“If I think that overall demand for equities will come down, maybe within that, the sweet spot in the context of millennials would be ESG and climate related investments.”
Szymon Idzikowski joined Abu Dhabi Commercial Bank (ADCB) in January 2015 to lead the 3rd party fund selection and co-manage discretionary client investment portfolios. He is a lead fund manager of ADCB Target Date Funds and ADCB Multi- Asset Funds.
There are three major factors driving the market and forecasts of future returns: demographics, globalization and global growth. We see aging demographics across the world which will serve as a drag on the economy. Globalization peaked around 2010 and its decline will ultimately moderate the pace of global growth. This portends lower investment yields in the coming decade. “If I look on the IMF forecast, growth is only going to continue to moderate [due to globalization and demographics] and debt that companies and governments have built.”
LISTEN AND SUBSCRIBE
SPEAKER
Szymon Idzikowski
Fund Manager
Abu Dhabi Commercial Bank (ADCB)
MODERATOR
Anthony Scaramucci
Founder & Managing Partner
SkyBridge
EPISODE TRANSCRIPT
Rachel Pether: (00:08)
Hey everyone and welcome back to SALT Talks. My name's Rachel Pether and I'm a senior advisor to SkyBridge Capital based in Abu Dhabi as well as being the MC for SALT, a thought leadership forum and networking platform that encompasses business, technology and politics. SALT Talks, as many of you regular viewers know, is a series of digital interviews where we speak to some of the world's foremost investors, creators, and thinkers. And what we're really trying to do here is provide our audience a window into the minds of subject matter experts.
Rachel Pether: (00:42)
Today, we'll be discussing why investors should be bracing for lower returns. And I'm very excited to be speaking to my friend Szymon Idzikowski, fund manager at Abu Dhabi Commercial Bank. Szymon leads the third party fund selection for ADCB and co-manages discretionary client investment portfolios. He started his career with Morningstar in London, where he was involved in the rollout of Morningstar's qualitative fund research and ratings across Europe and Asia. Szymon holds a master's degree, a bachelor's degree and is a CFA charter holder. As always, if you have any questions at all during today's talk, just enter them in the Q&A section of your Zoom screen. Szymon, welcome to SALT Talks.
Szymon Idzikowski: (01:28)
Thanks for having me.
Rachel Pether: (01:30)
Now, before we begin, I've known you for about five years now, and I'm always worried that I get your name pronounced incorrectly. So for the benefit of the audience, can you just pronounce your name in the correct way?
Szymon Idzikowski: (01:43)
Sure. I actually think you've done a great job pronouncing it, but it's Szymon Idzikowski.
Rachel Pether: (01:52)
Perfect. And I also severely paraphrased your biography there. So maybe you can start just by telling me a bit more about your background and how you ended up where you are now in ADCB.
Szymon Idzikowski: (02:03)
Yeah, I think you actually summarized it very well. Well, I've been in the industry for nearly 13 years now. I've started my career in London with a company called Morningstar and that was in the beginning of 2008, so very interesting times to join financial services. But that also means that pretty much I've seen the full market cycle by now. I've joined ADCB in 2015, to lead the multi-manager capabilities for the bank and I'm responsible for idea origination both on the traditional and alternative side, portfolio management as well as client advisory.
Rachel Pether: (02:49)
Excellent. So, I'm sure we'll get into some of those ideas a little bit later during the course of today's talk as well, but the two of us have discussed before how post financial crisis returns have exceeded longterm average returns, but that investors should be bracing for lower returns going forward. So maybe you could talk me through some of the structural changes behind that reasoning.
Szymon Idzikowski: (03:16)
Sure. Look, there're three areas I think, and then there's probably a number of those areas, but the three areas I would like to talk about are demographics, globalization and global growth. But maybe before I dive into that, I would like to just spend a minute on actually, what you just said that the recent returns have exceeded the long-term averages and maybe put a few numbers behind that. I think it would be a nice place to start and you've been absolutely right. If we look on equities, US large company names S&P 500 benchmark pretty much over the last 10 years, it has returned something like 13, 14% annualized versus its long-term average closer to 8%. So if you think that at some point, those returns will mean revert to the long term average, that would simply imply quite lower returns going forward.
Szymon Idzikowski: (04:26)
And as we just discussed a few minutes before this webinar, I was earlier today looking on capital market assumptions on some of the bigger asset managers, BlackRock, JPMorgan, and GMO. And of course, all of them would go beyond just the simple mean reversion but the conclusion has been pretty much the same. So BlackRock, for example, expects that over the next 10 years, S&P 500 will return something like 5% annualized, JP Morgan thinks it's going to be 4% and GMO is the most bearish of all three and GMO doesn't think we're going to see as much as 1% from S&P 500. And again, that's after receiving 13, 14% annualized over the last 10 years, so that's one thing. Unfortunately, on the fixed income, it doesn't look any better. I guess, in the context of fixed income, you probably want to take a little bit longer horizon because I think what we've seen is the yields coming down from early 1980s, and that yield compression has provided a great tailwind for fixed income investors.
Szymon Idzikowski: (05:48)
But the reality is where we are now most of the sovereign bond funds pay close to zero. In some cases, these are negative returns and we can actually see negative returns even in credit, both investment grade and high yield. You look on an index such as Barclays global agg and 20% of that index actually is in negative yield territory. And again, if I look on those free providers, all of them are in the agreement that over the next 10 years, in the real terms, you will unlikely to make any money from government bonds. In a nominal term there has been mixed conclusion but that's not a very rosy picture as well, so that is where we are. But then if I go back to the structural drivers you've asked about, again, they don't really change the picture or they don't make the picture anymore rosy because if I start with demographics, I think it's been a quite topical area.
Szymon Idzikowski: (07:00)
There has been a lot of headline about the Japanification and aging populations and none of this is good for the market. Aging population means that the portion of population that is working versus the non-working population is shrinking. So their involvement in income generation and productivity and workforce is decreasing the [inaudible 00:07:22]. That's not good for our economy and that's not good for cashflow generation of the companies. So ultimately that's not going to be good for our returns if we invest in those companies, so that's one thing.
Szymon Idzikowski: (07:39)
The second thing is globalization. And again, I think globalization is a trend we've seen over the last few centuries. And what it has done is it's made the world much more interconnected. It has resulted in probably creating more prosperity around the world. It has introduced new products, share know how, helped to lower the costs, helped with the migrations, but a lot of those trends have been reversing. So if we look on the last few years, it seems like the globalization has peaked probably around 2010. So these tailwinds again, we've been getting in the past from globalizations are not necessarily going to help us going forward.
Szymon Idzikowski: (08:36)
And then the third driver is global growth. And again, unfortunately I don't have a good news there either. We've been already over the last few years in a slow growth environment and if I look on the IMF forecast, looks like this growth is only going to continue to moderate. And some of the drivers behind that would be actually globalization would be those demographics I just spoke about but it will be just as well things such as pile of debt that companies and governments have built to the high leverage is not going to really help going forward.
Rachel Pether: (09:21)
So firstly, thanks for such a great overview and breakdown of those three drivers. I want to pick up on the first point that you made about demographics and maybe just look at how this is impacting demand for equities as well. Just touch on that, given that it's also projected to only be one to 5% return going forward in the S&P.
Szymon Idzikowski: (09:48)
Yeah. And that's a good point because I guess when I was talking about demographics, I was referring only to this demographic support ratio for the economies, but you are absolutely right. There is probably another angle. You can look at demographics, which is propensity for risk, appetite for risk-taking. And a lot of studies suggest that it is the mid-age working population that has the highest propensity for risk-taking. So these would be those natural buyers of equities. But again, if we think that the population is aging, this appetite for equities will be decreasing, which will not be good for the prices of equities.
Szymon Idzikowski: (10:47)
But maybe second point I would make in that context is the context of millennials. Because again, some of the studies suggest that, or some of the expectations suggest that millennials will not necessarily be as eager to buy equities as baby boomers when they were at their peak potential for buying equities, so that's again also going to drive demand.
Rachel Pether: (11:19)
And I appreciate that you're more focused on the investment side versus the client focused side, but where are you seeing millennials wanting to invest if it's not in equities and I'm presuming it's not fixed income?
Szymon Idzikowski: (11:35)
Yeah, it's interesting. Well, there's probably two points I would make around that because the first point is probably what I just said that maybe the demand will come down compared to historical standards. But I guess the second point that is probably quite important in this context is what they will be buying. And I think what we've seen is that they try to align their value systems with the investment. So of course, they've attention has been much higher in all those sort of ESG related teams. So again, if I look on some of the statistics that I've seen, they would suggest that probably millennials are twice as likely to buy ESG compared to baby boomers. So if I think that overall demand for equities will come down, maybe within that, the sweet spot in the context of millennials would be ESG and climate related investments.
Rachel Pether: (12:45)
Yeah. And I guess one other thing that's kind of come up in the millennial age as it were is this, the sharing economy. And I want to link that into the point you made about global growth. Do you think that we still measure growth correctly in the context of this sharing economy?
Szymon Idzikowski: (13:04)
It's a good question. Let me maybe start explaining the concept of sharing economy, just in case some of our viewers are not familiar with that concept. And I think the easiest way to explain this is by using some of the examples which probably most of us know, and this would be the type of Ubers, Lyfts or Airbnbs. So basically what sharing economy is, is the part of economy that involves exchange of goods and services on a peer to peer basis but very often utilizing some unused goods or assets. So if you think about Uber or Lyft and basically personal cars, the reality is that we don't use our cars to the full extent.
Szymon Idzikowski: (14:02)
I mean, most of us would wake up, you drive to the office for half an hour, then you park the car. You are at the office for the next eight, nine, 10 hours, your car stay there unused, drive back, go sleep. And basically at the end of the day, you use your car for maybe an hour, right? Just imagine on top of your full-time job you become an Uber driver. You don't really need any new assets to become an Uber driver, but you are utilizing an already existed asset. It will be the same case for Airbnb. In a traditional economy, if you wanted to increase the supply of something, maybe housing or apartments, you would need to build them. But within this concept of sharing economy, instead of building a new hotel or a new apartment, you basically utilizing the existing structures and maybe renting unused rooms.
Szymon Idzikowski: (15:03)
So all those examples, in all those examples there is for sure value created by sharing economy. But that value is not necessarily captured by the GDP, because you're not buying a new car to provide a service. You're not constructing a new hotel or a new apartment, but there is some value created. It is a little bit open question. I think we are all trying to find maybe new template, maybe partially that does explain to some extent this slowing growth environment that we've just discussed.
Rachel Pether: (15:37)
That's a really good point. I also do have to add, if your day is just driving half an hour to the office, working, driving home, and sleeping, then we need to do something about priority in your life. Okay, so you've mentioned demographics, globalization, and global growth. So maybe we can now turn that over and look at maybe what is the antidote to some of them. And I know you're a big fan of Howard Marks as well. And he was making the comment that asset prices are higher than they were a year ago. Prospective returns are lower than they were a year ago. And so people are having to take more risk to get return, but it's not the really the type of an environment where you want to be taking more risk. So I guess putting all of that together, where can investors look for returns as global growth is slowing?
Szymon Idzikowski: (16:31)
Yeah, look, so if you think we are in the slow growth environment, then you basically need to look for high growth opportunities. And the way we look at this is through the lenses of new economy versus the old economy. And the new economy would be your type of sectors or industries or companies with some sort of cutting edge technologies that disrupt those traditional and old economics. So these will be maybe your FinTech versus traditional financials organizations, this may be electric cars versus the traditional cars, this could be some sort of online learning and online shopping, maybe alternative energy versus traditional energy. So we do think there is some sort of parallel shift, a paradigm shift taking place. And we do think that those new economics will be winners from this new situation.
Szymon Idzikowski: (17:37)
So that's the first thing. Well, the second comment I would make is probably around private markets. And if I think about the private markets, well, the companies right now have much more option to raise capital than they did in the past. So they are not as eager as they used to be to go for the IPO and when they do, they take much longer to get to that stage which means that much more value is created when they are still private. So if you want to utilize that value, you need to participate or buy them when they're still private.
Szymon Idzikowski: (18:21)
I appreciate you're giving up liquidity in that case, but I do think it's a very fair trade. And if I look in again in some of these capital market assumptions, BlackRock, for example, expects that over the next 10 years, you can make as much as 17% on annualized basis from private equity. And that compares to meet single digits coming from public equities so that the trade-off is I think, quite attractive and the same on the fixed income side, you will look on the direct lending where private things you can make as much as 8% annualized return versus your very low single digits from public fixed income.
Rachel Pether: (19:10)
I mean, but the private markets point you make is a great one, SpaceX just did a series in funding round, it used to be ABC stop at D but companies are staying private much longer for sure. We're both based in an emerging market. How are you seeing emerging markets within the things that you've just discussed?
Szymon Idzikowski: (19:37)
Yeah, so I think emerging markets have probably one advantage versus developed markets and that would be demographics. So when I was speaking about the aging population, most of that applies to developed market. So for sure, someone that has a long term investment horizon there are opportunities in emerging markets and they're worth considering.
Rachel Pether: (20:11)
And where are you seeing the best opportunities, when you look at emerging markets, how do you divide the world, the emerging market world?
Szymon Idzikowski: (20:19)
So we are the most excited about emerging Asia. And we think that on one hand, you do take advantage of, of course, those better demographics, but at the same time, if I go back to the comments I made about the new and old economy, a lot of the new economy sectors and companies you can find in Asia, so it ticks both of the boxes. On the other hand, probably, I would stay away from the old economy emerging markets, all those commodity producers, mainly on the back of the transition that China goes through, transitioning from more like a manufacturing base toward domestic and service oriented, which means that the demand for local commodities is coming down, which of course will not be good for the commodity-producing emerging countries.
Rachel Pether: (21:17)
Yeah. And I guess that goes back to your point about capacity as well. Maybe we don't need more things if we're using our current resources more effectively. We've had an audience question come in, which I think it's probably opportune to ask now. Someone has asked, what is ADCB doing in the ESG space, be that, in equities or fixed income?
Szymon Idzikowski: (21:42)
That's a good question. Unfortunately, I feel that ESG has not gained as much traction in the middle East as we've seen in Europe and in the US. So I think Europe is leading the way, US is probably second. In the middle East, I think that the only angle I would put in the context of ESG is probably Islamic investing, which you could argue is a form of ESG where you basically align your values with how you invest. And of course, most of the local banks will have products around that. We've got products on both equity side and the fixed income side that gives you exposure to Sharia products. And we've seen a lot of interest in those products, but if I look on the sort of broader ESG products, we've talked about it quite a lot. We write a number of thought leadership papers but we haven't seen probably as much traction as some of our colleagues outside of this region.
Rachel Pether: (22:50)
I'm quite impressed Szymon because we haven't actually really discussed the pandemic yet, which I'm very happy about. So I'm not going to dwell on it, but what we appear to be in now is more of this K shape recovery and dispersion amongst sectors that are forming well, how are you looking to take advantage of that dispersion from an investment side?
Szymon Idzikowski: (23:17)
Yes, you are right. I think we've seen a huge dispersion this year, basically all those growth related sectors leading the recovery and value related sectors lagging. But the reality is this is not only this year phenomena, we've seen this dispersion actually for quite a few years now. And I think by Q3 this year, probably the gap between the growth and value names has been the highest we've ever witnessed. And I think a lot of that goes back to what I said, that we've been in a slow growth environment for a number of years. So if I was a long-term investors and I focus on my strategic asset location given... We don't think the growth is going to pick up much really going forward, I would probably stick to those growth and new economy names.
Szymon Idzikowski: (24:21)
So that's the first comment I would make. But having said that, we probably have seen some rotation the last few weeks where those cyclical and volume names have been picking up. And I think interesting thing that COVID has created this year, it's almost rotated the beta of names and sectors and industries.
Szymon Idzikowski: (24:47)
So sectors that traditionally are associated with trading at a high beta, the type of like, let's say your IT sector actually had a very low beta this year because of all this online demand, which does explain why it has done so well. And on the other hand real estate, which is traditionally very defensive and lobbied, the sector actually has seen a huge spike of its beta because of the commercial real estate and problems related to that. So while I made the comment about your longterm and structural positioning, there's probably an opportunity for more tactical investors who would like to potentially play this beta normalization.
Szymon Idzikowski: (25:37)
Of course UK has just approved the vaccine, probably we're going to see more of that happening as we are seeing this process rolling out and economies reopening. Again, we're probably going to see some of those cyclical or some of those defensive names and sectors that have lagged playing a catch up game. So for the small tactical investors, probably, things such as airlines, auto, hotel, leisure, energy and a few other sectors and industries that have lagged could be potentially a nice tactical play.
Rachel Pether: (26:22)
Yeah, absolutely. From the hedge fund perspective side, we've seen that it's the distressed corporate credit guys that have really had a great last six months, at least by picking up on some of the opportunities that you just mentioned. We've had a couple of audience questions coming in, actually both of which are brilliant questions and I wish I'd thought of them myself. One of them is related to private markets. And from Ken, has the explosion of [SPACs 00:26:52] , which offer a faster approach to private investment liquidity affected the investment decisions i.e in high growth areas such as tech?
Szymon Idzikowski: (27:04)
Has that impacted decision-making?
Rachel Pether: (27:08)
Yes. So I guess, I mean, I know SPACs haven't yet really taken off in this region yet, but obviously they're all the rage of the day in the US at the moment, are you thinking that that's affecting investment decisions with regards to the high growth areas?
Szymon Idzikowski: (27:30)
I don't have a strong view on that but clearly, if we look on overall, I mean, private markets have seen huge traction over the last year, raising a lot of assets. I think the two probably biggest trends we've seen in the last few years is the race of course, of passive investment on the public space and then potential investors going, searching for alpha in the private markets. I'm not sure if that's related to what the person from the audience has asked, but potentially it does partially explain some of that.
Rachel Pether: (28:17)
Yeah, that's great. Thanks, Szymon. And if the question wasn't answered, Ken, just do let us know in the Q&A section. A couple of other questions coming, one about hedge funds, one about emerging markets, so I'll start with the hedge funds. What is your appetite for hedge funds at the moment and which type of hedge fund do you believe is attractive at this stage in the cycle?
Szymon Idzikowski: (28:42)
So a lot of allocations we do and on the hedge fund side, most of our allocations are on the liquid alternatives. So across all our models, irrespective of risk profile, we would have a bucket for alternative assets for a lot of liquid hedge funds. Most of our allocations currently are to multi-sector hedge funds so we do see value from a strategic point of view to have those allocations but we don't necessarily have resources to spend and try to allocate within that, which is why we find fund managers that will do those calls for us.
Szymon Idzikowski: (29:29)
Having said that, some of the discussions we've been having internally has been about potentially some opportunities within the event-driven space, given where we are in the market cycle and higher MNA activity and where the interest rates are. So that's probably one area where we've seen a little bit more opportunities.
Rachel Pether: (30:00)
Yeah. That's great. Thank you. And also a question from Lindsay, who said, you mentioned your excitement on emerging Asia, what are you most excited about in emerging Asia and this could be countries or themes and has COVID accelerated any of those themes or trends that you're seeing in that area?
Szymon Idzikowski: (30:22)
Yeah. So one position we initiated this year was within the equivalent of NASDAQ within China. So again, that was a play on this sort of new technology. So I think if I think about the new technology, the two hops for that is the emerging Asia and a lot of that does happen in China and the new internet based companies are your Baidus and Alibabas, which would be probably equivalents of Fancy or [inaudible 00:30:51] in the US. So we've initiated position in the spring of this year to play that.
Rachel Pether: (31:01)
So you mentioned China, that's obviously a place where older demographic... Are there certain countries within Asia that you're looking at on a country specific level, or when you look at emerging Asia, it's really more of a broad brush approach?
Szymon Idzikowski: (31:22)
Yeah, like I said, within emerging markets, we are overweighed Asia as a whole, and again, in model portfolios, I would basically appoint an external manager that then would find opportunities within Asia. But if I look at the countries there, if we do point out one country that is China, but within the China, we do like only that sort of segment of the new technology, which we would then have a dedicated product to play that.
Rachel Pether: (31:59)
Yeah. And that sounds great. We've just got a couple more minutes left here, maybe you could just finish on an optimistic note. I know you're going back home for Christmas, you'll be coming back to the UAE in the new year. What are you most looking forward to as an investment professional in 2021?
Szymon Idzikowski: (32:29)
It's an interesting question, because in a way, from investment point of view, if you look at how market has done in 2020, it's even hard to believe that something such as pandemic has happened, but the reality is economy have struggled. A lot of people have lost jobs. So in a way, if I think about 2021, I'm happy to have a little bit more moderate returns. And in a way I do think, as I've been arguing, they might be a little bit more moderate. And I do think a lot of good news is priced in, but I would like for economies now to start opening and people being able to go back to work and maybe us having this discussion in a studio or being able to rebuild some of the social relationships. So that's one thing I'm hoping for, for 2021.
Rachel Pether: (33:31)
All right. That's a great thing to hope for. And I definitely hope that next time we meet it will be in person as well. But I just wanted to thank you. Thank you so much for your time today and thank you as well to the audience. Later in the day in December, we had some really great questions. So thank you so much for the audience participation. Thank you so much, Szymon, for sharing your thoughts and insights today as well.
Szymon Idzikowski: (33:56)
Thanks for having me.