00:00Joining us now is State Street Investment Management President and CEO, Easton Hung.
00:05Great to have you on the program.
00:08I've been looking at the work that you've done at State Street,
00:12and it's really impressive in terms of the amount of assets under management you've been able to accrue,
00:18I think four times what you had when you came in in 2022.
00:22But I wonder what changes now that we're starting to all kind of freak out about the private markets,
00:28which is one of the levers that you've pulled.
00:30Yesterday, Mark Rowan was on stage with our editor-in-chief, John Micklethwaite,
00:34and said private markets are in for a downturn here.
00:38Well, our focus has been primarily on the public markets and this convergence of private and public.
00:45And with Apollo, we launched a series of ETFs starting at the beginning of last year
00:50that was really trying to give investors some exposure to the investment-grade private markets arena.
00:57And importantly, because we're significant in the ETF space,
01:01we wanted to make sure there was good underlying liquidity.
01:04And what we found actually in the course of this year is we've provided transparency to those underlying holdings,
01:10is that the market makers are showing up.
01:13There are active bids on those underlyings.
01:16And ultimately, the ETF structure provides enormous amount of liquidity.
01:20We have a broad range of investors.
01:23And so, in many respects, there's a secondary liquidity that exists along with the underlying.
01:30This is an interesting thing.
01:31I'm sure you got this a lot when you put the ETF out.
01:33Everybody's saying, is there liquidity here?
01:35Are we going to see issues of not being able to get your money back?
01:38That's not where the issues have arisen.
01:40They've arisen in BDCs.
01:42Do you think that fundamentally, that the structure, if you are going after retail investors,
01:47it needs to have liquidity?
01:48Is it an issue to have these traded products that are geared towards wealth and retail investors
01:53that are semi-liquid or maybe just have an illusion of liquidity?
01:58Well, I think we've seen this with closed-end funds and with BDCs,
02:03that they do tend to trade on the basis of yield and attract a lot of individual investors.
02:08And that's why, in many respects, we think the ETF structure is a really good structure
02:12because it does have such a widespread interest and following.
02:17And the spreads that we see in terms of trading activity really provides good liquidity to investors.
02:23What are you hearing from investors?
02:24You are, I think, the fourth largest asset manager in the world.
02:28And as we enter now the fifth day of a war in Iran, we worry about, you know,
02:34fully a fifth of the world's oil and natural gas supplies coming through the streets of Hormuz.
02:39How are investors at State Street Asset Management reacting?
02:42Look, I think everyone is trying to make sense of this.
02:45In many respects, I think the length of this conflict is an important factor.
02:51And ultimately, what does it mean in terms of oil production and transport?
02:56Because ultimately, I think the market is concerned about a prolonged period of time
03:00where oil prices are elevated and, therefore, it's going to bump up inflation and limit growth.
03:06And so I think the reaction that we've seen so far is not unexpected.
03:11There's been a flight to safe haven assets like the U.S. dollar and gold.
03:15At the same time, because of this worry of inflation, we've seen Treasury bonds kind of trade down.
03:21And then volatility in the equity markets, in part because, you know,
03:25the direction of travel with inflation is not quite known yet.
03:29And if interest rates are higher for longer, that's likely to impact valuations overall.
03:36From what you see, conversations with clients or elsewhere,
03:39do you think investors are prepared for more volatility,
03:43are prepared for a world where rates might stay sticky, might stay higher for longer?
03:48Because we entered the year with hope for animal spirits, a lot of risk buying,
03:52and it seems that some of those bets are looking more complicated.
03:55Look, I think the questions that we were getting last year from investors were concerns about the valuations
04:01that we saw on the market, the concentration, and the advice that we've been given.
04:05A lot of our clients have done this, which is be really diversified across their asset class exposures.
04:13In fixed income in particular, I think because there was still a worry about inflation now exacerbated.
04:18But the flows have been more in the short to intermediate term.
04:22Credit spreads continue to be very tight, and so there's been more of a focus around treasury holdings
04:28and sovereign holdings.
04:30And increasingly, we're seeing clients have more of a buffer to deal with this volatility.
04:36Either cash, and we've seen enormous amounts flowing into cash starting at the end of last year,
04:41and continues today, gold hedge strategies.
04:44Have you been surprised by this, I guess not lack of reaction,
04:48but the muted reaction we've seen to the events over the past week?
04:51I think the market is really cutting through and wanting to understand what's the implications for
04:57oil prices belong to elevated levels, and then the impact on inflation.
05:03We've been watching ETF flows, and obviously since this weekend, it's been much more muted.
05:08But prior to that, it was an enormous amount of flows coming into ETFs.
05:13In fact, we were on pace to outpace last year's record volumes.
05:19And broadly speaking, if you look at corporate earnings, they're pretty strong around the world,
05:23led by the U.S. and emerging markets.
05:26And so that has been what we've been seeing with investor appetite.
05:30It's broadening out beyond the concentrated MAG7 into mid-cap, small-caps,
05:36and especially moving into non-U.S. markets.
05:39That's been dramatic.
05:40I think that's an incredibly important point.
05:42Just sticking with U.S. assets first, it's hard to judge what's actually happening under the surface
05:49just looking at the index levels, right?
05:52Because you could see people taking profits from the big winners in AI, in chips,
05:59even some of them were in software, obviously not anymore,
06:02and switching into the S&P 493 or now, I guess, the S&P 480 or what have you.
06:08Do you see that rotation really happening?
06:11We do.
06:11And actually, it's been a longer-term trend.
06:14The concentration in the U.S. market has declined over time.
06:17And then toward the end of last year, near 50% of the ETF flows from U.S. investors
06:23were going into international developed and emerging markets.
06:27And so that trend has continued, whether it's more diversification.
06:33Increasingly, gold continues to see inflows.
06:37I mean, we saw $50 billion last year, already $10 million year-to-date.
06:42So a lot of these have been in place, and they're just getting accentuated.
06:46And increasingly, obviously, people are trading through ETFs more than anything else.
06:52There are now more ETFs than there are stocks.
06:54State Street is one of the biggest ETF issuers in the world.
06:56Which, by the way, I do wonder if that's why we're seeing some of the market behavior
07:00that we are, that retail investors and single individual investors are more participating
07:05in this market.
07:06They're doing it through ETFs.
07:08They can more easily buy the dip.
07:09Is there almost a degree to which there's a floor under this market because there is so
07:14much appetite for products like those that State Street puts out?
07:17Well, we think that the addition of retail investors is becoming more sophisticated over time.
07:24They've had a behavior of buying the dip.
07:26But we've also seen the growth of model portfolios, which, again, I think fosters that sense of being asset-allocated
07:34as opposed to being too concerned about where the market is, where headlines are.
07:40And, of course, I'm getting a note from a viewer right now pointing out that people have learned to look
07:45through these geopolitical events.
07:48Nice.
07:50Your first decision could be your worst decision, right?
07:52You don't want to overreact.
07:54Are you seeing that as well?
07:55I mean, you have a storied career in finance, working at the biggest hedge fund in the world,
08:00at Bridgewater, and now running State Street Asset Management.
08:03Do you see that behavioral shift?
08:06We do.
08:07Across our investor base, it has been much more of a focus around strategic asset allocation, some tactical,
08:14but not necessarily taking that off the table.
08:19Because, you know, the corporate environment is still quite good.
08:24And notwithstanding, you know, the potential for oil to cause inflation to spike here,
08:30we still think over time the Fed should be in a position to be cutting rates.
08:35So there are good tailwinds here that augur for investors staying invested.
08:41Just the skeptic in me, and I'm sorry to go here, the skeptic in me just thinks maybe we've just
08:46been too conditioned.
08:47And we've been too conditioned to buy the dip.
08:49And we are talking about war that could change an entire region, that could completely change energy markets.
08:54And we've learned to look through geopolitical events.
08:57But what if this time is different?
08:59If this time is different, Yishin, what is the hedge?
09:02Because we've seen gold, for example.
09:04You talked about it moments ago.
09:06It's been acting almost as a speculative asset.
09:09Are bonds the hedge, even if we don't get cuts?
09:11But what becomes the ballast in a portfolio when people are willing to continue to put on more risk?
09:17I think it is these stabilizing allocations.
09:20And I do think gold has multiple purposes within a portfolio, whether it's a macroeconomic hedge, inflation hedge, U.S.
09:27dollar hedge.
09:28And, of course, central banks around the world have been accumulating more gold
09:32as they've reduced their dollar holdings.
09:34At the same time, cash is seeing a lot of flows as a result of now paying a good yield.
09:41And it's a good place in the event the market does truly dislocate.
09:46There's opportunities to go in.
09:48And increasingly, we're seeing hedge strategies.
09:50You mentioned Bridgewater.
09:52We had launched a strategy along with them, All Weather, that also provides some ballast within a portfolio.
10:00So demand for these different exposures is growing in an environment that we're in today.
10:05We're seeing hedge strategies.
10:05We're seeing hedge strategies.
10:05We're seeing hedge strategies.
10:05We're seeing hedge strategies.
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