“Companies are now being restructured for the safety of our employees and the safety of our customers… we’re not going to get to 100% demand anytime soon.”
Karen Firestone of Aureus Asset Management, Keith Cardoza of Brownson, Rehmus & Foxworth, and Shannon Saccocia of Boston Private joined SALT founder Anthony Scaramucci to discuss their strategies as three of the top independent registered investment advisors (RIAs) in the country.
The guests discuss their reaction to the pandemic-driven stock volatility and how they advise their clients in times like these. “It's very hard, sometimes, to convince a client to buy into a falling market and to sell into a rising market, but it is very important to continue to rebalance.”
The Federal Reserve and monetary policy will play a major role in driving investment strategy through this pandemic and the periods that follow, with particular interest in the extension of low interest rates. The current economic climate poses the question around the effectiveness of active vs. passive investing. “I believe in active management. I think that the passive investing approach has a problem right now.”
LISTEN AND SUBSCRIBE
SPEAKERS
KARI FIRESTONE
CEO
Aureus Asset Management
SHANNON SACCOCIA
Chief Investment Officer
Boston Private Wealth
KEITH CARDOZA, CFA
Chief Investment Officer
Brownson
EPISODE TRANSCRIPT
John Darsie (00:08):
Welcome everyone, back to SALT Talks. It's great to have you here. I don't know if you tuned in last Friday, but we had a great SALT Talk with General Kelley that made a little bit of news and we've been enjoying all the conversations we've been having, so thanks again for joining us today.
John Darsie (00:21):
My name is John Darsie. I'm the managing director of SALT, which as many of you know, is a global thought leadership forum and networking platform at the intersection of finance, technology, and geopolitics. With these SALT Talks, we try to replicate the environment that we create at our conferences, which is both providing a platform for big ideas and providing a window into the minds of subject matter experts, which today we have three of the leading independent RIAs in the country. Kari Firestone, Shannon Saccocia, and Keith Cardoza. I'll read out bios for each one of the panelists that are joining us today.
John Darsie (00:57):
Kari Firestone is the co-founder and chairman and CEO of Aureus Asset Management. Previously, she spent 22 years at Fidelity Investments, where she was most recently the Diversified Fund manager in the growth group with oversight of the Large Cap fund, advisor Large Cap fund, Destiny 1 fund and several institutional nonprofit and pension funds. Kari's Fidelity career began in 1983, as she was an assistant fund manager under the legendary Peter Lynch on the Magellan Fund, and we're going to ask her some questions about that experience today. Kari received a Bachelor and Master's in Business Administration from Harvard, and she's a regular contributor to CNBC as well as other financial media.
John Darsie (01:44):
Keith Cardoza is the Chief Investment Officer of Brownson, Rehmus & Foxworth. He co-chairs the firm's investment strategy and impact investment committers and serves on BRF's Private Equity, Credit, Public Markets, Real Estate, and Knowledge Management committees. He also leads the firm's asset allocation and manger selection efforts. Prior to joining BFR, Keith served as a managing director of Merit Ventures, an investment firm focused on technology investment, and previous to that, Keith chaired Boeing's investment strategy and asset allocation committee, where he was responsible for the investment strategy for their $41 billion in retirement assets. Prior to Boeing, Keith managed the $6 billion equity portfolio for the Illinois State Board of Investment's pension fund. Keith received a B.A. in economics from The University of Chicago and is CFA charter holder.
John Darsie (02:36):
Our third panelist today is Shannon Saccocia, who's the chief investment officer at Boston Private, which is a leading provider of fully integrated wealth management, trusts, and private and commercial banking services. She's responsibility for setting the overall investment strategy for the firm, overseeing asset allocation research, portfolio management, external manager search and selection, as well as creating an investment risk management. She also worked closely with both the business development team and the wealth advisor team to help construct and deliver customized wealth management solutions to meet client-specific needs. Previous to Boston Private, Miss Saccocia, Shannon, was the director of manager search and selection for Silver Bridge, which was acquired by Banyan Partners which was then acquired by Boston Private, which is where she is today. She got a B.A. in economics and history from Brandeis University and is also a CFA charter holder, and like Kari, Shannon is a frequent contributor to CNBC and other financial media.
John Darsie (03:37):
We're really excited to have these three panelists on today. Like I said, three of the leading independent RIAs in the country that provide whole suite of services to their clients. Anthony Scaramucci is the founder and managing partner of SkyBridge Capital, is going to be conducting the interview today. I'll kick it over to Anthony to conduct the interview.
Anthony Scaramucci (04:00):
Well, first off, John, thank you very much. It's great to be with you guys. What I thought I would do is go round robin the beginning here and then I'll give some individuals questions, but let start with Kari and then take commentary from each of you.
Anthony Scaramucci (04:13):
S&P 500 down 30% in March, a little more than that actually, and then has now rallied back to flat. Are we ahead of ourselves? Was this a near term blip? Fed induction? Tell us what you think, Kari.
Karen Firestone (04:32):
Well, I think it's very interesting, Anthony, and thank you very much for having me. The market is back to even, and you wonder what the market would have done if there was no coronavirus this year. So at the time, on March 23 when the market hit the bottom, the S&P was 2236 or so, and we thought that the market was very cheap at the time and that it was over-sold. We expected it to rally. It has rallied 44% now. That's not trivial. That, I believe, is the most that any market at any time has gone up in a short period.
Karen Firestone (05:16):
So do we think that the market is over-priced? I think that's what you asked, or do we think that there might be more to go? What we're seeing in the market today and for the last five trading days is that it has brought it and what drove the market higher for the first 35% of this rally was technology and the kinds of digital platform companies that have driven the market higher for the last two or three years. What has moved in the last week of trading has been financials, energy, industrial. Just a broader range of sectors, and if that can continue and we see the reopening as a success, then I think that the market can at least hold this ground and could go higher at the end of the year.
Karen Firestone (06:05):
It's not a cheap market, by any means. It just isn't cheap anymore. It was cheap. It's gotten pretty full, and it would be great if we can stabilize and show that we've got some revenue generation over the next few months to support this kind of valuation.
Anthony Scaramucci (06:21):
What do you think, Shannon? Cheap? Overvalued? Undervalued?
Shannon Saccocia (06:25):
I think it's impossible to tell whether it's cheap or not. I mean, the earnings, which is the denominator of PE, is completely unknown. There's zero transparency right now as it relates to earnings over the next couple of quarters. I think there's also a contingency that's being built into this market that you feel like you're in a situation where there are things that need to occur over the course of the next eight weeks or so to support this. So we talked a lot about an additional coronavirus package and that would include the extension of unemployment benefits through the end of the year. That is required right now for what we're expecting and I think the market is a little bit ahead of where we are from a support perspective. If you look at things like personal income, the savings rate, all of that cash that flowed into the market over the course ... or the economy over the course of the last eight weeks or so has all been artificial stimulus so if that rolls off in the middle of summer and we don't yet have the expansion of consumer spending back to reasonable levels, then I think that we're going to see a second wave, potentially, of unemployment.
Anthony Scaramucci (07:37):
Mr. Cardoza, Keith, what do you think?
Keith Cardoza (07:40):
I can't tell you what's going to happen in the short term. We are very strategic at Brownson, Rehmus. We do tell our clients to rebalance back to their strategic targets, as we did at the bottom on March 23 and as we would now. It's very hard, sometimes, to convince a client to buy into a falling market and to sell into a rising market, but it is very important to continue to rebalance.
Keith Cardoza (08:04):
On one hand, things are looking really good. U.S. financial markets are very liquid, they're functioning well. Of course, a lot of that has had to do with the Fed intervention. Spreads continue to tighten. They think the high yield is now yielding 550, which is the lowest since the beginning of March. The yield curve is steeper now. I think as of close as of at least Friday, I didn't see what it did today, but the yield curve between the ten year and the two year was 70 basis points. Just as an inverted yield curve can predict a recession, a steeper yield curve can predict growth.
Keith Cardoza (08:37):
Equity volatility has subsided. The VIX is back down to 25 or so. We've been under 30 since May 19. That's the longest we've had that stretch since February. Companies have not had problems issuing bonds and continuing to borrow more money. We've had probably a trillion dollars of issuance so far this year. March and April were record months for issuance. May fell just short of a new record. So there's a lot of positive things, but of course the challenges going forward is just as companies are taking on a lot of debt, that's being coupled with probably lower productivity going forward into the future. Companies are maximized for just-in-time delivery for just-in-sales and now all of our companies are being restructured for the safety of our employees, the safety of our customers. We are reshoring a lot of our supply chain, particularly from China, but as deglobalization continues to occur, that's going to hurt productivity.
Keith Cardoza (09:45):
As much as demand comes back, we're not going to get to 100% demand any time soon, so companies are now taking on debt with lower productivity and lower demand going forward.
Karen Firestone (09:56):
Keith, I have a question. How many of the people who you suggested on March 23 that they should re-allocate upward on equities said, "Hey, great idea. I'm dying to have you do that for us."
Keith Cardoza (10:09):
It's a challenge. Our clients are very strategic, and they have been through time periods like this before. Many of our clients were through the '07, '08, '09 liquidity crisis and our firm has been in business for 50 years, so even going through things like the dot com bubble bust. So they have been in time periods where frankly the markets were down more than 50%, let alone 35%.
Anthony Scaramucci (10:35):
What asset class is, given where we are right now, Shannon, what asset classes do you see the most opportunity?
Shannon Saccocia (10:43):
I think there's still some opportunity in credit. If you look at whether ... I mean, I think there's a little less opportunity in loans than there is high yield bonds right now, but there's still some opportunity there. I think that from our perspective, if you look at emerging markets in particular, they haven't participated in this rally that we've experienced, certainly in the month of May, that we've seen in the United States.
Shannon Saccocia (11:05):
I think that for us, we're looking at in terms of, to Kari's point, there are sectors within the U.S. equity market that are more or less attractive based on valuation, and then are a large swaths of assets outside of the United States that are pretty attractive regardless of where you're looking. So I think that there has been this sensitivity over the last decade about the underperformance of international and emerging market equities, and debt for that matter. I think that that shift, potentially, to a weaker dollar scenario, or even a stable dollar scenario, could create opportunities for investments outside of the United States.
Shannon Saccocia (11:40):
If you truly believe that the global economy is going to re-accelerate, which was our expectation coming in to 2020 and perhaps that's been kicked to 2021, you should be looking outside of the United States for potential opportunities in the equity and credit markets.
Anthony Scaramucci (11:54):
All right. So more diversity, basically. Kari, do you think that there's ... you worked at Fidelity, you've got this experience. Tech and momentum, up until today, seemed to be driving the markets, Kari. You think that's a smart trade? Do you think that's the nifty fifty of 2020, or do you think there's still room to go there?
Karen Firestone (12:17):
Well, yes. So that's the simple answer. Yes, I think that tech ... momentum, if we mean by that the people who brought us here, meaning the type of companies that have led on the upside through this whole rally, those are the companies that both have been able to maintain their leadership and been able to persevere and succeed throughout this pandemic. They're highly valued because they ought to be. We did a study, actually, I wrote a piece on this a while ago and I did a chart for CNBC that showed that the contribution of earnings within the S&P 500 from technology stocks and communication services was less than ... I'm sorry. Their share of net income as about 40% for this quarter and their share of valuation was 35%.
Karen Firestone (13:22):
Now, that number can be different today, but certainly they are not overly valued, if we look at their contribution to total earnings, and that can expand, in fact, not contract and it's because if you look at companies that are almost made for an environment that is difficult, that require remote working, requires connectivity of a different type, service providers that have to deal with a new world, it's Microsoft, Amazon, Facebook, PayPal, the different types of companies that we know they're not all in the same sector, but they're ones that have been able to prosper in this environment.
Karen Firestone (14:06):
So of course, that's where money has gone. Do I think that they need to take a break and rest? Well, perhaps, and that's been going on right now, but I think that for the market to go higher, they have to be the leaders again because they are the drivers of this economy. It's what makes the United States a preferential place to invest, rather than other global economies. Even though they might be cheaper, they deserve a lower multiple than the U.S.
Karen Firestone (14:35):
I agree, by the way, with Shannon, that I think emerging markets are cheap but to the question about what leads in the U.S., this could be another week or two of this kind of rotation, but I don't think it'll last unless the market falls and then everything will fall. But if it's going higher, I think that we have to go back to who's leading on earnings and revenues over the next six months.
Anthony Scaramucci (15:01):
So Keith, my old boss, Lee Cooperman, tepid on the markets three or four weeks ago. Dave Tepper, Appaloosa, tepid on the markets. Stan Druckenmiller, a little more bullish this morning but very tepid on the markets for four to six weeks ago. What did they get wrong?
Keith Cardoza (15:22):
Well, I think there's a few things. One, people have been conditioned to buy the dip and it has worked over and over and over again. I think second, the massive intervention by both the Federal Reserve and frankly Congress to keep the economy going in any way they could and to keep asset prices high. And I think three, there was just a look-through. It's this reminder that only 10% of a stock's value is based upon earnings of the next 12 months. 90% of a stock's value is based upon earnings that they'll gain after that and I think there was quite a bit of look-through this event.
Keith Cardoza (16:06):
So I think by being conditioned to buy the dip, with the Fed support and congressional support with both fiscal and monetary stimulus, as well as just looking through this current COVID crisis, I think that's probably what a lot of us missed.
Anthony Scaramucci (16:22):
Let me play devil's advocate and go to Shannon for a second because you mentioned the uncertainty of earnings. My old boss Lee Cooperman would say, "Well, I can't value this market. Is it 24 times earnings? 22 times earnings? What are the earnings for 2021?" So Shannon, what would you say to somebody like Steve Cooperman?
Shannon Saccocia (16:44):
I think you see-
Anthony Scaramucci (16:44):
Lee Cooperman.
Shannon Saccocia (16:45):
I wasn't going to correct you.
Anthony Scaramucci (16:46):
I mixed a couple of geniuses together. I'm sorry. But I meant to say Lee Cooperman.
Shannon Saccocia (16:52):
You know, I think the challenge here is that I don't know that right now that anybody's focused on that. I think that this look-through has two [inaudible 00:16:59], and I agree with Keith. I think the other thing that's happening is that we came into 2020, and this is not a typical recession. Generally we have some sort of economic excess that brings us to the brink and we have an overheating something, asset bubble, area of the economy. We didn't have that here, and so I think the look-through is really once it was determined that this wasn't going to be catastrophic from an economic perspective and that we would be coming out the other side, I think that expectations just sort of reset to where we were at the end of 2019, which we're not ... stocks weren't that cheap then, either, let's be honest, coming in to this year.
Shannon Saccocia (17:37):
So I think inasmuch as you'd like to trade on the fundamentals, the Fed has essentially told you that this bursting of the credit bubble that we've all been waiting for, this retribution for all of these companies over-leveraging their balance sheet, it's not coming. It's not coming today and it's not coming tomorrow. So now this pushes all of that out a few more years. We're in a zero interest rate policy. I hate to use the term, because it's overused, but there is no alternative. So whatever that E is at the bottom of that PE on the S&P 500, where else are you going to, maybe not in the next two months to three months because I think there will be additional volatility and uncertainty especially with China and the election on the horizon, but out into 2021. If you look at the back half of next year, where are you earning return for your clients? Are you earning it someplace else in the equity market? I'm not so sure.
Anthony Scaramucci (18:29):
Well, no, and look, you make a good point. Let's go to the zero interest rates for a second. Professor Stephanie Kelton just wrote a book called The Deficit Myth. It's coming out tomorrow. I had the opportunity to read it over the weekend. So let me flip this over to ... I'll take it back to Kari for a second. I'm talking about the modern money. I'm talking about what Shannon is basically saying. Interest rates are at zero, there's no other place to go. Put it into revenue-generating tech stocks. Otherwise there's no other market, if you will, and so there's a thinness to that. But let's talk about modern monetary theory for a second. Totally okay?
Karen Firestone (19:09):
Yeah.
Anthony Scaramucci (19:09):
There's a new book coming out called The Deficit Myth. We can rack up another $30 trillion in deficit, it's good for mankind. Professor Stephanie Kelton is saying that in her book. What do you say?
Karen Firestone (19:21):
Well, I think she's got a very good point. Monetary policy has changed over the last 30 years. It used to be where there would be inflation if the Fed printed a lot of money, and that has now changed. We observed that in 2008.
Anthony Scaramucci (19:36):
Why? Why has that changed? Why don't we have inflation?
Karen Firestone (19:39):
Well, first of all, we didn't have inflation over the last twelve years because there was excess of supply so even though demand grew over the last decade, there was so much supply going into 2007 and 2008 that we never achieved a point of equilibrium or demand exceeding supply. Now we're at a level where that hasn't been inflation for years, interest rates are low, you can print money and it does not cause excess demand into the marketplace and the global nature of the way people buy and sell has also continued to push prices down for-
Anthony Scaramucci (20:19):
I accept that. Keith, is that a temporary phenomenon for our time or is that something where the paradigm has shifted as a result of technology and that's now something permanent, that we can have an unlimited amount of credit printing without having any inflation?
Keith Cardoza (20:37):
I don't think that's necessarily true, but I would add to the comments of where can we go now. I actually think there's actually a few different places we can go now, and especially you're raising issues that are very complex. What is say is that one of the things that investors need to look at now are those complex assets. So assets that are typically avoided by a traditional bond manager or a traditional stock manager. As we were going through the end of March, one of our hedge fund managers said, "Hey, the way this market is priced is stocks are being priced for a three month shutdown, bonds are being priced for a three quarter shutdown, and structured credit is being priced for a three year shutdown."
Keith Cardoza (21:19):
Now that was a little bit of an exaggeration if not a bit of an exaggeration, but to his point, stocks have come back pretty quickly. Many areas on the credit side have come back, but things like structured credit is still very dislocated. Now that's not something you can get through an index fund or through an ETF or even a traditional mutual fund, but it is something that you can get through an alternative manager. Even assets like, for instance, that you can gain through a mutual fund manager, something like municipal high yield which is something that most traditional bond managers and us stock managers will avoid, even if it's a good value.
Anthony Scaramucci (21:58):
So why hasn't it come back, Keith?
Keith Cardoza (22:00):
I think because of illiquidity. There has been a big challenge in this marketplace of being able to make assessments about liquidity in the marketplace and when you think of things like municipal bonds, even particular high yield municipal bonds, pension funds aren't there, endowments aren't there, foundations aren't there, non-U.S. investors aren't there. And even for U.S. investors, it's a very particular segment of the market. It's people who are making high income.
Keith Cardoza (22:27):
On an intermediate duration high yield municipal bond portfolio, you can earn about 5.5% tax free. Even on a shorter duration high yield municipal portfolio, you can earn about 4%. It's nothing something you can do on your own. It's something that you need to hire a manager who has expertise in that area.
Anthony Scaramucci (22:46):
So Shannon, has the structure of credit come back or is it in a three year freeze? As I'm saying this to you, my heart rate is going up because I'm long on a tremendous amount of structured credit, but go ahead.
Shannon Saccocia (22:58):
I know. I have to remember who asked-
Anthony Scaramucci (23:00):
Lie to me, Shannon.
Shannon Saccocia (23:00):
I have to remember who asked me here.
Anthony Scaramucci (23:00):
Lie to me, Shannon. Lie to me. Tell me it's coming back, like, tomorrow. No, I'm kidding. Give us your critical analysis of it.
Shannon Saccocia (23:09):
There absolutely are ... there's opportunities in structured credit, but I think what March drove home for people is that you really need to understand how you feel about illiquidity, even if it's short term in nature. There were huge opportunities in the high quality municipal bond market in the middle of March as long as you didn't need to be liquid today. I think that structured credit, I think as long as you have the expectation that there could be pockets of opportunity there that some of that is going to dislocate ... there could be continued dislocation in that as we morph into this new phase of economic recovery and you have the wherewithal and the liquidity timeframe to be able to sit there and wait for those trades to pay off.
Shannon Saccocia (23:56):
I think that that's the challenge right now, is that the structures that are created for you to be in structured credit vary widely from interval funds to seven to ten year lock up funds. I think you really want to think about the underlying assets, make sure that you're giving the manager, to Keith's point, the opportunity to maximize the return on those assets without another run on liquidity and then I do think that you'll have opportunities. There's a premium for liquidity in this market that I'm not sure is going to go away, ever, and so I think that it's going to create the haves and have nots as it relates to relative opportunity.
Anthony Scaramucci (24:33):
So are you a buyer selectively in structured credit, or are you a seller of the whole thing?
Shannon Saccocia (24:38):
No, I think ... I absolutely think that it belongs in portfolios, particularly for clients, again, that can commit to a portion of their portfolio being illiquid and seeing it that way and positioning their overall portfolio for a portion of that to remain in structured credit.
Shannon Saccocia (24:55):
I think that the Fed has basically taken off the table the opportunities in traditional bonds to a large extent, and so I do think you need to get more complex in the credit space in order to make those returns.
Karen Firestone (25:08):
And just one other point I wanted to make with regard to a question you asked earlier about why is that Lee Cooperman or Howard Marks, et cetera, or Stanley Druckenmiller have been so negative and what was perhaps different about this time versus other markets such as in 2008 when the market collapsed and they might have been much more positive? We sometimes call this, or I call this, a blasphemous bull run in that it has felt like blasphemy to say that it's fine to buy the market because this market was not about evil doing of certain banks and the rest of us felt, "Gosh, there's so much undervalued stock out there. We have to support these companies, all of these people, institutions," you're just buying stock because it's out there and there's nothing about it that felt evil.
Karen Firestone (26:05):
Buying the market at the time where things looked very grim about a pandemic felt to many people almost sacrilegious and it was very hard to separate your feelings about what was happening around the world as an enormous healthcare crisis and then feeling like we've got to make money on this? It just felt ... I mean, I really think that it was a struggle that many people had-
Anthony Scaramucci (26:30):
I think it makes sense.
Karen Firestone (26:31):
... great investors.
Anthony Scaramucci (26:32):
I just think that when I-
Karen Firestone (26:35):
They were wrong, of course.
Anthony Scaramucci (26:35):
When Scott Wopner invited me on six weeks ago to talk about this, you got $4 trillion coming in from the Fed. As I said, it's a waterwall of money. It's not a bazooka. It's a green tsunami washing over the United States-
Karen Firestone (26:49):
Correct.
Anthony Scaramucci (26:49):
It's impossible for it not to show up in asset prices. We can do gymnastics, mentally, about the fundamentals, but it's just crazy.
Karen Firestone (26:57):
Correct. That's correct.
Anthony Scaramucci (26:58):
All right. We're going to do a quick round robin if you guys don't mind and then I'm going to turn it over to John Darsie, where we have audience participation and some questions. So quick round robin, so making this a short yes or no, don't like, a sentence or so. The hedge fund space is underperformed. Let's start with you, Kari. You're on my screen. The hedge fund space is underperformed. Is that a good place to be for your clients going forward, yes or no?
Karen Firestone (27:26):
Not necessarily. They haven't played it well for the last few years. Why should they start playing it better now?
Anthony Scaramucci (27:31):
Okay, so you would be underweighted in hedge funds?
Karen Firestone (27:33):
Yes.
Anthony Scaramucci (27:35):
Okay. We're not inviting you back. Can we go to Shannon, now?
Karen Firestone (27:38):
Except yours. Except yours, Anthony.
Anthony Scaramucci (27:39):
No, I'm kidding.
Karen Firestone (27:39):
Except yours.
Anthony Scaramucci (27:40):
I'm kidding. I love the objectivity. That's why we do this. Shannon, go ahead.
Karen Firestone (27:46):
We manage our own money.
Anthony Scaramucci (27:47):
Shannon, go ahead. We're recording this for posterity, Shannon, I might add that, okay? No, I'm kidding.
Shannon Saccocia (27:54):
I think there are the opportunities in place as there haven't been historically. There's probably some more opportunities in long short equity as we move forward. I think there's opportunities in structured credit. I'm shying away from relative credit. The Fed's essentially taken those trades out. I'd say uncorrelated asset classes that are available in the hedge fund structure remain pretty attractive here.
Anthony Scaramucci (28:14):
And what about you, Keith?
Keith Cardoza (28:15):
Yes. High complexity structured credit, distressed credit, multi strategy funds, macro funds. With macro, you're liquid.
Anthony Scaramucci (28:24):
Okay. Let's go to active versus passive management, so that could be in hedge fund format, it could be non-ETFs versus ETFs. Let's flip it around. Let's take it around the horn. Let's go, Kari. What do you think?
Karen Firestone (28:38):
Yeah, so if we're talking about active versus ... we are active managers here for our ... I believe in active management. I think that passive investing approach has a problem right now because passive includes an awful lot of equities that have not participated over the last five plus years in the economy and I'm not sure how they participate. So they're pulling down, I'd say-
Anthony Scaramucci (29:04):
Right. So you have to buy the bathwater with the baby, is basically what you're saying.
Karen Firestone (29:08):
Correct.
Anthony Scaramucci (29:08):
What about you, Shannon.
Shannon Saccocia (29:10):
We use both, depending on the asset class. I mean, if you're trying to capture beta you go cheap, and if you're trying to get active management, I think active management's probably a bit more in vogue now for the next 12 to 18 months given that the dislocation, but there's always opportunities to use both in your portfolio.
Anthony Scaramucci (29:25):
Okay. And what about you, Keith?
Keith Cardoza (29:27):
On the U.S. equity side, we're passive, and we have been passive for decades. On the international, it's a mix, and we are certainly are active on fixed income. I think particularly in this environment, the fixed income, you need active management.
Anthony Scaramucci (29:41):
If you were looking back at the world, it's 2025, so it's five years from now, equity markets are higher, the economy's booming. Where do you see the world ... let's go in reverse. I'll start with you, Keith. You're on my screen. It's five years from now. This was a great ... you're talking to your client today, but you have the foresight of five years from now, so you're encouraging them to do what?
Keith Cardoza (30:12):
Five years is not that far away. In the long run, we really do feel confident that stocks will outperform bonds and bonds will outperform cash, but as you tighten that timeframe, even within five years now for 2025, it becomes more difficult to predict.
Keith Cardoza (30:27):
That said, with the equity markets, we are priced for a U-shaped recovery assuming that COVID goes into a ... we have a summer respite from COVID, that things somewhat get back to normal by the end of August, that kids return to school, that we have a vaccine by ... call it the third quarter of 2021, and the economy has returned fully by fourth quarter of 2022, so 30 months from. Equities can be a good place to be over the next five years.
Anthony Scaramucci (30:57):
Okay. So bullish on equities. How about you, Kari?
Karen Firestone (31:00):
Well, I think it's hard to bet against equities because if you look over the past 50 years, they've consistently returned in excess of inflation and excess nicely of the risk rate and so yeah, I would say that you have to have, particularly if you're of a certain age and risk tolerance, a high portion of your assets in equity. I also think that we might get, over the next year or so, some real dislocation in assets like real estate. It's just totally unclear right now whether urban real estate is going to be attractive or not, what's going to happen with the suburbs. They were giving away everything. I don't live in Connecticut, I live in Boston, but it seemed to me people were giving away big estates in Greenwich for very little and now suddenly the prices are gone up 300%. I'd like to see what happens with real estate as a possible investment over the next few ... commercial real estate also can have some kind of dislocation and that can be true overseas.
Karen Firestone (32:01):
I think that we'll have these opportunities in the next twelve months. It's not clear right now how they'll shake out, but equities has to be an important factor, and I think interest rates will be higher, too, so I think that we'll have more opportunity in the fixed income side and so we can ... yes, we'll be buying your-
Anthony Scaramucci (32:20):
All right. Well, I got that on tape, okay? We're going to end. Thank you, guys, for participating. We're going to end it right there on that one statement. No, I'm just kidding. Let's keep going. Let's keep going, Shannon. What do you think? It's five years out. What are you projecting for clients?
Shannon Saccocia (32:37):
I think we continue to be in a low growth environment, Anthony, so I think that the one thing that we are projecting for clients is more subdued returns across both the equity and fixed income space and so I think things like fees, taxes, income opportunities outside of your traditional fixed income basket, those become increasingly important because client's expectations can only be changed so much. I mean, they need cash flow from their portfolio in order to support their needs, and so I think that that's where we're focused, is on this lower growth, lower return environment that we're going to continue to see over the course of the next five years, but even in that case, you want to see your allocations and equities because they at least provide some capital appreciation opportunity.
Anthony Scaramucci (33:23):
Okay. I'm going to turn it over to John Darsie. He's got some questions from our audience. I appreciate you guys participating on our game show. Go ahead, John.
John Darsie (33:33):
Yeah, we have a lot of great questions to get to. Investment advisory, asset allocation manager selection is only one of the piece of the puzzle when you're an investment advisor. What was it like communicating, psychologically, with your clients during the coronavirus-induced selloff that happened in markets and long term, how is this pandemic and the volatility that we've seen changed the way you'll look at risk management within asset allocation for your clients?
Karen Firestone (34:02):
Can I take that?
John Darsie (34:04):
Yeah, Kari. You go first.
Karen Firestone (34:05):
So we wrote to clients four times from February, started I guess February 25 was the first time we wrote and then we wrote twice in March and once the beginning of April. In 2008, beginning of 2009, we wrote to them twice. So this was a scarier period of time and we felt that the whole healthcare and very strange elements of this crisis required more reaching out by Aureus to our clients.
Karen Firestone (34:41):
So we tried to be thoughtful and calming. In March, we gave them a chart of what has happened the last six times the market fell 28% or more since 1961 and the subsequent 3, 6, 12, and 18 month periods and it turns out that in every one of those periods the market is higher following that drop 3, 6, 12, and 18 months afterwards. That spreads, that gap spreads as you go further out from the trough. So it was our way of helping to convince our clients, as well as ourselves, that it was a good time to buy stocks, but we could do it in a kind of graphical depiction and I thought that was a valuable piece of illustration for them.
Karen Firestone (35:35):
On the risk front, there are two things that I think are important. One is that the U.S. government, the Treasury and the Fed, showed us that they would reduce the risk of this environment by the amount that they were able to push out towards businesses, to citizen on the Fed side of borrowing and that definitely alleviated a big question mark and reduced the risk to investors and I thought that was very important. We saw that happen, to some extent, in 2008, but this was much bigger.
Karen Firestone (36:12):
Number two, when you start to experience this kind of meltdown in the market, you definitely, as an advisor, see the tolerance that your clients have to risk. They may have tell you how they feel about it going in to a relationship, but not until this sort of thing happens do you either hear them say, "I'm really scared. Maybe we should sell 25%," or they say, "Hey, this looks like a great opportunity. We should be buying." So it gives us more information that it could take 15 years to accumulate otherwise.
Keith Cardoza (36:48):
I want to add to-
John Darsie (36:49):
Shannon, how about ... Keith, go ahead.
Keith Cardoza (36:50):
... the second part of that question around risk and in fact, Shannon brought this up as well in terms of liquidity. I think part of the challenge that we have in our industry as a whole is when we look at risk systems, they deal with complicated problems but not complex problems. What do I mean by that? Complicated is like a jet engine. Once you figure out a jet engine works, it works the same way over and over and over again. Well, complex are things like the weather and market movements. It's always ever-changing. There's a lot of variables and once they're figured out, they continue to change.
Keith Cardoza (37:24):
So a lot of risk systems are based upon things like expected return, standard deviation and correlation, and then you can output some sort of number. The challenge is, is as Shannon mentioned before, would be things like liquidity. A lot of risk systems, it's complex. We can't measure illiquidity. It becomes very difficult. So for instance, even in terms of communicating things like with clients on something like investment-grade municipal bonds, which a lot of clients consider to be the safe part of their portfolio, during a good chunk of March and going into April and even now, it's difficult to sell, even investment-grade municipal bond.
Keith Cardoza (38:07):
So how do you communicate to a client that, "Hey, this is the safety part of your portfolio, but yet there are time periods where it's not advantageous to get out, and in fact if you do, you're really going to be hurting yourself," and I think we just need to do a much better job as an industry of being able to asses that liquidity across the entire portfolio.
John Darsie (38:27):
Shannon, do you have anything to add to that?
Shannon Saccocia (38:31):
Not really. I feel like everybody's really covered it. I would say the one big difference between, for instance 2008, 2009 to Kari's point and this time around is that our firm was more of an investment management firm back in 2008, 2009 and we're much more of a holistic wealth management firm with a significant planning component and I would say that that really helped us because reminding clients about their plan, what we had already set up for them, even when they started to get perhaps a little squirelly when we could just revisit the plan and remind them that we had really factored in through things like Monte Carlo simulations all of these potential events and that they were still coming out the other side where they needed to be from an outcome perspective, I think that really helped. So I think this particular crisis has probably driven home the importance of holistic wealth management and financial advisory as opposed to asset management, which I think 20 years ago is what we probably all were trafficking in.
Keith Cardoza (39:23):
Yeah, I will admit, Brownson Rehmus, we've been there for 50 years, so we are first and foremost a financial planning firm, and in addition to that we do investment strategy and asset allocation and manager selection. So this is something we've been doing now for five decades.
John Darsie (39:38):
Thank you all for that. We have several questions related to potential inflation, so obviously it's debatable about whether we're entering a potentially inflationary environment. Anthony touched on modern monetary theory and rising deficits and things like that, but we have a couple questions that I'll combine into one. One, if we do get some level of inflation, what impact do you expect that to have on earnings and do you expect companies to be able to pass that through to consumers, and second, given the possibility of inflation, do you think that things like gold, Bitcoin, or other inflation hedges, where do they belong in a portfolio right now, maybe increasingly so relative to a few months ago?
Shannon Saccocia (40:21):
I just want to start with that the misconception that there hasn't been inflation. There hasn't been inflation the way that we measure inflation according to the CPI. Services are certainly more expensive. Housing is more expensive depending on where you are and particularly rent. So I think when we start to think about inflation is what is the next level of inflation that could potentially feed into corporate profitability, because that's really what we're trying to discount here, is how much of this will impact corporate profitability going forward.
Shannon Saccocia (40:56):
So if you think about the costs, and I think Anthony may have mentioned this before, labor productivity and the cost of inputs, that continues to get cheaper and cheaper as technology gets cheaper as we shift away from very heavy, fixed asset businesses, to Kari's point about where growth is and that's really an intellectual capital going forward. So I think that that is where we really have to shift our framework to what do we mean by inflation, because services inflation is certainly there. Look at healthcare. Look at college costs. I mean, there is inflation in the economy, just not at the CPI level and so I think we need to think about when you're looking at it at a company level, what are the inputs that that company is going to increasingly be paying for and do we expect there to be macro economic rationale for those inputs to get more costly and that's really how you should be looking at inflation. I think the CPI measure is dated, and I wouldn't be surprised to see changes to that over the next five to ten years.
Karen Firestone (41:54):
You know, also we have to think about the near term and the long term. Over the near term, there are many inflationary pressures because of how companies that are reopening have to deal with the cost of a COVID open business. So whether that's ... if you're a restaurant and you can only serve a third of your capacity but you have the same amount of space, you have to charge more for your food. If you're in the retail business and you can only have so many customers in at a time, but again, you're paying the rent, keeping the lights on, have your inventory but have to have filters and have to have all kinds of measurements for your employees, that's inflationary. There are many ways in which people are going to deal with the coronavirus over the next six months that are going to be inflationary. Now whether that changes after there's a vaccine, we don't know, but in the short term, it's inflationary and if municipalities, state governments and eventually perhaps the federal government needs to raise taxes because everything is taking so much of the budget to manage the healthcare expenses of this pandemic, that's going to be inflationary. If companies want to keep their profit margins but their tax rates go up, I think they're certainly going to have to try to pass some of that on to consumers.
John Darsie (43:21):
Keith, do you have anything to add to the inflation question, and specifically about whether things like gold, cryptocurrencies belong as a small sliver in portfolios given the potential specter of inflation?
Keith Cardoza (43:32):
We do not have gold or cryptocurrencies as part of portfolios. Things like gold I think are just much too volatile for any type of expected return and so that is not something that we contemplate.
John Darsie (43:50):
Okay. On to the next question. We have a few that relate to China about whether, I know Shannon touched briefly on emerging markets earlier, but you guys look at China, obviously a fast growing economy that's been able to reopen a little bit more quickly than other global economies. Do you think that China has some attractiveness as an investment destination right now?
Karen Firestone (44:12):
Yeah, we do. I mean, we have of our equity assets a certain percent are in international funds. We manage the equities, U.S. equities, directly because many of us have done this as analysts and fund managers for decades and we like to do that. When it comes to international investing, we don't use index funds or ETFs or we use managers who we have a lot of faith in. We have a manager that's a China direct manager. I think that you can't be a global investor without having some representation from China. It's the second largest economy, it's become a larger factor in every index you want to look at that's non-U.S., and it's interesting. They're trading at about the same level of a year to date basis as the U.S., meaning about flat. It's about flat.
Karen Firestone (45:11):
So we own Ali Baba, that's the one name that's in our portfolio. We own 32 names, Baba's one of them. It's up, year to date, a few percent and we continue to think that's a great stock to hold. There are many good companies. It's not easy to understand that as thoroughly as people who are on the ground there and so we have allocated that mostly to external managers.
Karen Firestone (45:38):
But yeah, I think that China's very important in a global framework.
Keith Cardoza (45:43):
Yeah, I absolutely agree with that. We allocate to China through both our emerging market managers as well as our international equity managers. Anthony talked about before looking out to 2025. It's undeniable that China's economy is going to continue grow, being the second largest economy and whether we are economic allies, economic rivals, economic opponents or economic enemies, the U.S. economy and the Chinese economy are going to continue to be at the forefront around the globe. I'd like us to think about us being rivals, where we could continue to make each other better, but frankly even if we become economic enemies where we almost start having bifurcated internet system, where there are two internet systems and two global supply chains and it becomes a sphere of U.S. versus China, I think it is important to be allocated to a country and economy that's going to continue to grow.
Anthony Scaramucci (46:52):
But before Shannon talks, I want to go ... are you worried about political risk in China? And then secondarily, are you worried about political risk in the U.S.? If you were Chinese, looking at our televisions, you'd probably think that too. What do you think?
Keith Cardoza (47:07):
Yeah, political risk is certainly ... is always a factor. I mean, it's one of the reasons why when we allocate money to areas like China, well and even in the United States, we want to work with money managers who are experts, who are know the politics, they know the economics, they know the liquidity and know the systems and know the accounting and the balance sheets much better than most. So it's identifying the portfolio managers that have the uncommon knowledge of the politics and the economics and the demographics and the technology and being willing to trust them.
John Darsie (47:44):
How would the market react, in your opinion, and we'll start with Shannon on this one, if we did get a large second wave of the virus, we have more rolling shutdowns and quarantines? Is this a situation where you can't lose because if we do get another shutdown we'll get another wave of Fed liquidity and fiscal stimulus, or how do you think markets would react in that scenario?
Shannon Saccocia (48:07):
I think the markets will react negatively to a resurgence, however I think that there is little political appetite for a return to a lockdown scenario that we experienced in April. I don't mean to be crass, but I just think that from a political perspective, you're going to have pockets of progression that are going to see the benefit of going back into these lockdown scenarios and then you're going to see most places really react, I think, very differently than what we saw in April and May. I hate to say that, and I think it's going to be a challenge as we go through and see this re-acceleration of cases and so while I'm hopeful that we will not have a resurgence of the virus, I also am not expecting ... you're seeing a lot of anecdotal evidence and also several very notable economists coming out and saying that the way that we handled this was a mistake from an economic standpoint, that we should have taken a different tact. I think that's very easy to say in hindsight, since we managed to flatten the curve clearly, but I don't think that there is appetite for that in the August/September time frame.
Shannon Saccocia (49:19):
I am more concerned about how that will affect the elections in November, because I think that there will be a very ... I think that there's going to be an emphatic vote on how this crisis was handled in the elections in November, and if we get a resurgence in April and Septe ... or in August and September, excuse me, I think that's going to be even more impactful to those elections. So that's sort of how I view that potential.
Anthony Scaramucci (49:45):
So a resurgence is bad for the Trump administration, Shannon?
Shannon Saccocia (49:52):
I think it depends on how it's handled. I do. I think it depends on how it's handled in that August and September time frame. I think it depends on what's happening economically up until that point, and I do think that ... again, I think that if we end now, Anthony, to your question, and everybody can take the last couple of months and say, "Okay, how did we handle this politically? Who are the political winners and losers?" If you have a resurgence in August and September, you just get so much more fodder for that potentially contentious election that I don't know what the outcome will be of that, but I know that it will be more than about the progressive platform versus the incumbent platform than we could expect right now.
Anthony Scaramucci (50:35):
All right. If Trump wins, the next time I have you on, Shannon, I'll be wearing an orange wig, okay?
Keith Cardoza (50:42):
I'll add to the resurgence-
Anthony Scaramucci (50:44):
What's that, Keith?
Keith Cardoza (50:44):
You know, I'll add to the second wave. A lot of scientists and experts do believe we are going to have a second wave in the fall, but we're not going to have a national shutdown again. The national shutdown was probably a very prudent step to take because we didn't know where the hot spots were going to be, we didn't know what was going to be the exponential rate of the virus, we didn't know how it was primarily transmitted. There were so many unknowns about this very deadly and dangerous virus, and a national shutdown probably was prudent.
Karen Firestone (51:16):
We didn't have a national shutdown. We had a state by state shutdown. It was never a national ... I mean, it wasn't, to be clear.
Keith Cardoza (51:26):
Understood. So going to that further, I think in the fall, to your point, it'll become even more hyper localized. You will see, perhaps, specific cities, specific areas. It will be more hyper local in terms of being able to identify where hot spots are, where we will have to perhaps mitigate the virus. And also hopefully over the summer, we will have more therapeutics on the marketplace. There's not going to be an vaccine by the fall, but there's a good chance there'll be some therapeutics on the marketplace that will help alleviate the symptoms.
Anthony Scaramucci (52:01):
All right. Well, we're going to wrap up here in a second, so of course I have to talk about politics, if you guys don't mind. So let's start with you, Kari. What are you telling your clients about the election?
Karen Firestone (52:13):
I'd say that we're telling our clients right now that the market would be happy with either candidate. I'm assuming the candidates are Donald Trump and Joe Biden. I don't think that the Biden agenda is one that's going to make most investors wildly concerned about their holdings. It's probably true that there would be an interest in raising taxes, but the tax rate is so low relative to any time in history in the United States that even if taxes were to go up some, they would be far lower than they were under the Reagan administration, as an example.
Karen Firestone (52:51):
So I think that it's not as much of an issue about who wins. I think the bigger issue is what's subsequent to the election? You wonder whether there's going to be some national outcry, and I mean protests, demonstrations, or worse in either case if President Trump wins or President Trump doesn't win, and I think unrest is very concerning to the market. It hasn't been. I mean, just notice what's happened over the last week or so when we've had demonstrations, rioting, looting, et cetera. The market, I think, has gone up almost every one of those days so the market is living a slightly different state of mind but at the time of the election, and post election, it could have an affect. What happens subsequently could affect the market and how the country reacts, so that worries me somewhat. But not which candidate.
Anthony Scaramucci (53:55):
I hear you. Shannon, what do you think?
Shannon Saccocia (53:59):
I think that typically markets like to see the incumbent win. It creates greater certainty, normally. We certainly have lived in an uncertain environment and I think the China situation is the area where people are concerned about what a re-election of President Trump would mean for continued China tensions and that relationship.
Shannon Saccocia (54:20):
I also think it's important to see who Biden chooses for his running mate because we could see a more progressive platform after what's been happening from the social unrest perspective come aboard with a potential vice presidential nominee. So I'm interested to see how he positions his running mate and potentially modifies his initial platform to be more progressive in response to what's happened over the last few days.
Anthony Scaramucci (54:47):
Well, he's definitely tacking to the middle right now, because he was against the whole defunding of the police today. All right, we'll end it with you, Keith. Where do you see things election wise? See, notice I didn't pin any of you and ask you who you were voting for or who you thought would win. I want to invite you guys back, and I wanted you to accept my invitation, so I didn't push too hard there. But go ahead, Keith. What do you think's going to happen, or what do you think ... market wise?
Keith Cardoza (55:15):
You talked about 2025 and from a market perspective, I think the election is still way far out. For the market right now, no one's talking about the election. We're still interested in the reopening of the economy and what's going on with COVID, what's the advancement of therapeutics, what's the advancement of vaccines, what's the advancement of testing? Are more people going to be sitting in restaurants? Are more people going to be flying on airplanes? Are local businesses going to be open? That is what the market cares about at this moment and will be for the next few months.
Anthony Scaramucci (55:49):
All right. John, you got any other final thoughts or final question before we kick it off, kick it out?
John Darsie (55:55):
No, I just want to thank Shannon, Keith, and Kari for joining us. As we talked about in the open, these are three of the top independent RIAs in the country, beyond just asset management, as they touched on financial planning, advisory work. Really great fiduciaries for their clients that we've built relationships with and we really appreciate you offering your insights.
John Darsie (56:17):
Anthony, do you have any final words?
Anthony Scaramucci (56:18):
I don't. I just want to say thank you guys. I appreciate you coming on and the rigorous debate. I'm a little sore about the opinion on the hedge fund thing but that's okay. I can get over that. I can see through that. But listen, we obviously think there's a huge opportunity in structured credit and the stuff is fundamentally cheap and so ... but that'll be for us to convince you of that further.
Anthony Scaramucci (56:40):
So with that, guys, thank you very much. I look forward to our next SALT Talk, and you guys were great and hope you all come back.
Karen Firestone (56:47):
Thank you.
Keith Cardoza (56:47):
Thank you.
Anthony Scaramucci (56:48):
Thank you again.
Shannon Saccocia (56:48):
Thank you.
Anthony Scaramucci (56:48):
Bye bye.