The case for being more risk aware

Feb 18, 2014 @ 12:00 am

Runtime: 4:48

While the global financial backdrop has improved tremendously since the financial crisis, that has left investors open to more risk, according to Brian Rogers, chairman and chief investment officer at T. Rowe Price Group Inc.

Video Transcript

Well, this week's guest wears many hats that give him both a global macro view and a micro one. He is great investor, Brian Rogers, Chairman of the highly respected investment and asset management firm, T. Rowe Price, as well as its Chief Investment Officer and the long-time manager of the T. Rowe Price Equity Income Fund which he has shepherded since its 1985 launch. A Morningstar favorite, the fund has delivered consistent category beating returns over the years with less volatility than the market. I began the interview by asking Rogers why he is more confident about the state of the world than he has been since the financial crisis. -I think it's primarily because the world is a safer place financially today than it was four, five years ago. When you think about what's transpired over the last four, five years, how global economies have slowly recovered from the `08-`09 downturn, how the global financial system is in such stronger position today than it was, markets have rebounded strongly since 2009 obviously. That can be a good or a bad thing for investors by the way. -Right. Right. -It's been a good thing. It makes the question what it will be perspectively, but I think economic growth, I think the whole financial crisis is well behind us and I think investors and the global financial system are both in better places. -So, let's talk about a reason it could be a good thing and a bad thing. It certainly has been a great thing that the markets have rebounded as much as they have since the lows of 2009. However, looking at what you've been telling clients and I'm gonna, you know, quote T. Rowe Price, "Risk reward is more balanced and we should be risk aware", what do you mean by risk aware? What are the risks that we should be aware of? -Uh-huh. -Well, Consuelo, I think what that all means is that prices are up a lot since the bottom. And so, it's not uncommon to find stock market indices up at 150, 160 percent since 2009. Ditto on the bond markets. So, if you're a high yield bond investor, you've made almost as much money as you have in equities. And what risk aware really means is be sensitive to risk after prices have appreciated. Be aware of the risk you're taking when you make a new investments because valuations are higher. The global financial background is much better as we-- as we briefly mentioned. But with higher prices come higher risks. And so, that's what we're saying when we say be a little bit more risk aware than you've been over the last five years. -One of the themes that you've been talking to clients about as well and I love this. It was-- The title is, you know, What if Nothing is Cheap? So, my first question is, to you, is nothing cheap right now kind of looking at all of your investment choices in the different asset classes that you oversee as a chief investment officer at T. Rowe Price? -Uh-huh. -Is nothing cheap? -Well, very few things are cheap, Consuelo. When you look around the world, I always start with the fixed income markets. -Right. -Because there is a predictability of returns in fixed income. If you-- -From the income. -If you buy the 10-year treasury, you know over 10 years you will make today 2.8% a year. -Right. And you'll get your money back-- -And you get your money back-- We won't talk about reinvestment risk and all that, but you know your return will basically be 2.8% a year. When you think about equities, again, equities at 15 or 16 times earnings in the U.S. After the type of rebound we've had since 2009, many studies would suggest that you might earn between 5 and 10 percent. Maybe 6, 7, 8 percent a year over the next few years. -Right. Versus what you've been making, which was definitely double digits over the last-- -Over the last five years. -Five years, right. -Yup. -Compared to the long-term average of 9 or 10 percent. -Right. -When you look around the world, there are different markets-- a lot going on at different parts of the world, the global fixed income markets, I would say the perspective returns are similar to those of the U.S., which means modest. And I think in different equity markets I think there are all sorts of exciting stuff going on in Japan. Big question though at Europe's recovery, how sustainable it is. And then you have investing in emerging markets, which has been a tricky place for the last couple of years and an area where I think there's pretty good opportunity over the next few. So, if you think about that 2.8 percent starting fixed income return, as an investor, you have to ask yourself are you willing to take the risk of investing in equities to try to earn that 5 to 10 percent. And if you take the midpoint of that 5 to 10 and say your expected return from the equity market might be 7, 7.5,-- -Right. -is that enough to compensate you for the risk of volatility relative to that 2.8 percent? -So, is it? -I think the answer is yes. -Right. -But I think, again, you just have to be a little bit more careful. You can't indiscriminately throw money into the equity market and hope to make 15 or 20 percent a year. You just have to be more careful.


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