MASTERCLASS: Insights & Expectations for 2020

  • |
  • 01 hr 07 mins 16 secs
What were the biggest surprises of 2019 and what can investors expect in 2020? 

In this exclusive alpha female discussion with American Century Investments, three experts offer a broad overview of Emerging Markets, Target Date philosophy, ETFs, Alternative Investments, and more.  

  • Cleo Chang - Senior Vice President and Head of Investment Solutions
  • Vidya Rajappa - Vice President and Portfolio Manager
  • Patricia Ribeiro - Senior Vice President and Senior Portfolio Manager



For more information, please contact the American Century Sales Desk at 1‐800‐345‐6488 or visit our website at

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

Jenna Dagenhart: Hello and welcome to this Exclusive American Century Masterclass. We'll cover the growing global ETF space, target date funds, the trade war, and more of what's on investor's minds heading into 2020. We'll also dive into the importance of diversity and inclusion in some of American Century's initiatives to ensure that a variety of voices are heard. I'm joined now by our three expert panelists, Cleo Chang, Senior Vice President and Head of Investment Solutions, Vidya Rajappa, Vice President and Portfolio Manager and Patricia Ribeiro, Senior Vice President and Senior Portfolio Manager. Thank you so much for joining us here at Asset TV. 

Patricia Ribeiro: Thank you. Thank you for having us.

Cleo Chang: Pleasure to be here.

Vidya Rajappa: Pleasure to be here.

Jenna Dagenhart: So I want to start by setting the scene and hearing about your respective spaces. Cleo let's start things off with you. Tell us about the ETF space.

Cleo Chang: Well, Jenna, it's been a tremendously exciting year for ETFs in general. On a global basis, the total asset under management for ETF has just crossed $6 trillion. So, another important milestone. Within the United States, the current asset level is about 4.2 trillion, representing about a 25% increase just this year. And from a net flow basis, we have seen about $270 billion in net inflow, and had are very strong year on record, and very impressively about 50% of the inflow are actually flows into fixed income ETFs, which is the first time we've seen that level of interest in fixed income ETFs that we haven't seen in prior year. So, we think there's a new era coming for ETF assets. Last but not least, active management is thriving in a world of ETFs. We have seen the AUM for actively managed ETFs in the US listed to category, have a 61% compounded annual growth rate over the last 10 years.

Jenna Dagenhart: 61%, wow.

Cleo Chang: 61% so active management is thriving in a world that ETFs and we can't wait to see what the next 10 years will bring.

Jenna Dagenhart: Wow. And $6 trillion. That is a lot of money.

Cleo Chang: For sure.

Jenna Dagenhart: And I'm moving down the line, Vidya, why don't you tell us a little bit about the target date philosophy?

Vidya Rajappa: Sure. A good place to start would be by defining the objective. Our objective is to improve the certainty of outcomes for the broadest set of participants. So say, you think about a marathon, and if you use that as an analogy to target date investing, our objective would be not just to get the elite runners to finish with faster times, but it would be to get the broadest set of participants, runners, through the finish line. 

So how we accomplish that is by using a three pillar approach. The first is risk of aware glide path construction. Throughout the entire glide path, but particularly approaching retirement, and sticking with the marathon analogy, if you would, most of us know that most marathon runners out there can sprint for short distances, but they can't do it for the entire marathon, or they would get really badly injured. So, using that same philosophy, our mindset is towards downside risk protection. And our philosophy in terms of glide path construction is that we identify risks along the participant's life cycle, and how we balance these risks forms the foundation of our glide path construction.

The second pillar is asset allocation, diversified asset allocation. Here I'm talking about access to a broad set of asset classes. Changing the mix of asset classes as you go through a participant's life cycle to use the best mix along the life cycle. Essentially, to provide the participant with a strong growth, but with a smooth journey.

And the third leg is active management. Where we're talking about flexible adaptive strategies that can enhance return as well as manage risks. So, all of these three combined, we hope to improve outcomes for participants in retirement.

Jenna Dagenhart: So love the marathon analogy Vidya. Someone who's run marathons, I must say, I fall into that category of people who cannot sprint the whole time. And building off of that, I wonder, you mentioned diversification. What are some of those benefits that come with diversification and how do you accomplish it?

Vidya Rajappa: Sure. Diversification is key in a strategic asset allocation over a lifecycle, such as a target date fund. So, diversification happens, is the one constant, if you would, within target date funds. So, if you think about our glide path, glide path changes in terms of its riskiness as a participant ages, not just because the equity decreases, but also a lot of other changes happen with the asset allocation. We have a glide path within the glide path concept. So, for instance, more asset classes that have a higher volatility such as small cap, or emerging markets, et cetera, we'd reduce an allocation as a participant approaches retirement. When you think about, in retirement portfolios, even the underlying portfolios that we hold are more towards low-vol downside risk minded portfolios so that the riskiness, if you would, of the equities in retirement is actually lower than for a participant of much younger age.

So, if you think of a fixed income, for example, we've been through an interesting environment over the last couple of years in fixed income. So having a valid diversified portfolio, because the fixed income allocation typically gets larger and larger in the glide path as a participant gets older, so having diversification in terms of sectors, diversification in terms of geographies without necessarily incurring the currency risk, diversification in terms of credit, having inflation protection where it's required for the older participants in retirement. So, having all of these different elements helps you create an all-weather portfolio that can navigate the various market environments through a participant's life cycle.

Jenna Dagenhart: And we will talk about risk management at great length later in the program. I'm so very excited to continue that thought. And you mentioned emerging markets. Patricia, you specialize in emerging markets. What do you seeing in terms of valuations?

Patricia Ribeiro: So emerging markets continues to be a very interesting and attractive asset class. Valuations have improved, gone up since second half of last year. There was a very difficult half a year for emerging markets, but it's still attractive. There was a still, if you compare emerging markets with developed markets, there was obviously still a gap. Emerging markets are expected to grow faster than developed markets. So, there's still a lot of opportunities even within the asset class, within emerging markets, different countries at different stages, and that sort of economic cycle. Some of them starting to see fluxion in a positive inflection. Others are starting to go continue to benefit from the improvement, and others are starting to sort of roll over. So, opportunities all across emerging markets, different countries, different sectors, different companies, but it's still attractive overall.

Jenna Dagenhart: And emerging markets is not defined to one region, obviously, and you focus on Brazil as well as China. So, do you think there's any kind of a misconception there about what is emerging markets?

Patricia Ribeiro: Yes, I think still there is still that perception that emerging markets is a conglomeration and an aggregation of countries, and they all function together. And it's not. Every country is at a different stage in that economic cycle. They all have their own issues, challenges in terms of political, geopolitical. But at different stages as well. Some are better, some are improving, others are not. But that's also interesting, because it does create opportunities. So, if you see the people, and look at emerging markets is one just big, large group functioning the same, it creates opportunities for people that are really looking in depth into that space and finding opportunities across the board.

Jenna Dagenhart: Yeah. Can you tell us a little bit about your general philosophy there and finding these opportunities?

Patricia Ribeiro: Right. So, the way we look at emerging markets is really, what we look for is growth. For us, specifically, it's really looking for earnings acceleration. So, we like to identify companies that are at the various early stages of that improvement. So, companies that are showing data points, that are telling us something fundamentally is changing here and improving. And then obviously, through fundamental research is really validating that there is an opportunity here, there is a change happening, and also there is a sustainability on that earnings' acceleration going forward. So, we look at growth. And what a better place to really find those kinds of ideas and names than emerging markets.

Jenna Dagenhart: You touched on this a little bit, but do you find EM attractive compared to developed markets?

Patricia Ribeiro: Yes, definitely. So emerging markets has improved since the second half of last year. So, valuations have gone up, some, but still attractive on its own merits, first of all. But then if you compare with developed markets, then absolutely there is an attraction there in terms of valuation. And also, emerging markets as a whole is growing faster than developed markets. So again, opportunities there in terms of finding stocks that fit into the growth sort of story are plenty. And there's never really been a shortage of names to own, but in this environment for sure, there is plenty of opportunities there.

Jenna Dagenhart: And a changing landscape across the globe, Cleo, you mentioned assets surpassing $6 trillion in global ETFs. So, what else do you see in the ETF space?

Cleo Chang: Well, in addition to the things that I mentioned, another exciting development on the ETF front is 2019 has been a year that many non-transparent or semi-transparent active ETF structures has been approved or on notice by SEC, which means we anticipate a formal approval in the coming weeks or months. So that opens a whole new gateway. As I mentioned, prior to the approval of these non-transparent or semi-transparent, we have already seen a very strong growth trend in actively managed ETFs. So, we think active management is thriving, and I cannot imagine with the doors opening on the semi-transparent or a nontransparent ETF structures, which helps protect some of the IP that is so critical to generating alpha utilized by active managers like Patricia and Vidya, that we think this opens a whole new gateway. And I don't even want to surmise what is the possibility of asset growth once that becomes a mainstream available vehicle for investors going forward.

Jenna Dagenhart: And you mentioned the importance of active management within ETFs. I think some people sometimes hear ETF and they think, "Oh, passive management." Do you think there's a misconception there? 

Cleo Chang: Well, I don't think there's a misconception. I think it just, when you think about the evolution of the ETF space, so much of it started in the passive cap-weighted index world. And since then, there's been the smart beta, intelligent beta, alternative weighting world that has bloomed. And then that has now transitioned to the adoption and embracing of actively managed ETFs, and with the semi-transparent non-transparent ETF to come. I think this is just an evolution, and what's wonderful about the ETF space is we offer such variety to investors. For those who are seeking a lower cost passive exposure, the ETF world provides that. And now with these latest SEC approved products, or to be approved products, we now have a whole spectrum of offerings that really allow investors have a choice that meets their preference, and that's what we're excited about. 

Jenna Dagenhart: You can't say, "Oh, there's not an ETF for me out there."

Cleo Chang: That's right.

Jenna Dagenhart: And would you say that these non-transparent semi-transparent ETFs are a game changer?

Cleo Chang: You know, I would say it is, especially for a firm like American Century, who has honed our active management skill sets over the last 60 years. And this has been the moment that we've been waiting for, and there's a lot of exciting, enthusiastic conversations happening within American Century to see how we can better take advantage the FD's newer vehicles. But like anything new, we do expect there to be some kind of up option timeline. But we are committed to be one of the very first to tackle these opportunities and capture the assets that we think this new sort of segment will bring.

Jenna Dagenhart: A lot of doors opening.

Cleo Chang: A lot. And a lot of work that needs to go into it before we can bring these new innovative vehicles and investment strategies to clients everywhere.

Jenna Dagenhart: And Vidya, how would you say that target date funds have evolved over the last year?

Vidya Rajappa: Yeah, it's been an interesting year, 2019. Macro uncertainty and political uncertainty have been plenty. But somehow the markets did resilient through that. So, if you look at the broad asset classes, they all seem to have put in goods. At the end of last year, for example, if you look at equities as of 2018, the fourth quarter of 2018 saw a severe market correction. Going into 2019, there was just equally dramatic upswing in the market. So, the equities started the year with strong returns. There were a few bumps along the road in May, and sort of the middle of the year. But over the whole year, the equities have put in strong returns with the US outperforming the other regions.

Now, if we look at fixed income with the monetary policy, if you would, this year saw rate cuts. We had the inverted yield curve. We had 10 year treasuries dropping by over 100 basis points and then climbing back up some of the way. So, we had a lot going on this year. And if you think about the year, think about the headlines. Almost every day we had headlines that gave us pause. 

So, the one thing not to do in this environment was to have a knee-jerk reaction to this and want to make changes. So, our target date fund has a very steady eddy approach, if you would, in terms of mitigating some of the bumps along the road, if you would, with the diversification, capturing the growth, while being very mindful of the downside risks. And with the active managers underlying our portfolios, able to flexibly adapt as information unfolds. So, we feel that our target date fund approach has worked well during this uncertain period in 2019 and starting from the fourth quarter of 2018.

Jenna Dagenhart: Steady eddy, kind of like a marathon, going back to your analogy. And Patricia, I wonder what kind of headlines have been really relevant to the emerging markets world in 2019.

Patricia Ribeiro: Yeah, so obviously the biggest one for us has been really the trade war between the US and in China. Unfortunately, that has not been completely resolved, but it seems to somehow sentiment has sort of calmed down, somehow, or it seems that markets are getting used, maybe, to the challenge of having to deal with the trade war issues going forward. And it seems also, maybe, that is going to be some solution in the near term, right? So, all of that has all obviously created some volatility in emerging markets over the year. So that has been, I would say, the more negative challenge that we had in 2019.

On the positive side, obviously rates in the US being a positive for the emerging markets, they always are. Probably also the dollar has sort of been helping, or at least not being an issue in emerging markets this year. So, we had things going different directions. Some were positive, some were negative. Some of them are really more headline news. Others, potentially a bigger impact in the emerging space. So, challenges over the year, but nevertheless it has been a better year than last year for sure.

Jenna Dagenhart: And how do you weed out the headlines and make sure that you're getting through the noise and you're getting what's most important to your portfolios.

Patricia Ribeiro: Yeah. So, the challenge with emerging market, there's all this headline news, good or bad. Some are positive, others are obviously very negative. So, for us, what we really care about is what does that mean to the stocks that we own in the portfolio? Is there a real impact, a real fundamental sort of change to the investment pieces, and why we own the stocks that we own and holding the portfolio? So, we need to, every time there was news or headline news for us is to evaluate what that really means to specific stocks in the portfolio.

If there are no changes, if that really doesn't change the investment pieces around the stocks, then we would manage through the volatility, and obviously at the end of it, there was always a positive upside to that challenge. So, it's really managing through that, and really trying to really identify, and understand what those headlines mean to specific portfolio names.

Jenna Dagenhart: And thinking long-term as well.

Patricia Ribeiro: Oh absolutely. So not only short-term, but long-term. And that's the other challenge. Sometimes the impact is very short-term, but then again, they will normalize over a certain period of time. So, for us, the importance of the long-term is much higher than the short-term. The short-term for us is really to be able to understand how the portfolio is going to behave and is there ways that we can manage the risk, or just manage somehow, that volatility, the impact of the volatility in the portfolio. What we focus on is the long-term expectations that we have.

Jenna Dagenhart: And a long-term approach is also pivotal to target date funds as well. So, I wonder Vidya, how do you sift through the noise, and look at what's most important for target date funds? 

Vidya Rajappa: So for target date funds, we, as you can imagine, it's a full lifecycle investment. So, we look at creating, if you would, all weather portfolios that can navigate the different market environments throughout the lifecycle.

Jenna Dagenhart: No matter what's happening with the trade war, or the Fed, it's all purpose, all weather.

Vidya Rajappa: So it's actually very important that we don't have a knee-jerk reaction because, you would be positioned incorrectly. For example, take 2019. With all of the headlines that we had, the tweets, et cetera, the market's still, was chugging along, and had put very good numbers pretty much across all of the classes. So, if you had done something as a reaction to one of the headlines out there, you might be wrongly positioned, and perhaps not invested appropriately in the market as you should have been.

Jenna Dagenhart: Yeah. An extremely strong year for equities, as you mentioned, despite the inverted yield curve and all these other headlines that we've had this year. And Cleo, how do you navigate this record bull market?

Cleo Chang: You know, I think, as an investor, we want to be thinking long-term, and we don't want to become complacent. I remember a couple of years ago, when you speaking to investors, and then they said, "What's the one thing you want everyone to keep in mind?" Is we want to be cognizant of all the changes that's happening in world. Patricia spoke a little bit earlier, about the strong fundamentals we're seeing in emerging markets. And if we compare us of the earnings today, of the emerging market index versus where it was at the end of last year, we have seen a double digit growth in earnings in emerging markets.

But sadly, it's not the case for all of the equities markets around the world. For example, if we look at the S&P 500 index, and look at the earnings that they index at the end of 2018, and look at the earnings of the index today, trailing 12 months, what you'll see is the S&P 500 companies actually had a very meager earnings growth since at the beginning of the year, while the market has appreciated 20-some percent. So, when you think about the dynamics that has driven the market appreciation across different market segments, it's actually been really, really different. So, for S&P, it's primarily been a PE expansion, evaluation play, not necessarily the fundamentals improving at least in terms of earnings. Whereas, for emerging market, that has been the case. 

So, I think part of it is to understand and to be aware what's driving a different marketplace and trying to identify which marketplace may offer the better, longer-term opportunity, and adjust your portfolio in that way. It's sort of the end-of-the-year, the beginning-of-the-year, this is typically the timeframe that client is look at their portfolio and see if anything seems out of place, and this is a good time to reflect on the portfolio, and take a look at whether the risk of the portfolio seems to match the risk tolerance of the investors. So, I know that's a typical exercise that investors and their advisors should go through, right around this time of the year. So, we think there's a lot of opportunities to review the portfolio and make some decisions that's appropriate for the long-term.

Jenna Dagenhart: What do you think investors should be keeping in mind with some of these multiples that you've mentioned? 

Cleo Chang: I think we see the range. Emerging markets, probably in the high teens, 18 or about. For S&P is a little higher, is in the low 20s. I think not that... The market repeats itself, but it's important to understand the historical context and try to think for yourself, if you feel comfortable investing in a US equity market, knowing that the valuation is a little bit richer than its historical average. Doesn't mean there's no more room to run. Even though we're in the 127 month of the current bull market, which seems like a really long time, but when you think about the overall magnitude of the market appreciation, depending on the market index you look at, we're somewhere between 400% to 500% appreciation from the low point, 127 months ago. 

Compared to past bull markets, we've seen much higher ranges for a shorter liftable market. So, it may seem long from a duration, like timing perspective, but magnitude-wise, you can easily make the argument that there could be more room to go. So, I think it's prudent for investors to really look at the broad global market, look at where rates are, look at where the earnings growth potentials are, look at where the PE certainly stand. And again, look at the risk of the portfolio, and making sure that they're taking the amount of risk that matches their tolerance.

Jenna Dagenhart: More of a marathon bull market [crosstalk 00:25:09].

Cleo Chang: We're all in the market for the long-term. And I think that's the message that we think are so important to continue to advocate to all investors.

Jenna Dagenhart: And is there anything you'd like to add in terms of emerging markets?

Patricia Ribeiro: No. I think it's the same thing, but for emerging markets is really looking at that asset class on the longer-term. There was always going to be some volatility. Again, it's an aggregation of 24 countries, at least. And if you can even go into a frontier markets, or more. So, when you start looking at them, they are all at different stages, there is different drivers for different countries there, from a top down, and then from a bottom up, there's always companies that are doing well, and they're obviously in this very large part of the world. So longer-term is what we really focus on as well. 

There was always going to be headline news and volatility and challenges because emerging markets also, obviously, it's sort of perceived much more as in higher risk asset class. So, the challenges are always there. They're always going to be there. It's really understanding what the long-term impact is, from any challenge that we see short-term.

Jenna Dagenhart: And you're also doing something which is incredible, and you don't hear much about this. You're also looking at ESG within emerging market.

Patricia Ribeiro: Yes, yes. It's a really interesting new product that we have. And it's fascinating to see how the whole emerging space, there is so much to be done on the ESG, in terms of ESG, addressing ESG issues in emerging markets. And it is a part of the world which the focus hasn't really been that much in any ESG issues. So, for us, what we're doing there is looking at companies that can actually give us both. We can get the alpha, but also, we can invest in companies that are having an impact, either environmental, social, or governance, for that matter. So, we're looking at the United nations, there is, the SDG goals. So, it's defined by the United Nations, and then looking at how we can find the companies within the emerging market space that are actually mapped to at least one of those goals.

For example, in our education names in emerging markets, it's so important to really invest in education and in that part of the world. And there are plenty of names there that we can actually own in this portfolio, and that they are actually investing in education in all these countries. Water distribution, sewage treatment, there's so many different ways that we can look at how to invest in companies, again, that they would generate to give us the alpha but also improving the standards for the rest of the world. It's the very early stages at this point, so what we look for is really that sort of improvement more than where they are today. They're at the early stages. They will get to where they need to be. It will take a while. But for us, it's that improvement that we are focusing on. So, it's really fascinating actually.

Jenna Dagenhart: Yes. Early stages as you mentioned, I wonder what are American Century's goals with this initiative, moving forward.

Patricia Ribeiro: So what we're doing is aligning with what clients are looking for. What we see is that governments don't really have the funding, really, to be investing by themselves in all of the needs that are there in emerging markets. So, we really need private capital to go in. And what better than really use asset owners to really not only be investing again and getting the return that they are looking for in their portfolios, but also doing something good for society righting overall, and certainly, again, in a part of the world that's very much needed. So, it's combining the two, that's very interesting for us to offer to clients. So that's our goal with this product.

Jenna Dagenhart: And ESG is making its way into all different types of portfolios. Is this something that you're thinking about in terms of ETFs, or target date funds as well? 

Cleo Chang: Yes. I think given the new opened door for semi-transparent non-transparent actively managed ETFs to come to market, we have been having some very robust dialogues, and I absolutely expect the American Century to bring ESG impact-related ETFs to the marketplace in the coming months. 

Jenna Dagenhart: And some people also consider ESG as a way to mitigate risks, investing in these companies that have good governance, they're doing good things for the environment. So, do you also consider ESG, with some of these companies, just as a way to mitigate risk.

Patricia Ribeiro: Yes, absolutely. So ESG integration into our fundamental research has been there already for quite a few years. We have done that. We have a separate ESG team that really helps us understand what the ESG issues are, globally, and also, it's a proprietary research. So, we really define ourselves or what is really important to address, and when we're doing the research on ESG research. So that has been there already for a few years for us. And risk is one of ways to address it. It's really looking not only in the short-term challenges, but also longer-term. What are some of the exposures that companies have to certain parts, from a risk point of view, in terms of ESG issues? So that's been there already for us. We have already been looking at that for a few years, and it has been actually very helpful. So, it's one more layer of sort of really fundamental research being done across the board.

Jenna Dagenhart: And target date funds are also a great way to mitigate risk and weather volatility.

Vidya Rajappa: That's true. In terms of risk, risk management is the backbone of our target date fund construction. So, going back to our philosophy, risk aware, for example, risk aware glide path construction was the first pillar, was the hallmark of our glide path, of our portfolio. So, with that, what we mean is, a focus on downside risk protection. The other pillars, if you would, reinforce the risk of our glide path construction, and those include the diversification and active management. With active managers, as you can imagine, as uncertain, as the information unfolds, they are better able to adapt to the current environment. And if I may dare say, more than most other environments, environments such as this, active management is central stage. So, I think that's a key component as well, in terms of our management of risk.

Jenna Dagenhart: And Cleo, you also focus on alternatives, in addition to ETFs. So, alternatives are another way that people try to mitigate risk and hedge their portfolios. What are you seeing with alternatives given this record bull market?

Cleo Chang: Oh absolutely. We know there's going to come a time where alternative is going to have the spotlight again. It's hard to be that, when the equity market in general is up 20% to 30%. But we know we need to be there for investors, because there will come a time where this becomes a more important, more visible part of the portfolio. When we look across the alternate universe, particularly in the liquid alternative space, we've seen strategies, in general, putting up respectable performance. Because as you mentioned, Jenna, the strategy naturally has hedges built in, one way or the other, in most cases, either through a long-short type of portfolio, or they buy hedges, or they have some put options. So naturally, you would not expect alternate strategies to keep pace with a strong equity up market like we're seeing in 2019.

Jenna Dagenhart: Not very popular to buy a put when the market is at record highs.

Cleo Chang: Unless you're thinking about the whole portfolio risk in that context, right? You never want to put all your eggs in one basket, even though the emerging markets have been a stellar performance has a class this year. We wouldn't advocate to investors to put 100% of portfolio in an asset class in emerging market, in a good year, or a bad year. So we follow more of what Vidya's been talking about, this long-term thinking and making sure that you have a portion of your portfolio that you're always invested in something that you know is not going to keep up with the equity market, but also likely will not keep down with the equity market when we have a tough quarter like the fourth quarter of 2018. And I think that's the role and the purpose of alternative investing, and that's why you see a lot institutional investors who tend to be more sophisticated, have more complex asset allocation programs and particularly endowments and foundations that needs to provide income on a perpetual basis, they tend to embrace alternative investments through market cycles. And we think that's a type of behavior, a way to thinking about asset allocation, that can also benefit some investors as they think about resetting their portfolio for 2020. 

Jenna Dagenhart: And you mentioned liquid alts.

Cleo Chang: So liquid alternatives have been a tremendous vehicle that has only become available really, in large scale, to investors in the last 10 years or so. But timing so happens to be... This has been one of the longest bull market we've seen in equity market. So, we continue to test the patience of investors. But again, since we don't have a crystal ball and we don't know when the next market downturn is going to come, and we don't know what the macro environment is going to bring, our advice to investor is always have some exposure to growth asset classes like equities, have some income-generating asset classes. And they have asset class that tend to have lower correlation with your bond and stock investment to give the portfolio that diversification benefit that we all have learned about or heard about, and it is true. It's about the only free lunch in the investing world to investors. And we think it's prudent to have a component building the portfolio. 

Jenna Dagenhart: A crystal ball would be really nice though, wouldn't it?

Cleo Chang: Yes.

Patricia Ribeiro: Yes.

Jenna Dagenhart: And anything you would like to add, Vidya, in terms of risk management?

Vidya Rajappa: Yeah. Risk management is the backbone of our target date portfolio construction. Going back to our philosophy, the first pillar of our target date fund philosophy is the risk of our glide path construction, i.e. being sensitive to the downside risks across the entire glide path, but particularly approaching retirement. We have the philosophy of win by losing less. So, in terms of severe market correction, our objective is to not fall by as much, compared to a lot of our competitors out there, that we don't have as much decline once there is a subsequent market recovery. So that over the full cycle, the participant has strong growth, but a more consistent set of returns. And we accomplish that using the diversification that's, as I mentioned, was a constant across the glide path, as well as the underlying portfolios that we have, which are actively managed, which can react especially in times such as today and more than ever, you can imagine that today' is the active management, this center stage today. And active managers have the ability and the flexibility to adapt doing information as it unfolds in these uncertain times.

Jenna Dagenhart: Winning by losing last. I like that. And it also kind of reminds me of the concepts of loss aversion. Is it something that's also popular with clients who don't want to risk losing? 

Vidya Rajappa: Yeah. So, our approach out there is one of the most balanced approaches out in the industry. We have a moderate glide path profile. We will not shoot the lights out if there is a steady bull market. But our objective is to have strong growth, and a more consistent growth, if you would, without facing all of the ups and downs of the markets without the participants having to see that in their portfolio. So, it helps participants stay invested. It prevents abandonment risk, if you would, from the participants' perspective.

Jenna Dagenhart: And how do you go about mitigating risk in emerging, especially with the trade war. We've touched on that some, but that is such a huge elephant in the room. 

Patricia Ribeiro: Right. Right. So, for us in emerging markets, what we think about when we think about risk is really, again, diversification. That's the way to think, we believe. And for us this is really two different ways here. One is looking at countries. So, the diversification in terms of countries, and also diversification from a bottom-up, stock-specific diversification. So, stock-specific is really, once you do the analysis, at the same time that you have an investment thesis, and you know why you would like to own that stock. You also needed to understand the risks associated with including that name in your portfolio. So that's very important, and we really understand that risk really well.

The other side, on the countryside, diversification there is really trying to, again, get the best of the emerging world, but diminishing some of the short-term impact that we could see from headline news and some challenges, for example, the trade war with the US. So, for us, in that respect, yes, we continue to be invested in China. We still see as an attractive market for us. But what we do is, again, diversifying within the Chinese opportunities in the portfolio. So, having stocks that are exposed to different drivers within the Chinese economy. 

And what we see is that actually, there are companies that are beneficiaries of the trade war. And the reason for that is because there is a shift. One of the shifts, for example, that we have seen, is that... And this has started even before the trade war, which is, the Chinese consumer having more of a nationalistic profile, really wanting to own more of the national brands, high-end brands, which obviously the Chinese consumer still likes a lot, and is constantly demanding. So, we have seen a shift from owning US brands, or very high-end brands in general, not only necessarily the US, and more into the Chinese brands. So that has been a trend that started before the trade war, but the trade war actually expedited that process.

Jenna Dagenhart: And this is something that American companies have been talking about on their earnings calls and whatnot. 

Patricia Ribeiro: That's right. Yes. And so, for us who are investing in emerging markets, we take advantage of that, and we invest in those companies that are actually winning in that space, growing, competing with the US counterparts, but also, obviously, seeing that shift, the demand is obviously increasing for them. We see on the tech space as well, the Chinese government investing a lot more on the technology area because of the challenges with the trade war, and that shift happening where there is much more demand, and also regulatory changes pushing a lot of the Chinese brands, and the Chinese companies, to actually sell more into that space. And that's happening as we speak. So, there is also beneficiaries from a negative headline. And that's also what we to do from a bottom-up, is addressing that, and again, diversifying the portfolio where you have the opportunity to take advantage of changes, and again, mitigate some of that risk that could come with that.

Jenna Dagenhart: Capturing those opportunities in the midst of a negative headline.

Patricia Ribeiro: Yes. And that's what we see. Always, there is somebody winning even in a more negative space, either from a top-down, sort of a macro issues, or also just sort of the positioning of competitors in the space. Somebody is always doing better than the others, and that's part of the job, is to look for the winners there.

Jenna Dagenhart: Just a matter of finding it. 

Patricia Ribeiro: Yes. But the good thing is they're always there. So, there is always opportunities. It's really just digging and finding them. 

Jenna Dagenhart: And I know that the Fed is also watching the trade war closely and cited global developments that last time it cut interest rates. And the Fed's in a very different position than this time last year. They're no longer hiking. They've cut three times. Cleo, what do you make of all the Fed's decisions and this U-turn that we've seen in policy?

Cleo Chang: Well, like I said, I wish I had a crystal ball and I knew this U-turn was in the works, but I did not. But I think it's fascinating. I think we're in a world where even the central banks are being much more nimble than they used to be. They are observing what's happening in a global market and try to be more of a tailwind than a headwind. But most certainly, I think this U-turn in monetary policy has surprised a lot of investors. I remember, Jenna, as you were saying, a year ago, sitting here, a lot of people would've expected the Fed to continue to hike rates at a modest pace, but nonetheless, at least hold that a monetary tightening policy in place, and only to be here today finding that we have had three rate cuts. And that has really led to a very strong return market for US Corps fixed income investors. It's been one of the best year since 2002. And I think it provided that nice strong tailwind, but I think it also puts investors in a place to think about where it can a raise go here on? Can we experienced another three rate cuts without other economic pillars falling into a much weaker position? 

So, I think that's something that we want to think about. It's always nice to see a typical 60/40, 60% equity portfolio, 40% fixed income portfolio, perform well, because we know a lot of investors hold a portfolio that has a similar combination. But I think, again, like I mentioned earlier, this time of the year is typically a good time for investors to reassess and review the risks of their portfolio, and think about adding and reducing some exposures to make sure that the portfolio going forward, at least for the near-term is a good reflection of what they think is appropriate for their risk tolerance.

And I think it's important for us to think about, now the rates have turned lower, some of the concerns we had a year ago about rates creeping higher, and a lot of companies in the last few years have issued a lot of corporate debt, which put a lot of interest rate payment pressure on them. And if rates were going to continue creeping higher, that burden just increases on the company. So, I think there's a sigh of a relief of some sort, now that the rates have reversed, and we think is going to stay at this lower for a longer type environment, and take some that marginal pressure on companies having to somehow support a heavier debt burden eases the pain a little bit. And so, I think that lessens some of the concern that some investors had about companies' ability to pay their debt in a timely manner.

So, you know, I think it's taken some pressure off. But we also see that there are certain pockets within the fixed income market, particularly in the lower credit market, that in the last few weeks of the year, there tend to be a tighter liquidity. It's typical. We see it almost every year, but nonetheless, it's something that we pay attention to closely, just to monitor that nothing is out of the norm for us. There's been a lot of talk about the repo and the reverse repo market this year. We continue to monitor how the fed and other government agencies are monitoring and influencing that super short-term, overnight liquidity market, making sure that the liquidity doesn't become the trigger for a bigger market event. So that's something that we're paying close attention to. So a lot of things to keep in mind, and a lot of things are changing on the dime, and it's really important for us to always think for the long-term, but pay attention to the backdrop, the macro markets, and make small adjustments that we think will be additive and appropriate for the portfolio.

Jenna Dagenhart: And depending on someone's, where they are in their time horizon, fixed income can be a crucial part of a target date fund. So, I wonder what do you make of the Fed and interest rates, and this a low environment where we are right now?

Vidya Rajappa: In the target date environment, we are looking at total return. We are in the total return space in retirement. I think our mantra is still to have a diversified fixed income portfolio that can withstand some of what Cleo talked about, in terms of issues.

Jenna Dagenhart: So we've talked a lot about what's been in 2019, and now I want to look ahead to 2020. Patricia let's start with you. What are you seeing for emerging markets in the new year?

Patricia Ribeiro: Yeah, so for us, longer-term were obviously was very positive in emerging markets. We still see, again, tremendous amount of opportunities, going forward. And part of the world that's growing, growing faster. Big long-term drivers, secular drivers, for emerging markets. So very positive. 2020 specifically, we don't anticipate, obviously, any big challenges. But there are some headlines out there that might create some volatility for emerging markets in the short-term. Obviously, issues with the US and China trade war. If we don't get to a final stage, or really try to really resolve that, that could continue to be, over periods of time, coming up next year. I think another challenge next year will be US elections. I think, depending on how that evolves during 2020, it might create some more volatility for emerging markets as well as global markets, I would think. So that's another challenge there. 

And also, the usual. People worried about the rates for the US Fed rates, where is the Fed rate going to be next year? I think that could be another challenge. For me, it's much more of a short-term challenge versus really long-term. It's really how you adjust to that change, but nevertheless it's there. And the facts. The dollar is obviously very important for emerging markets overall. So that could be another potential headline next year, depending on how we see the dollar evolving. Longer-term, still very positive. Short-term challenges, I know there are always going to be challenges. And again, our job is really to be able to understand what those short-term challenges are, and then how do they impact the portfolio? If they have an impact in a specific stocks, we will address. If not, then we have to manage through that by diversifying and continue to be diversified.

Jenna Dagenhart: And I wondered, what are your high-level thoughts, heading into 2020?

Vidya Rajappa: You know, entering 2020, the backdrop still looks challenging. On the positive side, we have the strength of the consumer, we have full employment. We have inflation still being muted. And it looks like, at least so far, that the central bankers are still very accommodative. But the trade concerns are still there. Not just straight concerns with China, but also there've been suggestions of tariffs on goods from other economies as well. We have the Brexit uncertainty. It's an election year in the US. So, the road ahead looks foggy, and maybe a little bumpy. If you look at equities for example, the earnings, the data is actually a little bit better than, a little bit less negative, I would say, then previously. But it's still unclear. And the rates picture still looks bleak, as Cleo went through it.

So, given all of that, let's go back to our targeted approach. So, we have a very balanced approach, in terms of our target date. Mindful of smoothing the bumps along the way and capturing the growth. So, we feel that we are well positioned with our target date, to be able to navigate this uncertain environment. 

Cleo Chang: So I will say, 2019, we observed very different patterns of behavior between, short of how investors deal with your equity portfolio, versus their fixed income portfolio. For example, in equities, regardless of the higher beta type of equities, or lower beta type of equities, investors were full throttle ahead. We saw big dispersion between the best performing sectors and the worst performing sectors. It did not make a difference in the minds of the equity investors. 

However, when we look at the fixed income investors, there was a clear pattern where there is a strong preference for higher quality credits. So, they investment grade performed far better than the non-investment grade and a not rated fund. So, if you think about how investors are assessing and deciding how they want to take risk, sure, on the equity front, they were short of trading all equity risks the same, versus on the fixed income side, they were pretty discerning. They had a clear preference for higher-grade quality, ethics income.

So, we think that type of behavior will likely continue into 2020, where, if the monetary policy continued to be looser and more supportive, we think there's going to be this continued tailwind for equity markets. But as I mentioned earlier, we do advise investors to pay attention to the PE multiple, because for some markets, it's definitely stretching higher than the historical norm. And there's information in that data point that investors should take into account. And with the reversal of the Fed policy, I'm very sure now going lower, probably for longer, for those investors who are seeking income, they may need to look at places that they historically did not look to, to find income. 

There are value stocks, indices that are having a dividend yield that's above what the core bond is generating. Obviously, you're taking on a different type of risk. But if income is a primary objective you're trying to meet, there's rates that typically have a higher yield than standard broad equity asset classes. There is more value-tilted, dividend-tilted equity strategies that can also provide an enhancement to income for investors. And then I think there's investors that can look into more niche asset classes of fixed income. There's still bank loans, they're still asset-backed securities that in certain segments, that we see that offers very attractive risk-adjusted yield, that we think can be beneficial to a lot of investors' portfolios. So, I think now's the time for investors to look at their portfolio, if they kept their portfolio from the beginning of 2019, and just held onto it to now, just given how much equity has appreciated, and fixed income has appreciated almost 9%. But just given the dispersion between return, there are probably overweight equities, relative to where they started at the beginning of the year. So, if nothing else, look at the composition, the portfolio. See if there's a purpose to rebalance, and during that exercise, ask themselves if they want to look for more uncorrelated investment strategies. 

Cash. Cash could be an asset class. It's not yielding as much as we would like it to. Nonetheless, for investors who wants to be in something that wouldn't be dragged around by a tweet, by a headline risk, cash or enhanced cash strategies is not necessarily something that you should overlook. So, we think there's a lot of pieces to the puzzle that are available to investors this time of the year, for them to think about putting into their portfolio in a way that fits their risk tolerance.

Jenna Dagenhart: It'll be interesting to see what we're discussing at this point in time next year. 

Patricia Ribeiro: That's right.

Jenna Dagenhart: And this goes without saying, but this is an all-female masterclass, and I have the honor of being joined by three very impressive women. So, with that, I do want to talk a little bit about diversity and inclusion. Asset managers are increasingly paying attention to the diversity of their teams. And I wonder, what is American Century doing and thinking, relative to diversity and inclusion?

Cleo Chang: Yeah, that's a great question Jenna. I think at American Century Investments, diversity and inclusion is a business imperative for us. We see the importance; we see the value. We hear from clients. Clients are no longer asking, but they are demanding us bringing a more diverse team, a more inclusive team, to support their needs. So, I think the way we think about diversity and inclusion, I think, those two terms are equally important. You first have to have a group of diverse individuals, and this is not just gender or ethnicity background, this is experience. This is in the way they think. So, we think diversity captures all of that, and we think a diverse team is stronger, is smarter. We're able to understand clients better when we have a diverse team, and we're able to provide better performance because we have broader perspective. Last but not least, we also believe a diverse team helps us build a longer, better, deeper relationship with the client.

On the inclusion front, once you start with a diverse team, then we got to focus on inclusion. Inclusion is to not only hear, but recognize, and value the different voices that are brought by a team of diverse members. So American Central, we've gone through a number, from wide training to help all of our employees better appreciate what diversity and inclusion is all about, and that's an ongoing effort, and I think as you can see here, American Century has a number of very successful, diverse women investment leaders that continue to contribute to the needs of our clients and service them in the best way we can.

Jenna Dagenhart: And Vidya, this is something that you're very passionate about as well. And as Cleo mentioned, the inclusion part is also very important. Do you want to elaborate on the inclusion portion of this?

Vidya Rajappa: Sure. I completely agree with Cleo on the importance of diversity and inclusion and commend all the firms out there that have adopted such an initiative, because I feel that's crucial to the investment teams that I'm a part of. Because having the confluence of ideas helps us better address client's needs and put forth a more robust investment solutions to meet our client's needs. And my humble opinion, being in the trenches, is that of the two, diversity and inclusion, diversity seems to be the easier one because it seems like you could have a mandate, you could have metrics, you could make sure teams hire diverse resources, et cetera. And the more difficult one is inclusion, because that means that every member in the firm is embracing diversity. I.e. you get you know, everyone on the team to have a voice in meetings and other events, because that's when you realize that the full potential of having a diverse team is when everyone is included in the conversation. So, I personally feel passionate about the initiative, but also feel that inclusion is a very important aspect of diversity and inclusion.

Jenna Dagenhart: Certainly. And Patricia, is there anything that you would like to weigh in on that?

Patricia Ribeiro: I agree, obviously, with both Cleo and Vidya. Just mentioned... Obviously for my own, but also my team, I have a very diverse team with a tremendous amount of impact on what we do. I could not do without them. And I do believe that the fact that they are diverse and inclusive, so we do obviously care about what everybody thinks. I do believe that that's really the big part of the success of the product. Because we have people from different cultures, different genders, very diverse. And understanding how others think, and bringing that into the investment decisions are really, really important. So, for us, it's been crucial in how we actually have operated over the years and how ell we've done

Jenna Dagenhart: And what are some of the benefits that come with making sure that you're incorporating those diverse voices and that those voices are heard?

Patricia Ribeiro: Absolutely. So, for me, one of the big benefits is, with that diversity and listening, including everybody, listening to everybody's opinions and what they bring to the table, what it has done is has given us an insight into different countries, different cultures. Even when it comes to really engaging with management of companies, different countries, there is different ways of asking a question sometimes. Some certain behavior is acceptable in one culture but not in another one. So, we tend to get more if you can interact with those managements at their level, at what's acceptable to them, not on what is acceptable to us. So, we get this really broad range of benefits from having a more diverse group as part of the investment decision group.

Jenna Dagenhart: And there are enough challenges as is, in your industry. There are plenty of challenges out there, but yet you navigate all of them. As women as well, I know Vidya you were mentioning you were in the midst of taking the CFA exams as a new mother. Those exams are hard enough as is. So how do you balance all that you do?

Vidya Rajappa: Yeah, that takes me back many, many years when my son was still a little. He was just a couple of years old; I think. And I was out there preparing for the CFAs, clearly over the weekends, et cetera, when he was tugging at my leg and wanting to play. So yeah, we do what we do to acquire the knowledge that's... It's important to stay focused and develop your career.

Patricia Ribeiro: It's also by having a support group around you. So, you need support at home, you need support at work, because you might need to change, not being able to... You have to shift schedules around. So, you need support around you to be able to actually do this job, and do it well, and at the same time have everything else in your life. So, you need that balance, but you need everybody to contribute in order to do it. For me, at least that's how it's being all along.

Vidya Rajappa: Yeah. Supportive family and supportive coworkers.

Jenna Dagenhart: And I know this is something that the industry is working on, and something that you all are definitely doing a lot of at American Century. I wonder, what kinds of groups are you participating in, that are helping with diversity and inclusion initiatives?

Cleo Chang: No, Jenna. I think this is definitely all hands on deck type of effort. I can speak to what has been going on at American Central. Within the last few years, we have established at diversity and inclusion committee as part of the American Century companies board. In addition to that, we have formed internal groups that helps us further pursue these important initiative. So, we have a grassroots group called American at ACI, so American Century Investments, and that group meets on a monthly basis. We bring very prominent women speakers through shared experience, like the ones that you just heard from Vidya, just to provide all of our women colleagues the feel that they're supported, and they know that it takes more than one person, and to make this work. And we also have an internal diversity and inclusion committee, and they are charged to be the advocate for diversity and inclusion efforts, and the firm holds management team responsible for not preaching the concept and importance of it, but help us establish goals and actions that we can actually put into works to make all of our employees see the improvement of diversity and inclusion at American Century.

And Jenna, as you said, there's a number of industry groups that has a focus on diversity inclusion. And American Century's involved in many of them. I can't name them all, but just a few example, American Century was our founding member and continue to participate in a Diversity project. We're also a member of the CEO Action Diversity and Inclusion Initiative. We're a member of the London Education Project at 100 Women in Financing in London. And so, there's just a number of things that we continue to be involved that we think is important. And like I said, diversity and inclusion are a business imperative for us.

Jenna Dagenhart: And it's a good thing that that list is too long for you to name all of them. 

Cleo Chang: Yes, yes. And it's growing.

Jenna Dagenhart: Well, terrific. Thank you so much for your insights. It was a pleasure to have you. Hope to see you again soon.

Patricia Ribeiro: Thank you. 

Vidya Rajappa: Thank you.

Cleo Chang: Thank you.

Jenna Dagenhart: And thank you for watching this exclusive American Century Masterclass. I was joined Cleo Chang, Senior Vice President and Head of Investment Solutions, Vidya Rajappa, Vice President and Portfolio Manager, and Patricia Ribeiro, Senior Vice President and Senior Portfolio Manager. From our studios in New York, I'm Jenna Degenhart.