Fund Founder Beschloss Warns Interest Rate ‘Regime Change’ Will Ruin Investing

(Bloomberg) — When the Federal Reserve ended a years-long policy of ultra-low interest rates, it upended expectations for investments, according to Afsaneh Beschloss, founder and chief executive officer of RockCreek Group.

“There is a regime change in interest rates, which means that those things that worked in the last 10 years are not going to work in the next 10 years,” Beschloss said on an episode of Bloomberg Wealth with David Rubenstein.

The Fed slashed interest rates during the 2008 financial crisis and maintained them at low levels until inflation began surging last year amid supply-chain problems, the Ukraine war and pent-up demand for services following the Covid-19 pandemic.

While higher rates have yet to spur a recession, the tighter monetary policy was a major impetus for the collapse of several US banks and has helped create a liquidity crunch.

Beschloss pointed out that the 5% interest rate for Treasury bills is “quite a high rate” and makes things easier for investors who might have limited options.

“Today it’s an easier decision than it was maybe two years ago because Treasury bills are 5%,” said Beschloss, answering a question about where somebody with $100,000 should put their money. “I would say regardless of how much risk you want to take, you have to put a portion there.”

Interest rates aren’t the only factor investors should consider.

“We’ve been big investors in emerging markets,” she said. “At the same time, today we’re being very careful about investing in China. A lot is changing in addition to interest rates that determines our investments.”

The Iranian-born investor founded Rock Creek in 2003. The firm, which manages more than $15 billion, invests across sectors, with a special focus on climate, affordable housing and education investments in developed, emerging and frontier markets. 

Beschloss previously worked at the Carlyle Group (NASDAQ:), which Rubenstein co-founded, as well as the World Bank and at JPMorgan Chase & Co. (NYSE:) At the World Bank, she pioneered energy investments and policy work on areas including sustainable investing, renewable energy and infrastructure to reduce carbon emissions.

In her interview with Bloomberg, Beschloss discussed the transition to green energy, weighed in on a potential recession and shared how women can enter the investment world. 

For more insights from the biggest names in investing, watch Bloomberg Wealth With David Rubenstein. Beschloss’s interview airs June 27 at 9 p.m. New York time on Bloomberg Television. The interview, which was filmed on June 15 in New York, has been condensed and edited for clarity.

Your view, and the view of many others now, is that you can get a good rate of return and maybe even a better rate of return if you worry about social impact. Is that fair?

It is fair. A lot of the things that we’re calling “social impact” — I would put that aside for a second, but let’s say just sticking to climate or environment, they are real risks. They’re affecting us every day. In New York, we could not breathe last week.

In Washington we could not breathe just because of the wildfires in Canada. So the point is we’re all interconnected; the climate is one thing that connects everybody across the globe. 

And if we don’t do something about it, it brings down the value of all companies. So how could you be investing in a company without looking at that risk, just like you’re looking at any other risk?

You invested in energy at the World Bank. How did that come about?

When I came to the World Bank, I decided to go to the energy department. My boss happened to be a woman by coincidence, the fastest-risen woman at the bank at the time. I told her my work at Oxford had included looking at . 

I said, “There’s so much coal getting used in India, in China, in a lot of these emerging economies, and we should do something about it.” 

So at that time, I went and hired this whole bunch of lawyers and engineers from Gaz de France, British Gas, Tokyo Gas — people who were experts on the subject. And we started a department to invest.

The phrase “energy transition” is commonly used today. What do we mean by “energy transition,” and how realistic is it that there’s going to be an energy transition over the next five years, 10 years, 15 years?

It’s happening as we’re speaking. The cost of solar and wind has gone down hugely. In fact, I was in Texas about a year ago – Texas, as you know, is the second-largest investor in solar, the first-largest investor in wind energy in this country. I was in a meeting with a lot of both Republicans and Democrats – oil company executives and scientists, and if you closed your eyes and did not look at who was who, they all had one big problem: permitting. 

The problem in terms of moving is not the economics, because the economics of solar and wind has changed a lot compared to 25 years ago when I started working on this stuff.

What also has changed – which is positive – is new innovations coming into the market. All the research that’s going into hydrogen or other kinds of fuels. However, it is a transition.

Our biggest gridlock right now is exactly that – the grid. So the problems that you have are not technological problems. They’re not financial problems. It’s really getting the grid, and getting either utilities, or the public sector or the government to come in and spend some of the Inflation Reduction Act a little faster to build out the grid. So energy transformation is happening right now. It’s just the speed could be much, much faster.

Are you worried that we’re going to go into a recession in the next year or so in the United States?

I think it’s going to be probably a softer landing. Wages are still creeping up, which I actually don’t think is a bad thing, because more growth in wages means people will spend more, spending more means higher growth in the economy.

As you look at high inflation that we’ve had and now high interest rates, do you change your investment approach? 

Obviously, we’re coming off a period of very low interest rates. Five percent for Treasury bills, three-month and six-month and one-month Treasury bills is quite a high rate. Commercial paper is very high. So when you look at investments, you still want to look long-term. 

But you have to see that there is a regime change in interest rates, which means that those things that worked in the last 10 years are not going to work in the next 10 years, because of interest rates being one factor, but so many other things are changing also.

What kind of rate of return are you trying to get for your investors? I realize investors have different perspectives, but generally if somebody invests with you, they can expect a rate of return of roughly what?

We have different things that we’re doing. We have two businesses. One is our private funds that are investing in energy transformation and those will be like a growth equity type of investment in clean energy or in reducing water use. Those would be like any other growth equity private investment. Sort of 20% plus.

For our investors who are investing in what we call “multi-asset class” or “outsourced chief investment officer services,” it will be basically a 70/30 market — 70% equity, 30% bonds. And then making sure that goal is met. Plus, the fact that we have inflation, they can still spend 5% of their endowment. So that generally ends up being something closer to 8% rate of return.

Is it harder to build a firm then or today if you’re a woman, or if you’re an immigrant, or a woman and an immigrant? Which was the more complicated factor, if any?

I think being a woman is still very hard, I find, going into meetings. I see mostly men, and that has been something consistent in my career, whether it was energy, whether it was finance. I’m doing a lot of work in clean energy and renewable energy right now; a lot of the companies are also run by men. 

The evolution has been slower than you would expect. You see many more immigrants, both men and women, at the helm of many companies.

Today in your firm, how many employees do you have and how many are female?

Close to about 100. About half are women, and women are across the firm. They are in very senior positions, heading investment areas as well as other areas of the firm. Also another kind of balance is racial. We have a firm that is 75% plus diverse when it comes to its advisory board, to its staff, to its management team and ownership. 

What do you find appealing about the investment world? And would you recommend to young women who want to make a mark in the world that they go into it?

I think investment is a great area for women, and you can do it in different ways. You can be looking at running your own firm, where it’s easier these days.

Venture is an area in which smaller firms can thrive. You can start with $50 million, you can start with $100 million in assets, or even smaller. So it’s an area for women or people of color to start. And what we have seen is very interesting.

We do a lot of work on data, and we’ve always had a lot of quantitative people and computer scientists on our team. What we’re finding is that if you look at the last 10 years, the number of women who have started venture funds or been innovators themselves and entrepreneurs is increasing quite rapidly.

Do young people who want to go into the investment world need an MBA or some other degree? What’s the best training to be an investor?

I think the MBA is a little bit of an old degree the way it’s designed right now — unless they change this curriculum so that when you come into the program you learn about things like innovation technology in a real way, and they mix finance with technology. 

It’s not just about networking. It’s also about what you can create and sort of improving the creative process. I think it might be a big investment of financial resources for not a huge addition to your income in future.

I think people should see what area they’re interested in. If they’re interested in energy, go learn about that. Maybe take some courses on that. You don’t need to do a degree program anymore. 

What is the most common mistake you have observed investors make?

I would say hubris and thinking you know more than you do. If you’re investing in somebody else’s company or somebody else’s fund, you know so much, but you only know one or two layers.

You have to think about the risks and come up with scenarios of what could go wrong under even good circumstances. So as you’re creating your portfolio, look at risk as well. Don’t just get excited about the return.

What’s the best investment advice anybody’s ever given to you?

Continue to learn about innovation in whatever you do, because that is where returns will go.

©2023 Bloomberg L.P.

Source link