BlackRock Quant Says She Learned Resilience Working With Refugees
(Bloomberg Markets) -- SIMONA PARAVANI-MELLINGHOFF, who oversees $286 billion as BlackRock Inc.’s global chief investment officer of solutions within multi-asset strategies, never wants to stop learning. The first in her family to go to university, and with a grandmother who was illiterate, the Italian-born Paravani-Mellinghoff has seen the power of education firsthand.
With a background in quantitative analysis, Paravani-Mellinghoff, who turns 47 in February, stays up-to-date with investment trends by teaching financial analytics and machine learning at University College London. She says she learned how to stay resilient under stress during her high school years when she volunteered at a refugee camp with kids displaced by the war in the former Yugoslavia.
Her access to scholarships at a young age instilled in Paravani-Mellinghoff the spirit of giving back, she says. She’s written a children’s book that’s been published in three languages, and she meets regularly with young students in the U.S. and Europe, hoping to convince them that everyone has the power to change the world.
Paravani-Mellinghoff spoke to Bloomberg Markets in December. She says investors should prepare for another challenging year of elevated market uncertainty and limited opportunities for returns. And she talks about her biggest fear for 2021: inflation.
KSENIA GALOUCHKO : Which pockets of risk do you think are still a cause of concern?
SIMONA PARAVANI-MELLINGHOFF : The key theme when I think about 2021 is how to cope with lower rates for longer. Right now more than 80% of government bonds globally are yielding less than 1%. It would have been around 40% just a few years ago. This is compressing the level of returns across the board.
If we look at BlackRock’s forecast for key market returns over a five-year horizon, the majority of risk assets are expected to yield or return something in single-digit territory. As we approach the lowest theoretical bound on rates, the room for further government bond appreciation becomes more limited. And that reduces the role of government bonds as a ballast in portfolios.
This is obviously quite a big challenge for us as investors as we look ahead. I think the punchline for how to deal with this is long inflation and long risk.
In terms of how long inflation is expressed in portfolios, quite simply we are long inflation-linked bonds in the U.S. as well as in the euro zone. Fundamentally we believe that the market is currently underestimating the potential risk of positive inflation surprises, especially in the medium term. I’m not talking about 1970s-style of inflation, but I’m talking about a level of inflation which is more in line or just above the target of central banks.
A very good example of this is actually the U.S. If we look at what the market is currently estimating in terms of the inflation rate over the next 5 to 10 years, we will notice that effectively the market is expecting inflation to remain below the 2% mark. We think that if we take a 5- to 10-year view, that’s much more likely to be around the 2.5% mark.
Why is this the case? The policies that have been put in place to fight the Covid economic fallout—whether we’re talking about monetary or fiscal policy—are inflationary, other things being equal.
The second key driver is the change in central bank policy framework. A good example is what we’ve seen with the Fed, which has moved to the average inflation targeting framework. This is highly significant because it means that moderate inflation surprises when following periods of prolonged undershooting of inflation targets, as we experienced, may not really trigger an immediate policy response, so this further underscores the notion of lower for longer.
And then the third reason, which is perhaps less talked about, is that inflation may already be higher than what the reported numbers suggest. There is a great paper by a Harvard Business School professor, Alberto Cavallo, titled Inflation With Covid Consumption Baskets, and what they looked at is, effectively, that if we estimated inflation using a basket where the weights better reflected what we have experienced in terms of consumption patterns during Covid, inflation would already be higher.
KG : What place do you think ESG should have in portfolios, and do you believe in the mitigating quality that it brings to some portfolios?
SP-M : Sustainability is a key pillar of portfolio resilience. It is definitely one of the trends that the Covid crisis has accelerated. If we look at the flows that we’ve seen into ESG-focused products in the industry as a whole, this has been a record level of inflows.
It’s very significant fundamentally because it has proven the skeptics wrong. Their thesis was that the moment that volatility was back in fashion in the market, sustainability would go out of fashion. Well, we’ve seen plenty of volatility—and sustainability is even more relevant and in focus than it has ever been. We believe that the flows will continue to be directed to companies, sectors, asset classes that really best address the challenges, but also can capture the opportunities presented by the sustainability trend. So we see sustainability as a key driver of portfolio performance over the medium and long term.
KG : I was wondering about your quant background and how it helps you in your current work.
SP-M : It helps me in many ways, because if we think about the core of what we do, it is to look at data and help us form a view of what that data tells us about the future.
Having a quant background helps me understand the limitations of the data that we see, but also where some data may be more relevant and more telling than others. It’s also increasingly relevant as techniques such as machine learning become more and more common practice.
KG : Are there any particular machine-learning techniques that you’d like to talk about?
SP-M : The whole area of text mining is definitely extremely interesting because this can enable us to gain more insights into what is the market sentiment on a particular topic, but also the level of market attention to certain topics. And this is significant because the more a topic is talked about, especially in finance, the more likely that topic is to already be discounted to some extent in markets—and therefore less likely to be a potential driver for the future. Every minute of the day in 2019 we conducted almost 5 million Google searches. We sent more than 18 million texts and 188 million emails. I believe that this is going to be an area that will be increasingly relevant as more and more data becomes available.
Text mining can easily be applied to any form of text, not just the news. The BlackRock Geopolitical Risk Indicator, for example, tracks the relative frequency of analyst reports and financial news stories associated with geopolitical risks. A lot of the work that has been done in text mining has historically focused on the English language, but it is broadening to other languages like Chinese. And that, again, could yield some interesting venues for new applications more broadly, including in finance.
KG : I wanted to also ask you about your external job at UCL as an industrial professor of machine learning and financial analytics. When did you start, and why was that something that you wanted to do?
SP-M : I find it very exciting. I started in September 2019, and I’m teaching as part of the Institute of Finance & Technology, which is part of the UCL engineering faculty. The proceeds that I get from my teaching job go to support the program that UCL runs to help underprivileged students with the financial burden. I fundamentally see education as an essential tool to enable people to fulfill their potential as economic agents, as citizens, and ultimately as human beings. And this is strongly influenced by my own personal experience.
First of all, it helps me not to become a dinosaur. Because teaching forces you to keep learning. It’s also a phenomenally good discipline to ensure that you really understand what you are talking about, because when you have to explain it to people, especially to young, sharp minds, that really ups your game.
I also genuinely believe that this makes me a better leader, but also a better investor. There are unique insights that one gets into the values, the aspirations of the next generation. One example of this is how important the sustainability agenda is to them.
KG : I wanted to learn a little bit more about your own education and growing up.
SP-M : I grew up in Bologna. I moved to the U.K. right before university. Before that, I was at a boarding school that I accessed via a scholarship, which was located on the border of Italy and Slovenia. That was around the time of the war in the former Yugoslavia. There was a lot of emphasis on a broader civic engagement. So I did actually work with refugees that were escaping the war. And I think that is an experience that taught me a lot at a very young age, at 17.
We were working in refugee camps that were primarily populated by women and children. I was personally involved in looking after the children, and I learned two important lessons. One was the sense of perspective. When you see what disruption war can cause, when you see how quickly life can change, I think that had a very lasting impact on me in terms of my ability to put things into perspective, and this has helped me in terms of emotional resilience, helped me make decisions under stress. In addition, of course, to deepening my sense of privilege—and I definitely am a privileged person—[I learned] that with privilege also comes responsibility, to give back in any way that I can.
The other part was an incredible lesson in leadership, because I got to the camp and I was given responsibility for a group of children of various ages, and we didn’t even have a common language. And I think, again, it served me well. This was around 1992.
KG : I also wanted to touch on your background. Did you ever imagine that you would become a very senior executive at the world’s biggest asset manager?
SP-M : The short answer is no. I didn’t expect that I would end up in finance, but I was always optimistic that I was going to have a very interesting life. And, absolutely, my life story is one of social mobility. My grandmother, for example, was illiterate. And I’m the first person to go to university in my family. And that was largely possible thanks to scholarships that I started to receive at a relatively young age. It’s undeniable that my personal story informs my sense of purpose and how passionate I feel about education.
There is absolutely no doubt that there is more work to be done on diversity and inclusion. But at the same time I think we need to emphasize also the progress alongside the work that remains to be done, because I’m keen that especially young women get the message that change is happening. I want them to have a positive mindset that they can make it.
The analogy I use is Serena Williams at Wimbledon about to shoot the match point. I’m sure she doesn’t think that the odds are stacked against her. I think similarly for young women starting out, it’s important that they feel that they can score that match point.
We should also not lose sight of the power that each and every one of us has to make a difference. In fact, when I go into schools and meet with children to talk about my book, The Kids’ Pocket Guide to the World, I always tell them that every one of us has the power to be a superhero. I’m an introvert—to the point that sometimes I had to take a test twice because the teachers thought the result I got was a mistake. We just need to find something that we are passionate about and then take action. We shouldn’t forget that each and every one of us—as a leader, as an educator, as a parent, as a citizen—can make a difference in our everyday life.
I’m working class by background and female. By showing a story that is different, I think this contributes to create a different perception of the City [of London].
KG : Why did you write a children’s book?
SP-M : A part of the motivation behind the book is naturally my passion for education, but part was stemming from some of my experiences working with NGOs in different parts of the world. I was talking to kids in emerging economies, such as Kenya. What was surprising is that their attitude toward an interconnected, open, and global world seemed to be more positive than what I was experiencing while talking to kids in more sheltered and more privileged contexts in Europe or in the U.S. And so the idea of the book really came to me to help give a more positive perspective on the challenges, but also opportunities, that an open, interconnected world could offer.
Galouchko covers equities for Bloomberg News in London.
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