Webinars

Welcome everyone and thank you for joining us today. I'm Christina Shley and I sit within our customized portfolio solutions team working primarily with institutional clients. Over the last decade, some of the world's most valuable companies have remained private far longer than investors would have expected in previous market cycles. Companies like SpaceX, OpenAI, and Anthropic have accumulated extraordinary scale, attracted unprecedented amounts of capital, and in many cases become systemically important to the future of technology and artificial intelligence. As speculation grows around a potential new wave of mega IPOs, investors are asking several important questions. Why have these companies stayed private for so long? What would it take for them to become public? How would these listings differ from prior IPO cycles? And perhaps most importantly for institutional investors, what opportunities and risks could emerge as these companies transition from private to public market? To help us explore these questions, I'm joined by Aan and Dylan. Athan has been researching the evolution of private markets, AI infrastructure, and the potential next generation of public market leaders. Dylan works closely with institutional investors navigating portfolio construction, risk management, and implementation challenges associated with large private market exposures. We'll begin by examining the companies themselves and the forces driving this potential IPO wave. Then we'll shift to what it means for institutional portfolios and how investors are preparing for what could be one of the most consequential public market transitions in years. Athan, you recently wrote a research piece about the potential 2026 mega IPO class. To start us off, tell us more about these companies and how we got here. >> Sure. Thanks, Christina. It's great to be with you, Dylan, and our clients today on this webinar. I'll start by saying I think the simplest way to think about these companies is that they're not really three separate stories. They're part of the same story. A lot of companies out there try to claim to be at the center of the AI revolution, but SpaceX, Anthropic, and OpenAI can really make that claim in a way that I think most other companies cannot. Open AAI is now generating roughly two billion of revenue per month. Anthropic recently announced a funding round valuing the company at more than $900 billion. And SpaceX is increasingly becoming much more than just a rocket company. Historically, investors thought about SpaceX as a space business. Today, that description actually does not feel complete. If you look at some of the announcements over the past few weeks, you had SpaceX announce a major AI infrastructure agreement with Anthropic and Google as well that together represent roughly 26 billion of annualized revenue once those are fully ramped. SpaceX also announced a partnership with Curser, which is one of the fastest growing AI software companies. So taken together, those moves really suggest SpaceX wants exposure not only to the infrastructure layer of AI, but also to the software that's being built on top of it. And that's why I think these companies actually belong in the same conversation. Anthropic and Open AI are building the intelligence layer. SpaceX is increasingly building the compute, connectivity, and infrastructure layer. And together, these three companies are approaching a combined value of roughly $4 trillion. So just to put that into perspective, the next three largest private companies, which are data bricks, stripe, and are together worth less than $400 billion. So we're really talking about a completely different scale between those two categories of companies. uh these three companies have grown from ambitious startups into platforms that increasingly sit at the center of major tech trends and I think that's really why investors are paying attention. That's why the public markets are paying attention. So that's really how we got here. These three companies are now at a scale and they have ambitions that really require public market capital. >> Wow. You've really just described a group of companies that seem fundamentally different from the typical venture-backed IPO candidate. So that naturally raises the question of whether investors should think about this as just another IPO cycle or something entirely different. How would you compare this with previous per periods like the dot era or the 2021 reopening? >> Yeah, I I think the easiest mistake investors can make is assuming we're about to see another broad IPO reopening. I don't think that's what's happening. This is not 2021. It's not 1999. Those were really broad-based cycles. Um, at the peak of the dot boom, you had nearly 400 companies go public. In 2021, more than 300 300 companies went public. And if you include spaxs, that number is actually closer to 900. The market was willing to fund almost any growth story. This cycle does feel very different. The market isn't really saying bring us more IPOs. It's saying bring us the handful of private companies that actually matter. And I think that's a big distinction. The bar is just much higher today. Investors want scale. They want category leaders. They want businesses that are strategically important. The other thing that's different is just size. Private markets have allowed companies to stay private much longer than they used to. And as a result, these companies are arriving at public markets just far larger than prior generations. You know, we're not talking about5 billion companies, which we're talking about companies worth hundreds of billions of dollars or 1 to2 trillion dollars. And you know, that that actually does create an interesting trade-off. On the one hand, these companies may be among the defining businesses of the next decade, but on the other hand, investors are getting access much later in the value creation cycle. If you look back at you know Amazon and Nvidia for example those companies generated really extraordinary returns because public investors got in early but with SpaceX with Anthropic with Open AI investors are getting access after much of that value creation has already happened and you know I don't I don't think that means these IPOs can't work I just think it means the return profile is different this isn't really public market venture capital it's public ownership of already formed giant companies. And I think that's what's really unique um about this cycle. It's less about quantity. It's more about concentration. So, you know, I really think that's the big difference. This cycle is just about concentration and not quantity. >> Okay. Okay. And one of the other things I want to kind of touch back on is uh one of the reasons you just mentioned as well that the cycle looks different is how these companies have remained private far longer than the private prior generations of market leaders. So can you talk a little bit about how that happened? What changed in private markets that allowed companies of this scale to stay private for so long? >> Sure. Yeah. And I think that's one of the most important parts of the story, Christina. a decade ago, you know, companies of this size would have gone public much earlier. The reason that they didn't, it's, you know, it's actually pretty simple. Private markets have just evolved a lot. For years, people assumed companies eventually had to IPO to provide liquidity for employees and investors. And you know, that at least partially stopped being true as the private secondary markets really have grown larger and larger and just more sophisticated. So now employees could sell stock, investors could sell stock, new investors could buy stock, and you could do all of this without a public listing. And SpaceX is probably the best example. The company regularly organized secondary share sales while remaining private where employees got liquidity, investors got liquidity, and management retained control over timing. So, what's really remarkable is that SpaceX has not raised a traditional primary funding round since 2022 when it was valued at $125 billion. And today, the company's worth over 14 times that amount. So, a lot of the value creation happened after the company had effectively outgrown the traditional venture capital model. OpenAI followed a similar path. Uh late last year, employees of OpenAI sold about 7 billion of stock in a secondary transaction that valued the company at 500 billion. So, you know, those are big numbers. That's IPO level liquidity without actually being public. And it wasn't just limited to SpaceX and OpenAI. If you look across the venture ecosystem, secondary markets have really exploded. In fact, secondary deals for venture-backed companies reached about 112 billion on an annualized basis earlier this year. So for a period, secondary volume actually exceeded the money raised through IPOs. And you know, that's a really remarkable statistic. Private company shares became so liquid that secondary markets briefly became larger than the IPO market itself. And you know, that's really how these companies just stayed private for so long. private markets just became capable of solving the liquidity problem at least partially and that allowed companies to remain private longer than anyone expected. And there's also just another timing point worth mentioning. If you go back um you know to the 90s and the early 2000s, tech companies typically went public around age 8 and today it's closer to age 11. Open AAI turns 11 years old this year. SpaceX is 24 years old. So by IPO standards, SpaceX is practically, you know, like a grandparent at this stage. These are not young startups racing to go public. They're more mature private companies. They solved the liquidity problem, you know, years ago in the case of SpaceX and they're confronting now a new problem which is scale. And so it's really this scale problem that's ultimately pulling them towards the public markets. >> That's really helpful. So, um, thank you, Ethan, for explaining how private markets evolved to provide liquidity and support companies at this unprecedented scale. Um, but I think there's been another consequence uh of that trend. Dylan, what has this meant for institutional portfolios? >> Yeah, first let me just say I'm glad this is being recorded because normally when I'm on a call with Ethan, I'm furiously scratching down notes and everything because there's always so much information. So, I'll definitely have to go back and rewatch this part. Um but yeah, we've seen this impact for years across our institutional client base. A lot of these a lot of these clients have pretty uh robust private equity programs. They might have been very early adopters potentially decades ago. And as Ethan can attest, you want to have diversification not just across private equity managers, but also across vintage years as well. And the very best relationships tend to have that kind of ongoing capital allocation. So uh these clients might very well be pledging more and more capital even as the size of that private equity portfolio continues to grow. Other thing to consider is the denominator effect. So this is where you know public markets they might be priced and experience some downturns as the markets naturally cycle. You also have the benefit payments or in the case of endowments and foundations you have annual draws. So all of these things kind of come together where you might have public markets supplying the liquidity for the portfolio and naturally you know coming down in size relative to the private equity segment of the portfolio which could either be static or potentially increasing. And so you tend to have a situation where you have private equity or private market exposure really dominating or being overweight the natural allocation within the client's strategic asset allocation. So couple different ways to kind of solve for this. Uh secondaries as Aan already covered is one way to kind of get that exposure converted to liquidity that you can either redeploy elsewhere in your portfolio or uh a lot of our clients use a rebalancing overlay. That's where we'll use capital efficient derivatives to manage go long and short the relative exposure within the given client's total portfolio. That way we're not increasing or decreasing that exposure. We're just trying to realign it and get them closer back to their strategic asset allocation. But either way, all these clients are going to be very happy to get that capital back and redeploy it across their portfolio. >> Thanks. That's a helpful uh context on the uh denominator effect. So since investors have already been feeling the effects of these companies staying private, Ethan, what if and when they do decide to go public, what changes? What does it take to go public today? And are these companies pursuing IPOs out of necessity or really just a strategic choice at this point? >> Yeah, I I think that's a great question. I mean, the key question is really like why now, right? Why not just stay private for another five years? And I think the answer is that the next phase for these companies just looks very different from the last phase. You know, these were ventureback companies originally. The first phase was innovation. The second phase was commercialization. And now the third phase is really infrastructure. And infrastructure requires capital, a lot of capital. Anthropic and open AI are increasingly competing in what looks like an AI arms race. The competitive advantage. It's not just model quality. It's also access to compute, access to power, access to data centers, access to infrastructure. And the scale of investment required is just becoming enormous. Um you know the top AI labs generated about 17 billion of revenue last year and that figure is expected to approach 90 to 100 billion this year. So the growth is just extraordinary you know in revenue but so are the capital requirements and you know you see the same thing with the hyperscalers. Look at Amazon, Microsoft, Meta, Alphabet. They're expected to spend about 725 billion on AI infrastructure in 26 alone. You know, Alphabet recently announced they're raising 85 billion in equity. And you know, if you think about that, that's one of the most profitable companies in the world is raising capital to build AI infrastructure. And so that just tells you how large this opportunity has become. And that's really the lens through which I think investors should view these IPOs. They're not traditional venture-backed exits. The founders don't need an exit. Employees already have liquidity options or at least a lot of liquidity options. And many investors have already sold portions of their holdings through private transactions. So I mean that doesn't mean liquidity is irrelevant. It just means it's no longer the central issue. Private markets have become very effective at providing liquidity, but what they have not fully solved is scale. And that's just because the next phase is just extraordinarily capital intensive. The infrastructure requirements are measured in, you know, tens and hundreds of billions of dollars. And you know, at some point, even trillion dollar private markets just begin to look small relative to the opportunity. So if you take SpaceX, the company's hoping to raise about 75 billion. That would be nearly three times larger than Saudi Aramco's record IPO, which was the largest um equity raise in the public markets before, you know, what's coming with SpaceX. So investors aren't really underwriting last year's revenue. They're underwriting the next generation of technology infrastructure. So, you know, I think these companies are going public because the next phase just increasingly requires access to capital at a scale that public markets are uniquely positioned to provide. So, you know, private markets help finance the first chapter and I think public markets are just really needed to finance the next one. So, that's really why these companies are going public now. >> Okay, got it. So if these IPOs are really infrastructure financing events rather than traditional exits, maybe that creates a different set of considerations for existing investors. Dylan, what risks are institutional clients focused on as these companies move toward public markets? >> Yeah, definitely top of mind. Let me first talk about what's not a risk and that's the upside, right? A lot of these clients have been uh early investors and so they're looking at I mean multiples upon multiples of returns not percentages here or there you know. So that's like a very key kind of consideration when we talk about what they are truly worried about when it comes to risk. I mean number one is going to be downside. Second part is going to be volatility in their overall portfolio and then benchmark misalignment. Right? So downside's easy one right? Again they've experienced these huge gains. uh their investment committees probably love them and so they want to protect those. They want to you know look out for situations where those gains might get eroded uh through their entry into the public markets. The portfolio volatility is also a connected idea, right? You've had these companies remain private, experience great growth outside of the public markets. As soon as they enter the portfolio in that public market status, all of a sudden they're going to go from being valued, I don't know, quarterly to millisecond by millisecond scrutiny, retail investors, everyone paying attention, moving the price. And so not only is that a lot more volatility than when they were back in their, you know, private equity form, but they're potentially overweight over their intended target within the client's total strategic asset allocation. So you're introducing a great deal of volatility in a very substantially sized portion of the portfolio. Benchmark alignment, I'm sure we'll get into more of it later, but they're definitely going to be overweight. And so a lot of these clients have a tracking error, right? asset deviation of their portfolio versus their kind of policy benchmark is a major metric that they want to track and it's a major risk measurement. And so these clients are looking for multiple different paths to managing this risk. And that's where we love working with clients to help them figure out what toolkit will work for them, how they need to be thinking about it and what we can do to help them manage those risks. >> Yeah. So once clients have identified those risks, the next question to your point is what can they actually do about them? So how have we seen institutions starting to approach risk management and implementation in practice? >> Do you think I can get away with the it depends answer? Probably not, right? Uh really the clients fall into major two major camps. There are those who are looking to reduce their exposure. Then there are those who are looking to maintain it but maintain it within reasonable ranges of their benchmark within their total strategic asset allocation. So the first task is definitely stop by your legal team, figure out what you can and can't do, what you can hedge, what you can't hedge, when you can trade, because one of the first tools that we like to work with with clients is options. And so you really have to make sure that you have the legal ability to hedge your position using derivatives. But assuming that you've checked that box and you know you've kind of engaged a provider, we really like options because if you think about what they're trying to protect, they have these huge gains, this big run up in the value of this underlying position and they're worried about the downside, right? So think about a put option. This is where a client would go out there, buy a put. It's very similar to buying insurance, right? You are worried that something's going to go wrong. In this case, it would be a market decline, one that you're not comfortable with. And so, uh, if you combine the underlying position with buying a put option, the put option will kick in and start giving you protection or offsetting the losses if the stock starts falling below a certain designated level. Now, like insurance, you have to pay for it. And just like insurance, what you end up paying is called a premium. And so often times a client will look for ways to kind of manage that premium expense because it can be pretty hefty especially with the amount of uncertainty or uh we like calling it implied volatility associated with the name. And so this option structure might be something in the form of a costless caller. So this is where you combine buying that put with selling a call. So by selling a call, what you're doing is, you know, you're selling something and receiving the premium instead of paying the premium. And the goal is to align that with the cost of the put, the cost of the protection. You're giving something up, though, for sure. You're giving up any potential upside above a certain level. Now, keep in mind, these are the clients who are very early investors who've already experienced pretty significant gains in most cases. So they are far less concerned about the incremental bit of upside capture. What they really want to do is protect potential downside. So what you end up happening is of the full range of possible outcomes for owning the underlying security, you're kind of chopping off the two ends. You really want to limit it to let's just say plus or minus 10%. Right? So you'll experience all the fun market movements between a 10% decline and a 10% increase but anything beyond that you're not going to participate because you have the option that is going to be offsetting any gains or losses in the underlying. Now, um I need to kind of caveat all this by saying that in order to trade these options, there are certain documentation or setup that's required. In the OTC space, the over-the-counter space, you need uh is the documentation. Uh in the listed option space, you need to open up a broker account. Now, these can have pretty lengthy onboarding time frames, but our clients have found that they are a very useful toolkit and you end up using them later. I mean, I'm sure we'll talk about it uh further on as well that uh there are more IPOs coming down the pipe. There are other situations where risk might want to be managed or you might want to express a certain view. So, having these capabilities in place, it's always nice to have them uh ahead of time. But, you know, even in this market environment that we're in, you certainly can make a case for adding those tools to your toolkit. So all that was in the context of okay let's kind of uh limit that range of possible outcomes. You wait for the markets to settle and then you can start actually liquidating the underlying security. So one of the things that we hate seeing on our team is when you have a really good hedge in place checks all the boxes you meet all your objectives but then you have some suboptimal execution at the very end where you start kind of eroding the benefit of that hedge. So, what I'm talking about is, you know, this stock might still be volatile uh 6 months out, who knows when they're actually going to be able to sell the position. But if you are closing down the hedge and you're trying to sell the security, every little bit of misalignment between those two events is exposure, right? That's the very exposure that you're trying to hedge or protect against. So, the closer you can coordinate those things, the better off that you're going to be. That's a really helpful context and good to keep in mind. Um, one thing that I might add on the top of that that's been a little bit unique with these uh mega IPOs than with some of the ones that we saw um maybe back in 2021 is uh that we've have some clients just given the unknowns here who are concerned about that short call on that potential costless caller. And so we are seeing a lot more interest to your point in they want to protect their gains. they're happy with the runup that they've gotten on names so far. And so clients looking at just outright puts, willing to kind of pay that premium. Um, or looking at potentially a put spread instead, just not having to worry about a potential really positive event kind of happening on the on the upside. Um >> you've uh you've talked about now clients who want to uh reduce exposure, but some investors are looking to maybe keep their exposure, but just bring it kind of back within some of those bounds that you talked about kind of closer to policy. So that leads kind of directly into the role of benchmarks and index inclusion. How are index providers approaching these mega IPOs and what do investors need to be paying attention to? Yeah, big big topic. Um, a lot of hair on this one. Uh, so let me just focus on the parts that kind of matter the most and it needs to come along with a disclaimer that this is based on information that we know today. Uh, cuz the news cycle is giving us a lot of fun little tidbits to to process feels like every day or every week. But um, of the four kind of I'll call them major index providers, three of them have already uh kind of announced that they're going to be following a fasttrack procedure. So we're talking about Footsie, Russell, MSCI, and NASDAQ. So within the first 5 to 15 trading days, you know, these major index providers are going to start uh including the SpaceX name or any future mega IPO once it meets certain criteria in their benchmark uh building blocks. And so the really important thing here to note is when we talk about they're going to start including them, they're going to include them at their float or free float, not at the market value. So you'll see a headline, you know, uh SpaceX 1.8 trillion, that's not the weight that's getting added to these benchmarks on day one or or even day five or 15. I mean, the free float estimates are closer to the 5% range. So if you think about these benchmarks and when they include the name, we're talking basis points in the beginning, right? And I didn't mention the fourth one which is S&P and they've actually declined any kind of fasttrack protocol. Even when they were considering a quote unquote fasttrack, it was like a six-month time frame. Now they're going to follow their standard protocol which is closer to a year. and they're also going to apply the criteria of you know profitability and certain free float criteria need to be met before they'll consider including the name. So this creates some very interesting dynamics, right? So uh not only is it all going to be floatbased, but over the next call it 180 days as lockups expire and restrictions kind of ease, people start uh releasing shares into the public market, that float will naturally increase. And so the waiting will start to increase over time as we approach, you know, 6 months or even a year out. So, it just might be the case where that S&P where they're kind of sitting out this initial uh surge of interest into including the name. By the time it gets to the point where they would consider including it, they might be able to start including at the the full weight within the index, much closer to the actual market capitalization as opposed to getting the headlines and including it at a very very small weight. So, how does this impact our clients? those that have uh private stake that they now have you know public shares they might also have let's say uh a large passive US equity portfolio right maybe they don't believe that there's a lot of alpha opportunities in that given segment so they decided to go passive so call it 5 to 15 trading days after the IPO those benchmarks some of them might start picking up the name if that passive vehicle is replicating one of those benchmarks then it's going to start including that exposure as well. And so from a client's perspective, um they look across all their investments, right? They look at the shares they got from their private equity stake. They look at the exposure from their passive manager. And guess what? They might end up being overweight versus a benchmark even at a small weight. So to avoid this kind of a double counting uh you know situation that they might be in, a lot of them are looking to like a completion mandate or a custom beta. And that's where instead of just perfectly replicating the passive or benchmark, you know, we can set up a, you know, custom mandate which will allow you to apply certain exclusions or screens. And so it's pretty easy to remove that one name. And so you have the shares from your private equity exposure combined with all the other underlying names in the passive benchmark. And together that might end up getting you closer to your true benchmark exposure, you know. And for those uh endowments of foundations or even health care systems, the concept of screens might be pretty familiar. Uh they oftentimes will try to align their investment portfolio with the mission of their underlying entity. And so this can be, you know, applicable for that might already be doing it's just adding another name to the list that they're excluding. Of course, it's also very applicable for future IPOs and other situations where they want to be excluding names. still investing in the broad market, but doing it in a more thoughtful and intentional way to avoid exposure mismatches as they try to align their total portfolio with what their policy portfolio says they should be invested in. >> Thanks for talking through that, Dylan. That's a lot to consider. We've spent a lot of time discussing what these specific companies could mean for our clients portfolios. Uh but let's finish by looking ahead. Assuming some combination of SpaceX, OpenAI, and Anthropic ultimately go public, Ethan, what does that mean for the broader IPO market and the next generation of technology companies? >> Yeah, sure. Um, you know, I think, you know, I think the market's going to learn a lot from these IPOs. um you know not just about like the companies themselves um but also just about what investors actually want to own in the next tech cycle. If these IPOs perform well I think the next wave of IPOs just you know obviously will become easier. So those are companies like you know some of the ones I mentioned before data brick, stripe, andol, canva and other large private market leaders will just be watching very closely. You know even this next wave of companies are already large businesses. Data bricks for example has surpassed a $5 billion revenue run rate. Stripe processed nearly$2 trillion of payment volume last year. And is now worth more than $60 billion. So in almost any other IPO cycle, those would be headline companies in and of themselves. But you know, SpaceX, Anthropic, and OpenAI are just so large that they're next tier. And you know, I think that's just the key point that what I said earlier. It's just it's not going to be a broad reopening of the IPO market. It's a selective reopening. Even if these companies are successful, the market just isn't asking for hundreds of new listings. It's asking for a smaller number of category defining companies. And we're starting to see um upgrades and increases in in forecasts for 26 IPO volume. Goldman Sachs last week recently increased its estimate for US IPO issuance this year to 225 billion. You know, again, much of that's just being driven by a handful of large companies, not hundreds of them. And I think the more interesting question is actually what happens to traditional software, which has also gotten a lot of headlines. You know, in peak 21, many of these software companies were trading at, you know, 20 times revenue or even higher. And today, many trade closer to five to six times revenue or lower. And investors are just asking different questions of these companies. is does AI make the business stronger? Does AI make the business more vulnerable? You know, some of these legacy software as a service companies will adapt, some won't. And I think that's why this cycle um you know, one of the reasons this cycle matters is it's not just about who comes public. It's about how investors are choosing to allocate capital across technology. you know, public investors are effectively deciding which business models deserve premium valuations in this AI era. And really, SpaceX, Anthropic, and OpenAI are the first major tests. So, when I look at these IPOs, you know, I don't just see these three companies in isolation going public. You know, I think the market's just really trying to determine what deserves premium valuations in the next tech cycle. And I think investors are paying, you know, very close attention to how these offerings ultimately perform. So, it's going to be really interesting to watch the next few weeks and months to see how how all of this really plays out. >> Yeah, we will definitely all be watching, I'm sure. Well, AA and Dylan, thank you both for the discussion. Um, a few key themes I think stand out from today's conversation. First, this potential IPO wave appears fundamentally different from prior cycles. Rather than a broad reopening of the market, we're talking about a small number of exceptionally large companies that sit at the center of the AI infrastructure buildout and may require public market capital to support that next phase of growth. Second, the evolution of private markets has changed how value is created and captured. So companies are able to remain private much longer than they once could, meaning many institutional investors already have significant exposure before an IPO ever occurs. And third, for those investors, the challenge is no longer simply gaining access. It's managing concentration, liquidity, benchmark alignment, and risk. As these private holdings transition into public market securities, the investors who prepare ahead of time may be best positioned to navigate whatever comes next. So whether 2026 ultimately becomes the year of the mega IPO or not, the issues we've discussed today, such as AI infrastructure, private market scale, portfolio construction, and index evolution are likely to remain central themes for institutional investors for years to come. Thank you all for joining us and we appreciate your time and attention. We look forward to continuing this conversation in future discussions.

Hi everyone and welcome to today's webinar, The Fed at a Crossroads, Independent Succession and the path for rates. Thanks for joining us. The Federal Reserve is facing one of the most consequential periods in decades. Investors are navigating a new Fed chair, growing scrutiny around Fed independence, persistent inflation pressures and continued uncertainty about the future direction of interest rates. For institutional investors, these developments are more than just headlines. They have direct implications for fixed income positioning, portfolio construction, risk management and long-term asset allocation decisions. Today we're going to focus less on politics themselves and more on the market implications of these developments and what they could mean for institutional portfolios. I'm Rachel Carroll, managing director of consulting for Russell Investments and I'm joined today by Paul Idelman, our chief investment strategist and a former Federal Reserve employee and Keith Brakebill, our co-head of global fixed income. Thank you both for being here. >> Yeah, thanks for having me. >> Uh before we dive in, we are asking attendees a few polling questions uh as the webinar got started here. I'm going to use those questions to help frame today's discussion. So if you haven't done so yet, please go out and answer those. Um at the same time, there is a Q&A button at the bottom of your screen. If you do have a question that you would like to ask either Paul or Keith, type your question right into the Q&A and we'll do our best to get those questions answered. So while we're waiting for responses to the poll to come in, let's let's talk about that very first poll question. We're asking attendees what they believe the Federal Reserve is most likely to do over the next 12 months, cut rates, hold them steady or raise rates. So Paul, what's Russell's take on what the Fed is most likely to do over the next 12 months? >> Yeah, I guess that the short answer is we think a protracted hold is most likely, but it's been a pretty interesting year to put it lightly. At the start of cuts. Um there's probably three reasons behind that. Investors had different rationale depending on the person, but some thought uh Kevin Warsh had expressed a preference to lower rates. He'd be coming into the seat uh and that would create a bias on the committee. Uh there was some concern about weakness in the US labor market potentially motivating uh rate cuts and some economists and investors thought inflation uh at least before the Middle East conflict broke out was on a path towards 2%. But, that's changed quite a bit now and the market's even toying with the idea of rate hikes. I I think our view with a new chair and with a a labor market that is at best sort of balanced here and not generating a lot of wage inflation, we think the Fed's in a pretty good position to um stand pat at least through the end of this year. So, uh we sort of lean towards the Fed wanting to hold rates steady at this point. >> Yeah. Do you think that markets are aligned with that likely economic path? It seems like markets haven't always reacted in the way that we would necessarily think they might. >> I mean, markets tend to do a little bit of a a pendulum shift. So, I I would say at the increment here we're starting to think maybe the market's overpricing the potential for rate hikes in the near term and so maybe that creates some value particularly at the front end of the US curve if those hikes get taken out and short-term rates come back down a little bit. >> Yeah. Uh Keith, how about you? Can you weigh in on what you are hearing about the direction of rates based on um the conversations you're having with investment managers? >> Sure. I mean, looking across multiple investment managers as you can imagine there there is a variety of opinions and I think we you know we had a few that were on the uh the the camp of inflation being stickier coming into the year and obviously with the events that have occurred, um the closure of of Formosa, um that is that has come somewhat to fruition and there are greater concerns that that will continue to happen. Not so much that the Fed was going to raise rates or anything, but more about the Fed was is it hold or is it cut kind of coming into the year. Now though, the uncertainty that has them not taking as large of an active position in the duration perspective is what's going to be the Fed's reaction function and what's that going to lead to from a market reaction. And I think people are still taking very much a wait and see approach to how the Fed chair Warsh is going to when respond and how that leadership change is going to lead to any changes in policy. >> Yeah. Yeah, and we're going to get to that in just 1 minute. I will say looking at those poll results, it looks like 68% of our attendees Paul are in in your camp that likely that rates just hold steady here for for a while. So, we're now we're up to 70%. We'll give everyone final poll results once once the webinar is completed. So, as Keith was just talking about a major focus right now is obviously the arrival of the new Fed chair. There's been a lot of discussion in markets around how much influence a chair can have over the policy direction. Paul, I know you worked for a time at the Fed when Kevin Warsh was a governor. So, from your experience, what do we know about Warsh? What what about his background and his policy intentions and how much power does the Fed chair actually have? >> Yeah, I mean like maybe his hair is a little bit nicer and his suits probably fit better than your typical central banker, but jokes aside, like he's a he's a smart experienced central banker. When when I was there in DC roughly 20 years ago, Kevin Warsh was playing a really integral role with Ben Bernanke at the time. He was basically Bernanke's right-hand man working with Wall Street during the global financial crisis on the rescue packages and making sure the financial system was as resilient as possible to support a recovery out of that situation. So, having that institutional knowledge is um important and I think an asset for Warsh. He did have a couple of unorthodox views at the time that I think will be interesting to track if they still hold or not going forward around that idea of uncertainty with the reaction function that Keith was talking about. So, for example, during the financial crisis in late 2008, Warsh was actually kind of against the idea of cutting interest rates. He was worried about a ramp up in food and energy prices at the time that were coming through from the emerging markets. Uh that has some flavors of what we're seeing today and I'm very curious to know how concerned he'll be about those issues right now. Uh the other somewhat unconventional view uh he had after the financial crisis was he started to disagree and dissent against the Fed's big balance sheet program. So, he was against QE2 and QE3 and beyond. Um and so that's kind of what we know about him in terms of his history. He's also made a number of public comments in the run-up to uh his nomination and getting the chairmanship. Um And I'd say a couple things stand out to me there in terms of his policy intentions. First, uh at least based on what we know so far is he's still we think favors lower interest rates. And so, his last public comments talked about this idea of artificial intelligence being being able to generate a new cycle of disinflationary growth along the lines of what we saw in the second half of the late 1990s. So, that's an argument that he's put forward in favor of rate cuts. Uh he's talked about again favoring a smaller balance sheet, which could be interesting. Uh and then third and finally, although it's a somewhat technical point is he thinks the Fed's been communicating too much in terms of forward guidance, in terms of press conferences at every meeting, in terms of regional Fed presidents being on TV what it feels like almost every single day. And he's talked about wanting to kind of rein in that communication a little bit. Um I guess the caveat I'd make is it's not clear to me if he'll be able to achieve any of those preferences. And so you asked how much power a Fed chair has. >> Yeah. >> Um most of these policy decisions at the FOMC are made by majority vote, not by the chair. The The power that the chair has is very informal in nature. It's the power of persuasion, setting an agenda, trying to build a consensus on the team. I think historically that power has been quite strong. That chairs have been able to bring the committee along with what they want to do. Uh but that's not a given. It's not a formal power. And my suspicion here is uh particularly after several attacks against the Fed here over the last year or so, it could be a bit of an uphill battle for Worsh to get what he wants on this FOMC. And specifically, if you think about can he cut interest rates, he's going to be coming onto a committee where all 11 of his peers voted to hold interest rates steady in April. So, maybe over a time he can uh change the consensus there, but I I highly doubt that it's likely to occur um overnight here. >> Yeah. Uh so, let's uh explore that just a little bit further talking about his peers that are on the committee. So, can you talk about the potential impact of former Chairman Powell remaining on the Board of Governors? >> Yeah, I think that was uh an interesting development that we learned just in April. It's pretty unusual for a former chair to stay on as a governor after their time runs out. I think from a markets perspective, really the the sole consideration there was if Powell left, that would have opened a vacancy for President Trump to nominate a new governor. and that new governor potentially could have been more dovish and more aligned with lower interest rates than Powell perhaps is. Powell's very much a centrist on the committee. He's talked about he's going to play the role of a governor. He's not going to be a shadow chair, so he's he's intending to cooperate, but we have a centrist instead of maybe a dove. Um beyond that, I think the implications are pretty modest, at least based on what we can tell so far. >> One thing you said internally that I found really interesting is that investors should be focusing less on personalities and more on the broader committee and the underlying economic data. So, can you just elaborate on that a little bit? >> Yeah, so I guess like we already talked about this idea of the chair versus the committee. I think arguably bigger than the people though, the individuals on the committee is the economics of the moment. And so, like if I think back to my time at the Fed, Bernanke didn't cut rates to zero and do QE because he was this uber dove. He he cut interest rates to zero because we had a financial crisis. They were worried about another depression in the United States. And so, those aggressive moves were a consequence of the moment. >> Yeah. >> And so, if you ask any central banker if they're a hawk or dove, you you actually end up kind of annoying them a little bit. Like they're they're all data dependent and they interpret the data in their own way. They might be hawkish or dovish in a moment, but as circumstances change, they change, too. And so, I think for me, really focusing on fundamentals is often a more important anchor than than focusing on the people. >> Probably an important reminder for all of us. So, um so, let's dive into this idea of Fed independence. One of the biggest themes that we're seeing in the market right now. So, that phrase can be a little bit abstract or somewhat political, but from an investor perspective, why does Fed independence matter so much? >> Yeah, um maybe starting with what independence means. Like in practice, an independent central bank is meant to do what's best for the country in the long term, irrespective of what's politically popular in the moment. And so, when economic conditions are weak, there's not really much tension in Washington, D.C. The central bank wants to support a recovery, politicians want strong growth, and they're usually aligned. Where independence is critical is when the economy is really strong, when it's overheating, when you have an inflation challenge. Uh, politicians will often want to keep seeing more of that strength and growth, but the central bank, an independent one, can step in and say, "Hey, hang on, this is too much of a good thing. We need to have high or higher interest rates to make sure that inflation stays low and stable." And that's really important over time, uh, for interest rates, um, the cost of losing credibility on the inflation target is pretty high. Like, if you think back to the 1980s, for example, Paul Volcker had to engineer two recessions in 1980 and 1982. The unemployment rate went all the way up to 11% to start to bring inflation back down again after almost a decade of high inflation. So, the cost of not keeping that anchor is really high, and that's why you want to have an independent central bank that's willing to do so. >> Yeah. Yeah. Uh, so, Paul, I've been asking you a lot of questions. One more for you here. Uh, you mentioned three developments that investors had been watching really closely that tie into Fed independence. So, the first was the Lisa Cook Supreme Court case, uh, secondly, the investigation surrounding uh, former Chairman Powell, and then finally, the concerns about Fed governance and regional presidents. So, can you briefly explain why those matter from a market standpoint? >> Yeah, like all three of those watch points are related. So, the Fed leadership is structured in a way to have that independence. So, governors when they get nominated are given staggered 14-year terms. There are seven of them. And so, a president normally only has the ability to appoint two new Fed governors or leaders in any given term. And so, it makes it difficult if not impossible to overhaul that committee to align with your policy preferences in the US executive branch. The reason why those three watch points were important in our mind was those were potential avenues by which that leadership structure could get overhauled more quickly than the standard structure. So, can the president fire a sitting governor? >> Yep. >> That's being tested at the Supreme Court right now. I think the the rumblings are that Lisa Cook will likely be allowed to stay in her >> seat, but >> getting that confirmed would be important in terms of gauging Fed independence or not. There were these investigations into Chair Powell around the renovations of their headquarters building, the Eccles building. The DOJ has, at least for now, kind of paused those investigations, but it's not been resolved satisfactorily enough for Powell, which is sort of why he's staying on >> Yep. >> for the time being. And then the third and final watch point that you mentioned around regional Fed presidents, that's actually already been resolved. So, there was some concern that a stack of governors in DC could choose not to recertify all the regional Fed presidents. That's a process that happens once every 5 years. It happened in February of this year. The governors recertified all of those regional Fed presidents. And so, again, the leadership's preserved rather than having a major overhaul and and reshuffling that can allow some bias or a political process to to feed into decision-making. So, I think so far, so good, but there's a few outstanding items that are still going to be key. >> Yeah. Um I mean, I'm going to move on to the second poll question. In this question, we asked investors or the attendees what concerns them most over the next year from inflation to recession risk to this idea of Fed independence. Um it looks like while Fed independence is getting a a good chunk of the votes, about 23% as it stands right now, geopolitical shocks are coming in above that at 27% of the votes, but persistent inflation is the is the number one answer that our attendees gave at 35%. So, Paul, what stands out to you from those responses? >> Yeah, like in some ways I agree, like persistent inflation and geopolitical shocks are kind of the same driver and issue in the moment where we we have these much higher energy prices, um a number of commodity supplies and flows have been disrupted through the Strait of Hormuz now for almost 3 months, and we're seeing some pressure from that onto goods prices. And so, if we're thinking about the balance of risk to interest rates and the uncertainty that was flagged earlier around will they hike, will they cut, will they hold steady, that's an important issue in terms of at least near-term dynamics that's going to be important for clarity. If you want to get the Fed to actually hike, I don't think any of us want that, but if that's going to happen, they're going to want to be looking for signs of persistent and broadening inflation. So, I think that's an important watch point to have in mind, and it seems like that's top of mind for our audience here. >> Yeah, yeah. Keith, let's let you weigh in on that. Given these results we're seeing with persistent really inflation being that number one concern, what's what's your take on that? >> Well, I mean, I think the audience has has correctly identified what the most likely things, you know, sort of bad things to happen are, but the ones that are matter the most, I'll kind of go at the risk of going against our own clients, I think recession risk is is always kind of the one that really can do the most damage to your portfolio. While it's not our current forecast, it's the one that typically results in the significant losses at the total plan level or the total and your total portfolio that can take years to recover from. More so than any of these other dynamics, which matter a lot to us as active managers and matter to you in terms of it does have an impact on your portfolio, but those are singles and doubles issues in comparison to what recessionary risk can do. Maybe it's just because I'm I'm the bond guy and the bond investor here and thinking about the negative and downside, but that is our job on on on the bond side is to be something that can generate a positive rate of return in these recessionary environments because that's when you're going to get the larger spread, you know, across managers due to the you know, the typical reliance upon credit risk within bond portfolios. And that's something we're really focused on within our portfolios right now is how do we manage against that risk given that in our world, unlike in the equity world, we're capped on the upside. So, you know, betting against the recession that that the world is going to continue going on as it has gone and done generally well from a risk assets perspective, that's fantastic, but we only get so much of that upside. You can take that risk on the equity side where multiples and where profits can go to however far they can go to, seemingly unbound for certain stocks. We're only going to get back coupon and principal. And right now the additional yield that we're getting over treasuries for taking that risk is is pretty limited. So, um that's the one we're focused on on managing most tightly within our portfolios. Not that the others don't matter, they do because they can impact portfolios and they're more likely. You know, you know, wouldn't wouldn't say otherwise. But that's the one that's the big one. >> I will say in terms of the poll result, 8% of the attendees were were saying recession risk is the is the one that's of greatest concern to them. So, maybe they need to spend some more time talking talking with Keith on that one. Um so, that actually is tying in nicely to another one of our polling questions. So, question number four in the poll, we asked what area of the market do we think is going to be most vulnerable if this issue of Fed independence were to be seriously questioned. Um so, Keith, uh we're looking at I'm looking at the results um of that one and having a hard time finding the answers. Tell me tell me what you think about about that Fed independence and and vulnerability within the market. Oh, there we go. >> Well, I mean, I think all of the all of the options that that that folks have selected are are definitely possibilities and and likelihoods if we get a definitely a severe um reaction that that the Fed is not acting in an independent way, that they are cutting or holding rates in the face of three, four, five, you know, percent of inflation prints. Um that that would be uh that would result in probably all of these things happening. The one I'm most concerned with and maybe it's because again I'm a bond investor is that I think you'll have a a longer-term as longer-term Treasury yields, you're going to get more of a premium uh in that and you're going to need to see a much steeper curve from here if the Fed is not acting in the face and particularly given Warsh's history of not liking sort of QE and buying at the back end of the curve, you might be even more inclined to just continue to let it go. Um the only thing I'll say from a positive perspective on that side is there is a bit of a natural equilibrium that develops that if you do let things go on the long end, while it's very negative in the short term for bonds, uh it could be quite positive initially for equities as it's it's it's inflationary, but it's also stimulating the economy by keeping rates low at the front end of the curve. Um but there's an actual rollover where that's going to start to do damage at the long end of the curve as people have to do new borrowing as investors or just individuals again we know what that's going to happen what's going to that's going to do to the housing market and that's such an important part of the way individuals see the world it then it starts to roll back over on itself and then you get a flattening of the curve will be enough in the way you'd like that's because you're getting into more recessionary activity so it becomes I think investors are right increasing volatility as a result as you get the immediate stimulus fantastic and then it becomes even a more exaggerated boom bust cycle with higher long-term treasury yields. >> Yeah. Yeah and that was the number one response on that one was increased equity market volatility with about 35% of the of the respondents. Paul anything to to add there? >> No I think my views are probably aligned with Keith's this feels like a bit of an all of the above answer higher interest rates um that's a challenge for stocks because all else equal then you have a higher discount rate for your your cash flows and so it's a challenge for almost everything which is why it's important to preserve. >> Um so let's pivot another time and and talk about portfolio positioning as we're heading into this kind of higher uncertainty environment. So Keith from a portfolio construction perspective where do you think investors are most vulnerable today? >> I think I've kind of already alluded to the the recession risk is is your biggest vulnerability at a total portfolio level for most for the way most investors are are allocated in their portfolios. So that's an important one and that's why within our bond portfolios we've kept credit risk pretty well reined in compared to where we are normally comfortable with running it and think we should have a considerable overweight to to credit over the long term now is just simply not the time and we pulled that in. And you could argue well you know I still want to go get active management returns out out of my portfolio. And I can go do that strategically on the duration side. One of the reasons that have been highlighted here, the double whammy environment of rate sort of 2022 that we experienced is not completely off the table here with the questions around Fed independence. And that has us reigning in what would be our sort of you know, if you think of it as a hydraulics one way or the other, uh taking more risk over here and less over there, well, we're actually just lower kind of across the board. And what we see from our underlying active managers is them just being more tactical around that duration with the bias to to take advantage of it when they see little moves in the marketplace. You know, as we've talked about, you know, if your view on the the Fed raising the prospect of the Fed raising one or two times from here being unlikely maybe taking a short-term long duration position in a portfolio, that's the kind of thing we've seen. And then as those expectations normalize, take it off very quickly. No one's taking really big long beta calls here. And And I don't think that's the the right thing to do. The The better move that we've seen within our and tried to steer our portfolios toward is just more alternative types of diversifiers and ways to get still returns into your portfolios. And that can be done either within the call it bond portfolio, whether it's through something like you know, a more stable private markets type of allocation or more long short relative values type strategies. And you can even do that outside of the bond portfolio with more hedge fund style strategies as as a partial diversifier, albeit again, often times less reliable in that true true recessionary environment than a, you know, as a Treasury bond would be. Um so, wouldn't advocate going wholesale in that direction, but it's not the worst time to do. >> Yeah. Interesting, 56% of our attendees said they are remaining a neutral duration position. Uh nobody looking to increase at the moment, but then 38% saying they're evaluating changes. I think everybody's just trying to take the data come as it's coming in and trying to figure out what what to do next. Um Keith, you talked a little bit about the possibility of a structurally higher um term premium environment. We talked about today's environment versus '22. Um and you've also made this comment uh in internal conversations about bonds needing to be bonds. So, what what does that mean in practice? >> Yeah, when it comes to bonds being bonds, I think in today's market environment, it's just not being a yield hog. And we've seen that play out over and over again. Uh you know, you you get greedier and greedier at such a stable excess return right now cuz credit spreads aren't moving around very much, but you know, if I want to add 10% into investment-grade credit, that gets me eight basis points of additional yield. Well, if we were to go into a recession, that 10% added return is probably going to cost you two, three, 4% at the total bond level in terms of what it can do damage-wise. And then all of a sudden, you get this nice index return of 5, 6, 7% in a recession, something that's at least up for you, but you've actively, you know, gone and almost completely offset that because credit can be so asymmetric in in this world. So, trying to set up so that at least at the out stage or the outset of the any sort of major risk-off move, our portfolio will act like a bond portfolio so that we can then be aggressive and hit the home runs when it's the time to do so. And we're given that value opportunity and you know, maybe there is a recession coming, maybe we're in one, but the market's priced for it already, and that's when you go make your A is an active bond manager and start to, you know, dial up the risk. >> So, um let's talk for a few minutes about kind of future watch points that investors should be looking out for. So, obviously, there's all this noise surrounding the Fed right now. So, Paul, if you're an institutional investor and you're trying to separate signal from noise, what would you be paying attention to over the next 6 to 12 months? >> I I think on the interest rate side for me, um as we were talking about earlier, if the Fed's going to move, it can't just be what's happening to commodity prices. I'd be looking at signs of broadening out of inflation pressures. So, economists will look at things they call super core measures of inflation. So, there's trimmed mean measures of price pressures where you strip out all of the volatile categories statistically. So, if those were to move up, I think that would be uh concerning for the central bank and and ratchet up the likelihood of rate hikes. I'd also be looking at the labor market, and that's probably an area that's currently quite different from 2022. Uh back in 2022, the labor market was red hot. It It was about as strong as ever been in the history of the United States. It was generating and putting off a lot of wage inflation onto the service sector of the economy. We're not seeing that yet, but if that were to change, I think that'd be another watch point and sign that maybe this inflation problem's getting a little bit bigger and more concerning. >> Mhm. Uh Keith, how about you? Where do you think institutional investors should be focused, partic- particularly as it's relating to the Fed? >> Yeah, for me, it's watching what the Fed actually does, not just what they're saying, but what are the actions they take in the meetings versus saying what's to communicate less. I I don't think we're going to get as many words out of them. I would even take less out of what the votes look like cuz that can often be politicized as well once you know the outcome. Um so, I would focus on what they're doing, and what they're doing will tell us more about you know, whether this worries that we have over Fed independence and politicization uh are are really well founded or or And that's that's what we're going to be watching for. Unfortunately, it means the Fed has to sort of regain credibility that it's had for decades. >> Yeah. >> That's that's the situation that we're in, and we could get there very quickly, but it could also go the other way, and that's that's why we're watching closely what what they actually do, and we're staying closer to home in part because the downside to have to waiting on what they do is that everyone else is obviously going to see that as well, so it's harder to get in front of the market. That just means staying closer to home when you know you're just not going to be able to get an asset front of the market on actions. >> All right. Um just a couple final questions here, Paul. What's one thing you think institutional investors might be underestimating right now? >> I guess a a trend that we've seen that's maybe not fully considered yet is we've had just so many supply-side shocks here in the last 6 years. We had the disruption from COVID. We had the disruption from uh the Russia-Ukraine war. We had higher tariffs. Now we have the war in Iran, and I think there's a possibility that that continues going forward, and if it does, as I'm thinking out not just the next 6 to 12 months, but a 5 to 10-year view, that could make a world of more inflation volatility. It could maybe reshape cross-asset correlations a little bit and motivate some of the points that Keith was talking about around uh looking at a sort of broad set of diversifiers in addition to government bonds in portfolios. >> Yeah. Keith, um what's one portfolio risk investors might not be getting adequately compensated for? >> Well, I think given the responses that we got from uh from the crowd, I'll have to say liquid credit, and particularly sort of investment grade, and you know, one area of concern for me is these hyperscalers, may I companies, and then the massive issuance to to fund up what you know, is a potentially amazing opportunity, particularly the side, uh but do we really know when these these institutions are borrowing for 10 and 30-year type of bond issuance? Do we know what that world is supposed to go look like 20 years from now and how many of these are going to be money good and why are they borrowing at 80 basis points spread to treasuries right now? And that's just Well, that to me is not particularly risk worth taking in one. >> Yeah. All right. Keith, Paul, any final words of wisdom for for our crowd here? >> Uh I think we covered it. >> All right. Well, thank you so much for a really insightful discussion. I appreciate you sharing your views with us. Clearly, the Fed is operating in an unusually complex environment right now. For institutional investors, understanding not just the path of rates, but the credibility and independence of monetary policy is going to be increasingly important for portfolio outcomes. So, thank you to everyone who joined us today and for those of you who participated in our polling questions. We really appreciate your time and engagement. If you'd like to continue the conversation or learn more about how Russell Investments is thinking about fixed income positioning and portfolio risk in this environment, please reach out to your Russell Investments representative. Thanks for joining us.

Hello. Welcome to our webinar. Is the US dollar back? Currency issues for institutional investors. I'm Van Lu, global head of solutions strategy for FX and fixed income. It's been a remarkable few months in FX. Before the outbreak of the Middle East war, the US dollar looked set for a a slow grind lower. It's expensive on valuation and the US exceptionalism narrative was fading. But the conflict flipped the script completely. The dollar index went up by 4% from its low to its peak. Energy prices surged and the dollar rediscovered its safe haven role. Because the United States are now a net energy exporter, all shocks tend to strengthen the dollar. All this raises important questions for institutional investors. Is the dollar strength a cyclical response to conflict or is the dollar genuinely back? And if tensions ease, could the pre-war pattern of a weaker, less defensive dollar re-emerge or is the strong dollar here to stay? And what do these FX moves mean for currency hedging policy, return opportunities from FX and trading executions? So, let's explore these from three different angles, macro, FX management and FX trading and I'm delighted to be joined by my colleagues Andy also co-head of overlay solutions and Natsumi Matsuba, head of FX trading. First question I would like to put to Andy who oversees our FX portfolio management team. With this uh pick up in currency volatility, are institutional clients changing their hedging behavior? Are US investors increasing hedge ratios because the US dollar feels defensive again? And what about non-US investors? Are are they rethinking in some ways their their hedge policies? Thank you, Van. We have seen some non-US-based investors increase their US dollar hedge ratios in their passive currency hedging mandates, but these hedge ratio increases have been taking place over the last year anyway, rather than being a response specifically to the Middle East conflict that began 6 weeks ago. We are having very interesting conversations right now with both US-based investors regarding their foreign currency exposure risk and with non-US-based investors regarding their exposure to the US dollar. For most clients, the main reason for having a passive currency hedge, which is a hedge with fixed hedge ratios, is to reduce volatility. And so, a big topic right now is whether the dollar is rediscovering its safe haven role or not. Or another way to say this is to ask what will the correlation be between the value of the dollar and the value of global risk assets going forwards? We can see what the correlation has been in the past, but what will it be going forwards? And this is such an important question as the answer will determine the volatility minimizing static hedge ratios in passive currency hedging mandates. So, we are looking at this very closely. Something else we are seeing from clients is increased demand for dynamic currency hedging strategies which adjust currency hedge ratios up or down over time in response to changing market conditions. Van, I have some questions back for you. In March, both stocks and bonds fell together, which was a tough environment for diversified portfolios. My questions are and currency be a diversifier? How did currency factor strategies perform during the period? And did the factor mix help when traditional assets struggled? Yes, March was I'd say a good case study of how diversified currency factor uh approach behaves in a tough environment for traditional assets like stocks and bonds. So, three factors are commonly used to make returns in currency markets, carry, value and trend and we saw that all three posted positive returns in in March. Uh first, carry benefited from weakness in the low rate currencies as uh we saw a pick up in inflation risk. Uh value also contributed despite, you know, uh we were short the US dollar in in value, but uh we had other short positions that worked out really well. And then trend was also positive, but more muted, which is expected uh because often trend works better when macro trends drive exchange rates over a long period rather than being hit by a sudden shock. Overall, uh I think the combo meant that currency strategies did well when stocks and bonds were both under pressure and this is similar to what we saw in uh in 2023. So, we're quite quite pleased with uh this this outcome. Um let me bring in Natsumi at this point. Natsumi is heading our FX trading desk and whether you do currency hedging or currency for return strategies, to do them well, you need to be very cost-effective in trading. When markets turn volatile, um such as during COVID-19, how much can bid-ask spreads widen, Natsumi? Thank you, Van. Um yes, it's very important that you are able to implement um efficiently during market stress or otherwise. And during these periods, we do tend to see liquidity providers such as major institutional banks, they tighten their risk control and instruct their traders to widen the spreads to protect themselves even if there is ample volume in the market. The COVID-19 pandemic, that was an extraordinary time when spread cost was 10 to 15 times wider than normal. For example, euro-dollar, which is the most liquid pair, we saw top of the market book widen to about 1 to 3 pips. Usually, it's about 0.1 pip wide as reference. So, what that means is when it usually takes a trader a few seconds to a couple minutes to unwind 100 million euro, during COVID, it took uh an individual close to an hour to unwind the entire 100 million euros. So, that was a really tough time, but fortunately, they these stress conditions only lasted a few days as market participants were able to adjust quickly to these unprecedented times. It was certainly an interesting time that I will never forget. Yeah, these must Those must be uh stressful stressful conditions, uh right? I mean, how do you how do you trade during these uh very stressed periods to ensure that our clients um receive best execution? Yeah, I'm not going to sugarcoat it, Van. It was extremely difficult. Um we were all hands on deck. Pre-COVID, our traders, we did use quite a bit of algo execution. Um however, during this time, we shifted our approach and leaned very heavily on our relationships with a broad um network of approximately 25 different counterparty banks and their access. So, we're on IB chats and we're on the phone quite a bit more than normal. Execution discipline became extremely critical and crucial. We broke our orders into smaller clips than what we normally normally would do to minimize market impact and we were deliberate in how we approached larger trades. We wanted to prioritize anonymity for our clients and our funds and carefully manage information leakage to execute efficiently and discreetly. And in parallel, it we actively sought out pockets of liquidity tailoring our approach by currency pair and the prevailing prevailing market conditions with a holistic focus on best ex, balancing liquidity access, minimizing slippage, while ensuring settlement cutoff timing was met. It was a tough time, but I'm proud to say that the team did great and our trade costs remained tight and consistent throughout it all. So, Van, a question for me. The dollar has clearly strengthened in the short term, but with the tensions around energy flows, alternative payment systems and shift in global oil trade, are we seeing dollar safe haven role strengthen or do you foresee any signs of long-term erosion? Hm. Yes. So, in in the past, high uncertainty would tend to push flows into the US dollar and we've seen that again recently during the hostilities in the Middle East. But last year, 2025, it seemed like the dollar safe haven properties uh weakened. So, I think what's important is that the dollar's defensiveness is now more conditional. The dollar still acts as a safe haven when when the shock favors the US, like energy disruption because the US is a net energy exporter, but less so in other scenarios like liberate liberation day last year. And then structurally, the longer-term picture is I think still more challenging. The dollar remains overvalued and there are also some gradual shifts in the system such as whether the oil trade will still be predominantly invoiced in USD. Also, um saver countries like Japan or Germany need to invest in their own defense and infrastructure. I mean, it's becoming, I think, a more prominent topic because of the war and that leaves less capital to be exported to the US and that could reduce demand for USD assets over time. So, I think the takeaway is that the dollar is still defensive in some environments, but restlessly reliably so. And I think that's that's quite tricky for investors, including our own clients, to face these regime changes and shocks and um and wonder whether one static hedging policy can be appropriate under all circumstances. Um I want to turn it back back to Andy. Um are there any alternatives to passive hedging, Andy? Yes, uh there are dynamic currency hedging is definitely one to consider for some investors and we are seeing high client demand for this. In a dynamic currency hedge, the hedge ratios hedge ratios are adjusted over time in response to the changing market conditions. We've recently had and I'm continuing to have conversations with lots of clients who have a very similar outlook, which is of a weakening dollar over the long term, but also a possibility of high dollar volatility and the possibility that the value of the dollar could move significantly in the opposite direction, particularly in the short term periods, even if the thesis for long-term weakness plays out. And these clients also have some consideration to the carry cost of hedging. Many of these clients are not comfortable having a passive currency hedging mandate with static hedge ratios and instead they prefer dynamic currency hedging models. We offer different types of dynamic currency hedging models models at Russell, which are designed to achieve different things. The one which is proving very popular at the moment utilizes highly responsive quantitative analysis and daily monitoring, enabling it to adapt quickly to changing market conditions. Four clients have hired us for this strategy recently, specifically to manage their US dollar risk and it's performing very well. Uh Natsumi, given all of this volatility, what are Russell's FX trading costs and how can we help clients with their FX trading needs? I'm glad you asked, Andy. Um as context, in 2025 we traded over $630 billion in foreign exchange and we achieve a near-zero cost in trading costs across a broad range of currencies. This includes, obviously, the G10 markets, EM, and also restricted and frontier currencies spanning spot, deliverable forwards, and non-deliverable forwards, and also in swaps. And I would say that this outcome reflects a combination of trader expertise, deep counterparty relationships, as I mentioned before, you know, going through a stressful period, you have to know which banks have what kind of access and be able to efficiently communicate, and continuous data-driven analysis to ensure FX is executed efficiently while preserving alpha through minimal transaction costs. We are able to deliver similar benefits to our clients by reducing unnecessary FX execution costs and our approach is designed to integrate seamlessly into our clients' existing workflows, allowing us to enhance execution efficiency without disrupting their current operational processes. That I think will give some ease to our clients so that we're not opening up new risk by being an extension to their team, being their FX traders, if you will, within the same firm, even though we may be sitting apart, instead of just being their vendor. So, Van, back to you with the big question for today. Is the US dollar back? Well, yes, so leaving the toughest question uh till the end. I'd say is the US dollar back, I'd say yes, but it may not last. So, the recent strength um that we've seen, I would say, reflects cyclical forces, uh higher oil prices, um the war, and the fact that the United States are now relatively insulated as net energy exporters, and that's why the dollar has strengthened uh despite actually interest rate spreads moving against it. But structurally, I believe this the picture hasn't shifted materially. The dollar is still expensive on valuation, uh according to our models around 20% overvalued on a real trade-weighted basis, and the longer-term drivers like uh fiscal deficits, evolving capital flows, still point to a gradually lower dollar. So, the dollar is not back in a way that overturns these structural headwinds, but it has shown that it still has some teeth in some scenarios. So, I think to to wrap up uh today's webinar, what does it mean for investors? I think for invested investors, it means staying flexible and nimble and potentially using some of the things that Andy talked about, uh things like dynamic hedging, active currency strategies, and then being very mindful of the execution discipline that you mentioned, Natsumi, to manage their their currency exposures through this uncertain period. I think this is actually a good point at which uh we can conclude our seminar. Um on behalf of Natsumi and Andy, thank you very much for tuning in and see you soon.

Hello everyone and thank you for joining us. I'm David Morton, client CIO based in London. Many of you joined our web webinar last week where we discussed the initial market reaction to the conflict in the Middle East. Today's session is intended as a follow-up. We'll provide a an update on how markets have evolved over the over the past week and revisit the potential paths the conflict could take from here. First and foremost, our thoughts remain with our clients and colleagues in the region who are directly affected. While we don't lose sight of the human dimension of these events, today's discussions will will still focus specifically on the implications for financial markets and indeed client portfolios. I'm pleased to be joined today by Alan Zoutouni, head of multi-asset across EMEA and Paul Eitelman, global chief investment strategist. We received a significant number of questions last week, so please do continue to submit them throughout the session. We'll aim to address as many as we can towards the end. Paul, I'll I'll start with you. Last week Van summarized what we saw in the first few days as being a very typical market reaction over the initial days of the conflict characterized by a measured correction in financial markets alongside a more pronounced volatility in oil prices. Would you mind summarizing the key developments over the over the past week and explain how how markets have responded? >> Well, sure and thanks for having me, David. So, um the conflict is still ongoing. Um we're still seeing significant volatility in energy markets as cascading across global financial markets. As I know, this week markets began uh sort of Sunday night into Monday morning under pretty significant pressure. Um That was on the back of ongoing strikes across the region. There was also news that Mojtaba Khamenei was appointed Iran's next supreme leader and he's generally seen in the West as a hardliner. And so I think the narrative at the beginning of this week was that the conflict appeared to be dragging on and so that suggested a protracted disruption to energy supply. Um in just the last call it 24 to 48 hours the news has subsequently turned a little bit more positive and I point to kind of two developments there. Uh first and probably most importantly on Monday afternoon uh US President Trump told uh the press that the war in Iran is complete pretty much uh and that we're getting very close to finishing. So I think that helped to maybe calm markets that the timeline was uh getting more compressed again. Uh and then the second development that I'd highlight in a positive direction and this happened just an hour ago is that the IEA has agreed to release um a record 400 million barrels of oil uh to help uh alleviate some of this supply pressure in global energy markets. So you know, it's been a volatile situation. The conflict is obviously ongoing uh but as sort of one marker around this if you're looking at Brent crude oil prices uh last Friday they closed at $93 a barrel at their peak during that moment of pressure we got up to 118 uh and as of just a moment ago oil prices were back down to 90 again. So a lot of volatility but sort of point-to-point not that much more incremental pressure on markets um as sort of the tone uh particularly from sort of the US leadership uh has improved somewhat. I'd say from our perspective we're not quite at an all clear yet around this conflict. Um there's some ambiguity around exactly the US's plans and intentions here and I'd say there's also some uncertainty if Iran or for that matter Israel are willing to de-escalate even if the US wants to. So it's still a very fluid situation but a bit of a positive tone shift here over the last, call it 1 to 2 days. >> And Alan, given that backdrop, can you talk about, I guess the key variables you've been monitoring most closely while managing clients' portfolios during this period of volatility? >> Yeah, sure, David. Um, when events like that happen, it is very important to stick to fundamentals and stop looking at the headlines, which can be a destruction. So, um, in those environments, we specifically look at the sentiment part of our process, which helps us guide our investment decision around volatile timing. And these sentiment indicator is made of 11 subcomponents and they're trying to help us to capture the time when markets are moving into panic mode, when there is indiscriminate sell-off in various asset classes. And that is usually a time where you need or you can take more risk because that means that markets are capitulating. And that's something we've been monitoring on a day-by-day basis as the situation unfolded and markets were moving. And at we've never seen our sentiment indicator over the last 10 days triggering or being close to to triggering any action in our portfolio. And actually, if you look at markets, there has been a bit of a sell-off, 2-3% from the all-time highs in the US, but there hasn't been a disorderly sell-off as maybe last year over liberation day or in other crisis, COVID crisis or any other crisis that we've been in. So, our sentiment indicators are not showing any excess pessimism in markets. So, that's something we are looking very carefully. On top of that, we are looking at two two three other kind of indicators which can help us guide more volatile movements. One is what we call the fear indicator, the VIX. And the VIX hasn't moved drastically on the upside. At the worst of the the crisis and the sell-off that Paul mentioned Monday morning when markets opened, it was at 35. So, not near the level we saw last year when it picked at 50 55. So, that means that investors are still keeping their calm. Two other indicators we're looking at is what's happening in corporate spread on the fixed income markets. And this is as well usually a good sign to see whether there is panic or not in fixed income market. And corporate spread are a measure of the excess premium lenders are asking to lend to a corporate buyer versus a state a government lender. And those spreads haven't moved at all in the high yield space and have moved by 10 to 15 basis point into investment grade, which is very very muted and that shows that there is still confidence in the system and that the the credit market are still functioning functioning as they should. Finally, because this crisis is very much oil led in financial markets, we are looking at forward contract of of the price of oil. Meaning the price of oil for contracts that deliver in December at the end of this year, December 2026. And these price haven't moved. They've moved from 70 to $75 barrel, which means that actually investors are not anticipating a protracted conflict and expect actually the rise in oil to be very temporary and oil to be back at their pre-conflict level by the end of year end, which is something for us to to to to be mindful of. And that's why with those indicators and those measures, we we we kind of frame the view on what to do in our portfolios. >> Thanks. And and turning to you, Paul. This is very difficult question, but but what's your current sense of how this might unfold from here? Last week, Ben outlined three potential scenarios with the magnitude, but but just as importantly the duration of the conflict being the the primary drivers on the severity of the economic impact. Do you I mean, do they remain the two key drivers going forward? And how, if at all, have we refined our outlook in light of the developments over the last few days? >> Yeah, I think I would re-emphasize their point that the duration and magnitude of the conflict and the disruption to energy supply really continues to be the central parameter for financial markets here. And Ben talked about three scenarios. I still think that's the right structure for thinking about the situation. In the bull scenario we're envisioning a sort of de-escalation where energy supply stabilizes and financial markets recover. In the base case, the conflict continues but stays relatively contained. And so, we have volatile but relatively stable energy prices and global financial markets. And the bear case is where the disruption sort of builds, oil prices potentially move significantly above $100, and then there's more damage potentially to global business cycle fundamentals. So, I think base case continues to be um towards this idea of a contained conflict um where we do have volatility, but not significant disruption onto global fundamentals. I say in addition to that being our view, that tends to be the tone that we're hearing across the managers on our open architecture platform right now as we've been canvassing over the past several days. Um and there's some rational uh basis for that. I think particularly stateside here um there's some concern over higher gasoline prices. Um year-to-date, for example, re- retail gasoline prices in the United States are already up uh 25% year-to-date, so that obviously puts some pressure onto US consumers. Um and then as we sort of talked about at the beginning, there's been a little bit more positive tone from the United States around potentially compressing how long uh that we want to engage in military conflict in the Middle East. So, that's sort of how I see it at the margin, maybe a little bit more positive skew to the scenarios than what Van described last week, but um the structure is largely the same as what we talked about previously. When we map that onto what it means for global fundamentals and markets, uh as an American, I tend to build a lot of my uh macro models around West Texas Intermediate crude oil prices, so sorry, rather than using Brent, but I plug in something like $85 a barrel for crude oil prices, uh we estimate that to be a headwind onto US growth, for example, of around 3/10 of a percent for real GDP. So, that's a headwind, but unlikely to derail um the US economic expansion. In Europe and Asia, as Alister describing, I think a little bit more sensitivity to uh disruptions of energy supply in the Middle East, but maybe there a four or five tenths headwind onto growth. And so, again, I'd we obviously recognize this is a very fluid situation that we need to be on top of. We do see some headwinds on to fundamental economic and earnings growth, but where oil prices are right now, we're not currently at a level that is we think likely to derail the global business cycle and I think that's important. >> Yeah, and a lot potentially putting you on the spot here and acknowledging the the uncertainty around how events might develop. Can you discuss any potential changes you're considering or or indeed prepared to make within client's portfolios and at what point might you consider adding risk or when does that become attractive? >> Yeah, I think there are two two elements we'll be looking at to be able to be adding risk. One is no change in our cycle view to points two two ball points to the fact that we do believe that the moving oil are reasonable. They're not they're not taking removing the growth prospect of the US global economy. So if we don't change our cycle view, then our sentiment will be the driving factor and if we see areas of excess of excess panic, selectively to to risk. One of the areas of of interest in our portfolio has been high yield. We are currently in most of our portfolio underweight into high yield credit high yield debt. So that's below double B rated liquid credit and we've been underweight for the last three five months in our portfolio because corporate spread were priced at perfection at all time lows. So there wasn't any premium that was attractive for us to invest into the asset class given the the asymmetric level of risk. So if we start to see corporate spread moving higher to um 350 potentially, then that's uh an area where we'll be looking to add to our portfolio and to be um to be a moving closer from home from a strategic asset allocation um point of view. Secondly, equity weight um obviously because markets do move uh there are drifts in portfolio and just not doing anything sometimes means that your portfolio drift uh with a lower than uh expected equity or higher than expected equity weight. So, that's something to have in mind as well. Make sure that uh to be very disciplined into our rebalancing uh strategy within portfolio and uh look in real time how the portfolio do drift and adjust those drift to take into account um any any um any movements that we're seeing in portfolio. Obviously, if we're seeing uh more dislocated uh equity markets as we've seen so far and uh if our sentiment indicators move to stage two, stage three um kind of oversold level, um we'll be um we'll be considering um uh looking at uh to me, US equity seems to be the uh um the the the the the the biggest um uh uh the best uh equity markets to be in at the at this stage because they're more insulated uh from uh the impact of oil markets uh less uh impacted um by uh uh an oil price shock. So, that could be uh as well uh a place where we would be adding uh should we see a more pronounced sell-off. But again, we're not there yet. >> Thank you. Um please do keep submitting your your questions in um for our two two panelists. We've we've got a few in already. Um the first one uh I'll probably uh throw your way, Paul. And it's a question around divergent objectives between US and and Israel. So, if if US were to to pull back while Israel continues its engagement, how might that alter the the market implement implications you you discussed and summarized earlier? >> Yeah, I'd say strictly from financial markets perspective, it probably doesn't matter that much who is striking Iran. A lot of the focus is really lasered in around the Strait of Hormuz specifically as a critical bottleneck for global energy supply. Um And I'd say as well some of the damage to regional uh infrastructure exacerbating that problem. So, um yes, could the objectives diverge between the United States and Israel? I certainly yes. Um I do think um the United States will probably find it difficult to want to move out of the conflict until or unless energy supply is secured in the region. I think that's a big focus in the West right now. Uh and so I think that continues to be kind of the main emphasis from our perspective. And so, rather than maybe focusing on the players of the conflict per se, uh kind of going back to what we said a couple of times, that I think it's really the duration and magnitude of the conflict that is continues to be the central focus. >> Thank you. Um uh Alon, maybe maybe come to you next given this we've got a question around, I guess, regional performance touching on what you said about the US equity market in your portfolio. So, the the question is around um about the US equities outperforming non-US equities. Um specific reference to to Asian markets in particular. Are are you able to just explain, uh I guess, the key drivers behind that regional the regional differences we've seen over the last week? >> Yeah, there I think there are two drivers behind um the uh the underperformance of Asian markets uh versus US more specifically. I think one is the position of where we started before the conflict. Before the conflict, for instance, Korean market was up 50% year-to-date. So, we have seen and witnessed a very strong overperformance of um Asian equity markets um and emerging markets uh overall uh before the conflict started basically on the acceleration of growth, the positive momentum around AI um as well uh impacting uh those Asian markets. Uh so, um the fact that uh markets were more elevated, they had risen um I mean, emerging market and Asian market had risen very strongly last year and a very strong start of the year made them a bit more vulnerable to any um any um any kind of risk-off event uh which uh actually happened. Secondly, is actually 70% of the traffic in the Strait of Hormuz is directed towards Asia um and therefore any disruption to um to to traffic there in the Strait of Hormuz, which we're seeing now, is impacting um Asia dramatically. Being China, being India, being Korea, being Japan, they do rely a lot on oil energy and other chemical um and other chemical um kind of components to be uh shipped from the Middle East towards uh towards uh their home. So, therefore uh the impact um onto uh onto their business uh is uh more elevated than the US uh and US companies which uh don't depend actually on uh oil transiting from the Hormuz uh the Hormuz Strait of Hormuz because uh the US is energy um independent uh at this stage. European markets have sold off uh a bit more as well over the over the period. I think that's as well due to maybe differences in sector weights where Europe is more cyclical than the US. You have sectors such as industrial which are suffering from basically the disruption in in in all prices and all markets and which make them more vulnerable than the US which is more tech heavy which kind of have been quite resilient and are less sensitive to any any energy shock at this stage. So that's why you kind of seeing that rotation from the beginning of the year where we had witnessed Europe, Asia and on US markets over performing the US. That's shifted a bit over the over the the last 10 days but we haven't seen excessive move as well. Overall, the move have been quite quite well balanced. Korea was a bit of an extreme but again a lot of speculation in the Korean market as we entered into the conflict when market was up already 50% in in two months. So it is largely expected that there is a bit of a volatility in in markets where there has been a lot of hot money. >> Thanks. Another question around bringing in the concept of of the existing sanctions. Effectively, I'll set up Paul I think I think this is one for you. What what could the what could sustained upward pressure on oil prices mean for those existing sanctions on producers such as I guess Venezuela and and Could relaxing those sanctions be a be a tool to stabilizing oil prices? >> Well, yeah, I think there's a number of measures under consideration to try to relax the pressure on energy supply globally. Like we already talked about this 400 million barrel release of strategic reserves globally. Um around the sanctions with Russia, the US has already granted now a 30-day waiver allowing India to import Russian oil. Oil that's currently loaded onto ships. Um in addition to that around the Russia situation, um this week Treasury Secretary Scott Bessent has said Treasury's considering lifting those sanctions on Russia more broadly on oil stranded at sea. So, definitely a lot under consideration. Um around Venezuela, obviously that's been a dynamic area globally this year as well. It's actually the case that Venezuelan oil is already flowing um to the United States and some oil hubs in the Caribbean right now. The numbers aren't large, so it's not enough to in its own sort of solve the the conflict and constraints out of the Middle East, but it is contributing to global supply again. So, I think basically everything's under consideration here pragmatically to try to ease the energy supply constraints right now. >> Thank you. There's a question in and I I think I know who sent it and it's a question mark around gold and it historically all the textbooks will tell you that it's a good hedge for geopolitical risk. Alan, do you want to do you want to take that one? So, has has this has the gold sell-off small sell-off since the conflict began does that call into question the effectiveness of it of the asset class to to hedge these geopolitical risks going forward? >> I think here doing has been a bit of sell-off as well from speculative position which have pushed market down. You have to remember that gold was up 65% in 2025 which was the biggest performance of the asset class since 1979. So, 50 years dating back would have the best return for gold. And we've seen [clears throat] shift in gold holders in the last few years until the end of 2024 it was mostly [clears throat] central banks buying gold to store the reserves and in 2025 we've seen retail money through ETF coming significantly into the asset class. Close to 100 billion dollar of ETF money has been put into gold in 2025. And usually this is kind of the volatile money as well. They're not long-term investors. They're more speculators that are trying to capture the last trend in the market. And what we've seen over the last two weeks is just a bit of leveraging in the system and some of these retail player pulling out money that was invested in gold. Overall, the long-term case for gold for us remains the same. We are seeing central banks adding gold into their balance sheet to store reserve. We're seeing gold as the best as well hedged against inflation. And as well gold as as a good as a good protection against geopolitical risk. And actually I mean gold is still up 20% year-to-date in dollar terms. So, even though last week maybe it didn't perform fantastically well. It sold off by a few percentage points. It's still up 20% year-to-date alongside most of the commodity market. If you look at the broad commodity index so far this year it's up 20% so commodities have played that role of hedge towards your geopolitical risk and it's not only the the last events that we saw the Iranian war but we saw gold rising and commodities rising on the 1st of Jan on the Venezuelan news on the Greenland news as well and and the tension in the months of Jan and Feb building up into into the the war in Iran. So it is the top performing asset class this year so far gold and broad commodity even though over the short term there has been a bit of a dislocation or unexpected move but uh that doesn't change the fundamental case for gold and for broad commodities in portfolio when you have heightened uncertainty. >> Perfect. We we got 4 minutes left. I think we've got time for just one more question. Paul you mentioned earlier you mentioned the new supreme leader as has been named so we'll we'll throw this question at you. We had a an ask for just for us to summarize what we know about him and what this could mean I guess for the regime's policy direction and and the chance of meaningful change going forward. >> Sure so Mojtaba Khamenei is the son of the previous supreme leader. Um we do know some things about him. There've been a number of reports about his sort of profile and background over the past couple of days. Um so for example he's believed to be behind the rise one of the former hardliner presidents in Iran Ahmadinejad back in 2005 a big supporter of him. Uh Mojtaba also uh is reported to have pretty close ties to the Iranian military, the IRGC, the Revolutionary Guard in Iran. Um and is generally thought to have been a kind of quiet power player behind the scenes of the Iranian regime now for the past several years. So, I think that's sort of like the rough sketch that we have in mind for the new supreme leader. And I think with with that in mind, um sort of the general thinking here is that he's thought to preserve sort of the status quo of the Iranian regime. Sort of a hardline approach that's somewhat adversarial uh to the west. And obviously, there's some implications of that on to how conflict might evolve from here. >> Brilliant. Thank [clears throat] you. Um we we've got uh a a minute or so left, so I'll I'll just wrap up. Um essentially, just summarizing, I guess, the key points that have been made by by Alan and Paul uh already. Geopolitical developments, I guess, remain fluid and uncertain. The the market reaction has has not been unexpected given what we've seen in terms of the news flow and the and the data points. Alan talked quite eloquently around our focus continues to be guided by our process, and it's as crucial now as as as ever to remain disciplined was the the word that Alan used. Investors should stand ready to add risk back into the portfolio, but we're being thoughtful around the asset classes and the regions by which to add risk um as opposed to just purely focusing on the on the timing element. Uh thank you, Paul, Alan. We know it's incredibly busy for for you guys at the moment managing clients' portfolios. Thank you all for joining us today. Please do reach out to your Russell representatives should you have uh any questions about the content discussed.

Hi everyone and thank you for joining us. I'm Rachel Carroll, Russell's head of consulting for our North American institutional clients. Today we're going to dive into our OCIO outlook which was recently published on Russellinvestments.com. I'm going to quickly set the stage for our conversation today. OCIO refers to outsource chief investment officer services and over the last decade the OCIO OCIO market has tripled in size. The 2025 CRUi report projects that about 1.3 trillion of additional flows into OCIO mandates is expected by 2029. Alongside that growth is another trend in that OCIO services are expanding up market. For this conversation, I'm joined by Kevin Turner, managing director of strategic partnerships, and Stacy Bro, co-head of OCIO. They're here to help us unpack what that means and why it matters to organizations of all sizes. Kevin, I'm going to start with you. When we say expanding up market, are we just talking about bigger mandates or is this more of a structural change? >> Thanks, Rachel. And and first, yes, I just wanted to reaffirm that OC industry has certainly grown leaps and bounds. um both in terms of the asset flows you mentioned but also the broader ecosystem just with the sheer number of uh providers that have joined the market as well as the search consultants seeking to to understand the differentiation across uh these providers. Now to your question when we talk about expanding up market it's tempting to think this is just bigger pools right bigger assets moving towards a delegated model uh that is not what we're talking about uh what we're really seeing is an evolution in how institutions think about outsourcing in the first place and that's been driven in part by the demands of these larger organizations as they consider OCIO models. So think back uh a decade ago, outsourcing really just meant, you know, you determine a n allocation and then you select some managers to implement that strategy on behalf of the organization. Um now fast forward it's increasingly more of a enterprise focused uh engagement integrating governance uh to protect the organization customizing the implementation to align with their preferences and liquidity requirements as well as wholesale uh and holistic risk management all focused on achieving uh those ultimate objectives that every client has uniquely. So that's a pretty big shift in the mindset rather than just applying the prior models and engagement approach to bigger mandates. It's it's really how that large institution is redefining what OCIO actually means and those standards are cascading across the the entire market. Um so I guess the long-winded way of saying Rachel expanding up market isn't just asset size, it's really about the expectations. That's interesting, Kevin. So, so Stacy, if I'm a $300 million foundation that's listening in, why do I care what 10 billion dollar organizations are demanding? Thanks, Rachel. As a parent of teens, my first reaction to your question is that you shouldn't care about what your peers are doing, but at the same time, there is something to be said about imitation being the truest form of flattery. Lots of cliches there. Um, but getting back to our topic, we've learned that the application of a solution for a large pool does not always yield the same outcomes for smaller pools for lots of reasons. Some of them are controllable, others less so. And that's where OCOs come into play to bridge that gap. Often the largest asset owners will feel pain points first and more acutely and therefore are at the forefront of partnering with their outsourced investment teams to drive innovative solutions. That's why peers should care and can benefit because what those $10 billion plans require or portfolios becomes the baseline standard for outsourced solutions. Once those solutions exist, they don't get turned off for smaller clients. In other words, upmarket evolution in innovation raises the floor for all organizations with asset pools of every size. >> So, so Kevin, you had mentioned customization. So how is customization evolving in the OCIO market? >> Absolutely. Customization has really moved from a feature of a solution to a foundation. Um that has to happen in order to meet the increasing demands of of those largest institutions. Now some of the major shifts we've seen relate more towards implementation preferences um which in turn drive the need for customization. So, you know, a couple of examples there, whether it's, you know, a desire for a customized blend of passive and active to meet objectives with higher confidence of of success or, you know, integrating both public and private markets, not just to enhance outcomes, but to align uh constraints associated with each organization's liquidity requirements. Um we talk a lot about open architecture and what that means is really including a diversified mix of independent third-party subadvisor into the solutions um versus customizations around the inclusion of of various proprietary products that that may be out there in the industry. Um finally a lot of focus on specificity around the total cost of ownership. What's the true cost here inclusive of both OCIO platform and subadvisor fees? Now, that last one's kind of interesting because it does create a little bit of a paradox around the intersection of of scale and customization, particularly where you are trying to drive costs down for clients. Um, we think the path forward really demands a flexible platform to accommodate these kinds of preferences. um but via a combination of scaled infrastructure and and customized delivery to meet the client needs. So so ultimately this flows through the entire client base of OCO um providers benefiting both large and small organizations because at the end of the day what's evolving here isn't the degree of customization but really that um the definition you know and specific specifically through the lens of the client. That's right, Kevin. And then there's the governance side of that. Understanding and meeting the needs of a range of stakeholders is key. As customization increases, governance becomes even more critical because now you're not just designing a portfolio. You're designing a decision-making framework that has to work for a much broader group of stakeholders. It's not just the investment committee anymore. It's the board. It's executive leadership, finance, operations, and sometimes regulators. all of whom need clarity, transparency, and confidence in their decision-making. When governance is structured intentionally, it really elevates the whole solution. It sharpens the decision rights, speeds up implementation, improves oversight, and ensures the strategy and execution stay aligned, especially as portfolios become more complex with private markets and liquidity considerations. And ultimately, strong governance doesn't just improve portfolio outcomes. It creates organizational lift. It builds trust and allows leadership to focus on their mission and long-term priorities rather than getting pulled into the day-to-day of investment mechanics. Customization only works if boards can approve it confidently and step back into the broader organization. That's an interesting point, Stacy, because it really is that governance check on everything that would allow uh the boards to have that confidence. So, let's talk about governance in a little bit more granularity. Lots of boards and committees have been demanding more. They're really digging into a deeper level of analytical detail. So, Kevin, how do OCIO providers respond to that? Stepping back, I I think what you're suggesting is broader than just an an OCIO model or not. I mean, frankly, all boards and committees really need to be focused on this. Um, that market environment is constantly evolving. Uh, if you've got a portfolio with some less liquid investments, um, or maybe more complex than you desire, you you really need to understand what's happening. um fiduciary scrutiny is really higher than it has ever been. Uh or organizations um partnering with their OS providers really need to step it up uh and provide and force their provider to provide the appropriate discipline uh and comfort to all of the the stakeholders involved. >> After all, boards can delegate those investment and operational functions but not the their duty to to monitor those responsibilities going forward. So uh we believe the way forward is really to provide full transparency uh into portfolio construction a clear rationale of decision-m activity um documentation of those decisions and a full understanding of the the full cost of ownership. Now um one of the uh issues that have has arisen in the OCIO market recently is is the use of proprietary strategies and independence around that. So a clear justification for when that's appropriate or otherwise is is super important. And then finally proactive communication of exposures and impacts during times of volatility as we're experiencing right now in the markets. So uh an OCO partnership is inherently a tr a higher trust relationship than than most in the industry. And to achieve this that transparency can't really be thought of as answering questions. Rather it's pre preempting them with both clarity, independence and discipline. And so the actively engaged boards and committees out there >> when they're digging in they're not actually weakening the model. Uh we think that they're strengthening it. And so for an OCIO provider to embrace that and seek full fiduciary alignment and credibility um that governor support that can be provided is really a competitive differentiator in the in the market. I agree Kevin and I'll give an example that will help bring this to life. As OCO adoption expands to institutions where the invested asset program is even more consequential to the enterprise, this changes the way we address risk, but also how we communicate about risk management. Instead of saying or reporting, you know, volatility increased by 2%, it's more clear and productive to say, for example, if rates rise by 300 basis point and private capital distribution slow, your liquidity runway drops to X month and here's the contingency plan. So those best-in-class providers create scenario playbooks for their clients that are tied to governance action and they adapt those through time, not just at the point of reviewing asset allocation, but on an ongoing basis. Boards don't want data and charts. They want frameworks that drive effective decision-making. I think that's an interesting point, Stacy, because that playbook that is being provided to to really get ahead of any scenario that might come out, that's probably what develops that trust and really builds that solid relationship with an OCIO provider. Um, so Stacy, can you walk us through what a modern transition playbook uh would include? >> Yes, it's detailed and it should be. Transition playbook is a lot about a lot more than just moving assets. It really starts with alignment before anything trades. We're clear on who's making decisions, how we're communicating with various stakeholders, and ultimately what success looks like. Getting that right up front avoids surprises later. Then we dig into risk and liquidity. What exposures are we carrying? Are there embedded gains or losses that need to be managed? Any private market pacing issues? What are the interim cash flow needs? We want to understand how the portfolio might behave during the transition, not just after it. >> Next comes the execution piece and that's where detailed cost modeling, trading strategy, coordination with managers and custodians and sometimes overlay management all come into play. The goal is to minimize the friction, control the costs, and maintain intended exposures throughout the transition. And just as important as the pre-planning is the operational readiness, reporting, performance, measurement, risk systems, everything else has to be aligned. So once the transition is done, the new structure is functioning properly and there's no blind spots. And then finally, we closed the loop. We reviewed what happened, compare costs to expectations, and communicate clearly back to stakeholders. At the end of the day, a modern transition playbook is about protecting value and building confidence in the go forward relationship when done well. >> Yeah. And Rachel, just once one sec before we move on, I I think back to the theme of the conversation today, I don't think it really matters if you're a large organization or a small organization. You know, every basis point counts for everyone. So, managing the cost and the risk of any kind of portfolio changes is is super important. Um, now transition management is one of those classic examples of a a prior upmarket solution that has already trickled down for the benefit of everyone. Well, at least at Russell Investments that that same capability, the planning execution playbook, that's what we use for both those billion-dollar transactions as well as within our solutions for all of our u mid-market uh clients today. So, um I think I'll just end there by saying, you know, we're also noticing other providers using our transition management services to ensure that they can provide cost-effective solutions to their their clients as well. >> Yeah, that's an interesting point. So, let's talk a little bit about risk oversight. So, um Kevin, what do you think a forward-looking risk oversight um uh process would look like today? Yeah, I think it's helpful to distinguish between what is not. Um, so historically risk oversight was really backward looking, right? It what happened and why and how did this impact our our organization? Seems to us that that's really just stable table stakes in in our regular reporting nowadays. Um, what is required from a risk standpoint though when you move up market is more forward-looking oversight. So anticipating a range of scenarios um different res regime shifts um not relying on simplistic correlations holding but really understanding the full range of uh potential impacts on on portfolio. So this scenario awareness immediately elevates the conversation beyond the assumptions uh and a lot of folks earn additional brownie points for tying that back uh to enterprise level outcomes and and implications for that broad organization. Now, of course, risk oversight by a OCIO provider should not even be thought of as a reporting function, but just fully embedded in the the day-to-day portfolio management activity. >> And Rachel and Kevin, that last point is really important. Boards will benefit or organizations broadly from the practical translation of risk dashboards and a a truly holistic approach to risk management, more than just metrics and analytics. So Kevin's point about tying it all back to the enterprise level outcomes is where risk management yields real value. >> Yeah, that's a good point. So as a final question, um maybe to get a little insight from both of you, how does this expansion of demand uh change the access to talent? >> Yeah, I think I think for the largest organizations, senior credibility matters more than ever. Uh I don't take that lightly because that's not to imply smaller organizations don't. But there's a change here when you outsource um boards and committees of the larger organizations would have previously had large internal teams uh and direct access to senior um people supporting them. >> So our market demand in my mind doesn't just increase the number of professionals involved. It also drives who needs to be involved. So um those interactions require high levels of fluency with all stakeholders. Um boards, committees, you name it. Uh as well as um domain specific expertise for real-time engagement and interaction. Boards don't want people to necessarily go back to home base and come back with answers. They want to have conversations uh at at the point in time that they're living in today. So at the end of the day, you know, while I think you can easily scale assets, it's a little harder to scale that senior expertise, u institutions really want that experience, judgment, the knowledge and and trust um right there at the center of their their partnerships. >> I agree. And it's not just the access to senior expertise that they become accustomed to internally, but it's the immediate access. And so you're right that that's the area that's less scalable. Um and a final related point um co-sourcing can be a huge enabler as well for some organizations with adequate internal resources. For example, an organization can draw the line of outsourcing in a way that amplifies the core strengths of the people and the systems and the processes they have in place and delegate the rest. It's it's really all about flexibility. >> Yeah. And uh Stacy, I think that's a good point. That flexibility um is likely what's helping drive the appetite for OCIO to go up market because it's not that really rigid um delegated or non-delegated model that we've seen in the past, but it's something that organizations can really tailor to work for what works for them. >> Exactly. >> So Kevin and Stacy, thank you very much for uh joining me today. I really appreciate you sharing your thoughts and your insights with us. um you know that OCIO market isn't just growing. It seems like it's really maturing. It's been decades now. The upmarket adoption is accelerating the institutionalization of the OCIO model and it's really driving these enhancements in governance and implementation that can benefit asset owners and plan sponsors of all sizes. Um so thanks for helping highlight that today. um really seems like what began as a solution for resource constrained institutions has evolved into a sophisticated fiduciary model that's embraced by all asset alloc asset allocators of all sizes. So um it has the advantages of scale of access and risk management all the things that we just went through. Um it's, you know, it's interesting. It's not like the expansion up market is creating its own model, but it does seem like it's raising the standard for everyone, um in a way that's really beneficial. So, thank you to everyone for joining us. If you'd like to discuss this topic further, please reach out to your Russell Investments representative. We look forward to hearing from you.