Notes from Delivering Alpha 2014, Part I

I woke up this morning at 5:30 with no alarm clock. It was dark and gloomy for the drive into Manhattan but I couldn’t possibly be in a brighter mood. Today I get an opportunity to see and hear from a dozen of the world’s greatest investors all in one day at CNBC and Institutional Investor Magazine’s 2014 Delivering Alpha Conference. 

As I approached the Pierre Hotel on Central Park, the Comcast and NBC News trucks were lined up out front in a convoy. Technicians unspooled a snake pit’s worth of thick, black electrical cords from Madison to Fifth Avenue. A quick coffee and a few hellos and I’m in my spot – covering today’s events for you, live from the east press balcony of the Pierre’s ballroom. 

What follows will be my notes from each panel, which I’ll be writing as they happen (violating the blogger’s cardinal rule: Never write directly in the CMS!). Direct quotes will appear “in quotes” and everything else should be read as paraphrasing. I hope you get some interesting insights out of today’s events. Thanks for reading!  – JB


delivering alpha 2014

8:20 – 8:30 a.m. WELCOME

Master of Ceremonies: Tyler Mathisen, Co-Anchor, “Power Lunch” and “Nightly Business Report”, CNBC
• Diane Alfano, Chairman, Institutional Investor
• Mark Hoffman, President, CNBC

Tyler tells us there will be surprise guests popping up throughout the show. He says maybe LeBron so we know that one’s definitely not going to happen. But I am curious whom they may have gotten – and why have them be a surprise at all.

Diane Alfano (II Mag) makes her opening remarks: “Active management DOES have a future.” – LOL, it’s like a religious affirmation in this room, an article of faith. Cute.

CNBC’s Mark Hoffman comes out, he’s the head of the network. Mentions it’s the fourth year of the conference and a big point of pride for CNBC. Personally, I thought last summer’s conference was the best one I’ve ever been to (and I’ve been to a lot).

8:30 – 9:05 a.m. KEYNOTE

Jacob J. Lew, The 76th United States Secretary of the Treasury
Interviewed by Jim Cramer, Host of “Mad Money w/ Jim Cramer” & Co-Anchor of “Squawk on the Street,” CNBC

SecTreas Jack Lew makes some prepared remarks about cyber security…

Some banks are already spending $250 million a year defending against cyber security. Since 2011, we’ve seen more than 250 Denial of Service attacks against financial institutions’ sites, “almost certainly intended to disrupt our financial system.”

Jack Lew has been traveling around assessing the threats cyber criminals and digital attacks pose to the financial system. He’s been to a Verizon network installation in Virginia and has also been to China to discuss the threats there. He’s saying the responsibility to defend the financial system from security breaches should be shared by the Federal government and the companies themselves. He wants Congress to pass “cyber legislation”.

Jim Cramer comes out, asks Lew what he thinks about the threat to the market from erroneous news on Twitter and social media. Lew seems fairly unconcerned given the real threats out there.

On companies inverting to avoid taxes, Lew thinks corporate tax reform legislation is the answer. “We need to do something to prevent all these companies from rushing to do these inversions.” What a toothless, limp-wristed response. He says “there are limits to what we can do in the administration without some sort of legislative action.”

(editor’s note: Weak sauce, Jack.)

The President could actually come out and blast this stuff, putting all the pigs on notice. Jack Lew is a former Citi oprichnik, and it shows.

Cramer asks what tax rate would make us competitive with “regimes that have 8-10% rates?” Lew says somewhere in the 20’s would do the job and make it more attractive for “income to come home.”

On Treasury issuance and matching up with what the market wants: “We’ve seen a gradual lengthening of maturities in the last few years, but we don’t try to time it….Any attempt to try to time our products to capitalize on an interest rate of the moment would probably not be a good idea.” (editor’s note: WHAT interest rate? )

On the economy: Right now, the challenge is not deficit reduction. It’s GDP growth and rebuilding our infrastructure, worker training and immigration reform.

Bilateral discussions with China seem to be very important and front-of-mind for the Secretary. Cramer asks whether or not we have any carrots or sticks they even care about to get them to stop manipulating their currency. Lew’s like, “We are very confident enforcing unfair trade laws, we bring actions against them when there are violations, while at the same time approaching them about agreements so that these violations don’t occur in the future.” LOL

Cramer baits Jack Lew about whether or not it’s ever appropriate for a Federal official to comment on moves in the stock market. He says no. The room laughs at Cramer’s subtweet aimed toward Yellen about her remarks yesterday re: biotech stocks and social media stocks. Lew’s like “I’ll leave it to the people in this room to make judgments about individual market moves and stock valuations.”

9:05 – 9:35 a.m. THE GLOBAL STAGE

Moderator: Kelly Evans, Co-Anchor, “Closing Bell”, CNBC
• Lee Ainslie, Chief Executive Officer, Maverick Capital
• Mary Callahan Erdoes, Chief Executive Officer, J.P. Morgan Asset Management
• Paul Marshall, CIO and Chairman, Marshall Wace
• Jane Mendillo, President and Chief Executive Officer, Harvard Management Company

Kelly starts by asking Harvard Jane about her endowment’s low allocation to US stocks (11%), she says its inline with recent history, notes she also holds 11% in EAFE stocks as well. Kelly follows up with a great question: Why are you paying so much in fees when you can just own a 60/40 stock bond portfolio. Jane says no regrets about all the fees she’s paying for fancy managers because they’ve reaped billions in profits from their mix of liquid and illiquid assets in the portfolio. She  says “No regrets, Kelly”.  (editor’s note: I doubt it.)

JPMary: “At JPMorgan We’re delivering alpha every day.” LOL

Kelly’s asking awesome, tough questions about how much people have underperformed by trying to avoid the volatility of the stock market or trying to be too exotic. JP Mary’s like “Well, if you just invest in the markets, you get what you get.” (editor’s note: up 200% in five years, most people are okay with getting that, which is the subtext of Kelly’s question.) JP Mary explains that sophisticated investors in Europe want to be long and short, “it’s about how you invest, not which indices you’re involved with.”

Kelly asks Jane if she thinks Mary Callahan Erdoes should be the next CEO of all of JPMorgan. Jane smiles, Mary demurs to comment but doesn’t shake her head no.

Lee Ainslie says there are still opportunities in the markets as companies focus on shareholder value. Ainslie seems troubled though by the ultra-low levels of volatility. He’s buying risk instruments (assuming Vix futures) “very cheaply right now.”

JP Mary thinks that people putting money into the bond market are making the mistake of either investing based on current yield or “worse, they’re looking at the total return of the last 3-5 years and not understanding the risks of convexity.” She says that the majority of the $50 billion that’s come into JPM Asset Management this year has been for bonds, but thank god a lot of that fixed income money is going into the unconstrained bond funds they run, which are benchmark-agnostic and can be short bonds. Kelly follows up and asks JP Mary if she thinks “fixed income investors are aware” that they’re buying into a product that shorts bonds. She says yes, she believes they’re aware.

Is the Fed behind the curve? Harvard Jane doesn’t have a problem with the Fed’s recent remarks, thinks the Fed needs to keep treading the line and pulling the band-aid off slowly. She thinks the Fed can start to let rates rise, and that the world is ready for that now.

JP Mary is bullish on Emerging Markets right now, “they’re set up for a big run over the next 12 to 18 months.” (editor’s note: She oversees $2.3 trillion in assets, she could privatize the Mexican stock market herself – if that’s where JPAM is going to allocating, worth considering for the rest of us.)

Marshall Wace, who is British, disagrees: “China is either uninvestable or its a value trap.”

Kelly asks JP Mary if we’re in another credit bubble: “It’s not a bubble if we grow into it, it’s a bubble if it stops right now.

Marshall is worried about the internet disrupting business models around the world, In finance, he says banks are being picked off. He would avoid them. “Everywhere a bank makes money, it is being attacked” by technology-assisted competition.

9:35 – 10:00 a.m. KEYNOTE

Ken Griffin, Founder and Chief Executive Officer, Citadel
Interviewed by: Kate Kelly, Wall Street Reporter, CNBC

Ken Griffin starts with a comment about the Fox – Time Warner merger buzz. “I think it’s a great deal. I think the answer should be yes.” He notes that “Because there is no controlling shareholder at Time Warner, the transaction will come down to a vote from every institution that is invested.” He says Murdoch’s current assets are really well-positioned globally.

Kate Kelly goes right into Flash Boys, HFT. “I know you think this is constructive for the markets, but…what is the rationale behind payment for order flow?” LOL

“It’s tenth of a penny and it is a practice that has a long history, it’s replaced internalization of orders from 15 years ago.” His point is that there was always something like payment for flow, but now its being done by a network of boutique firms like his.

Kate asks if it is fundamentally fair that some people don’t have access to the same information at the same speed. Griffin says that it is available to anyone who wants to pay for it. “We’re not secretive, we’re hesitant to try to express our thoughts and ideas on the topic in two sentences.” He says these are competitive trade secrets, “like the recipe for Coke.”

Griffin mentions Citadel is now moving into other areas where they can be competitive. “We’re moving into interest rate swaps, as a market maker, as we speak.”

Kate: Talk to me about the soul-searching period for your firm after your losses of 2008 (they lost half of their capital). “We really, as a team, did a fantastic job about pulling together and making some tough decisions.” He mentions that CNBC had a news van parked outside his headquarters waiting for the bankruptcy announcement. “The key in the moment of crisis was to understand where the future was going to lie.” He moved into transparent, liquid markets – “there’s very little complexity in the markets we’re now involved with”.

Kate asks about how Citadel has kept a low-profile and avoided the problems of the SACs of the world. “We’re very focused on winning on the merits and we have a strong culture of compliance.”

On Janet Yellen: “She’s very thoughtful” Says she’s much better off waiting to raise rates, rather than raising rates and then trying to roll it back or halt it. “We really appear to have some positive momentum in the labor market for the first time in several years.” He wants her to wait until it’s clear the economy is strong, and then to “move decisively.”

On the State of Illinois (he’s made a huge campaign contribution recently): “The need for change in Illinois is much greater than the need for change in Washington” (big laugh line). She asks if he would ever run for governor, he says he wouldn’t rule it out “but I can’t see my future.” He’s totes going to run one day. “The Polarization in Washington cuts against what most Americans want. The differences between Republicans and Democrats are not so far apart.”


Stay tuned for Part II of my Delivering Alpha coverage coming shortly!





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