3 minute interview: When the next crisis hits, the cavalry won't come to the rescue

Friday 3 July 2020

Robin Creswell, Managing Principal at Payden & Rygel Global

Author: Maha Khan Phillips

Robin Creswell, Managing Principal at Payden & Rygel Global, talks to Professional Investor about the implications of the current crisis on the asset management business

Robin Creswell has seen many different types of investment crises during his decades in the asset management industry. But, says the regional head of Payden & Rygel Global, the international firm with $114 billion in assets under management, there are real ramifications for what asset managers are facing today.

“Asset managers will have to think about whether successive governments in successive nations will always come to the rescue when there is an event like this,” explains Creswell.

He believes that public opinion may gradually shift, making it politically unfeasible or unacceptable for governments to provide a fiscal bail-out to markets when the next crisis hits.

“First of all, we’ve got to imagine different scenarios. We’ve got to imagine future crises, different reactions, perhaps less timely reactions. The government reaction was exceptionally rapid this time, it was a matter of weeks, or a month or two, whereas last time it was twelve months. And this will affect the way we think about portfolios, and how we think about asset allocations,” he says.

Creswell believes governments can do more. “My concern is that interest rates generally have been nationalised. Interest rates are not set by the market, they are set by central banks who are to a greater or lesser extent independent, and when any asset is priced centrally, you tend to get less good outcomes in terms of poor allocations of capital. I think the disappointment of the last ten years is that we have had ten years during which there has been a lot of time to potentially resolve leverage in the capital markets.

Instead of building better structures, and addressing the leverage issue, governments have had to come to the rescue for a second time in a decade. “If there is no remedial action, if we don’t work our way out of this over the next ten or twenty years, when the next crisis comes, the cavalry won’t come to the rescue,” he says.

So do governments recognise the concerns? What is the likelihood of these structural issues being resolved?

The initial signs are not promising, Creswell feels, pointing out that the Bank of England is considering negative rates. “In my view these very low and negative rates are a mistake. Had we anchored rates four or five years ago where they were, and had we had small incremental upward movements in rates, at a rate at which corporations could handle those increases and remain solvent, it would have discouraged reckless limitless borrowing. Some businesses might have gone bust, but guess what? They have gone bust now anyway. So we have had zombie companies kept in business through low interest rate subsidies that unfairly compete with more prudent less levered companies. The latter have to keep prices artificially low to be competitive, which constrains their ability to invest in their businesses, hire labour, and grow productivity,” he argues.

Creswell is proud of how Payden & Rygel has responded to the crisis. Business continuity has been seamless, he says. “In terms of the function of the business, incredibly, no impact at all. We were a little bit lucky that we went through a disaster recovery scenario some years ago, where we discovered that our remote sites in Phoenix weren’t really a practical solution for continuity planning, so we actually closed those sites. So for four or five years our disaster recovery has been predicated on people working from home. And the other bit of luck we had is that we moved offices about six months ago in California. We only moved a couple of floors, but we bought zoom licenses for all our staff world-wide. So we had a bit of a first mover advantage because when this happened, everybody went home. They all had computer equipment at home, video equipment, they turned on their computers, and it’s been a completely one hundred percent seamless move to home working, which has been amazing.

The crisis has also had little impact on the business itself. Liquidity outflows in March have been ‘negligible’ says Creswell, and in fact the firm has won mandates and increased its assets under management since the beginning of the year, as clients have benefitted from monetary stimulus.  “Every time there is a major event, 08/09 was such an event, and 9/11 was another, remember that Payden is potentially a very big provider of liquidity to clients, and that is their expectation,” he points out.

Creswell believes asset management will be permanently changed by the crisis. “It’s really too soon to be very specific, it’s really too soon to know how those changes will materialise, but I think we can look at the big picture, and what we are seeing I think is more of what we would call a barbell approach. Institutions still are as keen as ever to take risk. Institutions seem to have a huge appetite for risk, whether it is private equity, or real estate, or other alternative investments. I don’t think that is going to change. In fact, I think there will be more demand for those,” he explains.

He believes clients will become more thoughtful about where they allocate capital from to their risk budgets. “I think we might see some of the short end less risky portfolios become a little bit more staid, and I think people already have a pretty good understanding that if you want capital security and liquidity security, there are certain things you have to give up, and yield is one of them. We are effectively in a zero yield world, and I think people will reprice the security part of their portfolio, and that will lead to a couple of decisions. Some will take money out that they will redeploy to the riskier areas, knowing they face more risk. Others will simply say that low rates and for some, negative rates, are the premium sacrificed in return for immediate liquidity and capital stability. And our job will be to make sure that if they pay that premium, these portfolios are of indubitable liquidity and capital security.

Robin Creswell, Managing Principal at Payden & Rygel Global

 

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