Ask Kathy Fisher to identify the greatest risk faced by investors, and she is likely to reference actuarial tables that suggest a child born today stands a good chance of living to age 100 or longer. She points out government protections for aging populations were created at a time when people would retire at 62 and die at 67. With lifespans now expected to routinely hit the century mark, a young person who plans to stops working at 65 is going to need a retirement portfolio that provides sustenance for another 30 or 40 years.
Fisher calls it “longevity risk.”
“The risk is acute for people who might not have saved as much as they should have for their retirement,” she says.
The situation means configuration of client portfolios cannot necessarily take a conservative posture in later years, but must remain aggressive enough to continue producing return.
“Decades ago, when people used to talk about switching to bonds [during retirement], bond returns were in the mid-single digits and that worked. At today’s interest-rate levels, it would be unconscionable to have a large bond weight if you need the money to work for decades to come,” Fisher told interviewer Barry Ritholtz during a Masters in Business podcast produced by Bloomberg. “So most firms are encouraging clients to maintain a good equity weight when they retire, because of longevity. The other thing that’s important is to assume that your expenses grow with inflation over time, so you capture the risk of living for quite a long time.”
All of which makes Fisher, head of wealth and investment strategies in the Bernstein private wealth business of AllianceBernstein (AB), especially comfortable with and committed to her organization’s long-term orientation, with a heavy emphasis on alternatives and real assets.
“We are long-term investors, and our clients are long-term investors,” says Fisher. “They come to us because they have complex, often multigenerational needs, and are looking for a multi-decade investing approach. There are different time horizons for different pools of assets, but almost all of them have a long-term orientation.”
Still, keeping clients consistently focused on the long term can be difficult in the Internet age, when real-time stock quotes and market data are accessible on their phones 24/7. Fisher notes studies have found that during pre-Internet days, investors who could access such data only quarterly or annually were more inclined to stick with their asset allocations for the long term.
ALL IN-HOUSE AT THE BIG HOUSE
Companywide, AB has a whopping $540 billion in assets under management, and $95 billion of that resides in the Bernstein private wealth division, making it one of country’s largest wealth advisory services to high-net-worth individuals and families. Clients’ core portfolio strategies are implemented in an integrated manner with services managed by portfolio teams at AB, not outside managers, which Fisher cites as a major differentiator between Bernstein and other wealth advisory firms.
Fisher manages two teams that work at the intersection of investment planning and investment strategies. The Wealth Strategies team has 28 experienced professionals developing long-term plans for tax-efficient wealth accumulation, wealth transfer, philanthropy, retirement and other objectives. The Private Client Investment Policy Group develops long-term asset-allocation and investment strategies that match the goals of those plans. Portfolios for clients of all stripes almost invariably contain diversifiers, including real assets, such as real estate, and alternatives, such as private-credit and hedge funds.
“We create an integrated investment platform for private clients that combines the portfolio services that we think should best achieve the outcomes that each client is looking for,” says Fisher. “As opposed to offering hundreds of services, we choose from 40 to 50 services to create customized allocations that enable private clients to achieve their goals. We have a fairly unique structure since we manage the money: we are fully accountable for developing the right asset allocation for each client, implementing with services we manage, and protecting against extreme risks.”
Bernstein’s multi-decade investing approach means the firm does not move clients in and out of asset classes, in part because this can cause undesirable tax consequences for clients. But staying frozen in the same asset allocations even as the market takes on different features can also have undesirable consequences of a different kind. That is why AB offers “dynamic asset allocation” from a team that monitors potential market risks around the world and will modify portfolios when it detects extreme risk that could damage clients’ outcomes. Fisher says the team is currently “neutral,” meaning no urgent risks require portfolio modifications to move clients’ exposure away from their long-term strategic allocations.
NEW FRONTIERS
Bernstein’s asset allocations are global, favoring broad geographic diversification, including with equities. Even though U.S. equities have been the best play this year, Fisher says the firm is still very comfortable with non-U.S. stocks. Indeed, AB is very deep in emerging markets. Though they can be more volatile, demographic trends and increasingly well-run companies in emerging markets offer attractive opportunities for long-term investors. The typical private client at Bernstein is weighted about 60 percent in U.S. stocks, 30 percent in other developed markets and about 10 percent in emerging markets.
“We are very comfortable with companies in China, South Korea, India, Russia and some Latin American countries as well,” says Fisher. “We are looking at the countries that are not yet in the emerging-markets index, countries that are in Southeast Asia, Africa, Eastern Europe and South America.”
One of the real asset classes AB emphasizes is real estate, and its investment team for that category follows a strategy that directly invests in acquiring, upgrading and reselling properties at a higher price, which requires a micro-level understanding of real estate markets. That value-add strategy is a sharp contrast to playing the real estate cycle by acquiring class A properties when the market is down and selling off portfolios when the market nears its apex.
RIGHT PLACE, RIGHT TIME
Fisher’s career began at the Federal Reserve Bank of New York, where she was part of the economic research group, working on both money supply and GDP research.
“It was quite academic,” she says. “What was exciting was seeing the academic work get rolled up into papers that actually had some impact on policy. But I also realized that I wanted a more markets-oriented role. I had the serendipitous good fortune of meeting someone at Morgan Stanley who told me they were looking for a bank stock analyst.”
Fisher pursued and was tapped for the job. But it was her next move, to JPMorgan Chase and Co. to continue her work as a bank analyst, that she describes as “incredibly fortuitous.” That post, in the bank’s corporate finance group, turned into an M&A role, right as the U.S. banking industry was heading into a huge wave of bank consolidation.
“I was very lucky to be there at a time when bank deals were happening all the time,” she says, “and that was a terrific time to be involved in a big transition when we went from 14,000 U.S. banks down to about 10,000 in the space of a decade, and then even more consolidation after that. It was a very vibrant time to be in that space. I learned a lot and did a lot of good business with some terrific companies.”
Her opportunity at AllianceBerstein came when several colleagues from JPMorgan migrated to AB and then enticed her to join the organization. Fisher knew of AB’s reputation for strong investment research, discipline and long-term planning, and took advantage of the opportunity to work there, first as a senior portfolio manager.
“It was a great move for me.”
HARD ASSETS AND ANCHORS
Bernstein’s clients come primarily via referrals — either from existing clients, accountants, or trust and estate attorneys.
“Potential clients often come to talk to us when there is ‘money in motion,’ meaning that they have sold businesses, received an inheritance, or are leaving large corporations and are cashing out stock or options,” Fisher explains.
Building their portfolios for the long haul includes using real assets and other alternatives to diversify portfolios, and hedge against inflation and interest rate spikes. Bonds are used to anchor portfolios. Though bonds do not create exciting returns, Fisher likens the bond component of a portfolio to the ballast on a sailboat, smoothing the volatility sometimes created by stock market gyrations, as well as keeping a portfolio from capsizing in especially turbulent market conditions.
In particular, she is a fan of bond funds, especially intermediate bond funds that are intentionally diversified across the term structure to take advantage of changing yield curves. What’s more, bond funds give clients readier access to their money, giving them the opportunity to pull their cash out, as opposed to selling individual bonds at a poor price in a less-liquid market.
“Bond funds are very flexible, especially when rates rise and let you take advantage of the changes that occur,” says Fisher.
APPETITE FOR ALTERNATIVES
Fisher has sensed a distinct evolution in the understanding among clients about the role alternatives play in their portfolios, including having the right risk and return expectations. Still, some clients are averse to alternatives, and Fisher thinks the next economic downturn will be telling for that group.
“There will be a recession at some point. We don’t see it in the near term, but eventually there will be one, and how alternatives do in the next recession will be an important test point for some clients who haven’t been as willing to have as much in alternatives as they might,” she explains. “But I think many alternatives will do well as diversifiers against both stocks and bonds in those more challenging times.”
Recession still stands at a distance at this stage, in Fisher’s estimation, because both the U.S. and global economies are showing signs of strength, though she did acknowledge the brewing U.S.-China tariff war might pose a challenge to continued economic expansion. The past four decades of accelerating global trade have been a hugely positive force in reducing poverty in countries around the world, notes Fisher, though she fears stress on trade and supply chains through the use of tariffs might create economic bottlenecks that could slow commerce and jeopardize the economic recovery.
BEWARE OF WHAT YOU HUG
Fisher and AB see a role for both active and passive management, believing they can and should coexist. The key to successful active management, she argues, is for active managers to demonstrate their value through their convictions in their strategies.
“There is little value to hiring an active manager that is hugging a benchmark,” she explains. “It is an easy thing for managers to do because it reduces their risk, they are never going to veer too much from a benchmark, but what is the point? I think the more clients see the opportunity in having portfolios that are very different than benchmarks — either because they are concentrated with a small number of stocks, say 20 or 25 names, or they are focused on a certain anomaly — those portfolios should give excess return opportunities to clients, but they will do it very differently than benchmarks. The job of the manager is to explain why they have the confidence that this strategy will indeed provide better returns over time than just buying a passive index would do. Being an index hugger is just not going to cut it going forward.”
Deep research and conviction are required for a manager to take positions in an asset that might be out of favor today but is likely to do very well in the longer term — or why something that is concentrated (and therefore, in theory, riskier) should still produce good risk-adjusted returns because of the particular approach AB managers are taking.
TICK, TOCK, TECH
The forces of change being exerted on the global economy as well as the wealth advisory and money management business can be summed up in a single word: technology. At AB, technological advances might express themselves in the form of better research capabilities and portfolio management, or the use of digital services and other algorithms that mix with personal service to increase transparency and client access to information.
“All good change,” Fisher says. “I would argue firms like ours are excited to harness technology to improve client outcomes.”
Artificial intelligence, for example, might provide a level of data science that allows researchers to pinpoint, on a more granular level, if there might be biases built into portfolio selections that are hampering performance.
GOLDEN YEARS
Despite all the technology surrounding Fisher and her investment teams at AB, and her enthusiasm for technology’s promise, she has no personal presence on social media platforms. While acknowledging her absence from cyberspace makes her sound like a bit of a Luddite, Fisher is an aggressive reader and says that keeps her more current about what is trending than social media advocates might imagine.
Some might also be surprised by her declaration on the Masters in Business podcast that she does not have a high need for fun, though she is a believer in the so-called Golden Age of Television and is a big fan of the plethora of critically acclaimed television series it has spawned since The Sopranos changed the game. Among her recent favorites are The Crown; Homeland; and House of Cards.
She is no doubt hoping the Golden Age of TV programming will be as enduring and rewarding as a well-crafted AB retirement portfolio, because, according to the actuarial tables she apparently reviews from time to time, Kathy Fisher is likely to be around for a long time.
Mike Consol (m.consol@irei.com) is editor of Real Assets Adviser. Follow him on Twitter @mikeconsol to read his latest postings.