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Published on: 7/23/2007
Last Visited: 8/12/2007
, Andrew Phillips, managing director, BlackRock Inc.;
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Mr. Phillips: I would agree with most of what's been said.
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Mr. Chernoff: Do you think that will last, Andy?
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Mr. Phillips: Well, there certainly has been a lot of compression.
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Mr. Phillips: Yes, most of it is currency.Overwhelmingly, most of it is currency.The question is, is currency a separate asset class or is it fixed income. … The way we've managed fixed income in a lot of our mandates traditionally has been you hedged a currency risk so that would remove much of that opportunity set.
So, a lot of the opportunity that you are talking about really depends on the issue of guidance, are clients willing to take on that kind of risk because clearly you can up your risk in your portfolio very quickly by taking currency risks.
Mr. Rogge: You're right, Andy, but roughly look at the U.S. treasury market and the bund, the German bond market.
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Mr. Phillips: Yeah, but it is moving very, very slowly, which is -
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Mr. Phillips: Again, but slowtrending markets.
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Mr. Phillips: So, you consider them not two distinct asset classes?
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Mr. Phillips: There are some very good arguments to be made in favor of what you just said, but the reality is that we have set ourselves up - and lot of consultants have set us up this way sometimes too - is that they are separate, that they (institutional investors) are looking for true value-added.
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Mr. Phillips: That was actually more of a traditional approach.It's country and currency.I mean you couldn't separate out rates from currency.
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Mr. Phillips: These changes have been happening, but mostly it's been happening under the alternatives umbrella.
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Mr. Phillips: Well, look how it affects their attitudes about risk-taking.
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Mr. Phillips: So that means the first-largest economy can suffer a recession, and it won't be anything.
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I think Andy put his finger on that very, very well in that you tend to see an appetite for liberalizing guidelines when no one has been burned for a long period of time by anything.
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So I think the fundamentals and the question that Andy put on the table - how much of this is cyclical and how much of this is secular - is the most important question for plan sponsors and wealth managers these days.
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Mr. Phillips: I think that's right.
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Mr. Phillips: If you are moving toward higher returns and more risk at a time when volatility is falling, you are going to have a better information ratio.
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Mr. Phillips: CDOs are an arbitrage vehicle, so you are essentially trying to sell pieces off for more than the value of the underlying collateral, and I think most of us as investment managers are really focused on buying the collateral.
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Mr. Phillips: A lot of risk management systems are value-at-risk systems and are very sensitive to changes in volatility assumptions.
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