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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.

Hello everyone, and thank you for joining us today. I'm David Morton, client CIO based in London, and I shall be hosting today's discussion on what is a fast-moving and and very highly sensitive situation in the Middle East. Many of our clients and and indeed colleagues based in the region are are directly affected by the events unfolding. So, whilst the focus of today will be strictly on the market and the investment implications, we don't lose sight of that of that broader context and and very human backdrop. I'm pleased to be joined by global head of solution strategy, Van Lu, and co-head of global fixed income, Ritesh Samanta. Thank you both for being here. I know how busy it is on desks managing clients' portfolios through this market environment, but sharing your your insights in in forums such as this is is hugely valuable addition to our client interactions as as we work through this period of market volatility. We've got 30 minutes, and we've got a lot to cover. So, Van, I'll start with you. Please, can you give a very brief recap of what's happened, and then spend a little bit of time talking about how markets have have responded. Sure, thanks, David. Yeah, I'm sure we're all glued to our TV sets, but let me frame where we are, fully aware that this is an exceptionally serious and fluid situation. So, the strikes carried out by the US and Israel against Iran's key military and strategic infrastructure resulted in the death of Iran's supreme leader, and the possibility of regime change in Iran creates a high degree of political and strategic uncertainty across the region. Uh we've seen Iran respond with missile and drone attacks against Israel, but also several Gulf states, uh and that threatens to widen the conflict across the region. So, in terms of the macro and market impact, which I'm going to be focusing on today, the transmission from geopolitical conflicts to the economy and markets is most often through energy prices. And shipping in the Strait of Hormuz is central to global energy flows, accounts for about 1/5 of oil uh shipping, and also important for liquefied general liquefied natural gas. Um and traffic through the strait is already severely affected, and and you know, vessels are pausing or being rerouted. Uh and clearly markets have reacted. Uh so, if we look at oil, oil prices have moved significantly higher. US oil rose to about $74 last I looked. Uh European gas benchmarks, which are uh very important for energy bills in in the UK and Europe, surged by 70%. Uh but all in all, market behavior, I would say so far, has followed a a classic pattern. So, you have a risk-off move through falling stock stock prices. Uh global developed market stocks are down about 3% from recent peaks, with the US outperforming non-US. We've seen wider credit spreads, and bond yields have been very volatile, reflecting, I think, a higher uncertainty around the inflation outlook. But I would say that while the situation is deeply concerning from a geopolitical and humanitarian standpoints, the market reaction up to this point is rational, uh and not not outsized. Investors are pricing higher risk premium, but they still differentiate between this short-term uncertainty and um robust fundamental uh economic trends. Thanks, Van. And I should have said it up front, please do submit your your questions to us. We can see them on the chat, and we'll we'll come on to those towards the end of the end of the session. Um Van, just picking up on one point you mentioned there, oil price. Um at what level does the oil price start inducing or creating kind of recessionary concerns or worries? Yeah, great question. Um I would say the consensus is that in the short term, every $10 increase in crude tends to raise inflation by roughly 0.2 percentage points, uh and trim GDP growth by about 0.1 percentage points. So, from our point of view, the real concern emerges if oil moves above $100, uh then it would knock down growth noticeably. And in our view, uh $130 $150 range, that's that's when we see severe recession risk. Um generally speaking, the global economy is structurally less sensitive to energy shocks than in in past decades. The the intensity of energy in in economic activity is is lower, and there's also a bit of a diversification away from the Middle East and in terms of the producers, but energy shocks, and I think that's important to remember, can still become a major choke point for the economy, and the experience of 2022 following the invasion of Ukraine has has clearly shown that. Fantastic. And and Ritesh, coming to you now, given that wider backdrop that that Van spoken about, are you able to summarize the actions that we've been taking in clients' portfolios? Firstly, on the fixed income portfolios that that you manage, but then also touching across other asset classes as well. >> [snorts] >> Yeah, absolutely. So, you know, I think when we start with fixed income portfolios and and consider how they might be responding to a situation like this, the first question is really how are you positioned from an overall risk perspective, which really essentially means how are you thinking about your positioning coming into this this event from a duration and credit risk perspective. And going into this broadly, and this message will resonate for our other investment teams as well, we've generally had a generally conservative sort of stance. We came into this with low to positive active duration, about 0.1, 0.2. And from a credit perspective, uh part of this has been a function also of extremely tight credit spreads, as everybody knows, over the last year, year and a half. We've generally gone towards lower spread duration, higher quality, and and maintained stronger cash reserves. So, the overall portfolio risk has been around 60 to 70 basis points of tracking error. Now, as the rates have risen pretty sharply, right, over the last 3 days, going from 4.6 to 4.7 in the US market on the 30 years, um and the credit spreads have widened as well. So, high yield spreads are now closer to 290 basis points over Treasuries, again, almost a 30 basis point increase over the over the course of February. What we're seeing then is that this diversification that you hope to get from credit and and rates, which often do diversify each other over medium long terms, that is starting to break down. So, from a risk perspective, that's the concern, that now you have credit and risk and rates kind of moving in the same direction, which is why going into this conservatively has been a good stance for us. Um of course, the watch point is going to be if credit spreads continue to widen significantly more, if rates continue to rise more, then we have to get potentially more conservative from the perspective of becoming shorter duration, higher quality, etc. On the other hand, of course, you know, some of the other areas of focus, if you drill a little bit further down into the portfolio beyond the top-level risks, emerging markets is is a key one to focus on. Our broad fixed income portfolios and global portfolios tend to not have very significant EM risk, on the order of 4 to 5%. So, there we're paying attention to specific country exposure in GCC countries or um the the broader Middle East region, but also we do have exposure in quasi-sovereign. So, these are names that are corporate entities that are backed by the government. Many of them are in the energy sector, and and this is something that is a watch point for us in our portfolios. Uh if I broaden the the lens out a bit more to other investment teams, my multi-asset and equity colleagues are similarly positioned. So, relatively quite conservatively going into this this event. On the asset allocation side, the broad betas in the portfolios have been just around one and lower than the strategic target um that we maintain on the on those portfolios. And the main drivers of risk there are overweights to small cap, underweights to credit, similar in spirit to the message from the fixed income side, and a small overweight to emerging markets also So, the active duration there in multi-asset portfolios is also sitting right around 0.1. Um and lastly, but not least, of course, in the equity side, the overall beta has been actually slightly lower than one, so quite defensive in that regard. About 70% of the risk is coming from stock selection, the remaining is coming from biases and tails and style sector, regions, etc. The tails have actually been towards value, low volatility, and small cap, and and those are all things that have actually, you know, been a source of of gains, of course, in this particular round of volatility. So, also well positioned from an energy perspective, the portfolios have been underweight to energy sector. There is an overweight to emerging markets, and a regional underweight to the US. So, these are all the sort of broad positioning coming out from equities, asset allocation, fixed income. They're all kind of rhyming, as as you might expect. Some key watch points for all of our teams, really, and in line with our strategies team and their observations, is whether or not there's going to be a risk on call at this point. So, as I mentioned, the spreads have on the credit side have started to widen, um and of course, VIX has risen, MOVE has risen. So, if we think about if those rise sufficiently enough to get to a place where we would consider having a risk on call, then it would be time to harvest some gains on the equity side from things like low vol and potential value, and lean into small cap. On the multi-asset side, as in the fixed income side, um in the in that environment again, we would be looking to potentially shave down some of the EM risk and allocate um towards high yield or take more uh sort of defensively oriented corporate credit exposure. So, that's the way we're sort of thinking about both our current stance we're comfortable with, but these are some opportunities and risks that we would need to be positioning for uh going forward. Fantastic. And um Van, I guess I guess looking ahead, what different scenarios uh do you see as being most likely from here? And and what are the key um catalysts that would determine which direction um that this really goes? Yes, really tough question, obviously. Uh but broadly speaking, we see three potential paths from here. Our base case is that uh the disruption from the conflict doesn't last so long that it substantially impairs the economic fundamentals. So, that means the duration of the disruption should be like in the in the in the scale of weeks to at most a couple of months. Um and in in that scenario, oil prices probably stay somewhat elevated, let's say within the $75 to $100 range, and the risk premium stay elevated, but the energy flows um don't see a true supply breakdown. Maybe some friction, but no true supply breakdown. Uh in that in that base case, markets will remain choppy and price in some geopolitical risk, but um should be still underpinned by uh solid fundamentals such as healthy corporate earnings. Uh I think it's quite interesting also to talk about uh the bear case. Uh the bear case I think would involve a military escalation, more prolonged disruption, and a true supply shock, and higher uh higher recession risk. So, if the conflict drags on or widens out further in the region, uh we could we could have more intense involvement for example from Iranian proxies and uh severely disrupting disrupting shipping in around uh the strait. And I want I think one trigger and one indicator that we're watching very closely is is the price of oil. And I think uh price of oil spiking above $100 uh would be a a red flag. And elevated energy prices uh would then start to weigh on consumption and corporate profits. And then I think that's something that we're worried about it that the fundamental economic outlook will be impaired at that point. There is also the possibility that uh that the whole thing escalates de-escalates a little bit faster and that that the actors step back from the current confrontation, which I think is is something that we're all hoping for. Um I think in in terms of the market impact, maybe the the bull case scenario and the base case are not that different except for the timing. In the bull case, maybe uh the the return to the previous path in markets comes about a little bit a little bit faster. And markets rebound a little bit faster. Fantastic. Thanks, Van. We've actually had a question come through already, which is around what are the relative probabilities associated with every scenario. And I think that's probably quite a a difficult question to answer, but can you give a sense of ordering in terms of likelihood? Yeah, we had an internal discussion about about this and seeing how fluid the situation is, I think it's more useful, as you say, to to rank order the scenarios rather than attaching precise probabilities. Oh. And obviously, the base case uh is the most likely in our view. And we would put the bull case slightly above uh the bear scenario. However, the bear case risk is still uncomfortably high. And I think that's important. And its impact would be large. So, I think we need to focus on what could shift us from one path to another. And and we touched on on the variables and the watch points uh in in this um in this geopolitical crisis, which are energy prices and also the the shipping traffic through the Strait of Hormuz. Uh I think those are the main main hinge points. One thing I would stress um is that prolonged US military engagement uh would run up against some domestic political constraints as well. We I think of the midterm election dynamics and uh attempts by Congress to constrain executive authority under the the so-called War Powers Act. And so, these constraints I think act as somewhat of a break um on the most extreme escalation path. Um thank you. And um Riti, just turning to you now. So, you've had those those original scenarios that Van uh mapped out. Um how does that impact the positioning in in kind of each one of those in in terms of clients' portfolios? >> [snorts] >> Yeah, I mean, you know, kind of listening to Van, and I think it's it's really helpful to sort of outline it this way. Um it it is uh it is it sort of essentially really pivots around the duration of the crisis, right? So, the extent to which the duration of the crisis becomes uh extended, that changes the level of um uh transition that we move away from sort of shorter-term impact on uh short-term rates and and start to think potentially about impacts on growth, impacts on recession risk, et cetera. So, that's that's probably the one way that I would think about it. Um it's interesting to note that uh bond volatility, so when we pay you know, we pay attention to the VIX, of course, which has spiked, but also the MOVE Index, which is a measure of implied bond volatility. And uh in this particular instance, as the crisis has been um uh evolving and and uh uh unfolding, the first couple of days actually the first day or so, MOVE actually moved sooner than than VIX did. And part of that is reacting to the fact that the uncertainty in the rate path is is one of the, you know, main pressure points for for something uh when when the geopolitical crisis kind of evolves. Um bond markets do of course capture uh sentiment and uncertainty that is being reflected in the rates, and the fact that it has moved higher and actually continues to move higher, I think really maps to the uncertainty that that that Van is is describing in his scenarios. Um specifically though, when we come into, you know, what does it mean for the for the for the parts of the portfolio, inflationary risk in the in the portfolios is is going to be key. And that is going to impact um the the extent to which we see uh we've seen a little bit of flattening actually in the US curve if I take the 2s30s aspect, of course, both levels have have gone up. Um but the the 2s have gone up by more than uh or the 10s have gone up by more than the 30s. So, we're starting to see a bit of a flattening in that. And in and so, the the risk right now does seem to be getting priced into the more into the short end. Um it is similar to Van's comments about kind of what can from a from a US standpoint, what does the you know, what can the market kind of or the the environment sustain? Um one thing that this does mean is it probably um weighs further lower on the probability of a rate cut in the near term, right? So, if there is going to be an inflationary pass-through going through, we start to see higher inflationary numbers, uh that does create uh some opposition to having uh you know, again, another near-term rate cut on on the short end. Uh that's one side of it. And then I think from a growth perspective, and again, speaking to the point about duration, if this is a one of the prolonged scenarios and has impact on on growth and and recessionary outcomes, and then of course, in terms of from a credit perspective, I would read it as uh potentially increasing default probabilities. That has much much more significant impacts in the real economy. Um so, one of the things we've been uh looking at on the credit side, and I know many of our viewers have been paying attention to this as well, is basically how uh a lot of AI-related companies have been issuing very long-dated credit. Google, I think uh last week in a couple of weeks ago, issued a 100-year bond in the UK market. It was 10 times oversubscribed uh at 120 basis points over gilts. So, you can you can see how how quickly any kind of um you know, uh any kind of uh shock to the system from a growth or uh that anything that kind of gets priced into whether the cash flows or the balance sheets are as strong as we expect them to to be can very quickly percolate over a much longer horizon in the real economy. And so, that's something that I've been, you know, certainly keeping a very close eye on is that as we think about whether this becomes a a short-term episodic event that perhaps creates some opportunities on the credit side or or in and you know, pairing on EM, those are more shorter, medium-term positioning things that we can do. If it becomes more of an significant inflation uh impact that's on the rate side, and if it's also a growth impact, then that has impact definitely for default cycles, for credit markets, and for the real economy more more broadly. Fantastic. Thank you very much. I I would encourage um the the listeners on the call to keep submitting questions. We've got a few already in um that I'll that I'll go through now. One um probably best for you, Van, is around um the dispersion globally of returns uh outlook and where the risks currently currently sit. There's a there's a reference there to Korea uh and and Korea's um reaction uh to these to these developments. Are you able to touch on on that a little bit? Yes, definitely. So, we've seen kind of a little bit of a flip flipping of the the market script um due to the Iran situation. Uh so, the US market has outperformed non-US markets quite significantly during during this episode. And I think it's easily explained by the fact that in a situation where there's a hard power conflict with the US being the biggest the strongest military power in the world and also with the heightened risk of an energy price shock and the US being um self-sufficient in energy, then US markets become a safe haven again. Which was not the case for much of last year. But I think that's an interesting uh situation. You mentioned Korea. I think Asian markets have been suffering from the fact that uh they rely more on energy imports from the Middle East. If you look at some of the numbers, Korea, for example, uh derives about 70% of its oil imports from the Middle East and Japan is closer to 90%. So, that dependence on um Middle Eastern energy supplies makes Asia a little bit more vulnerable, I think, to uh to the most recent uh developments. Fantastic. And and thanks for everybody for for submitting questions. There's quite a few um coming in now. Um there's one there's one uh interesting one which is um kind of encouraging us to take a step back and look at the broader context, particularly around more longer-term themes. Um they they mention AI as a theme and and how does this sit in terms of um in in terms of that context, Reeti? Do you want Do you want to just touch on that? Yeah, sure. I mean, I you know, I I I mentioned um some of the the uh issuance activity that uh so, like Google went through already this year, but this is kind of when you take a broader step back, I think there is um the the AI theme and how that's playing out um across the economy, but maybe specifically through credit uh is really quite quite interesting. I think one of the things that um we've been paying a lot of attention to is as these large hyperscalers are issuing very long-dated credit, typically 100 years was an extreme example, but um in the last quarter, quarter four, we had Oracle, we had uh Meta, we had or you know, multiple um Facebook, etc. All of them sort of come to market with different uh long issuance uh bonds. And that has changed the the the landscape for long credit uh particularly in the US, but also in in other markets where they've issued uh in non-US markets. Um the related point is that much of that issuance has been happening not just in corporate public corporate credit, but also in versions of special purpose vehicles, uh sometimes in the the securitized sector. And so, the AI theme uh even from a credit perspective is not just a public corporate credit story. It's actually also in securitized credit. Um and so, some of the risks that we're seeing, and and these are unrelated to AI, but we we did see last year the first brands and tricolor, these were subprime borrowers that got into some trouble. Those turned out to be very idiosyncratic and contained, but um the the point being that risks to any part of credit now can very quickly percolate kind of more broadly across credit and then across the real economy. And that's a real uh aspect of this of this AI issuance that we have to pay attention to because credit spreads generally have been so low that the risk is to the upside, that they will widen. And then the question is how much wider can they go? And then the question becomes, well, is that fairly priced or is that default risk that is starting to get priced in the market? Um so, I think that's that's how I read a lot of what is going on more broadly on the AI side is that um what does it mean for the credit cycle potentially turning? What does it mean for uh the default risk starting to rise? Those would be the things to to pay attention to. And and of course, to pay attention to some of the crossover that's going to happen from private into public and from securitized credit into public corporate credit. So, these these um sort of layers or lines between credit sectors are not so demarcated anymore. They are quite fuzzy and often it's the same borrower borrowing in different uh in different um versions of underpinning backing it with the same balance sheet. So, that's that's the key that we have to be paying a lot of attention to when I think about slightly broader from of course this this particular crisis that we're talking about today. Yeah, fantastic. We had we've had another question again on the broader themes, this time on on the downside in terms of the themes of protectionism, onshoring maybe, um and the reference to the implications of the the closing, whether it's a hard close or whether it's um a more softer close of the Strait of Hormuz, uh in terms of um how how does that impact um our our forward-looking view um and particularly with reference to supply chains? Van, are you um are you able to just touch on that? Yeah, happy to. Yeah, the Strait of Hormuz is quite quite critical, especially in terms of the the energy supply. We mentioned earlier that about 1/5 of the uh seaborne oil trade goes through that narrow strait, which is quite susceptible through to interference um by Iran because of the proximity uh to Iran. And uh I think the the economy can probably cope with a disruption of a few weeks, let's say three to four weeks, um because there are inventories and you can maybe reroute some of the shipping traffic, but if it goes beyond that time frame, then it starts to have a um significant adverse impact. I think some some economies have thought about, you know, making themselves less dependent on one supplier, and I think that that's what the the question is referring to in terms of, you know, protectionism and onshoring. With oil, it's difficult. If if your country doesn't have any oil, it doesn't have any oil. But you can kind of uh spread out your your sources of supply. Some countries have maybe uh gone to the US and made themselves less dependable on on Middle Eastern supply. Uh I think in in terms of the the the energy situation, I think that's some something that countries can do. Great. Thanks, Van. Um this next one's definitely for you, Reeti. Um so, you mention someone's picked up the you mentioned around lower likelihood of interest rate um cuts going forward. Um I suspect this is a a pension fund uh investor or or a trustee cuz they're asking about government bond yields um in general. What's What's your kind of view there? Yeah, I think in terms of government bond yields, um the the it specifically in the US, given all of those sort of discussions and and pressures on uh lowering interest rates and and at the short end, that's something that uh is is always a dance between the inflation data and, you know, policy imperative and and etc. So, this pressure from from this particular crisis, um the very near-term effects, to the extent that they come through on the inflation side, uh will have a pausing effect or a breaking effect on that on that on the pressure to have uh short-end cuts. So, I think that's that's one sort of clear uh point that we can we can consider. Uh the other thing to to think about with bond yields and is actually how the shape of the curve is is going. So, you know, through last year, we had about 64, 65 basis points of term premium. That's the distance between your 30-year and your uh 2-year or 5-year, however you want to think about a short-end and a long long-end uh distance. And that term premium was is really kind of feeding uh based a a lot of it was was pricing in um sort of the net present value of of growth expectations, which were quite uh in and that's something that we keep an eye on when we think about, you know, what what are bond yields going to do going forward. So, that that's kind of comes back to my comment about the duration of this this this uh crisis is is imperative to understand and and and will drive what happens to the term premium, what happens to the steepening or the flattening of the curve. Um and and to the extent that that then will impact, of course, we can say that the short end might be somewhat anchored given, you know, potential positive inflation, the long end then is going to be doing a lot of the work of telling us what the market's expectations are from a growth and inflation perspective. Um so, that's what I would say to keep a a close eye on if if the reading of the last couple of days is something to go by, um you know, the the uh the 30-year rate is now just sitting uh just about 4.7 in in the US um and has risen about 10 basis points the last couple of days. So, that that that is moving in the direction um of kind of, you know, concerns around growth, etc. , but if it all really pivots on uh on the scenarios and on the duration that this this this crisis unfolds because that is going to manifest itself in in uh in growth um in sort of harnessing or starting to impact uh growth expectations. And then that flows into the the real economy, as we've discussed. Perfect. Thanks. Thanks, Reeti. And and then I'll just squeeze in one more question if I if I may, and it's um a question that's come in about cyberattacks um from Russia, China, and and may potentially even Iran has increased. How disruptive can that be uh both from an economic sense, but also individual kind of corporate perspective? Um Van, do you want to take that one? Yeah, I'd say that um cyberattacks are a weapon at the disposal of you know, um sovereign actors. And we've we've seen that um in recent years. Just one anecdote that that I would like to share in that in that context. I read about this morning. Uh the Swedish Central Bank has advised its population that they should keep uh a week's worth of cash for food and essentials at home. And I think this is in relation to something like cyber attacks when maybe you know electronic um payment systems stop stop working for example. And if you have ever been to Sweden, you will know that it's basically a cashless economy. So, I I found that uh that announcement by the Swedish Central Bank especially intriguing uh with what's going on. Fantastic. Thank you. Uh thank you to to the speakers. I'll wrap it there. We're we're all over time unfortunately. I guess key messages just reiterating. We have we have seen a sell-off in prices. Markets down kind of between two and two and three percent. Um really how it plays out from here is largely dependent on the duration of how long the this this uh event carry carries on for. Um but there's plenty of opportunity to to look at buying opportunities to to go more risk on should we see markets um sell sell off further. Um I'd like to thank the two speakers, Van, Reeti. Thank you ever so much for your time. We know how busy you are at the moment especially. And and thank you everyone for uh for joining the session. Thanks very much. Thank you.

Hi everyone, thanks for joining us. I'm Rachel Carroll, managing director of consulting at Russell Investments and I'm going to be your moderator for today. I'm joined by two of my colleagues, Justin Owens, senior director and co-head of Total Solutions, and Brian Frick, senior director of investment strategy and solutions. Today, we're going to explore the topic of unlocking pension surplus. There have been some really interesting developments on this front that many plan sponsors are likely curious to hear more about. So, let's jump right in. Justin, I'm going to start with you. Most of us have heard of uh Kodak, but may not be up to speed with what happening with that organization right now. So, can you help set the stage for us? >> Yeah, thanks Rachel. Yeah, Kodak is a company that most of us in our generation will have heard of. It's an innovator and has been for for over a hundred years in in photography. It has had to adapt over time as the landscape has changed more to digital photography, but the but the company is is absolutely still around. Um it it's gone through a bankruptcy and has been restructured a bit, but the um but they have been a an employer for a really long time and have had a pension plan um for a really long time. In fact, the the the the pension plan would have hit a 100red years um in just in just a couple of years. A very mature plan, 85% in retiree and still offering new benefits to to their to their employees, a believer in the pension system. They've also over time accumulated a pretty substantial surplus about a billion dollars in in surplus. All while the company itself, its market value is is less than it used to be. Um it capped out in the late 90s. Um but more recently it's it's below a billion. So what you have is a company that had a billion dollars in pension surplus and a company value that was less than a billion. And all the while the the company has taken on some debt and was having some public um challenges um in terms of being able to satisfy those um debts and and remaining solvent over the over the long term. >> Yeah. So at a high level now that we understand kind of the base case of where Kodak was starting from, can you tell us what Kodak did as it pertained to this pension surplus that they had built out and why does that matter to other PL plan sponsors that are out there? Yeah, for sure. So, so we've all been working with pension plans for over 20 years, the majority of our of our careers, and this is one of the more interesting cases I've ever seen of a strategy to help um unlock the pension surplus. It's a pretty creative solution that I think that all pension plan sponsors can learn a few lessons from. And one that we found particularly interesting, just like we did with with IBM a couple years ago when they reopened their plan to unlock some of the value in that in that pension surplus at a really high level, they used that billion dollar surplus to help to satisfy um some of the loans within their company. Now, um pension surplus is is somewhat inaccessible. It's not completely inaccessible as we've as we've seen, but it's it's a little bit tougher to tap into. and they were able to navigate the the the the the landscape around what rules you have to follow, the tax implications, the the establishment of a new plan that we'll we'll get into um a bit later. But they've basically been able to unlock the value of that pension surplus to help satisfy um their their loan obligations and get themselves on much stronger financial footing, all the while still providing benefits. new employees to Kodak will still be able to to receive new benefits and continuing um employees will will have new pension benefits as well. >> It's really it's really interesting. I do think there had been a mindset for a long time that surplus was kind of stuck. There was nothing you could do for it. So Brian, let's turn to you. Can you walk me through what the steps were that Kodak took for doing this? Like how did they prepare operationally for uh for this move? >> Sure. Absolutely, Rachel. Um so this was not a short process. Uh it involved multiple steps, multiple parties involved in in this uh project. First uh complication really was there was a substantial holding of private assets in the plan. Um I think around a billion dollars, maybe a little bit more than that um which needed to be liquidated along the way. Uh so a lot of that was done through secondary sales. Um and so that was you know obviously takes quite a bit of time. there has to be some um some work done to make sure that value is retained and and funded status isn't eroded through that process. Um the sale of those assets primarily was allocated to cash uh to fund uh lump sum payments um as well as to fund some the uh the annuity purchase and then fixed income to to better hedge uh the interest rate volatility of the the plan liabilities. There was an annuity purchase that was done as part of this process uh with Metife. It was about 27,000 retired participants that were covered in this. Uh totaled about $1.8 billion of of assets and liabilities that were transferred and that was done without additional need to contribute into the plan. Uh additionally, there was a lump sum cash out for about 3600 active and term vested employees. That was about $230 million of of assets and liabilities also leaving the plan. So that you know covering uh over 30,000 um participants in the plan out of about 33,000 total. So most of the plan participants are now out of of the plan. >> Got it. So once they had that plan termination complete and their prior liabilities all all settled through those various um means that you just walked through, what did they do with the surplus that they had left? >> [gasps] >> Uh yeah, that's it's interesting and Justin alluded to this um in in the outset here. Uh on if we look at the next slide, um the the surplus was used in a couple of different ways. So there are excise taxes due on the value of the plan surplus. Uh generally if there's no other act action taken that that surplus is taxed at a 50% rate. Um but there are rules around if if a qualified replacement plan is the technical term is set up uh to benefit uh the current active employees of the plan that tax rate can be reduced from 50% down to 20%. And so they Kodak did that they established a qualified replacement plan that covers most of the current or maybe all of the current active employees um that can't be concentrated among highly compensated employees. So it can't just be an executive group that's continuing to be covered by the plan. Um, and then 25% of the value of that surplus has to be used to fund the the replacement plan. So the end result there for for that portion of the surplus was a a a new plan. Um, but that is very well funded to the point where there's a low likelihood of future contribution requirement. So it's not going to be an ongoing cash drag on the organization. So 25% of the surplus goes to that replacement plan. Then there's a 20% tax paid on the remaining surplus and then the the rest of that beyond the the that 20% tax flows back to the organization and that was used to pay down that outstanding debt and as well as to boost uh corporate cash. >> That's that's really interesting. So uh Justin, let's go to you. Can you tell me what the impact was on the plan participants during this process? Yeah, I think that's a good um natural question to ask because there was this plan that had been around for almost a hundred years and and now the plan doesn't exist anymore. So, first of all, on the um on all of those retirees that were that were part of that original plan, uh they went over to an insurer whose whose job is to make sure that they're they continue to be paid and and and history has shown that that the insurers are quite good at at at at making good on on all of those payments. So, for all of those retirees, um, and those that that that chose not to take a lump sum, they'll they should be taken care of with the, uh, with the insurer. And then for those that that took a lump sum, well, they have the option to put that over into their own IRA or another another 401k plan or or something like that. Um, so that, you know, they they still have those assets for um for for the future retirement needs. And then for the active participants, they get to be part of a new plan and a very well-funded plan, as Brian alluded to, was a relatively small um um active client base. Um but because of the requirements to put at least 25% of those surplus assets into that plan, it's just it's it's quite well funded um right now. And that's beneficial to the participants knowing that their their benefits are secure, but it's also beneficial to the organization um knowing that this isn't going to be, as Brian mentioned, a a cash drag on the on the organization going forward. So, it offers a the participants kind of satisfying the the fiduciary perspective of making sure the participants are well taken care of um and all their benefits are secure, but also there's from a from more of a corporate lens um being able to, you know, meet needs they had there as well. Yeah, that's really interesting to hear how each of those participant groups was um just as well off or maybe better off than they had been previously and then at the end of it, Kodak still had that additional cash that they could use for for those needs that they had. So um what can other pension plan sponsors learn from this example that that Kodak set? >> Yeah, I think that there's um you may look at this situation and say, "Well, that's not exactly our situation. We wouldn't do exactly that." But there are absolutely lessons that that that that can be learned from it just like there were with IBM a couple years ago when they when they had that pension surplus. And and the main point that I think um I want to make sure everybody hears is that pension surplus is not trapped capital as we've you know a lot of us have defined it like that. I know I have historically. It it may be tougher to access. That's that's for sure the case right right now. But it is not it is not capital that has no value. It is it is capital that can be used for for certain purposes whether it's for um you know the opening of new new benefits or or or doing something more creative like like Kodak did. I think that um just in looking at pension plans where most in the US now are overfunded um a lot of the committees now are thinking well what's the goal? What what should we do with this? Historically, the the pension plan was causing so much pain to the organization that that they thought, let's just get it fully funded and let's terminate it. But the mindset, ironically, now that plans are better funded has changed it a little bit to where they're thinking more strategically, well, what what actually can we do with this? Always securing the benefits um of those participants, but what other possibilities exist and what may exist for for pension surplus. And that has impact on not only the benefits potentially that the participants can receive um but but also has uh implications for things like the the investment strategy and so forth that we can that we'll talk about a bit later. >> So uh is this particularly attractive then for plan sponsors in a similar situation to Kodak where the market cap of the company is significantly smaller than the value of that of that plan. Yes, I think it that's what makes it particularly compelling for for for Kodak is that the the pension plan was in a lot of ways kind of driving some of the financial results of of the company. Um and this is you know a product of being around for so long that the company has just just accumulated a lot of pension liabilities and they um accumulated a significant you know surplus. So relative to the overall organization it was important to pay attention to the impact that the pension surplus could have. Yeah. And what about plan sponsors that aren't in that exact situation, but but might be quite overfunded? Like, is there a threshold at which an overfunded level makes this more attractive for a plan sponsor to explore? >> It's it's a good question because there's there's a lot of plans I mentioned that they're overfunded, but not all of them are 150% funded like like like Kodak was. Um so so my baseline advice for that is I get in enough um funded status so that at least your participants benefits are are secured. So 105 110% once you're at that level and can and can develop an asset allocation that gives you a very high probability of being able to secure those in in the future across various economic circumstances. Then as you start getting above that funded status level, you can start doing other things with the uh with the portfolio while still satisfying all the fiduciary responsibilities to to to working to to making sure that those benefits are are secured. [clears throat] >> Got it. So, uh, Brian, I'm going to turn to you. We've we've talked about what Kodak did with a little bit of illusion to what IBM did several years ago. What are some of the practical uses that plan sponsors could be thinking about for this pension surplus that they may have on their books? >> Yeah, that's really interesting to think through, Rachel. I think historically, and Justin alluded to this, we've thought of pension surplus as just excess capital that doesn't have a lot of value. And I think plan sponsors are really starting to change the way they think about that. There's, and we'll talk about in a minute, there's some legislation also that's pending that may drive some different decision-m. Um, and so the answer isn't always just fund your plan, hibernate, lock it down, and then ultimately terminate, right? There are other things to think about as your plan progresses through time. Um, Kodak, I think, is a fairly atypical situation. Um, you know, we've talked about how large the surplus was, just the overfunded position relative to the size of the company, right? That's not a situation that most plan sponsors will find themselves in. But there are a lot of interesting things to think about that may have varying levels of attractiveness for different plan sponsors depending on where they are in the life cycle of their organization or their plan or the cash needs of the company. Um how volatility impacts the volatility in the plan impacts the broader organization. So one thing we could talk about is uh the impact on future benefit acrruels. Right? So this is the IBM example. We've we've mentioned it a couple of times, but just to be specific on what IBM did, they had a surplus that they wanted to access within their plan. To do that, they um basically reopened a frozen plan and reduced their their defined contribution um match for that same participant group. So, the end result was that they were able to spend that surplus on an enhanced benefit um for for a group of participants and access the surplus that way. So, that's kind of one one way to attack it is if if you have a frozen plan and you're overfunded, you can reopen the plan or enhance an existing benefit structure. Um, on the retiree side of things, you can look at things like uh cost of living adjustments, right? We've all seen what's happened with inflation the last few years and and retirees on a fixed annuity. There could be some benefit in in providing uh a COLA or an extra pension check. Um, some early retirement incentives. So, you know, as companies look to manage their workforce through through changing economies, um there's often a need to look at reorganizations or downsizing or, you know, moving older participants out of the out of the organization, older older employees out of the organization. Um so, offering things like early retirement incentives to manage that workforce um can be another another way to use that pension surplus, right? So, accelerating maybe some some um benefits that you hadn't expected to pay for several more years, but utilizing the surplus in order to to to kind of manage the the size of the workforce. >> Um you can also think about retirey medical, right? So, there there are plans that there are companies that still sponsor retirey medical plans um that offer that as as a benefit. A lot of those plans are either unfunded or underfunded, right? So there are ways to to to transfer surplus from the DB plan to the retirey medical plan. So that's another kind of avenue to to consider exploring in that front. Um and so that that's all kind of on the benefit structure side of things and maybe some some work workforce stuff. Um but but some interesting conversations we've been having recently with some of our clients who have these overfunded or I I you know I call them superfunded plans. um you can think about a way to retain about retaining that plan to enhance your corporate earnings. Right? So as as these plans flow through pension expense um an overfunded plan can support earnings um and and we've had some really interesting conversations about re-risking very wellunded plans, increasing an equity exposure and maintaining the benefit security of those participants, you know, at an appropriate level and having fully satisfied that fiduciary duty. Um but if there's a a negligible downside risk um but there's an you know a way to enhance corporate earnings on on the through the the uh use of asset allocation that's another interesting conversation as well. And then the final thing on the corporate side of the of the ledger is um you know looking at a a plan surplus as a way to kind of support merger or acquisition activity. Right? So, if you're thinking about buying a company that has an underfunded plan, can merge that into an overfunded plan and not have an impact on on on that part of an acquisition strategy. >> Interesting. >> Yeah. And just I'll just add a couple a couple things on on that. There's just the general idea of having merging plans even within the company. So, it's pretty common among our among our clients and in the industry to have um several plans. Maybe there's a company that was acquired at some point. Maybe it's a union plan or or or whatever it may be. And just um t combining the two plans, maybe one of them's underfunded and the other one's overfunded and you can get that underfunded one um better funded. In fact, um just reviewing some of the 10ks that are coming through, Boeing just did this. they they combined seven of their plans together and they publicly said, "Well, this is to improve the funded status and reduce contribution requirements and all of the participants are going to still going to get the same benefits. It's just that that now they're um collectively um the company's not going to have to pay um more in in in contributions. So looking into those possibilities, we've we've discussed w with clients as well. There's just a number of different things you can think about for the practical uses of of surplus. And the one other thing that I'll that I'll mention that that has come up with our clients as well is just having you have different hats sometimes when you're on the committee and a fair question is well who benefits from from these different um choices. are we you have your fiduciary hat and then you've got maybe there's the settler functions that are more of like the plan termination the things that maybe directly can benefit the the company. It's important to think about all of that in advance and I think at the at at the very least we need to be u making sure that we're um not harming any of these employees. That's not the intent. We're not we're not trying to to game the system so that we um the company benefits and the at the at the expense of these participants. these assets are set aside for the benefit of the uh of the plan participants. So just just being mindful of those things. I think if you can um satisfy the um the liabilities with a high probability success across you know different economic scenarios that you that you should be well covered there but important to to think through those considerations. >> Yeah, I think uh I appreciate you mentioning that because which hat you're wearing is is super important and and making sure no participants are worse off. Um, so Brian, Justin had alluded a minute ago to some new legislation that might be coming out um that might give plan sponsors some more options. Can you talk a little bit more about that? >> Yeah, this is a an interesting development in the last 12 months or so. Um there's a a new bill that is proposed working its way through Congress. It's the Strengthening Benefits Plan Act. um that would allow transfers of assets from well-funded defined benefit plans to defined contribution plans. Um so uh um basically the mechanics are if your DB plan is over 110% funded you could once a year I think it's once a year transfer assets those excess assets as a non-elective contribution so it can't satisfy matching defined contribution plan uh contributions so 401k contributions um so but non-elective contributions you could transfer assets from the DB plan to the DC plan without any of this corporate excise tax um implication ation. Um, quick side note there, it also impacts retirey health assets. So, if you do have a well-funded retirey health plan, uh, the threshold there is 125%, you can transfer those excess assets as well. Um, there are some safeguards around on for the participants as Justin was just talking about, right? We want to make sure the participants aren't harmed, but there are some safeguards around um, how those the the impact of the plan and the benefit structure as a part of that transaction. Um so that 110% funding threshold is is a key one, right? You can't go from an overfunded to an underfunded position by virtue of of this activity, but there's also some um some uh uh some benefits around um the structure of of the employee benefits. Um so that cost structure, the benefit structure can't be materially reduced for five years after a transfer. So, you can't go in and and shut everybody's benefits down or take away benefits that that may they may have otherwise earned um once this this sort of transaction has taken place. So, this is a really tangible way to access pension surplus. Um obviously hasn't passed yet, but we think there's a pretty high likelihood of that. Um ultimately, this is a revenue raiser when it's looked at through the lens of of passing legislation, right? Main reason for that is that these transfers aren't taxdeductible. um whereas typically these types of uh non-elective contributions um are deductible by the the organiz by the company, the sponsoring company. And so that um you know that that basically just impacts the the tax revenue that's raised which can be used to offset other spending um as as legislation is passed. >> And the one other thing I'll I'll mention on on that piece is if you're doing a transfer from the overfunded pension plan into the into the defined contribution plan, it needs to benefit the same employees. So you can't just have you know this this particular location's pension plan doing this this this other group. There are rules around um it it's it covering the same base. So um there there would of course be an argument that why are we using the surplus from from this group that's just going to to benefit this other group. So, as long as you are are covering um a high percentage and they the the bill goes into the specifics of uh of that the employees that are in that pension plan that you should be covered from that from that basis. >> Interesting. So Justin, you had alluded to this earlier, but um >> can you specifically mention about this might impact our approach to asset allocation as we're working through it with plan sponsors? >> Yeah, this is one of the more interesting results as we start talking about um practical uses of surpluses because one of the main things that we do is provide investment advice um to our to our clients. And when you start opening up the [snorts] possibility of pension surplus having value, then you start thinking differently about how you'd approach the asset allocation for 120% funded plan. Maybe in the past the um the thinking would be well if you're 120% funded just lock it down 80 90 100% in fixed income because then you've satisfied all of those liabilities. And I don't think that that's an inappropriate approach. It's it it means that you're making sure that your participants benefits are well secured, but [clears throat] we would argue that you can probably secure those benefits um with 100 to 110% in in liability hedging um fixed income and then the remainder of it, that surplus portion, you can take a different approach to asset allocation. If you if you have the the option of transferring excess DB assets over into into a DC plan, then you could have kind of a core LDI plus a surplus approach where you're locking down the liabilities with a portion of the asset allocation and then with the remainder [clears throat] you can have more of a total return approach. You could think about well maybe we want to generate some return each year to help offset the cost that would otherwise go into the defined contribution plan. And that also adds an additional um purpose I guess to the to the overall to the overall assets still benefiting the employees in terms of the assets are are going towards um are going towards the the participants um benefits but it just opens up all all sorts of other possibilities. We've we've had glide paths in place for a really long time for our closed and frozen DB plans. But once they're at that what we call the endgame or that end end state, maybe there's a possibility to where you have a you still have a glide path to help um de-risisk as you get to that point. But then once you've started getting up to a a higher funded status threshold, then you start opening up that asset allocation a little bit more and having more in return seeking. And you can also start thinking about other asset classes that maybe you hadn't thought of before. Um, private asset classes, for example, you typically you wouldn't think about those with a frozen and fully funded plan, but if the intent is to keep the plan around in perpetuity and to generate higher returns, well, that that opens up the uh possibilities for for other asset classes. >> It is it is an interesting mindset shift, I think, for all of us that have been doing this for some time. Do you have one final question and and Justin, you're talking about, you know, building up that funded status level. So either Justin or Brian, what did Kodak do within their asset allocation that got them to that 150% funded in the first place? >> So Kodak had a really interesting investment strategy. They were pretty aggressive in their allocation. They invested a lot in um like private assets uh in a in an early stage um you know well before a lot of plan sponsors were thinking about that. They had a lot of success in that program. they haven't contributed to their plan for quite some time. There's been a long period where they've had zero required contributions. Um but just through a series of good investment decisions, um some fortuitous timing on some interest rate uh hedging changes in their portfolio. Um but really some good good work um by the team there and and you know in in coordination with their um their providers that they worked with. Uh they were able to grow that surplus um pretty pretty substantially over time. So, it wasn't a a matter of putting a bunch of cash into the plan and seeing it become overfunded. It was really a product of of uh good work on the asset allocation side that got them there. >> Yeah. And this is um you know, fortunately Kodak with it being a public company, there's lots of public information on their asset allocation on what they did with this pro in this process and everything. And it's it's really been a a a great case study in terms of how you approach investment strategy that may be a little less traditional but is but has uh worked well for them. There's also a a point at which when your plan is paying a lot of benefit payments and you're overfunded, your funded status just kind of keeps going up accelerating on its own. Just the the math behind it. It works the opposite direction for underfunded plans, but for overfunded plans, they're paying out benefit payments, particularly at such a high pace as this very heavy retiree plan, that funded status percentage just goes up. Um, even if it's a relatively high allocation to um to fixed income. So, they've they had reached that point where the funded status was was was high enough and they were just continuing to acrue um a higher, you know, surplus. I think um probably an interesting point, Justin, that maybe I should have brought up at the beginning, which is that um Russell did not work directly with Kodak on this program, but certainly it has provided a really interesting roadmap for us to think about as we were helping all of our clients think through what might be coming next for them and any overfunded status position that they've been able to build up. So, Brian, Justin, any final thoughts before we wrap up today? A final thought for me is this this is a really interesting time to to look at the evolution of a plan, right? I think for a long time we've talked about the the death of DB, right? Plans are going to wind down over time and become a lot smaller and the industry is going to going to contract. And I think what we're seeing here is a way for plan sponsors to recognize that having a plan that continues to exist in a surplus position can be beneficial to the organization, can be beneficial to the population group. Um, and so I think it's a really interesting time for for plan sponsors and for adviserss like us who work with corporations to navigate these waters and kind of see what comes next in in the the landscape here. >> Yeah, I agree. It's an exciting time as plans as the fund of status improves. It's not there's there's been more discussion about what new exciting things can we do with this overfunded plan than let's just terminate this and terminations are are going to going to happen. We're realistic about that. But there's but there's more possibilities than I thought there may have been um a few years ago for all the overfunded pension plans out there. >> Yeah, definitely. Well, thank you, Justin, and thank you, Brian. I appreciate you sharing all of your uh insights and perspective with us today. Thanks to all of you for joining us. If you do have any additional questions that we didn't address today, please feel free to reach out to your Russell representative. And thanks for joining us.

Hello everyone. Before we begin, I want to take a moment to provide some context for today's conversation. I'm about to be joined by General HR McMaster, a retired threear general and former US national security adviser who brings decades of experience at the intersection of geopolitics, national security, and global economic strategy. As a global asset manager, part of our responsibility here at Russell Investments is to understand how a wide range of forces, economic, political, and geopolitical, can influence markets and portfolios over time. One way we do that is by engaging with external experts who bring perspectives shaped by their own experience and analysis. I want to be clear that the views, opinions, and statements expressed by General McMaster during this discussion are solely his own and do not necessarily reflect the views or positions of Russell Investments. We do not endorse or assume responsibility for the accuracy or completeness of those views. But that said, we believe it's important for investors to hear and consider a variety of perspectives as part of a broader process of separating signal from noise in assessing what truly matters for long-term portfolio outcomes. With that framing, I'm pleased to welcome General McMaster. >> Well, hi everyone. Happy New Year and welcome to our webinar, Geopolitics, National Security, and Markets. I'm Paul Edman, global chief investment strategist here at Russell Investments, and I'm really thrilled to be joined today by one of the foremost experts on this topic, General HR McMaster. Uh, for those of you who aren't already familiar with the general's distinguished career, he is a retired three-star general of the United States Army. He was also the 26th National Security Adviser of the United States where he advised President Trump during his first term on global security, defense strategy, and foreign policy. Uh if that's not enough, General McMaster also holds a PhD in American history from the University of North Carolina, and he is currently a senior fellow at the Hoover Institution at Stamford University where he focuses on geopolitics, defense policy, and the intersection of security and economic strategy. So, welcome, General. Thank you very much for joining us today. >> Hey Paul, great to be with you. Thanks for having me. >> Yeah, thank you. So I guess as an opening and framing for today's discussion, I think investors as they're looking at asset allocation for the decade ahead face some really big questions here. Um not only major technological advances like AI, but also what looks like a rapidly evolving and potentially intensifying geopolitical risk environment. And I think geopolitical risk is obviously front and center right now for a lot of our investors given the recent events in Venezuela and some of the rhetoric towards uh Greenland and Iran amongst other countries. So I guess as an outline for today's conversation, I'm hoping we'll touch on three sort of broad issues. First um how investors should be thinking about the idea of economic security is national security and how that concept is being deployed around the world. Uh second, some of the long-term challenges and risks from this evolving geopolitical climate that investors should be aware of. Uh and then third and finally, some of the opportunities [clears throat] and requirements that private capital uh will be very involved with as these issues evolve over the decade ahead. So, I guess this is my first question for you, General. I was hoping I could take you back to 2017 when uh the Trump administration's national security strategy first recognized this idea that economic security is national security. And I was hoping you could help our audience appreciate the importance of this statement as an organizing principle for a lot of what we're seeing around the world today. >> Well, hey, hey, thanks Paul. you know, really what when we were looking at the the 2017 National Security Strategy, the development of it, uh that was really the effort to present to the public a a comprehensive uh strategy to advance American interests in in three fundamental areas. to secure the United States and and our interests abroad to promote American prosperity and to extend uh American influence and and all those were interconnected and I believe we were losing in all those areas in large measure because we had vacated critical arenas of competition based on fundamentally flawed assumptions about the nature of the postcold war world. So we're behind by at least a couple decades uh by then uh based on these three kind of overlapping assumptions. Assumption one being that an arc of history had guaranteed the primacy of our free and open societies and our free market economies over closed authoritarian systems and status mercantalist economic models. This was b after the you know the collapse of the Soviet Union uh a decade of of of really sustained economic growth in the 1990s and a period of of optimism associated with that. The second was that great power competition and rivalry was a relic of the past and what would emerge in the postcold war world would be a condominium of nations who had worked together on global issues under the opices of international organizations and then and then the third was that America's prowess our our technological prowess our technological military prowess guarantee our security well into the future and then that was a setup for the reality the realities that hit in the 2000s you know the attacks of 911 the unanticipated length and difficulty of the wars, financial crisis 2008, 2009 and and uh and then you know toss toss in an opioid epidemic, the effects of social media. So I think we went from over optimism and and maybe undervaluing the the degree to which uh we had agency over our future to a period of of pessimism and even like retrenchment and disengagement in the 2000s. So the 2017 strategy was hey how about something in the middle between those and how about a recognition that that really you know we are facing uh we are facing two ravanchous powers uh on the Eurasian land mass of China and Russia and that China in particular had weaponized its status merant's economic model against us uh in uh with various forms of economic aggression uh and and what we were grappling with was recognition that the assumption on China that China having been welcomed into the international order, the international economic order in particular with uh most favored nation status in the 1990s and entry in the WTO uh in in 2001 that China, you know, would play by the rules and as China prospered, it would liberalize its economy and its form of governance. Okay, those assumptions were no longer true. And so we needed to re-enter these arenas of competition uh that we had vacated based on those those flawed assumptions. Assumptions that underpinned I guess what we would call in retrospect un unchecked or uh you know unrestrained global globalism in in this period of time. >> Yeah. Well, I think that's super helpful as um a background and some context for a lot of what we've seen over the last several years. If we kind of build on that idea then of economic security as national security. Uh the US recently revealed its latest national security strategy which importantly included this pivot to the western hemisphere now and what some are calling the donro doctrine. It seems like this strategy may be playing out in real time. We've had the recent US intervention in Venezuela, some comments towards Greenland and other countries in recent weeks. So maybe I'd like to ask you how big of a change is this for US policy and what about that strategy or you may be most focused on in terms of the future path of geopolitics and potential spillovers and risk for financial markets. >> You know it it it is a shift and I think it's an overdue shift toward more focus on on security and and our economic relationships in in the hemisphere as well. If you're concerned for example uh about Chinese influence uh China Chinese efforts to create new spheres of influence globally uh in its effort to rewrite the rules of international discourse in favor of of its authoritarian form of government and its statisticalist economic model that was playing out that is playing out in the in the western hemisphere. Um, if you're worried about about u mallayian Russian influence and and Russia's subversion of US interests uh in in the region from more from a security perspective and and an intelligence perspective uh then this is also long overdue uh in terms of you know there there's a reason why the the largest Russian embassy in the world is in Mexico City because it's a platform uh for for undermining uh US security and US interest not in the region but also in inside of our of our own country uh and and what's changed I think and what has has affected the shift are a couple of things. One is is the mentality of some people in the administration who who tend uh to to be in favor of retrenchment from much of the rest of the world. And these are people who who feel that America's been taken advantage of by allies and partners abroad uh because we we've been underwriting and covering their defense bills and therefore indirectly American taxpayers have been subsidizing social spending in Europe. For example, Europe accounts for about 19% of the world's GDP, 50% of of of the world's social spending. And so there are a number of Americans and some these are some of the president's biggest supporters, President Trump's biggest supporters, you know, who who really are in favor of kind of hey, let's focus on our own security, our own hemisphere, and those other people over there, they're wealthy, they can take care of themselves, you know. So, so that's that's one of the dynamics. But the other is that that there has been a shift against US interests in the hemisphere uh since President Trump left left office. And this would be shifts associated with what we might call the pink wave uh that occurred, you know, across Latin America. The shift to the far left. This occurred obviously in Chile, in Peru, in it it occurred in in Colombia, you know, with the pro government. Uh the rise of of Amllo and the Murango party in in Mexico. Uh the reinstallation of Daniel Ortega, you know, in in Nic Nicaragua. Uh and guess who the lynch pin was for all that was Maduro, right? And and so Maduro was getting all this upstream support from China uh you know underwriting uh underwriting that that corrupt regime that had driven 8 million of its own people out of its borders and destroyed its economy. 80% uh contraction of that economy since what I think the early 2000s and so so so you know China's underwriting it. Russia was providing a lot of the security support and the Cubans uh were providing a lot of security support. That's support for them. But what did what did Maduro do? He used uh he lo used the illicit economy associated with uh with oil shipments and and narcotic shipments uh to to subsidize these far-left political parties and to prop up what I would call kind of far-left progressive dictatorships uh in Nicaragua uh and and in Cuba. So now you have a secretary of state Marco Rubio, you know, who knows the region extremely well and said, "Hey, enough of this. we need to, you know, we we need to really be more assertive in in the region. That manifested itself with, I think, some unfortunate language from the administration on Panama, the Panama Canal, you know, where we should have been more in favor of Panameanian sovereignty as we're looking for a solution to remove Chinese owned uh companies from uh from from controlling the commercial traffic through the canal or having visibility on it on the east and west side of the canal. Um but also this approach to Venezuela now with President Trump all to say what you're always going to get is an effort to get a deal, right? I mean he he'd rather he'd rather do a deal than do anything militarily certainly. >> And so this is why you had uh Mr. Grenell uh as as an emissary go down to go down to to Venez Venezuela in the beginning. You had kind of almost an olive branch to Maduro, you know, in in in the beginning of the Trump administration and then but you had other voices saying, "Hey, this guy's not going to sign up for any kind of a consiliatory approach. There isn't there certainly is an ideological dimension to to Chaveismo in Venezuela." and and uh and so so President Trump ran out of patience and uh began to go back to a strategy of of economic and financial pressure. You saw his effort to cut off the cash flow to the regime uh with the strikes on these narcotics trafficking boats uh the the the um you know boarding some of these sanctioned tankers for example and then and then ultimately uh the raid that captured uh Maduro and and his wife uh and extradited them to the United States forcibly. >> Yeah. Well, I think you mentioned a couple of times the role of strategic competition with China in this pivot back to [clears throat] the Western Hemisphere for the United States. One of the other risks that I've heard a couple of times with my financial markets hat on is investors are thinking about whether on the back of these developments that China could maybe take it as a lesson that hey the US is acting more forcefully in its own sphere of influence maybe that would shape how other superpowers like China will behave in their own and I think from a markets lens a lot of focus on if this changes the risk environment towards uh Taiwan that could have very significant ificant ramifications onto financial markets given the role it plays in uh supply chains and advanced semiconductors. So what do you think about that narrative and the risk to the Asia-Pacific? Is it a little bit of an overreach or do you think there's there? >> Well, there's an overreach there I think because you know here you have a a I mean a criminal regime. I mean he really was you know providing support to and enabling FARC in Colombia, the cartels in in in Mexico. uh he was indicted under Trump won. The Biden administration stuck with that indictment. He stole the last election. The opposition did a fantastic job uh in in Venezuela um exposing the results from all of the polls. I mean, he was voted out by more than 70%, you know, of the of the Venezuelan people. So, so I think you know what the administration, the Trump administration could have done a much better job, you know, of of communicating this at time. Secretary Rubio did, you know, others in the administration, the president maybe not as much. You know, talking about this was an arrest and so forth and and um and you're seeing kind of them trying now to use coercive diplomacy, as I would describe it, to try to alter the behavior of the regime. But, you know, I I don't think Xiinping is paying much attention to like international law, you know, on on Taiwan. He's already laid claim to the ocean in the South China Sea. uh you saw kind of the massive uh live fire exercises that that that he just conducted recently but but has been to kind of desensitize Taiwan to Taiwan to up the the pressure. So I I think Xiinping is determined to subsume Taiwan uh and and I think the timeline uh the clock on that will start running after the Taiwanese election next year in 2027. And and I think, you know, if you get a if you get a KMT victory in Taiwan, uh you know, he'll he'll try he'll pursue annexation by invitation, you know, and and through various forms of political subversion um as to to try to to do to Taiwan what he did to Hong Kong. Um and uh but if it's a DPP victory, I think what you will see is movement toward what some people have called a quarantine, you know, and and uh an effort to maybe, you know, a block form a blockade uh and to uh and to coers uh Taiwan uh into into giving up its its sovereignty. So um you know, I I think I think I think it's really the period of of risk. Uh the clock starts with the election in 27. >> Okay. Interesting. Um I'd like to zoom out a little bit then from some of the recent developments and focus on uh some of the really big challenges that are confronting uh not only the United States but a lot of the developed markets here. Things like supply chain resilience and energy security. And I think oftentimes big problems like these often require some level of global cooperation. Uh and we've had some of that. You know, the US has been involved in joint efforts on ship building with South Korea. We've uh been involved with nuclear submarines with Australia, crit critical mineral agreements, and we've even had some pretty big investment announcements from countries like Japan towards uh the Middle East. So, how do you think um global investors should be thinking about these multinational initiatives and some of the private sector opportunities that might surround them? >> Well, I think this is where a huge there's a huge opportunity for investors and we actually do need to mobilize. We being the free world needs to mobilize private capital to address some of our our critical vulnerabilities. What China has done a great job at uh is to is gaining control of critical supply chains to use that control for coercive purposes. I mean I think of of China's strategy of of the three C's co-option, coercion and concealment. co-opt you with what they always promise, you know, access to their market, you know, in investment and so forth. Uh, cheap manufacturing, right? What sounds great. Uh, but then once you're in to coersse you, to coersse you by restricting access to their market, uh, co coersse you to to give up your intellectual property and your knowhow. Uh, and then and then to to then pick a Chinese winner that shut you down out of their market. uh produce goods at artificially low prices uh dump them on the international market and drive you out of business. I mean how many US businesses are going to fall for that? And then to conceal this is oh this is just normal business practices right so of course it's not so what we have to do is work together to uh to to to reduce China's ability to coersse us right and and our exposure to to ch to China's coercion and that is as you mentioned already uh making our supply chains more resilient uh this this is critical minerals mining separation refinement processes for those minerals uh and and critical manufacturing everything from C, you know, circuit boards to wiring harnesses to, you know, you know, what what you're dependent on Shinjzhen for. What we need is to invest in new manufacturing techniques and capabilities because we're not going to recreate Shinjzhen anywhere. But what we need to do uh is reduce our reliance on this this sort of artificial concentration of so much of the world's manufacturing on the southeastern coast of China. And and uh it's going to take all hands- on deck to do it. As you mentioned, ship building, right? It is it's going to take South Korea, Japan, Finland. We're we're buying ice breakers from Finland, you know. Um, a lot of this cooperation is ongoing. What you're going to see more of, especially after the failure of getting a big trade deal with China, because that's going to fail, I I believe, uh, are are are more and more efforts on the part of the Trump administration uh to to to make Chinese overcapacity um trans shshipment and and dumping a big part, it already is a big part of these bilateral trade agreements, you know, and and uh and so there's already a recognition we have to work together on this. I'd like to see that manifest itself in maybe, you know, a nicer approach to our allies and partners, you know, and and uh and then and then uh but I think that there's there's certainly a recognition now that on the issues you mentioned, supply chain resilience, uh you know, invigorating manufacturing, reducing reliance on China, and energy security, that's going to take all of us working together. This is where our interests really align across the free world. you know, it's a it's a positive agenda that we can work on together. And I think we have some some mature technologies that we can apply uh to to uh uh that really uh will reduce significantly China's competitive advantages and make our supply chains more resilient. >> Yeah. I guess one of the other ways um geopolitics and national security strategy can impact financial markets is the defense budget itself. And >> we had a recent speech from defense secretary Hexith at the Naval War College where he talked about reforming the defense acquisition system. Can you talk about how >> government contracting and procurement might be changing here and what that could mean in terms of opportunities for smaller companies sort of like the venturebacked space within defense? Well, you know, I I think there's a real there's a real strong possibility for I mean significant and and uh you kind of generational type improvement here. Uh one of the reasons is you know we kept expecting a different result even though the same people were going into senior positions in the Pentagon. So now now one of the things with you know the Trump administration is disruptive right? I mean you know sometimes they're so disruptive they disrupt themselves but you know you got to get they're disruptive and there's a lot that needs to be disrupted. uh Steve Fineberg who's the deputy at at uh in in the Department of Defense. He is super competent. He knows the flaws in the system and he knows it from the perspective of of a founder of of a large private equity firm that invested in a lot of these uh companies that have technologies that are relevant to defense. And uh and so I think what you're going to see is a real change in the way that that we do business that is more accepting of risk for example uh and really gets behind rapidly scaling up uh products and capabilities you know hardware uh cap solutions uh in in a in a way that um you know that that provides the better incentives uh for private capital to invest in these companies to get behind uh these ideas confident that you can go from low rate initial production to production at at scale and longer term contracts. One of the biggest one of the biggest changes that you're going to see and we already are seeing now is is multi-year contracts that you know I mean I know the president's put a lot of pressure on defense firms, you know, but hey, you know, they're they're not charitable organizations, right? And so they've got they have a responsibility to shareholders, but to make the investments in capital, to make the investments in the labor force, they've got to have, you know, kind of confidence in in long-term demand uh for these products. And so that's changing and that's positive. And then the overall model of of going from, you know, a a a required capability to a big, you know, request for proposal, a huge RFP with all kinds of specs in it. and then and then the government funding the R&D and then and then and then uh developing prototypes and down selecting and how long that takes, right? I mean, I think what companies like Andrew have have uh have demonstrated is instead they're just like they're just building something and saying, "Oh, hey, I think you could use this, you know, and then and then the government said, "Yeah, I could use that undersea drone or whatever it is." and and so I I think there's a model that I think could accelerate innovation uh and so that we can provide capabilities at scale within the cycle of technology. So I I'm very optimistic about this, you know, and now Congress has a role in this, but as as the administration is showing, there's a lot that can just be done, you know, uh with with the way that you do it within the Department of Defense and uh and and I think Congress could help, you know, by endorsing and encouraging like they have in the National Defense Authorization Act, uh you know, multi-year contracting. If we could get to multi-year budgeting, that would be great. Congress will probably never give that up, you know, and it goes back to the time of the revolution, you know, and one-year enlistments and Congress wanting to have, you know, have that authority uh over over the military. So, but but anyway, I'm optimistic about it, Paul. I think there's going to be more to come on this front and um and and there's some good people working in this space. uh also uh for uh for companies that are looking at at you know advanced manufacturing techniques, supply chain resilience, you've seen the government contracts, you know, which sends the demand signal to companies that are involved in in uh in minerals, mineral separation, refinement, but also in manufacturing, advanced manufacturing and uh you know, large scale castings, all the stuff that we need more of. Uh I think you're going to see the Department of Defense trying to incentivize investments, which ought to be our approach, right? We don't want the state to be the allocator of capital for the participants. That's not going to work very well for us. But I think if we can incentivize private capital, continue to do that, uh it'll take advantage of of our competitive advantage visav uh China in particular. >> Yeah, I think that's really interesting. The long-term contracting idea in particular to really give the companies confidence to invest and take that risk for the long term uh around these really important strategic initiatives. Um, one of the other ways uh that we've seen um headlines from uh US President Trump impacting financial markets very recently has been uh his posting on social media that he might not permit dividends or buybacks from some of these large publicly traded defense contractors until they fix production problems or maybe cretailing uh payouts and executive compensation. Did Did that comment catch you by surprise? And how important of a shift do you think that is or is it just sort of musling the industry a little bit? >> Yeah, I mean does anything President Trump does surprise anybody anymore, Paul? [laughter] Probably not. No, but hey, you know, I I think you know he he's frust I mean he has a clear agenda, right? I mean he's consistent a lot of things. I mean he's been consistent on these things since like the 1980s, right? which is you know industrial manufacturing you know the trade deficit what he calls the need for like uh you know fair and reciprocal reciprocal he keeps saying is his his favorite word word energy security uh supply chain resiliency securing the border I mean so he's he he's consistent with a lot of this um and what he's frustrated by I think is just the timeline that is taking uh to to scale up man uh industrial manufacturing and defense uh manufacturing of weapons and and munitions in particular. And um and so he's looking at like the Patriot system for example. The Patriot missile system is under been under very high demand for a long time, but we have not scaled up manufacturing. Well, I mean the demand signal was not clear. Maybe uh you you know you got to put in maybe additional lines for for for manufacturing. Uh you're going to have to do bigger buys and and stockpile kind of the components, you know, for that for that system. and then you got to train a labor force, you know, and so there all there are constraints. He's growing impatient with that. And I think this is what you're seeing is him trying to incentivize more rapid progress on the part of uh these firms. Now, some of these companies that have been succeeding have just put anient private capital behind them, right? And think about, you know, Palanteer, for example, um or uh or Anderil, um you know, th those companies had patient private capital behind them. Uh and they made the investments, you know, and based on this leap, you know, that they were going to be able to develop capabilities, uh that that the government would buy. Um so I think I think we they got to meet both you know halfway in between those um to make sure that uh >> again I think incentivize is the right word you know. >> Yeah. >> Well thanks for that and I think we probably only have time for one more question here. So, I'd like to end by asking you to kind of look into your crystal ball at uh the next 3 to 5 years and what um geopolitical developments or strategic trends do you think are most likely to be material for investors as we look out ahead. >> Okay. I I think what you're seeing now is is a is a real crisis among the axis of aggressors. You know, we we have our own problems. you know, we do with our with our uh with our debt and deficit spending and and uh and our the vitriolic nature of our partisan political discourse and and the tendency among some in the Trump administration, the president himself to to be kind of, you know, uh difficult with our with our allies, insulting at times and so forth. But the axis of aggressors uh would include China and Russia, these ravanchous powers on the Eurasian landmass and how they brought into the fold Iran, the the theocratic dictatorship in Iran, Venezuela, you know, uh Cuba, Nicaragua, and and of course North Korea, the only hereditary communist dictatorship in the world. I think what you're seeing is that these these aggre these aggressors acted based on their perception of weakness in in our free market economies uh in the US and and and NATO countries and Europe broadly and and Japan and and others uh and and and but in that aggressive action that they've taken, you know, whether it's reinvasion of Ukraine in 2022, whether it's the the horrible attacks on on on Israel on October 7, 2023, They have overextended they've overextended themselves and they've created real frailties uh in in in their economies. Uh and this is what you see in the in the collapse of the theocratic dictatorship in in Iran. I mean held I mean the the corruption of that of that regime has resulted in the capital city with no water, you know, and and and energy crisis. Look at what Maduro did to his country. The Russian economy is a basket case. Uh and and I think I think China too, right? China in its race to surpass uh the the United States and our free market economies has created tremendous frailties uh in its economy which we saw manifest themselves in in the in the kind of the debt uh and the local debt the the real estate sector they're unable to get off the over production over capacity and dumping that's kind of by design I think and they've been unable to generate the kind of consumer demand so I think you know we should be confident we should be confident in in our free market economic systems. We again we have a lot to do to get our own houses in order from a from a financial and fiscal perspective, but let's get after it. I think you know strengthen our free market economies, have some more confidence in ourselves, uh and recognize that uh that these that these you know status merc models, these authoritarian forms of governance, uh they look strong from the outside, but they're actually quite brittle. So I think we should get ready, you know, for continuing this competition. uh but but also recognize that we should have confidence in our future. >> Yeah, I think that's a really good note uh to end on. Unfortunately, that's all the time we have for today, but General McMaster, thank you very much for sharing your expertise with us today on a range of topics from the recent geopolitical events, but also how they fit into national security strategy and can impact financial markets. I've certainly really enjoyed uh this conversation and on behalf of Russell Investments, a special thank you uh to all of our clients around the world as well for tuning in today. Uh thank you very much. >> Paul, thank you. >> Thanks. >> As we wrap up, I want to reiterate why conversations like this matter for investors. Periods marked by frequent geopolitical headlines can feel destabilizing, but markets don't typically break because the news is loud. They break when fundamentals deteriorate. Our job as investors is to stay focused on those fundamentals, maintain disciplined diversification, and avoid reactive positioning driven by short-term volatility. We hope today's discussion contributes one useful perspective in that broader effort. And on behalf of Russell Investments, thank you for joining us, and we appreciate your continued trust.