Milken Conference 2023: What's next for markets?

Yahoo Finance Executive Editor Brian Sozzi sat down with Ares Wealth Management's Raj Dhanda at the Milken Conference to discuss the state of Markets amid recent turmoil.

Editor’s note: Some images in this video have been removed to better reflect the conversation

Video transcript

BRIAN SOZZI: Joining me now is Raj Dhanda, partner and global head of Wealth Management at Ares Management. Good to see you here, Raj. I think this has been an interesting week in finance. We've seen JP Morgan scoop up First Republic. We're on the eve of, potentially, another rate hike from the Fed. What's next for markets?

RAJ DHANDA: Well, Brian, great question. Good to be here. We really are on the heels of extreme volatility last year in the equity markets, recently in credit. As you mentioned, the credit contraction that's been engineered has led to some bank failures.

Ares is really a micro investor that's aware of the macro. So our crystal ball is what it is, just a crystal ball. We do think the Fed will raise rates later this week. But what we spend time doing is providing advice to individual investors in our wealth management platform.

We're one of the larger platforms and talk to or 8,000 advisors every quarter. What we hear are really three things. One is, investors want help with a more defensive portfolio today.

They certainly want to benefit from the move in interest rates. And then inflation is on their minds. And so we're helping them think about portfolio construction with that in mind.

BRIAN SOZZI: Why is the broader market-- and you're not the first one that has told me investors are starting to get more defensive positioning or more interest in that. Why is the broader market holding up, you think?

RAJ DHANDA: So the public markets really don't offer much breadth to the economy. Less than 10% of companies over $100 million in revenues are in the public markets. Ares lends in the private market actually gives it great breadth.

Middle markets has been core to our franchise. And so what we see is an opportunity to capture both alpha through private credit, through secondaries, through distressed strategies. And you're absolutely right, the public markets are distracting. There's volatility. Individual investors historically have had effectively 100% allocation to the public markets.

The age old 60/40 allocation I think of as 100/0, 100 to the public markets, nothing into the private markets. Now, that's changed with maybe 4% or 5% allocated to the private markets. But that's where we spend our time, thinking about those opportunities.

BRIAN SOZZI: Is 60/40 dead? That seems to be another topic here at the conference.

RAJ DHANDA: Well, again, I think of it as, what is the right portfolio construction that achieves clients' goals? So, take, for example, private credit. We manage about $360 billion in assets. About 2/3 is in private credit. Some people would say we're a pioneer in credit. I think the advantages of private credit today are really apparent.

One, most of the assets are floating rate. And we've had a material move in the base rate. Secondly, you're defensively positioned. As I mentioned, that's topical for clients. So you're senior in the capital structure. You have a cushion to, if asset prices-- if asset prices decline. So we see a lot of interest in private credit.

We also see the need for diversification. As I mentioned, the public markets don't offer a lot of diversification. Secondary strategies-- another area that Ares has a 30-year track record-- is where you can achieve diverse exposure in private equity. You don't have a J-curve. You don't have to get the vintage perfect when you're investing in private credit. So those are two areas that we see a lot of interest.

BRIAN SOZZI: You mentioned you don't have a crystal ball. But what is your macro outlook? If you're looking forward, if you see people getting more defensive, we see a potential spike in volatility, what does that say about the economic outlook?

RAJ DHANDA: So it's a good question. I mean, we reported earnings for ARCC's, the largest BDC just last week. And we did see 8% EBITDA growth across the platform. So we don't see some material or severe contraction in the economy. If you think about the massive both fiscal and monetary stimulus over the last several years, there has to be now some impact from credit tightening and values coming down, asset prices coming down. But the underlying economy feels pretty good to us.

BRIAN SOZZI: As someone who manages money and is exposed to this industry, how concerned are you about a default on the country's debt? Lots of focus on the debt ceiling.

RAJ DHANDA: Again, the headlines are creating volatility. You'd like to believe that it's-- there's some brinksmanship and some politics around it and that it's a matter we'll get through. Again, the volatility in credit is more recent. In the last year or so, we had volatility in the equity markets. Credit markets, public credit markets aren't meant to have that type of volatility. And that certainly is causing distractions for investors.

BRIAN SOZZI: Lots of chatter at the conference too about the outlook for commercial real estate, which your firm is familiar with. How concerned are you about the outlook for commercial real estate in this country, as, again, we might get another rate hike and we still might get a few more? The Fed has given no indication it's getting ready to step off the gas.

RAJ DHANDA: Commercial real estate is a large asset class. There are clearly signs of some distress for office assets in large cities. That's a very small part of what we do.

Our focus has been in industrial or distribution warehouses and in multifamily and some of the Sun Belt communities around the country. So it's a large asset class. But we certainly are concerned about the headwinds. An area of opportunity in commercial real estate is within debt. And we find that today you can get equity-like returns from commercial real estate debt. And the firm has a credit DNA, a meaningful large commercial real estate debt practice. And so we're trying to take advantage of those opportunities while being cautious and sanguine about the headwinds elsewhere in real estate.

BRIAN SOZZI: I think Charlie Munger really scared a heck of a lot of people with his "FT" op-ed over the weekend on commercial real estate. Is it more of a rolling crisis? Is this something for next year we should all be concerned about or it could happen at any point?

RAJ DHANDA: I think it'll be over time, you'll see the impact of this sharp move in the base rate and financing rates. Commercial real estate is an asset class that historically has leverage associated with it. And interest rates have moved materially. So there'll be a period of time where it'll unwind. But, again, core strategies for real estate can withstand some of the move in interest rates if you see rent growth that we have seen in certain parts of the real estate market.

BRIAN SOZZI: Is return to office still a major contributing factor in what you are seeing in the commercial real estate market?

RAJ DHANDA: So, as I said, office is less than 10% of our exposure, both equity and debt. And it's not something that we see in our portfolio. But, certainly, as you and I were discussing, return to office is topical, will remain topical, and something that's on everyone's minds, but not as much as an investment practice.

BRIAN SOZZI: I'm back in the office, Raj. And I'm wearing a tie. And I'm OK with it.

RAJ DHANDA: Well, I think you look good with the tie.

BRIAN SOZZI: You look good with that one.

RAJ DHANDA: Hard to know how your office is, but our office is back. It's busy. We're happy to be there.

BRIAN SOZZI: All right, well, good to see you. Raj Dhanda, partner and global head of wealth management at Ares Management. Enjoy the rest of the conference. Appreciate it.

RAJ DHANDA: Thanks for having me, Brian.

BRIAN SOZZI: Guys, back to you.

- All right, great stuff that you heard from Raj Dhanda, Ares Wealth Management Solutions global head of wealth management, alongside Yahoo Finance's executive editor Brian Sozzi. Great stuff there.