Raymond Sagayam on the Biggest Overlooked Market Risk, and Building World Class Teams | MHC 118

Thank you Bilal, thanks for having me on your show.

Sure. My grandparents are originally from South India, or at least three out of the four of them. One of them is from Sri Lanka. My parents were born in Malaysia, so you know, Malaysian of Indian ancestry. And because my father was a Malaysian diplomat, we had an opportunity to really live all over the world. So pretty much from the get-go I was in a pretty mobile situation. You know, I consider myself a third culture kid. I'm not sure if you're familiar with that expression. I was born in the States, in DC, when my parents were living there. You know, we've lived in China, we've lived in Singapore, lived in Malaysia, and for most of my formative years in the UK as well. So geographic and cultural extremes were pretty much the norm for me and I got used to that from a very early age. That's one dimension. In terms of studies, I was always drawn towards medicine. I loved biology. In my mind, until I was around 16, 17, I was dead set on becoming a doctor. We have a few doctors in the family as well, and you know, with pushy Asian parents, that was also an acceptable route at the same time. But probably around that age, I don't think I could get away from that entrepreneurial and that trader-type DNA. It was always in me. I was always buying and selling stuff when I was in my teens, bomber jackets, mobiles, all sorts of things. And I realized that as much as I loved the thought of medicine, finance was probably something closer to my heart, my passion at that time. And so I switched from wanting to read medicine at university. I switched during my A-levels and decided to go for economics. And in the end I read economics at the London School of Economics. I actually met my wife there as well. So economics was my core discipline. And at a later stage, once I was well into the world of finance, I also decided to do a master's in theology, Catholic theology but with a focus on other religions, at the same time. So that was a completely different and out-of-the-box course, and that's something which I did part-time as well. That's quite unusual. Most people when they do a mid-career master's in something, it's usually an MBA or something in finance. But theology, that's quite an orthogonal move educationally. And I chose that precisely because, as you say, it wasn't a foreign move, it was different to what I was doing day to day. I think I've always realized that we are sometimes stronger and have a better perspective in our daily passions and our daily jobs when we inject with a healthy dose of something else. So that something else often has to be something completely different. So I wanted to do that. I was well outside my comfort zone. I was attending evening classes in Kensington, working in the city. Apart from that commute to the other side of London, I was surrounded by priests and other scholars who had already studied theology at an undergraduate level. So I really felt out of my depth and I didn't mind that, because that was new for me. And I learned a lot, I learned a lot just by being in a very different environment.

Yeah, I actually started on the sell side at ING Barings. I was in EM sales. And I don't mean to contradict myself, because even though I kind of knew when I was 16, 17 that I wanted to go the trading and the investment route, there was something about emerging markets, possibly because of my background, which fascinated me. You know, my sister was also there at the time, my biggest sister, and it was kind of a nice thing. And I just thought, you know what, let me give it a go, let me try sales out. And I joined in 1997, and of course that was just the dawn of the Asian financial crisis. It's interesting, most people I speak to these days make continual reference to the GFC in 2008, and they're not even aware of the 1997-98 Asian financial crisis, which actually for that region and for emerging markets was pretty catastrophic, and it was felt in a very deep and meaningful way. So that's where I started, and of course because of the crisis that tenure was short-lived, but it was an amazing starting journey as a graduate to be not only in emerging markets but to be exposed to a financial crisis, to be exposed to financial stress at a very early stage in your career. And I think that can either make or break you. You can either just think, oh my gosh, what have I got myself into, I should have really done medicine, you know, one year into it and everything is going pear-shaped. But I looked at it very quickly, very positively as a learning experience, as a door opener for other things. It actually paved the way for my future investment career, and it allowed me, because it was my first and only stint on the sell side, to really have, even though it was short, an appreciation of what it was like to be on the other side of the phone, to be the salesperson selling to me in my later years when I was a portfolio manager, to understand their perspective, to understand their challenges, and to have a glimpse of the sell side as well. So I think that was a short but great experience at the same time.

ING Barings at the time had other teams, proprietary trading teams, who were managing the firm's own capital. I was sitting very close to a team who was really investing in credit, global credit, a very small team. And they approached me not long after I'd left to see if I'd be interested in joining them in their next stage. They had moved on to Bank Brussels Lambert, BBL, and they said, look, do you want an opportunity as a junior analyst slash PM investor? And I said, absolutely, let's give it a go. And that's where my credit investing career really started.

Sure. Maybe historically better known as a wealth manager, its 200-year-old history reflects that footprint. But in reality, the Pictet Group now is a diverse one. Asset management, in terms of size, is just as large as wealth management and a very significant player in European asset management, and not only on the long-only side but also as a hedge fund player as well. We're also pretty large on the asset servicing side. So those are three large components, and there is a smaller but very fast-growing alternatives business as well, which is involved in real estate, increasingly now private equity, and we're also going to be looking at private credit at the same time. So the Pictet Group goes beyond wealth management, but of course its DNA and its heritage in wealth management is there and spans over 200 years.

Sure. And my role and responsibility is within the Pictet asset management side of the business, just to be clear, and I'm responsible for the fixed income business. But I'm going to speak for myself, I'm going to answer that question in terms of my own investment philosophy, because we are a multi-boutique business. We pride ourselves on hiring and retaining entrepreneurs and entrepreneurial teams who can have very often very distinct and very different investment philosophies. I know that sounds like a bit of a caveat, but it is an important part of our DNA at the same time. In terms of my own investment philosophy, if I were to distill it based on my experience investing in global credit over the years, I would say that investing globally was something I felt very early on was of paramount importance. It's very easy to say invest globally, you can't just invest globally overnight, it usually often comes from starting small, starting in a region. We're based in Europe, maybe European credit, and then expanding to Asia, expanding to US credit. It often starts by focusing on certain sectors and then expanding. But why do I say that? We are in a world which is inextricably linked. You know, what happens to an oil producer in Mexico has ramifications and is determined by geopolitical influences and energy prices elsewhere in the world. I had an interesting analogy recently in the context of the Russian and Ukrainian war. Is this the start of a de-globalization? And I don't think it is. You can't, to use the analogy of that individual, you can't unscramble an egg, right? And I'm very much of that belief. And as a result, I think with the passage of time, if you can develop that expertise and if you are able to have a team who can connect those dots, you're going to be superior investors by investing globally. So philosophy number one for me: invest globally. It doesn't happen overnight, but get there, have that as an objective.

I think the issue is precisely the word you use, dabble. If you think that this is a free lunch and a low-hanging fruit, you're going to get a rude awakening pretty quickly. Different regions, and we talk about credit, have different underlying buyer bases, different technicals, different support structures in terms of governmental assistance, state-owned influences, and otherwise. And I think dabbling is precisely an extremely dangerous path. You know, I smiled when you mentioned the US example. I think it'll come as no surprise to you that many US credit players can have a home bias. Right now they obviously invest and know that market inside out, but it can often be difficult for them to transcend into Asian credit, into European credit. I think one of the advantages as well of being based in Europe is just as simple as the time zone advantage. We're straddling Asia and US, and that alone lends itself to really overlapping in those different investment hubs as well. And I think that's an often overlooked practical point at the same time.

Okay, no, that makes sense. Yeah, if I could continue the answer to your question because there were two other convictions which are probably equally important for me. The other one is investing across the capital structure, again if you can. What do I mean by that? The more restricted you are to a sector or sub-asset class, the more trafficked that space is, the fewer arbitrage opportunities there are. If you take a corporate credit, for example, like General Motors, and you're able to assess its financial worthiness across its senior secure debt, unsecured debt, loans, equity, and so on and so forth, you have a much more holistic picture of where the value is on that particular entity. I think we, as analysts and investors, we overestimate the financial analysis that we put into a particular company, but we miss out two very important points, which is where is the value, where is the best value across that capital structure. Very often some parts of that capital structure will be extremely expensive and that doesn't render the trade as favorable as it should be. So I think the ability to look across the capital structure is an extremely important one. Most investors are not endowed and blessed with that mandate and they don't have that expertise. But I would say that that's an expertise which if you hone, you can be rewarded very handsomely because it lends itself to a more all-weather type of investing. And it leads me to my final point, which is a little bit related to that, which is be forward-looking. So much of the commentary I hear by investors, seasoned investors, is backward-looking. It's about the financial analysis which they've done. That's great, that sets you up really for the most important part of the investment journey, which is what's in the price. You can have a great investment call on a company, but if it's in the price, you're going to lose money or you're going to make very little. So I think the price you pay is almost more important than the actual standalone fundamental investment decision in itself. Of course they go together. But if I could summarize: invest globally, invest across the capital structure. Those are two experiences which you have to develop and you hone, you can't just dabble in them. But be forward-looking, what's in the price. There's a price for everything, but what's in the price?

Illiquidity can be a friend and not a foe. I think if you're managing a strategy which embeds honestly the underlying liquidity of those sub-instruments, then you arrive at a very honest answer as to what the capacity of your strategy is. So I think that should be the starting point. Once you have that, illiquidity can work in your favor. A very tight market which is quite illiquid can be very gappy, and that gap up or down can work very much in your favor depending on how you're positioned. So I don't look at illiquidity as a bad word. It is just something which has to be factored into capacity and the decision-making, but actually it can augment returns.

I am, and I'm pretty pragmatic about illiquidity because a certain asset class doesn't have a continuum of liquidity. Today as we speak, liquidity perfectly reasonable even though the markets are a little bit choppy. But you know, you have three down days in a row and suddenly that liquidity is going to halve. So I think you need to be pretty pragmatic about the fact that there is no single answer on liquidity. At the same time there are ranges, and as we've seen in March 2020, just to use a fairly recent episode, we moved from full liquidity to no liquidity in most fixed income assets, including even treasuries by the way, in a pretty short space of time. But fortunately that liquidity returned pretty quickly.

I'll answer that differently, because as I alluded to, our investment teams are multi-boutique and they will be very different. Some are long-only, some are very benchmark-aware, some are extremely opportunistic. So I'll maybe answer it because I think we're in an extremely unique situation following 12 years of easy money and a retreat from that. What's become almost a paradigm is proving to be very significant. I think it's taken the markets a few months to realize this. Inflation is clearly the most debated subject right now, and of course the key question is when will inflation peak. So I'm not going to go over those points because they're being extremely well debated and talked about right now as we speak towards the end of June 2022. But one thing I'm surprised which isn't talked about, I'm always interested in what people are not focused on. You know, I play cricket and I guess some people will play baseball. There's nothing worse than expecting as a batsman or a batter, expecting a certain kind of delivery. Let's say you're expecting a curveball, you're expecting a bouncer, but then you get a regular delivery and it gets you out. And I think the focus is quite rightly on when is inflation going to peak, when are rates going to peak. But there's very little on the second-order effects. I see very little commentary right now on are we on the precipice of a credit cycle. But I think that's an extremely relevant and important question to be asking in the context of funding costs rising materially and by a very large magnitude now. You very often hear the argument that rates moving from zero to three percent, that's still extremely low in a historical context. But if you think that many companies have had 12 years of rebasing and readjusting the entire budgetary and pricing process to that zero interest rate environment, I would argue that it is the relative and the delta of that move which is far more important than the absolute measure. Never get hung up with absolute measures. It's where we're going from and into. And I was in a conference in LA recently and I heard a very interesting statistic, which I haven't verified myself but it wouldn't surprise me, that in the US triple-C space, all things remaining equal, if funding costs were to rise by 300 basis points from where we were at the beginning of the year, we're pretty much halfway there, all things remaining equal, that would impact their net income and their bottom line by 90 percent. And that doesn't surprise me. They're triple-C rated for a reason. They have high leverage, that leverage is in the highest single digits rather than the mid-single digits. So for me, the question of are we on the precipice of a credit cycle, what is the relative strength of the corporate versus the consumer, our defaults remain very low and I think that's lulling people into a false sense of security.

Sorry, that's probably my Wi-Fi. I'm going to repeat that. You're right, so the low default rate is lulling people into a false sense of security. And I would say that these are questions which I think should be asked right now but are not being asked right now, and I'm a little bit surprised. But ultimately I just think that this is a structural theme around credit, the relative strength of the corporate versus the consumer. I think it's going to become topical in the weeks and the months ahead.

I think many investors are trying to, but the reality is that this inflation dimension has wrong-footed many, the interest rate move has wrong-footed many. So I think there is still a little bit of a hangover effect and a fixation on what has caught a lot of players out.

You know, I buy that argument to a certain point, and that maybe the cash buffer is higher. I think the average leverage metrics, the median leverage metrics on the investment-grade space, whether it's the US or Europe, probably looks in a reasonably healthy historic position. But again coming back to my original point, the delta is very important. Companies are rated as a reflection of their leverage and those financing costs, and of course if those financing costs are moving from zero to 300 in short shrift, that is going to impact and probably impact the lower end of the credit spectrum. So I don't think you're going to get a raft of defaults, and certainly not investment-grade falling angels in the dozen, but I do think in the lower end of the credit spectrum it's going to be particularly vulnerable. And I don't feel that we've experienced a material credit decoupling just yet. Spreads have moved, rates have moved, but the repricing of lower-rated corporate credit I think could be still much more meaningful and probably in the middle innings.

So how to distill a two-hour-long answer into two minutes. It's a matter which is close to my heart. I think in the world of finance, whether it's the sell side or the buy side, and in my 24 years to date, very often, not always, you see promotions to managerial levels which are a reflection of investment outcomes and performance but little else. And quite quickly you realize that that can be quite destabilizing to a culture and a team. I think there is, you know, the scrutiny quite rightly on management roles, on team head roles, is stronger than ever and the expectation on those individuals is stronger than ever. You know, you may have gotten away with it 15 years ago or 10 years ago, but right now I think that is rightly viewed as a responsibility and not a right and a privilege. And of course that lends itself to a culture that, it really depends on the size of the team you're managing. And I'm going to answer it in the context of my current role. I'm managing a large team of comfortably over 115 individuals. You can't do it alone. I view that as a partnership with my team heads, and it's so important that the team heads in place really should be exhibiting and adopting nurturing approaches to managing their team members. So nurturing versus narcissism, right? I know they sound like two very extreme words, but you can get those kinds of behaviors in our industry unfortunately as well. So I think realizing that you're not doing it alone, doing it in a collegiate fashion, relying on other team heads who have that nurturing mentality, the willingness to be able to allow that light to shine on their many team heads, is an extremely important starting point. And if it's not a starting point, you really want to be getting there as quickly as possible.

It's a great point, and that's far bigger than me. And I think that's one of the many beautiful things about Pictet, and I know this sounds like an advertisement but really it isn't, which is that's precisely why as a firm you can't create that culture unless your management, you know, that's the holy grail and that's what you should be aspiring to.

Just one route if it is suited to a certain kind of disposition, and of course, if you're a manager of an investment team, you really need to embody both virtues and approaches. But having a culture which supports, rewards, and gives visibility to specialists is extremely important. It should be an equally virtuous path to go the investment specialist route. Not necessary to choose actively; I want to focus on the purity of the investment and maybe managing smaller teams of just investors. So having a corporate culture which strengthens that being investment-led is extremely important, and we have that here.

The quality of talent is extraordinary these days. Our graduate talent pool is well-rounded with extracurricular pursuits. I look for two attributes: hard work and humility. I know it's hard to cover in interviews, but that's what I test for. Questions go off-piece; the process is collegiate with homework done by team members. Another key thing is homework on the organization. Go beyond the website; show you care. I can tell quickly if you've done a cursory glance or really researched. No excuse for not doing homework. Ultimately, I test for hard work and humility because more people are qualified, but character determines success and integration.

I'd like to get to that, but two final points on hiring. Hiring itself can be straightforward, but the bits around it are overlooked. The no's are important; I see a black-and-white approach in the industry, but no's are done piecemeal with little feedback. No's are important for realigning later. Also, what about exits? Not firings, but good individuals leaving. Understand why, beyond HI exit interviews. It's important to understand motivations. So, how you say no is important, and being an ambassador, and also for people leaving.

But Bilal, I interrupted you; you asked about younger talent. For graduates, the milk round can be disheartening, often a numbers game. Most will say no, even if you're awesome. Five people could be deserving, one gets it. Be different: instead of 15 CVs, send five with quality, do homework on institutions. Focus on quality over quantity. Once in, travel if possible for cultural diversity. Learn local languages; I regret not learning French earlier. As a graduate, don't assume everything is perfect; look for gaps and fill them. Take ownership, especially when wrong. Ask for things with solutions, not entitlement.

There is: cut and cut early. You often hear you never lose money by taking profit, but cutting losses is key. Be emotionless and ruthless when breaching trigger points. It's staggering how many investors are deficient in this. Teams need sparring partners. Also, it's easy to buy but harder to sell. In calamity, you can distinguish yourself. Identify shorts; credibility comes from avoiding landmines as much as picking buys.

It's the hardest battle; the biggest enemy is yourself. Behavioral finance considerations, but it's rare to self-regulate alone. More effective in pairs or smaller groups with respectful challenge. Create a culture for that self-check. Hard to exhibit ruthlessness consistently.

The simple answer is time management, saying no, but the deeper aspect is making decisions from health and mental clarity. We have different capacities based on well-being. The biggest hack is well-being focused: gut health, brain health, meditation, mindfulness, exercise, sleep, nutrition. That sets you up for competent decisions from strength.

It's hard, but influenced books were from my teens. Fiction: Aldous Huxley's Brave New World, read in early teens, a visionary dystopian novel from 1932, more relevant now than Orwell's 1984. Non-fiction: Liar's Poker by Michael Lewis about mortgage trading, a fun read, still a classic. And Arnold Schwarzenegger's Encyclopedia of Modern Bodybuilding—it taught flexibility and adaptability in training, inspired travel to meet bodybuilders, and the importance of training partners.

They can't easily, as I'm intentionally not on much social media. I'm on LinkedIn for information receiving but not active. I advocate in-person connectivity. I'm not difficult to track down.