Some of our favorite clips from interviews with portfolio managers, economists, and investment researchers.
Hi, and welcome to The Long View. I’m Dan Lefkovitz, strategist for Morningstar Indexes. In this episode, we’ll share some of our favorite clips from 2025 interviews with portfolio managers, economists, and investment researchers. It’s a companion to Christine Benz’s “Best Of” episode featuring highlights from conversations with financial planners, advisors, and retirement researchers. We’ll begin with some prescient words from Hendrik du Toit, co-founder of global investment manager, Ninety One, who spoke to Christine Benz and me at the start of the year from Cape Town, South Africa. Hendrik talked about the appeal of emerging-markets investments, both debt and equity, asset classes that went on to have good years in 2025.
“Hendrik du Toit: ‘Small Things Can Make a Big Difference,’” The Long View podcast, Morningstar.com, Jan. 21, 2025.
“Cliff Asness: ‘The Problem Was Never Beta. The Problem Was Paying Alpha Fees for Beta,’” The Long View podcast, Morningstar.com, July 29, 2025.
“Vincent Montemaggiore: ‘The Two Best Defenses Against Tariffs Are a High-Gross Profit Margin and Pricing Power,’” The Long View podcast, Morningstar.com, April 15, 2025.
“Louis-Vincent Gave: ‘The Future Is Being Built Over There,’” The Long View podcast, Morningstar.com, Feb. 25, 2025.
“Jason Zweig: Revisiting ‘The Intelligent Investor,’” The Long View podcast, Morningstar.com, May 27, 2025.
“Mike Pyle: Looking for Uncorrelated Sources of Return,” The Long View podcast, Morningstar.com, Oct. 14, 2025.
“Neal Shearing: The World Isn’t Deglobalizing; It’s Fracturing,” The Long View podcast, Morningstar.com, Aug. 26, 2025.
“Sudarshan Murthy: ‘These Countries Are in Much Better Shape Than They Were 10 Years Back,’” The Long View podcast, Morningstar.com, March 25, 2025.
“Joe Davis: How to Capitalize on ‘Megatrends,’” The Long View podcast, Morningstar.com, Sept. 2, 2025.
“Callie Cox: A Student Teacher of Financial Markets,” The Long View podcast, Morningstar.com, Nov. 11, 2025.
“Brian Selmo: ‘Winning by Not Losing,’” The Long View podcast, Morningstar.com, July 15, 2025.
“Daniel Rasmussen: ‘Be Very Wary of Illiquid Asset Classes,’” The Long View podcast, Morningstar.com, May 6, 2025.
“Eric Jacobson: The Entire Face of the Bond Market Has Changed,” The Long View podcast, Morningstar.com, Nov. 25, 2025.
“Barry Ritholtz: ‘How Not to Invest,’” The Long View podcast, Morningstar.com, Oct. 7, 2025.
“John Rekenthaler: ‘The House Is With You When You’re Investing,’” The Long View podcast, Morningstar.com, Jan. 28, 2025.
(Please stay tuned for important disclosure information at the conclusion of this episode.)
Dan Lefkovitz: Hi and welcome to The Long View. I’m Dan Lefkovitz, strategist for Morningstar Indexes. In this episode, we’ll share some of our favorite clips from 2025 interviews with portfolio managers, economists, and investment researchers. It’s a companion to Christine Benz’s Best Of episode featuring highlights from conversations with financial planners, advisors, and retirement researchers. We’ll begin with some prescient words from Hendrik du Toit, co-founder of global investment manager, Ninety One, who spoke to Christine Benz and me at the start of the year from Cape Town, South Africa. Hendrik talked about the appeal of emerging-markets investments, both debt and equity, asset classes that went on to have good years in 2025.
Hendrik du Toit: Particularly in the world of an incoming Donald Trump emphasizing US exceptionalism, a world of a strong dollar that we live today. By the way, a decade and a half ago, we didn’t have a world of a strong dollar. We were a decade-plus ago. In the decade before this decade, emerging-markets equities outperformed developed-market equities. There’s a cycle. There’s a cycle in the world. And I just think if you’re a global investor and a very long-term investor, you’ve got to access all the sources of return, or as many of them as possible, if the price is right, wherever possible, because then your portfolio is more diversified, particularly hedging yourself against regional risks. We just look at the value of destruction that’s happened in Eastern Europe with the Ukraine war. That’s on the borders of Europe.
So, one has to spread. And we currently live in a world where everyone thinks you’ve got to have everything in America, and that’s the only game. Now, the most expensive bet in life is to be short of America, but it doesn’t mean your entire portfolio should be in the US because there are also challenges. And so emerging-market debt is just providing you with both a government, but also corporate borrowers who are willing to pay most of the time, not right now actually, but most of the time a substantial premium over what developed-markets offer. And often the risk is priced in there, and you can actually get a pretty good return. I look at how many people made in Argentina in the last year, that was supposedly a basket case. The government followed through on its cost-cutting and on its belt-tightening, and then you made a good money.
You lost money in the last few days in Brazil because for exactly the opposite reason. So, I just think it widens your investment universe. It gives you access to substantial economies. Fifty years ago or 30 years ago, the emerging economies were really small. Today, the second largest economy in the world, the largest on a purchasing power parity-adjusted basis is China. India is substantially larger than Germany, on a purchasing power parity-adjusted basis, Brazil is like 200-million-plus people, is a substantial economy. Mexico, just south of your borders. And these economies are going to challenge the alternatives we had, which are the G7 economies, whether that’s Italy or France or so. And one needs to start to learn how to operate in these markets, how to capture opportunities. But in the world we live in, the ultimate risk-free rate remains the US Treasury. So, you start there.
But it is absolutely necessary. And also, great companies, we just mentioned Tencent. There are many other great companies that have been built from—I mean, this week here in South Africa, a new unicorn was created by a digital bank. But the investment came not from the US or a pension fund in Canada or something; it came from Nubank in Brazil, which is a phenomenal success story. One of the most modern, most digital banking groups in the world. And if you’re going to read about Nubank, you’ll get very excited. And if you didn’t invest in it, you’ll feel very, very sorry that you didn’t because it was a massive value creator. So, these great businesses are being built by people in countries which are not daily, if I’m talking to savers or financial advisors from the developed world. This is not something you everyday learn about.
And what Ninety One offers is we offer access in a very disciplined and structured way to these opportunities now. If I can bet here, the last 10 years, emerging markets didn’t have a good run for a variety of reasons, not least of which was the way interest rates were managed in the developed world. I think if you look ahead, we live in a world of 8 billion people. One billion of them are rich, old, and white. And there are 7 billion people on the march every day trying to improve their lives. And if you go travel Asia, and in particular you see it, you want to have a slice of that action. That is what emerging markets did or equities would provide. And I think it gives you diversification against the old tried and tested formerly. But that doesn’t mean that America isn’t a great place to invest in.
Lefkovitz: Sticking with the global investing theme, we spoke with Cliff Asness of AQR Capital Management on the valuation argument for international equities.
Cliff Asness: The rest of the world is cheap compared with the US. Here, I’m using cheap like a quant, just considerably lower multiples. Obviously, there’s a level of US superiority in growth that can justify a higher multiple. But the US has definitely outperformed the world for a long, long time. Let’s call it a quarter of a century. I like saying that instead of 25 years, I think it has more gravitas. But I’ve written on this, Antti Ilmanen at AQR has written on this. You can do it different ways and get slightly different answers, but call it 80%, 85% of the US’ victory has come from multiple expansions. So, pick your favorite one. Let’s use the Schiller Cape. I’m not claiming that’s the be-all, end-all method of valuation. Don’t hold me to the specific numbers, but if 25 years ago, the US was considerably cheaper than global stocks, it is now considerably more expensive on this measure. That has driven, again, the lion’s share of US outperformance, not all of it.
Again, that 15% to 20% that’s unaccounted for, that is the US actually being exceptional over this period, actually growing earnings, whatever cash flow, whatever measure you want to look at—better than the rest of the world. So, the US’ victory is not 100% from revaluation, but it is 80% from revaluation. And now the US is considerably higher priced. So, at the very least, I prefer a diversified portfolio around the world. Looking at it and saying I assume the US will win by the same margin in the next 25 years as it did in the last, is basically saying we’re going to see extreme multiple expansion on a relative basis—US against the world—from here again, which would take us to stratospheric differences that we’ve never ever seen. And I think any level of growth differential would find it very hard to justify. If one is more of a mean-reversion believer, maybe you want a little more global—that is a pretty low Sharpe ratio bet. Pure value to do country selection is not how I’d want to make most of my living. But it is something I would take a very small amount of risk on.
Sorry, long-winded answer to a short question. I do see it as a value bet. But I think there’s some interesting aspects. I think people maybe overextrapolate what we’ve seen the US do in the last 25 years, not realizing how much of it has come from people just willing to pay more and more for the same fundamentals in the US compared with other places.
Lefkovitz: On the fundamental side of global equities, we spoke with Vincent Montemaggiore, Manager of the Fidelity Overseas Fund, about strong returns in early 2025, specifically from European markets.
Vincent Montemaggiore: There has been a rotation out of the US. I can come up with some reasons as to why that is. It’s very hard to know if it’s sustainable, and I don’t claim to have a strong opinion or view there. But there are some things changing on the ground in Europe. And I think part of it had to do with that. So, one, I do think that the US was probably a little bit crowded and a little bit expensive coming into the year. Now, again, there’s been big selloffs. So, things are changing rapidly. But when you overlay that with an index that had rerated in the US, where we were kind of at our average key over the last 10 years in EFA, I think there was a valuation argument that you can make that was maybe high relative to where we’ve been at any point historically.
So, I think when you have those types of valuation markets, it’s just easier to see money flow from one market to the other. But even more importantly than that, on the ground, you’re seeing some change in Europe for the first time in a long time. So, the US is having some fiscal austerity with DOGE and cutting government projects and trying to balance the budget. In Europe or Germany, Germany has one of the best fiscal balance sheets or sovereign balance sheets in the world. They’re at 80% of GDP, plenty of room. But they haven’t expanded their balance sheet. They haven’t had fiscal expansion in 10 years or 15 years. So, they are now going the other way. The elections kind of prove that the people are OK with this or OK with letting some of the purse strings loose. They’re spending on infrastructure, spending on defense, reducing that austerity mindset. And I think that is positive for European growth, at least in a relative context, versus some other parts of the world.
In the other part of that, so that absolutely has ramifications for companies that are in the industrial sector, in the building products sector that sell products into some of the infrastructure spending, and then obviously the defense sector. And the fund has exposure to all three of these categories in Europe, which, again, things are changing with the tariffs on a daily basis, but I still think are going to be a relatively better off place to be in Europe, just given the visibility we have on that fiscal expansion in Germany and how it will trickle down and have a multiplier effect. But the second thing also is when Germany starts spending, and we saw this a little bit in the boon yield, you’re going to start seeing rates back up, or at least stay higher for longer. Now, obviously with recession risk, that’s a counteracting balance to rates. So, we’ll see where we end up. But all things equal or all things being considered, it is likely that rates are going to be higher, and we’re never going back to negative rates, like we saw for 10 years in Europe. And that has ramifications for banks and insurance companies in Europe. These are big parts of the market, and they are very sensitive in terms of the return on equity that can generate, depending on where the yield curve is and where rates are. And it does feel likely rates are going to be higher. So those two sectors probably have a lot of earnings power, a lot of capital return, and very attractive valuations, and that’s helping a little bit of that European market burst, the US dynamic that you mentioned so far year to date.
And then the last one we mentioned was defense. Obviously, they’re going to spend a lot on defense. I think that there was a bit of wake-up call that they don’t have the US to rely on the way they maybe they had for the past 10, 20 years, and they’ve had decades of underspending, so not only do they need to get back to baseline, they probably need to go above it for a period of time to rearm Europe, which is currently spending about 2% of GDP on defense, and that could go north of 3% over the next 10 years. So, lots of visibility and a lot of spending there. So those are just some—again, it’s all bottom up for me, but there are some kind of big tectonic plates that are shifting that haven’t moved in a while that are positive for sectors and businesses within Europe, and I think that’s part of that rotation.
Lefkovitz: Turning to Asia, we spoke with Louis-Vincent Gave from his base in Hong Kong. Here is his reaction to the widespread view that the Chinese market is “uninvestable.”
Louis-Vincent Gave: Oh, I think it wasn’t so far back that people were saying China is uninvestable. And to be honest, most people I meet with still believe that. And look, I think people believe China is uninvestable for lots of different reasons. But perhaps the number-one reason is that when China started to open up to the world 20 years ago or so, there was a lot of excitement because it is an exciting story, because there’s a lot happening. And a lot of people invested a lot of money in both Chinese equity and Chinese real estate. And frankly, while the GDP growth of China has been very impressive, the returns to investors have often been pedestrian. And so, when you contrast the return stream of the past, say, two decades to all the work you had to do, the due diligence, the risk you took by going so far away. A lot of people have decided that, you know what, this wasn’t worth it. The returns just weren’t high enough. And perhaps to your point they started deciding that in the past 18 months, pretty much just in time for the Chinese equity markets to start rallying and to start outperforming all others.
But I guess that’s always the way things go, right? I was once told that in financial markets, if you can sell something, you probably don’t want to buy it. And, at least China has that going for it today, that if you try to sell it—even though, again, in the past 12 months, China has been the best-performing major stock market in the world—most people have very, very little interest as of right now.
Lefkovitz: The early part of 2025 saw sharp drawdowns in the stock market, prompted by the Trump tariff policy. My colleagues Jeff Ptak and Christine Benz spoke to Jason Zweig, author and Wall Street Journal columnist, for some historical perspective.
Jason Zweig: To some extent, every big setback in the market is unprecedented, but this one feels more unprecedented than usual, right? I mean, certainly with covid, you’d have to go back to, oh, I guess 1918 and the influenza pandemic, but then you’d have to disentangle that from World War I. Here you have to go back roughly almost a century, maybe to 1930 in the Smoot-Hawley Tariffs, but you have to disentangle that from the Great Depression. The unprecedented nature of this, the unilateral sort of out-of-the-blue, enormous magnitude of these tariffs and the reversal of 80 years of global trade policy doesn’t really give us any past reference points, nor is it easy to project what will happen in the future because there’s so many different ways this could unfold from a total retraction by the Trump administration to wide negotiation by other countries to intransigence on every side.
So, it’s very difficult to find any historical precedent that is a clear pattern for what we can expect. So, I think investors need to rely on really basic questions as they try to put this in context in historical and psychological and investing perspective. And I think you have to ask yourself questions like, what do I own and why do I own it? Which is the famous question that Peter Lynch popularized. If you have most of your portfolio in stocks, you should ask why? Why do I have most of my money in stocks? And the answer probably isn’t contingent on economic policy. I think you also have to be very careful to evaluate what you mean when you say or feel that you have losses in your portfolio because if you’re a longtime investor, you surely paid much less for your holdings than they’re worth today, even after a 15% or 20% decline. So, what we all need to do is go back to basics but also pause to think and not shoot from the hip because it’s very easy to get panicky at a time like this. And the one thing history does show is that that is not conducive to good decision-making.
Lefkovitz: Stocks rebounded after April. We asked Mike Pyle of BlackRock for his views on market volatility. He contrasted the bullishness surrounding the equity market to the weakness in the US dollar.
Mike Pyle: Clearly, when you look at the US equity market, obviously March and the start of April were very volatile. Those very volatile periods saw a significant pullback, but we’ve obviously seen a very substantial rally since then. And we’ve got US equities up on the year. In some ways, I think that’s at core about exactly what I was talking about a moment ago, about the importance of the AI transformation around the extent to which US companies are leading the way in defining that. And investors around the globe, in the United States and beyond want exposure to that theme, to that transformation. And I think that that is a large part of why you were seeing the positive equity market performance that we’ve seen since the lows in early April.
You look to another part of financial markets, for example, look at the US dollar, there you see a somewhat different story. The dollar sold off alongside US equities in March and early April. Pretty unusual behavior, typically, you think of risk-off periods in stock markets as being positive for the dollar as investors look for that flight to quality. That’s not what we saw in March and April. We saw the dollar pull back. But interestingly, even as stocks began to find their footing and rally again, we continue to see the dollar weaken through April, May, June before finding, it seems, a more stable footing for now in July. And so, I think that that divergence is really interesting because on one hand, like I said, I think the equity market performance is at core really about that AI transformation megatrend.
I think in the dollar, you see a more traditional set of macro forces, you see concerns around the inflation dynamic in the United States. You see concerns around the fiscal trajectory in the United States. You also see changes, I think on the margin around investor behavior globally. Traditionally, the past couple of years, they’ve been willing to take those dollar exposures on an unhedged basis when they invest in US equities. I think investors globally are being a little more cautious about their hedge ratios today. And I think all of that adds up to—again to the point of your question—a slightly different perspective, depending on the market you’re looking at. And in some places seeing that uncertainty, and in other places, considerably less so.
Lefkovitz: Artificial intelligence, the dominant investment theme of our times, was a recurring topic on The Long View this year. I asked economist Neil Shearing for his views on AI and how it ties into the theme of his recent book on global economic fracturing.
Neil Shearing: Yes. So, I think in general, I would characterize myself as an AI optimist. We’ve done a large amount of work at Capital Economics looking at the economics of AI, and all of that points to AI having the characteristics of what we might call a general-purpose technology. These are technologies with broad applications in different sectors, and importantly, they tend to be technologies that deliver large increases in productivity. So, think about steam power, think about electricity, think about the internet. Those are all classic GPTs, general-purpose technologies. And I think this latest breed of large language models that has been the vanguard of the AI revolution, but by no means the only part of it, I think these can be considered to be general-purpose technologies.
So, in general, that therefore means we should be expecting this to deliver a boost in productivity growth globally. The question is, when does that productivity growth arrive? How big might that productivity growth be? And how, as you say, might that be affected, the dissemination of that be affected by these forces of fracturing that we’ve just been discussing?
Now, when does it arrive? We’re starting to see some evidence. If you dig deep enough in the US data of it having an impact on the US economy, but it’s still pretty small at this stage. So, I think it’s still mainly a story for the second half of this decade and the early 2030s. How big could it be? Well, I think it could be pretty big actually. It could increase productivity growth by about 1 to 1.5 percentage points a year in the decade after widespread adoption, according to some of our estimates, so potentially pretty big.
And how does fracturing play into this? This is the really critical part. When you look at the countries that are best placed to benefit from AI, you need to think about three things. The first is their ability to develop the technology. The second is their ability to diffuse the technology. And the third is their ability to adapt to the technology, because this is going to be incredibly disruptive. It’s going to create new jobs that we can’t conceive of right now. It’s going to destroy entire sectors but also lead the new sectors to thrive. So, you need to have incredibly flexible adaptive economies to reap those benefits.
Why do I belabor all these points? The point is that on all of those fronts, the US is the leader. Its ability to develop the technology, well, it’s US firms that are developing the large language models, but also firms in countries that are aligned with the US using US technology that are producing the hardware and the technologies to support those, not just chips, but also other computing power in data centers. If you think about their ability to diffuse the technology, we’re seeing increases in investment around AI, primarily in the US to a far greater extent than we are in other countries. And the US has perhaps the most adaptable economy in the world, incredibly adaptable labor market and product market.
There are two issues as it comes to fracturing. I think the first is that we start to see the US curtail China’s access to some of the US technology in the AI space, therefore forcing China to develop its own technology. We’ve seen that with DeepSeek. It will get there, I think it will do that, but it will perhaps take longer than would otherwise be the case if it had access to technology. And the fact it’s getting there is also now starting to generate this discussion in the US about, well, actually, should the US just accept the technology controls are porous, they don’t work and allow China access to its technology and therefore generate some strategic leverage by getting US technology into the Chinese ecosystem. So, I think that’s a really important debate to pay attention to.
And the second important issue is the extent to which some of the policies being pushed by the Trump administration, frankly, diminish the adaptability and the flexibility of the US economy. If you think about labor market reforms, the immigration clampdown, that makes it harder for the US labor market to adapt to some of the challenges posed by AI. If you think about some of the incoherent, inconsistent, we might say, approach to different industrial policies and tariffs, that makes it harder for US firms to invest around some of this technology. So, two big risks there, I think, for the US.
Lefkovitz: On the investment implications of AI, we spoke with Sudarshan Murthy of GQG Partners, who presented a measured outlook.
Sudarshan Murthy: One is, as with any new technology, and generative AI being one, there tends to be a typical hype cycle and then people start getting worried. And that’s natural. When you look at the iPhone, when it was first launched, at that time it was just a better Nokia phone. The true power of the iPhone emerged a couple of years later when you had new apps like Uber, Lyft, and so on. So, any new disruptive technology, it takes time. So just like for the iPhone, mobile native business models took a while to emerge, it’s likely that in generative AI, AI-native business models will take some time to emerge. But at the same time, when we talk to companies and large companies and so on, they’re still talking about how they’re going to use AI to cut costs, be it programming, sales force, call centers. But very few companies are talking about how they can use AI to generate revenues. But that’ll happen. And it’s just a question of time. There’s nothing wrong with that. And from what we can tell five years from now, it’s likely that generative AI will have a big impact on the world. But there could be air pockets for the next one to two years.
Lefkovitz: Joe Davis, chief economist at Vanguard, offered more perspective on AI, including a fascinating prediction regarding the unexpected investment beneficiaries of transformative technologies.
Joe Davis: And this was a surprise. I didn’t know this and it’s not infallible like motions of the tide, the ocean. If the tide is going out, they’re definitely coming back in. But I think the odds are tilted that way. And what was a surprise to me is that there’s stylistically, so very loosely, there’s two phases to a technology cycle. So, first of all, you have to know that you’re actually in a transformative technology cycle. Like, did I know in 1992 that personal computer—know now a personal computer was transformative, but did I really know in 1992? Probably not. Our system, our data-driven framework, gives you a modest sense, but with uncertainty in real time in 1992, because of the signals it picks up. Today, it says we’re certainly likely to be in this extended technology cycle, which means there’s a general-purpose technology likely to emerge.
Now, in periods when they happen—I wish we had hundreds of those examples, Dan, we just don’t. You have electricity, you have combustion engine. And people, even economists, debate what a general-purpose technology is. Just because we use something a lot doesn’t mean it lifted everyone and fundamentally changed society. Like the microwave oven, it’s a new technology. It’s not a general-purpose technology. However, we are in that, and our odds are more likely than not that AI is a general-purpose technology. What happens is there’s—what I was surprised to find is that there’s two phases to the technology cycle. The first phase is what I call just the production of the technology. It’s starting to spread, there’s a massive investment into the space. A lot of new businesses are formed trying to produce the technology. It was in the personal computer. It was hardware, software, some of the dollop internet. I’ll use that as an example because it makes it tangible.
And some will say, oh, there’s a bubble that emerges. I don’t know. I mean, yes, generally enough, I don’t want to make that claim. And that’s really almost immaterial to the second half. What emerges in the second half of the investment cycle is what was surprising to me and gets to your question, Dan. And if this technology is that transformational as we think it is, it starts to benefit companies through higher earnings, to productivity, to new products with that technology as a platform. I’ll give you two examples.
So, in the personal computer, now I know with benefit of hindsight, things such as online shopping, companies that sell it all, I don’t know, books and music ended up being 4% of the company—I’m trying not to use company names, but you can think of like the jungle, Amazon emerged. But that was not technically a technology company by the true letter of the law. It was consumer staple. With electricity, guess what powered the assembly line? Well, two winners emerged. They were called Ford Motor Company and General Motors. Now electricity didn’t lead to their profitability, but without those disruptive technologies, I don’t think we’re talking about those companies today. So, it’s spread to sectors outside of electricity on the one hand and computers on the other. But that’s how technology works. And if it’s not that transformative, then it hasn’t lifted growth, then it’s a dud to begin with.
So, that’s what was surprising to me is that if we play out—and you have to give this five or seven years, and again, the irony is that outside of the tech sector, parts of those investing universes don’t have the multiples that say the Mag Seven or the technology stocks do have. And I’m not saying they’re not delivering value. I just said that this AI has the likelihood of being as transformative as a personal computer. That’s pretty high praise. But what it says is that if it is truly this transformational, other opportunities emerge, and that’s where it pushes you at the margin, given the multiples outside of value and outside of the United States. It’s not being skeptical on technology. Quite the contrary. It’s actually saying, no, if this thing has legs, then it’s going to spider web into outside of Silicon Valley.
Lefkovitz: Sticking with the AI theme, my colleagues, Ben Johnson and Christine Benz, interviewed Callie Cox of Ritholtz Wealth Management. She sounded notes of caution on how AI has shaped the US stock market and the consequent risks for investors.
Callie Cox: One thing you should know, and it’s hard to put your finger on an exact number here because every ETF is different and they follow different strategies or every fund is different. But what you should know, if you’re invested in a no-fee hypothetical S&P 500 fund that just tracks the market caps of the stocks in the S&P 500, about a third of your portfolio is invested in these ‘Magnificent Seven stocks at the moment. You are very, very tech heavy whether you realize it or intend to be or not. And just having that piece of information can help inform you as to what you need to add in or what you need to tweak in your portfolio to make it a little more attuned to your own risk tolerances.
What you do there is ultimately up to you. There are value funds that you can look at. There are dividend stock funds you can look at. There are defensive funds you can look at. So, what that could look like in your portfolio is maybe trimming a little bit off the top of those S&P funds or those passive funds to an allocation that you pinpoint beforehand. I wouldn’t do this by feel. Maybe rotating it into more defensive and value stocks. As time goes on using calendar-controlled strategy, I’ll sell a little bit this month and rotate it into this fund. And also considering that there are assets outside of the stock market. There are bonds, there are gold, there’s cash. If you have short-term spending needs coming up, then it can’t hurt to take some chips off the table and sell a little bit of your S&P fund to move it to cash to pay for those spending needs. But just know that you have a lot of options outside of the S&P fund, and right now, the S&P by nature is getting—it’s getting riskier at a time when the economy is slowing. So, it’s probably smart to be a little more tactical and active on that front.
Lefkovitz: On the topic of neglected areas of the stock market offering upside potential, we spoke with Brian Selmo, a portfolio manager for First Pacific Advisors, on why he’s finding opportunity among companies with smaller market capitalizations.
Brian Selmo: If we look over the last year, we have been very much net sellers of large- and megacap companies and buyers of mid-cap companies. And I think there’s probably—there’s always idiosyncratic reasons, but it feels like there are maybe some larger drivers of that. I think that’s sort of the natural buyers of mid-cap companies, whether it is active mutual fund managers or long-short hedge fund managers. I think that those managers have seen tremendous outflows from their strategies over the last 10 or 15 years to a point where the industry is almost dead. And where you’ve seen a lot of inflows is, one, as a competitor to buying these businesses would be private equity. But private equity has probably been a little bit out of the market the last year or two because of the increase in interest rate. And then, also sort of failure to recycle capital and maybe a little bit of limited appetite.
But the other issues have been the huge flow into passives. And that tends to disproportionately go toward large- and megacap companies. And then I think the other bit is the dominance of pod shops in terms of trading flows and just assets under management over the last decade. And those are, at least as I understand it, on the equity side, they’re not really natural holders of companies with lower levels of liquidity because in order to run the kind of perfectly hedged neutral model, you really need to be able to get in and out of positions pretty quickly. And so, when you have a lot of the market move away from being, call it, bottom-up fundamental long-term holders, I think that’s creating an opportunity. And it’s an opportunity that we’re very, I think, well situated to take advantage of. And it’s something that we’re pretty optimistic about over the next, call it, three or four years or until something else changes.
Lefkovitz: Private markets were another recurring theme on The Long View this year. I interviewed investor and author, Daniel Rasmussen, on why he thinks investors are over-allocating to private equity.
Daniel Rasmussen: I think that one of the elements of meta-analysis is to look for correlated beliefs. What are places where everybody seems to agree, but where they might not be right, and where maybe logic and first principle suggest that they aren’t right. And private equity is a place where, if you think about the profit share of private equity companies, the share of the total aggregate profit created by private firms relative to publicly listed firms, they’re probably about 2% to 4% of the aggregate profit pool. Right now, private equity folks will always say, well, there are huge infinite number of private companies and very few public companies. And so, the opportunity set is much bigger outside of the public markets. The problem with that is that the private companies are much, much, much smaller than public companies. And it takes, yes, there are thousands and thousands of dry cleaners, but add up all the dry cleaners in the world, you don’t even get to one Facebook.
So, the number of companies doesn’t matter. It’s the aggregate profit share. And that’s again, quite small. And private equity deals are micro-caps generally. The median market cap is less than $200 million, about $180 million. And again, micro-caps as a corner of the public equity market are tiny, tiny, tiny. Single-digit percentages. And yet you’re seeing very sophisticated investors—endowments, foundations, even pension funds—putting 40% of their money in private markets. This is a massive, massive overweight of micro-cap companies in their portfolios. So, first of all, there’s a flood of money, an excessive amount of money relative to the opportunity set flowing into this space.
The second part is around risk. If there’s one thing we know about really small companies is that they’re distinctly more risky, distinctly more risky than large companies. They’re more likely to go bankrupt. They’re less diversified. They’re more volatile. And the next thing that we know is that private equity deals are leveraged. They borrow a lot of money. And so, you’re looking at leveraged companies, very leveraged companies that are very small. You’re looking at a very, very, very risky set of companies.
And so, to take 40% of your portfolio and put it in these very small, very leveraged, very risky companies is a very, very risky decision to do. Now, if you’re going to take that risky decision, you must have a view that private equity is going to somehow dramatically outperform public equity markets for you to take on this incremental risk and by the way, incremental illiquidity. But I would argue that it’s unreasonable to have that assumption for a few reasons. I think one is that the valuations today in private equity are actually higher than public markets. It doesn’t always look like that from the statistics, but what the statistics that are quoted or often missing is that private equity reports pro forma numbers, pro forma EBITDA. Pro forma EBITDA is often very different from GAAP if there was a GAAP concept of EBITDA, but the way public companies would calculate EBITDA. And so those adjustments are often about a third of the difference.
And so, what you’re seeing is these very inflated valuations in private markets funded by massive amounts of borrowing from private credit. And with allocators putting huge percentages of their endowments or pension funds into this asset class. And by the way, they’re doing so at very high fees and with illiquidity. And so, my view is that that’s the tremendous amount of correlated risk. Everybody’s doing it. Everybody’s doing it in way bigger proportion than the actual economic substance of what they’re investing in would justify all with the same correlated belief that private equity will outperform. And I think it’s not going to end well.
Lefkovitz: We also spoke about private markets with Eric Jacobson of Morningstar’s manager research team. He provided crucial insights for investors about evergreen funds that invest in illiquid assets, as well as the private debt market more specifically.
Eric Jacobson: Well, the first level of things, hopefully, that they do wind up knowing is that many of these that we’re hearing about today are structured either as interval funds, tender-offer funds—which the two are very similar, but they have different requirements of the managers, how much they either have to or not offer you to get your money back—or some of these BDCs, or business development companies. But the most common thing that you see among them, the way that they’re sold to investors today, is you can purchase them at some periodic amount of time depending on how it’s structured. In some cases, almost anytime, you can buy them, but you can only get some of your money back at certain times, where you request it back from the company. And generally, in some cases, not even obligated to send it back to you if they’re in a crisis situation, they don’t feel they can, or they have to just fulfill, say, only 5% of the requests, I’m sorry, 5% of their assets, for example. And whether you get your money back at that time depends a lot on what other investors are asking for their money back, do they have to make decisions and give it to you, what they would call pro rata, where everybody just gets a piece of what they asked for. But the most important part there, of course, is that it’s not the same as a regular mutual fund, it’s not like an ETF. You cannot just get your money back right when you want it, you can’t just cash it in. And in some cases, you may have to wait months. If you are trying to get your entire investment back, that could take a very long time depending on how it’s structured and whether or not there are other investors trying to get their money back. That’s sort of a high-level thing that’s critical for people to understand. You just don’t want to use those as a substitute for regular mutual funds.
The other issue is a little stickier right now because there’s a lot of debate on how risky these underlying markets are. And there is a line of thinking that says, if you’re investing in the kind of private debt that we’re talking about, but it’s inside of these ‘’semiliquid structures,’’ you can’t think of it the same way you do an ETF or a mutual fund. You’re just not going to be able to get your money out overnight the way you can with those—in fact, by law, by regulatory law, they have to allow you to do that. These semiliquid funds have all different kinds of rules and restrictions. You may not be able to get your money out for a month or a quarter or even longer, depending on what’s going on. So, you have to really be comfortable putting that money aside and recognizing, ‘’I can’t think about that as emergency money in any way, shape, or form. It could take me a lot longer.’’
Now, there is a line of thinking in the industry among some people that because of those restrictions, and the fact that the asset managers have so much control over when and how much money the investors get back that that creates some sort of safety with those underlying assets. The problem is, is that as we’ve seen in these markets in the past, there are unintended consequences. And so, for example, if there are other large investors that have the exposure to some of these assets and they run into other problems, that can cause them to have to dump things that have an effect on this or that, and it can cause problems in the underlying markets. These underlying debt markets could wind up in much rougher shape than we expect in the wrong kind of crisis.
A lot of people are arguing that we’re in sort of a bubble now, and it’s going to be just like the financial crisis was in 2008. I’m not saying that. I think whatever we wind up having in the next several years is going to wind up being different. The problem is, is that there are things that go on behind the scenes that you just don’t understand in terms of risk and how they connect to each other. So, you’ll hear people talk about the financial crisis, even people who knew that the housing market was starting to hit a point where it wasn’t sustainable, even what the Fed and the government didn’t understand is, they did not understand how much risk was deeper, deeper, deeper into the marketplace because of the way that investors had exposure to these things. They didn’t realize how leveraged the banks were to each other. They didn’t realize the level of derivatives that had been written on it. And I realize that’s kind of arcane stuff and it doesn’t sound like it’s the same. And I’m not saying that it is. But the bottom line is when you have a risk in financial markets, especially when there’s fixed income involved, there are connections and what they call transmission linkages that are really, really hard to see because the information is not public. You don’t know what the relationships are sometimes between these companies.
So, I think it’s just really important to understand that, especially in areas of the market that are newer, like this huge expansion of private debt, or areas of the market that don’t have as much transparency, you always have to be ready for the possibility that something can happen that nobody anticipated. That doesn’t mean you should never take those risks, but especially in an area like this, where so much is just not transparent. That’s sort of part and parcel of this whole private concept is that when we think of nonprivate, we talk about public, we are usually talking about things that are related to the banking system and the broader economy that are more heavily regulated. These are things that the Fed and the Treasury can see more easily. And so, we saw what happened in the Great Financial Crisis with mortgages and they had a reasonably good view of things, and they still didn’t see what was coming because they didn’t understand all these under the covers, if you will—that’s not the best way to put it—but connections between things that were not easily visible to the public. Well, in this case, they can see even less because these markets are much more lightly regulated, if at all, in many cases.
Lefkovitz: Barry Ritholtz came on The Long View this year to talk about his book, How Not to Invest. Christine Benz asked him to explain his view that valuation matters less than many investors tend to believe.
Barry Ritholtz: Yeah, you can pay attention to valuation, but you probably shouldn’t act on it most of the time. By the way, people hate these shades-of-gray answers. They want a black-and-white, up-or-down answer. And the world is much more complicated than that.
So, let’s take ’82 to 2000. Perfect example. People hated stocks. Remember, ‘’Death of Equities’’ a few years before on the cover of BusinessWeek. You were getting 10% on your bonds, not 10% real because inflation was so high in the ’70s, but stocks over that ’66 to ’82 period lost 75% of their value in inflation-adjusted terms. And so, stocks were cheap in the mid ’70s. They got cheaper in the late ’70s. They got even cheaper in the early ’80s. If you’re a long-term investor and you were buying through that terrible period, and very few people were, you killed it over the next 20 years. And the same thing happened in the 2000s, from 2000 to 2013. If you were a buyer, you crushed it in the 2000s, even though you had to live through the great financial crisis, you crushed it in the 2010s.
So, what does valuation have mom-and-pop investors pay attention to? For my whole career, I’ve been hearing how expensive the market is on a Shiller CAPE basis, the cyclically adjusted P/E ratio. If you got out of equities because the CAPE was high, you left untold millions on the table. If you look at stocks and say, ‘’Hey, you know, the long-term average P/E of the S&P is 15, and we’re at 18 or 20, so I’m going to get out,’’ it’s just an incredible amount of missed opportunity. Valuation is not a timing signal. Valuation is a reveal of where we are in a market cycle.
And I don’t know if that’s all that actionable. If you only buy stocks when they’re cheap, you get these narrow windows every decade or so. And my colleague, Ben Carlson, I write about this in the book, did an analysis that said, what happens if you only bought stocks when they’re at their lows? It turns out dollar-cost averages do much better because of the advantage of compounding, whereas only buying stocks when they’re cheap, only buying stocks when they’re close to their lows or both, underperforms simply dollar-cost averaging into a broad index.
Lefkovitz: On a similar theme, and on a concluding note, we spoke with longtime Morningstar researcher John Rekenthaler, who retired at the end of 2024, on the difference between stock market investing and gambling.
John Rekenthaler: The house is with you when you’re investing. Over time, equities, they make more money than inflation. The United States has been particularly successful, but you look at other countries, that’s true. As long as the countries have relatively healthy economies, and they don’t have complete political disaster and so forth, equities make money than inflation over time, meaning you’re making money in real terms over time. So, the longer you’re in and the more money you have, likely the better off that you’ll be. And it’s tried, but it’s true.
And people still get distracted. I can see, bitcoin has done so well, and people attempted to buy bitcoin instead, and maybe they’ll do better than with stocks, but bitcoin has no, there’s no underlying economic—there’s no cash associated with it. It’s not just bitcoin, any crypto, they’re never going to pay you cash. The only time you get a value out of that is if someone pays you more. Well, with stocks, it’s different.
Lefkovitz: That wraps it up for this “best of” episode. We hope you enjoyed it and found these excerpts as insightful as we did. on behalf of the whole team at The Long View wishing you and yours happy holidays, and a healthy and prosperous 2026.
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