10 Questions with Dennis Stattman, Portfolio Manager, BlackRock Global Allocation, Interviewed on Dec. 29, 2011
1 What U.S. industries do you see being most affected by the risks in Europe?
First, I think people are too focused on Europe to the exclusion of the rest of the world. Having said that, the greatest risk is to the international banks and investment banks because of their counterparty risk exposure. We believe that risk is diminishing and has been diminishing because of new European Central Bank policies to provide liquidity. The second area of concern is the cyclical industries—for example, industrials and materials— that will be negatively impacted by the probable recession in Europe.
2 Cash or government bonds—which is more risky at the moment?
In my opinion, government bonds are riskier. The risk with cash is underearning what you’d get in other assets and/or loss of purchasing power, since interest rates are zero and year-over-year inflation is 3.5%. But with government bonds, you could lose a lot of principal if and when interest rates go up. And people are not being compensated for recent inflation or the risk of higher inflation in the future.
3 What are the chances we could still see a bout of 1970s-style inflation?
I will qualify this by saying an exact repeat of the ‘70s is unlikely, but an increase of inflation that is uncomfortable and has bad implications for long-term fixed-income securities is more probable than not. But I’m going to give that a time frame of three to five years rather than three to five months.
4 Historically speaking, what period does the current investment climate remind you of?
I want to make it very, very clear that I wasn’t alive in the 1930s, but that’s what it reminds me of. Fear, an economy that’s underperforming what we got used to, stress in the financial system, low valuations on stocks, expensive bonds, low yields, and, ultimately, very long-term opportunity in the equity market. All of that happened in the ‘30s, and it’s happening again now. I’m not thinking 1930, I’m thinking mid-‘30s.
5 What are the biggest changes to global investing that you’ve seen during your career?
One of them is the explosion in available, immediate information. The second thing, and it’s a cliché, is globalization. The markets were still geographically fragmented 20 or 30 years ago. It’s not one global market yet, but it’s close.
6 It’s been just over five years since BlackRock acquired your former firm Merrill Lynch Investment Management—what has been the biggest change?
My life has been better. It comes down to a focus on asset management, rational spending, and access to top management.
7 You’ve built a highly successful team over the past 20-plus years, virtually from scratch—what contributed most to that success?
Finding the right people. It’s just that simple. If you have the right people, you figure out what to do and how to do it.
8 What books have been making the rounds among your team this year?
One of them is the biography of Steve Jobs by Walter Isaacson. That’s been the one that’s interested and excited me the most. I think people are coming to realize what an agent of change and progress Jobs was.