give me something a little bit better. But in the stock market, that's actually quite.

A big day. I mean about twenty percent, less than twenty percent of.

Days context or when we see a.

One percent move, So one percent is important, and being able to provide that kind of information can really help an average investor understand those headlines that say, oh my god, the S and P fell one percent. It's important to our clients too, write Barry, because we get more questions, more contact with our advisors when they see those headlines and those big moves in.

Markets, and it's our job to anticipate that and tell people in advance, hey, this is normal. So let's let's stay with this line. How often do we see two or three percent moves in.

The market, So that's less often. I know, we've seen a couple of those in the past month or so. You know, Barry, you're putting me on the spot, But it doesn't happen a lot. Remember twenty percent of days you see a one percent move higher or lower, and you also have to remember a two percent move higher. People care a little bit less about that because we're all happy we're making money. So you know, two percent days,

August is just a bad month for stocks. Go on vacation. I'm all through.

I though, if they say that about September, yeah, September.

Supposed to be a bit it's supposed to be.

But I have to tell you, I mean I often go on vacation in August and there's always something going on or something bad happening.

Well, there's not as much volume, so it makes sense there's a big gap.

I always used to hear the expression rookies manning the terminals because everybody who was senior would be away for the month of August, and they left the kids on the trading desk.

Yeah, you're not wrong. I mean I go to the beach in August too.

I am curious how you think about the markets as kind of a more efficient clearing house because there is so much information and then if there are worries out there, they kind of get it gets out there and we will often see kind of a big move in I feel like from peak to trough in an individual name or even in the markets, and we kind of clear out some noise and then we see investors come back in.

Yeah.

Well, I think you're absolutely right, Carol.

I think a lot about that since the drop we saw in twenty twenty and one of the fastest bear markets ever that special situation. It was a special situation. I mean that was a once in a hundred years pandemic. But the flow of information is just so fast these days that you do see it manifested markets, and what that leads to is more emotions, you know, more contexts that we need to manage on the advisor side, and that's where roles like mine, rolls like berries are quite important.

That's Kelly Cox, chief Market Strategies at Ridthill's Wealth Management. We caught up with her just before that FED decision. Now not sure if Cali is a gen Z, maybe probably close to it. On that we've talked about gen Z shunning the sixty to forty investment portfolio and opting for investing in things like sneakers and crypto, or perhaps taking on too much risk and not having enough diversification

So, Betterment Advisor Solutions is really our ria platform that helps this next generation of advisors reach the next generation of investors, right and so one step removed, if you will, And what we offer is really a seamless platform to move between investing and cash and retirement, and I think the key to this generation. There's a lot that is the same with this generation as the prior generation, right, a long term outlook. I want to be better off down the road than I am today. I want to

Right.

Fundamentally, they have grown up in a world where everything from e commerce to streaming is delightful and easy, and they expect the same of the platform they use for financial advice.

And I can access on my phone.

I can access on my phone whenever I want.

Right, So latest use of technology, friction free. What else are they looking for? Are they different than their parents in terms of what they want? In terms of their portfolios?

I don't think they're different. We don't see them being different in terms of their portfolios. I mean, I think there's a lot of theory around how the sixty forty portfolio has evolved, because.

We've done stories about gen Z kind of shunning the sixty forty and more interested in, you know, investing in things like sneakers and you know, rather than stock. So help us understand, well, can you say that they kind of have the same goals?

Well, I think ultimately their goals are to retire comfortably, and when you think about social security and the challenges that, you know, they're unlike their predecessors, you know, and the prior generations. They're not as comfortable with the role government is going to play, and they're fearful about what's going to happen in social security. They don't have the luxury of a pension right which their predecessors had. And so I think the idea that personal investing and a defined

Huh. Really interesting. So technology, we've talking about AI constantly this whole week. You guys have been embracing AI. Explain how you use AI to deliver a better product and better performance for your clients and their clients.

So I think of AI really as a continuum from automation. We've been delivering fantastic automation for advisors and for retail customers for a decade and a half, and AI really supercharges what we've been doing right. You know, there's a lot of fear around which I think is unnecessary, around you know, is AI going to take over the jobs? And I think the better way to think about it

I mean, it's all about making things easier, right and seamless, easier, faster, cheaper.

I am curious too in terms of the younger generation. I mean, are they feeling like it is going to be largely you talked about four O one k's and that it's going to be the financial markets, Because I think I have you know, I had a dad who had a pension and VA benefits and four oh one K and like just multiple things. And there's a generation that isn't going to have it. Is it going to be all about the markets? And they've got to figure this out.

Well, you're exactly right, and I think that is the fear that they have, right, is that I'm not going to have the same kind of social safety net that my parents had, and so I'm going to need defend

So you'd mentioned there's not that different goal, but a different method to get there. If you're a twenty something or a thirty something, does a sixty forty really make sense? You have decades before you retire. How do you feel about the people who advocate just straight equity, no bonds.

So we think about diversification and we believe from a long term perspective, you want to be diversified domestic, international, equity, bonds, some alternatives as a part of that portfolio. And I think where you are in your life stage that that affects the mix.

So not necessarily sixty forty seventy thirty eighty twenty.

Correcting, correct, The mix is about your risk tolerance and your timeline.

Last question, and just got about ten to fifteen seconds. Does a younger generation want investment advice or do they want to do more on their own or is it a combination.

The smart ones want investment advice, they do so they just go.

Back absolutely, particularly as their lives get more complicated.

That was betterman CEO Sarah Levy. Bloomberg BusinessWeek from future Proof continues featuring some of our favorite conversations from our two day coverage of the event out on the West Coast. Straight Ahead, Top financial advisor Peter bl Luke on today's investing environment and figuring out success.

This is Bloomberg.

Please see is Bloomberg Business Week with Carol Messer and Tim Stenebeck from Bloomberg Radio.

He's a lawyer recognized successful financial planner who has been given various accolades, including being named as the top independent financial advisor to America by Barons for several years in a row. He co hosts the Down the Middle podcast. He's a New York Times bestselling author, and he was fresh off the Ocean stage at the future Proof Festival talking about how he's done so much so successfully, sharing

Things couldn't be better. Nothing to complain about.

Is it really?

No?

Seriously, Yeah, things are fantastic.

I think a lot of running a firm or just money coming in well.

I think both.

You can't be running a firm and having it going well if money's not coming in. That's ultimately the sign that the market likes what you're doing.

So we're the one thing.

I look at every day is are people coming to creative planning? And that net inflow tells us that.

We're doing the right things.

And so we're really looking and saying for that ultra fluent client or that highitworth client, are they hiring creative planning many many more times than they might have money leave? And if that's the case, things are going well.

And you know, when I first met Peter back in twenty eighteen, twenty nineteen, you were still a reasonable sized firm, but you were like forty or so billion dollars. Five years later nearly.

A ten x.

That's a giant gain. How have you been growing the business so successfully? What has made creative planning such a force in the industry?

Well, I think we're for the end client.

We're known for working with that high net worth investor that has the million dollars or two million dollars, But we also have sixteen hundred clients that have twenty five million on average with us, and that group is the group growing the fastest.

But both of these are growing at a rapid clip.

But I think that they like Number one, you see people moving from brokerage firms to independent first, they're also moving to larger independent firms where they know there's more services, There might be more due diligence, better cybersecurity, all of those things that give those high networth clients comfort.

And they also like the specialization of services we have.

We look at the investment portfolio through a tax lens and an estate planning lens, and the world has gotten so complicated that you know, whether someone's got five hundred thousand or fifty million, they tend to value that more than they did in a decade ago.

So talk about that. You use the phrase that I'm very much enamored with of being the quarterback for their entire financial life. What does that mean to the average creating, creative planning client.

It's like a creative planning client knows, Okay, they're not just going to take my money and say this is my age or this is my risk tolerance and I'm just going to go invest.

In ABC, plug and play. Right that.

They know that's not happening. So they're coming to us saying, Okay, this is a firm that's going to have a certified financial planner. Figure out where am I, what am I trying to accomplish, what state do I live in, what's my tax bracket, what's my legal situation?

What am I trying to accomplish?

Am I charitably inclined to or onably the biggest inheritance possible for my kids and my short of retirement. We go through this pretty long multi meeting exercise to figure out, well, where are they, what they want to do, and then we construct a portfolio that we think has the highest probability of creating the outcome they want, taking into account what's already going on in their life. If they own a bunch of real estate, they're not gonna get real

After tax basis.

I think high net worth people appreciate that approach, and I think we're sitting at the center of that.

You mentioned sexy earlier, But how much of your investors are looking for, especially the higher net worth individuals are looking for sexier investments, and especially I think about the private world, private credit, private equity, private equity, but especially private credit.

Are they pushing for something with something more?

Yes, So we do at creative planning.

We're a very big believer in private investment, so we do use private equity, private credit, private real estate. Private credit is obviously kind of taken the world by storm, and I don't know that people fully appreciate the risk reward there.

I'm a big believer in private credit.

Talked about talking with a lot of explanation to people really understand, you know, and private credits.

It's like saying bonds.

You know, there's all kinds of bonds and all kinds of different profiles, and so really understanding what you're getting into is a very big deal. But you know a lot of them want those types of investments or hedge funds. We were not a big believer in hedge funds, so we don't use them. But I would say, is the higher networth you go, the more demand there is for private credit, private equity.

I want to ask you, do you think private credit should be available to the masses, whether it's even fractional ownership of some sort.

I think if if you have semi liquid I don't like that word very much, if you have things that people can get out of every six months or every year, then I think these sorts of investments should be available to people that have less money. I mean this idea they have to be a qualified purchaser and a credit investor. I think it made sense five or ten, maybe say ten years ago when these were tied up for seven years and you had a very very sophisticated to understand it.

And growing really fast. This is probably the fastest attracting cash. Maybe Crypto various times in its cycle is a little faster. We've seen it certainly explode and then pull back, but private credit seems to be growing so rapidly what percentage of someone's portfolio should they be thinking about for private credit, especially in the mid both the mid level and the high net worth level.

So I always start by telling clients like, there's only really only two investments. You're an owner or you're a lender with everything right, and so when you're a lender, the next question becomes, well, how much of my portfolio should.

I be a lender?

Because you really accumulate wealth being an owner, whether it's private equity or stocks or a business or real estate, and a lender is more preservation or you know what your income is going to be, but you can't compete with being an owner. It's why the Forbes list is full of owners, not lenders.

Right.

So but if you look at that private side, then you could say, well, what part of the private of the lending side, what part of the lending side of my portfolio do I not need access to for the next couple months or a couple of years. If you've got money that's years out, that's the part of the lending part of the portfolio that can be private credit. And that's how I back into the allocation.

Do you think it becomes much more ACCESSI I don't know in a few years, like what does it take.

Oh, I think it's happening at lightning speed. I think we're at Creative Planning. We're starting to added private equity into for when Kate plans will be one of the first firms in the country, if.

Not the first to do that.

Really, I think private credit is going to come very very quickly.

Thereafter.

That's Peter Maluke, President and CEO of the RIA Creative Planning. Before we wrap up our coverage from future Proof, we wanted to share our chat with Christian Phase, founder and CEO Phasing Company, which is an investment firm that actively builds an invest in technology enabled direct lending businesses across the UK, Ireland, Australia and the United States. He is also founder of the fintech and property mortgage firm lend Invest,

So we we're a private credit fund. We run a private credit fund that gives a credited investors the opportunity to get exposure to what we think is a really interesting asset class, and that's real estate. Bridging fondants against residential property.

Something you know a little bit about.

I do know a little bit about. Yeah, so ive been involved in the sector for almost twenty years. Originally was a lawyer. Grew up in Australia, which it might be able to tell from.

My accent, spend time over in London.

Spent time in London. Yeah, so recovering lawyer as well. Barry so a lawyer.

That's half of the lawyers aren't practicing seven years after graduation.

Why is it that? Because another podcast, that's.

A whole nother conversation. So what sort of real estate p you guys focus on? Is it just residential or is it a variety of sectors.

No, it's residential, So we're very careful to explain that to to investors. Obviously, there's parts of the real estate market that are quite troubled and sort of making headlines, like commercial and different parts. But we're small, balanced, single family residential. Our average loan size is four hundred and fifty thousand dollars, so it is kind of really targeting what we describe as property entrepreneurs buying the worst house on a nice street, replacing the bathrooms, kitchen, and then

I these the investors who are like constantly sending me texts and then I want to buy your house?

Are these the people that you like are dealing no all the time?

Right?

I guess those on houses I don't even know them.

I'm like, yes, send me, you definitely want to sell that one.

Here's my price, and it's like you know some crazy number you want it? It's yours.

But now tell me like like we're dealing with We described them as property entrepreneurs. I mean, I think that it's a bit of a misnomer because a lot of people turn on the TV and see the glamorous couple, you know, flipping houses, making lots of money, and it all looks quite easy. It's not that. In reality, it is kind of they're real hustlers. They have to work hard,

But so my brother has been doing this for years, right, sort of a side hustle, but he does four or five houses a year, and the conversation has always been, hey, I'm funding this primarily with my own money. I asked him, have you thought about getting venture funding or any sort of credit for this, because you could turn this into eight or ten houses a year if you really want to. And it's some of these houses are fairly it's not

Yeah.

Yeah, well, I'll have to give you my number you can give to your brother for afterwards.

And we see the deals happening.

I prooved people that are not trying to sort of maximize leverage. So the average LTV across our books less than sixty percent. So they're pretty conservative, but with a bit of leverage, they can do a couple of projects as opposed to being exposed to just a few, you know, the lesser number, and there's a lot of tailwinds for the asset class. You know, there's just fundamentally not enough houses being built here in the US, the same as in many parts of the world.

But that's a whole other story because it's in terms of, you know, acquisition of land and you've got to get neighborhoods to sign on. It's not just a case of here's the money and build.

Oh sure, it's not just a funding issue. But then the other sort of addition to that is that over sixty percent of housing stock in the US is over forty years old, so you do have a lot of aging stock that does need to be referbed. And so with not enough housing stock and a lot of older stock in the market, you know, referbing is kind of is something that's very much needed.

Something I've got to ask you though, and I'm curious about what your brother says, is that you know, there are people who want to do projects. There aren't plumbers, there aren't electricians, there aren't contractors, and there isn't a younger generation. I have two contractors in the family too, and but there is not a younger generation who wants to do this kind of stuff.

Yeah, definitely, and I think through COVID that's been a difficult time as well, you know, costs or even crease, yeah even still, Yeah, it's tough. And also you don't have a lot of end borrowers that want to take a seven percent mortgage, you know, to buy the end product. So it's kind of a time of disruption. I kind of see that as a time of opportunity in many respects.

That's Christian Phase, founder and CEO a phasing company. And that wraps up the weekend edition oft Bloomberg Business Week from Bloomberg Radio, featuring highlights from the future Proof Festival. If you want to hear more, just head to our podcast feed. Thanks so much to you, Barry Ridholtz for filling in for Tim this week, and thank you so

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