What was your role at the time of the GFC?
I was at the epicenter of the crisis. At the start, I was working as an equity analyst at a global investment bank. I saw the initial ripples in the summer of 2007. I later moved to a small hedge fund that covered the consumer cyclical sector. We traded both equity and credit, as a result I had a front row seat to the crisis.
What was your immediate reaction; and once you’d had the opportunity to reflect on it?
I remember going home every day wondering if I was going to have a job the next day. Mind you, the fund I worked for was doing well, the founders of the fund had done an excellent job of anticipating the oncoming crises and amassed significant short positions in financials. That said, the ambient fear in the markets was palpable. At the time, many hedge funds were putting up gates on withdrawing capital. My fund did not do so. Living through that experience has impressed on me the importance of understanding and having adequate liquidity as an investor.
Did it change the way that you think about investing?
I don’t know if changed the way I think about investing as much as it solidified the difference between investment theory and investment practice. As a former Army officer, the one thing I can tell you is that no one knows how they will react in a crisis if they have never been in one. The constant refrain we hear from talking heads in financial news is to look through any volatility and invest for the long term. That is easy to do when the longer-term trend for markets is up. However, periods like the GFC can shake even the most ardent value investor to the core.
Do you think there are any echoes of the Crisis in the market conditions we see today?
I’ve been asked this question a lot and what I often tell people is while I can’t see the future the one thing I do know is that the next crisis won’t look like the last one. There was a proverbial “perfect storm” of factors that led to the Global Financial Crisis. Even though it’s been almost 10 years I believe the “scars” of the crisis are still fresh in many investors’ minds. Because of that I don’t see the same conditions present that were present in 2007 and 2008. You must remember that leading up to the crisis the leverage in the system – particularly the leverage related to the housing market was enormous. While I believe in recent years we have seen some increased risk taking and leverage entering financial markets, I don’t think it’s anywhere near the levels that we saw before the crisis.
That does not mean I think that markets are cheap or that I’m not worried about valuations. However, the benefit of managing a multi-asset portfolio is that we aren’t tied to one geography, market or asset class. So, while the argument could be made that some asset classes are fair to overvalued, I believe there are still pockets of value in the markets. That said, at this stage in the cycle our awareness level of the downside of any investment is heightened. When we meet with managers we spend a lot of time making sure we have good understanding of the worst-case scenario in any opportunity.
What should fund managers have learned by now? And have they?
I believe the GFC taught fund managers the value of long-term capital. As I mentioned earlier, when investors are scared they will move to cash and inevitably force managers to sell assets at the wrong time. Managers which have access to long-term capital are not only better able to weather those turbulent time periods but can also take advantage of dislocations and opportunities during those periods.
Our philosophy when we invest with managers is to look for firms which truly want to be partners. We are not just looking to hire an investment manager but to enter into a partnership with a firm that cannot only add alpha in a particular strategy but is willing to engage in a two-way dialogue with us as we shape and implement our overall investment strategy. I believe it’s that type of relationship that is beneficial for both sides.
How has your organisation’s approach to private debt been shaped? Are you optimistic or pessimistic about the future of the asset class?
We have an internal team that invests in liquid investment grade debt. I believe our activity in the liquid markets better informs our approach to private markets. At a high level, we look at private debt less as a separate asset class but as an extension of our overall global credit buckets. As such we tend to look for managers which invest like us – looking for high-quality assets that are trading at attractive prices.
Over the long-term I am optimistic about the prospects for private debt. There will continue to be a need for private capital to many of these smaller firms which cannot access capital in other ways. That said, like any other asset class things can get frothy from time to time. Our team is vigilant about understanding downside scenarios and the liquidity of our investments.