Morningstar - Q1 2023 - 61

business side have improved quite a bit since the
start of the pandemic. The fiscal stimulus
meant that the government was a big net borrower
during the pandemic. Whenever the government's
a big net borrower, holding the foreign sector
equal, the domestic U.S. private sector becomes
a big net lender, so they paid down a lot of
net debt on both the household and the firm side.
With the monetary-policy support, many
entities have refinanced at lower rates, and
those are still locked in, even as rates have risen
quite a bit over the past year. That would all
suggest reason for optimism at the macro level.
But could there be micro pockets of vulnerability?
That I'm less sure about.
Investing in Uncertainty
Lauricella: I want to follow up on emerging markets.
China isn't necessarily a big part of everybody's
portfolios, but it plays a big role in the emergingmarket
indexes. Marta, how do you evaluate the risk of
investing in China, when so much of it is at the
government level?
Norton: We just had a teamwide conversation
on what is uninvestable and how do you
determine it? I've seen several sell-side headlines
that have come out over different stretches
calling China uninvestable. If the uncertainty
window seems particularly wide open for
a market, people don't know if they're going to
get paid back. Sometimes that relates to
rule of law, or geopolitical risk more broadly.
But we're global investors. My perspective is
that there's probably greater uncertainty
around most investments than people realize.
You're never going to be able to handicap
the geopolitical risk in China, at least not
accurately, and the zero-COVID policy can surprise
in ways that caught us off guard. And there
are a number of regulatory concerns as
well. When we wrestle with that, we consider
what could happen if this investment went
to zero. What would that do to the portfolio?
We do a lot of scenario analysis around
that type of uncertainty.
In fact, from our expectations of returns, China
looks very attractive right now. But the
Alts have redeemed themselves as
diversifiers. In other down markets, plain old
short-term bond funds had done a better
job than alts, for a smaller fee.
Russel Kinnel
fundamental risk is also through the roof. So,
that's how we're sizing it, based not on how big it
is in the markets but on how much pain our
portfolio could take and still deliver a good
outcome for investors.
Lauricella: Russ, the Morningstar house view on
liquid alts has been that they often do not deliver what
they advertise. When you look across the spectrum
of alternatives for fund investors, what's the verdict
for 2022?
Kinnel: It's actually been a pretty good year
for a lot of alt strategies. One big reason is that
trend following worked. Trend following
would have told you to, say, start buying up
commodities. The average market-neutral fund has
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