MASTERCLASS: Insights and Expectations for 2019

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  • 50 mins 34 secs
2018 delivered more than it's fair share of challenges and even shocks to the markets. From geo political crisis to rising US interest rates and a stronger dollar, which led to a deep sell off in a emerging markets, and who can forget the growing trade dispute between China and the United States that has weighed on the markets for months. It was a lot for professional investors to digest last year. Today three of the finest at American Century will discuss how they've managed their specific areas of expertise throughout all of it and what they see on the horizon in 2019.


  • Cleo Chang - Senior Vice President, Head of Investment Solutions

  • Patricia Ribeiro - VP & Sr. Portfolio Manager, Emerging Markets

  • Vidya Rajappa, CFA - VP & Portfolio Manager, Multi-Asset Strategies

Moderated by Paul Herdtner - VP, Corporate Communications

For Financial Professional Use Only / Not for distribution to the public.

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MASTERCLASS

Paul Herdtner: 2018 delivered more than it's fair share of challenges and even shocks to the markets. From geo political crisis to rising US interest rates and a stronger dollar, which led to a deep sell off in a emerging markets, and who can forget the growing trade dispute between Chine and the United States that has weighed on the markets for months. It was a lot for professional investors to digest last year. Today three of the finest in American Century will discuss how they've managed their specific areas of expertise throughout all of it and what they see on the horizon in 2019. Welcome to Masterclass, navigating global investing. Ladies, thanks for being here. Patricia Ribeiro, let's start with you.

Paul Herdtner: You head up American Century's emerging markets equity strategies. Obviously 2018 was a very difficult year, but you're saying do not look at EM as one monolithic block. Why is that?

Patricia Ribeiro: Right. There are 24 countries in the emerging markets index. They are all at different stages of their economic cycle. Some are beneficiaries of, for example, in positive increasing commodities. Others tend to be penalized by increase in commodity prices. They are all different at different stages of the economic cycle. We should look at them individually. Then when you look from a bottom up as well, each company or different countries and companies within the countries, they have the benefit differently from the top down. If you look at a country where we are on a positive trend, economic improvement. And then if you look from a bottom up, we look for companies that actually benefiting from that improvement. And when they are on the decelerating side as well. If you look from the bottom up, we can also find companies that are taking advantage of that deceleration.

Paul Herdtner: There's a lot to look at. It's not just EM.

Patricia Ribeiro: Exactly.

Paul Herdtner: One big country.

Patricia Ribeiro: Exactly. Every country has to be thought of and be analyzed separately.

Paul Herdtner: Cleo Chang, you head up American Century's alternatives business. We chatted recently and you're saying that you're hearing the word hedge come out of client's mouths a lot more than in the relatively recent past. Why is that?

Cleo Chang: Yes. We have. I think it's easy to recognize 2018 was a year full of volatilities. Much more so than 2017 or 2016. I think as volatility starts to rise in a sharp manner like it did in 2018, naturally investors are thinking about ways to protect their portfolio. Certain hedges can provide some downside protection. Characteristics to one investment portfolio versus an unhedged portfolio.

Paul Herdtner: Vidya Rajappa, you're the portfolio manager for American Century's multi asset income strategies. Your colleague Rich Wise who's here periodically on asset TV, recently said, he said he's not sure that we're in the late innings of this cycle. He thinks we're in extra innings. Do you buy that? If so, is it time to get defensive?

Vidya Rajappa:  Yes. I agree that caution is definitely warranted. I do want to also caution against a knee jerk reaction to the current market events, but to follow a systematic process. This whole recovery has been anything but a standard market cycle. It's been unprecedented. Bull market, sustaining this recovery is going to be difficult. There's been a lot of ... sustaining this recovery is going to be questionable. We have positioned accordingly through the year.

Paul Herdtner: What do you see are the biggest head winds there in terms of sustaining the momentum?

Vidya Rajappa: The momentum. Let's think about 2018. We came into the year thinking that there was going to be synchronized growth and that the monetary policies were all going to be similar. We did not get that in 2018. There was a lot of divergence in terms of both the monetary policies as well as US growth substantially outpaced growth in Europe and Japan. We've had the tariffs and the trade concerns. We've had political uncertainty. There's a specter of inflation. There's a lot going on in the market that leads us to believe and looking ahead as well leads us to believe that the recovery is not sustainable for long.

Paul Herdtner: I don't have to tell anybody watching and I don't have to tell you guys that volatility was the thing in 2018. It bears to this question, are we in a new normal? Or Patricia, are we back to normal? Obviously there were five, six, seven hundred, eight hundred point down days in 2018. We had gone so long without seeing that real volatility. Are we just back into what we forgot existed?

Patricia Ribeiro: In emerging markets, we obviously have more volatility I would say versus developed markets. 2017 was actually there was not much volatility. There was clearly. 2018 was very volatile. The drivers of that volatility in 2018, some of that should be not in 2019. For example, there were a lot of countries in emerging markets that actually had elections in 2018 that created a level of volatility. That, we're moving ahead. There was some elections, but not that many so we should not be seeing that in 2019. There was also the issues of appreciation of the US dollar. The speculation of the rates in the US, there seems to be a lot more consensus as where we are on those two issues as well. Those are, I think out of the way where it's still outstanding is obviously the issue between US and China. There has been another level of volatility created in 2018. There was not a whole lot of clarity still of where we are going to land on that. In general, if we look again in emerging markets and from the bottom up or even top down, there is still growth in emerging markets.

Patricia Ribeiro: We're still seeing positive data coming through from a top down, from a micro side and then from the bottom up. Bottom up, we're still seeing growth and growth acceleration in emerging markets. There's still significant areas of opportunities there to invest. We just need the markets to focus more on fundamentals and less on the really top down or headline news.

Paul Herdtner: Cleo, aside from where the focus of investors ought to be, do you feel like we're back to a normal cycle with regard to volatility after things were placid for so long?

Cleo Chang: Yeah, I think 2018 was a difficult year because as Patricia just said, we went from literally no volatility all of a sudden to probably slightly above normal volatility. That transition probably felt harder for investors than if we came from a normal environment to a slightly higher. I can appreciate that shock nature of what 2018 was to investors. I do think we are, whether the opinions we are in the extra innings or later innings. I do think those tend to be the time market environments where there are more surprises that can be had and investors tend to react to those shocks in a more averse reaction. Those tend to trigger more volatility than a smooth, no shock environment. I do expect some volatility going into 2019. I think many of it will actually come from the credit market. High yield has had a good run for many years. In the last quarter of 2018, we started to see spread movements, more so than we have had in a while. I think that will probably continue.

Cleo Chang: I think we will start to closely observe what's happening in the investment grade credit space, particularly the names in the triple B segments of the market because we do think there's gonna be some movements there. Since triple B is used one notch above a [inaudible 00:08:55] bond, those movements can trigger more reaction to the broader market than otherwise. I think those are some of the areas we're paying attention to.

Paul Herdtner: Vidya, a couple of times I saw you nodding as Cleo talked about the credit markets. What are your thoughts there?

Vidya Rajappa: I agree with what Cleo said. Accordingly actually, we are positioned with an under weight to credit at this time.

Paul Herdtner: When markets get volatile, the advice to the retail investor is you probably shouldn't do anything because you might be doing the wrong thing at the wrong time. For professional investors like you, you probably see opportunity. Vidya, do me a favor and just walk me through your process when the markets get choppy and maybe you see opportunity. Are you stepping back and looking at your portfolio and figuring out we should go more here or less here? Walk me through that process Vidya.

Vidya Rajappa: Sure. Sure. I'm gonna be in a potentially different from my colleagues here. As you know, most of our investors in the multi asset solutions team are long term investors. As such, we find it best not to react to market circumstances, but plan ahead. Use a systematic process and make the changes all along as we did through 2018. Having said that, because we've been positioned appropriately, given the current equity market volatility, we expect to be rebalancing our positions.

Paul Herdtner: Cleo, how about you?

Cleo Chang: Several things. I think being an alternatives fund manager, we do have a broader tool kit to incorporate hedges into our portfolio than some of the low only funds. As such, some of the tactics that we have used in the past include buying single name credit hedges. When we think a credit may have more credit risk then we want to take at this time, our options are either sell the credit or buy protection on that credit. We've actually gone and bought protections for certain credit names in our portfolio. We also can adjust our cash position pretty flexibly. Holding cash now that cash is actually a positive yielding asset class. Holding cash can be a very effective hedge of market risk in today's environment.

Cleo Chang: We also look at the volatility marketplace through the VIX index. We can structure option pair traits around the VIX structure to see if there's an opportunity for us to buy some volatility protection through the VIX options.

Paul Herdtner: Patricia, when you see big sell offs, oftentimes good companies get punished just because it's a rush to the exit. What's your process at that point?

Patricia Ribeiro: Right. What we do is we go back to the process exactly. We visit every company in the portfolio. We are bottom up investors [inaudible 00:11:55]. For us, it's to revisit and make sure that nothing, none of the headlines or the new changes that are actually getting the markets to react are impacting the specific companies that we own in the portfolio. If you continue to see that there is earnings growth, earnings acceleration and the visibility that we look for has not really changed, we own the names, we hold the names. We go through the volatility with the conviction that once we are out of that volatility we will see obviously the stocks in the companies that we own being recognized and a price appreciation coming through.

Paul Herdtner: How often do you see a position in a company and see a sell off and say, you know what? We should be doubling down. We should be buying more of this because we're being presented an opportunity. How often does that happen for you?

Patricia Ribeiro: It happens very often because as you know, there is always some volatility in emerging markets. It might not be for the whole emerging as a group, but we might see volatility sometimes in one country or in a couple different countries. It does happen. That's why it's so important to have a very strong team of fundamental analysts supporting me in this case and my team. It's to have that conviction that we earn the right names, they still continue to show growth, acceleration in that growth. Then build on that. Seeing opportunities there. If prices go down, that we add more to the portfolio with that understanding and that conviction that, that will be rewarded eventually.

Paul Herdtner: Cleo, let's go back to you and let's dig in a little bit for alternatives. Given what we've seen in the last 12 months or so, are you seeing a lot more money rush into alternative investments at this point?

Cleo Chang: It depends on the alternative category that you're talking about. We definitely have seen money going into equity hedge or market mutual strategies, which essentially give investors reduced beta exposure to the equity market compared to the lone only portfolio. We've seen some of that. In the multi alternative category, which is a catch all bucket for many different things. We've seen global macro strategies attract some flows. It's been choppy throughout the year. For income oriented alternative strategies, I think we've seen more steady, but more modest flow throughout 2018.

Paul Herdtner: What are the best strategies as developed markets diverge as they have been?

Cleo Chang: Meaning from emerging markets?

Paul Herdtner: In terms of developed markets as they diverge, as some take off and others don't. How do you then hedge that wide spectrum?

Cleo Chang: I think it depends. When you hire a global equity manager, whether one that manages only portfolio or along short portfolio, they are able to leverage their investment process to really determine where is the most favorable investment opportunities. Whether it's US or non US. I think one way to achieve that is through hiring a global equity mandate to help you make that decision as an active decision over time. I think certain asset location [inaudible 00:15:06] tend to break US equity into its own asset class and international equity into a separate asset class. Then it's up to the asset allocators to determine which area of the world do they think is a more favorable or offer better risk at just a return in the current and going forward market environment and make that asset location decision at that level.

Paul Herdtner: I think a lot of times when people think about halts, they think about hedging equities. You make the case that a lot of investors ought to at least give some thought to hedging a fixed position as well.

Cleo Chang: I think it's less common amongst I think outside thinking institutional investor world. It's probably less common. It's definitely a very large market. Credit market is much larger than the aggregate equity market when we think about the total capital markets in dollar terms. There's definitely very effective ways for investors to think about how to position their credit portfolio all the way from treasuries to investment grade to non investment grade and to the niche asset classes that in 2018 turned out to be very good diversifies relative to the overall credit market. I think there's a lot of opportunities for investors to think about. Paul, to your point, there's definitely ways to hedge certain credit risk just like you're able to hedge equity beta at risk.

Paul Herdtner: The story of volatility I think is gonna follow us for part of 2019. It seems like that's the mode we're in. The other story that is gonna follow us from 2018 to 2019 is the United States and China and the trade war. I don't know whose crystal ball is best calibrated today. Patricia, you want to take a swing at that topic? Obviously your specialty is EM. How does this thing end? Maybe when does it end? Take your best shot.

Patricia Ribeiro: I wish I knew when that's gonna end. I think what's becoming more and more clear as time goes by is that nobody is winning on that. There is no clear winners here. I think that the more we stretch that, that the more difficult we will be. What we do in that situation again, it's to look from a bottom up. Look at companies that are not being impacted by what we have seen so far in terms of a trade war or what could be coming. In the case specifically of emerging markets, it's China. Even other countries around because there is the worry that if China decelerates too much, then it could impact other countries in the region. I just had two analysts coming back from a trip to China. They spent three weeks in China visiting with companies and talking and traveling around to see what is the impact that we are seeing there. So far what we have been hearing from the corporate side is that it's being very segmented. Obviously the export market in China has been impacted.

Patricia Ribeiro: It's still not being something that's spread across the whole economy. Hopefully as that gets resolved, if it gets resolved, we're never gonna get to that point. I think we need to be aware and constantly be revisiting again the investments behind each one of the names to see if that has been the case impacting the names or not.

Paul Herdtner: Vidya, on that same topic, who do you think blinks first?

Vidya Rajappa: That's difficult to say. I agree with my colleague Patricia here. It's impacting everybody and the market has already shown that in the last few months. One thing I'd like to add in addition to the market impact is the impact on inflation. As input costs rise, we worry that inflation is going to rise. As you know, in a defined contribution world that I work in, the retirees can get substantially impacted because inflation is going to erode their purchasing power. We worry about that.

Paul Herdtner: How are you managing to that concern?

Vidya Rajappa: Keeping with our discipline of most of our investments are long term, we have positioned our retirees portfolio to include inflation hedges in that. In addition to that, depending on the market impact, et cetera, we're watching as information flows related to the trade concerns. We'll continue to adjust our portfolio accordingly.

Paul Herdtner: Cleo, I think we can all agree that there are no winners in a trade war, but there probably can be bigger losers. Who do you think has more to lose between the United States and China?

Cleo Chang: I think that's hard to say. I think it's probably not unreasonable to say that state of economy and the growth cycle is definitely favoring the US right now. That can go away quickly. If we run into policy errors or a surprise low down in corporate earning growth, that engine can get shut off over a matter of a quarter or two. I definitely don't think we should be overly complacent about the good standing of our economy today knowing that those things can turn on the dime if a couple things try to go down the wrong path.

Paul Herdtner: Patricia, let's drill down a little bit into EM and let's pull the thread on China a little bit. One of the reasons for volatility in 2018 was that thread of the trade war and additional sanctions going back and forth. Then there was that overarching worry of contagion in the EM world. Didn't see a ton of that, I don't think. A lot of people are still worried about it. Do you share that concern?

Patricia Ribeiro: Not today. I don't share that concern at all. Again, I think every country is different in emerging markets. There is a I think a consensus perception that if China, because of the size of the Chinese economy, if China were to slow down significantly, that would impact everybody. I agree with that. We have not seen that. We have seen again, pockets of slow down certain areas in China, but not something across the board. There is still a consensus expectation of GDP growth of 6.2% in China versus a 6.5%. It hasn't really impacted that much at this point. Obviously again, I think the longer that this trade war carries on I think the bigger the impact will be. Not only in China, but then we might start to see it in other countries. It's really the two largest economies, China and the US. We're starting to see it on both sides.

Paul Herdtner: Obviously we talked a bit about what a tough year it was for EM investors in 2018. The down turn that you saw last year, was it different in any fundamental ways in comparison to other years where EM took it on the chin?

Patricia Ribeiro: The driver, the cause of the downturn is different. The reaction, the market reaction is exactly the same. It's the perception that growth is going to decelerate significantly and then it escalates. Emerging markets tend to really get hit much harder I would say versus probably developed markets. The driver of what we saw last year, the reaction in 2018 was different than 2015 and 2011. The impact on the market was very similar. What we saw last year was obviously growth. It was factors in the market. Growth and momentum did not do well at all. Then value is actually what performed better.

Paul Herdtner: Do you think that a lot of investors are losing sight of the fact that so many of the emerging market countries are now not just exporters? That there's actually consumption happening within their own borders?

Patricia Ribeiro: It could be that perception. It could be some of that. I think at the end of the day what we see is the market is looking for direction. It's looking for clarity. Whenever something significant happens that distorts that, then the market loses the sense of what direction to go to. That's what we see. Then again, historically in emerging markets whenever that happens, what we see is that the market will quickly move into a value mode. It's not the perception. There is no growth happening anymore. Let's hold value stocks as opposed to growth stocks. That was exactly what happened in 2018.

Paul Herdtner: Do you think that EM hit a bottom in 2018? Or do you think we're on an uptrend in 2019?

Patricia Ribeiro: Yeah.

Paul Herdtner: I know what you hope.

Patricia Ribeiro: Yes. Exactly. What I do see is that EM compared to the value markets, evaluations are very attractive in emerging markets. Again, we haven't really seen the impact that the market has priced in as far as the trade war or any other of the issues that we saw in 2018 that impacted the market. When you look from the bottom up, that hasn't really trickled into no growth or significant acceleration in growth across the board. What's priced into the emerging markets is clearly not what we have seen or what we expect to continue to see in 2019.

Paul Herdtner: One of the reasons the EM took such big hits last year were rising US rates. A lot of folks think that the fed has gotten it out of their system to a large degree that we're getting back to normalized rates. Cleo, the forecast is probably one, maybe two more hikes in 2019. Do you buy that?

Cleo Chang: Yeah. I can see that being the case. I think that the most recent comments from the fed chairman Powell seems to indicate we're close to the neutral rate, which I think probably means one or two more rate hikes baked into 2019 rather than three or four like some are anticipating earlier in 2018. I think that has also provided some guidance to the market participants as to where we are in the right environment. It is interesting to see that the yield curve will continue to flatten for most of 2018 and in early December we saw parts of the yield curve invert. That yield difference between the five year and the three year treasury actually inverted. Meaning the three year was yielding higher than the five years. I wouldn't say that is the most important comparison points on the yield curve. I tend to think the two year and the ten year is the most important. Early in October, November we saw the two year and the five year invert.

Cleo Chang: In early December we saw the three year and the five year invert. The next point of comparison to watch is definitely the two year and the ten year.

Paul Herdtner: There's so much chatter about that. Does it signal the recession? What are your thoughts on that?

Cleo Chang: It can be. I think if you're purely taking for a historian perspective, it's hard to argue that an inversion of the two year, ten year treasury yield curve is a bad indicator. Again, we know markets don't repeat itself. It's important to take that historical context into our analysis, but not make the assumption that the inversion, that the yield curve is a causation or is a firm indicator leading up to a recession. I think it's something that we just have to take that historical context into consideration when we analyze that and everything else going on in the market.

Paul Herdtner: It has been a harbinger in the past. Doesn't mean it will be going forward and it wasn't every single time in the past, right?

Cleo Chang: That's right.

Paul Herdtner: It's another data point.

Cleo Chang: It's a data point, but I think it's an important one. It's one worth watching.

Paul Herdtner: Vidya, as the rates rise, I'm sure it's keeping you on your toes given the nature of your investing. Is that a big concern for you? Do you feel like the fed is going too fast? What are your thoughts?

Vidya Rajappa: I think in 2018 fed stayed the course. They've indicated that in 2019 they'll use a more data driven approach. We'd have to see what unfolds over the course of the year.

Paul Herdtner: How are you managing that Patricia, in your area of expertise, these rising rates?

Patricia Ribeiro: The expectation that the rates are not gonna be rising as much as before, I think it's actually positive for emerging markets. That's actually something that we look forward to. That should be one of the positive this 2019 if we continue that trend. That there is not that war in the market that rates are going to push emerging markets to have to raise rates or adjust significantly or push inflation.

Paul Herdtner: The president has taken his shots in recent weeks and months at J Powell and the federal reserve. Cleo, do you feel like the fed has been too aggressive?

Cleo Chang: I think it's hard to say. I would agree with Vidya. Throughout 2018, our sentiment is that the fed largely played to what they have articulated to the market place.

Paul Herdtner: No surprises.

Cleo Chang: They stayed the course. To me, I can't say the movements the fed has made throughout 2019 brought any shock reaction from the marketplace. I think like I said, the most recent comment is indicative or at least seems to suggest that the fed is going to be much more data reliant as they look forward and we look forward to hearing how the narrative coming from the fed evolves over the next few months. It should paint a more clear picture as to what is the interest rate policy going forward.

Paul Herdtner: Vidya, let's dig in a little bit to target dates and American Century's multi asset income strategy. Obviously the company has a very steady conviction when it comes to building a conservative glide path toward and through retirement. How can that help investors of your strategy?

Vidya Rajappa: Sure. Our construction of the glide pod is very distinct in the market place. That stems from our philosophy. We evaluate risks that a participant faces along their life cycle, such as longevity risk, which is the risk that the participant may run out of money in retirement. The risk that their savings don't grow at a good clip. Market risk. The risk of timing of the returns, which we call sequence of return risk. Tail risk, et cetera. We evaluate these risks. How we balance these risks along the participants life cycle is the foundation of our philosophy. We have a three pillar approach to implementing our philosophy. One is the risk aver construction along the entire glide path specifically with down side risk protection as you approach and are in retirement. The second is effective diversification. IE, providing the participants with a strong growth, but with a smooth journey. Last but not the least, active management. Both in terms of dynamic risk management as well as our fundamental bottom up idiosyncratic alpha.

Vidya Rajappa: What we have done is we have one of the most balanced approached in the industry, which we feel will benefit the participants in the target aid and our construction of the target aid. Also, we find that our objective of the glide path is to help the abroad that are participants meet their retirement goals, get to their retirement goals essentially.

Paul Herdtner: What is your theory on the two versus through debate when it comes to glide paths?

Vidya Rajappa: Sure. Fortunately the consensus has moved away from the two versus through terminology. All that the two versus through monikers indicate are just visually how the glide path looks. The through glide path, the allocation evolves past retirement. Whereas in the two glide path, the allocation is constant, steady after retirement. That's where the usefulness of two versus through ends in my opinion. What it doesn't help you understand is the riskiness of the glide path. It doesn't help you understand whether it meets the participant's needs and most certainly a two retirement glide path does not indicate that the glide path ends at retirement. Both the two and retirement glide paths take you through the full life cycle of the participant. I'm encouraged that the industry is using those terms less now and is referring to the overall target aid funds universe.

Paul Herdtner: Obviously 2018 was a very large laboratory to test about how your strategy was gonna hold up to choppiness and volatility. How did it do?

Vidya Rajappa: It held up very well. Let me take you back to the three pillars of our philosophy to describe that. Risk aver glide path in these choppy markets, we can relate to how that approach would be very helpful with downside protection. Particularly approaching an in retirement effective diversification. Again, providing a strong growth but a smooth journey toward diversify portfolio. Last but not the least, allowing our active management to react to the current market environment. For example, in our dynamic risk management, particularly for investors or participants approaching an in retirement, we've taken a conservative approach over the last year that's help mitigate some of the volatility that we are seeing in the marketplace.

Paul Herdtner: Vidya, one of the biggest areas of concern both for people and governments around the world is how to fund retirements for all of these folks after they stop working. We've gone from a world that was defined by pensions, to now it's in this country 401K, 403Bs. How do we help soon to be retirees get to where they want to be?

Vidya Rajappa: This is a key question Paul. As you know, more and more participants now are retiring with DC as their primary savings. I totally given the baby boomer generation, we hear that more than ten thousand people are retiring every day.

Paul Herdtner: Ten thousand.

Vidya Rajappa: Yes.

Paul Herdtner: Wow.

Vidya Rajappa: There's a latent demand we feel for help and advice that needs to be provided to them. As well as solutions that can help them manage their money in retirement. We talked about longevity risk, IE not running our of money in retirement. Helping retirees use solutions in retirement or professional manage solutions to manage the longevity risk is a key thing that all of the providers in the industry is working on. A few years ago we had regulation on the option of providing deeply deferred annuities or called longevity annuities in what was called [inaudible 00:35:14] contract. Following that, there's been a lot of thinking within the industry in terms of what are some of the tools both just investment only solutions as well as investment plus insurance solutions that we can offer participants. There's now a recognition across the industry that there's no one silver bullet for all of the participants. That within a specific plan, you may want to have multiple options that are afforded to the individual so that they have a choice.

Vidya Rajappa: Also, oftentimes a single participant may need multiple solutions. There's a lot of innovation going on in the retirement income industry. That is a hard research area for us. We're spending a lot of our effort in that space.

Paul Herdtner: Let's switch gears for just a couple of minutes here. Obviously you can't help but notice that we have three women up here who run money in an industry that is traditionally male dominated. Let's talk for a little bit about what attracted you to the industry, the challenges you had, what you say to other young women who are looking to start out. Patricia, let's start with you. What was it that brought you to this industry?

Patricia Ribeiro: I had the passion to come and work in the asset managing from the very beginning from when I was in school when taking courses and really feeling that this was something that was calling me to focus on. From the day I got out of college, I was focusing on getting into the asset management industry.

Paul Herdtner: Cleo, how about you? What was it that attracted you?

Cleo Chang: I think similarly to Patricia. I was always very curious about drivers of market and the fact that is almost impossible to make a good prediction. That's what I think challenged.

Paul Herdtner: It doesn't stop me from asking though, does it?

Cleo Chang: That's right. That's right. I think that, that curiosity about continuing to learn what drives the market, how can we develop better solutions to help general investors achieve a better outcome I think is something that I think gets me going every single morning. It's lasted as long as it has.

Paul Herdtner: Vidya, how about you?

Vidya Rajappa: It started out with me just being curious. Being in the New York City area, you hear about finance all around you. I was curious about the industry. The team that I met with were solving a lot of very interesting problems that hooked me. After all these years just like I heard Cleo and Patricia was, the problems may be different, may be more complex. But they're still fascinating to me.

Paul Herdtner: Patricia, how about overcoming obstacles? How did you recognize opportunities? How did that work in your career path?

Patricia Ribeiro: I think there's always going to be obstacles. It's never obviously gonna be straight forward. I don't think. I think if that happens, it's great. I think we all have to look for opportunities. That's how I did it. It's just always focusing on what I wanted to do. Then working really hard to get there by looking for the right opportunities. Where there were an opportunity for me, I just took it. I took it and I work really hard at this. I think it's an industry where you need to work very hard. I find it is incredibly rewarding if you do. If that's your passion, if that's what you like to do. That's how I got here.

Paul Herdtner: Cleo, how about you? With any obstacles or seeing where the opportunities were for you.

Cleo Chang: I do think as I entered the industry, I recognized more of my colleagues and mentors were male than female. That never discouraged me for learning from the industry and thinking that there isn't opportunity for me to advance. I think to Patricia's point here is don't set limits for yourself. Work hard. Seek out opportunities and don't be afraid to ask questions and learn things that you don't know. Just continue to broaden your skill set over time. I think it's helpful.

Paul Herdtner: How did you do that in terms of broadening the skill set Vidya?

Vidya Rajappa: My suggestion would be to stay hungry for knowledge. Be confident and take on opportunities as they present themselves.

Paul Herdtner: Is that the kind of advice you would give a 21 year old version of you or any 21 year old woman who might be looking to get in the industry?

Vidya Rajappa: Yes. Definitely adding to that the passion for the industry and the work.

Paul Herdtner: Same question Cleo. I'm sure you do get requests for career advice from 20, 21, 22 year old women who are either studying this in school or just out. How do I get to where you are? What do you say?

Cleo Chang: I stay committed. Don't get intimidate throughout this journey. It's a fun journey. It's a challenging journey. I think that the reward for me at least is worth while. Just stay committed I think is important.

Paul Herdtner: Patricia, obviously one person's playbook is not necessarily applicable to everybody. What would you say to someone who's looking for advice in terms of being successful?

Patricia Ribeiro: I think it's very similar with what we're saying here. It's just stay committed. If you really like it, if that's what you really want to do, just be very focused and look for the opportunities. Look for where you think you can add value and then push to get there. Then once you are there, you need to work hard. It's not an industry that it's tough. It's very challenging. It's very competitive. You can do it. You just need to really be focused and push.

Paul Herdtner: Cleo, let's talk about something American Century did in 2018 that it had never done before in a 60 year history. That was roll out ETF products. Obviously there are a lot of competitors out there. How is American Century differentiating itself from the competition in ETF space?

Cleo Chang: I think one of the first things that I think stands out from the American Century ETF offering is we're not offering any passive ETFs. We as a firm believe in the value of active management. We carry that belief through and through into our ETF franchise. All five of the American Century ETFs are actively managed. They do leverage different active management processes, but nonetheless, there is the goal of generating alpha and improve [inaudible 00:41:58] as an outcome of those strategies. We offer both equity ETFs and fix income ETFs. I think that's another unique way of our approach to entering the ETF market. Oftentimes you see firms either exclusively be an equity ETF provider or an inclusive way fixed income ETF provider. Given our breath of investment expertise, we feel like we're very well positioned to offer ETFs in those equities of fixed income. In our first year, we were able to accomplish that by launching five ETFs. Three equities and two fixed income.

Paul Herdtner: I probably know the answer to this question already, but I'm gonna ask it anyway. What do you say to the people as investors who say, look I can go out and buy index ETFs for a few basis points. Why should I be buying yours? What's the answer to that?

Cleo Chang: I think 2018 is probably the best way to answer that question. The market can bring surprise volatility to investors much more so they may think it can be. I also would caution investors not to equate index investing to low volatility investing. I think those are things that I always say 2018 highlighted. That the importance of active management, I personally believe you want professional investors thinking on your behalf, making both proactive and reactive changes to the portfolio because the market environment is different everyday when we wake up. I think there is benefits to having passive ETFs in your portfolio. If you're simple trying to get beta exposure and nothing else, but if you think there's more you can do as I believe and as I believe my colleagues believe we can do, then the actively managed ETF we believe is an option for investors.

Paul Herdtner: You talked about a different market every time you wake up. That leads me to this question. Vidya, as we start 2019, what's keeping you up at night?

Vidya Rajappa: The specter of inflation. I know there's a lot of things keeping me up, but definitely that stands out.

Paul Herdtner: That's number one on the list?

Vidya Rajappa: Yeah.

Paul Herdtner: All right. Cleo, how about you?

Cleo Chang: I think it's the maturing business cycle, particularly as we observe it through the credit market. Then just the potential slow down in corporate earnings growth going forward and how companies are going to figure out how to operate in that new slower growth environment.

Paul Herdtner: Patricia, I'll give you the same question and probably since you're in EM, I'll say what are the three things that are keeping you up at night.

Patricia Ribeiro: That's right.

Paul Herdtner: There's probably not just one.

Patricia Ribeiro: That's right. The first one is obviously the unknown. Things that could happen overnight. Again, headline news that could distort investors perception and create volatility that we've talked about before. That's one of the challenges. Duo political issues also there. Those are really the ones. From a bottom up, from investment opportunities, there are always opportunities in emerging markets. For me, the challenge is much more about the investor perception or the market perception I should say of emerging markets, because that seems to be the one that actually creates that unneeded volatility.

Paul Herdtner: Let's talk now that it's in the rear view mirror, a little bit about 2018. Patricia, what was the biggest surprise for you in '18?

Patricia Ribeiro: The biggest surprise was probably the trade war between the US and China lasted a whole year. I didn't think it would.

Paul Herdtner: And longer.

Patricia Ribeiro: Yes and may be longer. I didn't think it was going to last that long. Again, because I didn't see that there was any benefit. There was no winners in that war.

Paul Herdtner: You thought that maybe it was mainly posturing fluster.

Patricia Ribeiro: Yeah, or maybe trying to get ... and I certainly understand some of the requests from the US position. Trying to be more in a diplomatic way as opposed to actually seeing the tariffs and that quickly coming through.

Paul Herdtner: It jumped up a notch as they say.

Patricia Ribeiro: Pretty fast, yeah.

Paul Herdtner: Cleo, how about you? What was the biggest surprise for you last year?

Cleo Chang: I would say how the longer end of the yield curve moved throughout the year. Obviously when the fed raises interest rates, it has more direct impact on the short end of the yield curve. The longer end of the yield curve tend to be anchored based on investors of [inaudible 00:46:49] DDP growth or long term inflation rates. For the ten year treasure yield to remain as stable as it has, it just definitely did move around during the year, but nonetheless, it remained quite stable and continued to have the short term rates inching up. Producing this very, very flat yield curve. I think was something that was a bit surprising. With the GDP growth improving throughout 2018 and seemingly very strong and stable corporate earnings growth, I think it's not hard for one to expect the ten year yield would be creeping up a bit. For it to creep up and then come back down, maybe a flight to safety given the volatility we saw in the equity market. That whole movement looking at the shape of the yield curve I think was a bit of a surprise.

Paul Herdtner: Vidya, how about for you? Your biggest surprise in '18?

Vidya Rajappa: For me given all the [inaudible 00:47:47] that we were seeing, I was surprised by how long it took. It was almost the end of the year before the market and the VIX reacted. I thought that was surprising.

Paul Herdtner: Let's talk about high level expectations for 2019. Patricia, what are your thoughts here as we start a new year?

Patricia Ribeiro: For me, the big question for 2019 is where is the market gonna be focusing? Because again, from a bottom up it seems that the market has priced much more negative news than what we are seeing. For me, it's the disconnect between the fundamentals and then the headline news is where I wonder if that's going to be corrected somehow in 2019.

Paul Herdtner: Do you think it will snap out of it in that regard?

Patricia Ribeiro: It should because again I think if you look at evaluations in emerging markets, they're very attractive. On its own versus history and as well as compared to developed markets. You'd think that the markets would focus on that eventually. That always happens. They always go back to fundamentals. The question is, when? I would expect that to happen sometime in 2019 assuming that the issues between China and the US don't get even escalate from where it is today.

Paul Herdtner: Cleo, what do you see on the horizon?

Cleo Chang: I think we're gonna see some interesting moves in the non investment grade or high yield credit market. Later in the late weeks in 2018 in cue four and beyond we saw high yield spread start to widen out. At a modest rate. I think there's probably some more movements there that we'll continue to watch. Over the last few years a lot of investors have entered into the high yield market because of the attractive yield it was offering. As spread start to widen out, it would be interesting to watch how investor both institutional and otherwise decide how they want to allocate to high yield going into 2019. I think the other thing we would want to keep an eye on is with the year end sell off we saw in the equity market. Evaluation for equities globally has tampered a bit. It'd be important to continue to watch how company earnings grow continue going forward into 2019. That should set the stage for how equities perform for the foreseeable future.

Paul Herdtner: Vidya, what are your expectations for this year?

Vidya Rajappa: We feel that cash finally has a potential to be king next year.

Paul Herdtner: It's been a while.

Vidya Rajappa: Yes, it has. We also expect that there's a potential for a rotation into more defensive sectors within equity next year.

Paul Herdtner: Ladies. We can not thank you enough for the incredible insight that you've offered for almost the past hour. Thank you again. Thanks to you for spending some time with us today. That'll do it. We'll see you next time.