Technology and the Economy: Milken Global Conference – Day 2 (Part 2)

(2:00 p.m. PST)

The Milken Global Conference continued at full speed on Tuesday. The first panel I attended put the spotlight on the asset management industry. With the slightly menacing title, “The Age of Asset Management: Harbinger of Stability or Chaos,” it was a broad-ranging discussion of macroeconomic and market topics. Featuring Jim McCaughan, CEO of Principal Global Investors, as a panelist, the conversation first looked at global levels of capital investment. McCaughan sees the influence of technology fundamentally altering the required levels of capital across the globe. Because technology has made the deployment of capital much more efficient, he sees the possibility for more capital investment than would be required for the current level of activity.

Jim McCaughan - Milken Global Conference 2016

McCaughan on the “The Age of Asset Management” panel.

Beyond the level of capital investment, Hilda Ochoa-Brillembourg (CEO of Strategic Investment Group), examined the destinations of that investment. She pointed out that the complexion of equity investors over the last several years has taken a distinctly fixed income hue. That is to say, yield-starved investors who would’ve typically piled into fixed income are now moving to dividend-producing equities. Why, then, is there still a good deal of interest in fixed income? She explained that the correlations between equities and fixed income have gone negative over the last four years, turning fixed income into the “ultimate hedge” for equities. This, in her opinion, is why investors continue to look at fixed income investments when they either provide meager positive or slightly negative yields.

Back to the topic of technology, McCaughan opined that some of the disconnect in the United States between a robust labor market and a disappointing GDP was due to a part of the calculation of real GDP. Inflation-adjusted GDP is calculated with the GDP deflator, an inflation measure that’s susceptible to technology’s deflationary pressure. Mismeasurement in one part of that equation could lead to a misunderstanding about the true levels of not only U.S. GDP, but also global levels of growth and productivity. Noted economist Nouriel Roubini pointed out that mismeasurement has always been an issue, but saw the real question being whether mismeasurement was greater now than it has been in the past. This is important for investors because businesses base their planning and forecasting on these macroeconomic measurements. If those measurements are understated, there is potentially inefficiency in the economic mix, skewing the distribution of capital across the economy.

When the discussion turned to active investment management versus passive management, the general consensus was that the solution is active and passive, not active or passive.  There are certain markets that are very efficient (e.g., U.S. large-cap stocks) where it is difficult for asset managers to exploit inefficiencies, or very few inefficiencies to exploit. This sets up a combination of passively managed beta and actively managed strategic alpha.

McCaughan pointed out the growth of interest in less liquid and less efficient markets as sources of strategic alpha. In his view, this is partially driven by regulators forcing public markets to begin acting like private markets. For example, the fallout from Dodd-Frank has meant that investors looking for bonds have to go out and find them themselves, rather than going to a bank, as they have been able to in the past. This turns the dynamics of public bond markets into more of a private market transaction. This type of dynamic creates investment opportunities in areas like real estate, high yield fixed income, and emerging markets.

Excellent panel discussion! We’ll post the video link when it’s available so you can see for yourself!

Update:

Click here to watch the video for “The Age of Asset Management: Harbinger of Stability or Chaos.”

 

Follow Principal Global Investors on LinkedIn

 

_________________________________________________________

The information in this document has been derived from sources believed to be accurate as of May 2016. Information derived from sources other than Principal Global Investors or its affiliates is believed to be reliable; however, we do not independently verify or guarantee its accuracy or validity. Past performance is not a reliable indicator of future performance and should not be relied upon as a significant basis for an investment decision

The information in this document contains general information only on investment matters. It does not take account of any investor’s investment objectives, particular needs or financial situation and should not be construed as specific investment advice, an opinion or recommendation or be relied on in any way as a forecast or guarantee of future events regarding a particular investment or the markets in general. All expressions of opinion and predictions in this document are subject to change without notice. Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security, nor an indication that Principal Global Investors or its affiliates has recommended a specific security for any client account.

Principal Financial Group, Inc., Its affiliates, and its officers, directors, employees, agents, disclaim any express or implied warranty of reliability or accuracy (including by reason of negligence) arising out of any for error or omission in this document or in the information or data provided in this document.

Third party content, such as comments to this blog, is not reviewed by Principal Global Investors before it is displayed, although we may remove, alter, edit or adapt any such comments. Principal Global Investors does not endorse, authorize, or sponsor any third party content. Links contained in some blog posts may take you to third-party sites and Principal Global Investors makes no guarantees to the accuracy of the information provided.

Investing involves risk, including possible loss of principal. Equity investments involve greater risk, including higher volatility, than fixed-income investments. Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline. Lower-rated securities are subject to additional credit and default risks. International and global investing involves greater risks such as currency fluctuations, political/social instability and differing accounting standards. Risk is magnified in emerging markets, which may lack established legal, political, business or social structures to support securities markets. Real estate investment is subject to risks including liquidity risk and risk associated with general and local economic conditions. Asset allocation and diversification do not ensure a profit or protect against a loss.

Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc.

t16050304p4