Doug Hodge, the COO of PIMCO, kicked off Morningstar’s ETF Conference Wednesday evening with a measured, thoughtful address that spoke of what we’ve all learned about the travails of investing in the post-financial-crisis world.
His speech was chock-full of market and economic data that called into question, for example, the traditional teachings of the capital asset pricing model, which he suggested “doesn’t quite hold up when it comes to distribution.”
Hodge reiterated this point with the not-so-newsy revelation (at least to advisors) that “there are fat tails,” that “black swans do exist” and that in the real world “asset prices don’t always revert to a mean.” The audience—perhaps not all of the 550 registered attendees were in the room—respectfully listened as this representative of the world’s largest bond manager argued that for advisors, “active management is required,” that they should “diversify your return engines” and “employ downside risk mitigation, because there are fat tails and correlations do change.”
He said that “we have much to learn” from the still-newish science of behavioral finance, and urged the audience “to face demographic realities and communicate them to our clients; we have to factor in unanticipated shocks.” Most appropriately for this conference, he recommended that advisors should “use ETFs as tools to remain active and agile” in building portfolios, while ”never losing sight of our fiduciary responsibilities to our clients.”
Then the question and answer session started, and the measured, thoughtful speech was forgotten as several audience members asked Hodge to directly address the government shutdown and its effects on the economy. He was asked about the debt ceiling and whether Social Security recipients would continue to see their benefit checks.
Good-naturedly responding more than once that “this is a tough audience,” Hodge patiently answered the questions. At least one of the questioners, I discovered in the reception following the keynote address, was not an advisor at all, but an individual investor. The Morningstar ETF conference has grown over the years—the attendee number this year was up 20% this year, reaching that 550 number, with 35 sponsors, a Morningstar spokesperson told me earlier in the day.