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- Let's focus on active versus passive investing. Can you explain to me what those two terms mean?- Sure, so passive investing just means that we pick an Index. The Index people know is the S&P 500, that's an equity Index. In fixed income the broad index is called the Bloomberg or Barclay's Aggregate Index, and it really is the definition of the majority of the bonds in the Index. So when you passively invest you just say I won't think about what's in the box, I'll just buy the box. When you do active investing you say no, there's some parts of the box that are better than the others, and I'm going to choose to invest in the things that are going to give me a better return over time. So active investing is what we focus on at Morgan Stanley Investment Management, but passive investing has been the biggest growth in fixed income over the last few years.- So in such a volatile market, what should investors be doing, is there one over the other?- So passive investing is good for liquidity, and usually in times of volatility there are moments where you just need to buy something quickly, and that's when passive investing is actually very appropriate. Because what you're saying is the prices have gotten so below where I think they should be that I just need to buy whatever the box is quickly. For people who wanted to keep that investment for longer, I think active investing is where you want to be. Because in times of volatility that's when it's actually most dangerous. So the longer you hold things, if you're not careful about what you're buying, that's when you get into trouble. So active investing I think is actually your better bet during volatile times, except for that moment where you need to buy something without thinking about it.- How can investors know when they should be investing actively versus passively?- The way I think about it is there's a few places in the market where passive investment is just easy. If you're buying just U.S. Treasuries, and that box is actually pretty generic, so you know those bonds will mature at par. You know that it's not super important which bonds you actually pick. As you get into things like credit and high yield, where actually there's a big difference between these for sure, that's when I think active investing is the most important. Though really, the more you get into things that have a credit aspect to it, the more important it is to know what you're buying as opposed to just buying what's in that passive index.- Is there one thing that the average investor just does not know about active versus passive investing?- I think one thing they don't know, everyone thinks passive is cheaper, right? And if you look at just the fees often times they're right, or the cheapest thing you could buy is probably the Treasury passive ETF. But when you start to look at performance, when you start to look at things that are more risky, so the high yield DTF, yes it's cheaper from a fee perspective to buy the passive product, but the passive product underperforms its Index by a large amount, much more than the fee. So I think what passive investors miss is they look at the fee as the expense, but it's actually the fact that it's not as easy to replicate the Index, they're not getting what they think they're getting, and I don't think most investors know that in passive products.- So my next question was gonna be what are some telltale signs, but it seems like you lined that one up. Is there any other telltale sign for investors?- You know, again, I mean I think passive has its place, right, it's good for quick, it's good if you don't wanna think about it as a placeholder. I think investors, yeah, they focus too much on just the fee, it should be all about what you're getting. And fixed income is so much more complicated than equities, right? Everyone knows the S&P 500 and the DOW, no one on the street could explain to you what's in the Aggregate Index in fixed income. And actually I said before it has almost all the bonds in it, it actually only represents about half the bonds that are out there, so I think what investors don't realize is it's actually important to have probably a mix of fixed income products and also that mix of passive, where it's super safe and easy, but active where you're really trying to get a long-term value, and get some income and actually have that push of your portfolio be a different risk than your equity risk.- How can investors balance their portfolios?- You know, I think you look at, there's lots of different ways that you can buy fixed income. So the most popular product we've had lately is called our Global Fixed Income Opportunities Fund. What that product says is actually there are so much focus on the benchmark in passive investing, that if we get rid of that benchmark and just ask the question of what do our investors want? They want income, they want some semblance of safety, and they want to get as high a return as possible from their bond portfolio without it acting like an equity, so those groups of opportunistic funds actually don't even look at the benchmark, we just buy the best bonds that we can find to meet our investor's needs. So I mean, that should be a big part of people's portfolios. Cash has become an asset success with some return, so I think that the way you balance it is you spread out, you wanna own some cash products, you wanna own some products that don't have any Index exposure at all, and then you wanna be very careful when you're looking at things that have Index components, to pick a manager who you trust that's performed well over time. So it does take some work and a little bit of research, which is another reason why investors often go passive, because they seem so easy.-But I mean it's all about that research. If you're investing you gotta do your research. Okay, so I wanna switch over to global fixed income. How is global fixed income looking right now?- So global fixed income is looking a lot different than it did in the middle of last year. So in the middle of last year the markets got in this mode where there was, except for emerging markets everything seemed totally safe. So last year by the middle of the year we saw really tight spreads, which actually means you're not getting paid much for the risk you're taking in credit, in high yield. And it all unwound in November and December. And people saw it in the equity markets, right? We felt it there, but fixed income it was happening too. So there's a lot more opportunity now in fixed income, so high yield spreads are back to much more normal levels, which means instead of getting five or 6% on your high yield you're getting seven or eight, which is a much better spot. Emerging markets have been hit hard. And then places that are safe, like U.S. Treasuries, have done very, very well. So you're actually getting paid not too much for safety, and you're actually getting paid to take some risks, which is the opposite situation that we were in, call it middle of September of 2018. So the world of fixed income changed very, very quickly, similar to the way the equity market did. Although I would say I think that seven or 8% return in high yield is a pretty attractive amount of return for a bond portfolio, it could outperform equities this year.- What should the average investor know about that? How can they position their portfolio?- Like I was saying before, I don't think most investors are going to take all their money and put it into high yield. But I think what you should do is say okay, well, I think a lot of investors have a lot of equity exposure, it's a very common thing to be heavily invested in equities. So what you could do is say well, I'm gonna take a percentage of that, say 10 or 20%, and put maybe half of it into a global, go anywhere-type of product, and maybe the other half into a high yield or credit-type product. And what you're doing there, I mean you're really getting lower volatility, right? The equity markets move a lot more over time than fixed income markets. So what you're doing is you're diversifying away from equity risk and getting some income in your portfolio. And doesn't mean it's gonna work tomorrow, but over time that income component is actually pretty powerful. If you could compound it seven or 8% income in a year, in a bond, that's actually a pretty good return in today's world, so I think, again, it's just a matter of getting comfortable, doing research, looking right at who's done well over long periods of time, I think that's important, right? You don't want someone who's hot now. People tend to chase what's hot now. We tend to think of things in the long term, right? We're tryin' to perform well over one, three, five and 10 years. And if you find those managers, and there are some, then I think you've found something that it should help you sleep better at night.- Okay, what are some telltale signs in global fixed income that I should reposition my portfolio, or I should at least look at it?- Well listen, I think, again, I think bonds are meant to be taken in the very long term, but when people start talking about bonds on television usually it's the sign you should be paying attention. Bonds are not the sexy part of the market, right? You don't see as much coverage. So in November, December, there was a lot of talk around triple B credit, and high yield credit, and emerging market credit, so it's a good sign to kind of do some research. And I think you want to avoid one thing, right? You don't always wanna use, people tend to buy what's going up in their portfolio and sell what's going down. Remember, fixed income is very mean reverting, so equity markets can trend and in very directional moves for very long periods of time. Bonds, you tend to get a coupon and they return at par. So their price deviation is a lot smaller than equities over the long term, so I think you have to be careful not to overreact. When you ask yourself the question, hey if I own this high yield portfolio and it's going to earn me around 8% a year, if it moves up and down, call it a percent in between, do I really care, do I have to trade it around? It's supposed to be a sleepy part of your portfolio, so you're not supposed to worry about it as much as you worry about equities. It's also not as liquid, right? So people think ETFs, they can trade it around. Fixed income was always meant to be this sleepy part that sat there, earned you income, and I think you are supposed to think about your fixed income portfolio as kind of off to the side, and in kind of keeping your portfolio more balanced and safe than the equity portion is.- So just kind of pretend that it's not there?- Yeah, yeah, yeah, hope it spins off some income, and income's been hard to come by, right? When the Fed had rates at zero that didn't really work, right? But now again, when high yield goes from five back up toward seven or eight, it's a big, big difference. So you can put that in your portfolio, keep it on the side. Again, it's not gonna be 100% of people's portfolios, we understand that, but it does give you that cushion, and it will spin off some cash which is nice. And again as I said, you put in some actual cash funds, some money market funds at two or 2 1/2%, better than zero. And you have your equity is kind of in the middle, and it'll be volatile, and you can move those around, but it gives you some good balance around your portfolio.- So you mentioned the Fed, and I'm wondering going into 2019, going further into 2019 I guess I should say, how are interest rates looking?- So interest rates, it's unbelievable. So I was traveling around the country talkin' to our financial advisers at Morgan Stanley in September, and I was telling everyone that we had to get ready for the end of this interest rate cycle. Not because the world was going to end, but because we were priced at that point for the Fed to hike basically to about three to 3 1/4% in 2019. In our view that was as good as it could possibly get, and everyone was still afraid of it. But when it's priced in, you shouldn't be afraid anymore. Now here we are are we're priced for no rate hikes at all next year. So that corrected itself in three months, which is unusual, very, very, very quick. And I think what it does is it leaves interest rates in a much tighter range. It's unlikely that the Fed is going to go, again, the market says zero times, we think there's a chance for one if things got really safe again, potentially two, but they're closer to done. So we don't think they're going to be easing any time soon, so it leaves interest rates a bit more boring, which once we get through this period of volatility and people reset all their portfolios, less interest rate volatility, more dovish Fed, should actually be better for risk assets 'cause people were so afraid in December, after Powell's speech, that they were gonna go too far. And now it's very clear they've walked it back. So interest rates could be a little bit more boring. And again, the retracement was amazingly quickly, and I think buying safe U.S. Treasury-type assets now, it's gonna be a lot harder to make money on it 'cause they captured all the value that they pretty much could in the two months, three months at the end of the year.- Okay Brian, thank you so much for joining me. This has been wonderful, I feel like I've learned more about global fixed income and passive versus active investing, so thank you.- Thank you for having me.

Do you know what kind of investor you are? 

Brian Weinstein, head of global fixed income at Morgan Stanley (MS - Get Report) Investment Management, discussed active vs. passive investing and how investors can position their portfolios to prepare for market volatility. 

In case you need a quick refresher, here's the breakdown of active versus passive investing:

Sure, so passive investing just means that we pick an Index. The Index people know is the S&P 500, that's an equity Index. In fixed income the broad index is called the Bloomberg or Barclay's Aggregate Index, and it really is the definition of the majority of the bonds in the Index. So when you passively invest you just say I won't think about what's in the box, I'll just buy the box. When you do active investing you say no, there's some parts of the box that are better than the others, and I'm going to choose to invest in the things that are going to give me a better return over time. So active investing is what we focus on at Morgan Stanley Investment Management, but passive investing has been the biggest growth in fixed income over the last few years.

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