MESSAGE FROM Kirk Hartman Chief Investment Officer Wells Fargo Asset Management Asking the tough questions Have you ever felt concerned, even during good However, we’ve seen this before. Recall 2008. A financial times? (As CIO, it’s my job to worry.) credit crunch hit the world as part of the Global When markets perform well, investors can become Financial Crisis. I had some very candid, emotional complacent. They stop asking important questions. conversations with clients. A common question they’d ask me: “When will this end?” But in your heart, you know some issues have been bubbling under the surface. The challenge is: How Naturally, clients sought a forecast for when do you react to that? market conditions would change. When chaos is As I look back on 2019, I cannot help but notice outside of your control—and it threatens to affect the phenomenal performance of both equity and your financial goals—it is unnerving. But I couldn’t lead with that type of outlook. Instead, we dug fixed-income markets, even as times of chaos permeated the news—all amid a backdrop of deeper and asked questions such as this: “What are global central banks supporting the markets at we doing about it?” unprecedented levels through low borrowing rates The answer then was innovation, just as I believe and a growing balance sheet. It seemed the world it is now. While the issues leading up to the 2008 was awash with liquidity. Both consumers and credit crunch bubbled under the surface, our businesses were borrowing and spending. Many money market team had been studying credit risk would think: Good times, right? and structure. Our competitors had been turning As we look forward, it’s 2020 and these conditions to credit agency ratings for direction. So, we asked have helped generate a rather large amount of ourselves: “Is there a smarter approach?” That’s when our team decided to build an in-house credit debt in our global financial system. This has been on my mind, and I believe it’s time to ask: What scoring system. happens to all that leverage when a credit crunch To this day, I believe that system helped us avoid hits the markets? the money market bailouts that many others in Investment capital would become harder to the industry were forced to undergo. The reason: secure. Lenders would become wary about We understood structured investments and we loaning to consumers and businesses. And those focused on the quality of the collateral underlying accommodative central banks? Historically, they the debt obligations. This allowed us to avoid many would lower rates in this environment. Instead, credit problems. they have limited room to do that since rates Here’s the takeaway I’d apply to 2020: are already near historical lows and their balance sheets are massive. There will undoubtedly be Say market conditions do end up shifting economic ripple effects. due to events we can’t control. I’d want to look back and know that I acknowledged the concerns, asked tough questions, and tackled issues head-on through innovative thinking. 5 2020