Macro, Markets and Musical Metaphors: A Very Enlightened Conversation with NewEdge Wealth’s Cameron Dawson

Stay tuned after the conclusion of the podcast for additional important information.

GREG HALL: Hey everybody, welcome to another episode of Accrued Interest, PIMCO’s podcast dedicated to serving financial advisors and their clients. My name’s Greg Hall. As always, I’ll be your host. I lead the wealth management business for PIMCO here in the United States.

And today’s really exciting for us. All of our podcasts are exciting, but today we’re really, really happy to welcome our first outside guest to Accrued Interest. It’s a milestone for us. It’s—you know—we’re inflicting this on you.

CAMERON DAWSON: Well, I have to say, I have accrued so much interest in this podcast and it’s an honor to be on.

GREG HALL: Oh that’s good, tell me you had that waiting and you didn’t just come up with that on the spot.

CAMERON DAWSON: Right here right now, we’re doing it live.

GREG HALL: Okay. Cameron Dawson, who at this point needs no introduction. 'cause I think she just showed you the razor-sharp wit that we are all going to benefit from. Cameron is the CIO of NewEdge Wealth.

We met I think back in May. You were nice enough to come to a conference that we had, an internal conference, we call it the Impact Summit for young professionals starting out in their career. An emphasis on some of the young women that work here at PIMCO. And you were nice enough to be interviewed by one of our folks about risk and resilience in planning your career.

CAMERON DAWSON: Yeah, definitely. Well, it was a huge honor to be able to be out there. And I have to say, and I know that I've told the PIMCO team this, that the class and the professionalism that all of the people that I got to meet out in Newport was incredibly impressive and really speaks to the quality at which you approach everything, not just in asset management, but how you present yourselves and how you conduct business with clients. So, it certainly was fun.

GREG HALL: Oh, well, it's really nice of you to say, and if we stay in this tone, this podcast is going to go really well. No, it was a pleasure to have you out there. I think the whole team was incredibly impressed.

Not just with your comments on career management and career development, but what you had to say about markets and investments. And that's where we'll spend the bulk of today's conversation. Let me also introduce Ryan Keating. Ryan's an account manager for us. He leads our RIA coverage on the East Coast, and Ryan works very closely with you, Ryan, thanks for being part of this.

RYAN KEATING: Delighted to be here. Thanks for having me.

GREG HALL: All right. All right. And you'll, you'll jump in on the conversation throughout, and we'll make sure that you know, especially for you representing the RIAs that you speak to, make sure that we're kind of focusing questions on things that they can derive value from. Cameron, maybe you could help us just set the stage a little bit. Tell us about NewEdge. Tell us about yourself, how you got there, where you've been.

CAMERON DAWSON: Sure, definitely. Well, my background is that I came from Bank of America. I spent eight years there as an industrial analyst covering very cyclical parts of the market, which I often think that covering industrials is a bit like living in dog years because you have so many more cycles that I think we had three major huge cycles in that time, while the rest of the economy was still just sort of plugging along and chugging along.

So, you learn a lot about how macroeconomics influence the earnings of these cyclical companies. Sometimes it makes me have a disposition where I have a notion that this is why we can't have nice things, because every time something started to go well in industrials, they'd always just absolutely blow it up and could never trend higher. But that led to a fascination with broader macro and broader kind of cycles outside of just being a specialist within an industry group.

And so I shifted into being a chief market strategist at a firm called Fieldpoint, and then joined NewEdge about three and a half years ago. And we have been on an absolute tear of growth. It's been an incredible journey in that three and a half years of growing now to be, we were just ranked number three in Barron’s in the top RIAs, which is incredibly exciting.

And what we've built is a team that's laser focused on ultra high net worth clients. So NewEdge Capital Group is a broader holding group of what we do, but NewEdge Wealth is focused on institutions, family offices, ultra high net worth clients. And that allows us to do the kinds of investing, have the kinds of resources to surround our clients with that allows us to invest in very specific ways to meet their needs.

CAMERON DAWSON: Everything being custom, everything being a very involved process. We do a lot in wealth strategy, tying in to the kinds of investments that we hold in portfolios. So things are exactly tailored to what can be oftentimes complex situations for these larger kinds of clients.

But it makes it also really fun because of the size of the accounts, we can invest in things that are often off limits or incapable of being invested in for smaller account sizes. So we continue to grow rapidly. It has been so fun. I work with I think my favorite team I've ever gotten to work with. We have a blast. We work hard, we play hard. And it seems certainly that's what you guys do here at PIMCO as well.

GREG HALL: Yeah. That's awesome. I noticed also, I saw that you guys won or ranked number three in the Barron’s poll, then you, yourself, you were CIO of the year, according to IAI in 2024.

CAMERON DAWSON: They did make me give the crown in the sash back, unfortunately.  So now that it's 2025, I didn't get to do…

GREG HALL: Has somebody else been crowned yet? Has that happened?

CAMERON DAWSON: I'm not sure. I didn't get to do the ceremony where I got to put the crown on somebody else. That would've been, that would've been a lot of fun.

GREG HALL: Oh, that seems just like a rite of passage. They should absolutely [UNCLEAR]

CAMERON DAWSON: You would think. I was all excited with my Miss Congeniality dance and the whole thing, but alas I didn't get that opportunity. But maybe next year.

GREG HALL: Well, let's get into why you're recognized as one of the top CIOs in your space. So we're recording this, the morning, the rainy morning of October 30th. It's a Thursday. Yesterday was Wednesday Fed Day. And so we're, we're fresh off chairman Powell's decision or the Fed's decision. And Chairman Powell's comments what do you think?

CAMERON DAWSON: Yeah, well, what a fascinating time because I just gave a speech a couple of days ago where I started the speech by giving a eulogy to data saying that data has died. And not to say that we're, that there's no data to rely upon, but because we're not getting as much data as we did in the past, there's been questions about the truthfulness of that data. Right? You have the firing of the Bureau of Labor Statistics that we still don't have somebody leading it. So the quality of the data has been called into question whether that's deserved or not.

We've also seen a lot of the relationships of data really break down. So things, for example, soft data no longer really reflecting what goes on with hard data. The best example of this is leading economic indicators no longer leading, not being useful meaning that the entire time leading economic indicators were saying that you were going to be having a deep, dark recession over the past couple of years.

US economy has actually grown above trend. So I say that in the context of this Fed meeting, because the Fed is having to make decisions in this environment. And the reality is that you could effectively argue for a hike, a hold, and a cut, given this set of data that we have, depending on which one you want to focus on. But I think that depending on where you look in this market, you can draw a story or a picture to support whatever move you make.

And I think it's one of the reasons why Powell was so non-committal to saying, Hey, December's not a foregone conclusion. If you think it's a foregone conclusion, you'd almost have to make assumptions that A, we're going to actually get labor market data, B, that labor market data is going to continue to show signs of slowing. And C, any kind of inflation data that you have, is going to show no signs of reaccelerating.

And so, even if we just isolate the labor market data, this is a fascinating question of, let's start with the soft data portion of it. We've gotten conference board surveys this week, and the conference board survey continues to show that if you look at something like the labor market differential, jobs being plentiful, versus jobs being hard to get, that's pointing to a higher unemployment rate. You can look at the NFIB survey of small businesses.

You look at the concern about sales, that's usually a good leading indicator of the unemployment rate that's pointing to a higher unemployment rate. You look at the pace of job additions or initial jobless claims on the state level, that's pointing to a higher unemployment rate, however, you have lower labor supply. So all of those things talked about labor demand being weaker, but labor supply is weaker.

And so now you're in a scenario where your pal is saying, Hey, 4.3% is not that bad of an unemployment rate, but does 4.3% really reflect the underlying currents of this labor market? So even if you were trying to isolate that one factor, not, you know, let alone talking about things like inflation or financial conditions or financial stability, even that one factor of the labor market is inconclusive because of all of these very unique kind of dynamics that are happening under the surface.

Which is why I think this Fed will err on the side of caution when it comes to policy changes. But I think we could talk about how the new Fed, new Fed that we get in May of 2026 might be very different.

GREG HALL: Do you… Tiffany Wilding, who's our macro economist, and she was on the pod a few weeks back. She published a note overnight and in it noted that she felt like Powell was my words, not hers, but concerned about positioning that definitely sending a little bit of a message to markets not to become complacent about outlooks. Do you feel like that was a meaningful part of the tone of his commentary?

CAMERON DAWSON: I mean, if we compare it to those hawkish greatest hits that we had back, I believe it was in 2022 when Powell came out and threw out so much cold water on the rally and the expectation that you were going to pivot to cut. So the summer, if you recall that was the Jackson Hole speech where he said, absolutely not. I don't know what you're talking about. So compared to that, it wasn't that hawkish, but I think that…

GREG HALL: A dovish hawkish cut.

CAMERON DAWSON: It was I mean, yes, it was a dovish hawkish cut in the sense that you saw them cut, but you saw the pricing of 2025 in 2025, and in 2026 Fed funds's futures pricing of what, where that would be tick up just slightly. Not as much as you have seen at prior meetings.

So it was slightly more hawkish. And I think that non-committal, you also have to factor in the political influences of how much are people wanting to lean more on the side of Hawkishness just to dig their heels in and say, yes, we are independent. No, we're not going to be pressed by political circumstances. But then at the end of the day, in the same breath, this data is incredibly confusing and inconclusive, which just means that if you, unless you have the evidence of some kind of broader weakening within the labor market, you're, you have people will look to things like financial conditions and say, if it really was that weak, would equities be trading at this valuation?

Would credit be at these types of spreads? I will note though, and Neil Dutta makes this point, I think very well from Renaissance Macro, where he'll argue saying, if you're waiting for the labor market to tell you that you're too tight, you're going to be too late.

CAMERON DAWSON: Right? The labor market is a lagging indicator, which makes things like consumption lagging indicators. So are we now starting to get into an environment where consumers who are really boots on the ground and understanding what's going on in the local communities have been telling us for a while, the labor market is weak, we can't find jobs, and now all of a sudden you're getting big headlines of companies that are still putting up really respectable profitability, Amazon covering, cutting 30,000 jobs, maybe a little bit less so for the folks like UPS, but do these start to snowball into potentially more job losses where people say they're cutting jobs, maybe we should cut jobs.

And that speaks to a characteristic of unemployment we have to appreciate, which is non-linearity. And Donna talks about this a lot as well, which is that usually you get a little unemployment that turns into a lot of unemployment, it doesn't climb slowly.

And surely it has an increase that then snowballs into something that is much larger. And that's, you know, you know, where Claudia Sahm comes in talking about the Sahm rule that it's not predictive of a recession or some kind of greater weakness. But to effectively say, once you've seen this degree of weakness in the labor market, you should expect more, which is when some of your countercyclical fiscal measures should kick back in.

So all of that is to say that, we're potentially an inflection point of where this labor market goes. And I think then it raises the question of what is the bond market pricing in? What is the equity market pricing in, and is there complacency? And the spoiler alert on that one is probably yes.

GREG HALL: It's a lot to unpack here, but I was, I do, I want to talk about the new Fed and kind of how you bridge that between now and then, you know, as the months go by. But maybe what you just referenced, like how do you reconcile in your head spreads where they are equity valuations, where they are some of these debated, you know, inconclusive signals around unemployment. There were some credit market jitters this month.

Spreads have largely maybe halfway retrace that, but certainly they were there. We've seen some headlines around some big losses. There was one this morning as well. Like, how are you trying to make sense of these kind of conflicting signals? And may ask you the tough question, like, where do you think they net out over time?

CAMERON DAWSON: Yeah. Well, I think that when we look at this environment and what has led this market in 2025, the key thing that jumps out is that liquidity has been a major and important driver of this market's expansion. And the way that you can, you can prove that is by showing that the best performing cohort of stocks this year has been non-revenue, NASDAQ companies, non-revenue, not even non-earnings, not even non-profitable companies that don't have any revenue.

GREG HALL: Yeah. Non-profitable is, so 99.

CAMERON DAWSON: It's so 99.

GREG HALL: We've achieved new things.

CAMERON DAWSON: It's so 2021 as well, right? Remember, you know, you had this huge surge in non-profitable companies back in 2021. And of course that led to the reconciliation of all of that through the course of 2022. But 25 has been really driven by low quality parts of the market, which suggests that there's tons of liquidity that's still very much sloshing around. And maybe you're now going to get even more liquidity because the Fed's going to cut back on QT and we get rate cuts.

There's some funky stuff happening in funding markets, which we can talk about, which maybe suggest that, you know, some of this liquidity is starting to at least turn in the other direction. And I would also note something like Bitcoin not making new highs while the rest of these lower quality companies are making new highs, maybe it is one of those sort of canaries in the digital coal mine that you are going to, you are seeing liquidity tighten.

But it helps to explain why, for example, when a large company who already has a lot of debt is going to raise capital in the debt markets and for, you know, a very long-term bond to fund AI spend, and people are only demanding less than 150 basis points over treasuries for that. So, you know, the fact that there still is all that demand is something that tells you that there's just still so much liquidity and that there's enough optimism that people want to put, have to put that money to work.

I think the thing to remember that we always have to remember about equity markets and credit markets is that, you know, equity markets are often included in the leading indicator side of things. But there have been plenty of situations where equity markets have been late to the game.

GREG HALL: Sure, yeah!

CAMERON DAWSON: 2007 being a really great example of that. And that credit markets at the same time also exhibit what we would call episodic volatility, which means that they're pricing in, when it starts to get bad, not necessarily anticipating that it's getting bad, sometimes it's a little bit earlier than what the headlines are picking up.

So to say, Hey, equity and credit say everything is fine. That must mean we're all clear. Yes. Most of the time, however, I think we have to be very cognizant that there have been times where it becomes very coincident, and then that's when these kind of black swan kind of shock events happen.

GREG HALL: Do you, and when you look at AI spend and we talk about these non-revenue companies, 'cause right, I mean, obviously the bull case is that, you know, they are in a race to create world changing technology akin to the internet revolution. Clearly not all of them can win that race. So there's room for some differentiation over time. Do you have a view as to– do you believe in the AI transformation story? Or do you think that this is redux of what we experienced in the beginning of the century?

CAMERON DAWSON: Yeah. When you say it's a race, I keep thinking of, remember that movie Rat Race, a very obscure movie from back, I think it was in like the late nineties, early two thousands.

GREG HALL: Your pop culture references confound me. Like, I don't, you always manage to pull something interesting and obscure and… your favorite band.

CAMERON DAWSON: Oh. Tool.

GREG HALL: Tool, yeah. Like, awesome. But like, where does that come from?

CAMERON DAWSON: I mean, it's math rock. So like, if you're a nerd, then it works and…

GREG HALL: So is Russian. Yes. But you go Tool.

CAMERON DAWSON: Oh, but Russian is also amazing. But also I think that Maynard James Keenan is one of the greatest poet, living poets of our time. So, you know, it's very enlightened.

GREG HALL: That's the title of the podcast. We're done. It's good.

CAMERON DAWSON: Very enlightened. But I, so, you know, remember these movies like Rat Race and it's a mad, mad, mad world, if you remember it. And you know, this concept of a race, and there's this one prize at the end and everybody has to get there. And then all of the destruction that happens in the pursuit of that one prize, and there is only one winner. And so obviously this buildup of infrastructure is a race, and they're, they've been very honest about it.

They, you know, you have folks like Zuckerberg coming out and saying, the risk is spending not enough, not spending too much. And if we happen to spend a few extra, you know, however many billions of dollars, no big deal as long as we get there.

The problem you have is that then I think the market right now, and maybe a little bit less so today, as you see a reaction to earnings, the market right now is effectively taking the old monopoly revenues and margins and return on invested capital, which were very, very capital light from these businesses and extrapolating them perpetually into the future under the assumption that AI will have the same kind of profitability profile that those old monopoly kinds of businesses would have. And I think that that's wrong.

And the question is, at what point will the market care, so to say it another way, you're taking cash flows from capital, late monopoly revenue streams and investing them into capital intensive competitive revenue streams. There's a lot more competition within AI, then there is, and for say, let's say legacy social networking for meta or legacy search for Google.

And let's take the example of search. You know, I've had a lot of conversations with people talking about, oh, these new AI browsers are amazing, and you go, okay, awesome. We have a better search function. And you think about the last 15 to 20 years of Google, they've innovated around search, like yeah, it's great. They have, you know, the predictive texts and the whole thing there, there's been some innovations, but it hasn't really changed that much. The browser looks very much the same as it did when we used to log in with AOL with all those, all those noises.

GREG HALL: Sure. Very much. Yeah.

CAMERON DAWSON: And so how much of this is the fact that because these have been monopoly businesses, they actually didn't innovate that much. And so what you're now going to have reckon with is the idea that you're going to have a catch up and spend to offset the fact that there wasn't as much innovation. And this all tells me that ROICs are likely to go down for these businesses unless one of them reaches this super intelligence at a far sooner pace than everybody else.

And then we're contemplating that the world is ending and all this stuff. So I take it very simply, which is that the infrastructure build out portion of any kind of tax cycle always has very distinct winners. And it's those winners that we can identify. It's Nvidia selling chips, and it's, you know, potentially, you know, people building data centers and the power and all of that. But the actual application of the technology itself could have very, very different winners.

RYAN KEATING: A question that I hear often and I think about myself is, like, how do you think about the risk here? If there is a risk? Is it, and I think the best way to think about it, is it balance sheet risk? You know, tech bubble or is it systemic risk because of the circular nature here, à la GFC? How do you think about that?

CAMERON DAWSON: Yeah, So I really like, I wrote a piece about this a few weeks ago, tying it into the hypothesis from Andrew Lo. And he talks about the adaptive market hypothesis. It's a very weighty book, but there's one point in his theory, which is that interconnectivity, so think about I lend money to you who then lends money to somebody else, and you have all this counterparty risk that gets built and everybody gets interconnected.

So you have this web of interconnectivity that gets built into an economy, and that web gets more and more complex as a cycle goes on. And what happens is that actually makes things stronger on the way up. It builds things up on the way up. And people have probably seen those notes about how $1 of AI spend on a subscription to Open AI ends up cascading down to $8 of kind of ecosystem type of revenue because of that circular type of financing or an investment that you're talking about.

And so, in this adaptive market hypothesis, the key point is that as that interconnectivity builds up, it's a good thing. But as soon as one domino starts to fall, it ends up being a bad thing because it ends up being something that can cascade lower. So what makes you stronger in the upcycle actually makes you weaker in the down cycle. And so the evolution of this is that you've always had circular financing.

NVIDIA's been doing, you know, vendor financing effectively for quite some time. They've invested in their customers for quite some time. It's the scale that's incredibly different at this point, meaning that you're just talking about billion dollar amounts in such a different way.

And so if one of those dominoes were to fall, then that's when, you know Andrew Lo's kind of adaptive market hypothesis where it hurts you on the downside likely comes into play.

GREG HALL: I mean, it's how do you then, you know, given everything we just talked about, how do you advise a client right now in terms of what to do with their very real-world financial goals and ambitions? You know, over the next, I don't know, three, five years?

CAMERON DAWSON: Yeah. The conclusion of that piece is that we raised all these questions about the sustainability of this CapEx cycle, was two phrases that are often used, which is you have to dance while the music is playing. And that being early is the equivalent of being wrong. And so there's, you could have made some of these same observations and arguments, whether you're, you're talking about the degree of spend.

You could have made those arguments at the beginning of this year. You could have made arguments that the concentration with inequity markets is unsustainable, could have made that this year, last year. Right? We keep making new highs in concentration. You could have called equities expensive at the beginning of this year, credit expensive at the beginning of this year, and sat out on what has been an everything rally.

And so I think that part of it has to appreciate that if we're investing for the long run, understanding that, you know, that cycles are inevitable. Volatility is a feature of this kind of investing. And so what we have to make sure that we do is we don't get over our skis in two areas.

One is in just leverage within portfolios making sure that people don't get so ebullient that they add on a whole bunch of leverage and try to juice returns. And the other one is making sure that we aren't overexposed to one trend or theme in a portfolio where we have a higher risk of everything having a correlation that goes to one.

And that's where diversification, you know, as much as it is kind of a tired word at this point, we think still is very, very powerful, mostly at these high points of valuations. And, you know, we would argue that diversification into fixed income will be more helpful versus 2022, which of course it was not helpful, but 2022’s distinct uniqueness was obviously you were in the midst of a big rate hiking cycle in an inflation fighting cycle.

And you were coming off of a fever pitch low point in a 40 year bull market and bond. So a very unique kind of situation. So I think that in addition to making sure that our factor exposure within equity markets isn't too concentrated within one theme, making sure we have the diversification then on the asset class level of things, and where else within, potentially in the alternative side of things that you could add in layers of diversification to be able to make sure that we can remain invested, but we're not overexposed to one trend, one theme.

GREG HALL: Yeah. It won't surprise you to hear we agree on the bond market.

CAMERON DAWSON: Surprise, surprise.

GREG HALL: And you know, over the course of this year, I mean, I think our, you know, our very simple thesis that we've laid out for clients on this podcast and elsewhere is exactly what you just articulated. You know, equity prices are, you know, very high multiples are very high, but we've actually had a relatively benign view of the economy. We've not had a sky is falling mentality and it's really very difficult to predict when valuation will matter.

I've heard you speak about this, you know, and how multiples can kind of, you know, they can amplify the downside when fundamentals turn, but trying to figure out exactly when that's going to be tends to be a pretty difficult game. And in the meantime, we've been recommending people insulate their portfolios against that by maybe taking some of the gains of the last 10 years that have been so great in equity markets and just beginning to get back to that kind of, if it's not 60-40, then something that looks like it you know, portfolio set up.

CAMERON DAWSON: Yeah. I think that the reminder about valuations is a really important one because we know it's well appreciated that they're not a timing tool that valuations, if you do a scatter plot, scatterplot of one year forward returns have no predictive power. And that valuations have better predictive power looking out five years and 10 years, which is just to say the higher valuation you are today, the lower it is possible that your next 10 years will be.

But the problem with stopping the analysis there is that it completely ignores the path you get to lower forward returns. And that's what we continue to encourage our investors to say, look, we could know, let's say we had a crystal ball and no, with certainty that forward returns were going to be 4% over the next 10 years in the equity market, that would be a big disappointment compared to the 14% that we've had in really since 2010.

And so people obviously would be rather rattled by that. However, there are many ways to get to lower forward returns. You could have a market that just kind of chops sideways. And goes on the road to nowhere. You could have a market that has a huge bubble and then has a crash. You could have a market that has a crash now and then has a long recovery.

And I think that that's when you have to be appreciating the fact that A, the short term tactical will matter about how you put money to work and how you deal with a lower return environment. And then B, understanding the role, you know, back to how valuations play into this, which is you, what we argue is that valuations are an amplifier. So effectively the lower valuations you have, the more you're resilient to bad news, simply because you've already priced it in the higher valuations you have, the less resilient you are to bad news.

And that if you were to get bad news then it amplifies the downside because you simply have more room to fall. So then you have to talk about then what is that bad news? And for us, it's the discipline about earnings. If 12-month forward earnings estimates, and it's been a broken record over the course of the last six months ago, but we've been arguing if 12-month forward earnings estimates are hitting new highs, the equity market will hit new highs. If they start to roll over or go sideways, people are revising their earnings estimates lower, then you should expect market returns to be lower.

And that happened over the six-month period between, let's say this time last year and into March and April, you actually had estimates level off. And guess what? So did returns but then estimates started to kick back higher as they were cut coming out of liberation day.

So, you know, I think then it really comes down to kicking the tires on earnings estimates for 26, because that's effectively what that number cap captures saying. Is this realistic? What's the potential for further upside, strong economy? Or what is this? Is this, what's the potential for downside, which would be a weaker economy or some kind of issue with the AI CapEx kind of cycle.

GREG HALL: One of the things you mentioned just a second ago was controlling leverage levels in the portfolio. And I guess what that implies to me is sort of the inverse of leverage is liquidity. Maintaining liquidity and optionality, right. The ability to change your mind, which we've observed especially with the increasing popularity of private strategies in the wealth space which we are generally constructive on as a trend.

We think your investors, our clients ought to have a choice. And on the other hand, there we worry sometimes that there's a failure to appreciate the value of liquidity. How do you, how do you balance that, especially in describing these markets that you think are at an inflection point?

CAMERON DAWSON: Yeah. I think that the illusion of liquidity is the biggest risk with the private market push into the wealth channel. And I think that it's really important for investors and for asset managers to appreciate how different wealth is as individual investors versus institutions. You know, institutions tend to know what their liquidity needs are going to be.

They know I have to spend 5% every year. An institution all of a sudden doesn't wake up and say, I want to buy a boat, or I'm getting divorced. Right. Like, maybe there, maybe there's some institutions that are having some challenges these days.

GREG HALL: Depends on the institution. Yeah.

CAMERON DAWSON: But the point is that liquidity needs from the wealth perspective tend to be at least slightly less predictable. Right. And so that's number one. The number two side of things is that taxes really matter, which we can set aside for a second.

And then the third one is that emotion. Emotions are incredibly important. And when we think about people's reaction to what could be more volatile markets at some point in the future, that's when the emotion comes in of people saying, well, you know, get me out of X, Y, and Z fund. I just read this article about it, I'm really scared.

And at that point, you can't get access to the liquidity that you thought you had because it was not a liquidity promise, it was a liquidity feature that you may or may not be able to access. And the problem is that if everybody wants access to the liquidity, at the same time you have issues.

So what we do is we spend a lot of time talking with clients to make sure that they understand that if we are investing in this, even though there might be a liquidity feature, do not count on it being there, which means that it has to be sized appropriately for the account.

So this is what it gets back to. I mentioned at the very top why we do so much work in wealth strategy and understanding what people's spending needs are, people's different kind of buckets of money. Whether it's money that's meant for multiple generations out in the future or today kind of money, and making sure that those buckets are sized properly that if we stress test portfolios.

Let's say we have a dire situation, that liquidity bucket is large enough that it's not having to rely upon something that is illiquid in order to fund the needs of the liquidity bucket, which might mean that you hold more liquidity through time than you might expect in the scenario where those funds were actually liquid. But we don't think that you can count on that. So all of this comes down to education and expectation setting.

And the biggest issue we see is that people making promises about liquidity that we just don't think is going to be there in the event that it's needed. And so we do a lot to make sure that our clients are very disciplined about it and very much understand the ephemeral nature of this liquidity in the event that they need it.

RYAN KEATING: How much—I have a question on that—within your, say, average client at Wealth? What’s the percentage of illiquid assets? And then, does that fluctuate with starting valuations or expectations, illiquidity premium?

CAMERON DAWSON: Well, it really is driven by the wealth strategy work that we do to get to understand what each of those buckets will be. Because if it's a bucket of assets that is meant for two generations out, then you can take on a lot of illiquidity, and the portion of the portfolio that will be illiquid will be much larger than if it's assets where you might look at a client and say, Hey, you know, you're going to be spending 50, 60% of this over the course of the next 15 years just to fund your lifestyle expenses or whatever it might be.

So you, to give you an average would probably be misleading because it's skewed by those that you know, that you will have so much money that it doesn't need to be spent and thus can really lean into illiquidity. But even then, you know, just because you can tolerate illiquidity doesn't mean that you can tolerate bad selection.

Right. So I think that an important thing to continue to keep in mind is that these private markets also have huge spreads between the top and bottom decile of performers. So venture is a great example of that. If you're picking the best venture funds, then your returns are extraordinary.

But guess what? There's a whole big chunk of venture funds, not just venture investments, but venture funds that are actually very detrimental to portfolios, which suggest to us that if you're going to go down this path of putting more illiquid kinds of strategies and portfolios, you have to have an incredibly robust due diligence team in order to be able to pick those right strategies because that dispersion is so wide.

Whereas in public markets, the dispersion, of course, is very tight because these are much more efficient markets because they're transparent and you have, you know, the voting and weighing machine.

So I do think that as these asset classes become bigger and bigger though, as the big funds continue to gobble up more of the market share, the returns that they were getting, alpha will tend to become much more like beta.

And that dispersion will spread, but that also means that you're going to get less for the fees, the extra fee that you're, you're paying, which again, gets back to us being, making sure that if we're, if we're paying for alpha, we better darn be getting it. Which is why we do so much due diligence process to make sure that the returns that we think we're getting is what's going to materialize.

RYAN KEATING: And you're getting less for your illiquidity, which we would argue. You need to look across the entire liquidity spectrum and know what you're getting for being illiquid. If you're being compensated, then it's appropriate.

CAMERON DAWSON: Yeah. If you're being compensated, then it's appropriate. But if the illiquid spaces become so crowded and spreads in them, as an example, becomes so tight, and then it's not that much better than what you could get in public markets. The only thing that public markets would be the detriment, is that you just see more fluctuation in the NAVs.

You'd see more fluctuation in the marking of it on a statement, which, you know, is it gets back to that emotional side of an individual investing statement volatility is something that can be very jarring. But you know, the challenge with private markets as well is making sure that we work with the right partners, that there's a high trust factor, because we have to trust them on their marks.

There's no market to check and balance them, which just means that as they're reporting, we are getting the numbers from them. And it means that we have to trust their due diligence process. We have to trust their underwriting process. We have to trust their transparency. All of these things have to come into place, which again gets back to this idea of manager selectivity.

GREG HALL: Yeah. I think, I mean, I find it very frustrating when our industry speaks in these very broad-brush terms about every wealth investor ought to have 15% of their portfolio in illiquid solutions. 'cause one, what you just described, you know, we see our best clients are always talking to an individual investor and understanding exactly the sources and uses of money over a multi-generational time period.

And good answer for one is not a good answer for everybody. Secondly you know, there's this, I think it's just because it's such a new phenomenon and we've had such a benign economic environment over the last 10 years, there's a little bit of a view that these strategies are magic. And your comment about marketing, it plays into that, right?

If the NAV never changes and we haven't had a market event, then you might conclude after enough time that the strategies don't go down and they always deliver on their promises.

And any of us, you know, who look at financial markets know that's not the case. And any space can become overcrowded and spreads can compress and will compress and returns, you know, will compress. And then the psychology of it that you mentioned is so interesting because, you know, back at Bank of America or, you know, I started at Goldman Sachs and equity research, the notion of mark to model as something you transact on, you know, in scale would be, it'd be a really strange thing. Right?

That's why closed end funds exist that are publicly tradable. And so not having that market signal of pricing, I can't imagine that doesn't lead to complacent behavior. Not just on the part of the people who invest in the strategies, but actually the people who do the deals that go into the strategies. If you forget that you can make mistakes, it's not usually a great, great thing.

CAMERON DAWSON: Well, and it's making sure that the incentives are aligned, right. If you're marking your portfolio down significantly, it's going to be really hard to raise capital.

GREG HALL: Yeah. So these are, again, I think the theme of this conversation, right, is that we're in this everything rally. Lots of things are tight. Every good idea comes with tons of caveats. Right? And thank goodness your clients have you to kind of get into the weeds and think about all these things. You know, what you haven't done in this conversation, which I so appreciate, is you haven't said this is the right answer.

This is the only answer. We've got it. We've figured it out. You know, you have qualified every answer with a case for what else might happen. And that it depends on the individual needs of the investors, which I think is the professional way to approach these things.

CAMERON DAWSON: I mean, it was Harry Truman who once proclaimed and said, can somebody send me a one-handed economist? Because these economists keep saying on one hand, on the other hand, so I apologize for being a two-handed or maybe multi handed. I feel like Shiva, you know, as a strategist.

But I think it's important because, you know, the other kind of observation of the difference between wealth and institutions is that I would argue that institutions are much more homogenous, which just means that there's so many differences in idiosyncrasies and wealth and what works for one kind of client, one kind of portfolio can be very different than works for another, which means that there usually isn't just one right solution.

Now there can be one right, one strategy that we have the greatest conviction on in order to express this idea, but everything is kind of seen as this modular building block in order to be able to build something.

And the other reality though, is that as the time horizon of the assets grows and grows and grows, things do start to converge and look really similar. And that's when some core principles end up being very important, making sure that we don't overreact to volatility and making sure we take advantage of it when we can.

Making sure that we're very efficient with fees, getting what we're paying for, making sure we're efficient with taxes, right. Assets in the right places, finding tax efficiency in different ways. And I think the last one is making sure we're efficient with hassle, right? So all of this push into private markets comes with a certain degree of operational hassle, not just for the advisors, but for the clients themselves, hunting down K-1s, depending on what kind of strategy is used.

So we judge everything from those three buckets of efficiency, taxes, fees, and hassle and being able to make sure that if we're taking on any of those things, whether it's higher fees, higher taxes, or higher hassle, we're getting what we're paying for. And I, and that, you know, kind of gets us back into this notion of where can we solve in portfolios to make things using the Einstein quote, make things as simple as possible, but not simpler to really make sure that each of those things is optimized.

GREG HALL: That's awesome. Thank you Cameron. Really appreciate you coming talking to us today. We could probably go on for another couple of hours without even breaking a sweat, but what a great first appearance on Accrued Interest and we'll definitely invite you back. But we appreciate your insight and thank you for all the work you do with us and on behalf of your clients.

CAMERON DAWSON: Well, thank you so much for having me.

GREG HALL: And thank you Ryan. I really appreciate you joining us here. Great to have your perspective. Also, I know you and Cameron do a lot of work together, so great to have you in the room.

RYAN KEATING: Thank you.

GREG HALL: For everybody listening, thanks so much for spending the time with us. This has been another episode of Accrued Interest. If you're interested in what you heard today you can visit us at pimco.com. If you identify yourself as a financial advisor, you'll be taken to the Advisor Forum. Advisor Forum is our one stop shop for you to find everything at Pimco that you need to educate yourself on the fixed income markets, prepare for your next meeting and otherwise practically and efficiently do a better job on behalf of your clients.

GREG HALL: We will see you next time. We bring you an exciting episode. Who knows what will happen between now and then for the time being. Thanks for listening, and we'll talk to you soon.