Vanguard Dipping a Toe into PE

on iTunes, SoundCloud, or Bloomberg dot Com. You can also listen to our radio show weekdays at two pm Eastern only on Bloomberg Radio. We're gonna roll around, all right, So let's talk a little Tesla. We do it often. We're also very fortunate that we get to do it pretty often with Dana Hall. She follows the company so closely, and the headline on the story today that she wrote with Gabby Coppola really sums it up. Tesla Capital Raise

keeps fourteen billion dollar virtuous circle rolling. It certainly does. And Dana, one of the things that struck me, and you just nail it right there at the top of your story is normally, in this sort of situation, you would look at a company saying, oh, we gotta go get more money. As a little bit of a problem, we're diluting shareholders. That's a little bit of a problem. And yet, and yet this is Tesla. Tesla does not

go the way that people normally expect. Help us understand the context here, Yeah, I mean, I think what you're seeing now is that, you know, it's always about the future, right Elon Musk is always selling this vision of the future. And now that they seem to have mastered you know, the past challenges of actually getting the Model three out

the door, the share price is really high. You know, the idea of them going out and getting money so that they can do things like build out this plant in Berlin or perhaps another plant in Texas seems more doable. So people are more than willing to kind of fund the vision of the future, and the banks get fees,

and you know, everyone sort of wins out. Dan, I'm also wondering if Gene Munster puts this correctly, as you right in your story where you say you know Elong had a shirt investors, he didn't plan to r capital. His backpeddaling is a criticism, but frankly, the state of the balance sheet is a bigger criticism. So perhaps this is scene is a good thing because it could shore

up the balance sheet. Yeah, I mean, and some and some analysts like David Whiston and morning Star, they just wish that Tesla would go out and raise like five billion dollars and be done with it, like and just raise a ton of money and then and and be said, instead of having to go back to the market sort of year after year. But it is kind of funny, how you know, just on their earnings called two weeks ago, Musk was asked very specifically, do you have any plans

to do a raise? And he's like no, And then you know, two weeks two weeks later, here we are. This is the second time that he's done that. Actually, so you know, people people are a little frustrated that, you know that he says one thing is and then they do the other. But from an investor perspective, having money on hand is always a good thing. And so Dana, you know, this is also a good moment to ask you about sort of the state of Musk. You know, we have a fairly good sense of the state of Tesla.

What do you sort of draw conclusion wise from looking at the company right now? Looking at the decision making and especially this amazing run where is sort of Elon's mind as much as anybody can understand it outside of his own head. Well, it's not like I'm talking to,

I'm talking against from the guy every day. I don't know, I have not like interacted with him directly recently, but you know, I think that this is a guy whose entire career and much of the kind of mystique in persona around him is built around him proving doubters wrong. And so like the classic example is with SpaceX, they were, you know, for for months they tried to like land

this rocket on a drone ship. No one thought they were ever going to be able to pull it off, and now they've not only have they done it several times, but it's kind of become old hat like most you know, we don't even cover the drone ship landings anymore. And with Tesla, like you know, the Model three, everyone questioned what the demand would be like. When they started building the factory in China, there were a lot of skeptics who said that this mud pit would never turn into

a factory. And now like here they are like building cars in China, and so I think he feels probably emboldened. Um, certainly. Um. You know, he has a very long kind of time horizon and so people always ding him for being laid on his promises, but he ultimately does tend to deliver on them, Like, maybe not in the time frame that he originally anticipated, but you know, you look around at

the at the competitive landscape. You know, no other rocket company is landing rockets quite in the way that SpaceX is. No other automaker is selling electric vehicles and the volumes that Tesla is. And it's like a new decade. They've had two quarters of back to back, back to back profits. Um, you know, they just went out to the market and

raised another tree billion. I mean, I think he's feeling pretty good about things right now, Dan, I'm doing my Elon Musk dance right now for our YouTube video, all right, Dan. On a more serious note, Elon Musk and Tesla have been criticized for the lack of investment in R and D and Capex last year, and of course then they've got a big profitability number, but some of the concerns, Now, if you come out with a three and a half billion dollar Capex budget, can you still be profitable on

that number. What are you hearing? Well, I think I think that I think it'll be really interesting to see what the first quarter is, which they've sort of hinted at will is likely going to be soft because of seasonality and the and the fallout from the coronavirus. But you know, I mean, that's that's one of the things

that Musk has gone back and forth on. They've said they'll be seasonally, they've said that they'll be sustainably profitable, and then they're like, unless we're investing in growth, but they're always investing in growth, So our investors willing to kind of take you know, I mean, I guess the question is what do investors want. Do they want profitability every quarter or do they want the company and really

kind of come and dominate. And I think some investors are willing to sacrifice short term profits if it means long term you know, sort of market dominance. All right, Dana Hall, we really appreciate it. Tech reporter looking after all things Tesla, all things that Elon must that is, as we joked yesterday yesterday Taylor like eight full time jobs.

All right. She joined us on the phone from San Francisco my whole patient and I know, all right, well, there are a lot of opportunities for songs leading into this segment. It also is a story in a discussion, and it helps solve a little bit of a mystery that's been going on over at Goldman, which is where all these guys going, a lot of big tech guys leaving, and at least one has landed, and he's landed in

the marijuana business. Shrina Rajan here with me in New York City finance reporter looking after all things Goldman for us and much more across Wall Street. Uh so, tell us about Mike bum Well, high frequency training experted Goldman is ditching his prestigious partnership role to go and join a company that's going to open a bunch of weed dispensaries across the country. You missed an obvious opportunity to make a high frequency joke, but I'm gonna let that slide.

Were you surprised by this move? Oh my god, Taylor, no offense. But I really miss Carol because if she was here, the amount of serious irols people, so many irols, so many irols. I'm I'm I roll Lane Jason just can't see me because I'm not with them in person. Luckily all of our YouTube viewers can see it. I just have to be the poor guest I can I know, I know, you're so nice. No, but do your question, Jason.

It's instructive in many ways, right, of course, when people leave firms, why they choose to do it When they do it, there are a variety of different factors, family, lack of interest in the role, new opportunities. But still, when you decided to leave you a perch, as you know, a partner at Goldman Sex their highest title, one of Walt Street's foremost investment banks, and decided to take a different opportunity. In this case they start up in the

marijuana space. It just it gives you a sense of where he thinks the all opportunity lies, and perhaps also indicative of the fact that it wasn't entirely fully committed to what he was doing at Goldman because he did have a weighty task. He did win approval and a lot of funds to make a bunch of highers to make a big push to overhaul the electronic trading systems, had to convince senior management a number of other people to be able to get those projects rolling, and for

him to be leaving a few months after that. It was a bit of a surprise when we heard about it. And it seems that he's decided to go out there and pair up with some of his ex colleagues from a previous firm to join the startup venture three. I'm curious to get your thoughts about what's going on at Goldman more generally. You originally never really heard a lot of stories about people leaving. It's so hard to get into that. Once you're Derrick Goldman, you are really excited

to be there and to work your way up. We've seen, though, a lot of departures recently, especially from the top ranks. Is there a lack of vote of confidence in Goldman or is there just a bigger vote of confidence somewhere else. That's a tough question, Taylor, because and we had this discussion yesterday when we were thinking about all the troubles at government and all the people leaving. When we go back a year ago, the January February of nine, again

we saw a lot of departures. We were able to explain away a lot of that saying, hey, whenever there's a new management. In this case, David Solomon took over the role of CEO and chairman from Lloyd Blankfind you expect to change with the Guard. You expect a lot of people aligned with Lloyd or the old Guard to be leaving. And the new guy comes in and installed a lot of his people at various roles, and in an ambitious, competitive place like Goldman, you will see a

lot of churn. The difficult part here, the troubling part here is a year later, fifteen months in his tenure, we're still talking about this time of the year and the kind of high profile departures we're seeing, which is which has got a lot of tongues wagging across Wall Street for sure, and the competitors are paying attention. You can be guaranteed about that. And somebody else leaving and and you the other other names that are we included

in the story. Couldn't play it higher Bi because I was just so much interested in giving all the details on the marijuana startup. Otherwise Jason would have killed us. But yes, Jeff Winner joined Goldman two years ago after having senior engineering roles in places like Stripe and Uber Silicon,

Valley name. He was supposed to build out this big San Francisco office for Goldman uh and he's gone in onto two years and it's it's funny when when when we sort of look back at the old clips and the interviews we did with him at the time of his joining. He talked about how there's still a lot of stuff in us in this place, but the bank is working to get rid of it. He talked about free flowing kombucha. Unfortunately, before he could get a free

full of kombucha, he's decided he's had enough. All right, Well, it's a good story. Thank you for being a good sport. As I make all my terrible, terrible marijuana punts here, it's a Friday afternoon, it's been a long week, and you know, it's just too good. It's just too easy. It's sitting right there, Shri Nadaraja and always doing such a great job with the comings and goings at Goldman,

Sachs and Codman Arture Partner. Ditching a pursuit of Quantz for a marijuana start up is a really nice story in one of the most read on the Bluebird. And what is it that hasn't done as a puzzle in song. Alright, so when it comes to Valentine's Day gifts, maybe this isn't the one you want, unless you what you're Valentine to be both ignoring you and maybe really really mad at you. It's such a great story. We're talking about

stave puzzles, where the torture is the point. Devin Leonard wrote this story quite an assignment he got for Bluebird Business Week. As I joked earlier, Devon, you know, usually you're doing these deep dive investigations you're telling us about like McK mulvaney and Steve mcnuchin and folks like that. But here we are talking to you about puzzles. So why what's going on here? I don't know. This is a really weird one. And I mean, this is a company basically until recently was run by a guy who

described himself as its chief tormentor. It's customers they all basically say their addicts, and I mean to these weird games, some of which the company says are are created by you know, a sadist. So I mean, this is not the type of story I do all the time. And I had no idea what I was getting into when Joel Webber, the magazine that are asked me to do it. Yeah, Devin, how did you find this story? I've never even heard. I've never heard of this company. I never I'm not

a puzzle guy. Uh and and uh, but Joel kind of is. I mean, I think he that part of it is he knew about this from maybe being Tork cousin or or something. But no, I don't. I just said I just had no idea. It really wasn't. I went up there and I stayed at that place. It's really swanky, uh, you know, Resort Twin Farms, and they had them in all the rooms. I couldn't do mine. My daughter later did in ten minutes. But but but that's when I started to see like, hey, wait a minute.

You know, you know, you know the rooms, the sweets I go for, you know, a thousand, two thousand dollars a night, and you know, you know there's something that you know there, there's some there's something going going on here. And then then I went over to the company and basically they took me all around and show me with crazy puzzles. And then they showed me a whole wall and there's Jeff Bezos and Bill Gates and Queen Elizabeth and the Bush family and you know, so basically all

these people. Um, I mean, well you have to have money because because the puzzles cost as much as you know, ten ten ten grants. Right. I have to say, like, in reading your story, it feels like, and you just illustrated it pretty well. It's almost like you go down this rabbit hole, right, you know, into into this place where people are sort of obsessive about it. Clearly they appeal to a certain type of person. Tell us about

the puzzles themselves. Well, they mean, they're they're they're sort of I guess they're very they're very I guess they're beautiful, I mean a person. But they're designed and ways to to just be be very difficult. They come in boxes and blue boxes, so you don't have a picture of the puzzle in the box and you put it together. They throw in pieces that purposely don't fit. Then they have all these other tricks that that they used to

drive people crazy. But then but then you you know, you wind up talking to the people who spend all this money, you know, these things, So that's what they want. They want to kind of be tortured and and you know, they want things to be really hard and they want to be a challenge, and sometimes it drives them crazy. And one guy said he's he curses at his puzzles, but he buys ten a year, sorry, not ten a year,

ten at a time. Oh wow, you know, Devin, I'm going on the website right now and there's a puzzle for Valentine's Day that Jason's gonna get me. It's nine hundred and seven dollars. It has this sweetheart little street. It's called sweet Streets, just in time for Valentine's Day. But in your story you talk about a lot of other cool ones, um like these boxes and locks and very non traditional, right, talk to us about some of

these crazy puzzles that you mentioned in your story. Well, maybe the best example is, you know, this custom made one that they made for this guy in in Dallas. His name's Hal Brierley. He's a relaters and guy ended up himself. I mean, he's sort of one of the fathers of customer Customer loyally programs. He either designed them or random for the major airlines, for Hurts, for Hilton. But basically he's he's he's a guy. He's he's he's a workaholic and he needs these puzzles sort to get

his mind off of an off of work. He's still like seventy four and he's still doing this. So so basically, his uh, his wife and his sister in law been ordering him these custom made puzzles and uh, you know the one he the one he's he's working on he can't finish, just driving him nuts. It's more than a thousand pieces and it's designed you know, it's inspired by these African safari trips. They've all taken two thirds of the pieces are all blue, and basically basically when he

doesn't understand, I mean maybe he's figured out. No, I don't think he has. But there's a whole other level to to the puzzle that fits on top of the continent of Africa. It's all water but the but the pieces are almost all the same size. There's no guide. And this is a really smart guy. There's tons and tons of puzzles, but he can't figure it out. And he's I mean, I he basically said, I'm a guy of bills by the hour. I'm sort of calculated how much time they I don't know it's worth it. But

I love these things. So, you know, one of the things that occurs to me Devon, and I wonder if this occurred to you as you were working on it. This feels like kind of an analog antidote to a very digital world, right, you know, it's very tactile, and even some of the other things you talk about are experiential and more and more, it does feel like, and you've alluded to this already, this is an escape from being in front of these screens or holding our phones

and things like that. People draw a lot of satisfaction out of this. Yeah, and and and and it is sort of amazing that that in this day and age, some little company could you know, prosper by making something that's sort of like I guess now you can buy

them online. But they used to Everything used to be you know, done through the male, and so they think they still do something, you know, thank you notes, handwritten thank you notes, and I mean the whole thing is so sort of retro but I think that's for the point. I mean, the one thing for them is the customers are are pretty old. Just about everybody I talked to was their seventies, so I mean, I did see them,

among other things. Well, it's Valentine's. They designed these puzzles for people that you know, some person puts it together with their significant another and then as they're finishing it, you know that, you know, they put these pieces and I guess, I guess the person I bought the puzzle gives oh, by the way, I got these pieces, and and it says, will you marry me? And and I guess the one example, the one or two examples they showed me, the answer was no. But no, so so

you know, buyer beware. But but but I mean, it's it's uh, it's it's it's like nothing I've I've ever seen before. Absolutely need I need to meet that girl who said no. I think I'm a fan of hers, you know. But on a more serious note, I think, like you, we're alluding to Jason. In this digital world, I remember during Superstorm Sandy, when all of our lights went out, we're all doing puzzles by candle light, right

because our mobile devices stopped working. And around Christmas time, when we're all on our phones, it's kind of a nice break to maybe just sit down and do a puzzle. And so I'm really wondering if this is the beginning of a bigger trend where we put some of these mobile devices down and use this as a really way to connect with people again, if you're gonna afford it, If you can afford it, that's absolutely true. Well, uh, this is a really terrific story. It is being consumed

pretty madly on the Bloomberg terminal and online. This one's gonna have a long tail. I can guarantee you that Devin Leonard wrote it. He is projects an investigations reporter, a different sort of project, in this case looking into some very tough to solve puzzles. All right, it's one of my favorite stories of the week. Not surprisingly, any Massa wrote it. It's about big mone me on big

money Vanguard. We're talking about the mutual fund manager looking after mutual funds, looking after index funds, getting into the business of private equity, sort of dipping its toe a bit, but we think probably we're going to put a leg in it before too long. An easier with me in New York City, tailor raigs in San Francisco. All right,

so Annie, tell us what Vanguard's up to. So Vanguard has announced plans for a new private equity fund that at first will only be available to institutions, smaller institutions like endowments and nonprofit foundations, but that it hopes to open up to a broader range of investors as it can, and it's doing this with Harbor Vest Partners managing the fund out of Boston, so Annie. The interesting thing is

that Vanguard is known for low cost passive indexing. This is now PE, which you think of as high fees, certainly nowhere near passive investing. How does this fit into Vanguard strategy. It's a great question. As you know, Vanguard is synonymous with this kind of retail facing, ultra low cost index fund ethos that it was really built on. But I mean, it does have an active management arm. It's got over a trillion dollars in active strategies and it sees this PE vehicle as a continuation of that.

But that's not to understate that it really is a departure for such a huge indexing giant and index fund

giant um so PE. Obviously it's a place with higher fees, longer lock up periods, and just a very different realm of investing than index funds and so tell Us about the experimentation that's happened so far because other big money managers, the big three you know we call Vanguard, you call you helped us understand a few weeks ago, Vanguard, State Street, and black Rock, there's been some experimentation here, right, Yeah,

that's right. Vanguard certainly not the only one of those three big fund firms to try and get into PEE. You also saw black Rock two years ago announced its own new private equity style of vehicle called long Term Private Capital that's taking stakes in private companies. And it's another indication now that you see Vanguard doing it as well, that private equity is becoming kind of irresistible to these firms. And you know, fees are something that you cannot ignore um.

And also there's more institutional ability to allocate to private equity. UM. You see funds raising record amounts. So it's a piece of the market that they don't want to be left out of for much longer. Andy, I also wonder if this is classic peak pe that a Vanguard is getting in. It's just a sign of my mom, my dad, my grandma, you know, every sort of retail investor wanting a piece of the action. And it is a sign that we were at peak PEE. We should all be running for

the don't be so dismissive of the rigs. They're very sophisticated investors with UM no offense to anyone in your family and the investing strategies, Taylor. UM is that some people say, some kind of advocates for individual investors have said, you know, we haven't This vehicle is not open to retail investors yet. And it's important to note that there are regulatory restrictions on who can invest in PE right now.

You see big firms like black Stone and KKR and Apollo wanting to angle into a broader audience UM and open up their private equity vehicles to more investors. But what these UM advocates for individual investors say in some cases is, you know, they're not sure that it makes sense to change the rules about who can invest in

P because they're more esoteric. Lock up periods are longer, and they say that it might not necess necessarily be a good thing for the end investor or, Like the less sophisticated Invester Well and as you noted there, Blackstone and others Blackstone, Carlo, KKR, they are desperate to get to this like holy grail of the retail investor. They just see this as this massive pool that they want

to swim into the to their hearts content. Right, And if you think about it, you can't really have pe in a four oh one K, for example, But I think that they might argue a four oh one K is a perfect place for a private equity fund because you're not really supposed to touch that money for long periods of time, for decades, so it makes perfect sense to, you know, put a p style vehicle in there. UM. Of course, they have products to sell, so you have to keep that in mind as they, you know, make

their case. UH in Washington, any any sort of thoughts on when we would see this type of vehicle be open to retail investors. There's no real clarity around that yet. But regulators are reassessing whether they should change some of the restrictions on private equity investments. So it's a an issue that's evolving, and UM Vanguard is UH, I think, trying to get ahead of it because I think they wouldn't want to be caught flat footed if the regulations

were to change. UM with their army of advisors that could potentially sell those um kinds of vehicles to trying to be on the vanguard. All right, Annie massa investing reporter for Bloomberg, keeping a very close eye on everything that happens in the world, a big money on our investing team journal. Yeah, but you let me drive, No, Ann, please, I want to drive, drive the questions, the drive to the globes community. Thanks well us, Bloomberg Radio. All right,

it's time for the Drive to the clothes. Let's get into it with Rob Crocha. He is senior portfolio manager for Risk Parody and Managed Features at Melon, joining us on the phone from Boston. Rob, great to have you with Taylor Riggs and myself. So what are you seeing in this market right now? It feels like we're kind of catching our breath here on a Friday after a few turbulent weeks and candidly a couple of turbulent Fridays where you saw a big sell off going into the weekend.

It still feels like a risk on market to us. Um you know, when we when we saw the response of the market to you know, frankly, pretty big macro news including coronavirus UM and the market just seems to continue to shrug off risk with the idea that monetary policy has got our back. Um, it's the market has a really positive sentiment here, Rob, I was reading through your notes and one thing that I really liked, as you're talking about value go along cheap stocks, short expensive ones.

We were talking in an earlier segment about the rotation or really the lack of rotation here between value and growth. Are you still preferring value here? You know, as a as a quand investor, we try to be empirically driven. And the truth is that for a big investor that has to deploy significant capital, traditional value it just naively applied,

has never really worked. So if you break down what's driven, you know, from a French factor performance, it was tiny stocks and it was actually the short side of tiny stocks. So small stocks that have been really beaten down and are still expensive, those those are the ones that have tended to do very poorly, and being short those has been has has been a great booster for value strategies.

And so if you look at the data that is underneath of the original papers on value, they are not supportive of just being long a big naive value index portfolio never worked, doesn't work now, so talk to us about factors. Rob remind us, you know, for our audience that's not as familiar what that involves. What basically the lens through which you see the market is absolutely when we think about the market, we're thinking about it as a group of stocks that are weighted by their market

capitalization relative to each other. So when I think about beta, that is just exposure to the market as it exists in the market today, I'm buying more stocks that that have higher market cabin less of stocks with lower market cap. Smart beta or or sort of long only factor exposure is where you don't you're still long only, but you've

got exposure only two stocks with certain characteristics. So you let go of that cap waiting methodology and you begin to wait based on something the attractiveness of valuations, or how well it's done recently, or how defensive it is low volatility, it is how the quality of the stocks earnings. So those are smart beta portfolios. I'm still long only, but I'm long a basket of stocks I think will

outperform the market because they have good characteristics. And then power factors long short are smart beta minus bet at just a smart part. Rob curious to see how you are factoring in momentum at this point, if at all. So we're always factoring in momentum. Momentum is one of the factors that works across capsizes, so if you're a big investor, you can still take advantage of momentum strategies.

The other thing about momentum is it's the same language across asset classes, So it's very straightforward for me to build a portfolio where I'm doing momentum cash equities, I'm doing momentum in equity indices, I'm doing momentum in bonds and commodities. It's it is a very robust factor, and frankly, it's been a much better performing factor than value since since it was discovered. Do you have I'm curious to dig a little bit more into the momentum question. If

you've ever seen momentum like this before? You think of the massive run up, the length of the bullmarket, and the rate at which we have gotten to fresh record highs every day. Have you seen this type of momentum before? As you take a look at your factor models, we've seen we haven't seen this length of a bull market in stocks. I mean, I think that that's you know, unequivocal. But what we've clearly seen is is runs where you have made as much money being long or short based

on momentum. What's different in this market is that if you're if you're if you're talking about trend trend falling, which is momentum, but but but with a drifting bias to being long and stuff is going well on average um. This is not a market that's been permitted to fall. So it used to be the case that when sentiment got bad, it could get worse and get worse after that, and that markets would continue to fall in there would this be this building sort of bad sentiment that gets

worse and worse. That has not happened. Monetary policy has got our back um and and anytime the market really starts to do very poorly, monetary policy expectations change, treasury yields plummet, and the party starts over again. And and because of that, that's been hard because a lot of as a factor investor, a lot of what we do in factor space makes money when saying when sentiment changes for the for the worst. That is a big part of why factors have been so awful. Lately, so Rob.

You know, we started the conversation talking about a market that has been uh shrugging it off or maybe in the words of another tailor, Taylor Swift, shaking it off. When you think about the coronavirus I risk, you think about how global markets, and certainly the US market has continued with a couple notable exceptions to really take it in stride. Does that worry you at all? Does that sort of go against what you would expect given all

the factors you talked about? It does a lot of stuff worries us because but but as you know, those worries are the same thing that cause an investor that doesn't have discipline, doesn't have a process to bail out before before they they've done as well as they can in the market. You know, most of our investors need to make seven plus percent return a year on average

in order to meet their their liabilities. And you can't make that kind of return in a high valuation market, especially if you're not invested, and so tapping out is not an option. So what's left Well, you basically have to manage risk very actively. You stay in the market, and you monitor for for when the environment changes and you adapted very quickly. And that's what we do across our platform with all of our adapted strategies. All right.

Rob croch Is, senior portfolio manager for Risk Parody and Managed Future, is talking to us about smart beta factors and so much more. He works at Mellon joined us on the phone from Boston. Thanks for listening to Bloomberg Business Week. You can subscribe to the podcast on iTunes, SoundCloud, or Bloomberg dot com. You can also listen to our radio show every weekday at two pm Eastern only on Bloomberg Radio