With the turbulence of U.S. markets in the last quarter—an about-face from the stability of 2017—captains of the investment industry will discuss where to look for pockets of opportunity. How has the investment industry changed with the advent of new, technologically-enhanced strategies, and what are the classic approaches that withstand the test of time?
John Authers, Chief Markets Commentator, Financial Times
The latest Robinhood Investors Conference is in the books, and some hedge funds made an appearance at the conference. In a panel on hedge funds moderated by Maverick Capital's Lee Ainslie, Ricky Sandler of Eminence Capital, Gaurav Kapadia of XN and Glen Kacher of Light Street discussed their own hedge funds and various aspects of Read More
Alex Denner, Chief Investment Officer and Founding Partner, Sarissa Capital
Jodie Gunzberg, Managing Director and Head of U.S. Equities, S&P Dow Jones Indices
Jason Karp, CEO and Chief Investment Officer, Tourbillon Capital Partners, L.P.
Alex Roepers, Founder and Chief Investment Officer, Atlantic Investment Management
Anne Walsh, Senior Managing Director, Chief Investment Officer, Fixed Income, Guggenheim Partners
ok ladies and gentlemen thank you very much for joining us we know we have a lot of competition for your attention I am aware that you're taking us over Tom Brady my son is going to be furious with me for not going and getting his autograph for him so there we go such is life I am also aware that you're choosing us over a panel with the portentous title can be the open world economy survive and if the answer to that question is no then of course we could all leave the conference straight away those are the Bahamas while we still have a chance so anyway thank you very much for perfect for choosing us for your time I think we are going to have a very interesting conversation today now this is anjaan authors I'm the chief markets commentator for the Financial Times we're very proud to be one of the sponsors helping the Milken Institute with this remarkable conference this is something of a sub franchise or an ingredient brand of the Milken conference the reading the tea leaves session is a regular event this year given the particular circumstances we're going to be aiming at answering a few very very general questions we obviously had the best part of a decade of remarkably cheap credit that has been associated with of the growth of passive management's in general and the the the rise of the ETF in particular it's also been associated with great difficulties for active managers the reduction in the total size of the public markets in a sense that if you need alpha if you want to be able to generate alpha it may be easiest to do that in the private markets not the public now we are now beginning to see as central bank's try to normalize interest rates try to normalize monetary conditions beginning to see what looks like an end to those conditions what we wanted to talk about today what we're going to try to cover is whether there are anomalies there whether there are conditions that will allow people to thrive in the new situation if we're beginning to see a new regime coming in to replace the post-crisis regime we have got used to for so long now I'd like to starts we've got a great panel I'd like to start with Judy günzburg from S&P; Dow Jones media it's my right thanks for taking part you're obviously SP has been very much at the forefront of passive the passive revolution and more recently in smart beta is smart beta factor investing and an option that can work to close any anomalies that are showing up in the in the in the future as the investment regime begins to change or is there a risk that smart beta could ultimately generates more confusion we now have more than we million indices out there in the world is far more the number of public stocks is there a danger that the very modern science of indexing and passive management is going to beat the golden egg whatever the analogy I'm looking for eat the the goose that lays the golden eggs there's a lot of questions yet usually that asked me so I will try to organize this and answer them in a way that can make sense for you the whole movement of active towards passive has really been growing in the last decade and I think where we need to start is separating not active and passive but alpha and beta because when indices were first started the sp500 the Dow Jones Industrial Average they were just printed levels that were representing what the market looked like and as academic research grew and the capam came to light the sp500 was largely used as beta to represent the market risk that's the systemic risk in the market the way that the market looks market cap weighted you know there's more technology and finance there are utilities and there's no decisions being made really it's just the market proxy as the that benchmark gained popularity active managers would benchmark themselves against it and any excess return positive or negative could be considered alpha so there's your line between beta and alpha as indexing and technology and data availability and computer power became more available and cheaper we're able to put some of the choices that active managers would typically make into a systematic format that could follow indexing rules I'll give you a very simple example the sp500 that's market cap weighted can be considered beta as a market representation and it can also be considered passive the S&P; 500 equal weight is not beta it has more weight in some of the smaller companies at the expense of the larger weight of the bigger companies that is not what the world looks like that's not systematic risk that is a choice to equally weight which can be put into an index format and can be considered passive through the years there's been a development like John mentioned there's over three million stock indices a day printed now we print them almost a million a day and some of that comes from more granular levels of indexes like sectors or industry groups or sub industries where investors are starting to be able to track more closely segments of the market and they're also with the development of new products like ETFs able to take positions using those indices so investors have largely started to create alpha out of that beta that represents different market segments and further along the spectrum we've been able to take more things that research has known for many years about size premium or the value premium and there's factors that have been able to be put into index formats and those are I don't say taking away from active managers or opportunities necessarily but where you can get some of the Sam choices or returns through passive indexing that you might be able to get through active management then it becomes a question of what's the best way to get access and what are you paying for it and what's the transparency or the liquidity and this is an approach that can continue as the environment changes you is the idea of a smart beta index that it's something that you're going to have to treat in and out of or with the idea of a smart Patriot it's something that you can have first of all I really don't like the term smart beta I don't know because last year the smartest beta was the S&P; 500 so it all depends on the environment but as we move into different environments with rising interest rates or inflation or volatility is picking up there's different kinds of indices that address each of those environments today so now I think what might really change is the way that investors do due diligence because whereas a lot of analysts may look for managers to recommend or to invest in now there are so many choices of indices the question becomes do you start doing the due diligence on index strategies either to better benchmark your manager or to actually get access to a strategy for a much cheaper price okay the the world is steadily a changing could I now move over to and we'll choose the CIO of credit for Guggenheim Partners what are the opportunities for for the for liquidity imbalances that many people are worried could be created by the increase in the number of ETFs and other passive strategies within within the credit universe and is there any sense in which this has been we've moved to a top-down market rather than the traditional bottom-up market where people are taking a look at at the underlying credit worth of credit credit worthiness of companies and making their investment decisions from there so there's a lot of layers and getting questions so thank you but you know in the land of fixed income just as a statement I want to let you know I'm I'm biased towards active management and and I think that in terms of active management for fixed income the whole idea is then to mitigate or reduce risk and I think at the outset we probably need to define the risk set in fixed income as being very asymmetric so what happens is is that if all goes according to plan the day you buy a bond you get a coupon assuming you pay par for it and then at some point in time in the future it matures you get your principal back you get your coupon along the line and that is happiness and then what ends up happening is in the terms of the asymmetry is the risk of default so the the risk that you don't get paid that principal or and/or that interest along the along the line and so you can't take the asymmetry out of fixed income we can change the box it comes in and of course the rise of the ETFs particularly in credit and fixed income is is a is a method if you will or a technique hopefully investors are able to do two things one get immediate liquidity on on fixed income in a way that that doesn't exist necessarily outside of the REITs arena right now and to maybe hopefully to through diversification of a whole portfolio of fixed income assets to reduce this risk of this asymmetry the problem is is that ETFs have done something to fixed income market that that may be actually introducing additional risk and that is that that you're the option of immediate liquidity is being given to the investor at the same time the risk is that particularly in times of market dislocation or seizure we're liquidity starts to dry up and we'll talk about where it is right now all of a sudden ETF managers can't sell assets when they need to to to meet that option to liquidate an investor's position in the ETF what we have seen over the course of time as regulation has changed post-crisis is that dealer balance sheets particularly those intermediaries that tend to offer liquidity into the market between fixed income sellers and buyers for the longest time their business was to hold these assets and that made that they facilitated that trading that was going on today dealer balance sheets are down to very very small sums relative to history particularly in high-yield credit and this this sort of unwillingness to act as an intermediary is challenging the liquidity that's out there right now right now those intermediaries are starting to act more as simple brokers arranging a buyer and a seller to do a transaction or trades the more this develops the more risk is inherent in ETFs at times of seizure and times of seizure can happen rather rapidly without a whole lot of warning and again raising the risk if you were in the panel this morning you heard Scott Minard our chief investment officer talked about sort of additional risks in this space in high-yield and bank loans and that is the normal time of settlement for these very illiquid assets that have worked their way into the ETF space is substantially different than again that option for liquidity that's being given to the investor so there's risks arising and to the point where both the Fed and the Treasury are really taking notice of this and and and may or may not start to develop some regulation around it particularly in the area of gating so for those investors who are looking for immediate liquidity they may not get it and we'll find out what what ultimately comes with regulation but but for now I'll just say that the risk of illiquidity in the market is already increasing as well as the fact that we've put the assets into a particular form that may or may not provide that liquidity when when investors expect it now under direct follow-up that I suppose is if there is a greater risk in the in this universe does that mean that there is an opportunity for you to get on the other side of that risk is that it does this create opportunities for patient capital well yes and we can look at you know post crisis as well and by the way you know ETFs aren't the first investment vehicle to suffer a liquidity or fail in price which it hasn't happened yet but it could closed-end funds we saw with the tremendous amount of leverage that they had pre-crisis so many of them performed poorly particularly those of limited sector mandate and and so you know this is not the first time we've seen this this play before as risks begin to rise and there is and there is a rush to the bank but but for patient capital the concept would be to to wait it out for the moment when there is this dislocation but you know on the other hand people want to stay fully invested and it's hard to pick the best time and and to be that patient and Scott said in the earlier panel that even your clients who are long-term ist's regard long-term is thinking about next quarter exactly which might not be the best way waiting as a credit bust by kids move now to a - Jason Karp affair of Jobi on partners if I could ask you presumably the environment of the last decade you would think has been difficult for long/short equity managers you've had low dispersion high correlation low volatility has the long period of low volatility and also the the rise of passive investing has that created new opportunities for alpha for you and where are they yeah so I think most certainly I think the frame the question it's important to recognize what's changed so I'm in my 20th year now of being in the hedge fund business congratulations the 21st next month I said when I began so there's been two massive changes in those 20 years the first is competition and and you know when I got into the business you know having a Bloomberg was a source of edge you know being able to read was actually an advantage and and you know I routinely remember people going to the library to get historic 10ks and 10-qs and there was extreme payoff to doing really hard work from a fundamental perspective yeah this was also when there were only several hundred hedge funds today there's over ten thousand so the just from a kind of economics 101 perspective the the competition has increased massively which has created a lot of distortions and and a lot of the easy money and areas that were ripe for easy alpha are no longer there the second major change has been the rise of systemic strategies and these are quant this is passive this is risk parity this is CTAs you know if you look 10 plus years ago they estimated that between 40 and 50 percent of the average daily volume in the stock market was from what they call fundamental discretionary discretionary managers meaning people who were trading stocks for people who actually had opinions about what those companies were today that number has been confirmed at less than 10% so over 90% of the daily trading volume is coming from machines who do not have a view on what these companies are and do not have a view on what these companies do and do not have a view on what these companies are worth and if you think about that in terms of what kind of distortions that creates fundamental managers people who actually have opinions about what companies are worth are no longer the marginal price setters and so the quants and and it's not so much quads it's just systemic strategies are really doing that and so the way that we approach it is we tend to look for opportunities that are somatic in nature that have nonlinearities to them that are harder to model and I'll give you a few examples where you know you have to sort of think about it and contextualize it as what can quants easily do and what do systemic strategies like to do and what are the things that they're particularly not good at at least today you know I I can't tell you what it's going to be like in 10 15 years but as of today quads are particularly not good at things that don't have historic information where you actually need a precedent or you need data in the past to figure out what's going on in the future quants are particularly bad at figuring out thumb attic or what I would call you know that we would require some human imagination about where things are going and so here's an example so a few years ago as recently as a few years ago when there was all this hype about how low rates were permanently going to be there was a massive influx of capital into bond proxies stocks that look like bonds and that was staples it was utilities and it was reached and these companies became as overvalued as they've ever been and and even in spite of this or while this over valuation is happening one of the areas that we've spent a tremendous amount of research on at our firm is the vertical of health and wellness and what's going on particularly with consumption behaviors as it relates to food in particular and so companies like General Mills and Kellogg's and Campbell's at this time because they were bond proxies that paid a dividend and appeared to be stable and these are companies that have been around for fifty to a hundred years and so there was a perception of stability you could actually buy Google for a cheaper price than companies who made cereal that actually happened and you could have put on a long short spread of short General Mills long Google and you've made you know well over 50% over the last few years in doing that and and the reason that existed was twofold the first was a lot of the systematic strategies were just buying this factor which was things that look like bonds and these systematic strategies weren't actually doing the bottom-up research on what was going on with consumption behavior and in this country at least people are caring much more deeply about what are the ingredients in their food this population and particularly the Millennials are much more focused on transparency and and the quality of what's in their food and they don't want box junk anymore but this is not something that you could figure out on a monthly time horizon you needed to do real thematic work and it provided a huge opportunity and I think going forward there are several sectors which we can get into later that I think fit this bill where they're difficult to model today there's a very strong durable secular tale one behind them machines don't like them right now systemic strategies don't know how to figure them out and I think I know that's on the public side and then obviously on the private side there's plenty of really rich opportunities okay but in some respects the great opportunities in in stock markets have always come from those opportunities where you know there's a lot of value there in the future and it's just so difficult to measure it to work out where it is in some ways those opportunities have deepened they've got greater as a result of the move to systemic strategies yeah I mean systemic strategies are inherently Pro momentum you know most quantitative strategies have a significant momentum component to them trend following strategies are by definition momentum and then human behavior as it allocates to passive is also inherently Pro momentum because those passive flows tend to chase what's been working and at and so over the last call it five to ten years the amount of capital that has gone into Pro momentum strategies has gone up parabolically while the capital that's been in more contrarian more value oriented strategies has left because people just can't stay in business you know the duration of the of the capital isn't long enough and so you've had this huge switch which has created a lot more opportunity to be contrarian but you have to have the timer eyes now if I could tell me now have two Alexes to compete up and if I could send Alex Dana first from sarisa Capital you've been a great practitioner of one of the most obvious ways for air to produce alpha in this environment which is to be activists to to actually engage with with companies how greater the opportunities to do that how much easier might it be to do that in a in the private market which is where many people assume the kinds of strategies you you're working with might work better in this environment so thank you for having me we we think the opportunity is gonna get better you know every year in activism so what we do is we you know we look at companies that we believe our are suboptimal in terms of the way they allocate capital or the operations of the company and we will seek to get involved by putting leverage on the company will typically go on the board and try to try to fix the company try to improve their capital allocation or try to improve their operations in the area of health care where we specialize it's it's it's a very interesting situation because the the barriers to entry and margins in healthcare when a product is successful of course is very very hard to make a product that helps people unfortunately for society but when a company does that there's very high barriers to entry in very high margins so these companies can kind of they don't necessarily it's very easy for them to become lazy with capital allocation and operations as as with the growth of index funds and ETFs you have more and more as the percent owners of these companies tend to be passive investors and they're paying less and less attention to the operations of the company you think about the capital markets fundamentally are at least purportedly designed to sort of allocate capital efficiently to the to the companies that use the capital best to create value and when you have a situation with with ETFs and index funds where there's very large amounts of money going into them but let's say a particular company has a waiting in an index that suggests that you know it has a big waiting and suggested it should be an important part of important indices then there'll be a lot of capital allocated to that company so it a lot of these things that will in a sense become self-fulfilling that okay this is a company's stock price is going to do well and and and therefore we'll you know we can we can be we at the company can be a little bit less careful with the way we allocate capital I think activism is sort of becoming going to become more and more necessary and and I would argue a better and better opportunity over time it's a great opportunity right now we're just going to get better and better over time as more and more dollars are invested in ETS because there's nobody there that's sort of watching the operations of the company right now you know the the large passive managers are sort of getting more involved in governance and issues like that and what they're you know what their issues are is that the you know they're doing that I don't think they're doing that at a particularly fast pace that kind of going slowly they're not at all getting involved or very little in the actual operations of the company and it is reasonable for a share owner you know if you if you own stock in a company you own a piece of the business and it's completely legitimate to have a view as to sort of how that business is being run and is the capital being deployed efficiently as the company being you know do they have the right number of salespeople the right number of R&D; people or whatever and though the larger index holders do not have views on that kind of thing so I think it's going to create a more and more opportunities for for you know what happens is capital gets deployed in a suboptimal way and as an activist you can come in and kind of push them a little to become a little bit more a little bit more capital efficient or improve their operations and create a lot of value now does that operate in a way where they can ultimately in their all sort of dumb way help you or do they get in the way another in other words if you give a lead will you find that the you know the names of the top of the shareholder registers follow your leads with great relief or does it become more of a problem harnessing shareholders behind your points of view to have to have this big weight of passive management on their on on the shareholder registers so it's hard to see how that will evolve over time I don't really you know like right now I think a lot of this is sort of relationship things where you know at SRI sorry I I think we have good relations with a lot of the the the larger index funds and they know us and they and we have a track record of being able to successfully create value so they'll kind of they'll give us the benefit of the doubt you can certainly point to circumstances where you know we did a situation on a company it's a two billion dollar companies not too large in Aviva which was a company it's sort of an interesting example of how governance works in knighted States this is a company that literally all they do is collect a royalty check from another company they have no business at all they literally just get get a check in the mail I mean it's wired but I like to tell the story like the get in the mail you know they open the envelope flip over the check endorse it right for deposit only go to the bank that's their whole business but somehow in this company spent you know tens of millions in SGA doing this and you know had governance that was just abhorrent I mean it was they you know they didn't have a governance committee and on the board and just stuff that like would be 101 for for for governance so you know we got involved this situation and you know it was interesting and that in that we got support from virtually every single active manager and in this case it was it there's a long story here which I'm happy to tell off you know kind of later but there were there were there was one large shareholder owned a third of the company that was you know not going to be voting with us so we basically had to get every single large shareholder and again it's a long story but there was reluctance to support change by you know some of the biggest ETFs and you sort of say geez if you can't support change here when could you do it you know like Vanguard friends and support us but not everybody else did it ended up working out really well and you know there but you know we were able to get rid of all the old directors who are terrible and and and bring in bring in a new group but it was a long battle to get there and you could see that these these organizations still needs rights to to get up to speed with what's going on they create a normal ease for you but they can make it a bit harder for you to correct or profit from those that's right normally it's just us that's exactly right yeah I'm discuss this one aspect further and if I could turn to Alex Roper's of General Atlantic of our final Alex looks very much fair for joining us again if I could ask you were much the same question you very involved as a as an active shareholder very active very active engagement with the companies that that you hold is that easier or harder in the current environment and would it be easier in the many a lot of the conventional wisdom at this point is that it's easier to engage with companies in the private market and the public at this point are there opportunities still to do that in the public market first of all thank you for having me on the panel and thank you all for for coming into this session so I'm a value investor and look at companies as if you're buying a house or a car or dishwasher you basically you're looking for value and your comparison shop and you do your due diligence and you want to make money on it or you want at least have a good value good use out of it and you know started that in 1988 and you know if you look at activism you know in the 80s we had to thanks to Mister milk and largely the junk bond market was very vibrant and every corporation every private equity firm was a was an activist you know in the crowd often a hostile activist activism is just a tool for us we decided as a private equity business owner mentality to go into the public market to find very undervalued companies you know this is this environment is no different than any other I don't really care I'm gonna I've decided to go for private I was in a private environment development guy four companies into the public market because I don't like a liquidity and I don't like paying premiums for companies so we bide six times even I get out of nine if private equity gets involved if they get their hands on the kind of quality companies we can buy these inefficient markets they're lucky to pay nine or ten times even down so our whole world is in mid-cap two to ten billion dollar ten to two to timber dollar companies why that range because we like to be sizable significant minority shell or with liquidity and being able to obviously get into these companies with very attractive values roll up our sleeves engage with management only to the point where we need to get a better understanding to see we should be in this company how we should size it etc if we then can enhance the accelerate roll a value in a constructive respectful way with them getting all the credit and also retaining liquidity so much the better but this environment is no different I think yes there's more Kwan stuff more ETF stuff on the password for mutual funds there's a chance for a flash crash or for a real crash any moment that doesn't change the course of the economy unless it's really a systemic situation I go eight it was clearly something else going on but other than that it's just a very fertile hunting ground for stock pickers and don't forget of ninety nine point six percent or something like that could be up by tenth of all professionally managed equity portfolios and more than 30 stocks and to me that's almost like you've almost an index I mean it down thirty right the 30 stocks already so we are concentrating in the US on six core positions we have a global fund with you know adding 2006 another four or five in Europe and four or five in Japan and we having a portfolios training in less than ten times eunuchs in this market lots of catalyst oh it's pretty attractive environment so many ways your your ultimate clients are paying me to own companies for them rather than to manage portfolios oh no I mean we would like to be in for three three days a week and if if we buy stock and it gets taken over three days later we're happy to be out of it so no I'm typically the hold up here is 12 to 24 months we've been in in some situations one in Japan for seven years that's gone up Sevenfold thank God and it's still cheap because it's on so phenomenal we have a situation in the US where it hasn't gone that well but we've had you know we bought 38 million shares sold 30 million shares over eight years and their companies again today and we've been constantly involved for eight years is a very good valued seven times PE with corporate action activism and take off all three catalyst present so it is a very good market to be a stock bigger to be value investor and all the only other stuff is Jimmy's noises just liquidity there's nothing like witty for for guys like us to operate now if we could broaden their talk now to take a look at the again this is the kind of thing that's S&P; and others have taught us to look in terms of factors and styles plainly the momentum style of investing which often people tend to regard as the bad guy of the the the the different styles I even winners keep winning relative to losers who keep losing overtime momentum has had a remarkably strong run post crisis with relatively few of the big reversals that momentum tends to have meanwhile value which most of us have been there taught to regard as the as they're the good guys from Graham and Dodd through Buffett's onwards has with a few interruptions had a very bad time of it post crisis are there reasons to think that that is going to change what is going to be the catalyst that does begin to see a move away from momentum and towards towards value another other traditional fundamentalist approaches we'd like to go ahead so look I I it will change you know the history of the market is is is things are in favor and out of favor in that and that that kind of cycles back and forth I think with respect to you know I tend to be a value investor so that's the bias we have I think that with respect to momentum and things like this there you know there have been a bunch of companies that have been doing very well you know kind of they've changed there's some very high-profile companies we all know them that have sort of changed business in a fundamental way and you know getting economic rents from that that people didn't think we're sort of available to them even decade ago and and I think that has caused a lot of the sort of performance in in the momentum area where you know if there's a company that really has changes things dramatically it takes a long time for people to figure that out right it's not J it's it's you know you have to believe it and you have to say well as things really different this time and in that and that takes time and that takes years so those companies tend to be sort of quote unquote undervalued relative to maybe their DCF if you believe their whole story for many years and I think that's played out now the nature of those things is that they play out and then they play out too much and they go you know the pendulum swings too far the other way yeah you know I tend to be of the view that in for what it's worth one penny right but tend to be of the view that we're kind of getting to a place where that that we have pushed that a little bit too too far here I mean in classic leave at the moment that would be the fang stocks which now tellingly do have their own index not an S&P; one but they do have their own there they do have that once once it's been recognized and been turned into an index that might be about science exactly the likes of google have shown momentum because it turns out they were great value was heard earlier for a long time that's what i mean these things are very hard to time is one of the issues with picking your style and factor at the right time you know between momentum value quality low vol you've got all these factors that are available today and timing them is hard it's been shown again and again and again that this is a difficult thing to do and most people get it wrong so one of the trends is towards the multi factor investing where you're combining a lot of the different factors in order to diversify the risk of one factor performing against another but this these are the strategy is that the passive investing has grown into again you know I've heard across the panel now a few references to indexing but in still the mind frame of beta but it's not necessarily beta and even in I think an article that you wrote about the number of indices you showed over 40% of the indices are sector indices now that's people taking bets on what they think may work it's even hedge fund managers going short some of the ETS in certain sectors because shorting some specific stocks are sometimes hard to do and get the timing right so they short a sector and then they go long a stock that they like something like that so we've seen this incredible growth of creating opportunities alpha and also combining in order to diversify risk and I think that in the factor area we started with these single factors I mean this stuff goes back to I don't know the 50s fama and French where we're talking about factors so there's nothing new that's happening right now it's just that with the availability of them that they're becoming more accessible and more popular so people are really paying attention and trying to figure out where they should be but the timing story hasn't changed and people haven't really gotten better at timing we have a report that we put out that shows active management versus indexing and it's difficult for active managers to outperform the benchmark for any length of time I think over five-year periods the benchmark S&P; 500 so that's really the beta that's not any sort of smart beta outperforms 85% of managers and if you do it year by year after about five years you might have like 3% left of active managers that continue to outperform so there's really a difficult job in timing but if the active managers can do it and if they persist then perhaps it is worth paying them for what they do but again it's difficult to time this yes yeah so I think there's a couple pieces to this I think certain value strategies today I think are doomed because you know and we'll just use the 20 years ago and we'll go back even farther to 30 40 50 60 years ago when these books on value investing were written is you know back then you could actually find companies who were trading less than their cash in their bank accounts like when when when our legends became as rich as they did you could literally buy dollar bills for 50 cents that doesn't really exist anymore and so the rise of competition and and the availability of data has made what I'll call traditional deep value investing where you're just screening off of things like p/e metrics and and measures of cheapness there's enormous adverse selection in doing that because you're presuming that the millions and millions of market participants are not seeing what you're seeing and that you've discovered something that everyone else has just glazed over which i think is hubris and so you know you're you're tending to invest in companies that have severe structural problems where you think you're buying a good cheap p/e while the e itself is going like this and it's trying to chase a boulder down a hill so I think that part is definitely structurally difficult however there are pockets which which certainly speaks to what Alex does and and the and the role of being much more concentrated there are pockets of extraordinary value there are pockets where there are names that are not structurally declining that actually are growing but machines and systematic and everyone else doesn't want to deal with it because it's just so painful to own something that just keeps going down and and but you know if you do enough work and you have enough duration you can find plenty of opportunities of things that are actually growing that are despised that are value but you have to be much more selective today and so I I don't I don't necessarily have a view on when mentum will stop and when value will kick in I do know that value has become much more of a graveyard where there are diamonds scattered all over it but it's it's it's kind of difficult picking could you before we move on could you just give us an idea of one or two sectors where we'd continue to go down which are creating those opportunities oh sure I mean you know III just referenced the whole general mills situation where that was the go-go sector when when people were searching for bond proxies consumer staples today are are the hated sector now so within literally two years that went from the most loved to the most hated right now I think again there's a there's a structural reason why consumer staples are now acting like death for all the reasons that that we had negative opinions on them two three years ago but not all consumer staples are created equally and so there there are plenty of names that do not have structural headwinds that are not necessarily at the at the risk of sort of the Amazon effect and so there's there's actually plenty of opportunities in that sector energy is another sector where you know energy basically since I'd say 15 people were so scarred by the whole the fact that the whole sector could go down 50 percent in a year that it sort of become uninvested yeah and and you know energy stocks which we don't generally do because they're so cyclical but energy stocks have not really bounced relative to how much wealth it will have little defense company will price and and part of that is because the people were so scarred with how much they actually could lose in a year from the cyclic ality of oil and gas that there's just no demand for these shares and and eventually things get cheap enough where they get taken private we're starting to see this happening in a number of areas where stocks are getting cheap enough that either private equity steps in other companies are stepping in or the companies themselves are just buying enormous amount of their own stock back and and so there the good news about being long oriented if you have a long duration is that you know things as long as the fundamentals don't deteriorate things get cheap enough where the invisible hand does correct it I said that your experience and do you see it do you see value that's right yeah on your question about the cycle on whether yeah you know value and growth all that and we published a piece for whatever it's worth I think in the middle of 2016 and calling for an inflection point in the cycle the cycles are seven to ten years typically we're all I think agreed at March of 2000 was a inflection point you know from growth the value and it was frost was phenomenal that that whole run the key thing is for value managers to make money in a growth cycle to and outperform the index at least during a growth cycle which may be able to think lead to do before that the March 2000 period then after that was a massive gap where we outperformed the index bye-bye you know so much that you know it's still hugely important to us that's very nice and then you go you know you have this murky period I guess with the oh seven still very very good in a way Frost and no.8 happens and oh nine so you have and then we went into the social media at the whole thang period so if basically people agree generally we've had a tenure growth cycle it accelerated in 2015 when your two macro factors which is the oil price decline from a hundred to twenty five and dollar strength you know by 30 to 80 percent across all kinds of currencies these two macro factors paralyzed people into some some level fear and when fear hits the public equity markets two things happen one money comes out of the market whatever stage goes to the large caps particularly those not affected by those macro factors ie the whole social social media fen complex so it was an extraordinarily acceleration of an eight-year growth cycle in 2015 you landing into early 2016 in February 2016 that's why it's so important to macro factors the ones that caused this acceleration a growth cycle and the divergence and the desperation if you will for anybody else in the stock market stopped you know and they turned and then one said turns now we're like we could all breathe again like we're suddenly you know we started to put warm like the index it's not outperforming it because the growth cycle has arguably still continued dry to me would still look at the fangs doing very well in 17 early 18 but we're keeping up with it with a whole bunch of mid cap value stocks you know we love our chances I mean those guys are old training is a huge herd there's just been piling down the plains of the equity markets are trading at 30 40 50 times earnings with very risky models in many cases a huge operating profit margins that perhaps going to be sustained in our view growth and rates that cannot be sustained because of size and everything else and we're sitting with a whole bunch of great companies are all Bible by corporations and private equity trading at eight nine times earnings on PE s you know so it's a it's a great situation I think there hurts got to be very careful there ourselves you been piling hundreds of billions of dollars into Blackrock and ETFs and we'll have you and indeed they're not watching what they're buying they're just chasing whatever's been going up so I think it's a very very cool environment for individuals to pick stocks for value managers and you know concentrated managers of other strategies to pick stocks but do not diversify madly if you're after a compound growth rate but we're in a value environment that's been masked by the fan phenomenon no it's a it's a changing of the tide it seems to be a two year process I mean we can't wait for like the thanks to take a 20% knock because that will Beit basically you know take the SMP into a flat stage and then of course between private equity having a trillion dollars to spend corporations with a lot of cash and still lower interest rates you see more M&A; you know particularly in the Bible or financeable area of two to ten billion all the time companies you have any really cool I've just heard a couple of things repeatedly so I've heard a few times that index investors aren't paying attention there's a lot of different kinds of indices the S&P; 500 again which I've described as beta is a different kind of index then say the upstream energy sub industry group an energy right energy didn't go up as much as oil prices because companies hedge their oil and if you start to look inside of the sector and you look at large company versus small companies what you see is that the large companies underperform the small companies because they're more likely to hedge because they're more exposed to the price volatility and then when you further split it out into upstream and downstream you see that the upstream perform far better than the downstream in the rising oil because there are the producers and the sellers of the oil versus the ones who are consuming it so is the commercial consumers of course when the prices rise it hurts so you have to see these differences and with the availability now of ETFs and very specialized products that are coming from indexing to say that indexing and indexers aren't paying attention I don't think it's accurate I think that there are certain passive beta strategies where those are more reflective of just what the general market is doing but then there are a lot of very specific rules and specifications that go into other types of indices that allow views to be shown inside of indexing well yes a little bit different in the fixed income but kind of to that point I think there is quite a bit of naive investing going on that's index strategies if we look at the Barclays AG for example and there's a number of indices out there there so you know kind of replicating that the Barclays AG in fact we produce a piece called the core conundrum it's become the index of choice against which managers compare themselves it absent it also happens to be about not quite half a little bit less than half of the entire US fixed income market so the u.s. fixed income markets about 40 trillion it's approximately 19 trillion dollars of assets that appear in this index and so many pension plans and individual investors think that's core investments that's core fixed income the problem is is that in this rising rate environment and we've only seen rates come up in me feel like a whole lot obviously at the short end but in that 10 year we've only seen REITs come up about 25 basis points for about two and a half to just under or excuse me 50 basis points from about two and a half to up to towards three and and so but that sort of small move mean maybe on a percentage basis has turned the AG negative because it's so focused on and so biased into government securities and so what so many pension plans or investors are doing is to sort of bar Belling they're saying okay this is going to be my core part of my portfolio and then I'm going to barbell into credit or wanna put alternatives whatever that may be whatever universe that is and it doesn't fit neatly to my earlier point it doesn't fit neatly into a commingled type of a pooled product that's available particularly to retail investors so animal by the way it takes a much longer timeline generally speaking to sort of play out in terms of the performance so you have a lot of investors out there who are kind of potentially getting the worst of both worlds if we happen to have as we would expect in the next couple of years a fairly significant risk off moment investors could be caught with a poor performance in their core portfolio as well as a tremendous price risk that's going to be happening in that other part of their portfolio that their bar billing so you've got the worst of potential both worlds for fixed income investors coming in the next couple of years could I ask one final question before we before we move it over to the air move it over to the audience it's amazing how how difficult it is just to cover everything in just one hour but we we do have this very important move that rates are beginning to come back we actually do have a shift towards quantitative tightening within this particular country whether we're really tightening given the amount of the money's fungible and there's still plenty of money sloshing around elsewhere is another matter but plainly the year that the direction is is changing what opportunities gets created by this shift in rates assuming that it continues so it's sort of the an area that is particularly of Appeal right now or asset-backed securities or other particularly floating rate securities like bank loans and bank loans are a good investment for institutional investors I you know I where they belong or have a place in an ETF but the problem right now is is that so many of them have come up in price they're trading right around par and so what you're really doing is sort of clipping a coupon and as short rates go up as LIBOR has come up about 40 percent this year those particular assets which are resetting based on LIBOR or you're at least getting more coupon there is a real risk however and that is that if short rates go up so much more much more participative even than we've seen that's going to cause stress to corporate borrowers who are already over levered on an absolute basis relative to history the good news is because rates have been down for so long that service coverage ratios have been very very strong that could ultimately change with this environment I think there's a there's a friction point at which or an inflection point at which if rates went up any further by Fed action or other central bank's action around the globe or even just LIBOR going up as much as it has that we are going to potentially see a tremendous credit pinch if you will or even crisis for corporate issuers so it's not without risk but that is a that is one area that has historically performed well in a rising rate environment and and we do believe that the rate curve the shape of the curve is likely to if this continues for much longer potentially even invert so it makes it a very tricky time to be a fixed income investor right now quick I don't you know from the value growth perspective if the rates go up you would think that you know in the growth area there's a lot of companies are based in terms of valuation they're to justify the current share price on a discounted cash flow model that always includes the discount rate if the discount rates goes up as a result of short term rates going up means eternal value comes down therefore it's harder to justify the current valuation so I think rates going up typically has been a bit of a depressant if not there difficult for growth stocks and those who are values or can entirely be valid on DCF if you go to the value sides you know clearly if rates go up too much it can have a negative impact on the economy it could affect their sales and earnings but it doesn't go up too much it doesn't really affect the economy too much of course it's a Federal Reserve job to make sure they'll raise rates to the point where they check killing off the economy economy it just look at the pension funds of a lot of our holdings I mean a lot of our you know in value stocks are industrial consumer products or service companies with legacy liabilities pension funds were underfunded pension funds being a big part of that there was also the pension benefit obligation like Billy Sally's pension plans are determined quite often with these were our larger Germany discount rates as well that goes up massive improvement in the underfunded nurse just a company called iconic that we happen to know as a 3.2 billion dollar pension unfunded pension liability sensitivity analysis says one percentage point improvement ie higher discount rate reduces debt liability by a billion dollars so that's all good for for the very start and iconic stance something like 18% this morning I noticed on the blue so that's a good buy maybe this becomes yes absolutely in general does that become a thing that if you're that there is a buying opportunity in companies with their with pensions with big deficits if you think that rate it's one thing to look at I'm just saying there's a general impact of interest rates across the board of so many impacts but that's one of them I think there's a huge opportunity for shorting again so there there there were two major things that happened with low rates to Y shorting has become close to impossible and there's very few people who actively short for a living that are still alive and so the first is you know and I've been shorting stocks since I got in the business you used to receive a large rebate for shorting you know I can remember times when I was getting five 6% that you receive for shorting stocks so if the stock doesn't move you actually collect five percent up until about a year of the rebate rates were flat to negative so it actually cost you money to short and so that changes the calculus quite considerably on your expected return but much more importantly from a fundamental perspective having extremely low rates has allowed the inferior companies to survive much longer than they should have you know their access to capital has been unusually good and and so a lot of problems that would normally show up where bankers are unwilling to lend to you because you have either an inferior business model or inferior capital allocation or inferior operations I suspect you will see dramatic separation between the good and the bad when the bad are no longer able to borrow so cheaply so with rates go up we get delayed Schumpeterian creative destruction and if you're short the companies that get destroyed that's a great opportunity yes this sounds great right investable invisible hands helps us along with rising rates so I look not just at the rising rates but with the inflation the GDP growth acceleration and the falling dollar but what we see is splits between sizes of companies so we see opportunities for small caps rather than large caps in rising rates we also see some more opportunities on historically energy does far better than anything on inflation and again it's got to be upstream not go downstream and probably smaller rather than larger because they've got less hedging so with less hedging then they're allowing their stock to go up with the rise in price then you've got financials are probably showing some good opportunities with rising rates they get their spreads back in the banks but again you've got to break it down into the sub sectors healthcare for example we've seen again small outperforming large with the healthcare services and equipment really doing well and the biotech Pharma not so much with the biotech underperforming a farm outperforming so there's a lot of choices and icing rates I just saw a big red sign same session over Alex would you do you want to have a final whit if anybody is hungry to ask questions rather than go to lunch there are a few more minutes before lunch Alex yeah just very quickly look I think raised right I agree with what Jason said about you know the low the role the low rate environment we've been in for such a long time has been able allowed companies to sort of hide their financial I'm you know kind of under performance and you know sort of having them be required to sort of be more efficient with how they deploy capital which is what really what happens when rates go up it will actually be very good from it from an activist point of view we in those kinds of markets I think that's the best kinds of markets is you can put pressure on the companies but adults are there so between the bond markets and active investors like yourselves you you're all true to Schumpeter we've that's right we will do some destroying and we'll do it creatively I think it's lunchtime if anybody does want to ask ask a question we're all we're all still here or otherwise you can chat with our panelists straight afterwards does anyone have a question okay everybody's hungry for food thank you very much it's been a great conversation