ZACH BUCHWALD:  Welcome to the BlackRock Future Forum.  I’m Zach Buchwald, and it’s my pleasure to serve as your host today.  At the Future Forum, we bring together prominent thought leaders to discuss the biggest topics that shape today’s investment landscape and that, in many respects, define our future.

Since we launched the Future Forum, our news feeds have been dominated by so many different types of crisis: health, racial, political, environmental, the retirement crisis.  Through the Future Forum, we explore the investment implications of these issues.  We’ve dedicated sessions to the 2020 election, the path to net zero, China’s expansion on the world stage, the ongoing health crisis.  The Future Forum is designed to help us as investors make sense of a world that is in constant change.

And change itself is what we’re going to focus on today.  We’re not quite in a post-pandemic world, but we’re also not living anything like our pre-COVID routines.  More than ever, the pace of change is accelerating as the future unfolds, and as investors, we don’t really have the luxury of taking a wait and see approach.

Every day we see new developments in the pandemic and the recovery, supply chain disruptions, the spending bills in Washington, the debt ceiling crisis, political tensions here in the US and around the globe.  The list goes on.  Each of these situations has a rippling effect of new risks and new opportunities.

To help us explore these topics, we have assembled some of the foremost thought leaders with us today.  In our first segment, Ray Dalio, founder of Bridgewater, and BlackRock’s Rick Rieder, will come together publicly for the very first time to take a close look at the markets, along with BlackRock investor Kate Moore.

Rick and Ray have almost eight decades of investing experience between them, and we’ve asked them to give us both a look backward as well as a look forward, and to explore what’s driving the markets today.

We’ll also hear from Elizabeth Burton, CIO of Hawaii’s employee retirement system as well as Calvin Yu, head of BlackRock’s client insight unit. 

Now, before we get started, I encourage you to familiarize yourself with the new tech interface that we’re using.  We have an interactive agenda, so there’s a place to ask questions, a chat room, and the opportunity to participate in real-time polls.  I’ll join you live in the chatroom to discuss the content and to analyze the polling results, and following the conference, you can access replays of all of the sessions on this platform, as well as on the BlackRock website. 

Now, to start us off, I’ll pass the mic to Kate Moore.  Thanks again for joining us today, and now over to you Kate.

KATE MOORE:  Thank you, Zach.  This is a particularly interesting moment in the economy markets, and I can’t think of two better people than Rick and Ray to help us think through this inflection point in monetary policy, in fiscal policy, geopolitics, and in sustainability.

Eighteen months after the start of the pandemic, liquidity remains high.  The labor market is tight, and consumers are in great health.  Companies are also flush with cash and corporate margins are at or close to all-time highs.  And yet, we also have concerns around the duration of supply chain disruptions and what will happen with rising energy costs, what the impact is going to be on inflation for both businesses and individuals. 

So, I'm excited to be sharing this conversation with Rick and Ray, two titans of the investment world who combined have a staggering 75 years of investment experience, incredibly impressive.  You both managed portfolios through the crash of 1987, the tech bubble, the great financial crisis, the taper tantrum in 2013, and now have made it through in one piece over the course of the pandemic.  I think we can all agree that the past year-and-a-half has been difficult at best. 

So, Rick, I'm going to start with you just quickly here to sort of set the stage for markets.  I'd love if you could kind of reflect on why today’s investment backdrop is different than past market events, and specifically, you know, how you’re thinking about balancing risk, how do you think about building resiliency in a portfolio, and where we go from here.  So, Rick, over to you.

RICK RIEDER:  Thanks, Kate.  So, thanks and thanks all for doing this.  When it comes to investing today or thinking about the investment backdrop, I mean you can’t get around we just went through what has been the most epic event in the history, arguably the history of markets in terms of this health crisis.  And I think the impact that that is going to have and the way it’s going to change the nature of commerce going forward: technology, travel, supply chain dynamics, how you balance and how the world balances long-term versus short-term investment dynamics, things like energy commodities, etcetera.  So, first consideration is, you know, how do you think about the new world on the backside of what is an extraordinary historic healthcare event? 

Second point I would make is that the usage of fiscal and monetary policy to bridge to the other side of this epidemic has been pretty extraordinary and beyond anything I’ve ever seen, certainly in the investment universe.  You know, I would say generally well-designed, flexible, more than adequate, you know, in order to minimize social and economic disruption.  And you think about though the backdrop of it when you pull monetary and fiscal together, not just in the US but globally, I mean you pressed into the system immense amounts of liquidity. 

You think about it, just to put a couple of these numbers in the backdrop into perspective today versus 20 years ago, 20 years ago it was less than $3 trillion of liquidity in the system in dollar equivalent, 6% of GDP.  It’s now $40 trillion or just under 50% of GDP.  So, first thing and from an investment point of view, that liquidity is completely different.  And then, how do you invest and now you think about you’re probably on the back side of that. 

And then finally to wrap up, passing it to Ray for, you know, his better, bigger picture thoughts than mine, I would throw out, you know, how you think about global and political tensions on the backside of what I just described: supply chain breakages, the dynamics around how do you think about your domestic trade, how do you think about your domestic ecosystem, you know, which I think you’ll see some stress based on, you know, how have you operated internationally over the last few decades.  So, big consideration I think is going to be how do you think about political tension and how do you think about sovereign or regional dynamics that may be a big more profound and different than we’ve seen over the last couple of decades.  So, with that, I will, I’ll pass it to Ray for his big picture thoughts on these things.

KATE MOORE:  Yeah, well, Rick, thank you so much for framing that.  Ray, I think it’s, you’ve talked a lot about the key to imagining the future and looking beyond just the lessons of one lifetime or the lifetime that we’ve all lived.  So, maybe can you expand a little bit on, upon that and what you think the biggest forces are and what history we should be paying attention to to better understand our present?

RAY DALIO:  Well, I think Rick did a good job of describing the big forces.  I look at it this way.  I learned a lesson in 1971 when there was the first dollar devaluation, and the stock market went up a lot and I thought it was going to go down a lot in 1971 because it was the first devaluation in my lifetime.  And that got me in the habit of looking at history to figuring I need to understand those things that happened even before my lifetime, because that same devaluation happened on March 5, 1933 by Roosevelt and it – so, I like to look at history by being able to study the Great Depression.  It was that which allowed us to do well in the 2008 financial crisis.

So, there were three things, three big things that happened, didn’t happen in my lifetime before that happened in recent years that required me to study back of the last 500 years of history to gain perspective, and I found these things happened over and over again.  And the first is the hitting of zero interest rates requiring the creation of a lot of debt to send out those checks and the monetization of that debt and how that passes through the system.  I'm like a mechanic.  You know, I follow the flows and when you make those purchases it passes through the system.  And as Rick mentioned, that has had a transformative effect and will be part of our future. 

So, the last time you have to go back to see that was 1933 and it happened many times before and has a big effect on the value of money, the value of money, because we talk about assets but what’s the value of money?

The second force is the gaps, the sizes of the wealth and income gaps and the political gaps, and with that, the conflicts that we’re having internally when I look at a lot of statistics is the greatest since 1900.  And that – that has an interactive effect with how the checks are going out and so on.  So, a big, big issue is that internal conflict and how that’ll be dealt with through tax policy, through even antagonism through the political system as we start to think about how will the 2020 elections go?  Or even, you know, any of those aspects.  That internal, and that’s just the United States.  The world is encountering that.

And the third great influence that didn’t happen in my lifetime before but happened many times before was the rise of a great power to challenge the existing great power and existing world order.  In other words, the rise of China to challenge the United States in trade, technology, capital markets, geopolitically, and conceivably military.  That factor is also entering into those.

And then, of course, and when I studied history, I studied that acts of nature have had a bigger effect on the world than wars, than depressions and so on.  They’ve killed more people than wars and that includes pandemics, floods, and droughts.  And so, when I – I didn’t pay as much attention to those, because pandemics are one of those things that come along regularly like the giant storm that comes along regularly, but we forget about it because it doesn’t happen in our lifetime.  So, I've started to think about not only pandemics, but floods and so on in light of climate change.

So, Rick and I, I think, are agreeing.  We may phrase it differently.  But history tells us a lot about the mechanics of today.  And so, those are the subjects I think we’re all interested in.

KATE MOORE:  Great.  That was sort of fascinating.  I love thinking about periods of history that we all need to study to have a better understanding of today.  And particularly, you know, my – and attention was caught by that comment you made around the great power shift with China challenging the US.  I want to bring this back actually to monetary policy for a moment though and give this to Rick.  What do you think is kind of the biggest story in the market?  Is it inflation and the adjustment of monetary policy?  And, you know, how should investors be positioning portfolios and reacting to the dynamics in policy and inflation right now?

RICK RIEDER:  So, I think inflation is a tricky thing in terms of what are we talking about when we talk about inflation?  How do you measure it?  How do you think about the impact on different areas?  Listen.  I think if you had to generalize inflation over the coming months, maybe the next couple of years, I think we’re talking about inflation that’s going to run at the, in the high twos type of inflation.

You know, our estimate is that core PCE is going to go, over the next few months, to about 3.5%, peaking in around December, maybe close to four.  But then, we think it’s going to decline to below 2% by around the end of, by around the middle of next year.  There are some things that are going to be with us for, I think for a longer period of time.  I think labor costs are going to be, higher labor costs are going to be with us for a long time. 

I think – I think, quite frankly, I think we’re going through the strongest job market in history, literally in history.  I was studying this in terms of, over the weekend, over the demand for jobs.  And if you, depending on the metrics you use, whether it’s quits to layoffs, whether it’s JOLTS, job openings, I think we’re in the strongest job market in history.  So, I think you’re going to see persistent wage inflation take place. 

I also, by the way, I also think there’s a cultural evolution at play around a movement of the spoils going from capital to labor.  That suggests that we’re going to be in a dynamic where you have higher wages that will lead to, you know, areas where you have pricing power, where you’re going to see is a bit more inflation which I actually think is going to reduce growth in some areas.  You’re seeing it in houses today.  You’re seeing it in some of the consumer durables, a lot of the inflation’s coming from the supply side of the equation.  The central banks modulate the demand side.  So, what do they do with the supply side?  Do the central banks hike?  Well, it’s hard to hike if actually you create, you’re creating denigrating growth from higher prices. 

So, I think, so what do you do in portfolios?  Listen.  I think investment in things like real estate are going to be durable.  I think investments in and around some parts of the commodity infrastructure I think makes some sense going forward, some inflation protection.  And then, you know, where real rates have been artificially low for an extended period of time, I think you could see a bit of upward pressure on real rates as central banks around the world in varying degrees start to trying to address some of that inflation.

So, I do think inflation is one of the couple of big subjects and big things and risks and things and opportunities, quite frankly, to take, to think about today.  I would say the other one is China.  But I'm going to stop, and because I think Ray is going to, I think China, as Ray was describing earlier, is a shift of regional concentration of growth and politics, etcetera, is maybe the biggest, biggest thing we’re going to face in the coming years.

KATE MOORE:  Yeah.  Rick, you were just stealing my thunder there for a moment, because I was going to turn to Ray in a moment here to talk more about his point on China and to dig into some of his thoughts around China’s ascendency, the challenge in terms of power.  But I also, Ray, wanted to sort of frame this to say the regulatory and policy environment in China looks different right now, very different, than in other parts of the world.  And in the near term, Chinese growth looks a little bit weaker.  Does this matter?  And maybe if you could build out your thoughts on the China point, geopolitics and growth in markets, that would be very helpful. 

RAY DALIO:  Uh-huh.  I'd love to do that.  But before I do, can I offer some thoughts on inflation and the question that you asked?  I'm much more concerned about inflation than Rick is, I think.  Okay. 

Inflation is the value of money.  If you look at where we are in terms of liquidity, the savings rates, and so on, and you look at where real interest rates are, this is the most important thing I think investors could, should pay attention to, which is they look at nominal rates and they measure their wellbeing in their local currency.  I think you have to be careful. 

I think looking at real interest rates and looking at the returns that you’re going to get in investments relative to the inflation rate is the most important.  And the amount of liquidity and savings that exists, the savings, the net worth has risen because so much money has been put out without any liabilities.  The Federal Reserve has taken the liability side of that and now everybody’s got so much more money and they’re not going to reel that in significantly because if they did, they would cause a downturn.  Imagine if we had a downturn now.  Imagine the political consequences.  Imagine all of that. 

So, what you have is a situation where there’s an unlimited amount of money around.  People have never had so much money.  So – and they have interest rates which are negative real interest rates.  You cannot run, history has shown you cannot run for a sustainable period of time without accelerating inflation and paying for it, spending a lot more than you are earning and creating that with money and credit. 

So, investors need to pay attention to what are the real returns?  And, of course, as that money goes through the system, what it does is it first starts in bonds and then it goes through to, all the way down the risk level and it bids up the asset classes, all asset classes, and bids up stocks, which lowers their future expected returns.  And so, the Federal Reserve cannot make a significant tightening.  I imagine, at some point, that they will make some sort of a tightening.  But they’re very late on this tightening by any measure.  So, I think that paying attention to the real rates, and I think this can be much more chronic, and there is also this tax element, which is this train, change in wealth that’s an issue too. 

So, as far as the, as far as the China element goes in terms of what’s going on in China, I’ve been very lucky to, since 1984, go to China.  I went to China because of the interest, and it’s been enthralling.  First 20 years I didn’t go for making money, because there was no money in China really to make.  But it brought me in contact with the system and the people and so on, and I was lucky enough to be actually able to help them in some ways to develop the financial system, which brought me an intimacy.

I would say the important thing to understand is that these are very smart practical people.  That would be the headline.  And since I’ve been there, per capita income has increased by 26 times.  The market has become a much more market economy.  So, the capital markets become twice, the second largest capital markets there.  People be – may become billionaires and so on and they understand, like Deng Xiaoping said when he was asked about capitalism, and he said it doesn’t matter whether it’s a white cat or a black cat, just as long as it catches mice.  And he said it’s glorious to be rich. 

And what they’re in is a phase of that in which what they call is common prosperity.  And we’re wrestling with common prosperity, and I don’t know who’s against common prosperity.  And you, but you also have a different way of approaching things, top-down versus bottom-up.  One of the leaders of China described to me, he said, you know, the United States is a country of individuals and individualism, and it values that.  And it, so it’s a bottom-up type of country.  In China, it’s an extension of the parent.  It's like a strict parent.  It’s top-down and it’s collective.

There are other factors that are going on simultaneously, which include the control of data.  Who is going to control data?  Data is power, particularly in NAI.  So, you’re getting a movement for the government there to control the data.  In the United States, we’re struggling with the question of who does control the data and so on.  That's what’s going on.

And so, when – also when you hear communism or you hear Marxism, there’s a knee-jerk reaction from people who are not used to that to understand what that means and that has to do with common prosperity.  In any case, what I would say is I think that there’s an exaggerated reaction to the things that are going on.  We could talk about the particulars.  There’s an exaggerated reaction to those.  The assets are cheap.  And just basically, you have to say they are a competitor, an effective competitor in the world and we are operating in an environment where diversification is a very important thing in this largely bipolar world, because when we look at it, we look at American risks, we look at Chinese risks, we look at risks around the country, around the world, and that type of diversification I think is important. 

KATE MOORE:  Well, thanks very much, Ray.  That gives us a lot to think about and you made two points in there that I'd love for Rick to expand on.  Number one, Ray, you mentioned that you thought Chinese assets are cheap, especially after the recent selloff.  So, Rick, I'm going to ask you to speak to that.

And the second point you made, which I know is something that we care a lot about at BlackRock, is thinking about portfolio diversification and the importance that Chinese assets play for a diversified portfolio.  So, Rick, talk to us about how you’re thinking about investing in China at this point and in the near term and kind of over the medium term. 

RICK RIEDER:  I think China is arguably the biggest opportunity and one of the biggest risks to how the world plays out both inflation, growth, fiscal, political pressures, etcetera.  But I think putting some backdrop to it to understand where we’re coming from, and I think Ray described this right, 20 years ago China was a trillion-dollar economy.  It’s – it is now a $17 trillion equivalent economy.  It’s now 73% of the size of the US. 

And so, the discussion about is there – should people be investing in China or not investing in China?  I think it’s going to be, I think it’s going to be challenging to say, gosh, I'm just going to avoid investing in that part of the world from diversification or otherwise.  And so, what I try and think about is so what do you do with that today in 2021 leading into 2022?  Listen.  Today, China is less than 4% of the ACWI and 7% of the global AGG on the fixed income side.  So, today you can have a discussion and say, you know what?  Those are small parts of the index or your benchmark or what your investment opportunity set is and I'm not going to do much there and I’ll wait and see how things develop. 

But I just want to give you one good stat that I think is critical.  If you think about big cap in the world today, there’s 72 big cap companies in the US.  There’s three in China.  So, you think about, gosh, the ACWI and what am I doing in big cap?  Maybe I have some investment in some of those big cap names and – but there are not that many of them today.  However, when you think about unicorns, there are a, there are 234 unicorns that came out of the US over the last couple years.  There’s 125 out of China.  If you add that up, the US is 48% of the globe, China’s 26%, so meaning you’ve got some exciting companies and interesting companies coming out of China, and that’s where I think, you know, you start to take some risks. 

You think about where you are in the capital stack, where I have some convexity to the upside, God, I think there’s some exciting things coming out of China.  And then you say, so you say, gosh, you know, there’s some exciting investments bottom of the stack.  Listen.  I think the rates market, if you look at where real rates are in China and, you know, some different policy, as Ray was describing the amount of liquidity that’s been pumped into the system, the easy policy, I would say maybe a bit more deliberate.  So, can you have rates exposure in China?  I think so.  And then managing the currency around that, which is not always easy, is critical. 

And then credit, you know, listen.  I think you’re building some opportunities in the credit markets that have manifest themself over the come – over the past few weeks that require immense amounts of work and dissection.  But I think there’s some opportunities there, too, to actually look at some of the credit markets.

KATE MOORE:  I love that.  That's awesome, Rick, thinking about China.  One of the other things, Ray, that you said in regards to China is that data is power, and that is one of the reasons why the government has been exerting the influence that it has.  And I want to sort of tie that idea into one of the other major themes you outlined at the beginning, which is around the digital revolution.

So, over the last 18 months we’ve seen an acceleration in technology trends and technology adoption.  I'd love, Ray, if you could start here and talk about where you think we go from here and how will technology transform or disrupt our existing systems and institutions?

RAY DALIO:  One of the great things of studying like the last 500 years is that I could see, you know, the depressions, the wars, all of those types of things, and then I could see the evolution.  So, in charts that show real GDP per capita, life expectancy and so on, you plot a chart of that and everything that we’re talking about, the wars, the depressions, and all of those barely show up in – they look like little blips along this line of upward rising living standards and so on, which comes from humanity’s inventiveness and the technologies that they’re developing.

Now, the issue is we see these cycles long, very up close.  You know, in history, ten years is a very minor blip, and it barely shows up.  In our lifetimes it’s, you know, just the most important thing that, you know, can kill us.  So, you see that and you, but you see it in the form of just like the wonderful vaccination discoveries and so on. 

And so, when I look at that I think that we’re now in an era to have more revolutionary technology development than ever before, more disruption because of the fact that the learning, the intelligence does not apply to a single area.  It implies to all learning and all developments.  And because of that, thinking better and using that data together, hopefully intelligently, there are risks to it, too, but with that comes the greatest power to make the greatest revolutions we can see.

I think that when I look at investments, some of them are in the technology development of that.  Of course, those are the obvious ones, and they can be quite expensive.  One has to pay attention to the prices as well, not just good investments, good companies, but you know, good companies can be bad investments and bad companies can be good investments.  You have to pay attention to the price.

But also, those that are taking advantage of those technologies to transform the businesses, those that are quickest to do that and great revolutionary change, I think that that’s one of the most important things.  That's also why one of the areas – China’s very, very important.  There are only really two big technology centers, and that’s the United States and China.  But to be able to realize that those revolutionary changes are through the technology will matter. 

KATE MOORE:  Great.  Thanks so much, Ray.  And, Rick, I want to bring this over to you.  You know, a famous element of your market commentaries for years and years now it seems has been on the power of technology, and you’ve highlighted many transformational technologies, and you have been out front on a number of brands and a number of disruptors.  So, I would love for you to kind of talk a little bit about how you think about the technology investing landscape at this point and react at all to some of Ray’s comments. 

RICK RIEDER:  Well, I think Ray hit it.  I mean I, yeah, I didn’t know we were both going to talk about the, these, this dynamic about data.  But I have to say I think you're now going to take internet development, mobility, and now data.  And so, maybe I’ll take a little bit of a twist on what Ray was saying. 

But I think data – I think your ability to actually move data, transmit it, assimilate it, process it, analyze it are going to change everything, everything we do.  And there are a couple of areas I’m super excited about.  One, I think healthcare, which Ray touched on.  Understanding the human genome, understanding you can actually take DNA, I think there’s – somebody told me there are 22,000 genes in the body, you know, and it’s actually just a software program. 

And if we can actually analyze that DNA construct, boy, you think about, and like Ray said, if you think about how quickly we got the vaccine, once you understood the genetic makeup of what COVID-19 was, all of a sudden you could go and run that software program.  I think you’re going to see discovery over the next five years in and around healthcare because of data, robotic surgery, diagnostics, that I think is truly extraordinary.

The other part of it which I, you know, I think people are already scratching at the surface on it, it gets a lot of media attention, is space.  How do you get data from space, not just GPS technology, which is one of the great technologies I think of our time, but how does it, how does that change agriculture, logistics, mining, disaster recovery?  And I think you’re going to see discoveries out of space, maybe manufacturing.  I know Jeff Bezos has talked about manufacturing using solar in where you can use it in space obviously when you get 100% of the time in the, in sunlight.  Boy, I think this ability to take this into space and move this data, I think is incredible.

You know, I’ll say one last thing on investment management.  You know, we are scratching at the surface of what other industries I think have done and the ability to use AI, to use data simulation, to use efficient correlations and diversification and, you know, build data into your modeling of economic conditions, pretty exciting point in time.  And I think five years from now people are going to look back and say, you know, this is the most exciting time to invest in new companies, new businesses, but also actually hopefully put money to work efficiently.  So, I’ll leave it there, Kate.

KATE MOORE:  Awesome, Rick.  You know, as we’re thinking about data and talking about data, I was reminded of the quote that if you don’t pay for the product, then you are the product.  Your data is valuable.  But I love those other themes, Rick, that you mentioned around healthcare and space and where we’re going to be able to really see some incredibly interesting innovations over the quarters and years to come.

So, with that, I just want to give a major thank you to both Rick and Ray for incredible insights and for sharing their perspectives today.  I think this was a really fantastic session and I loved being part of that.  And with that, I'm going to turn it back over to you, Zach.

ZACH BUCHWALD:  All right.  Thanks, Kate.  And let me thank you as well.  It’s not easy to wrangle those guys and that conversation was pretty brilliant. 

Now, Kate, I want to ask you stick around for a few minutes and to take off your moderator hat and put on your investor hat, because I want to go a little bit deeper on some of the investment themes you just talked about. 

First off, let’s start with technology.  Rick and Ray were talking about all of the advancements in technology, and we’ve also experienced a surge in the amount of data that’s being generated and that we have access to.  And so, I think the opportunity for us as investors is much bigger than just how we invest in tech.  It’s also about how technological advancements impact all sectors and how all this data, you know, has changed business models.  So, my question is, you know, tell me about how all this informs your view of the investment landscape.

KATE MOORE:  Yeah, sure, Zach.  We’ve really been through this interesting last 18 months plus.  We were talking a little bit in that session with Rick and Ray about the acceleration in some of the trends and the technological adoption over that period.  But what I really think the last year-and-a-half did was shine a bright spotlight on the haves and the have nots when it comes to technology and platform across all industries and sectors.

If you were a company that had made investments in security software, in inventory management, in communication services, you were in one place over the pandemic.  And if you were not investing significantly previously, you were in a much tougher place throughout the course of the pandemic. 

So, what we’re seeing right now is companies across all industries, sectors, and geographies make a huge commitment to spending on technology, not just at the end of 2021 into 2022, but over the next couple years ahead.  It is the critical element to determining, you know, who is going to win and who is going to lose in the 21st century in this incredibly competitive environment.

So, when we think about technology, we are looking at companies that have made these investments, that are making continuing commitments to spending and investment in that space, and to those companies that are creating sort of bespoke solutions based on the data and information that they have access to from their customers and from their commerce.  So, this is a really interesting time where technology is critically important to the way that we think about investments around the world.

ZACH BUCHWALD:  Okay.  Listen, there’s another topic that came up with the guys that you just mentioned and, you know, that’s like how fast the world seems to be changing right now.  I know you think about structural change and how it moves markets short term and long term.  Has your approach changed as like the pace just seems to be getting faster and faster?

KATE MOORE:  Yeah, Zach.  That's a great question.  So, let me just give you a little background on how I think about thematics.  Everyone does it a little bit differently who operates in this space.  But there are three ways to think about thematic investing.  The first is what will pop out of the slow change, the evolutionary change in a sector, industry, behavior or, you know, a region of the world. 

The second is discontinuous change, when there’s been more of a shock to the system, when you start to see a meaningful step change in adoption of a technology or a behavior or a way of interacting.  And then the third is kind of more cyclical change that’s really interesting for thematics, something around the business cycle.  Where are we in terms of growth, inflation, and policy? 

We really try and focus on those second two types of thematic investing, thinking about where is there discontinuous change?  Where has there been a shock to the system and how can we capitalize on that?  Who are the beneficiaries?  Who are the winners?  And then, also, who are the losers because that’s a critical part of our investment strategy.

And then the second part of it is the cyclical side.  You know, we spend a huge amount of time – you heard Rick talk a lot about our macro views – thinking about where we are in the cycle and where policy, inflation, and growth are going to be coming out over the next couple months and quarters, and then figuring out those companies, those sectors that will do particularly well in that cycle. So, this is really about thinking about dynamic change and fast-moving change.  That's how we want to focus our thematic strategy at this point.

ZACH BUCHWALD:  All right, Kate.  Last question.  I want to drilldown a little bit further into the notion of change and ask you to think about the past 18 months during the pandemic.  You know, there have been so many changes in behavior, corporate behavior, consumer behavior, even our behavior as investors.  How much of these changes are permanent?  You know, and tell me, how does that change your approach to portfolio construction and how you think about risk taking?

KATE MOORE:  So, Zach.  I think the simple answer is all of this is permanent.  We learned incredible lessons over the course of the pandemic.  We thought about using data differently as investors.  We were communicating differently with our global teams.  When it came to how businesses are operating, the way they’re engaging with their customers where they’re thinking about inventory management, the way they think about their supply chains, all of that has changed and I see very few areas of the world where we would go back to kind of a pre-COVID way of operating.

But this is also a huge opportunity.  I mean part of all of this change and part of witnessing all of this change is also witnessing the entrepreneurialism and the innovation that comes as a reaction to that change.  And so, we’re seeing a lot of opportunities, not just in the public space, companies that are adopting that change and kind of running with it or beneficiaries of spend, but also private companies that have started up. 

You know, Rick mentioned a couple areas that we’re very excited about and focused on and one of them is sort of space and using satellite technology across a variety of different industries.  We’re seeing major change within the healthcare sector, particularly in using telemedicine and data to access, you know, patients better and to provide more comprehensive solutions.  And then, we’re seeing this across all consumer sectors.

So, this is an exciting moment in time.  Nothing is going back to where it was.  I don’t want to say a Pandora’s Box, because that has a negative connotation.  But I really think we are sort of opening up to a great era of innovation and interesting investment opportunities.

ZACH BUCHWALD:  All right, Kate.  Thanks for that.  I always love having you at the Future Forum.  Really appreciate you joining us here.

KATE MOORE:  Thanks, Zach.

ZACH BUCHWALD:  All right, we’re going to shift gears now to hear from Elizabeth Burton, Chief Investment Officer at the Employee’s Retirement System of Hawaii.  You may recognize Elizabeth from her appearances on CNBC or as one of the top 40 under 40 according to Chief Investment Officer Magazine.  Today she joins us from her office in Honolulu, Hawaii, and to Elizabeth I say to you aloha. 

ELIZABETH BURTON:  Aloha, Zach. 

ZACH BUCHWALD:  Good to see you, and thanks for joining us at the Future Forum.  Elizabeth, I want to start by asking you to take stock of the new world that we’re in.  We’re not quite in a post-pandemic world yet, and in addition to COVID, we have a whole host of new uncertainties that Rick and Ray just discussed.  Now, when you think about your strategic asset allocation, are you making any shifts to reflect all the uncertainties in today’s environment?

ELIZABETH BURTON:  I would say we’re not making dramatic shifts but we’re moving faster towards our target allocations.  So, for example, after the convexity in rates, we reduced our rates exposure after we thought the majority of that had kind of run its course. 

In equities, we’re trying very hard to reduce our growth overweight in favor of alts and real assets largely because we think that this is a regime shift, we do think that things will look different going forward, but also because the – you know, the past ten years of returns in the US equity market, US growth rates have been really constructive for where our portfolio was positioned then, but going forward I find the output is much more negative, much more bearish.  So, I think that we’re just moving more quickly along our target allocations than we would have.

ZACH BUCHWALD:  Okay.  I want to drill down a little bit into the growth assets, and, in particular, around alternatives and real assets because I think that resonates a lot with our institutional clients in that everyone is looking for alternative sources of income and return right now in more illiquid asset classes, and, in particular, in the private markets.  How are you thinking about that opportunity set today?  Are there any particular asset classes where, you know, you feel like you can stomach the illiquidity in order to achieve the returns?

ELIZABETH BURTON:  Definitely.  I mean, I think in the liquid markets, let’s take a simple 60/40 portfolio, you’re likely to get negative real returns over the next decade in either of those two markets.  So, you have to look elsewhere for yield.  Private equity, I think most institutions we’ve all seen a denominator issue. 

So, we probably are all over allocated versus our targets to private equity at the moment.  We’re still constructive on it, but I think particularly in terms of the credit side and the real asset side of the equation, we want to look for where we can be more illiquid there.  I don’t think there’s a ton of exciting stuff to do in liquid parts of the credit markets.

There’s a couple things that you can do if you have to look for some protection, but there’s some correlation issues there.  In the real asset space, I definitely think we need to get more illiquid, we need to harvest that illiquidity premium.  Real assets are going to help us potentially protect against inflation, depending where you look, but also within the real asset versus infrastructure space, not only do the two have some inflation protection, can offer higher returns, they’re also uncorrelated to each other.  So, I think more than ever, that’s where our focus is for right now.

ZACH BUCHWALD:  Okay.  Speaking of real assets as a hedge for inflation, I want to ask you to drill down onto that for a minute because for years I’ve heard you express the view that markets have underpriced the risk of entering, you know, a new inflationary regime.  Elizabeth, what’s your view now, and how are you capturing an inflation perspective in the portfolio?

ELIZABETH BURTON:  My view has not changed.  In fact, I think more people have come to my side.  I thought that we were going to be seeing inflation back at the start of COVID.  I didn’t really see how we could avoid it with the printing of money, disruptions in supply chain, people not returning to work, and I think that more people have kind of come around to that side. 

I could still be wrong.  There’s a lot of pressures out there that look somewhat deflationary, but I do think it’s an underpriced risk.  That doesn’t mean it’s necessarily going to happen, but the confidence interval is certainly wider, it’s something you need to pay attention to.  There’s no institutional portfolio out there that doesn’t have inflation as a key risk input into their asset allocation models.

One of the problems, as you know, well there’s a couple.  First of all, go back to the 1920s, where only been in inflationary environments 13% of the time.  That’s not a ton of datapoints, and no two of those regimes had the exact same drivers of inflation.  So, you look at the ‘70s and it’s more cost push.  You look at the ‘40s and you have a bunch of other reasons there.  And you go back to the ’20s, look at the ‘30s.  I mean, there’s all these different environments and no two had the same reasons behind them, and I think people also forget how long those regimes can last.  You simply cannot sit through ten years of negative real returns as a pension fund.  You have to pay out benefits.

So, I think that that’s a huge focus for our portfolio right now, but again, one of the problems with that is that you have to think about the opportunity costs.  What if we’re wrong?  What I’m wrong about that specifically?  A lot of the instruments that I think should do well in an inflationary environment will not do well the rest of the time.  They may not be negative, but they’re not going to help us hit our return target.  So, it’s a very delicate balance, and I think one of the only places that can really provide sort of an upside in both scenarios may be real assets for right now.

ZACH BUCHWALD:  Lightning round, Elizabeth.  First, what market or portfolio issue keeps you up at night?

ELIZABETH BURTON:  There’s probably two.  One is funding.  So, as you know, the balance of a portfolio for a public fund is returns, but also employer contributions.  So, that’s one thing that keeps me up at night.  The other is actually our private equity portfolio.  There’s huge raises, we’re overweight.  There’s a lot of companies that probably went public that shouldn’t, which should be constructive for those books, but I don’t want to pay for a company in one of my books to go to another company and have that transaction cost on me and that’s the only benefit.

ZACH BUCHWALD:  Lightning round question two.  What investment opportunity are you most excited about right now?

ELIZABETH BURTON:  So, for the portfolio or personally? 

ZACH BUCHWALD:  I’d love to hear about your PA if you’re willing to tell us, yeah.

ELIZABETH BURTON:  There’s a lot of things that we can’t do here that I think would be really interesting if we had more flexibility.  I think collectibles now is a great time.  If you have any edge in that area, if you’re a family office, that’s something that your founders have interest in, I think this is now a really interesting time to start looking there.

I think there’s a lot of winners and losers from COVID, particularly on a country level that I think should prove more interesting for our institutions going forward who historically have had a mostly US bias and that will not necessarily be a good place to be going forward.

ZACH BUCHWALD:  Last question, Elizabeth.  Where is a better place to live, Hawaii or Maryland?

ELIZABETH BURTON:  Hawaii. 

ZACH BUCHWALD:  That was an easy question.  All of our viewers agree with you on that one.  Elizabeth, thank you very much for joining us at the Future Forum.  That was great.  We’ll talk to you soon.

ELIZABETH BURTON:  Thanks for having me, Zach.

ZACH BUCHWALD:  You bet.

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