YouSaid · the spoken record

Matthew Kadnar

lines on the record: 95
first: 2018-04-05
most recent: 2018-04-05
sittings or episodes: 1
sources: podcast

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“It's all the developed currencies and 25 or 30 different emerging currencies. Maybe 20 to 25 different emerging currencies.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“To be kind nearly as strong as it is within equities. You have the central bankers who can kind of muck around with the front end of the curve or the long end of the curve, depending upon the particular market. So the case for mean reversion within bonds is less strong. And so that leads us to having a mean reverting model, having a model that doesn't mean revert, having kind of adopting a Leibwitz type framework with constant duration in real terms. So it's a little bit more of a mosaic with respect to bonds. Currencies, we also, we value as well. It's primarily purchasing power parity. We make some adjustments for it.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“So we value a whole host, I think there are 40 or 50 different equity markets. We'll do a similar exercise with respect to bonds. The issue with, however, with bonds is that the evidence for mean reversion is not.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, so our seven year forecast, the framework is pretty simple. You have valuation and you have growth and income. On the valuation side, you have PEs, and you have margins, or I think it's probably more technically, we have proxies for return on capital. So we know that what really mean reverts for equities is returns on capital. And so we'll look at that. We'll cut that several different ways in building our forecasts. And we'll combine that with PE to get a sense of the valuation. We'll also combine that with growth. You get that as an equity investor. You get income as an equity investor. And that provides a fairly simple framework for thinking about what you think something is worth. And then you ask the risk management question of where you might be wrong.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“And also, you know, you didn't get as much help from bonds in this particular run either. So, you know, investors' portfolios were a bit more exposed. Now the markets kind of come back, not all the way. Bond yields have stayed have stayed high. But I think it was a nice reminder that Hey, you know, bad things can happen out there.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“I think it was when you just had such an extended period where nothing had happened to the markets. And so when that gets jostled in a pretty violent way. And I think that just reawoken the fact to investors like, oh, hey, this thing is not a one-way train, that bad things can happen here. Stocks go down to?”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“It felt, certainly felt like in January, things were trending in that direction. I think there is room for that narrative to come back into the market, but I think February really was a shakeup for some investors.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“To implement those views. We got more defensive in 2008 because we were more scared about what was going on. That was a shorter-term view. But Jeremy's kind of one in two chance of things melting up. We get less questions about it now after the market fell 11% than we did at the end of January when the market was taking off.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, I think certainly as we talk to clients, the clients were pretty clear with them. The process they bought was based on our long-term valuation forecast. That's the process that is going to be the primary input in terms of putting together their portfolio. I think Jeremy wove a very interesting mosaic with respect to, hey, the pieces might be in place for this thing to really blow off and melt up he put a, I think he put a probability of 50% probability on it. So he wasn't saying it was a sure thing by any stretch. And I think it was an interesting, it is an interesting speculation, but our job is to not speculate, obviously, with clients' money, to follow the process that we've been doing for almost 30 years within asset allocation. We do from time to time have shorter term views on the markets, but they are few and far between. It's a high bar.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“Trillion dollar market. It's complex, it's reflexive, it's got stochastic as a quant's call, you know, random elements tossed in that, trying to predict that in the short run is simply impossible to do consistently. But we know, and we can test this back to the Chester AR3 administration, that valuation really is going to your starting valuation, the price you pay for an asset, is really going to really determine the vast bulk of your outcomes. It's not a guarantee, but there's...”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, so we think that valuation is going to determine the vast bulk of your outcomes, that no asset's preordained to make you money unless it's priced to do so. So our investment process, if you wanted to sum it up into 11 words, is figure out what you think something's worth and where you can be wrong. And so valuation for us is the thing that we have the highest degree of confidence in. And trying to predict the rhymes and rhythms of, you know, the S&P, it's a 23.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“I think we read about it just because they're important parts of our industry. But our focus is not on kind of what the internal politics or what Harvard is doing. Our focus is more on, hey, how do we generate returns for our clients? So it's interesting to read, but it's not really germane at the end of the day.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“Correct. So if you are an educational institution, your endowment oftentimes is contributing 5% of that endowment into the budget for the school, you think about it in real terms because you want to maintain the purchasing power of that environment over time.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“Kind of card carrying members of mean reversion. We were the kind of the founding members of the mean reversion society. And for us to recognize that there's a chance that things are different this time is very different, is certainly very different for us.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“You're assuming less mean reversion. So you're actually, your forecast actually improves equities two to three points bonds about a point. We call it hell because over the long term, if you're not getting five and a half or six real add equities if you're getting four or four and a half real out of equities and you're getting two real out of bonds, not three, it really blows up everybody's asset allocation. Your ability to generate five real in that environment is really hampered. And so the hard part with predicting what environment you're in, hell versus purgatory, is we don't have people working on a model that will predict what Powell's going to do or Powell's successor is going to do. We really don't have somebody working on that because that's a useless piece of activity. You can't forecast that. But we do have to weigh those probabilities and we're thinking about expected returns for our portfolios. And, you know, we are.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“I think it'll be a pretty good indication of it won't be dispositive, but it'll be a pretty good signal or pretty good signpost as to what regime we're in. When we think about our forecast, our traditional forecast assume normal mean reversion, normal mean reversion to cash rates term premium on top of that, and then equity was premium on top of that. Ben and Inker has written several quarterly letters about this alternative universe that we've coined hell, which is basically zero real for cash rates. And then you get your bond premium on that and your equity was premium on top of that. But if you're getting zero real for cash instead of one and a quarter reel, which is our normal traditional assumption, you're expected return for bonds and stocks falls similarly lower. And it has, in the short run, it actually has the impact of”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“If it's two and a quarter on Fed funds, that's a pretty good indication that secular stagnation, things are very different this time. If it's at three and a half on Fed funds or three or three and a half on Fed funds, that's a pretty good indication that secular stagnation, that things aren't different this time. That secular stagnation might not be the argument that's winning the day.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, it's hard to envision quantitative tightening being bullish for assets. Right. I'm not quite sure what it really means because the market can take on different narratives in the interim if the economy, economic growth is stronger. The market can kind of twist its, you know, twist the justification almost any way that we want. What I think is interesting is if we do get the continued hike in rates over the next several years, I think the fascinating question is what point were those rates Tip the economy over into recession.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“I'm not quite sure what that specifically tells you about the how the interest rates impact the expected return for U.S. equities. I think as we look at U.S. equities, They're just expensive on every metric that we can come up with, even the kindest and gentlest metrics. So, you know, I think what has happened to us as well as all investors is basically the Fed has bullied us into owning more risk assets than we would normally, given how poor Cash yields and bond yields have been.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“I think that's the worry. The thing that will cripple anyone's portfolio is a rise in the discount rate. So that will impact anything with duration, both stocks and bonds actually impact stocks the most because they have the higher duration. But I think that's the concern. And if you weigh the risks one versus the other, I think over the longer term, the concern is that inflation is a higher risk than deflation at this point.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“Over the intermediate to long term, I think it's hard to see how bonds could deliver anything associated with the longer-term returns that we've seen in this bull market. Obviously, the yield is what the yield is. You've had duration, the benefits of duration and falling yields over that time period. Our best guess is going forward is that bonds are going to be very disappointing, certainly relative to the last 30 or so years. We do like tips. We think that TIPs offer an interesting inflation hedge relative to nominal bonds. So, you know, as we think about benchmark free, we have very little in the way of nominal duration. Most of our duration at this point is in real duration through tips. In a benchmark-oriented portfolio, it's about half and half.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“It's done very well versus stocks and bonds or any combination of over that very long period that it's compounded, I don't know off the top of my head, but much higher than stocks over that time period, which half the volatility. It's got a sharp ratio of over one.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“To that because the ability to get out of the way of the oncoming freight train, the ability to load up on an asset when it's really cheap, that's really how you compound wealth through time. And so that benchmark free investing, which was originally the where to hide portfolio, really has been part of our DNA since 1999. It wasn't until 01 that somebody had the gumption to give us some money to invest that way.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“It was a portfolio that was so far out of central casting for any institution that it went over basically like a lead zeppelin. Nobody could take that portfolio back to their investment committee and say, this is the best way to compound wealth going forward. And so it wasn't until 2001 when the market started to fall apart, you were in the middle of the bear market that we got somebody to say, hey, maybe this thing isn't as half-baked as it originally seemed. And benchmarks are necessary for measurement for institutions, for individuals. But what is very difficult for us about benchmark-oriented investing is that it forces you to own more of the things that you don't like and less of the things that you really do like. And if your goal is to compound wealth, that's a pretty big inhibitor.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“Overinflation is to own a portfolio that is basically 75% bonds, a little bit of reits, and a little bit of emerging equities. And I wasn't at GMO at the time, but I could imagine kind of the crickets in the audience after they unveiled this in the middle of the dot-com.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“And it was a very interesting portfolio. And they actually unveiled it at our fall conference in 1999. And in GMO grew up investing in a lot of endowments and foundations. So the concept of five real. We've kind of been part of who we are for a long time. And so they said the best way to make five real.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“1998, 1999. And so the reason was we have tracking air. We have a benchmark that we're supposed to be, and we have tracking air constraints that run into it. And so they took that feedback. Went back to the lab and they came up with what they called the where to hide portfolio.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, benchmark free investing kind of really came out in the run-up in the bubble. And our flagship strategy that has been around since 1988 with Princeton and Phillips Exeter was our balanced strategy. And so 65 equity, 35 bonds. And so we had two groups of clients, one of whom was firing us and another group was saying, hey, Jeremy and Ben. Why do you have so much U.S. equities? It's the most expensive it's ever been”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“I think it's difficult to figure out what that concern is. I think the general concern is there's been a huge reach for yield and people of the belief that these mutual funds and ETFs that you can get daily liquidity on these things. And you can. It's just that the prices underneath them aren't going to reflect that. And so as everybody starts going for the door.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“I mean, it's a reasonable amount of capital, and I think one of the things that is a source of worry is the rise of mutual funds and ETFs in high yield and the levered loan market. With that market used to be dominated by insurance companies, now it's dominated by mutual funds and ETFs, which have obviously the daily liquidity. And Stein and some others have had the quote that their liquid claims on a liquid investments. And so I think that's a potential source of worry.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“Exactly. Yeah, I mean, you know, the return with a vengeance of Covlite lending a lot of money and lost that Covelight lending would have been ever. Exactly.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“We are not as defensive as we were in 2007. We don't have an obvious bubble kind of staring us in the face. You have some signs of stupidity in the credit markets, but it's not as nearly as pervasive as it was. Give us an example.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, well, that last one, that's a tough one. So I'm going to start with the easier question first. Right. And then come back. But I think our view today is certainly cautious, that you've been in this environment where you've had extraordinary equity returns, where you've gotten kind of 20 years worth of returns in nine or ten-year period. And so we think that we believe in mean reversion. There's going to be a give back to that. So I think we are cautious in our outlook in that. There's just not much return left in markets because everything with duration, stocks and bonds have done incredibly well. I would contrast this with 200 seven where valuations were also poor, but you had a wonderful three standard deviation housing bubble staring in your investment.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“So the forecast originally when they started in 1994 were that they were a 10 year forecast. And so what we had heard from clients was, hey, we get that you're long term, but 10 years just too long. And so in actually 1998, Ben Inker, the current, my boss, the head asset allocation, he had done this study where he had found 28 bubbles going back to the South Sea bubble in the 18th century. I remember. And so at some point he just did the math to see how long it took for those bubbles to rise and fall. And so it turns out that the average of those was actually six and a half years. And so we converted to a seven-year forecast.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“We have a relationship with Wells Fargo that grew into Wachovia, which grew into Wells Fargo. So the Wells Fargo absolute return fund is still a big piece of our business.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“You know, I found that the way GMO approaches the world is different than a lot of other firms, a lot of other academic literature. So I basically ask my boss Ben Anker a million questions. And I spent a lot of time with Jeremy and other members of the team listening, asking questions, trying to understand how we approach the world, why we did what we did, all in an effort to be able to educate clients what we did. But I would say most of that education was internal as well as a handful of other Kind of friends of the firm out there that we read Andrew Smithers in the UK wrote a lot of very good pieces that seem to rhyme with what we were doing. So it was an education with a limited outside, but mostly trying to take the wealth of information that my colleagues had and digest it in a way that I could use.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“I think that was atypical for somebody to go from the relationship side to the investment side. That's actually happened a couple times since then. GMO tends to be a pretty flat place, so that does produce a fair amount of fluidity between roles. But I think that was just an opportunity to kind of do something that I discovered that I really loved, that I thought was interesting I thought would give me an edge, but I probably took it to the next level trying to really understand it.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“Correct Well, back then, actually, I joined as a client relationship manager. And so because GMO was growing, they needed more folks to deal with clients. And so I spent a lot of time In those early days, trying to better understand asset allocation because I felt it was my edge as a relationship manager that I could go in and talk to a client about our seven-year forecast about how we think about the total portfolio. And I guess I spent so much time talking to the asset allocation folks after several months. They said, hey, you seem like you have a lot of interest in this stuff. Why don't you join the asset allocation team? We need somebody out there as a portfolio strategist talking to clients. You seem like a nice guy. Why don't you take the gig?”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“So here, value is basically the cheap half of the market, whereas quality is quantitatively low debt, high ROE, and stable ROE. And so value because it tends to be in the more cyclical sectors, it has more financials, tends to be on average lower quality than growth.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, you know, there's a price for everything and high quality got pretty expensive kind of into 2000. Value tends to be lower in quality. And so the value in US and outside the US, particularly international small value, particularly EM, just got really left behind. And so as the market got its legs and rallied, that stuff was so cheap and just was just took off.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, and the performance out of the bubble actually, Jeremy will talk about generally we don't do well in bull markets, but the performance into the bubble through it and out of it was really spectacular where there was a lot of cheap low quality assets International Small Cap emerging that just did spectacularly.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“So I was in the DC investment only group, so basically working with institutional clients that had Putnam investments on their DC platform. I did that for a couple years and then transitioned over into the consultant relations channel where I was covering the West Coast DB consultants. And the travel was starting to wear a little bit. My wife was pregnant with twins and I got an opportunity to come work at GMO in 04 and GMO had made its way through the bubble, acquitted itself very well.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“And that did a nice job of matching up what I enjoyed doing with what I thought I was good at. And that was finance and sales and communicating with people. And so I was lucky enough to kind of get an opportunity at Putnam where a couple guys, Alex Nelson and Kevin Sullivan, took a chance. Them in the fall of 2000, and I discovered that you could actually enjoy working”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“And so my father in law, he wasn't my father in law at the time, but he has a lot of wisdom, and so he said he knew I was miserable, and he said, son, if you enjoy what you're doing, you'll never work a day in your life. And so he actually gave me the book, What Color is Your Parachute?”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source
“It was pretty simple, Barry. I was just miserable. I did litigation for my legal career So while I always enjoyed advocating for my clients the adversarial process was pretty miserable. Here in Boston, a lot of the litigation was pretty brass knuckled. And so I just, I would take the train in to work every day and I would watch the tea coming back out and just could not wait to be on that tea coming back.”
2018-04-05 · Masters in Business · Matthew Kadnar Talks About His Transition From Law to Finance · IDENTIFIED FROM THE TRANSCRIPT · source