CIO: These have not being a boring five years for you, or for any investor. What, in your specific space, was the pivotal moment over the last five years?

Davis: In the real asset sector, it was the validation of our thesis for investing—that those assets are uncorrelated with most of the other major asset classes. Our portfolio kept humming along while everything else was falling apart. People love to say that during the crisis all correlations went to one, but in fact, the real asset sector didn’t.

Riegel: Coming out of the bubble, we saw the increased effects that certain macro events had on the way markets behaved. You had these definitive periods of risk-on versus risk-off, and the response of the regulators was to try to correct it. We had to adapt to a market where old-fashioned bread-and-butter research wasn’t working, and we had to get comfortable with trying to figure out exactly when to take risks versus not, and when to stay the course.

Black: In the public debt space, liquidity or asset pricing—or lack thereof—was the watershed event. Starting with money market accounts, you had to have federal intervention because a number of money funds owned Lehman debt. One broke the buck, and so a very safe market, typically, was anything but—and that permeated the debt markets. In managing bond funds, you had to be cognizant of the pricing issue.

We found a lot of opportunities during risk on, risk off periods. We have a large credit research staff and we were buying bonds of companies we liked after prices dropped 10%, 20%, or more.

CIO: Tom, what was the pivotal point of the last five or six years in real estate?

Garbutt: It was the realization that real estate is a mainstream asset class now. The real estate business is more disciplined now, more transparent, but it is fully entrenched within the macro capital market space. It’s different than it was, say, 10 years ago.

CIO: So flipping this question around a bit: What happened in the past five years—including the crisis—that people may have forgotten, overlooked at the time, or are only now realizing?

Black: A turning point was when the European Central

Bank (ECB) essentially said they will do whatever it takes to make sure that the financial system in Europe holds and the countries that are undergoing significant stress would be supported. Clearly, Europe didn’t tackle their problems as quickly as the US did, but I would say that was number two in terms of impacting the public markets today.

Riegel: I would broaden it out and say it’s global quantitative easing—the ECB has promised it, but hasn’t yet delivered. Markets are highly correlated because all this money is being printed and it has to go somewhere; it’s driving down rates, driving up the stock market, and also affecting real estate prices.

CIO: Heather, what’s your below-the-headline take?

Davis: In real assets—and infrastructure investment in particular—investors are beginning to penetrate these markets in a big way, and have a lot of desire to add these assets to the portfolio. They’re having trouble finding ways to do that because not that many engines have been built that can generate the opportunities.

CIO: Has the perception of risk changed since the crisis?

Garbutt: The identification of risk is much better than it was, and I think it goes to a few levels. It’s not just looking at the surface issue that can affect performance of an asset, but a much heavier application of economic modeling and research—and a look at second-order derivatives that could drive something to change. It’s a much broader and deeper view of what could create volatility for investors.

Riegel: I think the focus shift from relative risk prior to the drawdown in 2008 and 2009 to absolute risk in that wake is significant. It still manifests itself in the way that many people still don’t trust the equity market.

CIO: Now it’s a broad question, but I’ll ask it anyway: How do markets look to you right now?

Riegel: I’m cautiously optimistic on this equity market globally. The US could get a lot more volatile. That’s generally going to be the case as the Federal Reserve begins to remove liquidity from the market.

Black: We do have some concerns as to how much further

They represent the best TIAA-CREF Asset Management has to offer: the heads of global private markets (Heather Davis), global real estate (Thomas Garbutt), global public markets (Lisa Black), and equity investments (William Riegel). Between them, they have 122 years of experience in the business, but Chief Investment Officer (CIO) Editor-in-Chief K.P. (Kip) McDaniel asked them to focus on the last five years, the now—and what they see five years out.

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The material is for informational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. Certain products and services may not be available to all entities or persons. TIAA-CREF Asset Management provides investment advice and portfolio management services to the TIAA-CREF group of companies through the following entities: Teachers Advisors, Inc., TIAA-CREF Investment Management, LLC, TIAA-CREF Alternatives Advisors, LLC, and Teachers Insurance and Annuity Association. Teachers Advisors, Inc., TIAA-CREF Investment Management, LLC, and TIAA-CREF Alternatives Advisors, LLC are registered investment advisers and wholly owned subsidiary of Teachers Insurance and Annuity Associations (TIAA). Real Asset investments may be subject to environmental and political risks and currency volatility.

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credit spreads can compress. Our view is that interest rates are going to stay in a fairly benign or narrow trading band in part because of inflation, because of demand for interest-bearing assets by Baby Boomers moving into retirement, coupled with a decline in overall issuance of US government Treasury, Agency mortgage-backed, and US corporate securities. New deals are multiple times oversubscribed despite the fact that spreads are much narrower.

Davis: We’re seeing that Infrastructure has become a very crowded market. There’s been a lot of capital raised. Chasing those deals is an expensive proposition and has a high rate of failure, frankly. Nevertheless, the world has need for infrastructure. You pretty much have either crumbling infrastructure—or none. There’s this enormous need to bring capital to the sector, and that’s an opportunity that we’re interested in.

Garbutt: I’m cautiously optimistic for the right real estate—but I do think we’re starting to see capital flowing for less than optimal real estate. We haven’t seen a lot of oversupply. So, I think if you’re smart and you know how to navigate toward the well-constructed, well-positioned assets, I think things are looking fine.

Davis: A lot of people think there’s a farmland bubble. We don’t agree. There are a lot of different qualities of assets within that whole sector. We believe that those invested in the highest quality assets, with ample water, will continue to perform well. We could see deterioration in value in assets of inferior quality and/or with inadequate water.

CIO: Are there any unresolved issues from the crisis that still concern you?

Black: For me it’s what the Fed will do with the $4 trillion in assets on their balance sheet, both Treasury and Agency mortgage-backed securities. I am in the camp of thinking that they’ll let those holdings mature. I think the Fed is more concerned now about deflationary pressures and the employment picture which presumably means that they will remain accommodative.

CIO: Bill, is there anything that could come out of left field that would throw this market down 20%?

Riegel: I don’t think it’s anything that the Fed could do. I’m concerned about Europe. You’re coming into a period where you’re beginning to see elections, and part of the European thesis is that the reform process will continue, which in turn will make it easier to do business, and profitably. If that gets derailed, that’s problem number one; number two: a Chinese real estate bubble collapse.

CIO: Tom, what’s the potential black swan in your sector?

Garbutt: If we saw some major shock to interest rates, that would clearly ripple right into the real estate business valuations. If it’s something that’s a slow, progressive move, real estate can handle that fine.

CIO: Okay, imagine yourselves five years in the future. Besides all being a little grayer—myself included—what is your biggest concern?

Davis: For my sector, it’s that we don’t bring in capital efficiently and can’t bring enough capital to be effective and address what is obviously going on in terms of population growth. The failure to bring enough capital to solve these problems is going to be a problem—a big problem.

CIO: Lisa, what worries you the most in five years? Black: I would say regulatory overreach. You see

almost every day an article about financial institutions in the crosshairs of the regulators, and it’s crimping their business. I believe these important institutions are safer now, with stronger capital bases, however I’m not sure the regulators really understand where all the risks are.

CIO: Bill, what’s the biggest risk in your world?Riegel: The real risk is a prolonged period like we went

through in first quarter of this year, where all of a sudden you had a negative GDP number and inflation continues at rock bottom. It’s something that really concerns the Fed, and it’s the same in Europe. If collectively they can’t put the juice back in the system, there are a lot of balance sheets and pension schemes that are going to be in deep trouble. You’re going to be looking at a lot of bankruptcies.

CIO: Final question: Put the reader in your shoes and describe the biggest lesson from the past five years—and how it can be used in the next five.

Garbutt: It was very interesting to see portfolio managers and research analysts paralyzed by the events that were unfolding. The individuals that were able to look beyond the panic and invest were those that were able to not only succeed, but to make some very sound investments. In terms of lessons learned: Having that ability as you go through your career—when things like this come up, being able to have that fortitude and take action—is essential.

Davis: What became clear to me, and I think to the entire firm, was and is the focus on asset- and people-selection. What’s been so critical is to identify the people who can select and manage the best assets. If you’ve invested in the cream of the crop, regardless of what is going on, they should perform. n

From left: Thomas Garbutt, Lisa Black, William Riegel, and Heather Davis

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