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