Howard Marks Says ETFs Aren't as Liquid as Investors Assume

we look at the flows this year we've sixteen trading days so far this year and boy are people buying ETFs left and right we've got 50 2.7 billion in year-to-date flows that's a three point three billion dollar a day pace that's 50% more intense than the flus last year so what is the difference this year the X Factor is spy SP y alone has put in 14 billion dollars in flows now spy normally has bad January's so that's despite that so what I what I interpret this as is traders are very excited about the market right now namely equities IV V is number two but IV these more allocators so that's the buy-and-hold crowd so what you have is traders and buy and hold on the same page both loving equities what seeing outflows if anything so far this year we look and we see not much but what sticks out to me is a couple junk bond ETFs hyg j and k and then BK ln is a little further down to billion out of junk bond ETFs could be rising rates normally you see those on the other side when there's a risk on trade going on but right now we're seeing flows out of junk bond ETFs which is interesting but this to me is the story so far this year in the flows alright well we'll get more of a read on that I want to welcome Howard Marks co-founder and co-chairman of oaktree capital management the world's largest distressed debt manager and when Howard writes memos to his clients as he did this week investors sit up and listen Howard what is her takeaway when we get data showing that money is flowing into spy big cap US stocks and out of high-yield credit well you can look at it constructively or not the constructive interpretation is that people have made a decision that interest rates are going to be rising and that's bad for bond investments and so they should get out and that you can't argue with that with that conclusion the less constructive interpretation would be that stocks did so much better than bonds last year that now everybody says oh I want stocks now what they really want is stocks a year ago or maybe stocks eight years ago but of course you can't buy that but you know people people misinterpret and they think that what it did last year is indicative of what it's going to do next year so it's momentum building on itself at this stage of the market and economic cycle what are you more concerned about equity ETFs that you say keep driving prices higher which attracts more bids or high-yield ETFs that promise liquidity even though the underlying securities can be pretty illiquid well good question which which do I worry about more the easy answer is that I worry about both I'd have to struggle to quantify it but you're right you know I've written about high-yield yeah bond ETFs and you know high-yield bonds are inherently illiquid and people buy ETF's instead of bonds themselves because they think that the etf is liquid but how can an investment vehicle be more liquid than the underlying assets so that that's that's a big question and then of course as the stocks yes you have to worry about piling into stocks after they've had a big run you know I put out this memo this week that you mentioned and the p/e ratio on the S&P 500 is about the third highest in history and you know you have to think about that so the answer is we're in a low return world and there's no easy place to to invest one of the most interesting things I think you've written about is this buying of assets on autopilot right through passive funds yes like spy it's definitely true there's been just about a trillion dollars buying that money now I'm curious what you make of smart beta which is it's a rules-based index but it takes active fundamentals that active managers like and puts it into the recipe of the index and then buys them all based on fundamentals curious what your take is on smart beta Charlie Munger once said to me Warren Buffett's partner and none of this is meant to be easy anybody who thinks it's easy is stupid can you do better by going from a passive vehicle to an active vehicle which is what what a smart beta is its I guess we'd call it a semi active vehicle and the answer is if the decisions that are made are good ones it'll be better and the decisions that are made are bad ones it'll be worse so there's the great thing about the investments there's nothing you can do which just by doing it is going to make you richer you have to do it right and you know if you say you I want to have a I want to have a smart beta fund and I want to emphasize small caps and technology and low quality that's an active bet on those factors if you've made a good decision you'll make more money than a passive fund and if you made a bad decision you'll make less now whether it's passive or semi active whatever form of the ETF I wanted to get your take on hyg and the kind of dislocations that's had in the past we spoke with Matt Tucker the head of iShares fixed-income about whether hyg would ever trade an 8% premium or discount to its net asset value like it did in 2008 he said it's unlikely and then he followed up with this explanation let's listen if those premiums are discounts what I'll tell you a lot of times is the ETF is telling you where the market is so a lot of times with the ETF's at a premium that's because the underlying bonds haven't yet been marked up their prices are not yet reflecting new market information which the ETF reflects real time so Matt is essentially saying that each X can be an efficient price discovery vehicle in illiquidity illiquid securities do you think he's right is he wrong I guess it I guess in theory he's right you know I think what he's saying is that that ETF strayed more actively and in in a shorter time frame and and though so they priced more currently and what he was saying is that you can have an ETF which you which is underlaid by let's say a hundred bonds those bonds haven't gone up but the ETF has on the assumption that the bonds are going to it may work and again it's it's an active decision and do you like it but you know most of the time they tell me ETF should trade in line with nav and and the great word in that sentences should write and I've seen a lot of times in my 49 years in this business when should and will we're not the same thing sometimes the things that should happen happen as sometimes the thing that should happen don't have right right just want just on that note we you know heard that you're gonna work with advanced to file in the next shares which is an exchange-traded managed fund right which is a way for active managers to utilize the ETF structure but not because of Holdings every day what was behind your decision to get involved that well eat an ATF is a vehicle for participating in a certain set of securities it could be a passive index it could be a smart beta where you're trying to augment the return on the passive index by making some active decisions on on style or it could be active management delivered through an ETF delivered through a vehicle which is traded on the market you know as long as people by ETS for the right reasons and with the right expectations I think they're fine and I think it's a way to deliver an investment product to the retail market we would not first of all we're not involved at all in passive investing or even in smart beta semi passive let's call it and and you know we are active managers we're trying to we manage a relatively small about the money compared to the etf giants and we try to find little opportunities to add value so so the TMF permits us to do both permits us to deliver the product through the etf market but also to have active management now we wouldn't want you know ETFs have to disclose their holdings every day we wouldn't want to do that first of all it's laborious and secondly people confront right you right right and so the EMF doesn't have that requirement we think that's a good solution

Channel: Bloomberg Television

Views: 28,904

Keywords: Bloomberg

Id: bTj639snDOw

Length: 9min 0sec (540 seconds)

Published: Thu Jan 25 2018