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[AOS Virtual Keynotes / Ep 1] An Asset Owner CIO View from APAC.mp4: Video automatically transcribed by Sonix

[AOS Virtual Keynotes / Ep 1] An Asset Owner CIO View from APAC.mp4: this mp4 video file was automatically transcribed by Sonix with the best speech-to-text algorithms. This transcript may contain errors.

Hi, my name is Tom Brigandi and I am the vice chairman of CFA Society, New York's board of directors. I'm also the founder of CFA Society in New York's Asset Owners Series Initiative. Since its inception in 2015, there have been over 50 in-person asset owners series events. While the majority of these events occurred in New York, 14 of them took place outside of New York and were cohosted with our Asset Owners Series Federation Partner CFA societies in their local markets, from Hong Kong to Atlanta and from Paris to Lima, Peru. Asset Owners Series in-person events have been attended by over 6000 in-person attendees. Globally, Asset Owners series events have featured over 300 leading asset owner and investment consultant executive speakers. These speakers represent organizations such as Sovereign Wealth Funds, pension funds, insurance company, general accounts, family offices, endowments, foundations, central bank reserve funds and institutional investment consultants that collectively represent organizations that have in excess of 70 trillion dollars in fiduciary assets under ownership or advisory. This would not have been possible without the tireless work of a network of over 500 industry leading volunteers globally who serve as our core team that organizes the asset owners series events around the world in light of covid-19 CFA society in New York in partnership with Caia Association created the Asset Owners Series virtual keynote discussions to ensure CFA Society and Caia Association members globally will still be able to access exclusive asset owner and investment consultant perspectives despite not being able to convene in person.

Now, with that said, I'm very pleased to welcome you to our inaugural asset owners series Virtual Keynote Discussion, which is titled An Asset Owner CEO's View from AIPAC. Now, without further ado, it gives me great pleasure to introduce my friend and our moderator, Mark Franklin. Maag is the CEO of CFA Institute and leads. It's more than 170000 members worldwide in promoting the highest standards of education, ethics and professional excellence in the investment profession. She assumed her current role in September 2019 and has more than 25 years of investment and wealth management experience. Before joining CFA Institute, Maag led International Wealth Management for North America and was president of being Y. Mellon Wealth Management Advisory Services in Canada. Maag the floor is all yours.

Hello, everyone, and welcome to our session this evening. I'm Mark Franklin and I'm the chief executive officer of CFA Institute.

Joining me is Mark Delaney. He is the deputy chief executive and chief investment officer of the hundred and eighty billion dollar AustralianSuper, where he acts as an adviser to the board. He develops and implements investment strategies and manages the work of Australian Australian Super's investment advisors. Prior to assuming this role in two thousand and six, he spent 14 years at National Mutual AXA and began as an economist working his way up to senior manager of Investment Services. Mark is a of economics and he holds the CFA designation. I've had the opportunity to speak with Mark several times before this evening, and I can tell you he's an essential structural thinker. More about that than the trade in the transaction. So I am sure you were in for a very rich, robust conversation and insights from Mark.

So, Mark, certainly thank you very much for joining us this evening.

The world looks quite a bit different than it did a month or two ago, so maybe we might try starting out with what it's like in Australia. And how is the AustralianSuper adjusting to these actually extraordinary times?

Ah, good evening, Mark, and good evening, everybody. Thanks for listening in. It's it's very different. I don't think I've ever experienced anything quite as different as this.

Six weeks ago, everybody packed up their books and went home, and no one was sure how that was going to work, but what's incredible is how dexterously the organization has been and how all the staff have been in terms of adjusting to the new environment and how the technology has come on in leaps and bounds and allowed people to be far more flexible in how they go about their work. The other thing which has really struck me is that we seem to be getting a lot more done even though we are at work, which strikes me as maybe we're not doing the less important things.

Mark, one of the things in our earlier conversation that you and I talked about was how you were responding from an asset allocation perspective, given the market volatility, given that your responsibilities are very long term in nature, provide for beneficiaries really for their financial security over a long period of time. But be interested in how you're thinking about responding from an allocation perspective because you've been there since 2006. This isn't your first time at the rodeo in terms of crises and responding, yet it did.

Ride is different. I'm always locked in body.

When I first started in the investments back in 87 and I went to work one day and saw the equity market was down 340 points, which I thought was 34 points. And I had the typo wrong on the telex machine, and that was during the financial market crash of 87. So I saw the financial market crash of 87. Then I went on to do Japanese equities in 89, 1991, 92. And that was probably the the sort of the searing experience because there was a market which went to a PE of 60 times and then fell from 60000 down to 11000.

And so it was completely different, like the Great Depression experience all over again. So with that in my back pocket, everything else doesn't seem that bad and. The bond market crash of 84 or the tech bubble or the financial crisis had its moments when all the banks were failing, and this one is completely different because I've never before come across a health crisis and then how it's flowed right through to the whole portfolio. And it really brings home the point that the biggest risks you have are the things you don't think about, all the things you can manage or measure up to pretty much under control. And so when you have those new ideas, it really knocks things around. So what we did with the portfolio was we had an idea in 2018 that we're getting toward the end of the cycle, hardly revolutionary, ideal, hardly what difference what others were thinking. So we started to take risk out of the portfolio. We. Sold all our credit, we decided to have less in unlisted assets because you can only sell unlisted assets on the way up. You can never sell them at the top on the way down. And we started to buy back into fixed interest after having very little of it during the previous period. Though we kept our stock waiting, sort of encouraged by the resolution of the trade war and all those other issues. So the takeaway for me is that. Be more structural in your thinking is better than being tactical in your thinking around asset allocation, because the tactical things can knock you around from time to time and we would have been better to be more structural in our thinking and less tactical.

One of the things we talked about last week in one of our calls was really how you're thinking about fixed income and sort of that classic. If we think back to the picture in nineteen, 1995 five, you could get to seven and a half percent by having 100 percent bonds. 25. Remember the good old days of just a nice 50 50 portfolio of stocks and bonds? And if you look at it now, recently it would have been a kaleidoscope of asset classes, a fair number of them with illiquidity built into them. So we had a discussion about fixed income, which is more risk, less return, and maybe not quite the diversification benefits that we've historically used as the anchor and balance for the portfolio. And I was intrigued by your response to a response from a portfolio perspective around fixed income.

Yes, fixed income is pretty interesting. If you're a long term investor, you really are on fixed income do to give you returns when shares don't work.

Otherwise you would always on the high return on the asset classes. But with fixed income getting so close to the lower bound and rates being so low, I don't have that much scope to if I don't have much running yield, nor do they have much capital gain. So the ability to provide diversification in 60, 40 or 70, 30 percent is much reduced, particularly if the downside ban remains in place. So what we have to do is we still got to have diversification in the portfolio. We have to try and look for it elsewhere and look for other asset classes. And certainly for Streiner might be Canadian investors, the currency is a bit of a diversifier similar to the way fixed income does and falls in declining equity markets.

If that's not sufficient, we're going to have to try to try and correct them synthetically through options or some sort of structures around that or through some other means. But you won't be able to get as much natural diversification from fixed income as what we've had experienced historically. So it's quite a problem.

Mark, one of the things we also talked about is this issue of having to communicate with your beneficiaries. So you're an adviser to the board and clearly, you know, boards are not necessarily made up of investment experts. That's why they have you on you on board. And maybe you could talk a little bit about the communication exercise that you're going through because you have beneficiaries, Australian citizens, and particularly during a time where Australia has allowed Australians to take up to 20 percent out of their out of their soopers, which has some interesting twists for long term savings programs being used to meet immediate cash requirements.

Yes, great question. There's two points which makes the Australian system pretty different. It's a defined contribution scheme, but people can change their providers and change their investment strategies basically at will. So what happens is in our fund is that when sharemarket start to fall, people will move out of growth, stock portfolios, balance plans or the like into cash. So when we look at how they've gone during this these periods, we find they always lose money because they sell as the markets are going down and typically after they've gone down a long way and never buy back in again at the bottom, because I never get the confidence to get back in again at the bottom. So for most people, this is incredibly value destructing and long term and destroy the long term objectives in terms of building retirement savings. So what we try and do is encourage people to sit through these events and don't make any changes because invariably they'll lose money out of it. And as I mentioned, really undermined the whole premise for what they're saving for. The second thing is that they'll also point you talked about the Australian government's allowed people to take out to lots of 10000 dollars as their retirement account to fund themselves during this sort of unique period when they've run out of money and they've got no work and circumstances are quite difficult.

That's entirely appropriate because if you're destitute, you need something to live on and time is a long way off. But for those who don't need it, they can also fundamentally undermine their long term savings, as we all know, because of the power of compounding. So getting the message right that for those who need it, it's an important thing to do. But if you don't, it's a long term disaster for your savings has been important. Interestingly, when we've seen the numbers start to come through on this 10000 dollar early release scheme, what we've seen is that the amount taken has been at the lower end of our expectations, which suggests to us that most people have got the message this is for long term savings and not a not to be dipped into now, which is quite interesting.

So given that dynamic around the opportunity for people to withdraw funds and that, you know, that they I mean, obviously that's a good confirmation that you've done a good job of communicating what the purpose is and how to respond to things like this. But do you have a. As an acid owner, taking the playbook of illiquid assets, private equity infrastructure, the like in your portfolios, I don't think we had that question earlier. And if so, how do you think about right sizing it in the portfolio, given you have to say, look, you have this liquidity aspect to it that's different than, for instance, a defined benefit pension plan or sovereign wealth fund?

I think that's probably for people who build portfolios. The most interesting question might be a bit nerdy, but the most interesting question so. What you know is that the illiquid assets give you access to it, part of the investment universe, which you normally can't get access to or can't get in the same scope is the first point. The second one is often there's an illiquidity premium, two percent or so for buying illiquid assets. Now, in a world where by risk premiums are really small and you don't get paid much for taking risk. That's very valuable and. If you think about a property which is on a yield of, say, four or five per cent, maybe the illiquidity premium might be worth one or two percent of that just in terms of that number, which is pretty and might be a third of the total return of the property asset, the issue. So I think they're good long term investments. And if you can get access to infrastructure assets and a like, they're pretty stable as well. The real issue is how much you have with them in the portfolio and how do you manage your liquidity. So we had a cap of about a third of the portfolio and he liquid's with the idea that the shares went down by half. Our liquid allocation wouldn't get to more than half of the total portfolio. Very rough rule of thumb, but tend to work pretty well.

The real thing about this crisis is not how much you have in your liquids. It's whether we should have a budget for liquids. This is the most important point, a budget for liquid's, because what we found during March and into early April was that your ability to get liquidity in the portfolio was dramatically reduced. We found the government bond market in Australia was impaired as people were selling bonds to rise to raise capital on the share market, couldn't take much volume and even semi government bonds, which is like state government bonds in some countries, or even not quite as bad as municipal like had no liquidity and also with the cash portfolio. If you need cash, you'll need it now. So if the cash portfolio is going to mean Chima 45 days, that means much of your cash isn't available for 45 days. What is your cash available in six days or three days or whatever? So the idea of a liquidity, how you manage, that's important. And I think a number around the third to A is probably doable with a strong cash flow fund. But most important take out of this one is that funds will probably need a liquidity letter and a way of managing their liquidity to handle these events. And that hasn't been something people have thought about much.

Right. I would think liquidity or illiquidity and the nuances to it always get lost at the top of the market this year or two before it comes out under. Appreciate it. And where it comes from and how it looks. And one of the things that I thought was very interesting from our prefatory call was your thinking on health care and sort of the places that you want to be. But the world might look sort of post corridor in a rolling pandemic or as covid long for a longer world. But I was quite intrigued by how you were thinking about it, both from what it means for us, but also how you're thinking about it from a portfolio perspective. So maybe you'll touch on that with.

Yeah, perfect. Health security is going to be as important as physical security. It's something we took for granted, but people might take for granted ever again. And I think people took physical security of flying pretty much for granted, apart from the plane crash through some malfunction. And if you view health security, like the change in health, security being like the change in physical security after 9/11, you start to get a feel for it. And so people how people interact and how they behave will dramatically change. And there's going to be a huge business in providing health security the same way there's a huge business in providing physical security for your buildings, for your public events, for airports, all that sort of stuff. And that's where the real opportunities are going to be, not just to the treatment of this virus. I suspect the long term benefits will be around the infrastructure or the mechanisms around providing health security, whether it's screening at the airports, whether it's different ways of accessing buildings. And I also think that people's. Behaviours around health and security in the office will change dramatically. So what's acceptable officer behavior? How closely do people sit together in the office, minimum of two minutes apart or what? And how is that going to be? How do you run a meeting room with only every second chair being used? This stuff is going to change dramatically. So health is going to become a bigger part. And the other thing about health is that the governments are going to spend a lot more money in building health capacity. The real issue and why we shut down these economies was that the capacity in the health system was so little limited and couldn't manage a spike in demand. They won't allow that to happen again, so if they're going to have more health capacity, they're going to have to fund it. That's either going to be funded through individual payments or through higher taxes.

So do you think as you look forward and I love the way you characterize the you know, the consequence of the great financial crisis defined the next 10 years that came out of it? Do you think this is a just a post pandemic period, or do you think what we're going through right now defines sort of the next 10 years going forward?

I think you're right about it's going to define the thinking around the next 10 years. Some of the trends are in place, but the financial crisis really set up the thinking around debt levels, gering of corporates, low interest rates and regulation of the financial system. Those sort of systemic changes are likely to happen around people's personal health regime, whether it's tracking devices for individuals, apps for tracking health and the other things I talked about, it'll materially impact the investment universe and. They'll be both opportunities and more regulation involved in this.

Mm hmm. So do you think the consequences what would you talk about? Debt levels lower for longer? I mean, those those consequences of the great financial crisis that will remain and in addition, will have the consequence of health security. So more and more and more on the regulation on the consumer side and on the conditions that really have made it challenging to have normal type markets for the last 10 years.

Yes, I think that the crisis will actually this health crisis will actually overturn some of the orthodoxy which was put in place around the financial crisis and and before. So probably since the Thatcher, Reagan, Putin 1980s, governments were pretty averse to running large debt levels. That has completely changed with this health crisis, that governments are running the biggest deficits now that I've ever seen or could you could ever imagine. And had they done that in 2008, imagine how much better it would have been.

Let me OK, let me pick up a little bit on that. So so our response to this in the great financial crisis, of course, is dramatically different than the response in the depression that caused the depression. Do you ascribe a probability or remote possibility to a depression or depression like scenario?

Oh, crikey. That's the that's the scenario which everybody's terrified about. And back at the start of what I said, that's the Japan scenario whereby the market goes down by 70 percent or something. There was two rounds of the depression. The first one was when the there was a bubble going in. They popped the bubble and then the economy went down. And then as that recovered, they tightened a lot. And send it back down again. It'll be interesting to see how the governments respond as this economy starts recovering this time because they said they didn't need a lot of support around them to keep them going. Business will take a long while to return to normal. So if they can to move back to orthodoxy, tighten pretty quickly and and whatever, and you had another round of the virus, you could end up with a scenario whereby you roll over a second time and you have a pretty deep downturn.

So on the you know, on the relationship between the economy and the markets, I mean, sometimes those things don't really go hand in hand. The GDP is not the best indicator of the. Of the markets, however, it has been remarkable to see that six weeks of essentially shut down economies can bring the world to a complete standstill and the fragility of the system. Do you think this is one where the real GDP starts starts to correlate more highly with the market? Do you think that the psychology can turn the other way? Because, I mean, markets are predicated on optimism, but no small part of the markets are psychological.

Yeah, I did write. So when the word dead right in the in this coronaviruses, thank you very much so. Early on, when the market started falling, you knew it was around the virus, but became pretty clear early on that the the markets were highly correlated with the virus numbers and the the growth rate in the virus's. We need a little bit of digging into this, and because I got an economics background, I want to find out what was happening to the economy, where things were going. And eventually we built these series of feel like weekly economic monitors for all these all the major countries. And the the New York Fed has got a weekly economic indicator, but we built them for all the countries. And what we find is that the shutdown and the markets were by and large coincident. And the answer, even though the official figures lag, that if you actually look at the actual numbers as people were shutting down and moving activity back, the markets were going down. And since about. For the last four weeks, these economies are, by and large, gone sideways along the bottom. So the markets are looking forward to whether the pick ups are going to be and that's a car loaded with the virus numbers. So I still think that the markets are pretty correlated with the GDP numbers, but. The interesting thing from an investment perspective is that people are now using alternative datasets to Google Mobility Maps, all that sort of stuff, weekly economic indicators, rather than waiting for monthly data, will quarterly data or whatever. And the markets are responding to that weekly data and what they see in the real economy much more quickly.

Great, so I will say Mark and I did not coordinate our fits together, we were actually surprised that both of us showed up with a green outfit. But it does leave a little bit into into your policy for the AustralianSuper, where you do have a necessity and stewardship policy and would love to hear a little bit more about that. How do you think ESG, which was prior to this? I mean, the E was just going hyperbolic, particularly with regards it was essentially carbon governance we've had a good track record on. But boy, this has been a snap situation on social. So interested in how your policies are responding, how you're thinking about it structurally going forward. And what are some of the takeaways for the audience as ESG has really, particularly in the last six to 12 months, taken up a lot of sort of the the.

What if they pressure the air time for thinking?

There's no doubt that I went to the U.S. in February and. Just before the virus hit, actually, so I got back safely. The interesting thing was people thought that Australia had burnt down. There was nothing left. The whole place was burnt down. And while the fires were huge, absolutely huge, like many times the size of the Californian fires, much of the country was untouched. But the media storm about that was phenomenal. Hmm. And the public interest. And that was a pivot point where people shifted their views over around climate, but as investors. We need to be forward looking and understand what's going to happen next 10 years, 15 years, when we ascertain the cash flows of these companies and we all know that the climate was changing and the policies were changing around it. So as investors, I think investors were well ahead of the public firestorm around climate. But how that gets integrated into public policy and public awareness is the more interesting question. And I think ESG is really a way of getting boards and companies to really have a look at that and take on those long term risk and manage them. One thing I'm fond of doing is having a look at the the price of coal companies to have a look at what is the price of those to see whether or not they've taken on the ESG risks.

And when you have a look at the big coal companies, they want price earnings multiples of six and seven times. That says the market doesn't expect them to be around in 2050, right? So there's three levels. There is what's the market pricing, which is I think they're pricing a much more rapid transition to low carbon world of 2050. There's where public policies and where the public debate that. And all those things are happening pretty dynamically that respect your other point about social, I think. Social with the with the health security will become a very big issue, a very big issue for funds and also an issue around how these funds take a proactive way of helping these economies out of recession. So I think the social side of AEG will end up being could it have been the most important going forward? And the environmental could end up being the least important because it's pretty much played itself out.

So just to pick up on the comment around basically capitalism for good, right. Thinking about it for social purpose, not just a return. I was on a call the other day where one of the people, one of the CEOs for an asset management firm that has a fair bit of allocation to a large from a fair bit of allocation into the middle market and said one of the things that they're doing is trying to harvest that return opportunity and risk opportunity, but also to put that forward as a force for good to help these companies cement those relationships, take the long term view and make sure that they get the capital that they need. Do you think about it in terms of that?

Do you think that put that into your equation a bit and that's a bit of a fiduciary duty, really clear, which is to generate strong returns for our members. It started legislation. That's what a complete requirement is, how those returns get developed. It will be a function of how society evolves over the next 10 or 15 years and the market's expectations of that. And that really is what ESG is about. The third level is, if you like, being your social license or your ability to create an environment which helps your economy flourish and helps your members generate strong returns is something we're increasingly focusing on. And we had to look at this to see whether there are places where we think there are aspects of market failure which may benefit from our active participation in a ways which made our return hurdles and risk hurdles for those investments. And there's no doubt that we thought that. The reregulation of the financial system in. The 2010s provision of capital to midsize corporates was much more constrained than previously, and that was an area of opportunity, but equity capital and also biotech capital. And so we've moved to do some more of that as being a way to try and bridge these companies and keep them viable.

Right. The CFA Institute recently released its trust study and we found that certainly Australia is an interesting market where trust levels are very low. So while health care crisis that's globally felt by everybody, do you think this is an opportunity for us to improve people's trust and confidence in the system? Or do you think this is one that will leave us in much the same spot?

Really great question. A really great question. I think it's changing. I think there was a lot of distrust of experts and of institutions prior to the health crisis. But as these things developed, we've had to rely on experts and we've had to rely on institutional framework to deliver. And and the governments, I think, have actually found their feet in terms of what they're meant to do for their people. So I think that could well be the change in that environment.

Well, one of the things that the trust and he did find was that what mattered to people was information, innovation, you know, how they get the how they get that information and then influence their ability to have some impact and input and maybe perhaps historically into the portfolios. So perhaps what this ends up being is a master class in statistics, uncertainty and information in a way that's very meaningful, that might make it into people's consideration of consideration of portfolios. And one of the calls that you and I were on and your fellow countrywomen said, you know, is that risk risk is really going to be the competitive advantage, that the process matters somewhat, but it's more the outcomes rather than the inputs, right. That people are going to be looking to us to deliver outcomes they know they won't care so much about your process. Do you think that's true? Do you think that that's that's how and what kind of timeframe?

Because, you know, three years is different than 10 years is different than twenty five years that this is book by Peter Bernstein on Risk Against the Gods, which is I think is to say if I book as a fantastic book to read and when you read that and then what you read, what people talk about risk currently, it's hard to dovetail the two together. The risk is really about managing unforeseen events, events which occur which could have a material adverse impact. But you only manage them to improve your outcome. There's no point in managing risk for the engine itself. You have to get a better overall outcome and we now we now have members. All they'll do is look up online and see what the balance is and whether it's gone up or not and whether we've done a good job. It's pretty clear what the score is. Either you've made money for them or you haven't. Yeah, yeah.

Good. Tom, I think you're on the line or Chris, and we're going to open it up for questions from the audience or Rob.

I can't remember which one of you are doing this, Rob. Rock Hudson navigated through the question. So, Rob, over to you to start with, one of the first ones came across the transom.

What are your inflation expectations? And I believe this question was positioned globally.

Not much. Not much. They weren't much before and they're not much. They're the amount of excess capacity created by the downturn is going to take a long time to work off. And so I think central banks as a question is the central banks will give up on their long run targets of two percent or thereabouts and just accept a lower number and give more.

Can I just a follow on that? I had the opportunity to interview Janet Yellen and she was very clear that she thought that lower for longer inflation was it was here for at least a decade.

Very likely and systemically, and this was pre pre all of this, so would you. Yep, yep, yep. The long term, which then, of course your risk premium rates can be the whole nominal return comes down, right? Yeah. And you see that in all sorts of securities.

So if you were to think about a balanced portfolio in a construct that was sensibly done and you have essentially zero a zero risk free rate and very low inflation, what do you what do you think? What I don't want to say with that, but the New World, 60 40 looks like like what do you think? A nominal rate of return for a predisposition to risk, but not an extraordinary amount of risk with the portfolio if you can't make a return at a fixed income.

In the portfolio, all cash, it's going to be hard to hold that much of it and generate viable long term returns. Now, no pension plan will make the hurdle. So what you could do is take that part of the portfolio and roll it up the risk spectrum, roll it up into corporate debt, into infrastructure property, up into shares. But what that will do is shift the center of balance of the portfolio up the spectrum and you'll end up with a more risky portfolio. The alterna thing to do, which is something we've started to think about, is whether these sort of barbella whether we butterfly the portfolio, go back to my all fixed interest days whereby you put more assets in the middle part of that spectrum unless it at the ends of the spectrum. So you might hold less fixed interest and you might even hold less equities and hold more of these risky assets to give you the same overall risk perspective, allowing for the fact you can't hold as much fixed interest as you used to.

And if I think about that, then you can then go back here and go back to your more illiquid assets and that goes back to your liquidity budget as opposed to your illiquidity.

Yeah, exactly. So the ability to implement that sort of strategy depends upon your ability to hold liquids and get access to and implement them. But the list of markets really only operate at the end of this of the risk spectrum, not in between. Right. Interesting.

Ok, Rob, next question.

Next question. I'll stick with the broader one. What other key risks do you see that the market does not.

Oh, oh, um.

Hey, Mark, can I ask that in a slightly different way, if you think people will anchor on the stuff that they have now, the strategies that they have and try and talk their way through them, given that it's very difficult in an uncertain environment to think to go forward?

Yeah. So I think when I'm asked about what I'm doing with the portfolio at the current time, I said I use the phrase I'm working very hard to try and do nothing. And because it is so much uncertainty around about how things are going to evolve and you don't have any differential insight as to how that's going to occur, doing anything is pretty risky against your long term strategy. So I think focus on the long term and tweak your strategy a little bit in the near term is probably all you can do in the current circumstances. And as for will, the virus is by far the biggest risk we currently face is it's enormous because no one really knows how that's going to pan out. And then geopolitics will be the second one because the geopolitical environment was deteriorating prior to the virus and has got materially worse after that. And then I think the third one may well be what role governments play, because I think they've been not emboldened but reinvigorated with the virus crisis. And I think they're going to take a more active, more vigorous approach to managing things and managing the economy than what they've done probably the last 20 or 30 years.

Rob, you're up for the next one. Fair enough.

One of the other attendees. Yes, thank you. Fair enough. One of the other attendees is curious about your view of gold as an investment right now and wonders whether you have it in the portfolio.

No, I don't have gold in the portfolio. I are you? Oh, I suppose so. I've never had it. I just have trouble getting my mind around investments which have no cash flow. And so I've never had it, I don't really understand it, and that's been going back for 30 or 40 years, I suppose, because golf was really big in the 80s and the 90s now. So I I'm not help them at all. You sound like Warren Buffett.

So moving on to the ESG comments, how do you conduct due diligence on ESG and set the parameters to measure the compliance and success for portfolio companies again?

Good question. When we're doing a deal, we'll do a formal due diligence on the deal as part of the due diligence process, and we'll look at all aspects from environmental to health and safety and the like, will look at their documentation, will look at. We'll look at the practice. We'll look at all the things and come up with both a numeric and a qualitative assessments of what their ESG capabilities for listed companies will have. You can't go in there and do a detailed due diligence, but we'll look at what the worst practices are for their documentation, what the board says they're doing and the general broad approach.

Hey, Mark, can I ask attack on a question to that one? Have you found that through the due diligence process, either in the public or private companies, that there has been a material gap between what they say they do and what they actually do? Like, have you found that to be a rich hunting ground for both a risk management and.

Often when we have engagement, it might be with the directors of the companies when they come and see us sometime, there's a disconnect between the directors and the management, between the vision the board has got and the people are in the day to day of doing the job. Not surprising, but sometimes there is. But generally, I think their practice is much improved over the last 10 years, if you go back to the early 2000s, people thought AIG was something somebody else did. No one really affected. They never factored into that, you know, spreadsheet analysis at all, and that's not the case any longer.

Good. Rob, what's the next question we have?

Up next up, the audience is interested in your thoughts on oil, particularly when oil prices have approached the pre 2015 levels. And how do you see the demand for oil evolving as the emergence of renewables and other alternatives grows?

It seems to me that the person asking the question does more about oil than either of that, but in a simplistic sense, you know, the oil markets driven by supply and demand and the supply of oil and the supply of alternative energies continues to develop and develop really fast, particularly the alternative side. And the demand is increasing all that much as industrialization has reached its peak. It's interesting to see how much global transportation has collapsed in this financial crisis, in this crisis, feeding through the collapse of the Berlin Wall. So I think that. There's got to be a reason why the Saudis are selling off their oil reserves.

Do you think they're trying to get an advance? Do you think it doesn't? They've got so much of the last way longer than it's ever needed. So they'll just pump it out at whatever. Doesn't matter. Just get it out no matter what.

No money.

I don't know. But I think that it's interesting idea. It was to. If you try to forecast your total future revenue from oil sales and you would Saudi, do you have a lower price and stronger demand for longer or do you have a higher price and higher revenue for a shorter period? Interesting questions, if you would, the king crab.

Next question.

That is an interesting one. So we're going to move on to policy here a little bit more. One of the people in the audience observes that the as the policy measures for covid unrolled, the stakeholder was not put first as employees were furloughed and other things happened. So this person is curious to hear your opinion about the stakeholder in the private marking market during the covid-19 pressures that we see now is so interesting where you employ your employees, EMH stakeholders in this.

Absolutely. That work out why the matter and all private companies we've got we look at that was clearly the case. The private companies can't keep. All the staff on if there's no revenue coming in, is that different to any other business? And some stuff some private companies perform essential services, power or this sort of stuff, and you need to find a way to keep that in the right balance, keep them safe while doing important work.

Ok, so now a question about the broader market. Do you think that the equity markets have been too complacent and are not pricing in the risks with covid-19 and.

Oh, wow, that's a good one. I spend most of my waking hours thinking about the equity market and I've done it for a long time and I've made some headway, but sometimes not enough. It's what do you do? It really comes down to how long you think the impact on earnings are going to be. If you if you're buying a stock with a 20 year view and it has six months of disappointing earnings, will that materially change your view of the stock? It'll certainly reduce the value in a positive because you won't have the first six months of cash flows. But beyond that, will that materially change things? Probably not. So when you look at the S&P, it when it fell to around 2000, 3200, it was getting down to around 14 times earnings, which is historically been a pretty fair place to buy. And you've seen a lot of astute contrarian investors start to buy stocks at that level in the low, low 2000s. What it was getting to thirty four hundred thirty five hundred was started to get expensive compared to where it's been historically and the market clearly struggled and came up pretty quickly. What you've got now is a market which sits right in the middle of the two of them, not cheap and not expensive. And that really reflects the fact I think the market doesn't really know where things are going forward. So if things improve as anticipated, the Western economies follow the China path of gradually opening up and things coming back. The market could well trade around here for a while. If things improve dramatically and they find a cure for the virus, well, things could pop. And clearly, if you have a big second wave, you could have a retest of the lows. I reckon everybody in the market knows they're the scenarios that are the probabilities. But beyond that, they've got no insight about the second wave or about a cure or about anything else.

Hey, Mark, can I ask a on on question around that? And, you know, we've had a decade where passive management and the proliferation of ETFs really as a result of liquidity injected into the system. So all boats and floated it. Given that this is a really different thing you do you think this is the moment where active management, where the tide turns and active management starts to be rewarded and you start to differentiate because you've talked about the market? You know, there are definitely winners and losers in this one.

Earmark really an important point for asset management, passive has been smashy active management for a long time, I think, in large part because there are more value managers also than there are growth managers and values, an easy way to invest in growth and evolves more certainty, which suits invested people. But values outperform growth for probably five percent per annum for a decade. And so it's hard to sort of compete against that if you in that space and. All automatically indexing puts more money in the bigger stocks, which are going up more, which has been the right strategy for the last period as well. So the market environment has suited indexing. It is also underpinned by the type of businesses which are in the indexes themselves, which the market likes, and the probably the more long term viable businesses. So you've seen in the current period, maybe it might change in the last few days or so that the winners prior to the health crisis have been the winners after the health crisis. So gross outperformed value right through the whole period. For value investor, that's a horrendous experience because you expect to be outperforming when the market goes down. But the cyclical stocks have really not provided much bounce at all. And you wonder whether the cyclical stocks or just old fashioned stocks and then for the Australian market has been less pronounced, whereby some of the managers have done better, but they do have a bias toward valuing that market as well. So it's the most.

Important question, asset management really is can active asset management.

We revive itself to become a viable competitor to index management, and I think the jury's out.

Ok, let's stick on a country level for one moment. One of the people in the audience is interested in your take on your investments in and out of countries short or long term in the near term. So asset allocation choices in or out.

So we don't allocate on a country basis. We allocate on a asset class and typically a sector basis. And that's been the case probably for 15 or 20 years prior, that there were some country allocations but invariably turned out to be more difficult. The move to asset classes and sectors really is a reflection of globalization. As a world opened up became much flatter. You might wonder whether in a world which is becoming globalized, whether or not country allocation starts to become a little bit more important, but not yet.

Ok, so that that is actually connected to another question was asked, do you think the broader trend of globalization will shift in any material way as countries re-examine their supply chains, products, demands change, et cetera?

Interesting globalization, unlike call that globalization is one of the secular themes of the 20th of the 2026. Globalization peaked some time ago and has been declining. Look will try percentage of. Senator will will try to GDP has been declining and is likely to keep on declining. Nothing tells you that the world's moving back to a more integrated place and health security will never make that more difficult because you've had the trade wars, which were essentially about putting up barriers around goods and maybe barriers around technology. But this health security is going to put barriers around services, businesses trading internationally and become much more difficult.

Ok, and also a related question to that, the judge said one of the people in the audience is curious what you think about how China's growth will be impacted due to some of those changes, like the global supply chain and some of the things you just mentioned.

If China will be impacted because they said the environment with the global supply chain, but they are the world's largest manufacturers, they aren't going away in a hurry. So when the market really current, when you read research coming out of China, now they're talking about the reason why the Chinese economy might recover as quickly as anticipated is the recession in the West. So they still are exposed to issues of the West and that will still impact them. So I think they're going to grow more slowly than what they've done and the trend growth rate was coming down anyway. So I don't think it's going to make that much difference. But the globalization won't favor China.

Ok, looks like we are at the end of our questions for this evening, so first let me say thank you to Mark and Mark. This was great. We cover the world. It's wonderful. Thank you both for your time. I would also like to thank the people on the call for dialing in where you came in via the Internet, et cetera. And I would like to just remind you that our next week is when webinar series is going to be every Monday. Next week, we are going to hear a global view from the former chief strategy officer of the Saudi Arabian Sovereign Wealth Fund. That's on May 11th. Please keep your Web browser pointed here. Thank you.

Thanks, everybody. Thank you, Mark.

Thanks. Thank you. Bye bye.

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