Transcription
Please welcome to the stage Bob Prince, chair and co-CIO of Bridgewwater Associates in conversation with Idelu, CEO at HSBC private bank. Hello. I'm absolutely thrilled to be with Bob Prince, the chair of the board and co-CIO of Bridgewwater. Bob, it's also a pleasure to have you as a long-standing private bank client. So, even more exciting for me to be on the stage with you. Uh Bob, you have just celebrated at Bridgewater your 50th year anniversary last year. So tell us what's the secret to building longstanding, durable, and resilient portfolios for clients?
Well, thank you. Thank you, Ida. It's really great to be here. Um and um you're right. You know, last year was a really big year for us. It was our 50th anniversary and um in addition to the anniversary a a lot of great things happened in terms of our transition and our governance and so on and so forth and and as we sit here today at age 50 we're almost like a startup you know going into the next the next 50 years but um you know when I think about what it takes to have that sort of long-term um survivability or success I do think that You know the first rule of investing is survive. It's really capital preservation. Uh because if you conserve capital, if you survive, there will always be opportunities, but you have to be around to take advantage of them, right? And so, um, you know, you need a good offense, but I think you really start with a good defense in managing money. Uh if I could take a minute and maybe describe a little bit about how we manage money and how we view the world, then it might might help help you see things through our eyes. We uh I think there are really two elements to long-term survivability and and performance in the markets. I think there's an organizational element and I think there's an investment process element. For us, the organizational element really started with uh that the overarching goal is simply continuous improvement. And when you're an organization and your goal is continuous improvement, it actually then calls for a certain culture. Um it calls for a meritocracy of ideas where the best ideas win uh not seniority. it and it calls for a uh a very clear and explicit recognition of what your weaknesses and your vulnerabilities are because it's actually your weaknesses and your vulnerabilities that that are the fuel for the improvement, right? And that has a parallel to the markets because in the markets you really have to, you know, the markets seem like they're always trying to find your weak spot, right? and they do usually but in the markets um you you have to understand what your vulnerabilities are what your weaknesses are and you actually have to plan for them. So for us the way that we do that is that our investment process is what we call fundamental and systematic which is that uh by fundamental I mean we try to think about the world economy and markets and think about that like a machine that there are cause effect linkages levers and pulleys and those cause effect linkages describe how things play out over time and so given that understanding of those cause effect linkages in the markets we then prescribe a game plan so that if this happens we'll do that and if this happens we'll do that and we can then write down that game plan we can program it and we can then stress test it through history mostly to find out what your vulnerabilities and weaknesses are right how how bad how bad is it when you're wrong and plan for being wrong so you can be in stay in the game so I think those are two big elements elements of of resilience and survivability in in the markets. I think they're generally they're generally applicable, right? You need um you need diversification. Um but then you need uh you need agility and agility means you need u a plan for if this happens I'll do that. If this happens, I'll do that. And then you have to and test that plan and have the ability to then carry it out. It's almost like doing a health check for clients portfolios on a regular basis, right? And I love what you said about the meritocracy. I love what you said about really risk managing on behalf of clients as well. So let's do a double click on that. How would you think about global asset allocation today for clients and where are those opportunities?
You know, well, it's interesting. Most people don't start there. uh most investment portfolios start with the market cap index and because the US markets have done so well in the last 15 years and because the dollar has done so well a market cap index is massively overweight the US right now right and so you're starting off with a with a I think it's uh the US market cap is 70% of the world market cap which means it needs to attract 70 cents out of every dollar into equities to stay where it is. So, um that's a bad starting point because you're starting with a concentrated portfolio that's vulnerable to just a couple of things, right? It's much more our approach is much more starting with a portfolio that is diversified across countries. It's a diversified across assets. It's diversified across conditions and it's diversified across strategies because all of those things are important contributors to an outcome. But all of all four of those can have their own what we call environmental biases. Meaning any asset, any strategy, any country will have its inherent environmental biases. meaning an exogenous influence that will that will drive your outcome. And so the first thing that we try to do in building a portfolio is to build a build a portfolio that minimizes environmental biases. Uh and then when we work with our clients, try to help work with our clients which are uh to help them, you know, uh do the same.
Bob, I know you'll agree with me that there's only two points that matter. It's when you're get in and when you get out. And there's a lot of volatility that happens in between. But as a, you know, as an investment advisor, really thinking about building those durable portfolios, as you suggested, that will withstand the challenges over time and over the decades. Yeah. But, you know, it almost seems today like risk and volatility is the new normal for investors with all of the challenges that we're seeing around the world. You know, where where are you positioning and where do you see those opportunities despite the geopolitical concerns around the world?
Yeah. Well, it's, you know, there are these sort of timeless things that are always at a risk and then there are these time-sp specific things and and and if I go to the timeless things, you know, the economic cycle always matters, right? Economic growth and inflation, they always matter. They drive monetary policy, which drives interest rates and drives asset prices. And so globally as a timeless um uh approach, we're always trying to start off with a balance to economic growth and inflation to not be tilted one way or the other. And if you start in a balanced position, you can then als you can then always take risk one way one way or the other uh given what you given what you see at the time. So I think that's a key fundamental driver starting with a balance to growth and inflation and then you have the time-specific risks which are particularly you know um high and varied today but um I would categor I will I'll describe kind of two the two big ones we think one is what this what we call modern mercantalism which is sort of how the economic machine is now working which is very different than it's worked in the past which is the idea of modern mercantalism where governments are very directly involved in enhancing the wealth and power of their economy and accumulation of assets is a good thing. Trade balances are a bad thing and and you know to some extent you know China has implemented that sort of policy for a long time active active involvement in the in of the government in the economy to great success. Um and in the last few years and with Donald Trump in particular now the US is going heavy into that approach and what happens when when the US is there and China has been there it requires a comparable response from somebody else like if you're operating from your own self-interest heavily then somebody else has to protect their position somebody else to protect so this modern mercantalism is spreading globally um it has all kinds of manifestations fiscal stimulation, military spending, and so on so forth. Um, the second big driver though is AI. And I would say in in the near term, AI is is confronting a is in the middle of a very big inflection point. It's gone from an idea and a possibility to a reality. It's starting to impact actual businesses and how they operate. Starting to impact jobs. We saw it in the software stocks. But there are really three big risks uh related to AI right now. One is that in the very near term you're going to have a pretty massive supply demand imbalance for compute and basically everything along the supply chain which is creating a what we call a resource grab where everybody has got to get the resources that they need now so that down the line they don't have a bottleneck. So, so that's number one big supply demand uh mis uh imbalance. The second thing is is companywide company and sector disruptions um as a very big influence. And then the third one I think is less well recognized which is I I think we're on the verge of a political backlash against AI. Um in the sense that when you look at the spending that's occurring today uh you know GDP growth is strong but it's very unbalanced. It's much more you know spending on capital expenditures for technology much less on household incomes much less on consumer spending. you're getting already uh an income disparity that's un that's opening up again. And even if AI is successful in in generating the levels of productivity that support the investment that's been made, the secondary effects of that are going to be income distribution issues. Um and and when you get income distribution issues, you know, that was the basis of populism in the United States. It was the basis of Donald Trump coming to power. And so I think we're looking at a a next wave of income distribution issues related to AI. And um we're probably you're starting to hear kind of the straws in the wind right now uh kind of the Bernie Sanders of the world, but by the time we get to the midterms, you're going to hear more. And by the time we get to the next presidential election, you're going to hear more. And it and it also goes to data centers and electricity prices and, you know, lo potentially lost jobs and so forth. So I think that's the thing to be to be looking out for. These are the things to be looking out for uh with respect to the next kind of the next uh um set of wave related to AI but it will be successful as a tool but as a result of the success it brings along these other issues.
No indeed Bob and you know in addition to the tremendous growth in AI there's so many different opportunities peripheral and around AI as well. You know, as AI is growing, there's also a growing need for energy and supply of electricity and energy to supply the growth in AI. So, looking at clean energy sources and the brains behind AI, the semiconductor industry and so on. So, a lot at at stake and a lot at play here around AI too. And I loved how you talked about the core portfolio and the tactical elements around the core, which is really a healthy way to think about investor portfolios. Are there other tactical elements that you're seeing uh at the moment?
Yeah, sure. Um the uh you know the the really interesting thing about the global environment in the last few years is how radically different the conditions in Asia have been from the west because uh it it goes back to CO because coming out of CO um the policy response in the US and Europe and other countries in the west was print fiscal stimul ulation and that was overdone which produced a big inflationary cycle and in Asia it was much more social social controls and so coming out of COVID you had inflation in the west and deflation and weak economies in the east which and then you also had a political backlash in the withdrawal of US capital from China and that whole combination actually sort of drove risk premiums up in Asia but because there was no inflation problem you that policy makers had the latitude to support economies with liquidity now in China's case they didn't do it aggressively but they did it moderately and but but generally the financial system was in a position and and policy makers and monetary policy was accommodative so whenever you have high risk premiums low inflation and accommodated policies, you have the ingredients for good asset performance. And in the last few years, the Asian the Asian markets uh uh if I consider kind of across asset stocks and bonds and across assets have been by far the best performing markets and that's continues to this day. We still we still have a a tilt toward toward Asia. It it's not nearly like it was because because you know during the other side of that cycle 180 degrees on the other side of that cycle was an overheating economy and inflation and tight money in uh the US and Europe and and the west. So which was bad for assets. So you had the worst conditions for in in the west, you had the best conditions in the east and really favored a shift in that direction and that ultimately panned out in asset returns. that that's sort of equilibrated to this point. And actually um you know one of the things that we that we always look at is what is the aggregate level of economic conditions cyclally across countries and does it does it does it allow for a a central bank to maintain accommodative policies and actually in like 80% of the world today that is true. coming out of 2019 2021 it was only true in about maybe 10% of the world but that's also supported asset returns in the last year or so. So globally, we're pretty diversified because because of that, pretty pretty balanced between asset classes, although moderately favoring stocks in relation to bonds because this whole capex cycle is really good for profits and the fiscal borrowing and the demand for capital is not so good for interest rates. But but you're not on the verge of a major tightening of monetary policies. Uh it's pretty much steady as she goes. um while but in the but on the margin you know conditions in Asia are still you know moderately uh favorable we think relative to the rest of the world so we're a bit over positioned there
so let's double click on the tilt towards Asia and the favorable environment here in Asia obviously we're sitting in Hong Kong which is one of the wealth hubs of the world so where do you see the opportunities here in this region
well obviously there's a huge tech thing going on right all the IPOs in Hong Kong in the last year is big. You know, when we when we um when I say we're we're kind of overweight Asia, we we start off with what's called a balance portfolio where we kind of leverage bonds up and delever the equities and balance risk parity is a term for it, but we balance the risks across assets so we're not overexposed to stocks or bonds or commodities. That's our starting point. As I said, that's kind of the defense, right? And so for the most part, we're holding pretty balanced portfolios across assets on a risk basis and then also across economies in Asia with a bit of a tilt, you know, uh to it's a bit it's a bit better for equities because rates have come down so much.
Um so Bob, in our last few minutes together, are there any other key takeaways that you want to share with the investors in the room?
Well, I you know I think um yeah the it starts with it it starts with a good defense, right? Managing money starts with diversification. It starts with agility. Diversification, agility and resilience are kind of the three things that I think about. And when we work with our institutional clients, this is the focus. So um but but even when you think about diversification how do you get diversification correlations are very unstable we don't use correlations the correlation between stocks and bonds ranges between 7 and minus.7 like there's so how do you get diversification is is just is a bas and the way we approach it is you have to get divers you have to get diversification aligned with the fundamental conditions of the drivers of markets, right? So, but so diversification is your starting point. But then agility is really important because diversification deals with the things that you cannot possibly predict but might happen like things that have in the last few months, right? Agility is then as conditions unfold now what are you going to do about that? And so agility requires sort of thinking in advance about what types of outcomes, what kind of conditions are going to trigger you to take what kind of action and having a game plan to then execute that game plan as those conditions unfold. And then resiliency is where it all comes together because resiliency is really around achieving higher and more consistent long-term returns. and and that's really achieved by diversification and agility brought together into an ongoing process in a plan which goes ultimately to the way you run your organization um and the culture around that
diversity diversification agility and resilience uh incredible thank you so much Bob for the extraordinary takeaways uh from the discussion today ladies and gentlemen Bob Prince thank you thank you up. Thank you. Thank you so much.