E327: $7B CIO: The Right Way to Invest in Emerging Markets

Robert, you're a founder and CIO of a $7 billion fund

focused on emerging markets.

Everybody that I've ever met tells me

emerging markets is a trap.

Why is emerging markets not a trap?

Look, I think that's a great question.

And I think people perceive it to be a trap

because of the way that they've approached the asset class.

And what I mean by that is I think most investors

have thought of emerging markets more of an afterthought

and more of a yes, no digital should I do it

or should I not do it as opposed to how I should do it.

So what do they end up doing?

They end up kind of buying the wrong thing

at the wrong time.

They stick with it for too long.

They capitulate and then they blame it on the asset class.

But that's not necessarily how they invest in developed markets

in developed markets.

They think about where do I want to be?

Where do I want to be in fixed income?

Do I want to be in equity?

Do I want to be in growth?

Do I want to be in value?

But in the end, it just seems to be yes, no.

Or they'll go and do one investment in one country

doesn't work out and they say the entire asset class

makes no sense to them.

I invest in Indonesia, emerging markets doesn't work.

I mean, there's been times where, you know,

someone will say, give an example

of somewhere you're working right now

and say, oh, we're working in Turkey right now.

Oh, Turkey would never invest there.

I was like, well, let me guess,

you did one private equity investment.

The currency was at 1.5, today it's at 43.

The company's in great shape, but you're not.

It's exactly.

They said, well, that's about how to do the asset class,

not if to do the asset class.

Because at the same time, you probably could have conned

and done a private credit structured loan in US dollar,

gotten collateral, uncorrelated collateral,

and not needed some sort of super monetization event

to get your capital back.

So, like I just think it's all about how people do it

and they tend to come in late cycle

and they come in with very low conviction.

And when does low conviction ever work out?

It's absurd if somebody did that to the US,

they would invest into some factory in Ohio

and then they would say the United States doesn't work.

They had people do that for emerging markets.

When we last chatted, you said that

emerging market indices have done more harm

to emerging markets than almost anything.

Why is that?

Let's continue on the last concept,

which is now someone's made up their mind

to go into the market.

And quite frankly, they're usually chasing last year's returns

when they do it and they look at an index

and then they buy some sort of index tracker, right?

So, they made their decision probably later

than they should have.

And by definition, when you go into an index,

you're going into low conviction, right?

You're buying what somebody else told you to buy.

In our case, an emerging market debt, it's JP Morgan, right?

So, they create the JP Morgan emerging market

on index and it does some really bad things to investors, right?

So, when I started grammar see back in 1998, 1999,

Argentina was 18% of the index.

We were already writing research

about the coming default in Argentina.

Why the heck is it safe to be a market neutral

or benchmark neutral Argentina at eight, nine or whatever?

And you can say that was a long time ago,

but in 22, the same index forced you to own Russia and Ukraine

just as Russia was invading Ukraine.

The issue is that these indices

are just completely passive.

What's the issue exactly?

By definition, when you buy an index,

you don't buy what you've necessarily decided,

you want to buy, you've decided what someone else

should tell you that you should own.

But then look, I get the whole ETF effect in developed markets.

I don't get it in emerging markets.

And what I mean by that is if you look at the last five years

in emerging markets debt,

the index, the blended indexes may be done an average

of not an average, probably eight or nine percent

total return over that period.

Over that five years, the dispersion of outcomes

within that index have been down 95% and plus 200%.

So, to me, that seems like an environment

that at a bare minimum is target rich for active management

or another way of standing,

you're somewhere between negligent and grossing negligent

to take that approach as opposed to a high conviction approach.

What's the right way to approach emerging markets

and what has worked?

I'll start with the notion of high conviction.

And the emerging market story over the past 20, 25 years,

if you were Ripman, Winkle actually came true, right?

Which is you've got these upper limb mobile economies,

populations, GDP growth, and you've had better returns,

than the U.S. comparable risk elsewhere.

The challenge has been is that people

haven't been Ripman, Winkle.

They have been trapped by the cycles that have occurred

within emerging markets.

And each of these cycles has had a name, right?

So, dislocation events.

One was called the tequila crisis,

then we had the Asian debt crisis,

then we had the vodka crisis,

then we had the company in your crisis,

then we had the tango crisis in Argentina,

then we had the global financial crisis.

You would think that a monkey could figure out

how to allocate and trade into this market.

There's very identifiable cycles that have occurred,

but people have done this strange dance

between fear and fear missing out.

So, last year was a great year for emerging market debt,

and quite frankly, for local markets and emerging markets.

What do people want to buy this year?

Local emerging market debt.

The FOMO has kicked back in.

And what will happen is people will allocate to the wrong thing,

they'll be a gap, they'll capitulate,

and they'll blame it on the asset class.

So, how should you do this?

Take a high conviction approach.

Try and capture the return that's embedded in the asset class,

but avoid the downside that has become embedded in people's mind.

The behavioral mistakes that people made.

So, take a top down and bottoms up approach,

I call it like a barbell.

Anchor of the barbell in high conviction yield.

So, once you have high conviction yield

that comes from your single best ideas,

underwrite everything you own,

underwrite everything you don't own,

and what you don't own is equally important.

And then when you have high yield,

the opportunity costs to move away

and make the other mistakes that people have made,

which is people tend to buy distressed

when it's not distressed,

and opportunistic when it's not opportunistic,

in special situations when they're not special.

And David, that's because they don't really have the conviction

on the other side of the barbell.

They don't, and they get shaken out of volatility really quickly.

If you don't have conviction, you end up capitulating.

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This rooted thesis that I talk a lot about,

which is everybody wants to know when to buy an asset.

They never want to know the thesis.

And the reason that's a problem,

the best example of this is Bitcoin.

If I had come to you in 2011, told you to buy it for $40,

it went up to $100, then it went up to $200,

and you sold.

Great, you would have gone to 5x

if you didn't have a fundamental thesis.

But if you had held it, if you had a fundamental thesis,

you'd be up 1,000, 2,000.

A lot of people don't think about the second order effects

of having a rooted thesis.

It's not only you keep you from selling when the asset goes down,

it also keeps you from selling when the asset goes up.

You just have a fundamental view on asset.

I couldn't believe more.

I mean, we call that something different here.

We call that planning the trade and training the plan.

And so when you underwrite something,

you say, this is where I want to buy it.

This is where I think there's value.

And because of the thesis,

this is where I think I should exit it.

So what do people typically do?

As it approaches their target, they talk themselves out of it

because, you know, volatility has made them rethink it.

And when it's well below their actual target,

they tend to sell too early.

So we like to do what I call the happy trade,

not the grumpy trade.

Plan three levels on the way in

and plan three levels on the way out.

So what does that mean?

I want to learn to sing it X.

Well, I should get myself from knowing it at Y and Z

because there's all sorts of reasons.

I'm not smart enough to pick the bottom.

But what a lot of investors do is they wait for X.

X doesn't come and they miss the trade, right?

So for us, it's plan the trade, buy it in three levels.

If I buy it after the first level

and it keeps going down, I'm happy.

But if it grips, I'm happy as well.

The worst thing is the grumpy trade

where you did nothing.

And I think that's a derivation of what you're talking about,

which is people took all the risk.

They said, I think it's worth X and I should get out of Z,

but they changed your mind at Y.

Not because any information changed.

They're just psychology changed.

You have the job of deploying $7 billion

into emerging markets.

How do you go about investing then?

Tell me about your first principles.

This is an asset class where you should come in

with high conviction.

We like to think about this asset class less about beta

and more about how you get returns.

It's a place to go and get returns.

It's a lonely place.

I think people put too much emphasis

on liquidity in this market.

So the idea that the safe way to emerging markets

is through liquid emerging market debt, liquid fixed income.

It's like the gateway drug to emerging markets.

And then everybody buys it and what do they find out?

One, they didn't really need the liquidity

because a lot of allocators, pension funds,

that have been on your show would have you.

They make a decision, it's strategic, right?

We're gonna be two, three, four percent for a long time.

And if we change your mind, it'll take two years.

But they park all their money in T plus one, right?

So number one is the liquidity is not there when you want it,

but the opportunity cost for parking and liquidity

when you don't need it is too high.

And what do I mean by that?

Where we see a lot better return potential

is in structured private credit and emerging markets.

Two, three year duration paper, not one year,

but you can get a thousand basis points

over what liquids get in you.

And you get more return, you get less risk,

and you explicitly give up some liquidity,

not a lot, and you get handsomely paid for it.

I think that to us is what is one of the most interesting

opportunities in emerging markets today.

Give me an example of this kind of investment.

If you were buying the index, you would buy Mexico,

and one of the things you would buy in Mexico

is a company called Pemex,

which is the Quase Sovereign Oil and Gas Company of Mexico.

And over the past few years,

if you had purchased short duration bonds in Pemex,

you'd get about five, six percent yield.

But what do you get and what do you not get?

So when you buy a bond, how is it baked?

So the way a bond's under written in our market

is JP Morgan or some bank calls you at 8.15.

They say we're doing a billion dollar deal for Pemex.

It's 10 times over subscribed, how much do you want?

So there's no opportunity to get your DNA

on the establishment of that credit at all.

And by the way, it comes with a bond trustee,

which isn't really there for bond holders,

they're there for themselves,

and it has a collective action clause.

So what does that mean?

You don't bake the credit,

and you don't have the opportunity to work it out

because of collective action clause,

you get forced into what others want.

And for all that, you get five or six percent,

and it's liquid, except for when you need liquidity

in these dislocations that I talked about before.

An alternative would be,

we lend to suppliers of Pemex.

People will lay the pipes or build the platforms

or whatever it may be.

We get correlated collateral,

which is a receivable from Pemex itself.

And then we get uncorrelated collateral,

things that have nothing to do with the business,

shopping malls, real estate, whatever the family groups may have.

And we're coming in at like a thousand bases points

over that, like 16, 17%.

This is 12 to 18 month paper.

We're not talking about 10 year infrastructure paper

or what have you.

It's advertising, it's not pick, it's cash pay, et cetera.

So give up 12 to 18 months of liquidity,

pick up a thousand bases points,

pick up collateral and pick up uncorrelated collateral.

I think that's a tradeoff you're supposed to do all day long.

Tell me about your philosophy on currency risk.

Do you always hedge it out?

Is there sometimes times to take it on?

I'll say that generally that we look at currencies

and emerging markets as nothing more than opportunistic

from time to time, there's distress.

Now, we run a lot of different returns dreams.

We have fixed income, private credit,

special situations, whatever it may be.

So if I think about it from a private credit,

which we just talked about, the Pemex loan,

we're going to lend in US dollars.

And if not in US dollars,

it's going to be pesos hedge back to dollars.

If one's getting mid-teens returns in dollars

and you can mitigate that currency risk, why take it?

It just adds another layer of risk that's unnecessary.

Another layer of risk that's unnecessary.

And to your point, what's the thesis?

What's the target return and what's the safest path

to that target return?

So if the target returns mid-teens

and you can get that in dollars

and get collateral on correlated collateral,

the currency just becomes noise.

And let's talk about private equity in emerging markets

and that's kind of the Turkish example I gave you a moment ago.

When you buy private equity in emerging markets,

you commit to something for 10 years

and you have currency headwind in your face the entire time.

And over 10 years, why take that risk

when you can lend in dollars,

get private equity type returns?

Like a private equity manager will say,

well, I got you a moick.

They like to talk moick two, three times moick.

Well, you give me money for 10 years,

I'll get you moick too, right?

But if you look at their IRRs, right?

The IRRs that we're putting up,

the yields that we're getting in private credit

and short duration and then turning it over

and over again, well, she's just keep taking our number

for 10 years, it's more than three times, right?

Why take that extra risk?

People talk about assets as if they're priced,

but there's always supply and demand dynamics.

Once some asset gets really out of favor,

the price goes to a price where it's very favorable

to come in, you were talking about,

you people do the exact opposite,

they ride momentum versus trying to go in for value.

Is that why this trade exists

in that there's not many investors

that want to own suppliers to Pemex?

There's a couple of things,

I think private credit emerging markets day,

like we've talked about in the case of Pemex,

you're typically, you want to be solving for market failure

and you want to be getting paid for market failure.

And I think that's what developed market private credit

was doing in the US in 2009 and 2010.

The market failure was the sucking sound of capital

that left the banks, the proprietary capital

that was no longer available to be lent out.

Well, we've seen that in places like Mexico and Turkey

and whatever it may be, which is,

if you go to a place like Mexico and Pemex,

the bond investors are buying bonds.

Banks are being told that they have to lend

senior secured locally

and they don't really have the capacity

for the supplier credit.

So lending directly, they use up their entire line

on Pemex direct, not on the Pemex suppliers.

There's nobody left to lend,

despite the collateral that's there.

If I go to Turkey 2018,

we were getting high teens returns in dollars,

LTVs of like 33% gas stations, shopping malls,

land at the new airport as our collateral.

And why were we getting that?

Because Turkey was in the midst of a financial crisis

and banks were being told they can no longer lend.

And we were able to find borrowers that had great assets

and had mismatches between those assets

and the liabilities that they had created for themselves.

And we had one borrower, they were a supplier.

They would take post-ated checks for their product.

We call it post-ated checks, they call that commercial paper.

January, February, March, April.

And then they would take all those checks

and they would go to a bank and they would factor them.

When the midst of a financial crisis,

the banks stopped funding.

So all of a sudden, they've got these liabilities

and they can no longer turn their assets into cash.

So we're able to turn their assets into cash

and rely upon the value of the assets.

Start the conversation, talking about how absurd it is

to group all emerging markets as one trade,

Turkey, Indonesia, and other countries.

But at the same token, aren't each of these markets

very specialized, have specific relationship networks,

specific diligence, how are you able to have a fund

that focuses on all of emerging managers?

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You have to be able to approach

the asset class both top down and bottoms up.

And the bottoms up for us, which is missing in that question

is we have local teams throughout emerging markets.

So I want to talk about a private credit alone to Pemex.

We have a partner in Mexico who's dedicated to us

who has nearly 100 employees on the ground,

engineers, and what have you,

that are focused on the supplier credits

that we're dealing in Mexico.

Now, we don't give them the investment decision,

nor do we simply pay them to source credit.

We require that they co-invest alongside with us.

So we have lending platforms in places like Mexico, Brazil,

Peru, Turkey, Africa, et cetera.

And the cool thing about lending platforms

and local presence is information in emerging markets

doesn't know if it's long-only or alternative in nature.

It's just information.

So one needs to be properly set up

to capture that information.

So go back to Pemex's example when COVID hit

and oil went to negative 30 or 40 or whatever it was,

well, the bonds at Pemex that I told you about

that were issued at five, six percent,

the longer duration bonds in Mexico went from par

to like 50 cents.

At the same time, our suppliers were paying us.

So we knew that Pemex was paying our suppliers

and our suppliers were paying us.

So this wasn't a fundamental issue.

There was something technical going on in the market.

Now, our private credit team could just sit on that,

but of course, we have an open architecture

to capture this information.

They're like, hey, by the way, we're getting paid

on our credits.

There's not a fundamental issue in the oil sector in Mexico

in 2020.

We're getting paid.

Well, that's informative to people

who are doing other business elsewhere in the platform

to understand that what they're seeing in New York

is very different than what's happening in Mexico City.

Tell me about your team.

Are you focused on a couple of countries

and how do you deal with the cyclicality

of emerging markets?

How do you strategically place your team

and your relationships?

First of all, we have four major teams.

So we have four different return streams and four teams.

And that's different than some alternative credit shops.

I mean, we made a decision nearly a decade ago

to go from like a founder-led firm

with all the investment process and people around the founder

to classic CIO, PM construct,

align the investment teams with the success

of their product, the performance of their product

and what have you.

So within our business, we have four individual strategy groups

and four individual businesses.

And the cool thing is they tend to be very uncorrelated

to each other.

So what's going on in public credit

can be rated for them private credit

and special situations are kind of uncorrelated to both.

So one is the way that we're organized.

So each one of those teams will have portfolio managers

internally, analysts internally, lawyers internally.

I mean, this is very legal, intensive business.

But then we also have our platform partners.

I mentioned close to 100 in Mexico, 35 in Turkey,

another 20 in Peru, whatever it may be, that are essential.

But even that's not enough.

I think a big differentiator for us is,

we've been around as a team for 28 years.

We've been in EM 35, 40 years,

depending on who in the business you're talking to.

And we grew up before emerging markets emerged.

We were involved when emerging markets

was the lesser developed country debt crisis.

And so much of the region was in default.

And we were, our expertise back then

was really on how do you put Humpty Dumpty back together again?

Well, in order to do so, you needed a US lawyer,

a US financial advisor, a local FAA, and a local legal advisor.

Well, that network remains with us today.

So having a great team in Greenwich, Connecticut, London,

and Buenos Aires, and Mexico City's great,

having great platform partners is great.

But having a network of relationships for 35 plus years,

they can give you a color on people.

And David, I think one of the big differentiators

of emerging market credit versus developed market credit

is in developed market credit,

you have to figure out, where are you in the capital structure?

What judge do you get?

And what did he or she have for launch

to determine your outcome in bankruptcy?

In emerging markets, we have to underwrite people.

We have to underwrite all the credit,

and where you want to be the capital structure

of the structure would have you.

But we underwrite people first.

Who are we lending to?

What's their credit culture?

And how they behaved in times of dress in the past

to predict how they're going to behave in the future?

That's where we start.

Because ultimately, of course, contracts matter,

and structure matters, and jurisdiction matters.

But it only matters when you get the people wrong.

Because if you underwrite people properly,

all that secondary that spells a suspended.

Why is it that people are even more important

than the jurisdiction, the paper, the laws?

Because credit is about the ability and willingness

for someone to pay you, right?

Ability is pretty easy to figure out, right?

Financial analysis, the willingness,

like you can work with someone who's lacking ability,

you cannot work with someone who's lacking willingness, right?

So you have to have people of good character

who have a credit culture that's supportive of credit,

not just jurisdiction, but the way people behave,

and then evidence of how they and that culture

behaved in times of dress in the past.

So we do things like, and maybe we over screen

with these biases, but we'll talk about,

we think Columbia has a credit culture,

of payment, and they pride themselves in the fact that

when the rest of Latin America was in default in the 1980s,

they were, they paid.

Mexico has a culture of collection.

If you work the credit, you'll get paid.

There's all sorts of different levels

of how to collect upon that credit.

There's other countries where I would say,

credit is an oxymoron, I'm thinking one in particular

where you're not even allowed in the courtroom

as a creditor when there's a bankruptcy proceeding,

and you wake up in the morning and read what you got.

We're just not interested, right?

So that's the people, the people part of it.

And I've been doing this for 38 years,

and a young greenhouse will come in and talk about,

you know, Mr. and Mrs. ABC and Y country,

I'm like, whoa, you know, let me tell you story.

Let me tell you how they behaved in the past,

or let me give you the names of some people locally

that we've dealt with who know those people really well,

because it matters.

I sometimes I wonder if developed market credit

is people agnostic.

We cannot be people agnostic.

One of the difficulties of emerging markets,

and one also arguably the opportunity is

the geopolitical risk of the specific country.

Do you just go risk off uncertain countries?

Do you, and when do you decide whether you're doing

any opportunities in country,

or is there always an opportunity

that you'll take for the right return?

It's talking about geopolitics,

start to think about the top down,

how macro is affecting what we're doing,

and we're clearly not a macro shop.

I have the good fortune of working with someone

who I think is the most brilliant top down

to code in the world, and that's Muhammad Larian.

And with Muhammad, we have institutionalized the process

to help answer that question, which is,

we wanna make sure that our top down

is informing our portfolios,

influencing our portfolios,

and from time to time, imposing a view on those portfolios.

And, you know, early on in my career,

I didn't have the confidence as the CIO to go and impose

and say, you can't be in that country,

because I think I know it better than you do.

Well, when you institutionalize the process for that,

it's not about individuals, it's about the process.

So, another way thinking about this is,

you know, when you're strictly a bottoms up shop,

you need to make sure that you don't buy good homes

and bad neighborhoods.

So, what we do is we marry the top down with the bottoms up,

and every so often we impose a view,

and I can give you one example.

At the end of 2019, early 2020,

if you recall, everything seemed overbought.

Nobody knew what to do with their cash.

Maybe a little bit like today's environment.

So much FOMO, like there's no value,

but, you know, felt like musical chairs,

but not ready to get off of it yet.

And we wrote a piece about the coming

to the end of the discussion in emerging market debt.

And we said to people, you know,

batting down the hatches,

but don't be afraid to buy the next to the occasion

in emerging markets.

And lo and behold, it came, it was COVID, right?

And everybody told us in 2019, thanks.

Great, give us a call when the next to the discussion comes.

We're ready, we have tons of cash.

Well, nobody listened to batting down the hatches

and nobody listened to March of 2020,

and I had nothing better to do than call them.

And they kept saying things like,

oh, this sounds great, but, you know, we're super busy,

and we can't get to this till July

or maybe the October board meeting,

and they miss everything.

I think one of the most underrated things

and private markets is LP base.

I think LP's can make or break a fund.

When you're dealing in something so volatile,

like emerging markets,

how do you think about your LP base?

And where have you found product market fit

between where you're investing the asset class

and also your investors?

We try not to convince people to buy emerging market risk.

We try and convince people who already have

an emerging market risk to take a better approach to it.

So I mentioned like, you know, pension funds,

sovereign wealth funds, what have you.

They made a decision to be in an asset class.

So you don't have to convince them.

You just have to convince them

that maybe there's a more intelligent way to do it.

So that's one.

Two, and probably, I think it's really important

that in order to meet and beat your client's expectations,

you have to set those expectations properly

and you have to educate them properly about

what to expect when certain things happen.

When I think about optimization of LP's

and particularly as we moved our business

more from public credit to private credit

over the last decade,

you have to have a client that meets the liquidity provision

that they're investing in.

And, you know, I think this is pretty timely,

you know, looking at some of the things

that are going on domestic private credit today

and funds that are being gated or what have you.

No one's talking about the underlying asset quality.

They're talking about a mismatch

that you have investors, retail investors

who won out yesterday or tomorrow

and assets that aren't liquid till the day after tomorrow.

So I think as you are constructing partnerships with LP's,

don't convince them to buy something

that they are not comfortable with.

Try and talk to them about how to solve the problems

that they've had in the asset class in the past.

Make sure that they have the proper alignment

between the assets that you're managing for them

and the liquidity.

And I think the bias is really towards institutions,

not redo.

Two great points.

You're not trying to sell emerging markets to LP's.

You're essentially selling them alpha.

Don't just do beta.

Beta is not good enough to do alpha.

There's another, I believe you mentioned,

a thousand base points for 10%.

The second aspect is really partnering with your LP base

and making sure that they have a prepared mind

and setting the expectations with them ahead of time

of what the asset class means,

what the fluctuations means,

and why that's actually an advantage

and not disadvantage to your strategy.

When it comes to your LP base,

you've been running this for quite a while.

How have you evolved your strategy

and what are some lessons that you learned a long way?

Our evolution has been anchored in the following,

which is one, you always have to be responsive

to what your clients are asking for today.

But you have to think about what they'll be asking for tomorrow

or what you think they should be doing tomorrow.

And emerging markets is rich with that opportunity

to optimize along the way.

You have to understand where there's opportunity today

and where there isn't.

And I think what we've learned in this asset class,

if not all, is that you have to,

if you don't evolve, you're gonna die.

And so we started as an emerging market

distressed hedge fund in the late 1990s

because that's where the opportunity

that really was.

It was in the patient going in and out of the emergency room

and how do you put Humpty Dumpty back together again

and if we could take our capital and expertise,

we could create alpha for our clients.

When the financial crisis said 2008, we step back

and we said the entire world's distressed.

Should we just do MPLs in Portugal?

Right now, that's not who we are.

We bring nothing to the table in terms of expertise

and doing MPLs in Portugal,

just because we did them in Mexico or whatever.

At that point, we just kind of evolved

towards what are our clients asking for?

It's no longer just about distressed.

They're asking for fixed income.

Maybe even a way that we don't think makes sense for us,

but they're the clients.

So we should give them what they're asking for today

and say, hey, maybe there's a more intelligent way

to do fixed income in the future.

So we did things like give them US dollar and local,

but we gave them corporate and corporate high yield

and then that gave us the ability to do blended strategies.

And then more recently, we said, look,

we didn't start doing private credit

because Apollo and everybody else started doing it.

We were doing private credit emerging markets

because we think that's the right way to get returns

from emerging markets for the reasons

that we've discussed.

Give up a little liquidity, get more return,

take more risk.

So it wasn't about that's where the market's going

and the US and maybe we can make it go that way

in emerging markets.

That's the way to get returns in the asset class.

So we evolve towards that.

And then ultimately, our latest and greatest,

if you will, is if you have all the return streams,

you can partner with your clients in those return streams

or you can run some sort of asset allocation on the top.

So we also offer like a single best ideas concept

for our clients to partner with us there.

And that's not just about asset allocation.

We've talked a little bit about asset allocation,

but it's about governance.

And I think one of the challenges investors

have had in emerging markets is they understand

that being tactical is necessary,

but they're not necessarily set up to be tactical.

And the example I gave before, which is, yeah,

give me a call.

Well, it takes them six months to make a decision.

So when you create some sort of single best ideas,

multi-asset up at the top, it gives a client the ability

to underwrite you in the return streams once

and then hold you responsible

for making the right decisions.

One of the things I see the smartest managers doing

is what I would call a pharmaceutical alpha,

which is partnering with specific asset class

to create specific products.

I've had managers do that in the Taft Hartley act,

pension funds and insurance funds.

Have you made specific products for specific verticals?

Or is that not something that you do?

So our private credit and our multi-asset

was intended to be customized complement

to the emerging market debt that people were already doing.

So the plain vanilla of the entry,

the gateway drug that I mentioned before,

we're like, look, there's a better approach.

We're not telling you to go all or nothing,

but you could complement that better,

what you're doing with the better approach.

So that was tailor-made towards pension funds,

sovereign wealth funds, long time allocators.

You mentioned insurance.

More recently, we have developed the rated note feeder,

which is a way to get a rating around the risk

that you're managing and package it in a way

that's efficient for the insurance companies.

And that's, you know, that clearly came out of the bout markets

and the rated note feeder has been around for a while.

So I think we're the first manager to do it in emerging markets

because we're one of the first to do private credit here.

But we try to solve a problem

that our clients and the insurance vertical

we're talking to us about.

I've had a CIO of a $20 billion asset management firm

talk about the need to have an anchor

for a new strategy that they built out.

Is that your North Star?

If you could get a pension fund

or strategic partner to anchor,

that's when you know you might have legs and new strategy?

That's one of the things that you learn along the way, right?

When you are biopically thinking about a market

and the opportunities in the market,

you may think about it very differently than the market,

than the LP market.

So, you know, I think early on,

we get so excited about an opportunity

or return stream, whatever we need,

that we would just put it together.

And I kind of called it teenage behavior

and then we would take it to market, right?

And then, and then we grew up a little bit.

We matured and we said, hey,

and we did this through a series of strategic plans.

And I remember one of them, we said,

we're not going to launch products without anchor investors.

Now, that seems like lazy, like, well, of course,

you shouldn't do that if you don't, you know,

if you don't have that first investor.

But for us, it was like,

we wanted the first investor to validate the concept,

but to help develop the product.

Because like, we manage, we manage risk,

we manage opportunity, we go get alpha.

But I can't tell you that how a state pension fund

necessarily has to bring that in on their side.

So, a lot of what we've done,

whether it was a multi-assing SMA forum,

the private credit, we partnered with our LPs early on

to not only try and increase the probability of our success,

but to make sure, certain that we were solving a problem

that they were trying to solve for.

It's literally a marketplace you have,

a strategy that you think is good,

and then you need something that has demand

and you have to find something,

co-centric circles, you have to find something

that is both good and is good for the customer base.

David, I think it's different in sales and marketing, right?

Like, sales you take what you have,

and you're trying to sell to the market.

Marketing is you're trying to understand

what the market really needs.

And in our case, trying to develop that with them.

You mentioned earlier on,

you don't look to educate people on emerging markets.

Is that a role you ever break?

So, let me clarify if I said it incorrectly,

it's not that we don't want to educate,

we don't want to convince them to take a risk

that they're not comfortable with.

We're all about education,

and there's so much content and so much material

that we have on our platform

that we probably take for granted

that we're trying to purposely go out there

and cascade it to our clients.

So they understand whether it's a top-down macro meeting

that's become a weekly for our clients

or a quarterly for our clients or whatever may be,

but we definitely want to educate our clients.

Again, if you're going to meet and beat their expectations,

you have to properly educate them,

you have to properly set those expectations.

So it's an education that goes from,

as we talked about before, not yes or no, but how?

We have to teach them about the cycles

that have been embedded in this asset class.

We talked a little bit about that,

the key look crisis,

factor of crisis,

capital union crisis,

and why once you continue to expect cycles,

what the cause and the effect of those cycles have been,

and we have to unpack other risks that we talked about,

which is in the end,

we need to talk about political risk,

and currency risk,

and governance and liquidity.

So I don't want to leave you with the impression

that we don't want to educate our clients.

I'm uncomfortable trying to convince someone

to do something that they're not comfortable with.

My point there before was there are hundreds of billions

of dollars that are already comfortable

with emerging markets,

and what I would call the sub-optimal approach.

I'd like to talk to them and educate them

about a better approach.

It's this thin line between finding people

that are sold on emerging markets,

but not yet sold on necessarily how you access it.

Correct.

Have it be a complement and an optimization

of something you're doing

as opposed to something novel that you've never done?

When it comes to emerging markets,

is there a frequent aha moment where investors are like,

oh, now I get it.

And if so, what is that?

I think the aha moment that we've seen recently

is around this notion of high conviction.

I mean, when you talk to people about the last 20 years

has all been about moving towards passive, right?

And emerging markets got pulled into that as well.

And yes, you know, paying 20 basis points

is better than paying 200 basis points,

or paying 15 is better than 150.

But I think the aha moment for people

is starting to focus on what's the net return

that I'm getting relative to the risk

that I'm taking.

If you could go back to 1998

when you had just for started grammar see,

what is one piece of timeless advice you'd give

a younger Robert that would have helped you either

accelerate your career or helped you avoid custom mistakes?

If I can only choose one, I would say

I would seek mentorship early and often.

And you know, I mentor a lot of young people.

I mentor mid-level career people.

I myself, I'm getting mentored.

I wish I had taken that advice much earlier.

I think there's this notion that when people graduate

from undergraduate or graduate school

that somehow they're baked and they're done

and we're supposed to know everything

and the reality is we know very little at that point.

And there are always people who have the wisdom

and the ability and desire to be mentors.

They can help you accelerate what you're trying to do.

And you can learn from their mistakes

as opposed to make the same mistakes they made.

So definitely seeking mentorship early and often.

Is that an ego thing?

Is that a fear of rejection?

Is that a lack of skills?

What causes you not to seek mentorship?

I think it was thinking that I would be annoying people.

Like I probably didn't really realize.

Being considerate.

Being considerate, right?

Like does that person really have time for me?

And the answer was yeah, they did.

People do want to help, right?

And they particularly when they,

like if you have a story, right?

Like what did we do?

We came into a market, but we were entrepreneurs.

We built a business, right?

And we had a story behind that business

and it had all sorts of fun narratives to that.

People really got excited about that.

And I wish that, you know,

I wish that I had sought that mentorship earlier.

Some another way, by not seeking mentorship,

you're oftentimes robbing the other person

from their mentorship,

from them getting back and getting back to the next generation.

Yeah, absolutely.

And, you know, I mentor a young man today.

And I learn more from him than he learns from me.

We go back and forth.

And I'm learning about the way

that his generation thinks about things.

And he's learning, getting hopefully some wisdom from me,

but I really enjoy it because it's like being on a board.

They can be on a board.

People think you're on a board to provide wisdom.

But actually, when I sit on a board, it's like, wow.

Like when I learn on a board A,

I can definitely apply to board B.

And it probably applies to the grammar C as well.

Well, Robert, this has been absolute masterclass.

Thanks so much for jumping on.

Thank you, appreciate it.

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