Lisa O'Connor, Head of Global Model Portfolios & Co-CIO for Multi-Asset Solutions, BlackRock

[00:00:00] Hello, this is Dean Curnutt and welcome to the Alpha Exchange where we explore topics in financial markets associated with managing risk, generating return, and the deployment of capital in the alternative investment industry. With early career roots in both equity derivatives and relative value fixed income, Lisa OConnor

[00:00:24] is now the Co-CIO of Multi-Strategy Assets and Solutions at BlackRock. Here, she oversees her team's development and delivery of a long-only systematic asset allocation process on behalf of the firm's clients. Our discussion first considers some of the lessons Lisa has derived from market risk cycles.

[00:00:42] In reflecting on vol episodes, she asserts that markets become very focused on relative value during times of crisis. That is, in higher risk environments there's much greater differentiation across risk categories as investors evaluate which assets can truly be defensive or at least weather the storm.

[00:00:59] We talk next about the model portfolio process in the mix of quantitative and fundamental factors that drive the asset allocation decisions. In contemplating the role of duration as a portfolio ballast, Lisa is concerned about risk-premia in the back end of the curve as a function of fiscal deficits.

[00:01:15] Instead, she sees value in diverse fires like gold, especially as China is increasing its gold holdings. We also spend time on AI and the challenges of being too little or too heavily invested. In looking for evidence that the Roaring-CapEx cycle may have peaked, she's following emerging

[00:01:32] signs of spending discipline from hyperscalers and tracking the reported ROI's from investment out 18 months. Lastly, we talk about the Fed easing cycle and its potentially positive implications for the market pricing of equities with more balance sheet leverage.

[00:01:46] I hope you enjoy this episode of the Alpha Exchange, my conversation with Lisa O'Connor. My guest today on the Alpha Exchange is Lisa O'Connor. She is the Co-CIO of Multi-Asset Strategies and Solutions at BlackRock. Lisa, it's great to have you as a guest on the Alpha Exchange today.

[00:02:06] Oh, thank you so much for having me, Dean. It's great to be here. I am excited to have been introduced to you and to have learned a little bit about your background in our pre-call.

[00:02:15] It's going to be excellent to explore your framework and the role that you and your team at BlackRock play on behalf of the clients of BlackRock. So let's get our conversation underway. I always like to learn a little bit about career history.

[00:02:29] So you spent a fair amount of time at both State Street and Mellon as well. Walk us through the early days of your career, how you got into markets and how that led to your current role at BlackRock. So into markets is an even longer story.

[00:02:43] I mean, I really thought I would do something quite different and like in the Foreign Service found that I didn't like it. And so I had to do a hard pivot. And I started working because I had done it here abroad in France, I speak French.

[00:02:57] And I'd done a lot of econ work. I started working actually in equity derivatives kind of in the early days, which was phenomenal. It was actually great to start in derivatives. I just loved it.

[00:03:06] It was a very quickly evolving space kind of in the early days of some of this. Some of kind of what is really now very traditional derivatives. And then from there, I had been in a lot of conversations with one of my colleagues.

[00:03:20] And some of the, if you kind of think about Delta and Gamma kind of thinking about similarities to duration and convexity got interested in fixed income and went to work in fixed income. Both global and US fixed income just kind of traditional course core work.

[00:03:36] And then from there, I went to Mellon Capital and I blended those two interests. So there were stock plus portfolios where what you're doing is you're continuing to roll the futures. And you pay the futures cost and then what you can earn in excess of what you pay

[00:03:51] to be long the futures is kind of drives your alpha. So those were pretty flexible portfolios. We could do a lot of dynamic trading where we were selling ball. There was all sorts of interesting, it was fairly early days in the AsaBeck space.

[00:04:05] And so we were able to capture some really interesting opportunities that way. And from there kind of having us that backbone both derivatives and deep into the fixed income space, I went deeper into the fixed income relative value and global macro on the hedge fund side.

[00:04:22] And a lot of that it was quantitatively driven strategies. Really what you're looking for kind of are mispricings that are quickly mean reverting right? So you're looking to be disciplined in how you're capturing alpha opportunities.

[00:04:37] And some of the ways that I was doing this, especially in the fixed income relative value space were market neutral, whether it was duration neutral or looking at really controlling that broader market risk so that mispricings drove the bulk of the alpha.

[00:04:51] And so that was a really interesting space. Those times once you kind of neutralize your primary market risk then you tend to have the most opportunities during periods of high volatility. And so during periods of low volatility that's when the market kind of dies up on you.

[00:05:06] So by about the 2005, 2006 these strategies were doing quite well and started extending more into fixed income relative value. And so it was really great 2008, 2009 there was plenty of disruption. And so we were able to capture some nice upside.

[00:05:24] And then on the other side of that when beta really started to roar, that's when some of these other strategies kind of quieted down. And then it's all about taking as much beta as you need to do so.

[00:05:35] So kind of right around that period of time just trying to do the investment triggers to change roles. I was really thinking about broader than valuation, broader than classic current relative value. Really interested in exploring kind of the macro side and went to state

[00:05:51] street but just as a part of them it was the global advisors as part of the hedge fund group and we had a variety of different hedge fund strategies. There's a lot of interesting spaces in the commodities, CDXs.

[00:06:04] And so it was a really interesting moment because there was still an ample amount of financing. Beta was inconsistent, wasn't roaring quite as much and you still had enough alpha opportunities. So it was a very interesting space.

[00:06:19] But by the end of 2017 was really thinking about next stage and I came here to BlackRock and the role that I'm doing is long only asset allocation which is nice because all this work that had been done, I'd focus a lot on fixed income relative value.

[00:06:37] Then I focus a lot on commodities deeper into the equities and through the global macro side and the credit side. And what's been really nice in this role is to be able to capture each of those different spaces but what's different is that it's not levered.

[00:06:50] This is long only asset allocation. But when you really think about what that means, it's like some of these core fundamental aspects of finance. How much home bias do you want to be taking? Because these SAA decisions can end up driving a lot of your longer term returns.

[00:07:05] And so my focus now is on both SAA, TAA and kind of really thinking about that relative value but in a long only space now truly through ETFs and active funds as opposed to some of the instruments that I've utilized before in previous parts of my career.

[00:07:23] So it's been great. It's been a really interesting element. We did use ETFs quite a bit in the hedge fund because they're just such efficient ways to capture exposure but we probably use a lot of them levered up.

[00:07:35] So it's a little bit different being long only as opposed to alternative but I mean, it's a lot of the same fundamental views driving portfolios. We'll have a lot to talk about in kind of the product that your team and

[00:07:50] you deliver as a function of model portfolios and these active tilts, how you arrive at them, the kind of process you use. But as you introduce the early parts of your career, I got to say you had me a gamma vegan convexity.

[00:08:05] That was kind of music to my ears in the first one minute. You were going back through your career history and look, you've been doing this for quite some time and I think one of the things that folks

[00:08:18] that are in markets for a while get the benefit of is just experiencing change. And when you first popped into equity derivatives, there certainly were no zero data expiration options, the OTC sort of exotic space much far less built out than it is now.

[00:08:37] And then in rates as well, of course, the US Treasury market's always been the bedrock of pricing and liquidity and the kind of information content of the yield curve. That's not a new thing. But what is a new thing is sort of the presence of central banks,

[00:08:52] the presence of exposures that sort of arise from the promises held out by central banks. And I'm kind of pointing to the Fed here specifically. And so I was just hoping you could reflect back a little bit, maybe 30,000 feet from the fixed income lens of your career.

[00:09:11] And as you talk about relative value, mean reversion, all these things are impacted by, again, the new presence of central banks, technology, developments in modeling infrastructure. Of course, BlackRock's been a pioneer in that.

[00:09:26] I'd love for you just to hear you think back on the change in things like fixed income and the pricing relationships, how quickly or how much or little they get out of line. What's different and what's similar over the last 20 odd years?

[00:09:43] I think what's similar is that the market gets very focused on relative pricing in a time of crisis. So things where people can get a little complacent during heady economic times, people price with a lot more attention when things are tough, right?

[00:10:03] And other things that are also similar and have been important financial conditions you think about. I've never found it to be that helpful if it's ample or ample-ample, but if it's tight, that's a game changer.

[00:10:17] And so kind of thinking about how markets price in that kind of scenario, watching how financial conditions are evolving is really important. The thing that I think has been such an important change over the past maybe even just 10 years,

[00:10:32] just the amount of issuance and thinking about natural holders, I think kind of really understanding the Fed's balance sheets and how it changes is important. That's become a major driver and something to really keep in mind as I think about the risk-premia going forward.

[00:10:53] I don't see a tremendous amount of fiscal discipline anywhere in the US, so I can't anticipate that issuance will continue, right? And so that does make you think about how long a bond profile you want to keep us in your SAA, right?

[00:11:08] Because if I think about what can happen at the back end of the yield curve, if risk-premia has continued to rise, that's important. Along those same lines, if I think about who are natural holders of US treasuries. Now on one side is the population ages.

[00:11:25] People tend to hold more fixed income, so there are some benefits that way. But then if you really think about central banks as a purchaser, that also has been changing. I mean, China's central bank reserve holdings have been migrating out of US treasuries

[00:11:39] and it's boosted its gold holdings from like 3% to 5% on 3.4 trillion in reserve. So those natural pockets as they've really, if you take a look, they've really drawn down the amount of treasuries that they're holding.

[00:11:53] And so you kind of think about where are the natural pockets to hold large bundles of bonds? And it's not quite as evident as it was 10 years ago, just given how much the geopolitical landscape has been changing. It's a really interesting area of exploration, this idea of

[00:12:12] how does the back end react to a proper risk off? A growth shock, an uncertainty shock. Perhaps there's a repricing of future inflation that is commensurate with that growth shock. The old days, of course, the bond market's going to rally like crazy, probably across the entire curve.

[00:12:32] It's a little less clear now, just given I think what you're pointing to is this lack of fiscal deficit. We promise not to talk politics, but one area of bipartisanship, I would say, is there's just no conversation around fiscal discipline. Maybe that's just by design these days.

[00:12:49] But do you look at the back end of the yield curve in US treasuries and think, okay, it's just supply demand and there are new dynamics there? You point to China reducing vastly its holdings of US treasuries. Of course, Russia is another one that's maybe a different reason.

[00:13:04] But how do you think about the reaction or the ability for duration to play a really meaningful role as a stabilizer and a significant equity risk off? Is it going to be different? How do you frame that out given the supply issue and the risk premium issue

[00:13:22] I think you're pointing to? At base, it becomes the stock bond correlation. How much do you believe in it? Can you rely on it? So you think in higher inflationary moments, stock bond correlation tends to be positive.

[00:13:34] And so you don't get that portfolio hedge that you do in other times as it goes towards a negative stock bond correlation, which is so helpful if you're looking to hedge. I have some concerns, right, of how much I tend to look sometimes at nominal bonds.

[00:13:51] But they're just one of the things in the toolkit, to be honest. If I think about stabilizers, you can also think of a variety of other things. Some of our global portfolio, we are using gold. And in this world going into a multi-pronged geopolitical landscape,

[00:14:08] that can make some sense. So we do use that in some places. Other places, if you're concerned about the instability of stock bond correlation, because I think that's really the question. If you have continued fiscal deficits and continued rise of the risk premium,

[00:14:25] then it's just not that attractive of a hedge. You can also, if IG spreads are really tight, and you know whether it's IG, if you're really bold, you wanted to take high yield, there's a lot of spread that you're bent against,

[00:14:37] if you don't, is you can underweight your credit to help hedge an equity position. And that can be quite helpful because the correlation is very, very stable. Now you have to be careful on how much it's going to move in response if you're going to be underweight credit.

[00:14:54] You want to make sure that it's a reasonable ratio of kind of what equity you want to hedge for with an underweight credit or a short credit position. But that can be a pretty stable type of approach as well.

[00:15:06] That's another one that we've used and it's been helpful. So yeah, the days where you could take this lovely long 20 or 30-year treasury position to help hedge your equity, I think it's gone. But there's still a lot of other things that you can utilize, which is pretty helpful.

[00:15:23] Yeah, at least my own reading of credit spreads, of course, relative to defaults they feel reasonably fair, but they're low. And so there is a lot of potential convexity in a risk off that causes a repricing of credit risk. So I think that certainly can be interesting.

[00:15:41] Talk to us just a little bit more about gold. I'm a big fan of gold personally. I mean, I think about it as you mentioned the stability of the correlation between credit spreads and an equity risk off. I think that's certainly superior to gold.

[00:15:55] I think gold's correlation is a sort of stabilizer to equities. It kind of comes and goes. It feels like it's better in a risk off where the bond market rallies, where rates come down. But you seem to be pointing to other developments.

[00:16:11] And I found this idea that China is adding to gold holdings or other central banks doing that as well. And from an attribution standpoint, I mean, many people will look at the chart, let's say of gold versus US real rates and say, wow, those are really disconnected.

[00:16:26] You wouldn't expect gold to be doing so well with real rates not really falling all that much. And perhaps that's this sort of new demand from central banks, including China. Yeah, no, I think it's a bit that because even like this year when you were

[00:16:40] seeing rising real yields typically to your point would really hit gold prices just because the opportunity cost of holding gold would rise in that situation. But there's a bit of a de-dollarization that's currently in progress.

[00:16:54] So gold bullion can be moved very easily and it's not subject to sanctions like those imposed on Russia after the Ukraine invasion. So central bank net purchases now account for more than a fifth of global gold demand.

[00:17:06] So as I alluded to earlier, China has boosted its gold holdings from 3% to 5%. So these purchases really do matter. So if China just allocates another 1% of its reserves into gold, that would be roughly 9% of total global supply. So it's also what's on this geopolitical element.

[00:17:25] It's also this gold is now being used as a settlement currency within brick countries for commodities as a substitute for either US dollar or euro. And so I think that's a really interesting space because then it starts to become

[00:17:40] another way to pay as opposed to truly relying on dollar in a similar way. I think Bitcoin has had a bit of that with a much higher volatility profile. But that I think is particularly interesting is how the geopolitical

[00:17:53] landscape has translated into how people are paying the settlement currency. No, that's super interesting. It's been a great diversifier. I mean, it's up at the halfway mark of the year up well more than 10%. And I think its correlation to the S&P, at least of its daily returns,

[00:18:11] is exceedingly low, maybe 15%. So that's a beautiful ad to a portfolio that's probably increasingly concentrated if you're a US investor, obviously concentrated in a good way and things that are working. Let's go just to the product, the multi asset strategies and solutions product, the clients that you serve.

[00:18:31] I'd love to learn a little bit more about the manner in which you and your team come together, the way in which you use technology. And then just sort of the consumption of the product. What is ultimately being delivered to and utilized by the client base of BlackRock?

[00:18:49] Yeah, there's such a different client base and multi asset strategies and solutions. We manage money for a variety of different client types. We have a large retirement business, O CIO, which is outsourced CIO for pensions, for endowments and foundations, for family offices.

[00:19:05] And then also if you think about what model portfolios it's outside outsourced CIO for advisors, for investment advisors. So it's different products depending on the client, but maybe I'll speak to models and in models, what investment advisors are looking to benefit from is just

[00:19:22] clarity on a very high quality, dependable asset allocation implemented in ETFs and active funds tends to be an ETF focus. They would tend to have 20 or so tickers. We incorporate both passive and active ETFs. So we utilize both of those elements.

[00:19:44] We're looking to take advantage of what we see on opportunities and US equities, equities global. Our bond allocations tend to be US focus and we're doing relative value of different parts of relative value in terms of credit, in terms of mortgages, in terms

[00:19:59] of nominals. We have had some commodity positions because I mean, really energy is a fabulous way to hedge inflation. Holding commodities and energy equities was a really key hedge for us during 2022. So we are looking to be nimble and to be able to take advantage of kind

[00:20:18] of all these different opportunities across each of the spaces in multi-asset. And to what degree is it evaluation of the landscape, sort of a qualitative evaluation of a team that's got a lot of experience? And then to what degree is it you've built a machine that's popping out

[00:20:38] its recommendations on where to go and to what degree to make the tels? Yeah, I like the little catchphrase, quantum mental. We are both quantitative and fundamental. So on the quantitative side, we spend a lot of time focused on signal development. And so we go deep into equities.

[00:20:56] We utilize a variety of different dimensions to make our equity relative value views into fixed income, into commodities. So we do a lot on the quantitative signal development and AI. I'm happy to talk about that maybe later, but there's a lot of interest

[00:21:13] in my research team by what else can we do in terms of large language models? And bringing that as a way to capture sentiment, that's pretty interesting. But then on the other side, we also have a very serious qualitative aspect of our decision making as well.

[00:21:28] So we kind of start with the quantitative and bring in qualitative views. Sometimes it would be an adjustment to risk or an opportunity not captured by the signals or it's a quantitatively driven approach that just hasn't been completely formalized in a signal space.

[00:21:42] Sometimes that will be driving our qualitative views as well. But we're a blend of the two, both quantitative, tradition and qualitative views. So we talked about gold as an alternative hedge and you mentioned getting a lot of benefit diversification wise and return wise

[00:21:58] during that very tough year of 2022 from energy and energy equities. We also talked about copper and other metals with respect to sort of more of a forward looking view on electrification, the green transition, the extent to which there was these inputs

[00:22:14] that were going to play a big role. Talk to us a little bit about that, how that's making its way into your thinking, kind of where you are and that from an allocation standpoint and how will that play a role in the product that you deliver to clients?

[00:22:28] So it's interesting, I think copper and aluminum are key in the green transition. So if you look across all these different whether you're thinking about renewable energy or the different sub components of that, those industrial metals are particularly important.

[00:22:44] Also important in terms of as we electrify more and more aspects, whether you think electric cars and this is actually a part of the green transition as well. Copper just an amazing conductor of electricity. And so copper is interesting.

[00:23:01] It is something that I look at not only just to see how it's moving because it does have on a cross asset basis, it can be helpful. We look at industrial metals as a sense of what's the real economy doing.

[00:23:14] Right now like copper, we've done a lot of work on what would the green transition look like and what does it look like with AI and all the energy needs with AI. And it looks incredibly important. Timing is tricky. We have not stepped into this space.

[00:23:28] And if I look now, it's still dominated by the Meles in China. But that is something that I do keep a close eye on for a variety of different reasons. It's important in two big transitions, the AI energy and green.

[00:23:41] It's also a reflection of what's going on in China because the quantity markets, like many of them are 50 plus percent that are held in Chinese inventories or the Chinese demand is still particularly important.

[00:23:53] So that is an area I watch for that and then also for the cross asset as a way to look at what's going on in the real economy. Let's talk about AI. I'm sure it's an area where you're spending a lot of time as is everybody.

[00:24:07] So we talked a little bit about comparisons of it's hard to get away from sometimes the comparisons of the concentration of the S&P and the top five or so, top seven or so names, the performance of these stocks. And certainly valuations are high.

[00:24:25] I mean, it's really hard to compare it to that original tech bubble in 97, 98, 99. But talk to us about AI, just in terms of how you're thinking about flying exposures to it. And then, of course, the risks here are twofold.

[00:24:39] Right? One is getting left behind from an investment standpoint. I think we were saying, gosh, you're underweight in video by just a tiny bit and you're in trouble. Right. So one aspect is just the risk of being underweight. And of course, there's also risk of being too long

[00:24:56] and something that just gets too far away from maybe its ability to deliver on the promises. How do you think about the AI component of the portfolio? Such an interesting space. There are echoes of the late 90s, the enthusiasm and unparalleled optimism.

[00:25:15] So we've got some really thoughtful analysts that I've been speaking to within BlackRock. So you think about it as kind of these couple different markets, the hyperscalers who will spend without any view on return on investment, and it's like an arms race to build artificial general intelligence.

[00:25:33] And really, that's where it's been driving the spend. So I think that's really interesting. They are starting to capture some revenue from it. So that's the train not to step in front of. And there's another component, which is more the middle markets,

[00:25:49] which is smaller companies and the non hyperscalers that are looking to step in. And that's a space where people are focused on ROI. I mean, to me, the things to watch for is do we start to get CapEx ceilings for the hyperscalers, right?

[00:26:07] Where they start spending less or really curtailing their spend on AI. That would be an important moment. You're starting to see a little bit. Meta's getting a little more disciplined, for example. And it's CapEx growth, there seems to be, which would benefit its own free cash flows, right?

[00:26:24] So I think that's something to watch. And then if the middle market, if there's still 18 months to two years and not getting much ROI, I mean, I think you'll start to see the spend change. And why does this matter? Because tech is such a broad group.

[00:26:40] It's such an important sector. Yet tech budgets are not going up. Companies are spending into AI and really those dollars are not going into software and services. So I think that's the area to watch. And if you look at how the market's been performing,

[00:26:59] semis and the AI theme is strongly outperforming. And you're actually continuing to see suffering in other parts of tech where spending has just moved away from. So this differentiation within tech, I think, is a really important thing.

[00:27:13] AI, not only we're really watching it as the key market theme, but then as I think about it for our own business, a lot of our researchers are really interested in what can they do for these large language models? How else can they utilize to capture sentiment?

[00:27:29] There's so many interesting projects. I mean, you do have to be a little careful, right? Because the rocket science itself, so to speak, is really interesting. But at the end of the day, we just care about the launch of the rocket.

[00:27:42] So you want to be careful not to get too wrapped up in the intellectual project of it all because it is super interesting. Then the other thing, which is just as a very much a pragmatist, like how else can we do things?

[00:27:56] Can we get things more and more efficient, free up more time for researchers to do research just by doing some of our kind of daily tasks a little more simply and actually harnessing AI to help some of those free up some time.

[00:28:09] So that's probably where I see the easiest wins. But yeah, it's super interesting space, absolutely essential. Knowing how difficult it is to not be a part of this on the long side. You know, I often call the S&P just a beast of a benchmark.

[00:28:25] This thing ran in almost three sharp ratio for the first six months of the year. It's kind of unheard of. You don't have to leave your house. It's as liquid as all heck. And it's annualizing a 30 percent return on it less than 10 vol. It's just truly unbelievable.

[00:28:40] So it's very difficult not to be a part of this. And yet, of course, when something is new and exciting, almost by definition, it has to get overdone. These things that ramp up so strongly are often time subject to sharp and sudden drawdowns, sometimes significant ones.

[00:29:00] What are the warning signs? Like what's the mosaic look like to suggest that? OK, what we were hoping to occur and was a sort of bedrock of the thesis. It's not materializing the way we anticipated. And this is part of the checklist of warning signs.

[00:29:17] What does that look like from your perspective? Just to clarify this for AI itself or for like a market rotation away from AI? Well, I think the stocks themselves, I guess a rotation away from it could be into bonds or something else.

[00:29:30] I mean, I guess we kind of saw a little bit of this recently. But at least for now, it seems to me that there is tremendous promise as you alluded to of this adding incredible efficiency. But the stocks are going up right now

[00:29:44] because of this incredible capex cycle, which is just unbelievable. And it's sort of like we can think that we'll realize the efficiencies at some point. But we don't exactly know. I guess what I'm asking is, is there a set of items on your dashboard

[00:29:59] that would say, OK, we've got to rethink some of the thesis here that the promise of efficiency and the way in which the technology can make us all better may not be playing out as expected because it is a high bar. It is a high bar.

[00:30:15] I think there's a few things like, look, if you're spending this much, I think seeing return on investment that's meaningful enough to move away from your traditional spend. If you're a company and you're not spending on your software, your services, because you're spending everything on AI

[00:30:32] and you're not getting more in your tech budget. If that AI, if you aren't starting to see real meaningful change and whether it's meaningful change, meaning that you can substitute capital for labor or you're able to develop a new business

[00:30:45] that is benefiting from it, I think it's going to be hard to be sustainable. And that's probably more for the middle market, where people are focused on the ROIs. On the hyperscalers, it's kind of the same thing. That attentiveness to ROI, if you start seeing CAMPX ceilings

[00:31:02] for how much people are willing to spend, for how much the hyperscalers are willing to spend, I think that's going to be really important because that would really shift how much money is being spent. Because you're right, I mean, it is absolutely an arms race.

[00:31:15] So we don't have to see a lot of killer apps, so to speak. You know, so I mean, yes, you can do things faster and it's really interesting, but there is a fair amount of cost. So is it fast enough? Is it impactful enough?

[00:31:29] I think it's always going to be what's necessary to continue to spend at this level. But it's interesting, very, very interesting. One area that we talked a little bit about was small caps. And this idea that this segment of the market is generally more leveraged

[00:31:46] and that the cost of credit in a higher for longer environment was biting. And certainly indices like the IWM underperformed by quite a bit up until very recently. And I feel like that benign inflation report was really a signal

[00:32:03] for a rip roaring rally, some of which felt like just vast under positioning, if not outright shorting in IWM. Walk us through just how you think through what feels like a pretty good bet that a Fed easing cycle is upon us.

[00:32:19] Maybe it's not a incredible easing cycle with respect to how much the funds rate travels, but something's coming. How do you think about the balance sheet differentiation? Small cap versus large cap in light of that Fed easing cycle?

[00:32:34] I think it's really important because the Fed easing, I think the reason that you saw and it's been kindling in the making, right, which has been waiting for this catalyst. So if I think about what the financing is, let's talk about the financing

[00:32:46] first and then we can go into kind of what the profit margins look like. What you're seeing is roughly three X, the amount of leverage in small caps for the broader market.

[00:32:57] So if you see a true easing cycle and I agree with you, I think it's going to be pretty shallow. That financial leverage will not be the head when it has been as you start to see the rates start to reduce.

[00:33:09] So I think that's why it's been just such a huge rotation, which has made a lot of sense, right? And yet you think about how sustainable is this going to be? I mean, profit margins in small caps are about a tenth to a third

[00:33:22] of the margins for the broader market. And so some of these small caps now are pretty small, like the average market cap now is like roughly one and a half billion. So financing, if you think about where rates have been and then you think

[00:33:34] about financing for some of those small caps, it's been pretty expensive. So if the financing becomes easier on the Fed cuts rates without a significant slowdown, gross slowdown and the valuations have been cheap relative to broader market.

[00:33:48] I mean, we've been close to the top desal now it's come off to the close of the quintile, but they are benefiting. They are poised to benefit disproportionately from that reduction in funding costs. I just don't know if it's going to be truly sustainable given the underlying

[00:34:02] fundamentals in these firms. Well, let's finish with this question around change. And again, you've had the benefit of doing this for quite some time. And as we talk about technology and hyper scaling and so forth, there's technology in our own business.

[00:34:17] You'd suggested that folks on your team were benefiting from AI related innovations that are reducing the time allocations to certain tasks. I would love to get some of your thoughts on NLP. And we talked a little bit about this, this ability to mine language

[00:34:37] as a kind of source of sentiment. I've seen work where Fed minute statements or FOMC statements per meeting are kind of gauged in terms of dovishness or hawkishness based on word choice. Talk to us about that aspect of how you're using the ability to mine language

[00:34:59] and how it works its way into your process. It's important and it's not super new, though. I mean, using large language models is new relative to what we've done previously, which was more like a you think about a bag of words type

[00:35:12] of approach where you assign words relative to a positive or negative sentiment. And so this is not super new. It's just more precise as you start thinking about it. So yeah, it's a way you can apply it to a variety of things.

[00:35:27] Hocked of from terms of central bank minutes is unknown space. You can think about a variety of different reports out and able to mine that information to be able to access one of the things

[00:35:41] people look for always as clients is what are new data sense that we can utilize to be able to infer positive or negative sentiment for the marketplace. It's a really important way of doing so. Sometimes it'll be in the new data.

[00:35:55] Sometimes it's just meaningful data, but a more precise way of looking at things like central bank minutes. These are helpful ways to you think about what are you doing as a fundamental analyst? You're pouring through report after report and making an assessment.

[00:36:12] And if you can do that a little bit quicker by using a large language model or like this previous bag of words type of approach, that can give you some insights. Last question and very unrelated to markets and diversifiers more about careers.

[00:36:28] You are a woman of prominence in markets and it's been so for quite some time. And BlackRock is a large institution. I'm curious if you can share some of your thoughts on just this push towards trying to empower younger females in the field of finance efforts

[00:36:48] to help them find their way. We obviously know it has been and continues to be a male dominated industry. But firms like yours have certainly made efforts to try to facilitate career growth for females. How is that going? What's been working?

[00:37:04] What would you like to see happen going forward? It's funny if I think about kind of the people in my day to day life. I mean, my team, it is full of quants and it's also more than 50 percent female.

[00:37:18] And that was just happens yet because of kind of the applicants that we've been getting has just been there actually are a lot of women interested in finance. So I think you are seeing, especially when it's kind of something of the classic CSEE type of approach.

[00:37:35] I've loved working in asset management. I was for much of my career, the only woman in the room. So I guess I never really thought about it that much. I just was really intrigued by the work. I think you have to get through sometimes like you think about

[00:37:51] periods of your life when I think a big stress point for women, whether it's in finance or in any other career, is if they choose to have children and going through the period of time when you have young children.

[00:38:05] I think that's probably where we lose the most women is because it's a really stressful period. And I would actually say for the men on my team who had young children, it's a challenging moment in life.

[00:38:17] I guess I just really enjoyed the journey, but it was definitely stressful when my kids were young on the other side. It's a lot easier. And other things that I'm doing in terms of we have women in investments, active group here in BlackRock.

[00:38:33] I was been historically haven't been as involved lately, was a really active person and 100 women in finance. And that's been phenomenal. That's a really nice outreach. I think networking, getting to know other women. There's a lot more of us out there than people would think.

[00:38:51] And as I think about it, asset management, it's the place where you can really feed your intellectual curiosity and learn new things constantly. And just as you go through your career, whether you're learning about different asset classes or about different methodologies to value those asset classes,

[00:39:08] it's just a space where you can grow and learn a lot. So I would encourage women to think seriously about it as a profession. Appreciate those thoughts. And boy, that jumps off the page that 50% of your quants are females. That's fantastic. That certainly wouldn't have been the case

[00:39:25] probably five or certainly not 25 years ago, that's for sure. Definitely not 25 years ago. But I also think here in San Francisco, we've got a tremendous amount of very solid universities and where we get a lot of our talent.

[00:39:39] And so, yeah, there's a lot of interest in generally speaking in the more STEM oriented disciplines. So a lot of STEM majors coming out of Cal, Stanford and the like. Lisa, I appreciate you spending the time with us. And thank you so much for sharing your insights.

[00:39:55] You're very welcome. Thank you, Dean. You've been listening to the Alpha Exchange. If you've enjoyed the show, please do tell a friend. And before we leave, I wanted to invite you to drop us some feedback as we aim to utilize these conversations to contribute

[00:40:09] to the investment community's understanding of risk. Your input is valuable and provides direction on where we should focus. Please email us at feedback at alpha exchange podcast.com. Thanks again and catch you next time.