The 2023 CNBC Delivering Alpha Conference

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Jacob Wolinsky
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Following are excerpts from the unofficial transcripts of interviews during the CNBC Delivering Alpha conference in New York today, Thursday, September 28.

Delivering Alpha
Image source: CNBC Video Screenshot

The Long and Short of It All panel featuring Dawn Fitzpatrick, Soros Fund Management CEO & Chief Investment Officer, and Katie Koch, TCW President & CEO

AI is a transformational technology, and we are using it: TCW CEO Katie Koch

We are going to have a recession because that’s the way the world works, says TCW CEO Katie Koch

Katie Koch on AI

I do think this is a transformational technology. And I do think that it is going to determine just like internet, mobile phone buying and consumer, it will determine the difference between winners and losers across a lot of sectors. And I think it has the potential to be highly margin accretive and in the running of our asset management business, we are using it. You need to get your data to the cloud, you need to then architect it the right way and then you should be able to use this in running of your business and also your portfolios.

Katie Koch on equity markets

It’s like 85% of returns are being driven by those seven companies. So we have very consolidated leadership. We have valuations that are above historical averages, and we have a backdrop that’s weakening and I think on a relative basis just kind of, there’s some possibility – and we’ll come on to that later – of equity-like returns higher up in the capital structure. So, I would say we’re not as excited for equity markets for that reason.

Katie Koch on the impact of higher rates

On the consumer front, this mortgage point is very important for – especially for the prime consumers that can be on a 30-year fixed mortgage and that has put some more resilience into the consumer and that’s a good thing. That is offset by the fact that it now cost the average American about $1,000 a month to own and operate a car because of a combination of where those loan prices are and where oil is. Credit card levels, I don’t think we’re at peak, but they’re elevated relative to the pandemic. Savings has depleted. The consumer who’s been really resilient and pulled us through all of this, we are starting to see some downward pressure on that consumer and rates are a driver of that.

Katie Koch on the economy

There is a lag and more things are going to break. We’ve already broken a couple of things or almost broken, then we almost broke the UK pension market, and we broke some regional banks. And there’s going to be more dislocation ahead clearly as capital reprices. I just want to end by saying the other reason I would be cautious about getting involved is that you are getting paid to be patient right now. Cash has a good return. And so being defensively positioned for us, you know being in high quality investment grade debt or in the securitized space, I think we have an agreed philosophy around owning agency MBS just – or cash, treasuries, these things are all paying to investors. So I do think it pays to be patient and wait to see those higher rates work through the system. We haven’t yet seen the full pain of higher rates.

Katie Koch on recession

We are going to have a recession, because that’s the way the world works. It moves in cycles. And we haven’t had a real one for over a decade and a half except for a short blip, which we all know. So we have a lot of excess we need to work out of the system. I think some of it’s worked out and the cushion’s much thinner and we can unpack that in more detail. But there is more excess to go and the longer we go until we get that recession, the more leverage there is to the downside.

Dawn Fitzpatrick on interest rates

We think interest rates, government bond rates globally are going to get – we’ve seen them kind of get sloppy in the last week or so. We think they continue to get sloppy and actually, will give an opportunity to set long positions that will serve investors well over time. But the net issue issuance that is coming to market, including central banks, speeding up QT which the Bank of England obviously did last week, we just think sets up for some pretty volatile moves there. And it is a good time to, you know, when nobody wants to buy, it’s a good time to buy. So, we like that opportunity to set it all.

Dawn Fitzpatrick on the IPO markets

There’s some great IPOs coming today and next week – a couple are launching. I just think it means that investors are discerning. And we’re not back in 2020, 2021 when people were paying crazy multiples of revenue, never mind profitability.

Dawn Fitzpatrick on lending capacity

There is a hole created by the regional banks, you know, in terms of lending capacity, and as much as private credit has grown, it hasn’t grown enough to fill that gap. So those opportunities are going to be big, and they’re going to increase in number. And I think that’s really interesting. And Katie also made the point that equities are harder here. They’re more volatile. You can argue valuations are full versus for the first time when it comes to, you know, government bond rates, we’re getting real, you know, positive real rates. In public markets, credit spreads, I’d argue, are too tight.

The Private Credit Boom panel featuring Michael Arougheti, Ares Management Corporation Co-Founder, CEO & President, Damien Dwin, Lafayette Square Founder & CEO, and Armen Panossian, Oaktree Head of Performing Credit & Portfolio Manager (Incoming co-CEO 2024)

Good companies are staying private longer, says Ares Management CEO Michael Arougheti

The Sharpe Angle: Sizing Up The Private Credit Market With Michael Arougheti

Michael Arougheti on private credit having a moment

I just want to caution everybody, while private credit is having a little bit of a moment, these are not exotic instruments of any kind. These are plain and simple loans. And I think because they’re plain and simple, and because they’re floating rate and senior secured, given some of the things that are happening in the world now, they’re very valuable both to the investor community but also to the economy.

Michael Arougheti on floating rate

The interesting thing about the floating rate nature, you’re capturing all the front end of the curve opportunity, but you’re not playing so much defense in your back book because the value of those loans is actually preserved as rates have moved. So, it’s a very interesting dynamic and a little counterintuitive if you’re used to traditional fixed income.

Michael Arougheti on access to capital

So again, if you go back 30 years, just in the U.S., we had 8,000 banks. Today we have 4,000, which is still way too many. But as these banks consolidate, all of that supply that used to find its way into the real economy, actually consolidated and moved into the securities market. So, there’s just this overarching trend of just capital, lack of capital availability.

Michael Arougheti on private credit

Most everything we’re doing in private credit is interesting, just given the spread per unit of risk that we’re generating. You also have to think about private credit through the lens of performing credit and nonperforming credit. On the performing credit side, you’re generating very high risk adjusted return, volumes are down. On the nonperforming credit side, I think we’re still at the front end – to Armen’s comment – of what will be a much larger rescue lending distressed opportunity. So I think right now a lot of what we’re focused on is investing into the existing book of business, continuing to accelerate the growth of our winners and then I think the next wave of what’s interesting is going to be distressed commercial real estate lending and some rescue financing.

Damien Dwin on underbanked companies

It’s interesting, you’ve got 240,000 businesses with more than $10 million of revenue in this country. You have 30 million companies with less than $10 million of revenue. And they’re all underbanked.

Armen Panossian on the state of the market

I do expect and I would expect that in broadly syndicated loans, you are going to see elevated stress and default levels and with the deterioration in legal protections in those documents over the last 10 years, I think you will see quite unexpected outcomes. Lender on lender violence, the ability for opportunistic lenders to come in over the top of what was once considered a first leaning priority loan. So there are embedded risks I think will begin to unfold over the next year or two, as there is stress in the economy and stress in the markets with elevated rates for a longer period. It isn’t a free lunch. I think I’m concerned right now in the market that everything looks quite healthy and quite good. But feels like a little bit of a head fake to me and that the economy and the markets could actually experience some trouble going forward.

Public and Private in Your Portfolio panel featuring Jase Auby, Teacher Retirement System of Texas Chief Investment Officer, Edwin Cass, CPP Investments Chief investment Officer, and Tina Byles Williams, Xponance Founder, CEO, & Chief Investment Officer

You have to have a long-term outlook on oil and gas: Texas Teacher Retirement System’s Jase Auby

Private credit is on the upswing because of the attractive returns, says Jase Auby

Commodities is something we are actively looking at right now: CPP Investments CIO Edwin Cass


Tina Byles Williams on the Feds staying behind the curve

This may be a little controversial to say, but historically, the Fed has never raised interest rates six months before a presidential election and 18 months prior to presidential election, historically, only 20 basis points – the only time, that that was done on the Paul Volcker where inflation expectations were really unanchored. That’s not the case here. So, I think the Fed is going to stay behind the curve because it doesn’t want to be part of the election narrative. So you will see this ongoing stickiness persist.

Jase Auby on fossil fuels

We’re one of the few pools of capital in the world that still has a dedicated fossil fuel investing portfolio. It’s 3% of our assets dedicated to that and then another 3% in infrastructure, which is largely linked to fossil fuels. So, we like an investment. We like it from a flows perspective. As other pools of capital are potentially exiting those sorts of investments, traditional oil and gas remains there for us. I think a lot of other folks have seen that as well. Now, lots and lots of family offices, for example, all over the country and the world are stepping into that kind of that – those opportunities where there might be a dearth of capital. So we continue to see that as opportunities and we obviously stress test for oil price.

Jase Auby on passive vs. active

We always look at something like passive portfolios as being an actual – that’s something we should all focus on and look to because if we don’t have the opportunity to deliver alpha, the theme of this – of where we are today, it’s absolutely, you know, passive is your friend or at least maybe your frenemy, as you’re trying to build a diverse, resilient portfolio.

Edwin Cass on rates and equities

We are in this amazing period from 2008 to 2020 where the best portfolio you could build was just equity-centric. Just be long equity. So I think it was really an exceptional period for equity where you had low discount rates and that led to high growth through increased margins. If you think rates have to be higher persistently because of some of these inflationary forces, and that’s the exact opposite. Growth is probably a little bit slower growth than earnings plus the discount rate is higher. And that doesn’t seem to me to be a very equity friendly market.

Edwin Cass on inflations protection

I think the demand for inflation protection in the sense of hedging that inflation risk grows. And that’s one of the things we’re actively looking at. If we’re going to get inflation protection, then where will we get it from? You have real return bonds, but they are really capital inefficient. Commodities is one area where you can allocate some capital and get some exposure to inflation to offset that risk within your portfolio.

Alpha Without Borders Panel featuring Mark Delaney, AustralianSuper Chief Investment Officer & Deputy Chief Executive, and Suni Harford, UBS Asset Management President

Anything with a floating-rate nature ‘must be a pretty compelling opportunity’: AustralianSuper CIO

Suni Harford on business in China

So China’s not for the faint of heart, which I think we all have learned. We talked about it a lot a couple years ago, now we’re living it. We’ve been there for a very long time, and we will be there for a very long time…We actually believe in China. It is a very big economy, as everybody knows. So, it’s a question of finding access there. Bringing the world to China, because their middle class is growing and all of the trends we see around the globe are accelerated there. And it’s a question of getting those opportunities in China for global investors as well. So, most of those investors have backed away for now, but there was a faint of heart. Interestingly, we are seeing a trend. Most of our institutional accounts have asked us about China again and are putting money to work.

Mark Delaney on China’s investment issues

China’s just China. It is not like the West, it is different. It’s got a different political system. It’s got a totally different economic system. And they’re managing their way through the issues like they’ve always done. So, I didn’t think it was anywhere near as bad as what people thought it was.

Harford on Europe’s perspective on U.S./China relations

If you’re in Europe, you have a very different perspective on the U.S./China relations and how dangerous it is. It does seem to be something that gets talked a lot about here. And then you go to Asia or you go to Europe, and it’s not the same issue that’s first of mind that everybody has. It’s not about the China Sea and it’s not about Taiwan, it’s about well, economic and what does this do?

Mark Delaney on interest rates

Interest rates are much higher than what they’ve been historically, and not everything has been repriced those higher interest rates. But anything which has got a floating rate nature, you can get floating rate corporate debt up to 10% or higher, must be a pretty compelling opportunity. Fixed rate payment depends really upon whether or not you think the Feds done and the markets, there’s going to be a decline in interest rates. And equities really depends upon how you view the equity market because there’s two parts to it. There’s the top 10 stocks, which are on average PE are 30,35 times and have been the big winners in the last period. And then there’s the rest of the market which isn’t doing very much. So my overarching theme is, it’s not so much about the markets. It’s where you are in the markets which has been driving returns.

Harford on ESG investments

Harford: If you want to focus on an area where nobody in the United States is paying anything or any attention to the IRA. Huge amount of investment in the United States on ESG. ESG here, all we get as far as the politics between you know, Texas and banks.

Sara Eisen: It’s like a dirty word.

Harford: It is. And you’re missing the point. If you drive in Dallas and you go down a major highway, you can go through the same property on either side of you for as far as the eye can see. This side is oil rigs, and this side is wind farms. They get it. Biggest areas for energy storage and solar in this country are in Texas and California, two different sides of that blue/red divide. So there’s a tremendous amount of opportunity here.

Harford on decarbonization

What people have missed in the broader scheme of things – solar and wind aren’t that expensive anymore. You used to have to pay up to invest in this tech. You used to have to pay up for the R&D and it was 20 years away. No, it’s right now. Cement buildings refurbishing on all of the real estate that exists in the world. 30 years, which is the typical mortgages we have – we’ve talked about commercial real estate in last thing – you better be a renewable building or a much greener building in the lifetime of your owning that asset. You have to care about this now. And there are a ton of businesses being built, a whole different ecosystem value chain across this that are going to have what it needs to become a city of the future, a building of the future.

Mark Delaney on industrial policies

Mark Delaney: I think industrial policies are going to become really important. China’s got industrial policy structures and how they do it, and the U.S. has responded by trying to build a network of industrial policies to compete. The Defense Act is industrial policy, which creates a whole lot of economic incentives. IRA Act is another one, the tech stuff is another one –

Sara Eisen: Chips.

Mark Delaney: Chips Act is another one. And I think everyone’s going to go down that path whereby security is first and then you have this ecosystem which you can control around it. The supply, we can’t rely solely on a U.S. or China for that supply chain. They will diversify that as well.

What’s Really Going on in Real Estate panel featuring Kathleen McCarthy, Blackstone Global Co-Head of Real Estate

Blackstone’s Kathleen McCarthy: Hospitality has been a conviction theme for us for a long time

McCarthy on housing rental market

I would say globally, we have seen, you know, insufficient new supply of housing for the demand for it in the markets where you’ve seen job and population or student growth as well. And in all the different markets where we invest – major cities in Europe, major cities across Asia, U.S. certainly, I think they’re – what is supporting demand for rental housing is the overall, I’d say, high cost of housing and renting as a good and now particularly to higher rate environment and affordable option for people to opt into.

McCarthy on single family rentals

In a world where purchasing a home is 50% more expensive on a monthly cost basis than renting a home or renting an apartment, I think having that alternative of institutional quality, institutionally managed, single family residential is a great product for the customer. And in our company in particular, we focus on buying homes that people who want to own that home pick out, and then we buy the home on their behalf, rent it back to them with a very clear and transparent option to buy the home.

McCarthy on institutional ownership

I think the numbers have been strongly overstated, and this has been a politically hot topic. But actually if you look at institutional ownership and investment in single family residence, it’s been declining pretty dramatically actually, over the past number of years. And I think there’s something like 1/4 of 1% of all homes in America are owned by an institutional owner. But rental housing, single family for rent housing, has been a part of the market forever. And yes, institutional owners are now a tiny fraction of that market, but it’s really not what’s driving the market at all.

McCarthy on housing supply

I think what we really need is more supply of housing, and we are focused on being part of the solution to that. But again, I go back to what I was sharing before when you have over a decade of not delivering enough supply for the household formation, the path out is to have more supply of housing.

McCarthy on warehouse demand

We just continue to see strong demand for warehouse space, but particularly in those more infill locations. So when you say you know Amazon or Target or any number of retailers, I wouldn’t pick on any one of them wanting to be more local. That is because they’re trying to reach their customer within a couple hours, not a couple of days. And we see that trend globally happening and e-commerce penetration rates actually continuing to grow. And you’re right, there was an acceleration in that growth rate during the pandemic but the numbers continue to climb higher and so we continue to see demand for it.

McCarthy on leisure travel

The leisure revenge travel that is, you know, scaled demand for leisure assets in particular and for vacation destinations to new heights that is slowing down and we see that slowdown coming. Our portfolio today I’d say it’s concentrated on I describe it as kind of two parts of the spectrum. One is, you know, beachfront super special assets, very special locations, and then special assets, but that deliver a high quality but more affordable guest experience.

McCarthy on business travel

Through the lens of all of our hospitality investments globally is that there is some normalizing of the demand from the leisure traveler, but at the same time actually, business travel has continued to be strong. And I think particularly when you look at kind of what we call upper upscale hotels, that demand has continued to remain strong as business people are back out traveling, conferences are happening. And so, hospitality has been a conviction theme for us for a long time.

McCarthy on higher rate environment

The weight and the pressures from a higher rate environment are starting to slow things down. We think the Fed and central banks are winning the war that they’re at. They’re fighting inflation and when we look through our portfolio, not just real estate, but 230 portfolio companies across Blackstone, we see inflation moving firmly into the rearview mirror.

McCarthy on BREIT performance

There’s been a dramatic decline in repurchase requests. I think last month the repurchase request were 45% below their peak in January. So we see that coming down very sharply. And I’d say from my perspective, and I think from our clients perspective, BREIT is delivering terrific performance and for us and our whole business, that is our true north. What is the performance. And BREIT delivered a 12% net return since inception, it is two times what our clients could have achieved in the public markets.

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Jacob Wolinsky is the founder of HedgeFundAlpha (formerly ValueWalk Premium), a popular value investing and hedge fund focused intelligence service. Prior to founding the company, Jacob worked as an equity analyst focused on small caps. Jacob lives with his wife and five kids in Passaic NJ. - Email: jacob(at) FD: I do not purchase any equities to avoid conflict of interest and any insider information. I only purchase broad-based ETFs and mutual funds.