Krishna Memani on Wall Street's Very Expensive "Free Lunch"

We're told over and over again that the one "free lunch" in investing is diversification, and that you can improve your returns over time simply by investing in a wider range of assets. This is textbook modern finance. And yet over the past several years this hasn't been the case. An investor would have done great (with the occasional hiccups) just by investing in US stocks. What's more, even within US stocks, investors should have concentrated on big tech stocks. Going long US tech has been identified as the most crowded trade by investors for years, and yet most of the time it has outperformed almost everything else. So what are the lessons from this story? And is now the moment where international diversification is going to work? On this episode, we speak with veteran portfolio manager Krishna Memani, who is now the chief investment officer at Lafayette College. Previously, he was the CIO at OppenheimerFunds, which got bought by Invesco. We talk about portfolio theory, the tragedy of the prudent international investor over recent decades, and whether that realized return we've seen across a range of asset classes should prompt a fundamental rethink of finance theory. Odd Lots Live is returning to New York City on June 26. Get your tickets here! See omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  Finance is increasingly being built on digital rails. But as the adoption of virtual assets, tokenization and stable coins grows, can regulation not only keep pace but help accelerate it? Find out more later in the podcast.

• 0:16Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting and hiring practices.

• 0:59Speaker 01

  But according to recruiters, advisors and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company. And Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at chatgpt.com.

• 1:39Joe Weisenthal?

  Hello, Odd Lots listeners. I'm Joe Weisenthal.

• 1:41Tracy Alloway?

  And I'm Tracy Alloway.

• 1:42Joe Weisenthal?

  Tracy, we're doing another live show and it's right here in New York City.

• 1:46Tracy Alloway?

  Yeah, this one should be our biggest yet. And we're going to have a bunch of Odd Lots favorites and do something maybe a little different to some of our previous live podcast recordings.

• 1:57Joe Weisenthal?

  When the guests are revealed, the show is going to sell out right away. So you should really just go get your ticket right now. It's June 26th. It's at Racket NYC and you can find a ticket link at Bloomberg.com/oddlots or Bloomberg Events.com/oddlotsLiveNY.

• 2:13Tracy Alloway?

  We hope to see you there.

• 2:17Speaker 04

  Bloomberg Audio Studios. Podcasts, radio, news.

• 2:33Joe Weisenthal?

  Hello and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

• 2:38Tracy Alloway?

  And I'm Tracy Alloway.

• 2:39Joe Weisenthal?

  Tracy, this has come up a few times on the podcast over the years, but you know, you really feel, you could really feel dumb as an investor over the last, I don't know, 15, 20 years, if you literally bought anything else besides big tech stocks.

• 2:54Tracy Alloway?

  Big US tech stocks.

• 2:56Joe Weisenthal?

  Yeah, big US tech stocks.

• 2:57Tracy Alloway?

  Yeah, that's exactly right. And the funny thing is, investors have been encouraged to diversify, right? Like, this is the mantra of markets, is that you shouldn't put all your eggs in one basket, et cetera, et cetera. And so you've heard for the past 10 or 15 years that you should diversify into international stocks. You should diversify into small caps.

• 3:17Joe Weisenthal?

  60-40.

• 3:18Tracy Alloway?

  Yeah, 60-40. And a lot of those things have turned out to be duds, or at least 60-40 was a dud for like, a couple of years, kind of.

• 3:26Joe Weisenthal?

  Kind of. I mean, it mostly did well, but like, it had some, it had some rough years, particularly out of the pandemic.

• 3:32Tracy Alloway?

  But certainly, you would have been missing out on big gains if you put money into small caps or international stocks versus the big US tech stocks.

• 3:41Joe Weisenthal?

  Right. And, you know, we've gotten a little bit, you know, when Deep Sea came out, that raised some questions about big tech stocks. Obviously, with the policy volatility in the US, which is one way to put it, there have been some questions about, okay, is now the time to diversify abroad? Yeah, okay, you could have bought money buying Rheinmetall or one of the beneficiaries of German defense spending. But so far, you know, it's still not obvious that like, there's some other big moneymaker out there for investors besides big tech. But this is, but we, we may be at a juncture.

• 4:17Tracy Alloway?

  Well, I think the other unappreciated aspect is the importance of the benchmarks in all of this. And I think investors tend to think of benchmark index providers as these very neutral entities that are like, holding out a mirror to the market and just reflecting what's already there. But actually, a lot of their decisions Are very active and have very, very big implications for investors. So you know, if MSCI says that the all world index is going to have small caps and big caps in it. Then investors are, you know, they're forced to buy small cap exposure.

• 4:53Joe Weisenthal?

  That's totally correct. And this is core finance theory that the optimal portfolio is more or less the global portfolio. We've talked about that with the dimensional guys. You really should have awaited allocation somehow, if possible, to every bond, stock and piece of real estate out there. And that's the best you can do. And that clearly has not been the best you can do for a long time. And so we want to talk about the tortured pain of the poor diversified allocator.

• 5:18Tracy Alloway?

  And the tyranny of the benchmark index providers.

• 5:21Joe Weisenthal?

  Yeah, very Shakespearean. Anyway, I'm really excited. I think we do, in fact, have the perfect guest. Someone who I've been a big fan of for a long time, someone I've wanted to have on the show for a long time. He's probably one of my top five favorite posters on Twitter, although he's quite down a little bit lately. But I think he's addicted like the rest of us. We're going to be speaking with Krishna Memani. He is currently the Chief Investment Officer of the Lafayette College Endowment. Previously, he was the CIO at the Oppenheimer Funds, which was bought by Invesco. So a long storied career, someone who knows about all of this stuff. So Krishna, thank you so much for coming on the podcast. Thrilled we can finally make it happen.

• 6:00Speaker 05

  Thank you. Thanks for having me.

• 6:01Joe Weisenthal?

  Absolutely. What do they teach you in school about diversification? What is, when they, you know, when you're training to be an investor, an asset allocator, what do they actually, what do they tell you?

• 6:13Speaker 05

  Diversification is the biggest free lunch available in the investment world. And I think from a longer term perspective, that is absolutely true. And, and probably something that we ought to think about, but as you mentioned, the results over the, it's not just last 15, 20 years, the results over the last 30 years, 40 years have been very, very, very, very different than what you would have expected if you had gone down this path. Doesn't mean that the, the basic principle isn't invalidated. It just simply means that you have to think about it and acknowledge the fact that it hasn't worked out according to plan.

• 6:52Tracy Alloway?

  Where did the diversification thesis actually come from?

• 6:56Speaker 05

  Well, the diversification thesis basically says that if you have security-specific risks in individual securities, if you can find a way of diversifying that away, then that is something that you should do because it reduces your overall risk profile without sacrificing too much in return terms. So that's where the theory comes from.

• 7:18Tracy Alloway?

  No, no, but like, who propagated it? It must have had like, you know, an endorser, or it must have made its way into the market in one way or another.

• 7:27Speaker 05

  I think it came from Cap M. and William Sharp and, you know, that cadre of academicians who basically did the pioneering research in this field in the, let's say, 70s, 80s, and early 90s.

• 7:40Tracy Alloway?

  Yeah.

• 7:41Joe Weisenthal?

  In my 401K, I have like, a very conservative diversified fund. It has not kept up with the S and P 500, I don't think. But every once in a while, such as the first couple weeks of April 2025, or the first couple of weeks of March 2020, I take a look at it, and I'm like, oh, I pat myself on the back for those moments of diversification. Is it worthwhile just for those reasons? Every once in a while, you're like, okay, you know what? This makes me feel good. I'm not going to panic less. Actually, my, you know, that 401K, it actually stays close to all-time highs. I keep allocating it a little bit. How much is that worth in terms of that comfort that I get for like, five

• 8:26Joe Weisenthal?

  minutes every 20 years, relative to the cost of underperforming a simple S and P 500?

• 8:33Tracy Alloway?

  Paying a price for peace of mind.

• 8:34Joe Weisenthal?

  Yeah.

• 8:35Speaker 05

  Well, so, again, my argument isn't that diversification is a bad thing. I think from economic principles, from financial principles, diversification is a good thing. And if you can find a way of mitigating your overall security-specific risk, you ought to do that. The point I'm trying to, I would like to make, is the fact that it hasn't worked.

• 9:00Joe Weisenthal?

  Yeah.

• 9:01Speaker 05

  And therefore, kind of relying on 30 years or 40 years.

• 9:06Speaker 05

  A hundred years of history to come to some sort of investment principles. Yeah. That people follow very religiously, you know, hasn't worked. So shouldn't we kind of think about that and try to delve into what are the drivers? And it opens up a new research field because I would argue that the overall research in financial kind of investing is basically hasn't evolved a lot since the nineties. It's basically redoing the same papers with a little bit of, a little bit of changes here and there. But the core thinking, CAPM related core thinking, really has not changed. So I, I think the right way to use this period of underperformance,

• 9:46Speaker 05

  whether it'll sustain itself or whether, you know, twenty twenty five changes the paradigm altogether or not is kind of, kind of irrelevant. The key point is, let's kind of look at this period, let's look at it in a little bit more detail, rather than being extraordinarily doctrinaire about things. Which is, you know, anytime you post on, on Twitter that while my international funds haven't really worked for me, I get schooled by all sorts of people. But the fact is, they haven't worked for me. And, and, and I continue to do that. I, you know, I have a very diversified portfolio and I will probably stick with it. But I think it is also fair to recognize that it hasn't worked.

• 10:29Speaker 05

  And therefore, we should look at it in a little bit more detail and kind of not, not take the, the mantra of diversification as religion, which is what it is right now.

• 10:41Tracy Alloway?

  So, in your opinion, what are the drivers or the reasons why it hasn't worked? Because I imagine, you know, you could tell a story that the big tech stocks in the US have just been phenomenal companies that continue to throw off cash. You could maybe tell a story about the benchmark indices, which we spoke about in the intro. You could tell a story about flows and investors crowding into stocks. Why hasn't diversification worked?

• 11:08Speaker 05

  Well, so again, let's just kind of narrow it down. When we are talking about this level of diversification, what we are talking about is US stocks not working or US stocks doing better than international stocks. So that's what we are talking about. I, I, I think there are several drivers. I think the kind of the tech supremacy of the S and P 500 is certainly one of them. The profitability of the tech franchise is, is another one. Low interest rates in the US where growth was higher than interest rates certainly was a, a factor in driving returns. Uh, so, and, and kind of the, the existence of private equity which got multiples high. So there are a plethora of reasons as to why things haven't performed.

• 11:50Speaker 05

  Uh, uh, and, and therefore, uh, you know, it, it, it is, it is worthwhile spending a little, you know, these are speculations on my part, but this is worthwhile spending a little bit of time figuring this out in a little bit more rigorous way than we have done so far because, you know, right now, again, if anybody puts up a, a, a notion that diversification is bad, they'll get schooled. Uh, but I, I, I think, given the, the length of time that it hasn't worked and given the length of, or the magnitude of how it hasn't worked, I think it is worthwhile spending a little bit of research, uh, focus to analyze what the drivers were, as you say, and see if there are, there are some other things that we can divine out of this 30-year episode.

• 12:35Tracy Alloway?

  So I totally appreciate the need for additional research and I would agree with you on that, but is saying that diversification hasn't worked the same as saying that investors should only buy winners and avoid all the losers?

• 12:48Speaker 05

  Well, so I, I think there's, there's an element of that in, in the, for sure. That is, international markets have done poorly relative to, uh, US markets. One anecdote here, I used to be the spokesperson for Oppenheimer Funds with respect to globalize your thinking.

• 13:06Tracy Alloway?

  Mm-hmm.

• 13:07Speaker 05

  In 2011, when the, when the campaign came out, so.

• 13:10Tracy Alloway?

  Oh, so you were a messenger.

• 13:11Speaker 05

  I was the messenger of this thing and I, I kind of diversified my portfolio based on that thinking. The idea about portfolio construction with respect to diversification isn't that diversification is, is a bad thing. I think that's a right approach. I, I think. Given the history over the last thirty, forty years, we ought to think a bit more about are there other drivers rather than just simply believing in the historical track record and the volatility context of that historical track record.

• 13:57Speaker 00

  What's next for virtual assets? I'm Jacob Grease, host of Economy Scale, a series exploring growth in key global sectors. And in this episode, we're diving into the digital forces shaping finance. Sean McHugh from Dubai-based Virtual Assets Regulatory Authority has this to say.

• 14:13Speaker 06

  We're seeing a lot of institutional players come in, digital asset dedicated hedge funds, high-frequency traders and that sort of thing, and folks who service institutional clients.

• 14:22Speaker 00

  As more capital enters the market, adaptive regulation is likely to become increasingly key. Reece Merrick of Ripple says.

• 14:30Speaker 05

  A lot of regulators globally would like to keep the industry at arm's length. That's the opposite here. I think also what you'll find is that regulation and frameworks can come out, but some of them are maybe a slight iteration on some eighty-year-old policy and not actually in line with what the technology can do and offer. And again, that's very different in Dubai.

• 14:49Speaker 00

  Listen to the full episode wherever you get your podcasts. This series is brought to you by Bloomberg Media Studios and the Dubai Department of Economy and Tourism.

• 14:59Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX. SpaceX didn't respond to a request for comment on its recruiting and hiring practices.

• 15:42Speaker 01

  But according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company. And Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute, brought to you by ChatGPT. Get started at ChatGPT.com.

• 16:22Joe Weisenthal?

  So I am very partial to the idea that a big part of the story is the unique profitability of large tech companies in the US. But that is clearly not the only story, because it's not just that global stocks have underperformed. In many instances, they've just performed badly against anything. I'm looking at a chart of E W Z, a popular ETF to exposure to Brazil. It's basically flat for 20 years. I assume the Brazilian economy has grown quite a bit in the last 20 years, but it has not redounded, apparently, to the benefit of an American shareholder investing in Brazilian stocks at all. So obviously, this can't be the entire story that it's just about US outperformance.

• 17:06Joe Weisenthal?

  It's actually that global stocks have done bad. What's going on? Why, why in a world in which the economy is generally, you know, more or less growing elsewhere, have international equities actually just done bad on an objective basis?

• 17:18Speaker 05

  The old adage is the economy is not the equity market.

• 17:21Joe Weisenthal?

  Yeah, yeah.

• 17:22Speaker 05

  And, and that is, that is absolutely true. But I, I think the, the, the period from, let's say, 2010 onwards in the US is especially galling. And I think if I had to come up with a reason as to why that has kind of worked out the way it has worked out, is basically because of dollar-related global flows.

• 17:43Joe Weisenthal?

  Okay.

• 17:43Speaker 05

  That is, I think, the profitability basically attracted a whole lot of Things that were going to come to or a whole lot of flows that were going to come to the US because of the perceived strength of the dollar during that period. Because as I said before, growth was higher than rate of interest rates in the US. So it was a natural kind of place for those flows to kind of arrive at.

• 18:06Joe Weisenthal?

  But like, again, another one, Mexico, it's just flat for 20 years. So in your story, it's not quite flat for two, yeah, it's where was it 2007? So like flat for like 18 years. Like there's a big, the flows are a big part of the story for the fact that these stocks can't deliver anything over a decade's time horizon?

• 18:23Speaker 05

  Well, so I, I, I think domestic flows relative to international flows are really very important in determining the state of the equity market.

• 18:34Joe Weisenthal?

  Okay.

• 18:35Speaker 05

  And the best example, counterpoint to what you're talking about that I can give you

• 18:39Joe Weisenthal?

  Yeah.

• 18:39Speaker 05

  is really India.

• 18:40Joe Weisenthal?

  Okay.

• 18:41Speaker 05

  It's a India used to be a market that was supported entirely by foreign flows.

• 18:47Joe Weisenthal?

  Okay.

• 18:48Speaker 05

  And foreign flows and when there was a panic in New York, all sorts of money would leave India and come here and the stock market would crater. Over the last, let's say 10 years, as the Indian economy took off and financialization and the saving vehicles in India changed and the equity market as opposed to land and property became the primary source of savings and deployment of those savings. I think the characteristics-

• 19:15Joe Weisenthal?

  So capital depth.

• 19:16Speaker 05

  Yes, capital depth, financialization of the economy. And right now, the drivers in the Indian equity market, at least for the last five years, really has been the domestic investors as opposed to foreign investors. So I think that is really the, the, from a flow standpoint, that is the, the difference.

• 19:33Tracy Alloway?

  Yeah, and if you look at the MSCI India Index, it's like the exact opposite-

• 19:37Joe Weisenthal?

  That actually looks like it's done well.

• 19:38Tracy Alloway?

  Of Mexico and Brazil. Joe, you know what I always say?

• 19:42Joe Weisenthal?

  I do, but I'll let you.

• 19:43Tracy Alloway?

  Are you gonna say it? No, I want you to say it.

• 19:45Joe Weisenthal?

  Uh, flows before pros.

• 19:47Tracy Alloway?

  Yeah, he did it. All right, that makes me happy.

• 19:50Joe Weisenthal?

  By the way, I stole Tracy's joke in the intro. She's not happy about that. I said that thing about how Shakespearean. Tracy said that right before, uh, we went on air. I want to give her credit.

• 20:00Tracy Alloway?

  Aw, thank you, Joe. Um, but now I feel petty. I didn't expect you to do that. Okay, uh, going back to the conversation.

• 20:06Joe Weisenthal?

  I'm trying to make you feel petty. You made me feel bad, so now I'm trying to make you feel petty.

• 20:11Tracy Alloway?

  All right, all right, fair. Going back to the conversation. Can you talk a little bit more about the role of the benchmark index providers in all of this?

• 20:18Speaker 05

  The thinking in this world is always benchmarks are terrible. But they are, they are terrible, but better than anything else that we have. So I, I think there is a role to, for benchmarks and benchmark providers are important participants in the market. And, you know, the market capitalization of companies like MSCI and, and S and P Global kind of tell you as to how valuable that most franchises are. The way, as an investor, you know, if, if you are an asset manager or you, if you are kind of an asset allocator.

• 20:51Joe Weisenthal?

  Yeah.

• 20:51Speaker 05

  You know, how you are doing has to be evaluated in some sort of a rigorous framework.

• 20:56Joe Weisenthal?

  Yeah.

• 20:57Speaker 05

  And that's where benchmarks come in, and that's why we need benchmarks. Because otherwise it'll be free for all, you know? I can, as an asset allocator, I can, you know, if my returns were 10%, let's say, I can always claim that I did a fabulous job and my benchmark outperformed by, you know, thousand basis points. So it's a, you know, there is tyranny of benchmark, but this is a necessary tool that we need. I think a separate question is the, uh, the extent of the kind of the diversification of the, uh, of, of the benchmarks.

• 21:31Tracy Alloway?

  Right.

• 21:32Speaker 05

  You talked about MSCI, Aqui, and even things like Russell 3000.

• 21:37Joe Weisenthal?

  Yeah, yeah.

• 21:38Speaker 05

  Yeah, things like that. So there are issues with diversification. I think, uh, S and P 500, on the other hand, for the large cap US market is a very, very solid benchmark. I mean, there are peculiarities of, with respect to additions and. Taking out of the index, but I think that is to be expected in a dynamic market. And I think for most, for the most part, it has worked out reasonably well.

• 22:01Joe Weisenthal?

  You are an employed person. You have had a career despite imbibing the gospel of diversification. You have had a successful career in the market. Talk to us, though, about like your peers and career risk, et cetera. Because, you know, at some point, like you keep making less money than you could have by buying US. What does that do? And what have you seen? You know, when you look across the industry, do you see an evolution whereby people who were taught the same thing as you about diversification have increasingly felt pressured to not be diversification? Or to disguise their diversification in some way that they could tell their investment committee, we're diversified, but actually like we just found a way to like go extra long in video.

• 22:46Speaker 05

  I think in the institutional world as opposed to retail world.

• 22:50Joe Weisenthal?

  Yeah.

• 22:51Speaker 05

  I think diversification is still the matter. And again, to emphasize that it is the right thing to do.

• 22:57Joe Weisenthal?

  But why do you keep saying that?

• 22:58Speaker 05

  If you think about it in statistical terms.

• 23:00Joe Weisenthal?

  Yeah.

• 23:00Speaker 05

  You know, there is a way to diversify the tail risk.

• 23:05Joe Weisenthal?

  Okay.

• 23:05Speaker 05

  But what I'm saying is we need to evaluate that and see or reevaluate that and see if there are some other techniques and methodologies that we can use where this doesn't become the only way for you to mitigate your overall risk in the portfolio.

• 23:20Tracy Alloway?

  So what would be another technique or methodology?

• 23:23Speaker 05

  Evaluating from a track record standpoint, let's say, or from a performance standpoint, let's say, does adding emerging markets to a globally diversified portfolio, does that really add a lot of value to the process? Does a just a, let's say, a developed market index, both US and Europe and perhaps Japan, can that deliver some level of correlation to the overall index without you being stuck in places like, you know, China for a long period of time or Brazil or Mexico for that matter? So I haven't found the solution. If I had found the solution, I would have implemented that in my personal portfolio.

• 24:05Speaker 05

  My point is we ought to think about that and we don't really think about it because diversification on a global basis has been the mantra and the accepted doctrine forever.

• 24:17Joe Weisenthal?

  But say more about the career risk. Okay, at the institutional level, they're fine. It's like, oh, yeah, diversification. But, you know, for example, I'm always a big fan of reading the Bank of America Fund Manager Survey every month. And these are discretionary fund managers that can do everything. And for like 10 years, with a few exceptions in there, they say long tech stocks is the most crowded trade, but also it's the trade that continues to work. Talk about this effect, this sort of the anti-diversification success on the sort of thinking of a fund manager who probably doesn't love being in a crowded trade, but also doesn't want to underperform.

• 24:56Speaker 05

  Well, so I think the active manager is a kind of caught in a way, right? On the one hand, you know, you have to outperform your peers. On the other, you have to outperform the benchmark.

• 25:11Joe Weisenthal?

  Okay.

• 25:12Speaker 05

  And that is a challenge. And that challenge leads to the sort of things that you are talking about. That is, well, they may do very well relative to the benchmark without crowding into the most crowded trades, but if their competitors are crowded in there and do much better than them, that's an issue for them. So, you know, that's their way of solving that particular challenge. I think the crowded trades have been there for a long period of time, but I think the way I would evaluate that is how much of a portfolio manager's performance is really

• 25:50Speaker 05

  driven by, you know, the core views that they express as to what their edge is, right?

• 25:58Joe Weisenthal?

  I don't understand that.

• 26:00Speaker 05

  So, you know, every portfolio manager would tell you that their strategy is we look at ROIC, and that's what we focus on, and therefore, that's how we kind of structure our portfolio to pick companies individually.

• 26:16Joe Weisenthal?

  Yeah.

• 26:17Speaker 05

  Now, if they say that thing, and they are kind of focused on, and that's how I hired them.

• 26:23Joe Weisenthal?

  Yeah.

• 26:23Speaker 05

  And instead, they focus on getting into, let's say, crowded trades because they are going up, then that's really a red flag from an allocation.

• 26:32Joe Weisenthal?

  Got it, got it.

• 26:33Tracy Alloway?

  So Joe alluded to this in the intro, but you know, if you were diversified into international stocks, there was, well, there were a couple of moments this year where you actually looked really smart and you did get a little bit of peace of mind as the S and P 500 was selling off, you know, European equities were surging earlier in the year. But what do you need to see for a durable change in international versus US stocks and specifically US tech stocks?

• 27:03Speaker 05

  Well, so I think the underlying economic environment has to change for that dynamic. Actually, underlying economic and industrial environment has to change dramatically for that to kind of play out. So if you look at the world from a capitalization standpoint, what we are talking about is US on one side and Europe, you know, Japan, India, China, Brazil, those, those are the really the places that we are talking about. So structurally, you know, US economy has done better. The dollar is the reserve currency and the growth outlook over the last 10 years have been much better in the US than it has been. So

• 27:48Speaker 05

  flows coming into the US ought not to be a surprise in that environment.

• 27:53Joe Weisenthal?

  Okay.

• 27:54Speaker 05

  Right? And for flows to go the other way, you know, basically the fiscal expansion in Europe has to get going in a massive way. And that fiscal expansion has to lead to companies and institutions that can take advantage of that fiscal expansion and, and therefore deliver superior returns to their shareholders and therefore I'd be interested in buying those companies.

• 28:41Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Businessweek's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 29:23Speaker 01

  and hiring practices, but according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company, and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at ChatGPT.com.

• 30:04Joe Weisenthal?

  Tracy, do you know how much, without looking the DAX, Germany's benchmark index, do you know how much it's up in dollar terms this year?

• 30:12Tracy Alloway?

  I do not, although I will confess I have a chart of the MSCI All World versus the S&P 500 on my screen right now.

• 30:21Joe Weisenthal?

  Yeah, but just take a guess. Take a guess.

• 30:22Tracy Alloway?

  I have no idea. Tell me.

• 30:23Joe Weisenthal?

  Thirty-two percent. Wow. The German stocks in dollar terms are up thirty-two percent this year. France, up seventeen and a half percent in dollar terms. The Euro stocks, fifty, up twenty-two percent. I mean, this is serious. And this is like, these are numbers that we're really not used to seeing in me and Tracy's entire career, this kind of divergence. Because as of the time we're talking about, the US benchmarks are actually flat on the year, which is pretty impressive, actually, given where they were a month ago. Like, at what point you're like, uh, this is a sea change? What would it take, not from a economic standpoint, but like, you know, what does it take for the other fund managers around the world to like, oh, I believe in?

• 31:06Joe Weisenthal?

  I mean, I don't know, start with, is this the sea change here or not, in your view?

• 31:10Speaker 05

  Well, so, you know, again, these are spectacular returns.

• 31:14Joe Weisenthal?

  Yeah.

• 31:14Speaker 05

  And definitely spectacular relative returns.

• 31:17Joe Weisenthal?

  Yeah. It looks like there's some spectacular objective returns. It's only May.

• 31:21Speaker 05

  Yes.

• 31:22Joe Weisenthal?

  But anyway, keep going.

• 31:23Speaker 05

  And, and, you know, a lot of these returns are dollar-driven as well.

• 31:27Joe Weisenthal?

  Yeah.

• 31:27Speaker 05

  So, a significant portion is really the, this, and a lot of it is because of the upcoming fiscal expansion in, in Germany.

• 31:35Joe Weisenthal?

  Yeah.

• 31:36Speaker 05

  Okay. So, for this to be sustainable in the long run, I think the economic picture for the, for the continent.

• 31:44Joe Weisenthal?

  Yeah.

• 31:44Speaker 05

  Has to change meaning.

• 31:46Joe Weisenthal?

  You know, by the way, uh, just the Bovespa, the Brazilian stock market, is up twenty-five percent in dollar terms. Chilean, uh, stocks, which I've never looked at, but it's right here when I go to the WEI page on the terminal, that's up thirty-two percent. It's not even, I actually hadn't quite realized this, it's not even just a Europe story. LatAm, too, is actually in dollar terms, having a phenomenal year.

• 32:08Speaker 05

  The confluence of dollar weakness, tariffs.

• 32:13Joe Weisenthal?

  Yeah.

• 32:13Speaker 05

  You know, uh, those are really the things that have kind of had an impact on dollarized returns.

• 32:21Joe Weisenthal?

  Yeah.

• 32:21Speaker 05

  If they remain sustainable, then it will be worthwhile looking into those markets, and the thesis would be proven. But we have also had episodes where we have had these types of moves.

• 32:34Joe Weisenthal?

  False dogs.

• 32:34Speaker 05

  And pretty soon, in six months, a couple of years, you give back all of these spectacular relative returns.

• 32:42Tracy Alloway?

  But if the argument is diversification is good for protecting you from tail risks, then, you know, what's been happening this year and specifically in April seems like a pretty big tail risk and diversification worked.

• 32:56Speaker 05

  In this case, absolutely, diversification worked. The question is, is the diversification or the relative performance of European markets and the rest of the world, is it all concentrated in, you know, in a very short period of time? What do I mean by that? I think if the expectation is that the US, because of tariffs and all sorts of policy responses, the things that drove the dollar and the flows into the US go away on a sustained basis, the trend will probably persist. I would posit that that probably isn't,

• 33:38Speaker 05

  or at least that probably isn't a very realistic scenario at this point.

• 33:43Tracy Alloway?

  What timeframe should you be judging diversification's success on?

• 33:48Speaker 05

  Actually, that's a really good question. So, success of diversification, from my mind, has to be evaluated over a reasonably long period of time. So, five, 10 years, even 20, 30 years, I think those are the timeframes that you have to evaluate it on. So that everything that has, you know, everything economically has had an opportunity to play itself out and all we are talking about is the security-specific volatility for individual securities that benefits from this diversification. So, I think it has to be evaluated over a long period of time. And that's why, when it hasn't really performed for as long a period as it has not, despite their recent performance,

• 34:29Speaker 05

  the point I would make is, let's kind of think about that a little bit and look at why that has been the case.

• 34:35Joe Weisenthal?

  Wait, I want to make a counterargument. Why shouldn't we evaluate a tail risk hedge, which implicitly is what diversification seems to offer? In just very short term, because like in March 2020, there was a possibility, you know, the economy could have unraveled further. I could have lost my job. I would have been on the hook for paying for my own health insurance and so forth. I was very excited in that moment that rates went to zero and the bond portion of my 401k or whatever shot up, right? That actually helped me in an acute moment. There's obvious, you know, we haven't hit a recession yet in the U.S. In those acute moments where there's suddenly a risk and your sort of your career is correlated

• 35:18Joe Weisenthal?

  to your portfolio, can it be enough for diversification just to pay off in the short term?

• 35:23Speaker 05

  Okay, so let's kind of make sure that we are talking about the same diversification.

• 35:27Joe Weisenthal?

  Okay.

• 35:28Speaker 05

  So, you know, diversification between equities and bonds.

• 35:32Joe Weisenthal?

  Yeah, yeah.

• 35:32Speaker 05

  I think that from a risk management perspective, because of different volatility characteristics of the two instruments, that is still very much valid.

• 35:42Joe Weisenthal?

  Okay.

• 35:43Speaker 05

  You know, one has, you know, double digit volatility, the other has five, six percent, and they react in, you know, in different economic environments, you know, very, very differently.

• 35:54Joe Weisenthal?

  Yeah, okay.

• 35:54Speaker 05

  So that is, that is valid. I think what we are talking about is really international diversification.

• 36:00Joe Weisenthal?

  Yeah, all right, fair enough.

• 36:01Speaker 05

  And if you look at the correlations of international equities relative to U.S. domestic equities, correlation is very, very high. So it's, it's giving you, it's giving you some diversification benefit, but it is not giving you the level of diversification benefit that you think you are getting.

• 36:19Tracy Alloway?

  Have you done anything in your own portfolios to take into account some of these thoughts over diversification?

• 36:26Speaker 05

  So I have been a victim of this diversification because I constructed my portfolio and I've posted this on Twitter for everyone to see, which is, you know, I have, I have bought, you know, international small cap and I bought U.S. small cap and I bought developing markets. And so I have constructed a portfolio in a very diversified way. It has worked out fine, but it could have worked out a lot, lot better for that. Am I doing something relative to, you know, that? I think the thinking with respect to that has to be about. Some valuation context in the environment. So if you were going, after sticking with it for 30 years,

• 37:10Speaker 05

  if you were going to flip that switch, doing it when US markets are the most expensive probably isn't the right thing to do. But that doesn't take away of us thinking about what the drivers of that when that is not the case.

• 37:25Tracy Alloway?

  I see, yep.

• 37:26Speaker 05

  So, so that when the opportunity comes back, we are kind of thinking about it the right way, rather than just sticking to the mantra that we have thought about for the last 30 years.

• 37:36Joe Weisenthal?

  If you flip and suddenly you're like, you know what? Everything I was taught, I was wrong. And I'm going to lean more heavily into the US. Will you let everyone know so that then we can then diversify exposure? Like, will you, will you put out that alert? I've finally caved. I've finally caved. I finally don't believe anything I learned in school because maybe the rest of us can use that as an opportunity to go heavy into EEM.

• 38:03Speaker 05

  Sounds like a good idea. I'll be, I'll be, again, as I said, schooled in, in, on whichever platform I kind of put that out. It, this, you know, as an investor who has kind of stuck with this for almost 40 years.

• 38:19Joe Weisenthal?

  Yeah.

• 38:20Speaker 05

  It, it has been a, a challenge. And what I am doing is acknowledging that challenge. That is, the lack of correlation that we were expecting from international equities hasn't worked out. That's it.

• 38:33Joe Weisenthal?

  But just on, on this point, and you've been in a few different seats. How do you, you know, what do you have to do career-wise to maintain that discipline? Because this is a big thing, right? Career risk in any seat. And there are different, you know, some people are on a very short leash at a big institution that has longevity of over a century, maybe of a long leash, et cetera. What is, you know, how does career risk and career longevity play into this type of thinking?

• 39:03Speaker 05

  Well, so, you know, again, you have to distinguish between the type of investor you are.

• 39:09Joe Weisenthal?

  Yeah.

• 39:09Speaker 05

  So if you are an asset class investor

• 39:12Joe Weisenthal?

  Mm hmm.

• 39:12Speaker 05

  And your mandate is international investing. International may not have done well relative to domestic investing, but somebody allocated money to you and they're looking for you to do better than international benchmarks. And your peers are doing the same thing. So there, the career risk is really not direct. The career risk is in terms of flows. That is, if you had a global mandate or an international mandate, you know, the, the

• 39:38Joe Weisenthal?

  So it's not like you're getting fired for underperforming, it's just that no one allocates to you.

• 39:42Speaker 05

  No one allocates to you.

• 39:43Joe Weisenthal?

  Got it.

• 39:44Speaker 05

  If you are an allocator, then, you know, it's, it's kind of, the, the, the performance is relative to your benchmark. And your benchmark, that's how you are evaluated. And your benchmark is for the, for most institutional portfolios is still very much MSCI ACQ for the equity component.

• 40:02Joe Weisenthal?

  Krishna Memani, that seems like a really key point. As long as that's the benchmark, some institutional allocation will survive. Really appreciate you coming on Odd Lots. We're all going to be looking out for that tweet when you decide to go into MAC7.

• 40:18Speaker 05

  Good.

• 40:33Joe Weisenthal?

  You know what I really appreciate? Krishna is probably the only person on social media

• 40:38Tracy Alloway?

  I knew you were going to say this.

• 40:39Joe Weisenthal?

  Who will admit that they didn't time the market perfectly and weren't all in on tech stocks over the last 10 years. Everybody else timed them, oh, I went to cash, you know, and blah, blah, oh, you know, whatever. I'm glad someone admits the truth, which is that most people have just been, at least in recent years, overly diversified.

• 40:59Tracy Alloway?

  Well, it's also interesting to me to see a big institutional investor tweet at all.

• 41:04Joe Weisenthal?

  Yeah, well, that's true.

• 41:06Tracy Alloway?

  All right. So that was really interesting. One thing I am coming to really appreciate is

• 41:13Tracy Alloway?

  That peace of mind point.

• 41:14Joe Weisenthal?

  Yeah.

• 41:15Tracy Alloway?

  And the idea that there is a price to pay for peace of mind. It's not necessarily free.

• 41:20Joe Weisenthal?

  Yeah.

• 41:21Tracy Alloway?

  But every once in a while, maybe it does actually help you in acute moments of stress.

• 41:27Joe Weisenthal?

  Well, eh, totally. And look, if the markets are going down, if you're, let's say you're employed in America and you have a lot of, this is something I think about a lot. If you're employed at an American company and you have a heavily exposed American index. When markets are tanking, that is often associated with recession.

• 41:45Tracy Alloway?

  Right.

• 41:45Joe Weisenthal?

  And that is associated with an increased probability of losing your job. And an increased probability of losing your job is associated with having to sell your investments, maybe even take a tax hit at a time when you can least afford to pay it. Sell your investments to literally continue your life, which is sort of like the worst correlation you could, you know, the worst confluence event. So the idea that like, okay, like if you lose your job and you have to dig into your savings, at least you're not selling at a local bottom in the market. That seems like one benefit to diversified allocation.

• 42:20Tracy Alloway?

  Yeah. So you're not so invested in basically America squared, right?

• 42:24Joe Weisenthal?

  And you won't panic. I mean, this is the other thing, right? Like people were all, were animals and you see the line go down and you sell and so forth. Perhaps if the line is a little bit more stable than, you know, your overall top line, then you don't, uh, you know, then you don't make rash emotional decisions as quickly, which I think there's a lot of benefit to not doing.

• 42:46Tracy Alloway?

  Do you think there's a difference between how much diversification helps the retail investor versus big institutional investors?

• 42:56Joe Weisenthal?

  That's a really good question. I mean, the nice thing about the big institutions, right, is they have longevity themselves.

• 43:02Tracy Alloway?

  Yeah.

• 43:02Joe Weisenthal?

  And. Yeah, it's a good question, but I don't think any American retail investors diversify anymore. I think that, you know, most, it seems like retail investors in America, like, you know, it's not enough to go long mag seven. You have to sell puts on mag seven, right?

• 43:17Tracy Alloway?

  That's right.

• 43:17Joe Weisenthal?

  Like, and, oh, like, hyper, hyper, whatever the opposite of diversification is.

• 43:22Tracy Alloway?

  Uh, hyper concentration?

• 43:23Joe Weisenthal?

  Hyper concentration, yeah.

• 43:25Tracy Alloway?

  All right. Shall we leave it there?

• 43:26Joe Weisenthal?

  Let's leave it there.

• 43:27Tracy Alloway?

  This has been another episode of the Odd Lots Podcast. I'm Tracy Alockway. You can follow me at Tracy Alockway.

• 43:33Joe Weisenthal?

  And I'm Joe Weisenthal. You can follow me at the stalwart. Follow our guest Krishna Mamani. He's at Krishna Mamani. Follow our producers, Carmen Rodriguez at Carmen Armin, Dashil Bennett at Dashbot, and Kale Brooks at Kale Brooks. For more Odd Lots content, go to Bloomberg.com/oddlots, where we have a daily newsletter and all of our episodes. And you can chat about all of these topics, including investing, diversification, markets, so forth, in our Discord, discord.gg/oddlots.

• 44:02Tracy Alloway?

  And if you enjoy Odd Lots, if you like it when we talk about the downsides of diversification, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

• 44:48Speaker 07

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