Karen Watkin
Welcome to AB's Alpha Females, the Multi Asset Investment podcast from AllianceBernstein. I'm Karen Watkin and I'm a fund manager in the Multi Asset Solutions team here at AB. The Alpha Females are those women who have developed unique areas of expertise and made their mark in the investment industry. This is the final episode in the current series and over the course of the past eight episodes I've been investigating the critical issues for those investors on the hunt for income. I've been looking at the diverse approaches to generating income in a turbulent macro environment, how to understand what's driving markets and how to react to the changes wrought by technology, shifts in the global economy and geopolitical upheaval, all while navigating a steady investment course. In examining these issues, I've been guided by the Alpha Females, an impressive group of women here at AB who've helped make our investment business what it is today. In this final episode, I'm reflecting on what I've learned from my guests and what stands out to me from all those conversations. Despite my guests coming from a multitude of backgrounds and investment disciplines, they all share some common themes that are critical for income investing. In today's environment, they show that it's more important than ever to navigate uncertainty, separate the noise from the signal and find original ways to connect the dots and develop unique insights. Part of the challenge comes from the need for them to think both fast and slow at the same time. Many clients want to invest for their future, but even with a long-time horizon, short-term market gyrations can put pressure on the best laid plans. As fund managers, we need to balance the best way to help our clients reach their desired destination while finding the smoothest path to get there. Alla Harmsworth, as co-head of AB's Institutional Investment Solutions team, focuses on building long-term asset allocations.
Alla Harmsworth
There's no such thing as a passive asset allocation. It is necessarily an active decision. Even if you have the passive building blocks and you invest in passive equities and bonds and getting that mix for the long term is a crucially important decision because research shows very compellingly that over 90% of your return and risk as an investor is going to be determined by that long term core allocation.
Karen Watkin
But crucially, she has to unpick which changes in the world will have long lasting impacts and which may be more short lived.
Alla Harmsworth
Our strategic asset allocation is slow moving, but it is responsive. It does very much reflect the market environment. It just tries to do it in a way that only Responds to longer term shifts as they occur.
Karen Watkin
Understanding the drivers of the global economy is one piece of the puzzle. Sandra Rhouma is a European economist with Alliance Bernstein's Fixed income team. Her job is to try to forecast the macroeconomic factors that will affect our investment decisions. As she explains, getting it right involves understanding both the long term trend of things like growth and inflation, but also the nearer term impacts of the current business cycle.
Sandra Rhouma
You have the business cycle that fluctuates around the trend, so the trend is a long term structurally driven drivers of the economy. While the business cycle is like you're either in an expansion or a recession. And when for instance we forecast GDP growth, we try to predict when we are going to shift from expansion or recession around that trend. So, this is kind of the short to medium term. The long-term forecasting is much more challenging because you have to take into account what is going to shift the trend around which the business cycle is evolving. So that's population ageing, climate change, what is going to drive in the short run these macroeconomic variables. GDP growth, inflation rates and the difference between the short term and the long term. And how the long term is impacted by decisions that are taking place within the next few months.
Karen Watkin
Building a strategy to provide income in retirement is a prime example of how investment strategies need to be built for a long-time horizon while still managing short term volatility. Elena Wang, a portfolio manager specialising in pensions explains how to do this.
Elena Wang
They need to generate growth for longer potential longer retirement, but at the same time control the risk because the more volatile market, given these changes and you know, challenges, we need to think about potentially design a solution that is more growth oriented but at the same time want to making sure balance that the need of generating growth with the need to control risks because of auto market. But I think that way we shouldn't really rely on predicting the market and passively react to it, but more thinking about proactively and design the solution that can work under different market environment.
Karen Watkin
With market risk heightened in times of economic and political instability. One critical way of smoothing out volatility is through diversification. Elena highlights some of the ways we do this in retirement strategies.
Elena Wang
Going forward the market will be different. That's kind of the reason why we think about diversifying. For our client there are two ways. One is think about liquid assets like defensive equity, global bond and the other way we actually try to explore also getting a lot of tension in these years is the private assets, if you will.
Karen Watkin
Another crucial source of diversification is to include investments from further afield. Liz Bakarich focuses on emerging market bonds and she explains how this part of the market offers attractive sources of income with quite different risks to those elsewhere in portfolios.
Liz Bakarich
Emerging markets offers diversification away from the US or developed markets so they can be exposed to different risks, good and bad. One of the things that we like about many, both sovereigns and more particularly in the corporate space is actually if you compare emerging market corporates to the developed market counterparts, they typically have better fundamental metrics, so they have lower leverage. Higher cash balances also too, if you look at the EM corporate space, it actually has a better Sharpe ratio than other fixed income assets. So you are getting solid returns for lower risk. Another thing to be considered for companies, they can be very strong companies on a fundamental standalone basis, but because of the country that they're operating in, their actual published rating may be notched down.
Karen Watkin
Investors would also do well to include assets that offer more safety in times of market uncertainty. The US dollar has historically been one of these safe havens, but even there, investors may want to look for further diversification. Julia Keating, a portfolio analyst in our Multi Asset Solutions team, monitors this closely.
Julia Keating
The dollar does remain unmatched in terms of currency peers that have the depth of liquid assets that the U.S. treasury market has backed by credible institutions such as the Fed. But what has happened this year is that there has been some concern from investors around the direction policy is taking. A little bit of uncertainty and we've seen investors reallocate away from the dollar. To my mind, what is happening right now is a step towards diversification, but not necessarily moving away from the dollar completely because there really isn't at this point a credible alternative as a reserve currency.
Karen Watkin
She takes a broad view of the investment world, which means in multi asset portfolios she can find other ways to mitigate risk.
Julia Keating
Gold is a very interesting one because as we talked about how investors are looking to diversify away from $, not fully get rid of their dollars, but looking to diversify. And if you look at central banks, for example, that have very high allocation to dollar assets, one of the things that we've seen them do in recent years is start to buy more gold. And so there has been a structural demand for gold as a safe asset. And as investors have taken a step away from dollar this year, that has also resulted in increased demand for gold, which can act as a safe haven as well and can particularly protect in periods of geopolitical risk and uncertainty.
Karen Watkin
Finding ways to deal with uncertainty is a critical part of Being an investor and my guests are certainly aware of this, with each of them discussing the ways they think about how the future may unfold. For an economist like Sandra Rhouma, trying to predict the future and managing uncertainty is a key part of the job.
Sandra Rhouma
It's more the directionality. Are we going to slow down or accelerate in terms of growth? Is inflation moving towards the target? So if it's bumpy, don't panic, take a step back and remember what the economist said about the next six months. It's still moving towards the target, but it might be surprising on the upside or the downside from one month to the other and to also not overreact to one data point that might actually contradict our baseline, but stick to that forecast.
Karen Watkin
Alla explains how she thinks about managing this in terms of building a robust rather than optimal portfolio.
Alla Harmsworth
There's no such thing really as one optimal portfolio in a sense. What I mean by that is that for any given investor, the idea of an optimal portfolio based on one central expectation, even if it's the one that the investor is most certain about, is dangerous. It can basically lead to bad estimation error and to an allocation that just doesn't work because your view of the world does not come to pass. Something different happens. So what we look to do in AB is create portfolios that are optimal, but optimal in many different possible scenarios that can unfold. And then we aggregate those possible different optimal portfolios into one portfolio that we call our robust portfolio. It is robust in a sense that it is not sensitive to one point of view being correct.
Karen Watkin
For Sonam Leki Dorji as a multi sector income investor, the most important thing is to have a game plan in advance and be nimble.
Sonam Leki Dorji
It's not a set it and forget it. At the end of the day, what you do need to do is as market moves, there are opportunities that presents itself even within the high yield space. We say we avoid Triple Cs for example, but at some point there are opportunities there as well which we can take at the high level overall risk rate. The best example I think was when we had most recently the Liberation Day and you had markets react very, very dramatically. And for us to have a set of scenarios set up and for us to have a fundamental view, we are able to take advantages of these types of dislocations in the market.
Karen Watkin
So a game plan is important. But in today's world, where US policy changes are announced on social media rather than behind closed doors, how do our investors navigate the constant stream of news flow and make sure, they only react to what matters. While technology might help with processing ever increasing amounts of data, it's still the human intuition and experience which is vital in identifying what matters. Rosalie Candido Lowe, co head of Alliance Bernstein's portfolio solutions team, focuses on how to use technology to improve investment performance. But the human element, she says, remains vital.
Rosalie Candido Lowe
The machines and the technology will help us understand the information, but it's up to us and it's up to investors to really know what to look for and know. Oh, this seems off and understand when the machines aren't right, everyone is going to see a stock moving. But it's up to the portfolio managers to really and the analysts to understand like, hey, well, this is important and I think it's up to the people to understand what to really separate the information from the noise.
Karen Watkin
Sonam also recognises both the benefits and challenges of having ever more data and news to digest.
Sonam Leki Dorji
The wealth of data is very. It's both empowering and overwhelming to me. I think it's still a big advantage in being able to look at the data and to compute things and look at analysis so much more quickly than we could before. Having all of that at our fingertips actually really empowers us to look at what the data is telling us and then to have our own views versus spending all that time collecting the data, going through it. So your focus is a lot more on what I think is the added value and both data and technology help you to be able to do that better today than it did 15, 20 years ago. So I think from that perspective we're in a much better place. But at the same time it can be overwhelming. Right. There's analysis paralysis as we talk about and it is quite easy to get pulled into dissecting all of this information in a hundred different ways and creating your own story. And that's where I think the discipline in having intellectual honesty is very, very important. And as an engineer, you will understand when you are torturing the data to tell you what you want it to say.
Karen Watkin
Ultimately, as investors, it's up to us to pull all these strings together to join the dots that we're seeing from multiple viewpoints and develop unique insights that will capture compelling investment returns for our clients. Investment grade credit portfolio manager Souheir Asba is is constantly on the lookout for what might impact her investments.
Souheir Asba
If I see a headline that could be related to, let's say, a country, a sector, my immediate thinking would be how does that impact these companies? How does that impact these sectors? Is there a link? So A lot of what we do is about connecting the dots. I think that being able to just take information and dissect it, whether it matters or not to your sectors, your names, your overall risk level, there's almost always something that you could extract and always, almost always impact. So yeah, I'm always there just like pinging my analyst, just with like random headlines saying, hey, does this matter for X, Y and Z? And then saying, go get some sleep.
Karen Watkin
And Liz Bakarich highlights the importance of getting out of the office and, and going to see potential investments on their turf in person.
Liz Bakarich
When you're meeting with these companies on the ground, one, you get to see their operations, visit a mine, visit the banks, visit the retailer. Also generally we find if you're going to visit someone's home, it creates a different level of comfort for them. Also in many cases, a lot of places I like to do what you call the taxicab poll. Talking to the wait staff, talking to your hotel staff, talking to taxi drivers. Some of those can give you a real sense of the sentiment on the ground. Just last year I went to China in Hong Kong, when we went to a mall construction, they were very much focused on the access that they were going to be offering so near a harbour near where Hong Kong investors can come onshore to China, which was a bit cheaper market. So it was understanding those points, it was also understanding where competitors were located. So seeing that the mall construction here was actually only maybe two miles from us, another mall that had very similar stores and very similar operations, those little details and features can really provide deep insight.
Karen Watkin
While my guests on this series have shared some important lessons on how to invest for income, they've also illustrated what type of person it takes to do this. Well, what's been most apparent from my discussions is that all my guests are keen problem solvers. Both Souheir and Sonam came from engineering backgrounds.
Souheir Asba
I went into engineering. I really enjoyed it. I think it kind of helped me build a good sequential way of thinking. Engineers are problem solvers at heart. So the problem that I'm trying to solve now as a portfolio manager is how do I generate my alpha and break it down into pieces? And I think that that kind of helped me take in like a different approach, I would say, into portfolio management.
Karen Watkin
Rosalie has also built her varied career on being an expert problem solver, which along with a persistent curiosity, helps us continually evolve our investment processes.
Rosalie Candido Lowe
You always need to start with why am I doing this? What is the problem statement? What are we trying to solve? What are the challenges what's the history here? And approach the problem with the outcome in mind and then take another kind of pivot and say, okay, well is this like something we've done before? You don't need to reinvent the wheel every time. Actually we shouldn't reinvent the wheel every time. We need to have processes that are repeatable, that are standard because this gives us scale, it lets us do more and do more better.
Karen Watkin
What's also striking is how all my guests recognise the importance of collaboration and how taking a team based approach not only enables everyone to succeed, but creates value greater than the sum of the parts. Liz Bakarich shares why this is so important. When navigating a complex space like emerging.
Liz Bakarich
Markets, there are people who will know things more than you. That's definitely true, especially as we have our in depth team of researchers and so really relying upon the people who know more than you about a particular topic is key. It's always been a team based approach and appreciating really in the emerging markets team even more given the breadth of the asset class.
Karen Watkin
And Rosalie Candido Lowe explains how building the right culture within an organisation and team is so critical in doing this. Well, you know, I think it's so.
Rosalie Candido Lowe
Important to open up and kind of come to work and come to your team with a open mind and an open heart and having that collaborative environment where you're comfortable going and asking someone what are you doing and why is this important and how does this connect? That's so important in building a strong team that is always working in the same direction and understanding that everyone obviously wants to deliver the best for their clients and themselves and succeed, but understanding that we succeed together.
Karen Watkin
Finally, what really stands out from my guests is the deep sense of purpose they each take from their work. Elena Wang, who works on our retirement solutions, says she always keeps in mind how her decisions can make a positive difference to people's lives.
Elena Wang
I find this really rewarding the way you see how my work have real impact. The participant real life is kind of go beyond the professional responsibility. It's also kind of my personal mission as well. Try to empower people to enjoy their golden years with dignity and comfort. And seeing witness people actually having peace of mind for retirement is just kind of inspired me to think that my hard work is really worth the time and efforts and inspire me to continue to do the great work I have been doing.
Karen Watkin
That sense of mission is common to those involved in investment. Interpreting what is going on in the world and considering the consequences is both a personal professional and intellectual challenge for economist Sandra Rhouma.
Sandra Rhouma
It's a social science, it's not a science and therefore you need real life experiments. There's always something happening that can again change the long term trajectory of a specific country or of the world as it is. Think of tariffs today, where we will be in two, three or five years time. So it keeps you curious and always asking questions because it's not just about GDP or inflation, it's really about day to day life. At the end of the day when we talk about these things, where are we heading in terms of as a society or as a world? It's almost like a philosophical question. But I like to be an economist because of that reason. It keeps you curious and asks questions.
Karen Watkin
Over the course of this second series, I've heard from my colleagues about the challenges and opportunities they face in generating income for clients in a world going through technological change and political convulsions. I've also understood more about my colleagues, the Alpha Females, how they think, what motivates them, and some of the secrets to their success. So, what are my takeaways from these conversations? Firstly, when investing for income, it can be more important than ever to think about risk. Sonam Leki Dorji talks about the idea of efficient income, which is all about balancing attractive yields with the amount of risk you need to take. And in today's uncertain world, building a robust, well diversified portfolio that can do well under many different scenarios is critical. Secondly, it's important to remain nimble, but focus on what matters. Even when investing for the long term, we need to be flexible and adapt to a rapidly changing market backdrop in order to provide a smoother path of returns for clients. And yet, in a world where headlines change minute by minute, it's our job as fund managers to separate the noise from the signal and not get whipsawed by the constant news flow.
Karen Watkin
And finally, even as technology surges ahead, the human side to investing remains vital. And as our Alpha Females have shown, if we can be humble, remain curious, and bring together investment ideas from a wide variety of experts, we can navigate these uncertain times together. And that draws to a close this episode and this series of AB's Alpha Females, the Multi Asset Investment Podcast from AllianceBernstein with me, Karen Watkin. If you haven't heard the previous episodes, please do go back and listen to them and subscribe so they automatically arrive wherever you listen to your podcasts. And if you've enjoyed this episode, don't forget to tell your colleagues and friends about it. It only remains for me to thank you for listening. This episode was produced by Richard Miron from Earshot Strategies.
