David Hunt Discusses Rates after the Financial Crisis (Podcast)

the world of asset management. UH. They've been around over a hundred years. Their quantitative group dates back to seventy five. It it could be the oldest quand group h that's out there. Pigam is somewhat unique, not just in their institute cutional um focus, but they are a very interesting mix of fixed income, real estate and real estate financing. UH.

That makes for a really, really fascinating combination of asset classes. UH. They David is as knowledgeable as anybody on these various subjects. If you're at all interested in private credit, real estate investing, fixed income investing, as well as traditional public markets, UH, you're gonna find this to be absolutely fascinating. So, with no further ado, my conversation with Piegams David Hunt. I'm Barry rid Hilts. You're listening to Masters in Business on

Bloomberg Radio. My extra special guest this week is David Hunt. He is president and CEO of Piegam. This is the investment arm of Prudential, the insurance and asset management giant. Uh. You might not be familiar with PI jim, but they manage one point to trillion dollars in assets. They may be one of the largest top ten asset managers. You might not have heard of. Uh. David comes to us with a bachelor's degree in engineering and he spent about

twenty two years at Mackenzie. That's a really unusual background to go into the asset management business. Tell us a little bit about how you found your way uh to PI JIM. Well, to be honest, it's not that unusual. Actually, the asset management world has quite a few people who have, you know, management consulting backgrounds UM. And part of it, I think is that UM, we are fundamentally wired to

be client oriented. And I think one of the aspects of a great asset manager is the fiduciary part of that culture, and I think you get that and spades when you're working uh in in a firm like McKinsey, and I really have appreciated that set of values from the very beginning. So you mentioned being client oriented. Who were the clients of pigum. So PIGAM, as you were nice enough to point out, is the tenth largest asset

manager in the world. UM we serve most of the world's largest pension plans and other large sovereign wealth funds central banks, so we are predominantly an institutional manager. We do have a retail business here in the United States which has been growing quite quite rapidly, but we're better known in the institutional market. UM we UH serve I would say the world's most sophisticated client based with a broad range of products. So we offer obviously public equities

and public fixed income. But maybe less known is that we're the third largest real estate UH manager in the world, and we do a lot of other alternatives, including things like private credit, which have obviously been very UH hot in in recent years. So we have both a public and a private business. And when I when I was working my way through the various websites of PJAM. Not only are you one of the largest real estate managers, but you're also a fairly substantial real estate financer. Did

did I read that correct? No, you're You're absolutely right. I mean, for many, many years, and this really does go back to the history as an insurance company. Obviously, we financed a lot of office buildings. Prudential at one point was the largest direct owner of of real estate and the United States. But we also have been lending

into the real estate business for many, many years. So those are old insurance businesses, and what we've done is to take in them and essentially make them available to third party investors. So at this point PIJAM, although it started out with an insurance heritage, only about twenty percent of my fees come from Prudential. Eighty percent of it

actually comes from a third party clients. So when you're dealing with some and wealth funds and central banks and pension funds, how is that different than the traditional base of insurance clients. Um, it is quite different. I mean,

insurers need their money managed in very specific ways. They have they have real specific liabilities that set future dates based on the tables and in general, they want to manage their money so that they effectively match those liabilities with the cash flow of their of their assets and so done. Well, there's actually not that much investment risk that is inherent in those in those books. Third parties

tend to want a more active approach. They have less specific liabilities that they're matching, and they will often want a more active um and higher active share style of management than insurance company will. That's quite fascinating. So you spent twenty two years at McKenzie. How did that prepare you for running what is now the tenth largest investment manager in the world. Well, I think maybe in two ways.

One is that UH, I ran UH the asset management practice at mckensey, so the group of people who actually served asset managers. So I've spent a lot of the last year's working with the leading CEOs in the asset management industry, and so I think my pattern recognition of what's worked and what hasn't is reasonably good UM over that period of time. And the second one is that I do think that UH managing and leading in a professional services context UH is a lot has a lot

of parallels with the investment world. Uh, investors are people with strong convictions. They don't need a lot of management. They might need a little inspiration and leadership. Um, there are people who have deep convictions, which are only good if they're contrarian. There's no point in having the same view as the rest of the market. And so by nature, uh, they're very independent thinkers. And I would say the same

things as true of good consultants. And so having a style where you're able to inspire and lead but not manage is a is a style that works very well in the investment world. What about the engineering background? Undergrad you want to Princeton? Did you plan on going into finance? Was the engineering background something? So? I think the engineering is a little bit of a misnomer in the sense that effectively the econometrics program at Princeton is in the

engineering school. And so I actually, I actually really majored in econometrics, and I my senior thesis was on the emerging markets debt crisis of the early eighties. You may remember that, you know, City and many others got themselves an enormous amount of trouble, and I built a model of how that worked out in order to help predict some of the future trouble spots. But so it was effectively in an a metric which led me obviously very

easily into finance. Quite fascinating. You were at McKenzie prior to joining Pigeum. What was your first job at Paigeum? Like? What was your role when you first joined the company? So I joined in the same role that I that I have now. I came in as the president and UH and CEO UM, and I think that in many ways it was a very a very natural fit with my with my background. I probably spend about half of

my time leading but not managing the investment units. I spend about a third of my time externally with UH, with clients at conferences, are really trying to keep my ear to the market. And then I spend some time on my kind of corporate duties for Prudential more broadly and with our board. So what's it like leading but not managing the various asset units. That sounds kind of interesting.

It's it is absolutely a delicate, a delicate balance. And I do like to say that the right style of leadership for a role like this is much more as as a servant leader. So I come into the office in the morning, and what's in my mind is what do I need to do to help the people running our businesses be successful. I do not come in the morning and think these guys somehow report to me in a classic corporate style. And I think that's an extremely

important mindset in the investment world. Investors don't want to work for a large corporate hierarchy. They want to work in a place where they have autonomy and freedom to express their often contrarian points of view. And you need to create an environment where that's not just acceptable but

actually encouraged. So what happens if one of these contrarians suddenly go off the rails and they're talking about, Hey, this this X y Z is terrible and we need to move to golden bottled water and we're gonna hide in a cave somewhere. How do you deal with the occasional um over reactions of managers Because all of us have a tendency to allow our emotions to get get the best of us without a doubt. And I think one of the things that we do well is we

have a very discipline, team based investing process. So one is that we have very few individuals who are making those decisions. We have a clearly defined process which lays out how we believe in investment UH thesis should work, and we stick with high conviction trades that stay within that philosophy and oftentimes will be wrong for some period

of time. Um, and that's okay. But we make a very clear distinction between high conviction within a process versus somebody who would make a move outside of what we've told clients that we're actually investing behind. And in that case we ran it back very quickly and very abruptly. What was the environment like during the financial crisis? Was everybody on point and thinking, Um, hey was something I wasn't in this role during you you missed it? So timing is important in all of Yes, moved over in

two thousand eleven. Okay, so you've been there for seven years decent um. So your whole experience at PIGEM has been during what pretty much looks like a rip roaring bull market. Certainly domestically if we're talking emerging markets, perhaps not so much. How do you think your role might change when the wheel turns? Well? I think it's a great, a great question. There's no doubt that in the years

since I've been in this seat, we've had pretty friendly markets. Um. And for our mix of business, I would say that's been particularly true because not only do you have you know, uh, the equity markets which have been uh, you know, moving up, but you've also had relatively low rates around the world and pretty stable UM. And then you've had a pretty attractive real estate business coupled with our private businesses, which really have thrived as banks have pulled back from lending.

So we lend money into the middle market, we lend money into the real estate business, and banks really pulled out of that or or or substantially out of it, and as a result, those businesses grew very rapidly for us as well. So I think the macro environment for us has been extremely strong. UM. We all know that will turn. UM. Nobody can predict exactly when, but it will.

And part of the art of all of these managerial roles are being willing to stay a bit ahead of that and begin to prepare uh portfolios for a for a downturn. So you guys have about you, guys, Pigium has one point two trillion in assets about if I'm doing this from memory, so far into me if I'm off a little bit, a little less than two thirds is fixed income? Is that? Is that about right? Seven

hundred plus? Yes, that's that's right. UM. We tend to look at it a little bit more in terms of fees rather than assets, because that tends to give you a better picture. And from that, about forty of our fees are public fixed income, about a third of it is public fixed income, and the rest of it at alternatives, including quite quite interesting. So given that we've just had a thirty plus year bullmarket in fixed income, and last year was the first year we really saw that sort

of coming to an end. What does this make your group think in terms of UM, how you're going to manage duration, risk, UM, et cetera. Are there big changes coming or is it hey, we have a thirty year time horizon, we don't care about last quarter. No, I think absolutely. We spend a lot of time thinking about

the effect of rates on our portfolios. UM. If you go back in time, we were one of the first people after the financial crisis that said that we believe that rates would stay low for a very long time. And actually that was an out of consensus call. Most people thought, oh, it'll be like the last time, it will snap back quickly, And we really didn't think so.

And the reasons behind that had less to do with the FED and more to do with the fundamental problems we have in our economy, which are low productivity and really low growth, and we felt that until either of those got fixed, rates were going to stay really low around the world. And you coupled that with very accommodative central bank policies, and obviously that turned out to be true.

I would say as we went into thirteen and fourteen, more and more people piled into our point of view, and I would say lower for longer kind of became the consensus view. Now you see many more people are beginning again to say, finally, growth is beginning to pick up. We actually do believe now that rates are going to rise. We would agree to an extent, but probably to a much less extent than most other people. We still have lower numbers on our our yield curve than most other people.

We just see, uh, this lack of productivity, lack of growth, and importantly the demographics around the world as keeping rates much lower than they've been historically and for a very long time. So let me ask a wonky question, giving your econometric background, how much of the so called weakness and productivity growth is a measurement issue. I know in my firm, or even here in Bloomberg Technology, software algorithms allow us to do so much more per individual employee

than was even imaginable ten or twenty years ago. So I'm always shocked. I want to hear, oh, there's no productivity gains, I see massive productivity gains. Or is that my narrow biased technology oriented service sector perspective. So I think there are two different ideas in your in your question, UM. One of them is whether or not there's a measurement problem with productivity, and the answer to that is absolutely yes.

But the more relevant question is is there any worse the productivity problem measuring that than there was in the past, and that we would actually say, there's no real evidence of that. It's always been badly measured, UM, and we don't see that it's necessarily any worse than it has been, So we don't think you can attribute the productivity problem

to measurement at this point. The second the second point you made though, is you know is your is your lens on the world just unique and different, and I would say that, I would say yes. One of the interesting things about productivity when you break it down industry

by industry is it's just massively different. So communications and media and some I've seen enormous growth in productivity telecommunications, but very large, very large portions of the economy in terms of healthcare, in terms of retail, have not seen that. And so, uh, the productivity story is not a kind of flat average. It's very much a tale of two studies. But much of the economy is not seeing the productivity lifts that you described. Quite fascinating. Let's let's talk about UM.

Where we are today in the markets, we see the yield curve flattening. Everybody seems to be jumping up and down and saying this fortends a recession in the in the near future. What what is pigeons view on this? So we believe that the yield curve will continue to flatten. UM. We do believe that the Fed quite properly will continue to raise rates at the at the short end, I mean, the economy is doing very well, UM, and we think that's entirely an appropriate policy response. On the other hand,

as we spoke about a moment ago. We do believe that there is an enormous amount of money that's coming from the aging population, so in the retirement systems and pension funds, which will continue to weigh down on the long end of the curve. So we think that flat meaning that they're big long term investors, big want to stay with long duration for they are because remember they're matching liabilities for that as opposed to looking for the absolute return. So we think that will continue to weigh

on that, which will just flatten that curve even further. Now, at some point does it become inverted, quite possibly, But remember an inverted yield curve doesn't cause anything. It's more a symbol of what may happen, because what the market is telling you when that happens is that people think long term growth is actually below what short term rates are, and that's actually the symbol that the signal that's being

sent out by an inverted yield curve. But we've also had inverted yield curves which have not led ultimately to recessions, and there's certainly a lag that goes with that. So you're still looking at kind of eighteen to twenty four months before that signal even really kicks out. Thank you so much for saying that it's a symbol and not a cause. I can't tell you how many people seem

to get that wrong. And it's absolutely um infuriating. We're also starting from such low rates, and as the FED normalizes, shouldn't the yield curve flatten anyway during that process? It should and and remember kind of low all depends on your perspective. So if you're in Japan, rates over here look positively luxurious, um. And it's even true in large

parts of continental Europe. So while we if you have a view on our our rates, many others around the world see US as an attractive rate play and certainly as a business we uh, we see quite significant flows from outside the United States coming back into credit products for that very reason. This is a yield pick up for them. But that of course in turn keeps our

rates lower. Sure makes a lot of sense. UM. So you have a substantial exposure in the private equity world, and in that side of the market, how do you, um look at that? Some people have been calling it frothy? What's what's the pigem view on private markets and private equity these days? So I would say that our view on alternatives broadly defined which I would include private equity, I would include real estate in particular in that and

our private credit businesses, UH is very positive. We actually think that UH private forms of investment will continue to grow pretty rapidly. We're seeing a lot of demand from our big institutional clients for that. Many of them have actually been taking money out of public equities and moving

it into into alternatives. One of the important things to remember about private markets is that in many ways they can weather a downturn a bit better, right because it is no daily prices, and so if you think we're twenty four months away or whatever your particular time frame is, UH, you may decide that a better way to play this

market is through the private the private businesses. So we we have a very attractive view of that UM and much of the dry powder that's been raised in p but equity, and we are not in the large buyout business ourselves, but much of the dry powder and there we think will actually probably sit on the sidelines until pricing gets a little bit more reasonable. I was going to ask about valuations. A lot of people seem to

think stocks and bonds are our price. We can we can debate that it's certainly not historically cheap on on the equity side. But that said, when we look at venture capital, when we look at some of the private equity firms, it seems to be a little frothy, seems like a lot of money has flowed into those spaces. Do you see the same valuation issue in private equity or is it a hey, we don't get daily prices, so we can ride out a downtown a little more

comfortably in that space. So this is where I think having an institutional perspective is maybe very different than what you hear in the in the retail world. So our view is the biggest risk the markets present today is high prices, not volatility. Actually, most of our clients would be quite happy if we had a bit of a correction in the market, because their biggest problem is today's vintage of money that they're putting out. What kind of return over ten years will they be able to earn

on that? Given the high prices that are almost any asset class that you've got. So actually a bit more volatility would be better and probably lower risk for most institutions. From where we stand today, and I think that's with the focus on what is the level of the market, it completely misses the point that that volatility is not risk, and actually a bit more volatility would give people an opportunity to get into markets that they've been priced out of.

High valuations mean forward looking expected returns are lower, and lower valuations are the opposite means. Quite quite interesting. Let's talk a little bit about the industry, because you've gotten to see how it's evolved from multiple perspectives um over the past almost three decades. What do you see as the evolution of the industry. What's the most significant thing

from your sort of institutional approach. So, I think the most important trend that we see right now in the industry is very much the fact that the two worlds of alternatives and long only asset managers are coming together. So the the entire universe was broken into these two. I mean, there were the black Stones and Carlyles and kkrs on the one hand, and they did they started

in private equity but expanded out broadly from that. And then there was the broad variety of people who largely did long only public securities, and these were covered by different analysts. They were talked about by different parsons. Even the press had very different people who covered those two groups. UM. That really is now UM, we're seeing a fundamental merging of those. So more and more you'll see firms like PIGIM where we are very much a blend of those.

We have a big alternative business. We have a big long only business as well. And you're seeing many more of the UH historically alternatives guys getting into long only all of a sudden they think core real estate is just great, UM. And you see a lot of other long only managers deciding that they'd like to really launch private credit and infrastructure funds. So you're really seeing this

merger and that is driving a need for scale. So the other I would say secondary trend you're seeing is that the large global firms are winning and they are taking share away from individual country specific firms UM, who have largely grown up in an individual asset class. So on the retail side, the biggest change over the past decade has to be the rise of low cost passive indexing.

How are you seeing the reverberations of that. On the institutional side, what what you guys do very much is not passive by design, you're looking for active share, you're looking for non correlated assets. It's a completely different it's very a very different game. In fact, we've designed our approach to the equity markets to work with passive, and we believe that passive will continue to grow. We think that it has an important role in many investors portfolios.

But what you need with that is than other high active share strategies which will allow you to drive alpha over longer periods of time. And most of the money that we manage is done in either that style, or we have a pretty big quantitative business um where we actually use computer algorithms which capture very consistent alpha over long periods of time at pricing that's just slightly above

what you would find in an index fund. So those two strategies are designed to work with, not against, passive strategies, and we've actually seen that approach be far more effective than what many others have done, which is effectively try to fight passive, particularly in the retail side, which has not been a winning strategy. So my assumption is that your clients have a big slug of passive exposure and they come to you for the active side. That's correct

and and you mentioned the quantitative group. Pardon me if I get the dates wrong. You had one of the first quantitative groups on Wall Street. Does that date back to like nineteen seventy five? You have a very good memory, it absolutely does. That's uh, that's not from the notes. Remember being a little startled in saying nineteen we were we were, We were absolutely one of the very first people into pioneer the use of computer algorithms. For that.

The business goes under the brand q M A a pig in business and uh, you know, it's been remarkably successful in both the US and in global markets. They also do a lot of our multi asset class UH investing, which again has had very attractive returns through through a cycle. And clearly that's a business that's highly scalable once you've you know, got your got your algorithms thoroughly thoroughly tested.

So we're talking about active versus passive and quantitative versus traditional. Uh. One of the things that keeps coming up in those discussions is the declining number of companies that are publicly available to trade, especially here in the United States. Any thoughts on that? What how do you how do how does pigam view that in terms of your public market exposure. So we uh, we are quite troubled by the health

of the public equity markets in the US. While they hit all time highs, we think that that actually UH masks what's going on underneath, and that is that our public markets in this country have ceased to be the home of choice for fast growing UH, mid sized or smaller companies. So if you go back to there were almost eight thousand publicly traded companies, there are now three thousand, seven hundred, so almost more than half falling in terms of number. As worrying or maybe even more worrying is

the is the I P O trend. So again, if you go back to the nineties, we were looking at five companies a year that we're coming in. I mean, if you were a tech and UH entrepreneur, then your your holy grail was to become public. Now your holy grail is to take another dollarp of private capital and stay private for as long as you can. And so what we're seeing is that basically private equity is becoming the owner of choice for these companies. And at one

level you can say, well, maybe that doesn't matter. At least we're funding it, and the capitalist system is working. But what's hidden in that is that it used to be the returns from these fast scoring companies were available to retail investors, and they now aren't. Um they're actually captured by institutions through private equity, and you know, that's a bit of a shame. I think that the democrazation of our capital market has always be an important part

of the American story, and that's becoming less true. But the public markets are going to have to raise their game because private equity has been very successful. They're getting better better at what they do. They have proven to be good owners of businesses, and the public markets are going to have to raise their game if they're going to work really turn this around. I don't necessarily disagree with you, but here's the pushback here on this subject.

When you control for the number of teeny tiny pink sheet companies that were a dry cleaner trading at three million dollar valuation, when you remove all that, the big decrease from eight thousand to four thousand, most of that

goes away, says some uh AN analysts. And then you take the Jobs Act under the Bush administration, which really opened up the ability for more people to make investments in then private companies, plus the ton of venture capital cash flowing around, I mean there is a uh tsunami of cash out there. Is it a shock that that we're not seeing as many companies trading publicly as we

did ten and twenty years ago. I don't necessarily say I was it's a shock, but I do think that our public markets are very much under threat by this um And almost all of the sources of capital that you describe, whether it's private equity or venture um, those are institutional pools of money for the most part. So yeah, as an institutional money manager, I will be able to capture a good deal of that, but it won't be

available the way it was in the ninety nineties. Two people through their four oh one K plans, and I think that is a bit of a shame, and it's certainly a big change in our capital markets. I don't know if we ever made the decision that we wanted to have private equity be, you know, a dominant funder of of midsized companies, but I think cats often they've been really good job at it. So what's the prescription for the various NASADAC nys c um various forces around

the world to repair that. So the so the popular whipping boy for this has been regulation. That regulation has gotten so onerous on public markets that many people don't want to kind of bear the scrutiny of that. And indeed, UH last year, in two thousands seventeen, we had more companies go from public to private than we've ever had. UM. I personally think that that is true a bit, but

it's actually far from the full the full story. The reality is, over the last ten years, effectively the banks and the cell side have withdrawn their support of small of small stocks. There's no analysts covering these anymore. They're not putting out capital in order to trade UH these, they're not supporting them. And so we would actually need to go back and rewire a good deal of the ecosystem that supports public trading and small companies in order

to fix this problem. And of course it's exacerbated by the huge flow into index funds that you described earlier, because there's a big difference between being in the know SMP not being Most of these companies would come in they wouldn't be in that and so they're not drawing the kind of capital that they would have pre pre indexing. Post financial crisis, we've seen a huge consolidation amongst the

big banks, amongst the big investment banks as well. How much does that top heavy much fewer banks managing the top half of assets effect what you're describing as the lack of enthusiasm for small and MidCap companies and for for I. P. O. S Oh, I think I think it's had a very significant impact. We have not only the consolidation that you refer to, but we've also had a massive retrenchment. Right so the continental European banks have gone back to continental Europe, the Brits have gone back

to their island for the most part. And whereas you used to have a whole series of large global banks who staked their ambitions on doing that, you now really don't. And so we see that even in our own trading businesses, where we have less options for counterparties um than we did UH ten years ago. We also get a lot less UH of our our analyst work done by the cell side, and as a result, we have many more of our own researchers and analysts than we would have

had a decade ago. For sure, quite fascinating. Can you stick around a bit? I have a ton more questions. We have been speaking with David Hunt's CEO of Pigam asset Management. If you enjoy this conversation, be sure and come back for the podcast extras, where we keep the tape rolling and continue discussing all things asset management. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. You can check out my daily columns at Bloomberg dot com or follow

me on Twitter at Ridoltz. I'm Barry Ritolts. You're listening to Masters in Business on Bloomberg Radio. Welcome to the podcast. David, Thank you so much for doing this. I've been looking forward to this. I'm fascinated by Pigamin and you hinted it at something I have to bring up. How do you get to be the tenth largest asset manager with a hundred year track record and not only does the

average retail investor not know who you are? Half the people from the industry I spoke to I said, oh, I'm interviewing the CEO of of Pigam and they're like, who, It's a trillion dollar firm and and I'm I'm guilty of it. Also, how have you guys managed to stay so under the radar grow as rapidly as you have? So the grow as rapidly as you have a part as the easy question to answer, and that is because we uh, we believe that we have some of the

best investment performance in the industry. At the end of the day, that's how we measure our success as to whether or not our clients are doing well. We actually don't care about how much a U M we have. We don't uh, we don't have a goal around that. We don't have financial goals, but we have a lot of goals around creating excess returns for clients. And if you do that well, the rest of the things take care of themselves. You'll have more clients, you'll have more

money for existing clients, and your growth will happen. So let's come on to your other question, which is about what about the What about the brand? So PGIM is only two and a half years old as a brand um. Prior to that, all of our different affiliates had their own brand names, and they also have their own independent websites right under the parent companies. Jurisprunce and while while this business was largely a US business in some ways,

I don't know if that mattered very much. But as you may know, we can't use the Prudential name outside really of the U S and Japan, and there are a few other exceptions. Is that is that due to contract or is it because of the Prudential Plc, which is based in the UK and which is not in any way affiliated with US, but they own the rights

to the name Prudential. So as I came into this role, um it was clear if I wanted to expand the business to be truly a global leader in the investment world, we needed a single name that we could use around the world, and so we looked around. We obviously did a lot of test marketing, as you can imagine, and we came up with with p Jim, which is a name that we can use everywhere. But that is only two and a half years old, and like with any brand, it takes time for that to really sink in and

be associated and it's a new brand. We didn't have really a name that we used externally for the the entire investment business, so it's not surprising to me at all that you've you've found that, but I do think that's in the process of changing. And my hope is that when we sit down three years from now and you've talked to your colleague, that they will say, oh, yes,

I have heard of them a bit. And there are a handful of acronym based asset managers from every M, S C I, UM, D F A. There are a bunch of them around UM, Ge Sam, M sim GAM, I mean, pick your favorite. Yeah, although ge Sam and those you know you they're really under golden sacks, So you really think I don't think of them as an acronym business the way I do. Uh an M, S C I or A d F A UM. So that's probably old enough to know what PIMCO stands for. Uh. Yeah,

Pacific Insurance Management Co R and uh. Not only that, I'm old enough to remember, uh And it helps to having had Bill grows here. The story of how pim was launched out of the Pacific Life Insurance Company began as, hey, why don't you let us manage your fixed income and maybe we'll find some other people. Yeah, so it's it's it's one of those things, and UM, I guess you forget I forget PIMCO is an acronym because I'm just so used to it as PIMCO. And then that happens

over over time, well thirty five years later. Sure, So well let's revisit this and and we'll see how how broadly pigem pigem has been has been accepted. So there's a bunch of other questions I wanted to to get to UM that we kind of skipped. We talked about market valuation, We talked about UM, your your role at

at pigam. UM, Let's talk a little bit about consultants, because I think consultants these days have gotten a bad rap, some of which is not deserved, but some of which is how do you how does your office work with various consultants two different large UM by side customers like pension funds, insurers and and solein wealth funds. Well, the pension consultants are obviously extremely important partners of ours in

in the whole ecosystem of money management. UM. You know, they are the people who the trustees look to for advice and guidance. There are also the people that do a lot of the asset and liability studies UM that the underpin the strategic asset allocation. So here's my question about that, and and this is really off the top of my head. Why does a investment committee at a big pension fund need and outside consultant. Isn't what the consultant does really their job? I think that's a fairly

common um perspective from people. Why why is that view wrong or is it wrong? Well? I think that there are two aspects of of the question. I mean, one of them is just are they doing the same job, And the answer to that is, in general no, Um. If you look at what goes into a detailed liability study of one of these uh, most pension funds are not staff to do that. And by the way, they only do that every few years, and it would be still leave for them to do it. So I think

that's actually an effective way. In other words, they have an expert from the outside as opposed to needing to develop any house for the occasional you know, quadrennial need. And the the other then is is having a second opinion on asset asset allocation sessions. Most c i O s do have their own internal views and group that does that. They have a pension group. They may even have a second pension group UM that they get views on that because they do want to get the very

best thinking on those questions. And I think that's completely completely appropriate. Quite quite interesting. Um, we discussed your clients, We talked about UM pensions a little bit. Lots of pensions in the United States, especially public pensions, seem to be somewhat underfunded, although there are plenty of corporate pensions that are underfunded. Also, how is that going to play out?

What what should these underfunded public pensions be doing today so that the rest of the taxpayers aren't on the hook, uh for for a big bill twenty thirty years down the road of the pension guaranteed trust is eventually going to run out of money. How do we deal with this? Well, I think it's a great question. I mean, for most of my career, you could walk into a corporate pension and a public pension and guess that the asset allocation was and you largely be right within a few percentages.

Now you go into a corporate plan and for the most part, uh, they have fundamentally de risk their portfolios. They have moved out of risk assets. They're much heavier into fixed income, they started to match through UH liability driven investing match their investment and in some extreme cases they've even done UM a pension risk transfer, which is to literally take that pension off their balance sheet and

give it to an insurance company to manage. But they've really worked very hard to d risk because what they care about is not absolute return. They care about whether or not their funding level relative to their liabilities is UM going to be appropriate so they can meet their meet their obligations. So they've been de risking. At the same time, the public plants have really been going in the other direction because the assets and the liabilities there

are not actually managed in the same place. The politicians generally control how large the liabilities get by what's promised

to unions and others UM. The c i O S tends then need to manage those assets to match that, and the only even if it's unrealistic, even if it's unrealistic, and so the only way they've been able to do that has been to continue to move out on the on the risk curve so real and leverage all equity, a lot of private equity, a lot of hedge funds UH to try to do that now, if you do the math, you really can't convince yourself that investment returns will actually make up for the shortfalls in a lot

of this. There's really no way. And when you look at the recent decade of alternatives that most of these pension funds are in, I know they for some reason, I can't explain it. They all have higher expected returns, but the actual performance for the most part across the whole industry has been pretty poor. That's true. Uh, And I would say that that's been uh as we've been.

We did a big study on different forms of alternatives, and the group that did come in for the toughest test was was hedge funds, because not only did you have the return problem, but actually most of them turned out to be quite correlated with the equity podats. And so you know, one of the reasons they were called alternatives was supposed to give you a different risk profile, right than then you had with your public markets, and

they really haven't delivered on that. Private equity interestingly did, as did real estate. Private equity least correlated and returns than than the rest of the alternatives. And and and some of that has to do I would imagine with the ability to not only have these longer holding periods where you're not more absolutely to market, but the ability to take advantages of the volatility and the dislocations when value presents itself. Private equity has the best seat to

jump into that or am I overstating it No? I think I think that that that ability to take the kind of seven to ten year view and not be forced to either mark the market or necessarily to invest this year even is a very attractive piece of the business model. I wouldn't underplay though, the role that getting kind of common incentives have played. I think that if you go back in the history of private equity, they the early days, a lot of this was financial engineering,

and it was it was done with leverage. That's the l b O side. That was not true today you really do you find that, uh, you know, private equity have been good owners, They've been investing behind their businesses. They get the incentives right with management um and I think they've proven that when you have a longer time frame, that's actually a very effective way uh to run to run a firm. So I pulled this off of the website that under your bio, I have to have you

UM explain this a bit. Mr Hunt oversees all aspects of the AST asset management business, including its public fixed income, real estate, public equity, private fixed income, and mutual fund units. That sounds like an enormous job. What is your day to day like? What what is a day in the life of David Hunt like at Pigeon? So I'm not sure there's any typical day, which is one of the wonderful things about a role like this is that it's endlessly,

endlessly varied, UM. But I can say that over the period of a year, UM, I would say about half of my time is spent um leading but not managing the businesses that you described. About a third of my time is spent out with clients UM and and kind of outwardly focused, so I'm trying to keep my ear to the market of what clients are really needing and wanting. And then the remaining time is spent more on kind of corporate governance issues and working with prudential executives in

our and our board. So it's a it's a pretty nice mix of activities. So you mentioned you have your ear to the ground and listening to what clients UM are talking about what our clients saying today, What what are they concerned about, and what do you think is kind of interesting that's bubbling up from that client base. So I would say the most interesting thing is that to watch the battle between the head and the heart

of many of our clients right now. So they look at all the numbers and they the economy is doing really well. Um, you know, we've got four percent growth in the second quarter, earnings were up, inflation looks really good. Um, you know, they should be feeling pretty um, you know, comfortable with with risk assets. And then that conversation ends pretty quickly and and the heart comes in and they

are very defensive. All of the questions they asked me are about positioning their portfolio to get through the next downturn. They're worried about trade and political risk. They're not worried about the traditional business cycles. So you have this very strange paradox where the numbers all actually look really good, and yet people's questions and behavior is actually much more of a group of people who is worried that, um, we're going to have a pullback. That that's that's quite

quite fascinating. It's um, that battle between head and heart is is an ongoing is an ongoing issue amongst all investors. So how do you how do you respond to people when they say, you know, we want to be defensive and and how much of that is still the scar tissue left over from the oh eight oh nine. I

think it's a great point. There's there's a fascinating anthropological study to look at those c I O s who were in their seats when we went through the crisis versus the guys who got their job more recently, and they have very different behaviors. And there's no question there's a lot of scar tissue that that still remains from the people that have their jobs. I don't know if you remember the book The Money Game by Adam Smith.

He within the book there's a chapter that describes a person running of funds and he says, I have to hire all these young turks to trade because I would never touch any of this stuff. I've been through the previous cycles and all this stuff looks like junk to me. But I would underperform if I didn't have the hot shots. And when they blow up, I'll still be around afterwards. They'll lose their jobs, but I'll capture the return now that I wouldn't have otherwise. It's kind of an interesting thing.

You were at Mackenzie in the middle of the financial crisis. What was the experience like there when it looked like the world was teetering on the abyss. Well, I think like almost anybody who was working in the financial industry, it was. It was absolutely frightening, particularly because of the ramifications all around the world on almost any industry of what was happening in the in the financial world, um,

you know, to some extent for consulting firms. Uh, there was an enormous amount of problems to be solved coming out of it. And if you're in the business of solving problems, that tends to be a good thing. That type of problems. Let me tell you, growth strategies pretty much came to a grinding halt. But but workouts and liquidity and risk management really came to the came to the four So the mix of work changed. But it

was absolutely fascinating and terrifying at the same time. So the one question I didn't get to that I would be remiss if I did not bring up, is the role of all the new financial technologies, both for managing assets and for running an asset management business. How is pi JAM looking at all the new fintech that's out there and what does this mean for the industry going forward. Well, I would say we're at peak hype on the technology

front at the moment. I'm convinced that if I just slap the word AI on the name of any mutual fund, I could raise another billion dollars. That's really not a good place to be. Um So, I I think that it's important to focus on technology, but I also think you can't be carried away with a lot of the

things that you're reading in the in the press. At the moment um, we have spent a lot of time on artificial intelligence and how to apply it to the investment process, and we do think, uh, there are some real possible breakthroughs in that particularly come coming from the use of satellite imagery and also the use of location device is for example, in our real estate business, we're able to underwrite an office building using that kind of information in a far more sophisticated way than we would

have before. What satellite information or I mean imagine you you you you you're about to buy in an office complex and you'd like to know for the last you know, five years, what is the traffic been like at how many cars have been parked in there, what is the foot traffic around it? And you can actually get real data on that, you don't just have to look at

what's happened to UH two sales. So there's there. The alternative data is important, but it's going to be an evolution um and many people will find false signals for a long time. And we we know running money quantitatively, you look at a hundred signals before you find one that has real staying power, and so it'll take time before we we figure this out. But I think that

is an important piece of it. The other side of it is the the use of robotics, and we do see a lot of the kinds of repetitive tasks that happen in UH an asset manager as being able to be done through bots. UM. We are certainly using those and have plans to do more of that, which simply allows us to UM use our associates in ways that make better use of their talents than doing repetitive tasks. What does this mean for head count in the world

of finance going forward? So far, we've post financial crisis seeing not just fee compression but an ongoing reduction in total employee head count. UM is that going to continue for the foreseeable future. So I would say let's leave for the financial services broadly out of it. We just talked about the investment world. UM. I think that broadly, fee compression has been uh concentrated in a couple of

different areas, mostly in public equities. But there's been relatively little fee compression in the alternatives world in private equity, uh, in private credit. So if you look at PIGIM for example, UM, we really haven't seen any uh any real price compression. UM. If you look across the total the total platform that

that's fascinating. The two areas where I'm where it's noticeable active mutual funds clearly under pressure from low cost um indexes, and then the hedge fund world that was known as two and twenty has become one in fifteen or less. And there are some really interesting alternative fee structures where it's UM fifty basis points and then a percentage of alpha as opposed to profits, much of which is beta. So that's really been under pressure. You're not seeing that

in the private equity side or the real estate side. No, you really, um, you really aren't. I mean, if you're able to generate alpha and you have a scarce source of that, I would say that people are willing to for it um and you know it's uh, it's very interesting if you were to ask yourself the question from the client's point of view, So do you think that large pension plans pay more or less for asset management now than they did ten years ago? I would assume

less because the mix has changed. Because we were talking about before how the asset allocation has worked. As they've moved much more into risk assets and alternatives, they're actually paying more now. A lot of that's in performance fees, so they're getting the return for it, but they're actually their total bill um in many cases has gone up. What they're paying for beta has definitely gone down. And

I'd say that's good, right. I think people are very comfortable paying up for performance if they get if they perform. What they were doing before was paying up for the possibility of performance and then not getting it. That business seems to really be on depression. I think it is. I think if you were a closet index guy, and charging actual fees for it. You're having a really tough time, and my view would be and so you should be that that. Bill Miller, the famous fund manager, said the

exact same thing. It's not necessarily passive overactive. It's closet passive with active fees because there's no reason people should be doing that. I would agree with. And I think for a long time people, uh, people didn't recognize that. But a little bit of turmoil and suddenly everybody comes a little uh clus conscience. I know I only have you for a finite amount of time, So let me jump into my favorite questions. Uh. These are what we ask all of our guests tell us. The most important

thing that people don't know about you? What? What? What is it that? Uh? Is the deep dark secret of David Hunt. I don't think there's any deep dark secrets whre I hope not, but I think that, Uh. The one of the most important things about my development has been the fact that I've had the opportunity to work around the world for much of my life. What word world? I worked when I first graduated from school, I worked

in Asia for several years. Um, I mean I I remember, you know, traveling throughout China when there were literally very few roads and only those big, you know, Russian black cars to ferry the government officials around. UM. I worked in in Paris, I've Worre, I worked for six years in London, UM and so I really feel that I have been able to develop a much broader perspective on on business and on people and on management because I've actually not just traveled, but worked and lived in different

cultures around the world. And I think that's so important for people to have. That experience gives you a global perspective as opposed to h home country bias. Who are some of your early mentors who helped guide your career when you were getting started out. So I really feel very fortunate in that having grown up at McKenzie, which is a partnership, that there were many other senior partners around who wanted to help and mentor people and explicitly made it a part of their day to day life

to do that. And I would point out particularly a guy named Ron Daniel, who was the managing director for many years, who was the person who urged me UM to really step out of the consulting world and go on a series of not for profit boards UM as a way of building a whole different perspective and different set of skills. And so he's the person who got me really onto uh, both the International Rescue Committee and then ultimately onto the Lincoln Center Board, where I've been

for about fifteen years. And these are incredibly important and formative experiences for people to have today. I urge many of my colleagues to try to go on boards because it does open an entirely different world to you. And the mentorship that I had early on really encouraged and supported that, and I'm I'm forever grateful. Quite quite interesting. Um, what about investors who influenced the way you look at the world of finance and investing as as you were

coming up through Princeton and Wharton and beyond. I think it's uh, I think it's hard to pick on any particular person in all of this because I think that, uh, you know, one does pick a style that depends on who your clients are, so uh, for uh, for for large institutional investors, the whole theory of asset pricing and what Marco wits and the work that they did, or FAMA,

where the people that I studied the most. But I also think that the world changes and uh as we see now what as an efficient frontier and how pricing work is very different in a world now with with beta the way we have it than it was when they did their work. So I think that uh, I think that while it's good to have early informative you know kind of uh stars that you study, you need to be willing to continue to update those views as well. Have to be into lexually flexible. UM, let's talk about

some of your favorite books. This is everybody's favorite question. What have you been reading fiction, non fiction? What do you like to recommend to people? So my my pick for the summer has been Why We Sleep? Why We Sleep? Which is written by the head of the Berkeley Sleep Lab, and it is an absolutely fascinating exposay on what does sleep really do for you? Why? Why do you sleep? And it starts even with the broadest range of why do all animals sleep? Do you know that giraffes need

four hours? Uh? Did you did you know that dolphins sleep with one half of their brain and then they wake up and the other half goes to sleep because they need to keep moving in the water. Talks about the importance of of rem and non rem sleep and what the two do and their involvement in that in learning.

And then it does talk a bit about how, uh, you know, as a society we don't nearly get enough sleep and don't uh and don't value it nearly as much as that we should, and how the technological wave that we were talking about earlier UM has actually intruded on people sleep in very important and fundamental ways. And he makes the case that America is an incredibly sleep star of society. And not only are we asleep star of society, we've exported that around the world, and other

countries have unfortunately been following our lead. That that sounds fascinating. I'm gonna put that on us and any other books you uh, I think that's a that's a good one for this all right for sure? UM, tell us about what excites you right now about the industry. What do you think is the most interesting development that's taking place today? Oh? I think it's a it's a fabulous time to be

in the investment world. UM. We are really seeing that the change of business models in almost every single UH aspect of the industry, whether or not it is in what is the technology g company, what's happening to online retail, what's happening with internet companies in the developing countries. So, you know, we see some of the most interesting opportunities in China and India actually being in technology companies there

because they don't have all these legacy systems. They are going right to the smartphones, and we see fascinating opportunities disrupt industries in that. So I think there's never been a more interesting time, given the pace of change, to be an active manager, because there's so many places where you can add significant excess returns. Quite quite interesting. Um, what changes are you looking forward to? What do you

think is in flux? What does the next decade look like, and how is it going to be different than what we just came out of. I think the biggest change is going to be this uh confluence of private and public into a very different form of asset manager who is able to do both of those and to deliver integrated solutions to their their clients. And we will no longer have a world where you know, Bloomberg as a reporter for private equity and a reporter for long only.

I mean, all of a sudden, these will become fundamentally integrated with each other. Quite quite interesting. Tell us about a time you failed and what you learned from the experience. I mean, so so many times it's uh, it's really hard to uh, it's hard to know what to pick. Um. So if I you you asked earlier about the financial crisis, Um, if I go back even beyond that to uh, the early nots w and we had the big meltdown around

technology stocks. So I was the leader of the capital markets practice at that point, and literally our revenue went from very large and global to zero in about four months. And I had partners all around the world who, uh, you know, we're very worried about what this is going

to mean for their careers and families. We had clients who were obviously in deep array about what they were going to do, and uh, you know, it was a monumental task to try to get that group up and running and confident and staying with clients and being willing to take the five year view on their success rather than whether or not that there would be anything to do over six months. And I would say in the beginnings of that I failed utterly at finding the right

way to motivate into enhance that. And it took me a lot of trial and error before I got to the point where I realized that what was needed here again was not management, but inspiration of the role that they could play with their clients. Those are two very different things, very different things, and I really learned to shift between the two. People didn't need, you know, day to day instruction on what they ought to be doing, and mostly they felt badly because they weren't generating any

revenue and that wasn't the point. But they needed to feel that they were making a difference with their clients. And once I got that right, then good things began to happen quite quite fascinating. Um, what do you do for fun when you're not in the office, What do you do to relax or for entertainment? So I'm a a a poor but enthusiastic tennis player and have been for a long time. Um and Uh, I have found that tennis has been a really important part of my life.

We talked earlier about living all over the world. Well, you know, you go to Hong Kong, you don't know anybody, You take your little rackets and you go down to the local tennis club, and in two weeks you have a whole set of friends. And by the way, they're friends that you wouldn't necessarily meet through your regular work day. So you're you're all of a sudden involved in a different society. Uh. It's it's really a wonderful sports of life, sport,

and it's one that you can do anywhere. So I when I travel, I take my tennis racket and I always try to get my tom on the courts. Have you been watching the US Open we're recording this right, of course I have. I went on Monday. In fact, why I I saw. I saw Madison's big match on Monday, So I do. I I watch as much of it, uh as as I can. I think it's one of the great terms world. I even went to the French Open this year as well, No kidding, I was a

little shocked by Federer. That was That was a surprise. It was a big surprise, and uh, you know, it's a reminder to all of us that even even the great ones do begin to slow down a little something like that. But that but that heat was really intense, I can tell you. On Monday when I was there, it was the hottest I can ever remember, and human feels like five and you got to play for four hours.

It's just I don't know how they do it actually, Um, and and Serena Williams, this is a pretty amazing just had a baby wonderful months ago. It's crazyerful story and incredible level of athleticism and most importantly ability to compete. You know, and you think about that even in a corporate context, of how difficult it is to actually play better when you're under pressure, and that is a unique and wonderful skill. And she does it time and again.

She very easily could be the greatest tennis player of all time. By the time her career is done, she will certainly have more opens in the modern era than anybody, maybe more of all time. That that'll be interesting. UM, So let's talk a little bit about we were discussing millennials earlier. UM, what would you say to a recent college grad or a millennial who was looking for some career advice and was interested in the world to finance?

So very similar to the story I talked about in In terms of my own career, I my biggest piece of advice is while you're young, make sure you have an opportunity to live and work abroad. UM, it's really important that you gain that broad based experience. It will change what who you are as a person. It will change how you feel about being an American, it will change how you learn to interact with other cultures and people.

And so while you're young and you don't have kids and you have some flexibility moved to Europe for two years. That that that is sounds like really good advice. And our final question, what is it that you know about the world of business and finance today that you wish you knew thirty years ago when you were just getting started. The value of time. I think that when you're young, it's really hard to understand what twenty years can do

in the investment world. And uh, it's very easy to get wound up and what happens to markets today and tomorrow and whether or not they go up and down. And Uh, what you learn as you get older is you have the perspective of cycles. You know what it's like to take the perspective of a broad portfolio, and you actually uh embrace difficult times. You embrace volatility as opportunity rather than concern. And when you're younger and you haven't been through a downturn or a crisis, it's very

easy to overreact to those things. And I do think there's a reason why many of the great investors are older. And I do think it's one of the few things that you can potentially get better at as you get older, because you have more pattern recognition of how things happen through you know, a ten year a ten year cycle. And I do think that the appreciation of time is really important, quite fascinating. We have been speaking with David Hunt,

president and CEO of Pigam. If you enjoy this conversation, well, Bi Sean looked up an inch or down an inch on Apple iTunes and you can see any of the other two hundred such interviews we have conducted over the past four years. Uh you can find that wherever Finder podcasts are sold Apple iTunes, Bloomberg, Stitcher, Overcast, etcetera. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. I would be remiss if I did not thank our crack staff who

helped put together these conversations each week. Medina Parwana is my producer. Slash Audio engineer Taylor Riggs is our booker. Slash producer Michael bat Nick is our head of research. I'm Barry Ritolts. You've been listening to Masters in Business on Bloomberg Radio.