Archive for August, 2015

SINGER: MACRO MATTERS TRANSCRIPT

Why are events in Greece and China so important to investors? In a rare interview, top performing, five star rated Portfolio Manager, Brian Singer of the William Blair Macro Allocation Fund explains why macro matters.

Brian Singer Portfolio Manager, William Blair Macro Allocation Fund

CONSUELO MACK: This week on WEALTHTRACK, as tensions flare up in Greece, the Middle East and China, five-star fund manager Brian Singer decides which strategies to follow to keep his William Blair Macro Allocation Fund moving in the right direction. That’s next on Consuelo Mack WEALTHTRACK.

Hello and welcome to this edition of WEALTHTRACK, I’m Consuelo Mack. Most of the top rated money managers we interview on WEALTHTRACK are what are called “bottom up” investors, they build their portfolios one security at a time, stock by stock, bond by bond by carefully analyzing the fundamentals of the security itself, the company it represents, the business it’s in, and the customers it serves.

This week’s guest takes a different approach. He is what is known as a macro investor. He is Brian Singer, Portfolio Manager of the William Blair Macro Allocation Fund which he and his team launched when they joined William Blair in late 2011.

The Macro Allocation Fund is rated five-star by Morningstar and has outperformed its Multialternative Category handily over the last three years with over nine percent annualized returns. Prior to joining William Blair, Singer was Head of Investment Strategies at his namesake firm, Singer Partners and prior to that was Head of Global Investment Solutions and Americas Chief Investment Officer for UBS Global Asset Management.

Singer’s top down approach doesn’t involve choosing individual securities. It does mean actively managing across asset classes, geographies, currencies and risk themes.

I began the interview by asking Singer why macro matters in a portfolio?

BRIAN SINGER: Well, it’s interesting. If you think back to the Cold War, the world was very geopolitically stable back then, and after the Berlin Wall went down in 1989 something changed, and we’re really not that geopolitically stable these days. You could call it Ukraine. You might call it Greece these days, the Middle East, but there are a lot of developments like this in regions around the world that portfolios need to navigate, and it’s this type of macro management that enables those portfolios to navigate the rough waters of geopolitical instability.

CONSUELO MACK: But there have always been geopolitical events. I mean World War I, World War II. I could think of the Russian Revolution and everything else. But is it because the markets are now global now? We’re much more interconnected so that, therefore, something that happens in the Ukraine that might not have affected us 40 years ago does. Is that why macro matters more now than it has in the past?

BRIAN SINGER: I would say a couple things. One is if I tried to identify an analogous period to the world we’re in today, it really is the first three and a half decades of the last century, 1900 to 1935-ish, but back then most investors were very wealthy, and now wealth is spread across the population, and individuals have savings, retirement accounts that they actually need to invest themselves, and for that reason this type of concern is now propagated throughout all of society, just not a narrow portion of society. But it did exist like that before, and we’ve returned to that today but for the masses, not just for the elite.

CONSUELO MACK: What does a macro asset allocation strategy mean to you?

BRIAN SINGER: Most portfolios are very well diversified from a bottom up perspective. In other words they have lots of security selection across stocks and across bonds. What they don’t tend to have is diversification across asset classes and countries that is thought of in a dynamic manner and that’s what a macro allocation fund is from our perspective, a compliment to existing portfolios that allocates across asset classes, currencies, individual markets, credit categories and generally manage the broad macro exposures of the portfolio.

CONSUELO MACK: But Morningstar, for instance, calls you a Multialternative fund. So are you an alternative investment? Do you zig when equities zag for instance? I mean is it that kind of diversity that it brings?

BRIAN SINGER: When Morningstar categorizes us in the multi-alternative realm, they observe that we are broadly diversified across equities, bonds, currencies, multi, and alternative because we can go long and we can go short in all of these. We’re also fundamental in nature. Most of these alternative funds are more momentum-oriented. We’re not. We’re fundamental in nature. We go through an economic analysis and a macro thematic analysis of these developments all around the world and consider what the implications are for asset prices in the portfolios. Because of that, we tend to be zagging when everybody is zigging. When prices go down, we’re observing that prices are probably moving further below fundamental values, and we’ll tend to step in in that type of environment. But it also means we tend to have a longer-term investment horizon than a lot of investors.

CONSUELO MACK: The big macro themes that you’re following evidently there are five of them, so currencies, global economic growth, geopolitics, commodity super cycle and interest rates. Why those five?

BRIAN SINGER: Those are the things that we find today, today, and they’ll evolve over time but today are having the greatest influence on asset prices, either compelling them away from fundamental values or toward fundamental values, and they’re providing us in our analysis with the best insight to actually take positions where we feel we actually understand something deeper or to a greater degree than is already priced into the market, and that’s where it becomes valuable for us. The geopolitical analysis is, for example, one of the most powerful things that we’ve introduced to the portfolio over the course of the last decade. It really wasn’t necessary when I got into the industry. We were still in the Cold War back then, and there were developments but not like what we see today on a day-to-day …

CONSUELO MACK: Because they were stable. You had these two big super powers, and they pretty much determined … they kept things…

BRIAN SINGER: I hate to say it. Mutually-assured destruction is scary but it’s stable and it was, and now we don’t have mutually-assured destruction, and it’s just not stable.

CONSUELO MACK: So there is no dearth of geopolitical events going on in the world right now. Which ones are you paying the most attention to? Which have the biggest investment implications?

BRIAN SINGER: Right now, right now I would say I’ll give you three of them. I hate to say three out of four. That doesn’t narrow it down too much, but I would Greece, Middle East and China, and I’ll just briefly mention why in each of those.

CONSUELO MACK: No, absolutely.

BRIAN SINGER: In the case of Greece there’s been a negotiation between Greece and the euro zone that is very, very important existentially to the euro and the integrity of the euro zone. The negotiations were such that they really focused on trying to stem the growth of populism in the euro zone. The Germans and the euro group had to make sure that Syriza, the party in Greece, a populist party couldn’t be deemed successful, because if they were deemed successful it would cause populism to arise elsewhere in the euro zone and threaten the euro. That had to be stopped, and from that perspective we had the view importantly that whatever happened, it would have to be so painful for Greece that no other populist party would want to go that route, and that’s what it was. It led us then from a portfolio management perspective to be cautious, to reduce risk until the pain was actually propagated through the system and now as we’re beginning to get approvals, we’re beginning to add exposure back into Europe, European equities in particular.

CONSUELO MACK: And reduce risk where? In your entire portfolio or just the ones that would be affected in Europe?

BRIAN SINGER: Both.

CONSUELO MACK: Both.

BRIAN SINGER: I would like to say what would be only affected in Europe, but the problem is that markets move in this kind of safe haven concept, risk on, risk off. So things tend to move up and down together, and we’ll take positions across currencies, bonds and equities to de-risk the portfolio. Examples of that.

CONSUELO MACK: Please.

BRIAN SINGER: We shorted Italian bonds. Why? If there’s a scare in Europe, the peripheral bonds of Italy, Spain, Portugal, things like that will tend to increase in yield. That was a risk management tool for us. It helped offset some of the risk that we had. We had equity exposure in Europe and in Italy and Spain predominantly. We reduced that as we went into this. Now we’re increasing that. We’ve eliminated our short to Italian bonds. We’ve eliminated that risk hedge, and now we’re introducing risk again by buying into France, Spain and Italy, the equity markets in France, Spain and Italy in Europe.

CONSUELO MACK: And what are you shorting?

BRIAN SINGER: The shorts that we have in the portfolio are really focused in on, I would say a little bit the U.S. We don’t have much exposure to the U.S. We’re net long bonds, I’m sorry net long equities, in the portfolio mostly in Europe and in the emerging markets. We don’t have a lot of shorts in equities. We do have shorts in fixed income, mostly in European fixed income where rates are just so astoundingly low. That’s really the short position that we have as an offset.

CONSUELO MACK: And actually that’s what I meant to ask you. Who are you betting against in Europe?

BRIAN SINGER: Who are we betting against there? We had very, very large shorts in the euro and the Swiss franc, very large shorts. The euro, however, we feel has dropped basically down to what we consider to be fundamentally appropriate, and we’ve brought our short position down to a very, very small position, very, very small position in the euro. Basically we’ll just say flat the euro now, but we remain short the Swiss franc. The Swiss franc has been a safe haven. It’s very overvalued because of that. The price of the Swiss franc has gone up dramatically against other currencies, and we’ve increased our short there as we’ve reduced the euro zone short here more recently.

CONSUELO MACK: Brian, you mentioned the Middle East and ou mentioned China. Middle East first.

BRIAN SINGER: Middle East. Middle East is very important because of crude oil prices, energy prices. What we believe is that the negotiations that have occurred throughout the Middle East, this is a game theater of geopolitics. The Shia population is based in Iran, and Iran has a partner in these negotiations and that’s Russia, and they both draw a lot of their power from energy. The Saudis are the basis of the Sunni population, and they had a coalition partner called the United States, but they no longer have that partner, and they needed to exercise some power to minimize the influence of Iran until they were able to build out their strength base. Our view was that they would manage to a lower crude oil price. They still are.

CONSUELO MACK: The Saudis would manage to lower which they have done.

BRIAN SINGER: I’ve been doing this for 25 years. The world always anticipates crude oil coming on line faster than it will come on line, but a couple of years from now it will begin to come on line, and we believe that will maintain a downward pressure on crude oil prices between what Saudi Arabia is doing, what fracking is doing around the world and what is ultimately going to be Iran bringing oil on line in a few years. So from our perspective, crude oil price is not going back up above 100, literally maybe staying 40 to 55 dollars a barrel when we’re looking at something like a Brent Crude Oil.

CONSUELO MACK: Therefore, how do you invest in that expectation?

BRIAN SINGER: Well, we don’t invest directly in commodities, but what it does do is influence our assessment of fundamental value for the energy sector. It influences our thoughts about commodity currencies. So the energy sector right now we’re saying that there’s a depressing effect on earnings. We do have a small long position in energy, but we have mitigated the size of that because of the downward pressure on oil prices. With respect to the commodity currencies, we’re generally looking at it and saying this is part and parcel of being on the back side of a commodity super cycle, and the downward pressure of that on the commodity currencies is what leads us to be short things like the Australian dollar and …

CONSUELO MACK: Canadian dollar?

BRIAN SINGER: …and the New Zealand dollar. We were short the Canadian dollar, but oil sands came off line a while back. That kind of played itself out, and we’ve taken that short position off. We’re neutral right now on the Canadian dollar.

CONSUELO MACK: Lower commodity prices are good for commodity consumers, and one of the biggest commodity consumers in the world is China which you also mentioned is on your radar screen. What’s your analysis of China which most of us focus on the negatives that are occurring in China.

BRIAN SINGER: I know, and our trajectory in China has been … up until about three or four months ago, it was the largest emerging market position we had in the portfolio. After the dramatic run-up that occurred, we cut the position in half.

CONSUELO MACK: In the stock market.

BRIAN SINGER: In equities, in Chinese equities, and now we’re beginning to nibble again and being to get exposure again or increase our exposure a little bit again to China. Why have we done all of this? There’s been so many negative perceptions about China. Debt. Yes, they do have a debt problem. Their debt to GDP is about what it is in the United States. The United States would die, would die, to have the debt to growth dynamic that China has. And that growth can chew through that bad debt, not bad debt, high levels of debt very, very quickly. Second thing is infrastructure building and over building, empty cities and all of that. Yes, there has been a massive amount of infrastructure. But it doesn’t mean that all infrastructure investing there is bad, and there’s a very good reason to build empty cities in China. You can build railroads and roads to the people in Western China from Eastern China. In China you basically have access to a welfare system based on the city that you live in. If you live in rural China, you don’t have access. So there’s a very strong incentive to migrate these individuals into cities, and building empty cities don’t stay empty for long. Third thing, shadow banking. Everybody talks about shadow banking, it being illegal. No, no, no, no, no. In China if you come out of communism and you don’t have the concept of financial intermediation because that’s not part of an anti-capitalist system, then lending, resource allocation has to come through some mechanism, and it’s called informal shadow banking. Is there bad shadow banking? Yes. Is there very good shadow banking? Yes. It’s valuable in an economic sense. So we see kind of both sides of this. That said, things got out of hand. In the course of the last six to nine months, there was so much leverage that was being brought into the equity markets, and there was so much buying on the part of …

CONSUELO MACK: Individuals.

BRIAN SINGER: … small retail investors, it boosted equity prices. The substance of that is very, very small. These are small retail investors. The equity market there is tiny compared to the economy. This is not the end of Eastern civilization as we know it in China. It is a hiccup. Final thing is China is very focused on making the Chinese yuan the reserve currency for Southeast Asia. To do that, they have to have stability in their capital markets. They are in the process of pulling out all the stops to stabilize the situation there and make sure it doesn’t happen again. Will bad things happen again? Yes. They happen everywhere. They happen in Europe. They happen in the U.S. It’ll happen there again, but from our perspective now we’ve flushed a lot of the bad out of the system. A lot of the bad lending behind the equity market, a lot of it, not all of it has come out of the system, but it’s time from our perspective to begin to think the fundamentals will reassert themselves, and it’s time to go back in.

CONSUELO MACK: How do you invest in China?

BRIAN SINGER: There are a number of ways to do that. We tend to invest in what are known as the H shares which are listed in Hong Kong.

CONSUELO MACK: Hong Kong.

BRIAN SINGER: But we do have access to larger cap and smaller cap securities in China through the H shares. We like the involvement of institutions. We like the involvement of the Hong Kong regulatory oversight and things like that. It doesn’t mean that there aren’t often great opportunities in A shares. There are, but from our perspective we’ve been able to get the exposures that we want, the macro exposures that we want, by going into those shares in China, and there are a number of ways to do it. There are ETFs that can be used. There are mutual funds that can be used. It’s an easy, easy market to get exposure to.

CONSUELO MACK: And you mentioned that China several months ago, and you got out and reduced your exposure after the big market run-up, but that it was half of your emerging market exposure. Do you think that’s going to be kind of the level that you’re going to be involved in China going forward?

BRIAN SINGER: The answer to that is no. It was yes, but things have changed. First is time has passed, and a lot of the value has been realized as the equity market has gone up. Yes, it’s come back down, but it did capture a lot of that. The second thing that’s very, very important is President Obama was able to get fast track authority for the Trans-Pacific Partnership, the big trade agreement between the U.S., Canada and a number of other Asian markets. It is the small Asian markets that will benefit from the free flow of goods, service and capital that hopefully will arise from that Trans-Pacific Partnership. What we did when we moved money out of China, we moved some of it to Vietnam.

CONSUELO MACK: How does the central bank explosion that we’ve seen around the world of this unprecedented accommodative policies …how does that affect your investment strategy?

BRIAN SINGER: It is incredibly important for us both in the long term and in the short term. For example, these central banks have an objective with their monetary policies of boosting asset prices, housing prices, equity prices and things like that and lowering interest rates. What’s the incentive? Borrow and invest in real estate and equities. That’s the incentive. It leads to corporations investing in capital projects that may otherwise not be profitable because interest rates have been held lower than their financing costs have been held lower. So in the end we look at it and say there’s been a lot of misallocation of resources that do need to be worked out of the system. What that means over the next ten years in mostly the developed world is we’re likely to see a relatively low-growth environment. We want to be cautious now and positioned to take advantage of the resurgence that occurs when all of those resources, the misallocation of resources worked out of the system and a lot of the technological developments that have occurred over the course of the last decade begin to really hit and increase productivity around the world. That’s the long term. The short term means that these central bank activities are influencing the supply of money and really having a tremendous influence on exchange rates. It means for us that the greatest opportunities where we’re taking most of the risk in our portfolios is in currencies, going long some currencies, short other currencies. We’re long the Southeast Asian currencies. The reason is they’re emerging market currencies that have not bloated their balance sheets like the developed market. They have not incurred the type of debt levels that a lot of the developed countries have, and many people remember 1998 when there was the Asian flu or the emerging market currency crisis. They’ve cleaned up their act since then. So they’re really the sterling players on the block. These are the good investment opportunities, and we’re long the Indian rupee, the Indonesian rupiah, the Malaysian ringgit, the Korean won. We are short some others like the Thai baht and the Philippine peso, so we’re not long all of them but we’re long those. We’re also long the Chinese yuan. The Chinese yuan is a unique case. Yes, they’ve been stimulative in terms of their monetary policy, but with an objective of making the yuan a reserve currency for Southeast Asia, they have to have a stable and/or appreciating currency, and we believe they will focus as much as they can on actually managing that currency to that objective, and that creates an opportunity.

CONSUELO MACK: One investment for a long-term diversified portfolio. We ask each of our guests on WEALTHTRACK at the end of every conversation with them, what would you have us all own long term?

BRIAN SINGER: And in long term I’ll say ten to twenty years, and I suggest that you contact my kids and ask them if this worked out for them, because this is what we’ve done for their portfolio. We have put their portfolios predominantly in emerging markets because we want to take advantage of the growth of the population there, the increased integration of their economies with each other and with the developed world, and the realization that going forward the contribution to world growth will come more from emerging markets, and it already is, than it’s coming from developed markets.

As capital markets, equity markets take advantage of that, that’s a wonderful thing for the long term and, as I mentioned, those are the central banks that have the sterling balance sheets, fiscal policies that are in pretty good shape right now. They’re adopting very pro-market regulations relative to what is happening in the developed world. That’s a long-term scenario. As I like to say, that’s a tidal wave that you want to ride, and don’t get caught up in the small little waves that bounce up and down around that. Ride that tide. Stick with that tide.

CONSUELO MACK: Emerging market stocks.

BRIAN SINGER: Emerging market stocks.

CONSUELO MACK: Is there a particular vehicle that you have put your children’s portfolios in?

BRIAN SINGER: I have chosen, because I do this for a living, to provide exposure on an individual country basis so there is focus on individual countries. However …

CONSUELO MACK: So individual country funds or a portfolio of them.

BRIAN SINGER: Individual country funds, but you don’t have to do that. You could invest in ETFs, very efficient, very cost-effective that invest in large cap emerging market companies. Great. Small cap emerging market companies and even in frontier markets, so the smaller than emerging countries and the equity opportunities that are available there. Those are the things that I would invest in. They can be done passively. They should be done passively if you don’t have the opportunity to do a lot of research or invest in a manager who really knows what they’re doing, picking stocks or picking countries in those areas.

CONSUELO MACK: Brian Singer, what a treat to have you for the first time on WEALTHTRACK. Thank you so much for joining us.

BRIAN SINGER: Consuelo, thank you. I enjoyed being here.

CONSUELO MACK: At the close of every WEALTHTRACK we try to give you one suggestion to help you build and protect your wealth over the long term. This week’s action point is take Brian Singer’s advice and invest some money in emerging market stocks.

Emerging markets are where the most dynamic growth is going to occur over the long term. And that’s where they belong, in the long time horizon, growth part of your portfolio.

They are called emerging for a reason – they have emergencies, as we have seen in China’s red hot then ice cold stock markets, which are heavily represented in most emerging market funds. Among the emerging market index funds and ETFs that Morningstar recommends are Vanguard’s Emerging Markets Stock Fund and its matching ETF.

Next week, for our Labor Day weekend program we are going to talk to one of our favorite guests about the essentials of planning for retirement and managing it with personal finance and Social Security guru Mary Beth Franklin.

In the meantime to see more of our interview with Brian Singer, specifically his favorable views on Bitcoin, visit our website wealthtrack.com and click on the EXTRA feature. Also continue to reach out to us on Facebook and Twitter.

Thank you for watching. Have a super weekend and make the week ahead a profitable and a productive one.