CalSTRS Likes Real Estate and PE, Cautious On Equities

at Bloomberg dot com. This is the song that we have for the one, the only, the Chris Almen, chief investment officer at Holster's Investments, which is the second biggest public pension in the United States. I love the little bicycle bell at the end. Of course, we use that song because you ride your bike to work every day, uh and listen to the show while you do that,

which I absolutely love you still riding your bike. It's been a bit too cold and way too rainy, so but yes, I ride it at lunch as often as I can, and I still listen to the show regularly. All right, So talking about investments, because you do oversee more than two or billion dollars of assets for a number of different pensions, a number of different retired groups

in California. Where are we right now. I mean, it seems like people are getting really pessimistic if you look at the bond market, But if you look at stocks, we just had an incredible first quarter. What do you make of this? Well, and I've been very clear, I think people need to start taking their clue from the bond market. I don't think it should be as overly pessimistic as it is. And your listeners are educated, they get it. The yield curve is not inverted. Let's look

at twos to thirties. Don't bother me with twos to tens. The fact that the curve has a slump in the middle of it, that's too bad. But if the whole curve got inverted, then I would be worried. I think interest rates need to be more focused on. The economy is okay. We just came off a very very cold winter. People forget the the cyclone bomb and all the craziest off that went on this last January and February. So the economy should be a little bit slow in the

first quarter, as it has been for the last three years. Well, the market seems to be discounting that the Fed's next move will be a rate cut, but if you're saying that you're you think the economy is generally in good shape, you don't see that. I think the Fed should be and should constantly say they are data dependent, not a headline. They have been for decades. But Jerome Powell's got to learn his own voice and the power of that he's had and moving that market, and he needs to be

much more cautious and need to be data dependent. The bomb market is kind of anticipating in ease, which I think is a little over extending. I think they're getting too far ahead of themselves. They're over the handlebars and bike terms. So they need to really back up and and look at the data. Look at data, Look at

where we are in the first quarter. The Fed may well end up tightening at the latter half of the year, but that's a long time from now, all right, So let's talk about how that feeds into your investment thesis going forward. Calister's the California State Teacher's retirement system. I believe broke even for the fiscal year nineteen. Is that correct? We had a small lost down three percent um on

a calendar year. But I'm looking at fiscal years and I'm looking at a thirty year time period, so we're doing okay over thirty years. So are you adjusting though anything in terms of allocations for We've been very defensive at the start of even a year ago. In in July, we started to get too defensive, and obviously the markets rallied in in August, but then we were positioned correctly when you look at December. Such is life as a long term investor in the markets. It's a roller coaster

and you never know your exact position. But right now we're pretty neutral. So I'm not extending long in many areas, and I'm also not being underweight in many areas. I'm a little cautious on equities. So we're right at the benchmark and a smidge under and we're long long maturity assets like real estate private equity. So it's sort of interesting that you said that that's where I was going to go. There was a JP Morgan survey recently talking

about how you know. They basically surveyed a bunch of institutional investors. One third of them is that they plan to increase their allocations to hedge funds up from a minuscule amount the prior year. Are you in that camp. Are you increasing allocations to hedge funds. No, UM, we don't consider hedge funds and asset class. We look at them as as they are there twenty two very disparate

investment strategies. Keep in mind, to me, a hedge fund is a legal contract, a structure, the vehicle underneath it is. What you care about is what is their underlying strategy. And I think what they're saying is it's tough to be long and asset class right now, so they want to be in a trading type of vehicle. They can be a bit more nimble and a bit more reactive

to the world. Between Breggsit, what's going on here in Washington, d C. Fast and slow economic numbers out of China, it's tough to figure out where there should be in stocks, bonds, currencies, and where I should be the world. It's interesting that you talked about that this you know, the volatility we've seen over the last you know, six months. I mean, so if you're an equity investor looking at the sp up this this year, you could say, well, I'm done, Okay,

I've had my performance. I'm gonna go away. However, if you kind of look at it relatives to what happened in December. We're just kind of getting back to almost where we were. So there's cases for the bulls and bears, but it sounds like you're a little bit more on the conservative side from an equities perspective. Yeah, Paul, we're number one. We're investors, not traders. So I wish I could say I could get out of the market, but

that is just never gonna happen. We're going to be invested in stocks as long as they're public school teachers in California. That I try and say that to your people, it's we're talking generations that will be along the US equity market. So from our perspective, um, it really has been a sideways market, and it's been a choppy one. So it's tough for even the momentum strategies to make money in this kind of a market, since you're swinging up and down eight percent sometimes in just a two

month period. We're gonna be fairly flat to the US equity market right on our benchmark. We're a little bit underweight global equity because we're so worried about Brexit and questioning Japan, and then we're gonna be looking around the world. Emerging markets is where the value is, but it's been so tough to go in, and it really is a question about your confidence in China and their economy. It looks like it's dialing back up and starting to grow,

which is a good sign for the emerging markets. But even for a fund our size, it's tough to be long, very far in the emerging markets. You said earlier that you like real estate and private equity. Where in particular are you seeing opportunities in real estate? Well, I like real estate because I think it's gonna hold its values. UM. I like occupied buildings that have solid lease and solid tenants because it gives us were good cash flow. Um.

We have owned some buildings where we work actually exists. Um. But you want diversified tenant base. That's the key, and you look at it. Manhattan, the Gateway cities, San Francisco, Los Angeles, Chicago, Goo, even Denver, Washington, d C have held in there and their value. And then obviously the bills people love to talk about Nashville. UM, talk to

the real estate people. They've got acronyms for everything. I'm sure, but but even Austin, those kind of markets are holding in there, and I'm not looking for a lot of capital appreciation. But what I'm looking for is steady cash flow. That's what we really get out of our real estate. So I think about high yielding dividends stocks and there's the value. And also real estate's very static. It doesn't

move in price every day like equities. Interesting, So what is there any part of the equity market that you're just no interest in? I just that you're really underweight that's noticeable for you, or you've just given your size, you're just kind of equal weight throughout the index. Paul, We own the entire market as a solid source. Largest the smallest um the one place that I don't have a lot of interest, and it's not that it's a

bad segment, but it would be microcap. At my size, it is impractical to try invest anything material in microcap that would it matter to my fund and then also make enough money. It's too problematic. The area that I'm worried about in the equity markets is how extended the tech stocks are. Um, there's a thing that I kind of believe in called earnings. I'm not sure people have heard of that, but earnings, net income not the lift investors obviously. Well, but we're back to that view is

it's all about the growth. Will pay whatever we have to to get the growth. I mean, I've been complaining about Amazon for Okay, how's that worked out? All right? Chris Chris al'man Chief investment officer California State Teachers Retirement System. Two six billion dollars invested for the long term. We learned, we did learns of information about Saudi Aramco, which is marketing dollar bonds for the first time to purchase to

finance its purchase of Sabik. We talked. We learned that it was the most profitable company by certain measures in the world, earning a hundred and eleven billion dollars in one year, dwarfing the amount of money brought in by Apple joining us. Now, I'm very pleased to say. Dr ellen Wald, president of Transversal Consulting, also a non resident Senior Fellow at the Atlantic Council's Global Energy Center, a contributor to Bloomberg Opinion, and a very wonderful guest on

this show. Dr Wall, thank you for being with us. What stood out most to you about the financial disclosures from Saudi Aramco? Hi, it's good to be here. What what stood out most most significantly to me was the number that a Ramco is paying in dividends to the Saudi government. And we all knew that around COO was a very profitable company, we didn't know quite how profitable. But the fact that it is the most profitable company

in the world isn't really a surprise. But what's more interesting is that we've learned that since the government lowered a Ramco's income tax rate to fifty UM, they had to be making up that money somehow, that that deficit in money somehow, And I've always suspected that they were getting it in dividends, but this information gives us a sense of just how much the government is getting in dividends.

It's up fifty eight point to billion dollars in in two thousand and eighteen, and that's a very significant number. Uh and and has a lot to say. I think about a ram Coosh financial future should it ever pursue an I p O on international markets. Um, it's really it's showing the government is still ending up with a lot of money. And um, even though it's switched, it's it's a come tax rate and could potentially impact an IPO in the future, particularly if it UM perhaps does

offer this kind of dividend rate to other shareholders. Right now, the government is the sole shareholder, But if you do do an I p O, you've got other shareholders. Will they offer such lucrative dividends to other shareholders? If so,

that could make a Ramco a very valuable investment. On the other hand, they may choose to not offer that in their share classes, which might make a Ramco not quite as valuable in investment if they do I p O. So so, dr Wall, do you anticipate or is it you're thinking that maybe this dollar bond offering that they're coming to the market with might be a precursor for an IPO. I do think it's definitely a way to test the waters to see what people how people respond

to this, what people make of their financial data. One of the things that we've seen throughout kind of Ramco's history is that it has been a very secretive company. Um Really, it's had no reason to ever share any financial data, which is why it's seen a secretive. But people have taken that to believe that something nefarious was going on. Perhaps the Ramco was bleeding money to the government in uh social projects or uh you know, palaces for the kings, And what we learned from this is

that that's not actually the case at all. Uh And so Aramco maybe using this as a way to test the water to see what the responses to to this financial data ahead of you know, doing this this I p O perhaps in a few years and releasing more financial data. Well. The interesting thing is Bloomberg Oil correspondent Javier Blast put out a piece where he said that looking at this financial data means that the valuation of Saudi Aramco is probably closer to one point two trillion

dollars rather than two trillion dollars. Would you agree with that. I'm not sure i'd agree with one point too, but I definitely think that based on this data, um the evaluation has to be at least one trillion, because if you're going to evaluate our bull Microsoft at about a trillion dollars, then this company is significantly, as you said, more profitable. So they've got to be above one trillion. So just where they are in between one and two

trillion is questionable. And I do think that there's a significant liability that a Ramco faces in terms of evaluation due to their connection to the Saudi government. Well, that was what I was going to say. I mean, how does a company go public and be beholden to public investors when ultimately it's still is very beholden to a government that can wields authority over it and demand higher you know, and tax it more, do what it needs to do depending on its revenue streams. Yeah, and that's

and that's a significant question. Historically, a Ramco has always had kind of a set tax rate, although at times it was actually an industrible tax rate to make sure that the government had enough money. So there's always a possibility that that could happen again. There's also this issue. I would have said, if you'd ask me that question five years ago, I would have said, a Ramco is a very independent company. The king really has a sense

of this, this company should be independent. They let it run itself, and you know, they take what they can get what they get from the company. But that's not the case anymore. We're seeing a king and also a crown Prince who are much more involved in the various power centers of the kingdom, and that includes a Ramco. And so I do think when you're looking at at a future for a Ramco. There's really no telling what kind of demands the Royal family may make on the

company and what the future could hold. So far, none of this is really damaging to the core profitability of the company. The Savag acquisition is not a significant add a significant liability. In fact, may be more profitable for the company in the long run, but we just don't know, and that is a significant risk. Dr ellen Wald, thank you so much. Dr Wald, as president of Transversal Consulting. She's also a nonresident Senior Fellow at the Atlantic Council's

Global Energy Center and a contributor to Bloomberg Opinion. Well, it looks like progress is being made between the U S and China on trade negotiations UH. Chinese Vice Premier Leo Hey is due to return to d C this week, suggesting that the both sides are getting nearer to the final deal. To help us break this down and all things geopolitics, we welcome our friend Dr Sam Natapoff. He as president of Empire Global Ventures. He joins us here

in our Bloomberg Interactive Brokers studio. Sam, thanks for joining us once again. Let's start with China. We'll get the Brexit later, but with China it appears like we are moving towards a deal. Do you think anything is going to get done? And when, um, some things are getting done, these are generally at the tactical level. So last Friday, JP Morgan, for the first time in ten years, was given permission to own a majority stake in their own

financial concern inside China. It was both Nomura Securities and JP Morgan, and that hadn't happened for a decade. So things are moving at the tactical level because the Chinese government wishes to show that they are being flexible with the pressure that the U. S Government is bringing on it. Unfortunately, at the strategic level, the important issues of intellectual property protection, UH, some issues of majority ownership and tech transfer, those are

intractable because there's domestic political pressures on both sides. Um Um. The president of China can't look like he's caving into the Americans, and President Trump, as always, is looking for a clear, definitive public win. So if you could give the odds here, what do you think the chances are of a deal between the US and China within the next two months? That's that's that's not what the market

is predicting. That is out of consensus. The reason I say that is that there will be trivial things that will be going across and the president of China will sign a deal that says will buy a hundred and fifty billion dollars more of US goods, particularly soybeans and US agricultural goods to make it look good on the front pages of the Wall Street Journal. But the things that matter I can't compromise on because I'm in a

sensitive position politically. That's why they remember March first was when they when Donald Trump was supposed to raise tariffs again from ten to twenty five. He kicked the can down the road a couple of months, and they're gonna they're desperately negotiating to try and make it look good enough, but they won't get there on the big things. The little things will be fine. It's very specific. That is he's been thinking about that that question first. Love it

so again. Just remind us, um Sam kind of what are really the constraints in China to agreeing to more substantive issues. Uh, there's a great sense of a national pride inside China. And at the rise of China as an economic and political and geopolitical power. The obvious counterpoint to the rise of Chinese influences US influence, and this contest which is in both trade, economics, science, military culture.

These are areas of enormous sensitivity inside China, and Jijinping cannot be shown to be taking a back a step back against pressure from the Americans, with whom he's had a complicated relationship. Furthermore, domestically, Uh Jijinping is under enormous pressure because the Chinese economy is slowing and and internal and domestic views of him and his government are beginning to sway because people aren't getting wealthier, jobs aren't being

created at the same level. And at the People's Congress two years ago he was able to pass a constitutional resolution saying he could have another term, but that that someone could have more than two terms in a row.

It wasn't specifically him. The moment he says I would like another term, his political opponents in China, and there are those powerful political opponents will turn and say, well, let's look at your record, and it hasn't been terribly distinguished to date, so let's shift let's move from China to the United Kingdom where there is another vote on Brexit, because it seems like every day there is another vote on Brexit. And what I'm struggling to understand is that

there is a hard deadline of April twelve. It doesn't feel like Parliament is all that much closer to some

sort of resolution here. Well, the thing to remember is what Mark Twain said about today, which is today is the day we remember what we are the other three hundred and sixty four days of the year, and this is the moment when Parliament is walking in again, and Parliament has taken away control of the Brexit process from the executive branch, from Prime Minister Theresa May, and now they are desperately looking for some kind of a solution.

There are three outcomes in general order of likelihood. It's a permanent customs union with the European Union. It's after that a second referendum, and third it's a no deal brexit. Generally, people want to avoid a no deal Brexit, except for a hundred and seventy Conservative MPs who signed a letter to that effect that they wanted it last week. But thank goodness, it's not up to them, we'll probably Parliament now understands that in eleven days Britain is looking at

an economic catastrophe and they can't um. The Government of Britain and Goldman Sacks have done similar analyses saying this has cost Britain a billion dollars a week since June. It's cost about two point four percent of their GDP since the referendum to say they want to leave. They need to fix their economy. This is a real problem and today they're going to be more indicative votes. But they have to come to a solution. Either it's a customs unions plus or minus, or it's a referendum, and

with the referendum comes a general election. I like the referendum and choice myself. I've been calling for that since day one. Let's let's just do it. Do over here. So what are the chances of cost we referendum? What are the chances of this referendum? And then is there what's the polling saying that that the polling was accurate the first time? Well, what is the polling saying about

an outcome up of a second referendum? Uh, It's enormously difficult to know because polling is all over the place, and it's still very difficult to tell because Britain is very split on this topic. And the terrible irony is

that this is an entirely politically created crisis. It was created by the Conservative Party and Benjamin Disraeli, the Prime Minister of Great Britain in eighteen seventy four, noted novelists said in one of his novels, there was a great deal of shouting about Conservative principles, but the awkward question did arise, what will you conserve? And Teresa May is faced with the problem. She can either conserve Britain as a functioning modern economy as part of the EU, or

she can conserve the Conservative Party. She will have to choose between the two of them. And in the next week Dr Sam natapaf in ten seconds, what is the chance of a herd Brexit right now versus where we were two months ago? Right? What about two months ago? Alright, so we're moving closer to some sort of resolution. Maybe perhaps Well Tom Tom Keane is over in London, he's on the Westminster Green. Maybe he can help get some some deal brokered. Okay, well we'll hope, Well, we'll hang

our hats for Tom Keane. Dr. Sam Nada, President of Empire Global Ventures in New York, Joining us here in our Bloomberg Interactive Broker Studios, Paul, I cannot wait for this conversation. Do you have an Alexa? Uh? We have something. My son installed, something that he installed. There's a big question, as I think eight billle in digital voice assistants are predicted to be in use by three, which is how

are people using these devices? Joining us now, Colin Morris, director of Product management for Adobe Analytics Mobile, based in San Francisco. Colin, so, how do you determine what? How are people using these devices? Um? So right now? A lot of the devices are over mobile smartphones, um, smart speakers, a little bit in the car, a little bit on tablets, but in general they're fairly rudimentary home applications. So interesting, Colins, So, just this market is it seems like it's just you know,

exploded over the last couple of years. You've got Amazon, Echo, Google Home. Just give us a sense of how quickly the growth and devices has been. Yeah, definitely. I mean in our in our last survey where we had about thousand US consumers, let us know, seventies seven percent of people you know reported increasing their use of voice assistance in the last year. That's up from the year before.

So not only is it is it exploding because the devices are obviously selling a lot, but also the applications are getting better, right, The AI behind it is getting better, and it's allowing a lot of brands to get into experiences with the consumer that they haven't been able to before, especially because voice assistants are a medium that sits on

top of a lot of different devices. So a media and entertainment company can now provide an experience in the home, or an automotive company can provide a continuous experience in

the home as well or on other services. But when you talk about a continuous experience, you're talking about playing music beyond music hopefully, but uh, imagine, for instance, if you're using a voice assisted remote control speaker for your cable company, right, and that cable company realizes that based on your preferences, they can offer other reminders for shows

or promotions of other personalized content. So um, that allows them to extend their brand beyond the confines of the device that they're in and also provides a better customer experience, So it can be music, it can be checking your stocks, it can be you know, news flashes. But UM, the ptential for voice assistance to provide a more immersive experience

UM for a lot of brands is pretty exciting. So Colin, how quickly are these devices and the apps that are on these devices, how quickly are they getting smarter and doing more and more complex things for consumers? Yeah? Great question. UM. I think now that the error rates UM have lowered a year over year between you know, inflections and syntax, UM, all the things that have kind of shown a poor

experience over the last few years. The AI and the machine learning behind it is really uh, come leaps and bounds UM. You know, think about chat boss as well. It's not just voice assistance overall. UM. But again, because there's so much of a test bed now because so many consumers around the world are using it, UM, that just helps train the models and helps better data provide

better experiences. I have a friend who won't get a digital assistant because she doesn't want her children thinking that they can bark commands at something and have it respond. They think that it's really bad training. And sure enough, when I talked to my Alexa, I do find myself saying and Alexa volume down and it is very nice. Is anyone focused on that and sort of promoting better sort of verbal skills? Yeah, I mean what do they start responding right? Um, that's not very nice. That's not

a very good inflection. Yeah. I mean one of the interesting areas is gaming, right, because gamers are gaming app developers are always pretty out on the forefront in terms of what experiences they provide. Um, like the Jeopardy app for instances by Sony is the number one Alexa gaming app out their skill I should say, Um, so there's a lot of AI that's coming back in terms of

responses and having more of a conversation. It's not going to be your therapist tomorrow, but it will be more immersive overall, and it might be who knows, right, we see longer session times now and longer interactions over over

the medium in general. And it depends by obviously which device it's on right now, home speaker is there, it's stationary, you're in the home, so you're going to have a different pattern of use than say, talking to your car, whereby you might be a captive audience, but trips might be shorter or longer in some cases. Yeah, so, Colin, one of the pushbacks I know from some consumer advocates is privacy. What is your survey telling you about, you know,

consumers and the concern about privacy. Well, the concern about privacy is real. I think. Within the last few years, obviously there's been a number of problematic issues um in

the tech industry in general. We had Adobe really pushed the experiential privacy promotion to a lot of our customers in general, meaning that you know, we we encourage brands to let the consumers know up front exactly what they're trying to collect and what the benefit is for the consumer, because when it's transparent and it's open, it's much easier for a consumer to say yes or no. If a lot of data is being passed in the background and

the consumer doesn't know about it and then something happens, obviously that's problematic and it erodes trust in the brand. Colin Mars, thank you very much. Colin is a director of product management for Adobe Analytics Mobile, joining us from San Francisco on what is just a really interesting technology here that just seems to have haven't really exploded really over the last couple of years. Thanks for listening to

the Bloomberg pen L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Paul Sweeney. I'm on Twitter at pt Sweeney. I'm Lisa Abram Woyds. I'm on Twitter at Lisa Abram woits one Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio