Surveillance: We Will See More Volatility, Warne Says

Bloomberg dot Com, and of course on the Bloomberg. Were advantage of Queen Victoria Street to have with us Andreas Odderman, Alien's Global Investor's chief executive officer and David Harrow managing a small pot of money at Harris Associates in Chicago as well, and we bring forward the great debate of the last twenty years active and passive investment. Andreas, let me go to you first. Uh Ms Johnson over at Fidelity and others have decided. I guess it's a price

war on E T F fees. Does this have critical mass? Are we going to start seeing every shop offering out

Vanilla management at a vanilla zero fee. I don't know about vanilla zero fee, but certainly, as you probably remember, we we were very early in terms of launching UM in the UK and also in the US in the term in the context of folkrom fees, very low based fee funds with a performance fee attached and that's something we've been offering an institutional space for many, many years and it's been very successfully taken up by our clients.

So you know, it's a it's a it's The reality is that the price of beta in most data streams has come down significantly with the advent of paths of ETFs, and I think the response of active managers that want to survive need to be to to to to acknowledge that and and figure out what that means. And of course it means that we need to earn I'll keep by aligning ourselves with client interests, which is through performance fees. David, how is this going to end up? We've been talking

about it for years. You've been a staunch defender of value of buying bank stocks, etcetera. When shares her own sale, you sound like Sir John Templeton at times here? How is this going to end up? This this active and passive debate, Where are we going to be in two

thousand twenty five? There will always be this debate, And I think it's actually a strong passive sector is actually a necessary and necessity for active investors because passive investing implies that you're buying things because they're in an index, and the more it goes up, the bigger space that occupies in the indext you buy more. This what is what I would call any efficient pricing of assets. And as an active investor, we need an efficiency to exploit

to outperform over the medium and long term. It may hurt us in the short term, but if we want to perform in the medium and long term, we need marketing efficiency. We need misspricing of assets, and if passive investing causes more misspricing of assets, then that's good for us. So the problem is that we keep shrinking and they keep getting larger, which means the opportunity set for the

remaining active investors actually increases. So as long as you have the staining power and the discipline to hang in there, I think it will be good for active investors. But you know, and and the relats have slices, the pie between active and passive will keep moving, I imagine, maybe still slowly towards passive. But for me, as an active investor, I'm thankful every morning that there are passive investors out there. Andrew, has it took me a little bit about outflows or

we can see more outflows in twenty nineteen. Is there a correlation between volatility and the markets and people actually deciding to get their money out? Not necessarily. I think the outflows that we sold primarily in Q four across the boards were caused by specific market events, and you know, we don't anticipate that continuing in two thousand and nineteen, now that the central banks globally have sort of take in the you know, the foot of the brake a

little bit. So I think as the year progresses, and Tom mentioned this earlier, the challenge of and investors with really negative interest rates, they're gonna have to start taking risk again in order to get those returns, and I think that's going to favor a slow, steady return you know, of of fun flows across the board, are you expecting more vlativity in the markets? I know the fourth quarter was a bit rough. What happens for the rest of

the year. I mean, the fourth quarter of was extremely strange, and not just because of the price movement, but the outflows. And I would say this location in prices, prices that were completely divorced from reality. Now, of course it will come back at some point, who knows one, But again, even though it's painful as you go through it, it's actually good for an active investor because it enables you.

It's basically the raw material which you could position your portfolios when you see emotional trading and price movement that is not reflective of reality. Andrea, I think I'm back, and I'm just brilliant on the mergers and on the combinations that we've seen in asset management. Does that just extend this year as we go into second, third and fourth quarter? Strategic planning is a mating of the industry are going to continue. I think it will continue, and

I think it will accelerate. We've seen a world of pain, as I've mentioned before, in terms of in terms of you know, the stresses that many traditional asset managers are facing with their hybrid models. Are quite sure do I focus on a technology lead model? Do I focus on the distribution lead model? Do I do I go active or passive? Um? I think. I think a lot of owners of asset managers are going to have a second look at at their businesses and decide they needed to

either sell it or or merge it away. And I think it's going to accelerate in two thousand and nineteen. Just allow me one further comment on the active passive debate that we just had. It just made me sometimes that the passive active debate is some focused on security selection. As we all know, and I'm sure David would agree with that. Many of our clients have concerns beyond that. You know, they want to know when to buy a particular currency exposure, when to hedget. They want to know

when to get market exposure or reduce market exposure. They want to know which asset classes to invest in or which regions. Now you can't do that in a passive manner. All of these are active considerations. So I think the active passive debate is unfortunately too focused on security selection, where it's clearly an issue. It's also an issue of pricing. But there's much more to the asset management industry than than just security selection. Do you want to respond to that?

I mean it it is. I guess we do focus on kind of on you know, equity analysis, but it is much bigger than that. I mean, it is much bigger than that. Especially if you're retirement plan, you have to have a diversified plan. You have to have assets that can deliver return to fund your liabilities, and so you have to look at it from my perspective. I'm just providing a service to that person who wants, you know,

an active value oriented global investor. That's my job. But if I was running a big pool of money, I certainly would take some of me, take some of them, take some of them. You have to be diversified, and you have to protect your ability to fund liabilities first and foremost. All right, thank you both. David Harrod there of Hairs Associates where he's the chief investment officer and injurious Utterman Alliance Global Investors CEO. Right now with us

on the political battle. Philippe RNAs who worked with Secretary Clinton and uh was boisterous during the Clinton campaign, where others maybe Finessenal. He was one of the great defenders of Secretary Clinton against this, that and the other thing. Do you expect the same boys this time, Philippe? Are we going to have a hugely verbal and physical campaign or could it even be worse than two thousand six um in the primaries? I you know, I think boisterous is a is not such a terrible thing. We want

a lively debate. I think as long there's there's no you know, violence, that's what the primaries are for. And whoever it will be stronger. Well, what's interesting about this a cage match this year? Given how many there are? Yeah, well I'll go with that. But what's fascinating to me as you had the sort of the Clinton era and the Obama era, and I tell those younger that I remember a Democratic party that was normally more fractious across a wide span of history than the Republicans. Do you

agree with that? I think so? I think, Um, I do. I think the Republican Party historically has probably been a little bit more monolithic, especially when they were mostly concerned with social issues, whether it was pro life or uh, anti gun control. I think that shifted a little bit as it's become less about social values more about economics. Um. And I think you can see the split within the

Republican Party personally. I think the Republican Party at the dead party walk given what has happened since two thousand and ten and particularly well, this is important and let's look at that from you as a democratic perspective. The Republican Party of two thousand twenty or two thousand eighteen in reality how different is it from two thousand and ten. I would suggest it is substantially different in makeup, particularly on Capitol Hill, than it was only six years ago.

You're right, it's um, you know, it's a shell of its former self. And I don't know if that's better or worse. But I don't think that they themselves, they being at least the establishment Republicans and the leaders, like you said in Congress, I don't think they've confut grips with that, and I don't think they know where it goes. I think there's a definitely sizeable bunch of them that's delusional and think they just have to ride out the

Trump era and things will revert back. That doesn't seem likely. Um, you know, it's the two party system was interesting in twenties. Sixteen, Hillary Clinton ran against someone who had previously been you know, independent, self described socialists, and Donald Trump had switched parties seven times. I mean, you know, you've had presidents who have shifted parties, like even Ronald Great, but not seven times. And he's done it not just Republican Democrat, he's done a reform

party independent. So you know, I think twenty years from now, we might be having a conversation where this was a moment in time that the Republican Party certain fractured and maybe the two party system. What about the Democrats? Fully, because there are many people it might think that party is fractured as well and might essentially break two. I don't think so. I mean, I know there's uh, you know,

there's an appealing narrative that we like to fight. I think we're kind of the family that uh on Thanksgiving sort of does go at each other, but then hug it out and it's a healthy debate. I think, particularly this year, the Democratic Party will end up incredibly unified with the one goal, which is to now Donald Trump. And I think we saw it last year where even though many of the policy debates we're going on, we took over the House. Well that's the goal. What's the message?

Because the policy debate in the midterms was quite a centrist message. The policy debates so far from the Democrats is way out on the left, Philly. Do you expect that to come in and why? I you know, I really don't know. I I think, Um, again, I think the debate is good. I mean, we're starting from a point where you believe everyone should have health care. If you're debating whether or not that's Medicare for all, some version of Obamacare, that's really not plously important. But we're

going to end up in the right places. And it's the disparity and the distinction between those beliefs and the Republican Party that people are going to rally around. Um. Phil Philippe rains with us as we talk about politics. You represented Secretary Clinton at the State Department and worked on her campaign as well, Philippe, the Democrats in the middle, did they just wait out this burst of democratic socialism or socialism or whatever you want to call it. Do

they wait it out or do they rebut it? In terms of the candidates or canidates. In terms of the candidates, there really might not be a lane to be honest. Um. And i'mm M sure if I'm a lot to say it, but someone like Mayor Bloomberg, who I personally love and voted for as a New Yorker multiple times, it's he's someone who I personally agree with more than most and it's hard to have that kind of message right now.

But that's not so different. I mean, typically you have it on both parties where the primary voters are the most energetic in the Democratic Party. Whether it's particularly twoight, it's a very very left excited party. In two thousand and seven and eight, it was Iraq and now it's a variety of things that obviously getting rid of Trump is not just, you know, the only policy, but you have to do that to enact these policies. I don't know,

it's it's hard to see. Um. I don't know how much you can veer from the left, from the hard left, but that's not socialism. I mean not to dance on the head of a pin um, but I think there's a difference between general purity tests on every issue. And also, look, it has a secondary effect. You know, Bernie Sanders jumped in yesterday. Reality had tremendous energy in he had an eye popping overnight fundraising. But in it was a binary choice if you want to call Hiller Clinton the centrist

or matter. If you didn't like her, you want to Bernie. If you didn't like the Burnie, you went to Hillary. Now you know, if you listen to the Bernie campaign of the Bernie supporters, they are very proud and to pull the party to where they are There's a secondary effect to that in that you don't have to choose Bernie to get those policies. So you have three or four people you can choose that app and still debate

between personalities. I mean, it's you've got to play where there are three understudies in every lane, which is good, but it doesn't mean anyone owns the lane. Yeah, we're gonna have to leave it there. Phlipe Brain is thank you so much, greatly, greatly appreciated formally working with Secretary Clinton, And as he mentions Mayor Bloomberg, we should mention that Michael Bloomberg is a principal owner of Bloomberg LP and

of course Bloomberg Television and Radio. This is if you're on Global Wall Stands, the conversation it is, this is the interview of the day because this is about this is gonna push aside all of the bologna, the bs about about the hedge fund business. At Credit Suitees, they have a jewel. His name is Mark Connor's Global head of Portfolio and Risk Advisory, which is a fancy name for he writes the smartest letter on hedge funds in

the business as well. Wonderful day have you here, we get a huge response when you're on is the concept of two and twenty two percent fee? And what's left over is that concept dead for hedge funds. It's it's it is uh, it's gone away for a fair amount of hedge funds. So there's something that we wrote called the vital few. So there's some folks who can still do it, and maybe their margins are even higher than that.

So what's happened is we talked about distributions and you know, I know there's a that jingle word you have you We can't do fancy words on the can on the program once awhile where a bell rings. The jargon the Peretto principle very cool. So people are there's a segmentation where as markets have gotten harder, there are only a few who are making that money and they're doing it. John's got like eight questions. Let me get one more in Here is most of the agony and hedge funds

because they're less diversified. Um, I think no. The agony was that there was no alpha um for many people because there's less liquidity and there's what we call untradeable volatility. So people love all they say, where's the vaal, where's that dispersion where there's movement in the market that we can proust you from that we can write monetize Where

is it? And what happens is it comes in moments like the swissy Euro, It comes in moments like June eighth, trade talks, and it comes in moments like fed October three, and they can't trade it and all they do is take a mark and there's no liquidity. So they wake up with the two percent gain and then they go

to bed with a two percent loss. That's hard. We de risk aggressively in December, trying to try to much we have re risked through the new year from the people you speed to, from the numbers, you see any evidence that we have no So this is this is in our ten years of data, we've never seen a run in the market where the hedge funds have not participated. This is the biggest gap between a when is it a move off the bottom of you know, Christmas Eve bottom and hedge funds are still lying in wait. We

are thirty one. I did the math today. We're round trip from the first week of December down and back up. Basically, it's a huge move. So what's holding them back? Um? In speaking to them, they're not really showing their cards to be honest about why. Um. What they're doing is they're renting the market. So hedgephones play with two things. They play with a gross exposure longs and shorts called the footprint, and they make money on both sides. That's their game. Or they can do it with their net

that tilts, so their net long and they're renting. They are a low small footprint, but they're covering shorts like you see the semis run and they're getting longer, smaller amounts. So there as we say renting, they're not convicted that this has duration. Does this explains some of the tension we see between the self in debt market, which it has treasury ye, it's rolling go investors clamoring for duration

because they don't believe in the global growth story. The tension between that and what we see on risk assets. Does this explain some of that? The sentiment really hasn't recovered yet, and it almost is too tight a narrative to to believe because it fits so well. It's like yields have set the highs and they're coming in because there's a defensive posture. People are not constructive on global

growth right now. I want to go back to diversification because you know, you know, we have these major head funds, you know, like six guys get all the ink. I mean, that's basically the way it isn't as you know everything else out there. Is it an underdiversified asset class. Does that mean that every three years, whatever hedge fund you own, you're gonna blow up? By definition? So I would I would say that there's some people who really have a

structural advantage there. They're faster there, they have a tight team, they have a through and through model where they can move faster. I think that is the case. So structurally, there's just a better teams out there. There's just that's just a I mean, take a good friend of the show and someone I did wonderful work with John Boglan, Cliff Fastness and a QR. I mean, he's doing a quant kind of thing, a factor based kind of thing, and even he struggled last year with one of his funds.

It was a significant double digit loss for someone as bright as Cliff Fastness. For Mark Connor's at Credit Sweeze what does it signal when someone like Mr Aston stumbles um So without speaking about specific clients, you understand you're dead on that some factor investing quote didn't work. And and what we saw, we we called it um um a matter of trust. When things go wrong, you buy sovereign bonds when things go wrong and buy gold. Well

in Q four, those things didn't work. There was something amiss, so historical price patterns didn't happen. And back to your point, John's about sovereign debt. We think that that parachute didn't open for a reason. And where I think people are still wondering why. MARCN has always great to catch oup with you again and in the window into the into the world of hedge funds, want to bring you some

breaking news just very quickly. At another exit at Tesla, the stock is down by a little more than one percent in the pre market, losing its general council two months after hiring him. Tom the general council is leaving. In a statement, he looks forward to returning to Washington to continue his work with Tesla in an outside council role as in the past. People familiar with the matter said he found that Tesla wasn't the right cultural fit.

That's the actual language in the headline that story, just dropping across them like you and me. We mean people understand you and me. There's no the wrong cultural fit. And then this is part of a wider story with a series of high profile exits at the company. Don't delve deep into the round of speculation. But it's the optics of this that I think signals a little bit of negativity. So the stock down by about one point

three five pc. I don't think it's necessarily dramatic, just plays into a much wider story about Tesla's semically inability to keep hold of some senior names after they've hired them. So just a couple of months after hiring the general council, he leaves Tom, I'm looking at the Barns and you know you I watched the Barns, should say. This is according to the to the Wall Street Journal. So this is the Wall Street Journals reporting Headlin flow out there.

And again the UBS find in France earlier as well, futures at negative three down, futures UH negative thirty three. And again I'm watching that yield. Germany now solid under point one zero point zero nine percent, John, and the Germany tenure yield. I'm looking at it a Blackpletat market, they continues to do well, the hangs staying overnight up by one percent in China, equities a little bit firmly in Japan too. In Europe they're okay stocks. The higher

futures here a little saggy. And you just wonder about that, you you you wonder, uh, the way we recovered yesterday, and as you said earlier, it's a grind higher as we drift towards the Federal Reserve minutes to come out at two pm Eastern, a huge Federal Reserve retreat in Ja. And you reformalized in the statement communicated by the chairman in the news conference. And we'll get the color in the minutes a little bit la Mark Connor is the

credits were still with us. I mean as you say that the hatch funds have not participated in this lift, right, what will it take for them to participate? Um? I I think that if when we get we we're through earnings, as we start to get a little bit of a window on how this this next quarter of earnings will happen, I think you'll see engagement, so pre announcements, that's going to be the next window. Mark Connors, thank you so much.

Thank you, don't be a stranger. I'd like to get back to first principal investment work, and you can do that with Kate Warren uh cf A with Edward Jones at Research and importantly she's been there through a few cycles. Kate, let us start with the GEA of the percentage of people that really don't have a memory back past two thousand seven? Is that overplayed? I mean, in the day to day grind of Edward Jones to a lot of people remember normal markets or is that just gone by

the wayside? Well, I think it's a combination. That they remember the two thousand and eight downturn and worry that that will happen again, and they probably don't have much of a memory normal markets before that, So I think

you're correct. But I do think that the solid, strong rebound we've seen since the market strategory cover in two thousand nine has, on the other side, made investors of two minds where they're worried about a severe downturn, but they also have very high expectations for returns, and that's an interesting time that's right where I wanted to go, and you've got the mathinists to do this. We talk about a single digit world. What's the actually assumption of

our near retirees right now? My answer is it's it's double digit or high single digit, and it ought to be set lower. Am I right? You're absolutely correct, And I think that's because everyone has what's referred to as recency buy. It's or more precisely, if the returns have been double digit over the last few years, then people

tend to expect that they will continue highlight that. Now, obviously last year with your decline, but you still go back in your average over the last few years, and the returns are higher than they're likely to be over the next few years. As we get back into an environment where we're more likely to see cycles, and we're interest rates are a bit higher, and some of the things that have helped to propel markets, uh who rise

over the last few years aren't quite as strong. So okay, one of the characteristics of the recent markets has been volatility, just you know, getting whips on in December and then rallying back here in early twenty nineteen. What do you think is driving this volatility and is this something that investors just have to get used to. Yes, I think this is sort of a return to more normal volatility.

So with Tom's question about investors, remember, no, we also had some very low volatility years, and I think investors sort of forgot how volatile normal markets are. So in answer to your question, yes, I think investors have to get used to more normal volatility. I think we're still in the bull market, but as you get later in the bull market cycle, with rising interest rates and a little less in the way of tail winds, I think we'll see more volatility ahead. At the same time, though

the fundamentals are still positive. We've got modest economic growth and modest earnings growth, and the rest of the world actually looks more attractive than the US right now, So I think investors really need to be looking for the opportunities rather than worrying so much about the higher volatility. So that leads me to the next question, the obvious questions, where do you see opportunities in the market these days given a volatilty? Well, right now, we still think U

S docs to have more room to rebound. The pullback in December probably gave the bull market more fuel because a lowered valuation and right now presenting stratio and the SMP five hundred is really near it's five year average, So that says stocks aren't as expensive as they were back last fall. But we actually think the opportunities are more outside the US, and the reason is investors have become so hessimistic about growth in the rest of the world.

With China providing more stimulus, with Europe looking like it may stabilize, the valuations are more attractive, and we actually think that's the place to be putting money right now to add and improve the diversification of a domestic portfolio. What about emerging markets? Interview after interview the EBB and the flow the challenges of international in two thousand eighteen Octo Weell February of last year. October of last year,

December of last year. Do you have the courage to say to somebody at the kitchen table across all of America, e M is the place to be. Well, I wouldn't quite say e UM as the place to be, but I would say Tom that if you're an investor who owns to US DOC, some US fonds and some developed market, you want to be adding emerging markets, and the reason is that, again the pessimism is high related to emergence. With China stabilizing its economy, we do think they have

the tools to do that. That's a positive for emerging markets. And in addition, many other countries are also taking stimulative policies. So when you think about it, we've all heard that, you know, basically the Federal Reserve is key to the outlook for this year. In the US, that's true, and the rest of the world we just don't pay quite as much attention to what central thanks you're doing there, And if the dollar doesn't continue to strengthen, that's actually

a positive for investments in emerging markets. Very good, Kate Warren, thank you so much. Of every Jones greatly appreciated. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio