Mary Callahan Erdoes
Investing in a Volatile Market
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| Callahan Erdoes Photo by Steve Boljonis |
Considered one of Wall Street's most influential young executives, Mary Callahan Erdoes (MBA '93) has gained that stature by working hard at what she has always loved. “My father was an investment banker, and I think my interest in finance started before my cognitive skills were well formed — maybe even in the womb!” explains Erdoes, who heads global investments for the private bank of J.P. Morgan Chase & Company. Her job puts her in charge of more than $200 billion in assets, managed on behalf of an exclusive group of private clients, most with assets of over $100 million.
Widely respected for her analytical skills and sound judgment, Erdoes is particularly sought out for her expertise in assessing complicated financial instruments, such as derivatives. The Chicago native and Georgetown University graduate says that during the current stock market slump she has spent much of her time guiding clients through the intricacies of risk management. “In this market, even more than in a bull market, clients need a Sherpa' to help them navigate,” she explains. “And that's what I enjoy doing most.”
When Erdoes wants advice, she often turns to her husband, HBS classmate Philip Erdoes, who runs his own venture capital firm, Bear Ventures LLC. “With his multiple investments in various early- and mid-stage companies, his point of view is invaluable to me,” she notes. But even more importantly, says Erdoes, given the couple's oftenstressful occupations, “his incredible sense of humor helps us keep everything in perspective.”
What has your typical client been most concerned about, given the harsh realities of today's investment climate?
You know, I don't really have any “typical” clients, and that's one of the best things about my job. So let me answer this way: In the late 1990s, with almost every market — public and private equities, fixed income, real estate — going up everywhere in the world, investors became overly confident and not in tune with how much risk they were embedding into their portfolios. What we've been seeing during the last couple of years is a wringing out of those excesses, and that means several years of negative returns. All of my clients have had to readjust their assumptions regarding risks and returns.
Your clients are extremely wealthy. Do they take that readjustment in stride?
No. It's a humbling experience to deal in these markets, because many clients haven't lived through anything like this — and neither have most money managers. It's painful to each of us. But it drives you back to a fundamental analysis: What is the purpose of my portfolio? What am I trying to encompass in my long-term goals? Do I have the right risk/return assumptions built into my portfolio to weather the storms? These are basic questions, but questions that have been mostly ignored over the past several years.
What do you recommend as an appropriate mix for the portfolios of the high net-worth investor in today's market?
Some investment advisors will give you a standard answer to that, but I need to understand each client's specific circumstances before ever giving asset-allocation advice. What are their income and lifestyle needs, time horizons, and goals? Is the money going to charity, to children, or to support the client's current needs? Can the investor afford to lose half her money in a downturn? Ten percent? There are so many twists and turns involved that those questions have to be asked in any market cycle. But in today's market, the pain can be felt tomorrow if you make the wrong decision, so it's even more important to ask those questions early and often.
Are bonds a good bet for those who want to reduce their reliance on equities? I have a lot of sympathy for those who are just getting into bonds now, but I still believe they should have a position in investors' portfolios in every business cycle. Interest rates are at a forty-year low, but they aren't going very high anytime soon and could go even lower. Even with rates so low, there are still plenty of opportunities to make money in the bond markets. While many investors ignored bonds in the late 1990s, most of our clients did not and are now sitting on yields of 5 to 7 percent, with lots of appreciation on top of that.
Do you have concerns about Japanlike deflation in the United States?
Some fear that with a very low inflation rate of 1.5 percent, the United States is in danger of following Japan into a deflation death trap. I don't think that is going to be the case. In the U.S. service sector, which makes up two-thirds of our economy, inflation is still running at 3 percent. So while some manufacturing businesses are experiencing price deflation for the first time in the postwar era, the dominating service sector should keep us away from the deflation danger zone for the foreseeable future.
How would a U.S. invasion of Iraq influence your investment advice?
Every decision we make for clients today takes that into account as a what-if scenario, but there's no formula that can predict the impact. Just like September 11, 2001, had no precedent, it's very difficult to say that this situation would have parallels to the Gulf War or any other war we've experienced. Take oil prices, for example. One might assume that oil prices will rise if we attack Iraq, but oil prices have already risen. And in today's environment, oil prices tend to move more on supply and demand than they do on crises in the Gulf.
Even if we solved the immediate crisis in Iraq, then what? Terrorism is a global issue that will take years to address. In the investment world, I think an invasion would further fuel the high level of volatility and lead to continued purchases of fixed-income instruments, a variety of currency investments, and other kinds of commodity-like investments. People will be looking for portfolios that will get them through several years of market uncertainty.
Are you already seeing this defensive shift among high net-worth investors?
Historically, public equities have been the anchor to growth in most of my clients' portfolios. After three years in a row of negative public-equity returns, which hasn't happened since 1939, I have seen growing frustration and a movement toward what I call a “barbell” strategy. Clients are deciding that they'd like to have some very low-risk assets like cash and fixed income and — rather than worry about the public-equity markets — barbell that with much higher-risk assets, such as private equity, real estate, and hedge funds.
How would you characterize the relationship between Wall Street and Washington today?
I think the relationship is a healthy and dynamic one. Whether it was the Glass- Steagall Act years ago, when Washington had to delineate roles and responsibilities, or whether it's the recent issues of accounting practices in corporate America, or Wall Street's research and public-offering practices, every business cycle produces reasons for the two of them to come together to figure out how to improve the system. The process feels a little tense at times — and we are going through one of those periods today — but the outcome is almost always positive for everyone involved.
— Deborah Blagg
