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Dennis Stattman and Ben Inker

In a world awash of money and structural problems, two global-allocation managers find opportunities.

Kevin McDevitt, 08/27/2014

If you could invest in any asset class anywhere in the world, what would it be? At June’s Morningstar Investment Conference, two skilled global-allocation managers—Dennis Stattman, manager of BlackRock Global Allocation MDLOX, and Ben Inker, of GMO Benchmark- Free Allocation GBMBX and Wells Fargo Advantage Absolute Return WARAX—shared their views on this and other questions. Our conversation has been edited for clarity and length.

Kevin McDevitt: With the Fed continuing to taper and the prospect of rates possibly rising next year, how do you two think the investment landscape is going to shift over the next 18 months?

Dennis Stattman: On the global-allocation team, we believe interest rates have room to rise, and potentially over the course of the next several years, rise a good deal. They’ve been kept very low by particularly aggressive Fed action and relatively slow economic growth. And real rates today, short term, are negative by almost 2%. Inflation is rising. The economy seems to be firming up. And our sense is that we’re in the late stages of this period of extraordinarily low interest rates and very depressed real rates.

Ben Inker I agree that interest rates are eventually going to have to come up. We see no reason to believe that that can’t happen in 2015 and into 2016. Some of that is priced in. Maybe we’re going to see a rise in implied volatility in the fixed-income space, as the bid for the mortgages has pushed down implied volatility, which is very low. There is stuff that could go wrong, clearly, as interest rates rise. But we’re not panicked about the fact that rates are going to rise from zero nominal. They will. They have to eventually. But it will be interesting to see how it plays out.

McDevitt: What could that mean from a liquidity standpoint? If you do see incrementally tighter Fed policy, are there pockets of the market that are especially vulnerable if liquidity is pulled back?

Inker I think one of the really interesting questions is what this means for the credit markets in the longer term. There’s been a lot of change to the structure of the dealers for credit. It’s well-intentioned Dodd-Frank and the Volcker Rule and all of that. But what it’s meant is the dealers no longer hold inventories of this stuff.

Stattman: Right now, the world is awash in money, but as Ben points out, there’s not much liquidity in the bond market. And this is in good times. So, investors who think that they own bonds for a trade, and that they’ll go through this period of relatively tight spreads and low interest rates and make the carry for a while, and then sell at just the right moment when things start to get bad—it’s very hard for me to imagine that there’s going to be the other side to the trade in much size.

Who in the world is it going to be? Because as Ben points out, it’s not going to be Wall Street anymore. Bond markets that used to be 25 million bonds a bid, 25 million bonds offered, are now 2.5 million bid or offered or maybe 1 million bid or offered. It’s a different world than it used to be.

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