Welcome to the New Fund Order. An Orwellian journey into the Darkside, the Frontier and the Fringe of Finance.
On the air you can hear the strings begin to play, as clouds roll off the Swiss Alps and Lake Geneva ripples on a gentle breeze.. The sun shines on Switzerland in a way rarely paralleled by any other market and there is much to be thankful for. European fund selection more broadly, as it is inextricably linked with the growth of asset management, too has enjoyed a beautiful renaissance over the last 20 years but is that Belle Epoch about to darken, will reflection give way to requiem?
I am joined by arguably Europe's most famous fund allocator, Mussie Kidane of Pictet. Join us, as two old soldiers of fund selection, as we reflect; on our careers, how fund selection and asset allocation has changed, the impact of ROBO and whether professional fund investing has a future. One retired; the other very much active. How then to keep tempo in an ever changing world?
Time is ever-unrelenting yet, 13 years on from the Great Financial Crash (GFC) and the awful realisation of the Bernie Madoff Ponzi scheme, many things continue to haunt us as fund allocators. Our history is littered with blow-ups, crashes and poor risk management. On the news of Madoff's passing; and as the fall-out of the Archegos scandal continues, is today's generation of fund allocators equipped to appreciate the risks in the system? Many of whom had no first hand recollection of the GFC let alone the dotcom bubble. In an age of complex social media, Crypto, asset bubbles, momentum, indexation, digitalisation, automation and tokenisation, Mussie and I debate the implications for asset allocation in this very special episode of New Fund Order.
Together with left-field opinion, global market news and latest views, direct from my dystopian bunker. In the Air, on the Ground, on the Street and around the corner of Debate. Watching, listening, in the Shadows and on your Airwaves. For Fund Selectors, distributors, wealth managers and investors.
In association with my sponsor Allianz Global Investors (AGI) one of the world's leading active managers. My thanks to my guest Mussie and Pictet.. and you dear listener.
Please LIKE, SHARE and SUBSCRIBE. Please leave a REVIEW and let me know what you think and what topics you would like for future episodes. Until then... stay safe and.. keep it left-field!!
That's 20 episodes, 20 Guests, every 2 weeks... each episode is 25 minutes!
George Orwell 'Nineteen-Eighty Four', Public Domain 1.0. Audio clips: Archive.org. General Douglas MacArthur address to Congress (1951). Public domain. Music: Wolfgang Amadeus Mozart, Requiem in D Minor, 626, by Slovak Philarmonic Orchestra. 2008. Public domain. Sound effects by Soundbible.com. Creative Commons Attribution 3.0 and Public Domain 1.0. All additional Music used by Silvermansound.com Attribution 4.0 International (CC BY 4.0)
The world has turned over many times since I took the oath on the plane at West Point. And the hopes and dreams of have long since vanished. But I still remember the refrain of one of the most popular power ballads of that day, which proclaimed most proudly, never gone.
JB Beckett:
Salutations... Dear citizens as we peer into the new fund order to discover the immutable truth for asset management and wealth managers, The lowdown from the dark side, the frontier and the fringe of asset management and fund research. A podcast for wealth managers fund selectors, distributors and investors. Bring it to you the People's Republic podcast on finance, in association with my sponsor Allianz global investors, capturing the latest market news views and interviews with leading minds in our industry. Allianz global investors is one of the world's leading active managers. And I'm very pleased to announce that today's guest is musika day in off peak day he is managing director Global Head of fund and manager research and has been with Pictet for almost 15 years
Computer:
Market news,
JB Beckett:
CNBC on the story that Bernie Madoff masterminded the biggest investment fraud in US history ripping off 10s of 1000s of people as much as 65 billion has recently passed at the timeout of was serving a 150 year prison sentence for his scheme, which investigators said defrauded as many as 37,000 people in 136 countries over four decades. The question next is what have we learned since the middle of Ponzi Independent runs a story crypto market overtakes world's most valuable company. Bitcoin alone is now valued at more than $1.2 trillion more than MasterCard, PayPal and visa combined. Adrian Whelan at BBH published the latest liquidity update with a focus on European money market funds, particularly around the EU money market fund regulation and review it or notes that BBH had previously highlighted that in the United States, the Securities and Exchange Commission has moved to reframe its money market fund rules through a public consultation where they outline 10 possible revisions to the regime. And lastly, ahead of our interview with moosey about the changing perception of risk in our industry since the great financial crisis. FT runs with a story Credit Suisse cuts bonuses following the Archegos loss, the magnitude of costs will be revealed with Swiss lenders fourth quarter results next week. Credit Suisse has cut bonuses for staff by hundreds of millions of dollars after the Swiss lender lost $4.7 billion from the collapse of family office Archegos Capital according to people familiar with the situation tag, #newfundorder and let me know which stories you want to hear about
Computer:
Interview.
JB Beckett:
And in these strange pandemic lockdown times. Rest assured that all guests are calling in remotely..and welcome to the newfundorder Mussie. And let's talk about some of those big vexing questions relating to fund selection, the macro changes and I guess, the asset allocation universe and of course impacts on fund selection. It's great to have you aboard.
Mussie:
Well, thank you, JB, thank you for having me. It's good to be here.
JB Beckett:
And I'm just going to throw us straight into it. You know, you and I have been doing fund selection probably for more years than we care to be here to mention. Although.. you're definitely ageing far, far better, like a fine wine, whereas I'm more like a vodka. I'm not ageing terribly well. But anyway.. I'll put that aside. And I guess it seems pertinent to ask you about your reflections on how you think Swiss fund investing has changed over the years. Do you see much change in terms of European standards, among other, you know, fund gatekeepers? And I guess that leads us nicely onto.. is education still key to our profession.
Mussie:
Yeah, well, again, the fund investment has changed in a significant way. And also in Switzerland in a way. For instance, the search for and the use of cheap liquid vehicles, both in the active and passive strategies has exponentially increased over the years to the detriment of full force traditional mutual funds and hedge funds with the advent of MiFID2. And this means that institutions are now more reluctant to hire senior people for these roles, especially in small and mid sized institutions. So yes, I would say education is important, but practical experience is even more so. You have now gatekeepers in important institutions that have not even lived through the Global Financial Crisis let alone the dotcom bubble and burst, you know, you can imagine what the implication of that was the good and the bad implication of it, by the way?
JB Beckett:
Yeah. And does that. I mean, that's, that's a great point in as much as.. our and I mean, you and I, and I guess, you know, fund selectors and allocators of our generation, you know, we're, we're very versed with risk, we've seen it firsthand, close and personal, and it is ugly, and it can, you know, ravage its way through through the portfolio valuations. Right, so we, you know, we were, we were we came into the industry, I guess, in that kind of crucible, as you say, you know, many fund allocators haven't had the benefits of that perspective, you know, how, how do you think the approach to risk in fund allocation is changing over the years, and, you know, if it is changing, if so, how, and why?
Mussie:
I have young members in the team, people that are three, five years in the business, and when I talk with them, they they seem to have a particular view of risk. Again, on the quantitative side, they would check and look at the same sort of risk metric is that we, we used to do, but with time I have become, and for me, it has become a dominant factor. When faced with new strategies or solutions, the urge to understand and quantify them,...risks far outweighs, in my case, at least, the enthusiasm I might have for unheard of strategies. So the difference that I see is simply how enthusiastic they might be with some of the numbers and the the strategies that they see, on the back of my mind, you always have this 2008.. 2009 crisis in mind. So yeah, that that's where I see where risks have changed. And again, there's also especially in the fixed income space, there are generations of fund selectors that have never seen rates going meaningfully high. I'm not talking the 1994 type scenario. But simply a lot of fund selectors in our business now have nothing meaningful weight risk cycle, like the one we had in the US between 2004 2005 up to 2007. And I'm not talking about the 1994 experience, people have a very cavalier view of risk. Again, the latest episode in the in the Greensil and Credit Suisse issue illustrates that basically this desperate need for uncorrelated city returns, which is a myth for me, in financial markets, especially in the public market. And and it's becoming an issue, a serious issue, multi billion issue, actually.
JB Beckett:
Absolutely. And I had Jerome Tagger on recently on the podcast show, and we talked a lot about the, I guess, the existential and yes, I mean, the black swans are, unfortunately, they're the things that always will get us because we can't know the unknown. But he was talking very much about also those 'grey rhinos', which we could kind of see from a long way. Yeah, coming.
Mussie:
Exactly. Exactly.
JB Beckett:
And they still get us but you know, we have opportunity to do something about it. But But often than not the industry, just as either slow or just doesn't react, right. So and with all that. Right. So your bond conditions are very different on a decade to decade basis that we've seen before. Equity momentum, I mean, wow, I mean, equity momentum that you and I probably could only dream of, in the 90s or the 2000s. You know, that and sustained momentum, broad market momentum, not just little spikes, right. I mean, it's whole new thing. And on top of that, as fund allocators know, we're also asked to broaden our perception of risk to consider environmental social governance factors, to consider sustainability, to consider climate risk, and somehow find a premia for that and make that work in our portfolios as well. How challenging is that for you as a portfolio allocator and of course, you know how od you deal with all that rampant greenwashing that we see?
Mussie:
Yeah, very interesting question. And again, I think as much as we are, I am pleased, we are pleased to see that the industry's eagerly jumping on the ESG trade; we have to be also mindful, and also honest with ourselves. Everybody is just trying to drive the car, or they are constructing it, you know. So, in a way, it's, it's a process. It's a process from here and people have to be mindful that what's important is simply to understand what you want to do, why, and how. The industry that we like the industry that we love, is very much prone to short cuts. So when you talk about'greenwashing', it's really mind boggling. And we know this is coming our way. And it's our job to understand who does what, and how in this domain to. Fortunately, there are a lot of convincing and convincing asset managers that they say what they do, and they do what they say. So we try just really to first and foremost, understand other firms.. as gatekeepers to understand 'what's important for our clients and for the firm that we work fo?' And then just try to find the same sort of continuity with external managers, knowing fully well that this is a process and not a destination. So in a way, we are happy to know that people are doing one thing or another, but it's, it's a continuous improving in that in that journey. I personally like clear, simple, factual, approach that are supported by data and with tangible results.
JB Beckett:
Let me throw your question about, I think one very contentious point right now, if we agree between us that portfolio allocation is essentially a way to delineate, to distil a variety of views of where we think markets and the world and the economy is going to go tomorrow. One of the key areas that I see huge disagreement right now is whether we will remain in a 'low yield' environment, or whether we will see spikes in inflation and is going to lead to sustained, you know, higher rates going forward? How do you reconcile that for your clients for your portfolios? Does that create any areas of innovation or indeed does that create new risks that you have to try and deal with?
Mussie:
For sure.. again, so your typical '60:40' portfolio for endowment asset allocation is challenging, because again, as I said before, the bond part of it, especially the high quality bond, part of it, in this low yield environment, is mostly risk without return. So in a way, how do you then construct a portfolio to withstand if not a low yield environment or in the worst case scenario, a sustained higher yield 3,5,10 years down the road? Again, I think somebody said 'diversification is probably the only free lunch in finance'. So in a way, to the extent that he can identify risk factors that are less correlated to each other, and diversify away your risk and that that will stay now for, for private clients. And that's what I see. There's no way most of our private clients would hold only equity portfolio. But then again, that would assume what to decide whether how much equities you're comfortable with and the volatility that goes with it, and then find a volatility dampening or a drawdown dampening strategies, be that Cash, be it diversification into currencies. This is including gold and for the younger generation cryptocurrency in Bitcoin, maybe, but you're right. We have to be a little bit innovative, away from the'6040' type of scenario because a big chunk of what we used to rely on for dampening risk and volatility. By that I mean high quality rates and bonds are, are unavailable or less available today than they were a few years ago.
JB Beckett:
And you see companies like Tesla taking on almost these secondary exposures to things like crypto assets. Right. I mean, that, you know, Elon making his chief financial officer 'Master of Coin', I mean companies are essentiall reinventing themselves. I thin Elon has probably always seen h s company as fluid, you know, he s not just seen himself, I thi k it was one of the first to s e is not an auto manufacturer is a digital company. But it makes t incredibly hard to then try a d allocate something like Tesl, because what are you allocati g against, and I've read, it tak s us on to, onto that theme f allocation and looking at, y u know, a typical, say, mul i-asset portfolio today, we mig t have, you know, 40 to 5% invested in the US, a d obviously, you know, quit, quite often quite concentrat d around those Big Techs. Do ou see that trend continuing? nd so where then do you see the ole of emerging markets? And guess, particularly China, in a portfolio over the next deca e?
Mussie:
Yeah. It seemed quite interesting you mentioned about Tesla, and the CEO and CIO, to decide to invest.. the liquidity of the company into this asset class, no matter how much they are convinced it? I would, I would assume that this is how it this fits with the fiduciary duty that you have is that with your investors, your co-stakeholders? I wonder about that. And again, curious about this, this move basically, for me, it's very much important to understand what you're doing. Investing and speculating are not the same thing. And by the way, you can do both. There's no harm in both, but they don't just sit well in the same portfolio. So it all depends, why do you want to do, if you want to speculate there are a lot of things you can speculate on, can be in the public equity market, but it can also be in a casino. But to be investing, your first and foremost responsibilities is the fiduciary responsibility vis a vie the clients and the people that entrust you with their assets. So I don't know how much you are dealing in their best interest when you engage yourself in speculation. But coming back to this weird sorts of things that we see now, and again, for a lot of us, it's becoming a challenge, then, how do you... I will give you just Tesla, I saw this tweet that really talked to me. So in 2020, Tesla, and this are the actual numbers sells 500,000, electric vehicles. And VW sells 231,000, this is 2021, they estimated 2021 numbers is 750,000 vehicles for Tesla, and 1 million for VW. Tesla has a multiple of what 900 times; VW multiple is 12. So again, you can you can give me what every other aspect values, if we are talking about electric cars, and only about electric cars, and as far as I know, Tesla is doing that very well. But it to say simply, if you stick to the Warren Buffett type of, you know, downstairs investment site, again, you have to struggle with some of these valuations that we see, maybe we're wrong. We'll be proven wrong. Like many investors have been with Amazon, for instance, back in before the crisis, but then ..it's faith, an act of faith that you have to make. But coming back maybe to what you said about innovation and emerging markets. Well, again, for me capital eventually flows to where innovation is and the US remains the centre of large scale innovations and as such, I assume or I expect it will continue to attract the bulk of the global capital. Not to mention that the US has also favourable demographics compared to challengers. Even China. An area where the US may be lagging in the innovation spectrum it's for me, it's all this climate change and the the related innovation to mitigate that risk in that space. probably, the US is not the leader, but elsewhere, I think the US is in a very good place, and it will continue to attract the significant portion of the global capital. Sure, other diversification and to tap in some of the mega trends, for instance, the consumption story, investors would be well advised to allocate money to emerging markets, in China in particular, that offers a great potential. But then again, I think the US is going to dominate the capital attractiveness, I think the US, the US is really a magnet in terms of attracting talent, and capital, because it's an innovative economy. And for years to come, this I expect the US to lead the innovation wave. And if you if you look at the game changing innovations that we have had over the last 30 years, it's mostly from the US and it continues to be to this day, if if you believe that, for instance, blockchain technology, if you believe in the sort of big data analysis and other aspects in the biology backed by but by chemical biotechnology, the US remains really the leader of innovation.
JB Beckett:
So my last question Mussie is okay, we've been talking about Tesla, we've been talking about the technology, I guess, in terms of the investment side, but flipping that, I guess back on to the fund selector. How do you see the role of the professional fund investor in years to come? And, you know, how is technology changing the tools available to your research team?
Mussie:
Yeah. Regulation, fee compression, and of course, technology, how can we continue to shape the scope and the shape and the scope of our role as professional fund investors and, and basically, I'm very realistic about it, then this, this role may not exist,.. at least in its current form with the next five or 10 years. But as far as investing and investment products are alive, I think there will be a need for some guidance, especially to non professional investors in one form or another, so forth technology has has and will continue to shape the scope and the scale of our role as professional fund investors. And I'm quite realistic, I was saying about it, and this world that's mine may not exist in its current form in five or 10 years. But as far as investing and investment products are alive, there will be a need and guidance for non professional investors for unbiased advice in one shape or form to go through this this the investment decision, so I think the role will survive but maybe not in its current form.
JB Beckett:
Yeah, I think that's that's a fair point. Mussie I think that's a fair point. Okay, so before I let you go mercy, we have my little 10 second rapid fire round. If you're ready, we will begin?
Mussie:
Let's go.
JB Beckett:
Question number one, bull or bear?
Mussie:
Bull.
JB Beckett:
Question number two, Bogle or Buffett?
Mussie:
Buffett.
JB Beckett:
Question number three, profit or planet?
Mussie:
Planet.
JB Beckett:
Question number four, divest or engage?
Mussie:
Engage
JB Beckett:
Question number five, lower cost, or better value?
Mussie:
Better value
JB Beckett:
Question number six. One of my favourites: supertankers or boutiques?
Mussie:
Boutiques
JB Beckett:
Question number seven star managers or team players?
Mussie:
Both!
JB Beckett:
You are not going to pick one?
Mussie:
No, ... investing is I would say star managers.
JB Beckett:
Question number eight, public or private?
Mussie:
Public
JB Beckett:
Question number nine, high growth or stable income?
Mussie:
Stable income
JB Beckett:
..and Question number 10. socialism or free markets?
Mussie:
Free market for sure.
JB Beckett:
That just leaves the bonus round, if you can pick a number between 11 and 40?
Mussie:
23.
JB Beckett:
Question 23, oh it's a good one deregulation or more regulation?
Mussie:
Better regulation
JB Beckett:
No, that's no fair. Okay, I'll let you off.. better regulation. Okay. Not more. Not deregulation. Okay. It's It's a good question, right?
Mussie:
Yes, very good question. The thing is simply you force it to go one way or the other. And things I'm out in the extreme, but it's very good. Exercise. Actually,
JB Beckett:
Life isn't binary and neither as as asset management, it's great because, you know, people people seem to enjoy this.
Mussie:
Yeah, you have to position yourself in a way.
JB Beckett:
Absolutely. So that marks the end of our interview, you have survived the new fund order Mussie. I just want to say thanks very much for coming on the show. It's been a real pleasure.
Mussie:
Thank you, JB. I enjoyed it. Despite the constant technology issues.
JB Beckett:
Yes, technology. It's the the AI is out to is out to kill us as you as you know, I preoccupy my mind with the new fund order, and how technology is going to undermine humans over the long term. And this is just another great example.
Mussie:
Yeah, the one thing that I know is ROBO advisors are not going to replace us anytime soon.
JB Beckett:
Please don't forget to like and share and subscribe you know, click the subscribe button, a new podcast every two weeks with a new guest. Stay tuned. A big thanks to you, dear listener for tuning in. Brought to you by my sponsor, Allianz Global Investors. A warm thanks to today's guest. Legally, I am compelled to remind everyone that all views of this podcast are independent, and do not belong to any affiliation or organisation. Just in case that was in any doubt... Tune in for the next podcast every two weeks from...
Computer:
the new fund order.
JB Beckett:
Please subscribe, share, like and comment. Let me know what you think and what you'd like covered in future episodes. Until then, stay safe and keep it left field.
[Clip] Douglas MacArthur (1951):
And like the old soldier of that Ballad. I now close my military career and just... fade away. An old soldier who tried to do his duty as God gave him the light to see that duty... goodbye.
