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Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.

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Speaker 1: This week on the podcast, I have an extra special guest.

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Speaker 1: His name is Sebastian Page. He is the head of

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Speaker 1: multi asset investing at investing giant hero Price. They run

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Speaker 1: about one point three trillion dollars. He runs about three

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Speaker 1: hundred and sixty billion of it. This really is a

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Speaker 1: master class on asset allocation, diversification, risk management, and the

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Speaker 1: concept of expected returns versus expected risk. As it turns out,

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Speaker 1: it's easier to predict risk than it is to predict returns.

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Speaker 1: I don't know what else I can say about this

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Speaker 1: other than if you are an asset allocator, a wealth manager,

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Speaker 1: anybody who's thinking about managing assets over the next ten,

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Speaker 1: twenty thirty years, then you're gonna find this to be

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Speaker 1: an absolutely fascinating conversation. So, with no further ado, my

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Speaker 1: interview of Sebastian Page of tiro Price. This is Masters

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Speaker 1: in Business with Barry Ridholts on Bloomberg Radio. My extra

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Speaker 1: special guest this week is Sebastian Page. He is the

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Speaker 1: head of Global multi Assets at tiro Price. His group

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Speaker 1: runs about three hundred and sixty three billion dollars of

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Speaker 1: the total one point three trillion that tiro Price has

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Speaker 1: under management. He is the author of Beyond Diversification, What

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Speaker 1: Every Investor Needs to Know About Asset Allocation and co

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Speaker 1: author of Factor Investing an Asset Allocation Sebastian Page. Welcome

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Speaker 1: to Bloomberg. Thank you, Barry, Thank you for inviting me.

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Speaker 1: I've been looking forward to speaking with you since March.

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Speaker 1: You were quite literally the very first show. The pandemic

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Speaker 1: led us to have to reschedule, and we'll talk a

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Speaker 1: little bit about the pandemic later, but I want to

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Speaker 1: dive in to your your job, your head of Global

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Speaker 1: multi Assets, which is a huge role. Tell us a

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Speaker 1: little bit about your day to day responsibilities. You know,

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Speaker 1: it's the perfect job for me. I absolutely love it.

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Speaker 1: Running a large global investment organization, in this case over

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Speaker 1: three hundred and sixty billion and a u M over

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Speaker 1: two hundred different portfolios. It involves not only, of course,

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Speaker 1: investment oversight, staying on top of capital markets, consuming vast

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Speaker 1: amounts of research and so on, but also running the business,

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Speaker 1: setting a strategic vision, making sure it's executed well, recruiting

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Speaker 1: and developing talent, managing product development projects, and also I'm

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Speaker 1: a member of Hero's management committee, where I'm representing our

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Speaker 1: division and helping manage our entire firms. So the job

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Speaker 1: is very broad, and I learned in something every day. Verry,

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Speaker 1: I know, you run your own successful company and you're

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Speaker 1: a thought leader, so I'm guessing it's it's a very

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Speaker 1: broad set of responsibilities too, So in that sense, running

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Speaker 1: an investment division in a large but agile company is

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Speaker 1: probably not that different. You know, It's funny when I

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Speaker 1: discuss what I do with relatives. They're so impressed by

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Speaker 1: two billion dollars and I always laugh and have to explain, no, no,

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Speaker 1: you don't understand. Two billion dollars is nothing. Big shops

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Speaker 1: are running hundreds of billions and trillions of dollars. So

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Speaker 1: given the size of the assets you manage, how do

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Speaker 1: you think about multi assets? What? What's the thought process

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Speaker 1: like when you're assembling an investment posture. Are you thinking

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Speaker 1: about stock picking or different sectors or global regions? How

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Speaker 1: does a multi asset portfolio come together? It's all about

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Speaker 1: putting all the capabilities of the FIR together in one

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Speaker 1: neat package or vehicle for different clients. So we put

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Speaker 1: together capabilities across tactical asset allocation, think about decisions to

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Speaker 1: tilt the portfolios with a six to eighteen month horizon

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Speaker 1: to take advantage of relative valuation opportunities, but also strategic

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Speaker 1: asset allocation, constructing the portfolio for the long run, trading

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Speaker 1: off returns against risk, positioning the portfolio for structural advantages,

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Speaker 1: structural alpha's, and also security selection that we typically source

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Speaker 1: in the funds of funds format so will allocate to

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Speaker 1: underlying key ro price building blocks. So most of what

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Speaker 1: we do is to put all these capabilities together and

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Speaker 1: then customize their in different ways for different types of investors.

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Speaker 1: So you're also on the asset Allocation committee, which is

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Speaker 1: responsible for tactical investment decisions, and you remember the firm's

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Speaker 1: target date franchise, which is a whole different animal, and

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Speaker 1: the broader management committee at large. How do all these

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Speaker 1: very very different pieces fit together. It sounds like you

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Speaker 1: have a lot of different roles to juggle. Yeah, our

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Speaker 1: Asset Allocation Committee is responsible for tactical assocation decisions. That's

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Speaker 1: all we do. On that committee. We're bring together some

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Speaker 1: of our most senior investors from equities, fixed income, and

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Speaker 1: multi asset and As I mentioned Verry, we take a

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Speaker 1: six to eighteen month horizon. We typically meet once a

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Speaker 1: month and we're very much focused on relative valuation opportunities,

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Speaker 1: but we also take into account macro think business cycle,

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Speaker 1: monetary policy, the fundamental I think earnings projections and the like,

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Speaker 1: as well as technical I think closed momentum sentiment. So

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Speaker 1: evaluations are main driver of decisions, but ideally we want

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Speaker 1: to take positions where all these factors aligned. So that's

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Speaker 1: for the asset allocation committee. As you mentioned, I'm also

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Speaker 1: a member of the management committee. That committee is chaired

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Speaker 1: by our CEO, and it's responsible for managing the entire

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Speaker 1: firm of seven thousand plus employees across sixteen countries. You know,

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Speaker 1: the entire one trillion in a u M if you will,

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Speaker 1: they're on that committee. I need to take my multi

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Speaker 1: asset hat off and put the tyro price hat on.

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Speaker 1: And you know, we meet for at least two hours

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Speaker 1: every week. We interact with our board, We set the

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Speaker 1: strategic direction for the firm, and we manage execution that

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Speaker 1: part of my job. There has been a fantastic learning

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Speaker 1: opportunity for me. So you mentioned earlier strategic allocation and

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Speaker 1: you just we're discussing tactical allocation. For the listener who

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Speaker 1: may not be deep into asset management, explain the difference

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Speaker 1: between the two. So, tactical asset allocation, the way we

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Speaker 1: define it is about taking advantage of primarily relative valuation opportunities.

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Speaker 1: And the time horizon is perhaps a medium time horizon

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Speaker 1: if you think about six to eighteen months, So it's

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Speaker 1: not day to day day trading, if you will, big

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Speaker 1: macro bats. It's more about leaning against the wind and

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Speaker 1: looking for situations where valuations are at extreme and other

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Speaker 1: factors give you confidence that you can take advantage of

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Speaker 1: those dislocations. That's what we mean by tactical asset allocation.

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Speaker 1: It's not what I would call gun slinging. It's more

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Speaker 1: about incrementally taking advantage of those opportunities in markets. Strategic

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Speaker 1: asset allocation, very is broader, and it's about how do

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Speaker 1: you construct a portfolio for a given investor or a

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Speaker 1: given institution for the long run. And the lots of

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Speaker 1: questions are being asked these days about whether the sixty

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Speaker 1: forty is dead, for example, that's a typical strategic asset

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Speaker 1: allocation question. Should we hold alternative assets in the portfolio.

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Speaker 1: That's also a strategic asset allocation question, and very the

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Speaker 1: biggest question of them all for strategic as allocation is

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Speaker 1: how much stocks should I hold versus bonds for the

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Speaker 1: long run. So those are the differences in the way

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Speaker 1: we define tactical and strategic. M quite interesting, you know.

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Speaker 1: I can't help but notice tro Price obviously a very

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Speaker 1: large organization, but you spent the early parts of your

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Speaker 1: career at State Street and Pimco, also two giant organizations.

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Speaker 1: What are the advantages and the challenges of working in

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Speaker 1: such large firms? Oh, good question. You know, I can't

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Speaker 1: speak a lot to small firms because, as you said,

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Speaker 1: I spent most of my career at very large firms.

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Speaker 1: But let's start with what I would say is one

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Speaker 1: of the most underestimated advantages of being at a large firm.

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Speaker 1: Large company, those that are successful over time, that know

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Speaker 1: how to innovate and take risks, have some advantages over startups.

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Speaker 1: It's you know, it's not like startups they called the

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Speaker 1: risks and large companies are sleepy giants waiting to get disrupted. Disrupted.

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Speaker 1: That's a cliche to me that it ignores how successful

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Speaker 1: large companies really operate. So I've been lucky enough to

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Speaker 1: work at fantastic companies where have been put in positions

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Speaker 1: to essentially run startup in shit. It's but with two

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Speaker 1: very big advantages. Number One, resources usually in the form

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Speaker 1: of headcount and brand and marketing support. And second, you know,

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Speaker 1: better career support that that I would have gotten at

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Speaker 1: a startup for example. Now, I don't want to diminish

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Speaker 1: the role of startups in our economy, but sometimes people

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Speaker 1: think of big companies versus startups in black and white terms,

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Speaker 1: and it really is not like that in terms of innovation.

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Speaker 1: But you know that being said, the main disadvantage is

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Speaker 1: what you would expect, right, no matter how agile large

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Speaker 1: companies are, no matter how successful, you'll always face frictions

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Speaker 1: involved with managing change inside large organizations. You know that

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Speaker 1: there's this tired analogy that it's harder to to turn

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Speaker 1: a supertanker than a jet ski. You know, it takes

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Speaker 1: a tremendous amount of leadership and political savvy and with

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Speaker 1: a bologies to ill en mosque power points uh in

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Speaker 1: order to align people inside large organizations and move large organizations.

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Speaker 1: And I'm still working on getting better at this, but

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Speaker 1: to me, the advantages of working at successful large organizations

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Speaker 1: outweigh the disadvantages for me. So so working at a

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Speaker 1: at a large company is a high risk adjusted return proposition,

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Speaker 1: high sharp ratio if you will, to use UH an

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Speaker 1: investment term. But but the trade office, I'll never be

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Speaker 1: a billionaire founder. But but that's okay, that's okay with me.

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Speaker 1: You know a little secret. Most of us are never

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Speaker 1: going to be billionaire founders. But we'll hold that myth

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Speaker 1: off to the side. One one last question about allocations.

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Speaker 1: So within the asset allocation committee, is the firm's target

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Speaker 1: date fund practice. I have this horrible bias thinking that

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Speaker 1: that is the easiest gig in the world. You set

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Speaker 1: a target date, you do almost nothing going forward. It

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Speaker 1: kind of runs itself over thirty forty years. Disabuse me

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Speaker 1: of that understanding. It's very hard for non investment professionals

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Speaker 1: to determine their own asset allocation right, and with the

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Speaker 1: d C Defined Contribution system in the United States, that's

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Speaker 1: essentially what we've asked people to do. We've asked them

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Speaker 1: to take control of their investments and their asset allocation decisions.

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Speaker 1: So I was talking with the financial advisors recently, and

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Speaker 1: you know he put it that way. He said, asking

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Speaker 1: non investment professionals to manage their investment is a big ask.

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Speaker 1: Do we ask people to perform their own surgeries? No,

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Speaker 1: we ask a surgeon. So the target date fund has

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Speaker 1: the advantage of apping people to the most important decision,

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Speaker 1: which is the stock versus bonds decision, based on how

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Speaker 1: far they are away from retirement. And if you read

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Speaker 1: my book Berry, you'll find that there's a lot of

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Speaker 1: science and research and practice and judgment involved in calibrating

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Speaker 1: those targeted funds to meet the needs of the different

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Speaker 1: populations inside these different plans. So people who are putting

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Speaker 1: it putting money aside for retirement, and the calibration takes

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Speaker 1: into account your risk tolerance, and it is I agree

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Speaker 1: with you. It is in a sense a not a

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Speaker 1: pilot solution because it will change your stock bond mix

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Speaker 1: automatically as you age. You'll have to targeted fund manager

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Speaker 1: select the underlying building blocks, monitor those, and add other

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Speaker 1: capabilities like the ones I was mentioning earlier on tactical

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Speaker 1: asset allocations. So it's meant to be an easy solution

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Speaker 1: for investors inside of the seed plans. So if you

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Speaker 1: take that lens, it's not that surprising that they've become

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Speaker 1: the default option of choice. Quite quite interesting. So Sebastian,

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Speaker 1: let's talk a little bit about asset allocation. You mentioned

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Speaker 1: the portfolio. It's been pronounced dead I don't know a

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Speaker 1: dozen times over the last decade. But with rates under

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Speaker 1: one percent and zero not too far off in the future,

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Speaker 1: maybe this time is the time where the portfolio really

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Speaker 1: is dead. What do you think about that traditional asset

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Speaker 1: allocation mix very these days? And that's the perfect question

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Speaker 1: to ask an asset allocator if you want a long answer,

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Speaker 1: it's a really important and well discussed question. Let me

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Speaker 1: start with the conclusion this sixty forty portfolio is not bad,

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Speaker 1: but it needs to be improved. I have three main

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Speaker 1: concerns with the sixty and the first one is really obvious,

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Speaker 1: is that the sixty provides a specific risk profile, and

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Speaker 1: not everybody should have that risk profile. So it is

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Speaker 1: too generic if you think about it as blanket advice.

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Speaker 1: Depending on how far you are from retirement. For example,

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Speaker 1: earlier we're talking about target date funds, you should probably

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Speaker 1: have a different mix between stocks and bonds. People need

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Speaker 1: to account for their risk tolerance. You know, the question

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Speaker 1: how much stocks should I own is often, especially these days,

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Speaker 1: probably more than you think. I talk about this in

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Speaker 1: my book. But if you look at target date strategies,

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Speaker 1: someone who's fifteen years from retirement save fifty years old, uh,

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Speaker 1: we think should hold about their portfolios in stock and retirement.

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Speaker 1: The equity weight it's still about fifty. And this is

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Speaker 1: because you know, longevity says or longevity risk is an

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Speaker 1: important factor, and it says, you know, even at retirement,

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Speaker 1: you can expect to live for another thirty years, so

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Speaker 1: you want your money to last. So that's kind of

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Speaker 1: the first thing to say about the sixty forty. Let's

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Speaker 1: just all realize that it's very generic advice in terms

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Speaker 1: of the stock bond mix. Second, really important risk is

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Speaker 1: not stable over time. Think about it this way. On

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Speaker 1: a rolling one year basis, if I calculate the volatility

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Speaker 1: of a sixty forty portfolio, depending on the environment, I

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Speaker 1: can get as much as volatility or as little as

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Speaker 1: five percent volatility. So that's for the same asset mix

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Speaker 1: can look very aggressive when markets are volatile, and it

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Speaker 1: can look very conservative in quiet times. Our industry is

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Speaker 1: evolving towards more dynamic risk management. To stabilize risk, I

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Speaker 1: think target risk rather than target allocations. And thirty two

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Speaker 1: at sixty your question, very captain, markets have change. Interest

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Speaker 1: rates are now post COVID Hunter basis points lower than

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Speaker 1: they were before COVID, and that's about a fifty drop

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Speaker 1: relative to their level at the beginning of the year.

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Speaker 1: So this means that for the same expected return, people

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Speaker 1: need to take more risk. But let me first it

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Speaker 1: this way. In order to hope to achieve the same

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Speaker 1: expected return, people need to take more risk. Uh So

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Speaker 1: it's not just the search for yield anymore. It's the

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Speaker 1: search for return. The Barclay Zagg has a yield of

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Speaker 1: you know, say one point two, which it's especially zero

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Speaker 1: after inflation. And our solution team has done a study

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Speaker 1: and they found that in order to reach a six

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Speaker 1: expected return. Now there are lots of assumptions here, depends

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Speaker 1: which asset classes you pick, it depends how you model

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Speaker 1: forward returns. But roughly speaking, giving current rate levels, you

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Speaker 1: actually need about in stocks if you want to reach

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Speaker 1: for a six expected return going forward. And to make

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Speaker 1: things worse, bonds no longer diversify stocks as much as

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Speaker 1: they did in the past. So maybe the answer to

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Speaker 1: the question how much stocks UH should I hold? Again,

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Speaker 1: as I mentioned earlier, is often more than than you think.

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Speaker 1: But I understand the spirit of the question is more

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Speaker 1: about the role of traditional asset classes, right stocks, bonds,

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Speaker 1: beers burgers, simple stuff. So my views at the portfolio again,

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Speaker 1: it's not dead, but if that's the risk level you're shooting,

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Speaker 1: you're shooting for it needs to be optimized. And in

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Speaker 1: my book I present some model portfolios and we have

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Speaker 1: shifted twelve percent of the allocation from bonds to low

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Speaker 1: volatility alternatives. We have a five percent allocation to a

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Speaker 1: risk premium or factor strategy if you will, the volatility premium,

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Speaker 1: and there's also a dedicated long bond allocation of three

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Speaker 1: to four The other thing we did in that model

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Speaker 1: portfolio is that within equities, you can swap five of

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Speaker 1: your stocks traditional long only stocks to risk manage or

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Speaker 1: defensive equities. There are different ways of doing that. Those

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Speaker 1: are a lot of those are not available on advisor platforms,

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Speaker 1: for example, and some of them integrate integrate dynamic risk management. So,

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Speaker 1: as I said Verry, if you want to get an

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Speaker 1: assallocation and an assallocator, talking asked them about the whether

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Speaker 1: it's dead. The bottom line is that you know it's

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Speaker 1: fairly generic advice. You have to calibrate this for risk.

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Speaker 1: You have to count for changing risk over time capital

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Speaker 1: markets have changed, or your expectations from the sixty change,

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Speaker 1: and ultimately I think you can re optimize it with

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Speaker 1: these different solutions that just mentioned. So let's stick with

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Speaker 1: the role of bonds within that beer and burger portfolio.

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Speaker 1: We know that they're diversifier, but not as much as

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Speaker 1: they used to be. We know that they produce yields,

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Speaker 1: but really not enough in real terms. There's still the

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Speaker 1: element of fixed income as the volatility dampener versus equity

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Speaker 1: or is that no longer the case? What are your

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Speaker 1: thoughts about that bonds and treasuries in particular can still

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Speaker 1: dampen volatility in your portfolio. But I have to say

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Speaker 1: that these days, if you ask asset allocators what keeps

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Speaker 1: them up at my a number of them will say,

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Speaker 1: and I'll include myself, the worry that treasuries, with the

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Speaker 1: exception of the very long data treasuries have lost most

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Speaker 1: of their rustation benefits. And I'll give you an example.

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Speaker 1: The US equity market had a draw down of nine

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Speaker 1: in September. During that drawn on, the Treasuries index actually

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Speaker 1: lost fifteen basis points over that time period. The zero

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Speaker 1: bound limits upside for treasuries. And this very is simple math. Right,

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Speaker 1: you can't go up during a shock when stocks are

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Speaker 1: selling off a lot more than your duration times the

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Speaker 1: amount by which races can go down. Duration times to

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Speaker 1: change in rates. And look at German boons during COVID, Right,

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Speaker 1: they only went up two in Q one. Meanwhile, the

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Speaker 1: Germany stock index was down. So maybe maybe treasuries can

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Speaker 1: dampen volatility, but they don't really hedge your risk in

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Speaker 1: the sense of rallying when you're incurring really large losses

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Speaker 1: on star, so you have to look for alternatives you

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Speaker 1: can extend duration. And if you look at the long

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Speaker 1: treasuries index during Q one, it was up, but again

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Speaker 1: I yield approached zero even in the long end, gains

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Speaker 1: of that magnitude become unlikely my views, you have about

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Speaker 1: one more good big crisis in long treasuries. Uh. If

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Speaker 1: you will, then you have to start thinking, Okay, if

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Speaker 1: I can't diversify, if I can't get the hedging from treasuries,

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Speaker 1: where am I going to get it. The simplest way

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Speaker 1: of doing that is to buy foot options from stocks,

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Speaker 1: but that can be really expensive. You have to pay

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Speaker 1: for it. With treasuries in a normal environment, at least

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Speaker 1: you get a positive yield. I mentioned earlier the possibility

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Speaker 1: of dynamically managing your risk. I think this is becoming

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Speaker 1: more important for asset allocators and for our industry. For example,

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Speaker 1: what's so called managed volatility strategies or defense as macro strategies.

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Speaker 1: Some of those strategies can pick up the slack from

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Speaker 1: treasuries going forward. You can consider absolute return strategies, adding

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Speaker 1: those to your portfolio because they allow for short positions,

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Speaker 1: which can be very effective hedges. Or look at other diversifiers.

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Speaker 1: This is usually the answer people will give you. Very

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Speaker 1: treasuries don't diversify as much. Look at gold, uh, I

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Speaker 1: don't know. Gold can trade like a risk asset in

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Speaker 1: the short run. At least look at investment grade bonds.

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Speaker 1: They still have default risk. Low interest rate currencies like

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Speaker 1: the Japanese end may help. They tend to rally when

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Speaker 1: stocks sell off, but you have to ask what the

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Speaker 1: expected return on currencies. It can be quite low. So

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Speaker 1: when all else failed, you can either accept higher exposure

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Speaker 1: to laws going forward, or reduce or reoptimize your equity

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Speaker 1: exposure giving your risk tolerance. And I mentioned allocating to

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Speaker 1: risk managed equity solutions for example, Barry. When I this

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Speaker 1: question brings to mind a story I have in my book.

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Speaker 1: When I worked at State three, I had a really

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Speaker 1: great mentor, and I talked about him in the book.

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Speaker 1: He had a fairly dry sense of humor, and one

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Speaker 1: day was in his office complaining about my career. You know,

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Speaker 1: I was saying my career was not going the way

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Speaker 1: I wanted it to go. And he looked at me

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Speaker 1: and he was getting impatient, and he asked, Sebastian, do

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Speaker 1: you know the secret to happiness in life? So I've

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Speaker 1: got to the edge of my seat. Do you know

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Speaker 1: what he said, Barry? He said, the secret to happiness

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Speaker 1: in life is to lower your expectations. So with rates

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Speaker 1: at the zero bound, the bottom line is that investors

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Speaker 1: have to lower their expectations for forward returns on both

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Speaker 1: stocks and bonds, and for how much treasuries can rally

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Speaker 1: when stocks are selling off. Quite interesting. Last question on

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Speaker 1: asset allocation and diversification. We've been waiting for a long

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Speaker 1: time to see when investments outside of the US will

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Speaker 1: begin to pay off. They've lagged for the better part

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Speaker 1: of a decade. Um when are we going to see

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Speaker 1: the benefits of global diversification or or has the law

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Speaker 1: of mean reversion been repealed. Yeah, that's a really good question,

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Speaker 1: because non U S stocks have underperformed for a long time,

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Speaker 1: and this is an example of where relative valuation has

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Speaker 1: not worked in terms of reversion towards the mean because

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Speaker 1: other factors have not lined up. But let's think about

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Speaker 1: the usual disclaimer. I'm sure you tell that to all

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Speaker 1: your clients. Very past returns aren't indicative of future returns.

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Speaker 1: That's a generic statement that I talk a lot about

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Speaker 1: in my book. But I show that over safe five

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Speaker 1: or tenure horizons, relative returns and valuations tend to mean reverts.

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Speaker 1: So it's possible that going forward, non US markets could outperform.

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Speaker 1: I believe that from a long term perspective, emerging markets

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Speaker 1: in particular position for higher growth than the rest of

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Speaker 1: the world, given where there are in their business cycles,

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Speaker 1: and given their demographics, and if you want to get

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Speaker 1: a little bit more tactical in an economic recovery, economies

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Speaker 1: that are more levered like Europe, for example, that have

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Speaker 1: more cychnical exposures could outperform the other ways. So that's

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Speaker 1: one way to think about this is that let's just

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Speaker 1: look forward when we try to answer that question as

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Speaker 1: opposed to backwards. And if we look forward, history says

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Speaker 1: the likelihood of mean reversion given where we are UH

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Speaker 1: could be sart high. Second, you know, there's just more breath.

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Speaker 1: There's more opportunities for alpha and global portfolios compared to

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Speaker 1: portfolios that are concentrated in the US, especially with the

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Speaker 1: current environment with the fangs dominating the US market. There

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Speaker 1: are more than fourteen thousand companies that are included in

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Speaker 1: the MSc I All Country World IMPACTX, so more than

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Speaker 1: just those nine or ten in the US that seems

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Speaker 1: to be driving returns this year, right, which leads to

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Speaker 1: better opportunities for alpha for stock pickers, for those that

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Speaker 1: know how to do that well. So you have the

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Speaker 1: advantage of relative valuation and looking forward relative to backwards,

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Speaker 1: and the breath of investment opportunities working in your favor.

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Speaker 1: Quite quite interesting. Let's talk a little bit about some

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Speaker 1: of the research and writing you do. Not only have

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Speaker 1: you written two books, but you've co authored a number

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Speaker 1: of award winning papers for the Journal of Portfolio Management

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Speaker 1: and for the Financial Analysts Journal. Tell us a bit

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Speaker 1: about how and why you write. You spend an awful

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Speaker 1: lot of time putting out well regarded research. What's the motivation?

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Speaker 1: My motivation in particular for the book was to build

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Speaker 1: a bridge between investment research, academic research, and the practice

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Speaker 1: of investment with a focus on asset allocation decisions. So

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Speaker 1: I reviewed over two hundred papers. I integrated some insights

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Speaker 1: from my colleagues at Tyro Price as well as from

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Speaker 1: my own twenty years in the business. And one thing

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Speaker 1: I wanted to do very with this book was make

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Speaker 1: it accessible without sacrificing the rigor. An author I had

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Speaker 1: in mind when I started writing is Malcolm Gladwell. You

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Speaker 1: know how he takes deep research and makes it interesting

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Speaker 1: and accessible. I want to write something like that for

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Speaker 1: asset allocation. And you know, you could say finances in

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Speaker 1: my DNA. I have absolute passion for it, and working

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Speaker 1: on this book, I wouldn't call it work at all.

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Speaker 1: It's what I do, it's how I think, and I

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Speaker 1: had this desire to put it all together in an

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Speaker 1: organized way. Going from forecasting return, forecasting risks, and then

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Speaker 1: constructing portfolios. That's how I've divided the three sections in

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Speaker 1: the book. So let's talk a little bit about some

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Speaker 1: of the problems of forecasting, especially things like fat tails,

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Speaker 1: black swans, and other financial disasters. How does the finance

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Speaker 1: industry think about fat tails? Do we pay enough attention

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Speaker 1: to these hundred year floods that seem to come along

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Speaker 1: despite their name, every ten years or so. Yeah, those

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Speaker 1: are interesting statistics, very and I actually have a chapter

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Speaker 1: where I talk about those probabilities and how they compare

430
00:30:09,240 --> 00:30:13,120
Speaker 1: in real life versus mathematical models that rely on a

431
00:30:13,200 --> 00:30:18,560
Speaker 1: normal distribution. Look, the issue of fat tales is actually

432
00:30:18,560 --> 00:30:21,680
Speaker 1: a really well known issue, but I would argue we

433
00:30:21,720 --> 00:30:25,760
Speaker 1: don't pay enough attention to it. I would say many

434
00:30:26,280 --> 00:30:31,880
Speaker 1: quantitative analysts, especially when they backdest strategies like risk factor

435
00:30:31,960 --> 00:30:36,600
Speaker 1: premium for example, don't really account properly for fat tales.

436
00:30:37,080 --> 00:30:41,320
Speaker 1: Someone once told me that the only people capable of

437
00:30:41,480 --> 00:30:45,000
Speaker 1: generating a sharp ratio of three point oh so three

438
00:30:45,040 --> 00:30:49,640
Speaker 1: point o return to risk ratio were either Bernie made

439
00:30:49,680 --> 00:30:55,880
Speaker 1: Off or quantitative analysts running back tests. And in the book,

440
00:30:55,880 --> 00:30:59,120
Speaker 1: I have a great example for this. It's from Andrew Low.

441
00:30:59,240 --> 00:31:01,520
Speaker 1: He's a professor r at M I T. And there's

442
00:31:01,560 --> 00:31:05,080
Speaker 1: a fascinating case study on the issue of fat tales

443
00:31:05,720 --> 00:31:08,760
Speaker 1: in the paper he wrote in the earlier two thousand's.

444
00:31:08,800 --> 00:31:14,480
Speaker 1: His studies based on monthly data from January December, and

445
00:31:14,560 --> 00:31:22,560
Speaker 1: he simulates an investment strategy that requires no investment skill whatsoever. Okay,

446
00:31:22,680 --> 00:31:28,480
Speaker 1: no analysis, no foresight, no judgment. The strategy is so

447
00:31:28,520 --> 00:31:34,080
Speaker 1: simple a monkey could do it. But despite this simplicity,

448
00:31:34,360 --> 00:31:39,080
Speaker 1: in Angrelo's fac tests, the strategy doubles the sharp ratio

449
00:31:39,240 --> 00:31:42,600
Speaker 1: of the SNP five hundred from point nine eight to

450
00:31:42,760 --> 00:31:46,600
Speaker 1: one point nine four, so double the risk adjusted return.

451
00:31:47,040 --> 00:31:50,320
Speaker 1: It only has six negative months compared to thirty six

452
00:31:51,080 --> 00:31:54,040
Speaker 1: for the SNP five hundred. And here I'm going to

453
00:31:54,280 --> 00:31:58,640
Speaker 1: quote Angelo because he sets it up nicely. He writes,

454
00:31:58,760 --> 00:32:02,960
Speaker 1: by all accounts, this is an enormously successful hedge fund

455
00:32:03,120 --> 00:32:05,640
Speaker 1: with a track record that would be the envy of

456
00:32:05,760 --> 00:32:10,760
Speaker 1: most asset managers. Then he reveals what the strategy is,

457
00:32:10,800 --> 00:32:14,800
Speaker 1: and this is where we illustrate fat tail risks. Can

458
00:32:14,880 --> 00:32:17,600
Speaker 1: you guess Bury what the strategy is? Well, I was

459
00:32:17,600 --> 00:32:19,840
Speaker 1: going to say, like a leverage S and P fund,

460
00:32:19,880 --> 00:32:23,560
Speaker 1: but the lack of monthly drawdowns kind of moved me

461
00:32:23,600 --> 00:32:27,720
Speaker 1: away from that. What's the strategy? So in this simulation,

462
00:32:27,800 --> 00:32:31,600
Speaker 1: all he does is just sell out of the money

463
00:32:31,680 --> 00:32:35,000
Speaker 1: put options on the S and P five hundred, so

464
00:32:35,320 --> 00:32:40,280
Speaker 1: essentially he sells insurance. The strategy is just to load

465
00:32:40,400 --> 00:32:43,280
Speaker 1: up on tail risks. And it just so happened that

466
00:32:43,320 --> 00:32:47,040
Speaker 1: in the nineties you didn't really get called on those

467
00:32:47,080 --> 00:32:51,160
Speaker 1: short put options. But what it is is picking up

468
00:32:51,200 --> 00:32:53,840
Speaker 1: pennies in front of a team roller. And when you

469
00:32:53,880 --> 00:32:57,720
Speaker 1: look at many risk premia or how our industry thinks

470
00:32:57,760 --> 00:33:03,320
Speaker 1: about liquidity risks for example, book or carry strategies, or

471
00:33:03,360 --> 00:33:08,600
Speaker 1: even how we construct allocations to credit in our portfolios,

472
00:33:09,520 --> 00:33:13,920
Speaker 1: a lot of those strategies return streams, if you will,

473
00:33:14,840 --> 00:33:19,160
Speaker 1: are short an option, and that is embedded tail risk

474
00:33:19,600 --> 00:33:22,800
Speaker 1: that our industry ought to pay more attention to and

475
00:33:22,840 --> 00:33:26,400
Speaker 1: find better ways to model. So I have a couple

476
00:33:26,440 --> 00:33:29,680
Speaker 1: of chapters on that in the book The Black Swans,

477
00:33:29,720 --> 00:33:33,920
Speaker 1: if you will. So since you mentioned Malcolm Gladwell, I

478
00:33:34,080 --> 00:33:37,360
Speaker 1: remember a piece he wrote, I want to say, early

479
00:33:37,480 --> 00:33:43,720
Speaker 1: two thousands about tail risk, and he has on one

480
00:33:43,800 --> 00:33:46,760
Speaker 1: side of the trade. I think it was Victor Niederhofer

481
00:33:47,280 --> 00:33:50,240
Speaker 1: who was on the other side of that tail risk

482
00:33:50,320 --> 00:33:55,920
Speaker 1: trade and now seemed to lab as the buyer of puts,

483
00:33:55,920 --> 00:33:59,520
Speaker 1: which was money losing until for for years and years

484
00:33:59,520 --> 00:34:03,920
Speaker 1: and years until the bulldozer comes along in two thousands,

485
00:34:04,280 --> 00:34:06,840
Speaker 1: and so the writer of puts were minting money all

486
00:34:06,840 --> 00:34:11,480
Speaker 1: through the until the dot com collapse takes place. Then

487
00:34:11,520 --> 00:34:15,040
Speaker 1: the buyer of puts becomes the big winner. And the

488
00:34:15,160 --> 00:34:19,400
Speaker 1: draw downs were so catastrophic that they completely wipe out

489
00:34:19,520 --> 00:34:21,840
Speaker 1: not only all the games for the previous decade, but

490
00:34:22,320 --> 00:34:25,959
Speaker 1: they pretty much bankrupt the writer of puts that whole time.

491
00:34:26,200 --> 00:34:29,839
Speaker 1: Am I portraying that more or less correctly? Yeah? And

492
00:34:29,880 --> 00:34:33,960
Speaker 1: it's a good example because it's extreme and it's directly

493
00:34:34,200 --> 00:34:40,160
Speaker 1: using nonlinear instruments like put But the issue of fat

494
00:34:40,200 --> 00:34:45,160
Speaker 1: tails is broader than that, right, It's the behavior of markets.

495
00:34:45,200 --> 00:34:49,160
Speaker 1: It's how we think about so called carry strategy, it's

496
00:34:49,200 --> 00:34:52,960
Speaker 1: how we think about credit, it's how we think about liquidity,

497
00:34:53,239 --> 00:34:57,680
Speaker 1: risk and portfolios. And you know, even you and I

498
00:34:57,880 --> 00:35:00,520
Speaker 1: very so far in this podcast of talked a lot

499
00:35:00,560 --> 00:35:05,040
Speaker 1: about volatility, but really when we think about forecasting risk,

500
00:35:05,080 --> 00:35:09,880
Speaker 1: constructing portfolio, we really ought to talk about exposure to loss,

501
00:35:11,080 --> 00:35:14,400
Speaker 1: which when you have options like in the example you

502
00:35:14,480 --> 00:35:18,840
Speaker 1: describe is obviously different from your volatility, and in my

503
00:35:19,080 --> 00:35:24,080
Speaker 1: Andrew Loo example, exposure to loss is obviously different from volatility.

504
00:35:24,160 --> 00:35:26,960
Speaker 1: And I'm not claiming this is not something that our

505
00:35:27,000 --> 00:35:30,440
Speaker 1: industry knows. We just ought to have the right tools

506
00:35:30,440 --> 00:35:34,080
Speaker 1: and the right approaches and the right way of thinking

507
00:35:34,120 --> 00:35:40,880
Speaker 1: about those exposures. And it's not just hedging or put options.

508
00:35:40,920 --> 00:35:44,600
Speaker 1: It's a lot of aspects of financial markets. Quite interesting.

509
00:35:45,000 --> 00:35:48,799
Speaker 1: Let's talk a little bit about the future of investing.

510
00:35:49,560 --> 00:35:52,880
Speaker 1: You've done a decent amount of research on active versus

511
00:35:52,960 --> 00:35:56,960
Speaker 1: passive and about the entire debate that's grown up around it.

512
00:35:57,480 --> 00:36:01,000
Speaker 1: Tell us about your findings are good, Susan and Barry.

513
00:36:01,040 --> 00:36:03,640
Speaker 1: I saw you wrote a good article about active verse

514
00:36:03,719 --> 00:36:07,680
Speaker 1: passive where you show that passive is not taken over

515
00:36:07,760 --> 00:36:11,200
Speaker 1: the world when you measure the assets size correctly, and

516
00:36:11,280 --> 00:36:13,759
Speaker 1: you talk about your approach where it's a place for

517
00:36:13,840 --> 00:36:18,319
Speaker 1: both active and passive. So I'm with you on that,

518
00:36:19,719 --> 00:36:26,080
Speaker 1: broadly speaking, passive creating opportunities for active. And in my book,

519
00:36:26,120 --> 00:36:29,319
Speaker 1: I have an example about this. I talked about when

520
00:36:29,360 --> 00:36:34,520
Speaker 1: e t s trade around a theme with high volume

521
00:36:35,719 --> 00:36:39,239
Speaker 1: and how when that happens, all the constituents in the

522
00:36:39,320 --> 00:36:43,719
Speaker 1: e t F start moving together irrespective of fundamentals, so

523
00:36:43,800 --> 00:36:49,200
Speaker 1: I show those correlations spikes. This creates opportunities for stock pickers,

524
00:36:50,160 --> 00:36:53,960
Speaker 1: So I show examples where, for example, regulators were going

525
00:36:54,000 --> 00:36:57,920
Speaker 1: after drug pricing practices and people were selling the healthcare

526
00:36:58,120 --> 00:37:03,160
Speaker 1: ts dragging down companies UH that have nothing to do

527
00:37:03,200 --> 00:37:07,359
Speaker 1: with drug pricing, like medical equipment or contact lenses. So

528
00:37:07,400 --> 00:37:11,839
Speaker 1: those are good examples of when people, UH stockpickers would

529
00:37:11,840 --> 00:37:16,560
Speaker 1: have had opportunities to buy temporarily undervalued companies because they're

530
00:37:16,600 --> 00:37:19,600
Speaker 1: just they're just being dragged down with et F trading.

531
00:37:19,960 --> 00:37:22,480
Speaker 1: But they're also good examples of when people, for example,

532
00:37:22,600 --> 00:37:28,719
Speaker 1: sold financials because of lower rates, but companies with positive

533
00:37:28,800 --> 00:37:32,040
Speaker 1: duration like reads, which used to be part of financials,

534
00:37:32,120 --> 00:37:34,160
Speaker 1: would sell off as well. So it's like throwing the

535
00:37:34,200 --> 00:37:37,560
Speaker 1: baby out with the bathwater. And the original paper on

536
00:37:37,640 --> 00:37:42,160
Speaker 1: this we titled it the Revenge of the Stockpickers. Look,

537
00:37:43,120 --> 00:37:45,600
Speaker 1: I just don't think we should look at average results

538
00:37:45,600 --> 00:37:48,560
Speaker 1: for active managers. We need to look at how skilled

539
00:37:48,680 --> 00:37:52,880
Speaker 1: active management is done, those that can add value at consistent,

540
00:37:53,400 --> 00:37:58,399
Speaker 1: replicable philosophy and process depth of resources to do that.

541
00:37:59,000 --> 00:38:02,960
Speaker 1: And I'm at all saying that there's no place for passive.

542
00:38:03,480 --> 00:38:06,439
Speaker 1: It's not a black and white answer. In my mind.

543
00:38:06,440 --> 00:38:09,840
Speaker 1: There's a place for both active and passive in markets,

544
00:38:09,840 --> 00:38:13,160
Speaker 1: as I saw in the article Europe. And remember you

545
00:38:13,200 --> 00:38:16,680
Speaker 1: know passive ultimately it doesn't work if you don't have

546
00:38:16,760 --> 00:38:20,640
Speaker 1: active managers setting prices. Quite quite interesting, Let's talk a

547
00:38:20,640 --> 00:38:23,680
Speaker 1: little bit about risk appetite here we are, it's the

548
00:38:23,760 --> 00:38:26,319
Speaker 1: end of the year. Were recording this a few days

549
00:38:26,360 --> 00:38:31,360
Speaker 1: before Christmas, and it appears that risk appetite is very high.

550
00:38:31,880 --> 00:38:35,000
Speaker 1: SPACs have gone postal, I p o s are are

551
00:38:35,080 --> 00:38:39,480
Speaker 1: doing really well, robin Hood traders are you know, I

552
00:38:39,560 --> 00:38:42,520
Speaker 1: know it's not a lot of capital, but it's certainly

553
00:38:42,560 --> 00:38:46,200
Speaker 1: a lot of mind share. Anecdotally, it seems like this

554
00:38:46,320 --> 00:38:50,520
Speaker 1: younger generation is really embracing risk. What do you think

555
00:38:50,560 --> 00:38:56,560
Speaker 1: this means in the current environment. It certainly creates fragility

556
00:38:56,640 --> 00:39:02,520
Speaker 1: in markets. The puzzling thing is that risk capited at

557
00:39:02,520 --> 00:39:07,040
Speaker 1: the moment seems high, but in pockets of the markets,

558
00:39:07,200 --> 00:39:12,200
Speaker 1: rather than say a systemic issue as in prior crises.

559
00:39:13,120 --> 00:39:16,720
Speaker 1: So pockets of the markets like the one you mentioned,

560
00:39:16,760 --> 00:39:22,160
Speaker 1: facts Ibo, robin Hood, some technology companies. But if you

561
00:39:22,200 --> 00:39:25,040
Speaker 1: look at it, we have a composite indicator where we

562
00:39:25,120 --> 00:39:29,359
Speaker 1: put together a bunch of variables on surveys to get

563
00:39:29,480 --> 00:39:34,600
Speaker 1: investor sentiment as well as positioning. That composite indicator is

564
00:39:35,239 --> 00:39:41,400
Speaker 1: only slightly above medium. And you also still have the

565
00:39:41,480 --> 00:39:44,520
Speaker 1: proverbial and I hesitate to use the term, but cash

566
00:39:44,680 --> 00:39:48,680
Speaker 1: on the sidelines in the sense that there's seven hundred

567
00:39:48,719 --> 00:39:54,040
Speaker 1: billion extra a u M in money market accounts versus

568
00:39:54,239 --> 00:39:58,960
Speaker 1: what we had pre COVID, So what's happening. Why are

569
00:39:59,400 --> 00:40:05,640
Speaker 1: pockets of the market showing fragility. I mean, we've flooded

570
00:40:05,680 --> 00:40:09,239
Speaker 1: the markets with liquidity, and we had at one point

571
00:40:09,920 --> 00:40:13,040
Speaker 1: year over year growth on money supply. That's basically the

572
00:40:13,080 --> 00:40:16,359
Speaker 1: biggest jump in the data set that I have. And

573
00:40:16,400 --> 00:40:21,680
Speaker 1: I've seen estimates for stimulus measures between fiscal and monetary

574
00:40:21,719 --> 00:40:25,160
Speaker 1: globally as high as twenty five trillion, depending how you

575
00:40:25,200 --> 00:40:28,839
Speaker 1: measure it. But that's a tremendous amount of liquidity. So

576
00:40:29,000 --> 00:40:34,719
Speaker 1: it will create pockets of speculation, but I don't see

577
00:40:34,719 --> 00:40:39,560
Speaker 1: it at this point as a systemic issue for markets. Ultimately,

578
00:40:39,680 --> 00:40:43,440
Speaker 1: very in our portfolios right now, we're neutral between stocks

579
00:40:43,480 --> 00:40:48,560
Speaker 1: and bonds, and we're taking advantage of relative valuations on

580
00:40:48,680 --> 00:40:54,279
Speaker 1: the recovery trade with long positions, for example in small caps,

581
00:40:54,360 --> 00:40:57,880
Speaker 1: and we've started to lean into value, and we have

582
00:40:58,040 --> 00:41:03,120
Speaker 1: some credit exposures, for example in loans which benefit from

583
00:41:03,680 --> 00:41:10,239
Speaker 1: rising rates. So yes, sentiment is high. Their pockets of

584
00:41:10,280 --> 00:41:15,960
Speaker 1: fragility in the market, not a systemic issue in my

585
00:41:16,080 --> 00:41:21,120
Speaker 1: mind at the moment. Quite interesting. We mentioned value a

586
00:41:21,200 --> 00:41:25,560
Speaker 1: little bit. Let's let's talk about value. Is the value

587
00:41:25,560 --> 00:41:28,279
Speaker 1: trade dead? Is it just that growth has done so

588
00:41:28,400 --> 00:41:32,360
Speaker 1: much better than value um not only during the pandemic

589
00:41:32,440 --> 00:41:35,560
Speaker 1: but the past decade. When do we see some sort

590
00:41:35,600 --> 00:41:39,399
Speaker 1: of catch up of value towards growth or not? Does

591
00:41:39,440 --> 00:41:42,399
Speaker 1: it just never happen? You know, you're really asking all

592
00:41:42,440 --> 00:41:46,120
Speaker 1: the hot button questions for asset allocators, right the role

593
00:41:46,160 --> 00:41:50,680
Speaker 1: of bonds going forward is the dead value? Growth is

594
00:41:50,760 --> 00:41:54,640
Speaker 1: the other one. And in our assocation committee we debated

595
00:41:55,440 --> 00:42:00,720
Speaker 1: all the time. I don't think value is dead. In fact,

596
00:42:00,719 --> 00:42:03,360
Speaker 1: in the medium term you could see rotate, you know,

597
00:42:03,400 --> 00:42:07,920
Speaker 1: the rotation that's started with vaccine news continue during the

598
00:42:08,040 --> 00:42:15,640
Speaker 1: economic recovery. But then it's clear still to me that

599
00:42:15,800 --> 00:42:20,880
Speaker 1: growth has some secular which I think long term advantages.

600
00:42:21,600 --> 00:42:26,040
Speaker 1: UM growth stocks do well in low rate environments, and

601
00:42:26,080 --> 00:42:31,439
Speaker 1: there's clearly a sector advantage with technology disruption being more

602
00:42:32,320 --> 00:42:37,120
Speaker 1: tilted or oriented uh in in in growth stocks and

603
00:42:37,200 --> 00:42:41,760
Speaker 1: in the growth style versus value. But the other reason

604
00:42:41,800 --> 00:42:45,000
Speaker 1: I would say value is not dead. There's a tactical

605
00:42:45,000 --> 00:42:50,680
Speaker 1: opportunity here because we're entering an economic recovery. But also

606
00:42:51,239 --> 00:42:54,240
Speaker 1: if you step back and you think in a capitalist system,

607
00:42:54,400 --> 00:43:01,200
Speaker 1: companies evolve and reinvent themselves, banks and make money in

608
00:43:01,400 --> 00:43:04,760
Speaker 1: low rate environments. Think of those that have thriving wealth

609
00:43:04,840 --> 00:43:09,960
Speaker 1: management businesses or trading. For example, energy companies, which are

610
00:43:09,960 --> 00:43:14,480
Speaker 1: also a big component of value stocks, can move and

611
00:43:14,800 --> 00:43:19,799
Speaker 1: are moving to sustainable energy models and and so on.

612
00:43:19,960 --> 00:43:24,160
Speaker 1: So I don't think value is dead Barry, And you know,

613
00:43:24,200 --> 00:43:27,840
Speaker 1: if we look beyond traditional value, look at some other factors.

614
00:43:28,480 --> 00:43:31,240
Speaker 1: Small cap value has been on a tear. The Russell

615
00:43:31,320 --> 00:43:35,319
Speaker 1: two thousand exploded in the second half of this year.

616
00:43:35,840 --> 00:43:38,919
Speaker 1: I think it's substantially outperformed the S and P five.

617
00:43:39,760 --> 00:43:43,920
Speaker 1: So maybe the concept of factor investing and value investing

618
00:43:43,960 --> 00:43:45,600
Speaker 1: is going to be around it in the future. What

619
00:43:45,640 --> 00:43:50,160
Speaker 1: are your thoughts. Well, we're an interesting position right now

620
00:43:50,239 --> 00:43:55,040
Speaker 1: because if you look at academic studies, a good time

621
00:43:55,080 --> 00:44:00,480
Speaker 1: to buy is when both value and momentum degree So

622
00:44:00,640 --> 00:44:05,759
Speaker 1: to your point, we started getting really unexpected news on

623
00:44:05,840 --> 00:44:11,080
Speaker 1: the vaccine, like effectiveness and updates some production capacity we're

624
00:44:11,120 --> 00:44:15,680
Speaker 1: not priced in. I was looking at probabilities produced by

625
00:44:15,719 --> 00:44:19,680
Speaker 1: the group called the super Forecasters, and the forecast was

626
00:44:21,280 --> 00:44:27,000
Speaker 1: chance that we get million doses before March. So coin

627
00:44:27,080 --> 00:44:30,560
Speaker 1: toss Feiser came out with their news and to illustrate

628
00:44:30,560 --> 00:44:33,760
Speaker 1: how that was not priced in, that probability immediately jumped

629
00:44:33,800 --> 00:44:38,080
Speaker 1: to eighty eight and now it's at So that has

630
00:44:38,280 --> 00:44:44,800
Speaker 1: helped those small cap value sectors performed well. They're still

631
00:44:44,920 --> 00:44:49,319
Speaker 1: cheap on a relative basis to other parts of the

632
00:44:49,400 --> 00:44:55,400
Speaker 1: stock market. So you have agreement between positive momentum and

633
00:44:56,640 --> 00:45:01,880
Speaker 1: attractive valuation, which historically across markets is a good time

634
00:45:01,960 --> 00:45:06,200
Speaker 1: to buy into the asset class. Now add to that

635
00:45:06,360 --> 00:45:09,480
Speaker 1: the macro factor. You can check the macro box too,

636
00:45:09,520 --> 00:45:14,000
Speaker 1: because we're in a recovery from a fairly drastic shock,

637
00:45:14,680 --> 00:45:16,920
Speaker 1: but you can think that there is a fair amount

638
00:45:16,920 --> 00:45:19,600
Speaker 1: of pent up demand in the economy and that you

639
00:45:19,760 --> 00:45:25,840
Speaker 1: over year comfortables will be showing substantial growth and small

640
00:45:25,920 --> 00:45:28,560
Speaker 1: gaps and value tend to be the asset classes of

641
00:45:28,680 --> 00:45:32,640
Speaker 1: choice during an economic recovery, so check that box too,

642
00:45:33,080 --> 00:45:35,080
Speaker 1: and then you can, to a certain extent check the

643
00:45:35,120 --> 00:45:38,600
Speaker 1: sentiment and technicals box as well. So the starts are

644
00:45:38,640 --> 00:45:43,440
Speaker 1: starting to align at the sixth to eight horizon for

645
00:45:43,600 --> 00:45:48,319
Speaker 1: the recovery trade. However, it's really going to be a

646
00:45:48,360 --> 00:45:53,040
Speaker 1: bumpy ride. And as we're recording this webcast Barrier, we're

647
00:45:53,040 --> 00:46:00,600
Speaker 1: getting some worrisome news about how devastating this new way

648
00:46:00,640 --> 00:46:04,280
Speaker 1: of the virus is while we're waiting for the vaccine

649
00:46:04,440 --> 00:46:08,600
Speaker 1: to be deployed, including mutations, travel restrictions, and so on.

650
00:46:09,040 --> 00:46:12,920
Speaker 1: So it's the fact that the destination is pretty clear,

651
00:46:13,000 --> 00:46:17,399
Speaker 1: but the path to get there is treacherous. So you

652
00:46:17,760 --> 00:46:20,600
Speaker 1: bring up so many interesting points I have to ask

653
00:46:20,640 --> 00:46:25,720
Speaker 1: you about. One is the combination of momentum and value,

654
00:46:26,520 --> 00:46:30,920
Speaker 1: combining the two. My friend Wes Gray at Alpha Architects

655
00:46:31,000 --> 00:46:36,600
Speaker 1: has written about combining momentum and value. The returns are spectacular,

656
00:46:37,200 --> 00:46:41,680
Speaker 1: but the volatility he describes as just so horrific. Even

657
00:46:41,760 --> 00:46:46,080
Speaker 1: God couldn't manage that portfolio. Um. Eventually, clients would just

658
00:46:46,120 --> 00:46:50,520
Speaker 1: screen bloody murder because the drawdowns are so brutal. How

659
00:46:50,560 --> 00:46:54,080
Speaker 1: do you deal with things like that? Obviously that's an

660
00:46:54,080 --> 00:46:57,239
Speaker 1: extreme but how do you deal with the drawdowns and

661
00:46:57,280 --> 00:47:02,600
Speaker 1: the volatility. I know it's the price of admission for performance,

662
00:47:02,719 --> 00:47:07,080
Speaker 1: but clients have a really hard time living through those

663
00:47:07,160 --> 00:47:12,080
Speaker 1: periods where you know you're underperforming, and sometimes if you've

664
00:47:12,080 --> 00:47:17,319
Speaker 1: been a global value investor, significantly underperforming. Yeah, let me

665
00:47:17,360 --> 00:47:21,680
Speaker 1: give you a kind of pity answer, but I think

666
00:47:21,719 --> 00:47:25,680
Speaker 1: it's important, and then a more philosophical answer. The kind

667
00:47:25,719 --> 00:47:30,080
Speaker 1: of immediate answer is, look, implementation matters as well. If

668
00:47:30,080 --> 00:47:34,239
Speaker 1: you make a statement like when value and momentum agree

669
00:47:34,440 --> 00:47:37,160
Speaker 1: it's a good time to buy, and you design a

670
00:47:37,239 --> 00:47:40,960
Speaker 1: strategy to take advantage of that, the strategy that you

671
00:47:41,120 --> 00:47:44,960
Speaker 1: actually design and the way you implement that broad concept

672
00:47:45,560 --> 00:47:50,280
Speaker 1: can lead to vastly different exposure to loss and vastly

673
00:47:50,360 --> 00:47:54,600
Speaker 1: different performance over time. So it's a broad statement where

674
00:47:54,760 --> 00:47:59,920
Speaker 1: implementation and risk management practices matter quite a bit. So

675
00:48:00,160 --> 00:48:05,080
Speaker 1: that's very few of my pity answer. But philosophically, if

676
00:48:05,719 --> 00:48:08,239
Speaker 1: I need someone in an elevator and you give me

677
00:48:08,320 --> 00:48:13,160
Speaker 1: thirty seconds to give investment advice between floors two and four,

678
00:48:14,320 --> 00:48:17,479
Speaker 1: I'm going to say stay invested for the long run

679
00:48:18,239 --> 00:48:22,200
Speaker 1: and stay diversified. So those are probably the two most

680
00:48:23,200 --> 00:48:26,879
Speaker 1: generic pieces of investment advice, but I think they're important

681
00:48:27,120 --> 00:48:34,320
Speaker 1: where it gets complicated. Uh is Again in terms of implementation,

682
00:48:34,400 --> 00:48:38,480
Speaker 1: diversification means different things depending on what you have on

683
00:48:38,520 --> 00:48:43,600
Speaker 1: the menu, what you diversify across, and depending on which

684
00:48:43,680 --> 00:48:46,600
Speaker 1: market environment you look at. The big theme in my

685
00:48:46,719 --> 00:48:51,400
Speaker 1: book is that diversification, you know, between risk assets, it

686
00:48:51,480 --> 00:48:55,400
Speaker 1: actually works really well when markets are rallying, which is

687
00:48:55,719 --> 00:48:58,040
Speaker 1: if you think about it when you don't want it,

688
00:48:58,640 --> 00:49:03,480
Speaker 1: and it really doesn't work when markets are crashing, as

689
00:49:03,520 --> 00:49:06,319
Speaker 1: we've seen this year in q Won during COVID. So

690
00:49:06,880 --> 00:49:10,680
Speaker 1: while this is generic, I think important advice again the

691
00:49:10,719 --> 00:49:13,719
Speaker 1: implementation of how you divers find the title of my

692
00:49:13,760 --> 00:49:18,280
Speaker 1: book is beyond diversification. What you do beyond that matters

693
00:49:19,040 --> 00:49:24,120
Speaker 1: quite a lot. But if you look over time, staying

694
00:49:24,320 --> 00:49:30,880
Speaker 1: invested is probably the most important of the two pieces

695
00:49:30,960 --> 00:49:36,319
Speaker 1: of advice, because over time, if you can weather exposure

696
00:49:36,360 --> 00:49:39,799
Speaker 1: to loss, especially in the low rate environment where you're

697
00:49:39,800 --> 00:49:43,640
Speaker 1: not going to get anything out of bonds anyways, if

698
00:49:43,680 --> 00:49:47,600
Speaker 1: your time horizon is long enough, it will pay off.

699
00:49:48,160 --> 00:49:52,040
Speaker 1: So there's investor psychology in there. And I'm guessing a

700
00:49:52,040 --> 00:49:56,640
Speaker 1: lot of financial advisors are listening to your podcasts and

701
00:49:56,680 --> 00:49:58,960
Speaker 1: they're probably throwing their phones on the wall at me,

702
00:49:59,160 --> 00:50:04,040
Speaker 1: right now, because if you're a financial advisor, investors psychologies

703
00:50:04,080 --> 00:50:06,000
Speaker 1: what you have to deal with with your clients and

704
00:50:06,080 --> 00:50:09,120
Speaker 1: day today, and your role is essentially to tell them

705
00:50:09,120 --> 00:50:13,440
Speaker 1: not to sell in March and if anything, to add

706
00:50:13,480 --> 00:50:17,600
Speaker 1: back to risk assets. I'm not making light of investor psychology.

707
00:50:17,600 --> 00:50:21,360
Speaker 1: It is quite important factor, especially for financial advisors that

708
00:50:21,440 --> 00:50:24,800
Speaker 1: deal with clients you know, day today. So we've talked

709
00:50:24,840 --> 00:50:28,040
Speaker 1: about hamburgers and beer. We've talked about stocks and bonds.

710
00:50:28,080 --> 00:50:32,040
Speaker 1: We haven't talked about private assets like venture capital or

711
00:50:32,080 --> 00:50:35,840
Speaker 1: private equity, or structured notes or any of the other

712
00:50:36,800 --> 00:50:40,640
Speaker 1: non publicly traded items that are out there. What are

713
00:50:40,719 --> 00:50:44,880
Speaker 1: your views, given lowered expected returns for stocks and lowered

714
00:50:44,880 --> 00:50:48,600
Speaker 1: expected returns for bonds, what are your views on these

715
00:50:49,040 --> 00:50:55,239
Speaker 1: various private, not publicly traded assets. Within asset allocation and

716
00:50:55,280 --> 00:50:59,120
Speaker 1: the world of diversification, private assets can have a role

717
00:50:59,360 --> 00:51:02,920
Speaker 1: in many of folios, but there are not a free lunch,

718
00:51:03,080 --> 00:51:07,960
Speaker 1: and many investors think of private assets as a free lunch,

719
00:51:08,040 --> 00:51:12,560
Speaker 1: private equity in particular. This is fascinating. But if you

720
00:51:12,719 --> 00:51:16,960
Speaker 1: ask me, uh, in the context of what I mentioned

721
00:51:17,000 --> 00:51:19,720
Speaker 1: earlier that I wrote my book in part to bring

722
00:51:19,880 --> 00:51:25,440
Speaker 1: academic finance into the industry into the practice of asset allocation.

723
00:51:26,040 --> 00:51:31,520
Speaker 1: If you ask me where academic research and investment practice

724
00:51:32,400 --> 00:51:37,560
Speaker 1: disagree the most, the biggest chasm in our industry between

725
00:51:37,640 --> 00:51:41,799
Speaker 1: the two, I'll tell you it's on the performance of

726
00:51:41,840 --> 00:51:45,920
Speaker 1: private assets over time. And you see a lot of

727
00:51:46,000 --> 00:51:50,960
Speaker 1: numbers that suggest that private equity outperforms public equity. Buy

728
00:51:51,040 --> 00:51:55,480
Speaker 1: a lot both an absolute and in a risk adjusted basis.

729
00:51:55,920 --> 00:51:59,959
Speaker 1: And then if you dig into academic research where people

730
00:52:00,000 --> 00:52:05,040
Speaker 1: will actually scrub the data and they remove zombie valuations

731
00:52:05,120 --> 00:52:10,520
Speaker 1: from the database and the account properly for survivorship bias

732
00:52:10,640 --> 00:52:15,239
Speaker 1: and reporting bias, and the account properly for the timing

733
00:52:15,440 --> 00:52:19,719
Speaker 1: of cash flows coming in and out, you start uncovering

734
00:52:20,000 --> 00:52:23,279
Speaker 1: a completely different story. There's an academics done a lot

735
00:52:23,360 --> 00:52:25,520
Speaker 1: of research on that. I quote him in my book

736
00:52:25,600 --> 00:52:28,719
Speaker 1: is then as Ludovic Value Book, and he shows in

737
00:52:28,800 --> 00:52:32,120
Speaker 1: some of his papers that actually private equity over long

738
00:52:32,200 --> 00:52:36,080
Speaker 1: periods of time can actually underperform public equities. Now, there's

739
00:52:36,080 --> 00:52:40,560
Speaker 1: a wide range uh within private equity and it depends

740
00:52:40,960 --> 00:52:44,719
Speaker 1: who you invest with. But it's it's a fascinating it's

741
00:52:44,719 --> 00:52:49,320
Speaker 1: a it's a gigantic chasm between industry and academic research.

742
00:52:50,280 --> 00:52:53,560
Speaker 1: The takeaway talk about this in my book it is

743
00:52:53,560 --> 00:52:56,080
Speaker 1: that it's not it's just not a free launch. You

744
00:52:56,080 --> 00:52:59,240
Speaker 1: need to account for the risk properly. You can earn

745
00:52:59,360 --> 00:53:02,840
Speaker 1: a liquidity premium, but it is like shorting an option

746
00:53:03,320 --> 00:53:06,640
Speaker 1: to a certain extent, if you will and if you

747
00:53:06,680 --> 00:53:10,080
Speaker 1: have the right approach to it. Uh, there's there's nothing

748
00:53:10,120 --> 00:53:12,920
Speaker 1: wrong with private assets and private equity. They're just not

749
00:53:13,280 --> 00:53:16,120
Speaker 1: the free lunch investors are making an amount to be

750
00:53:16,280 --> 00:53:19,840
Speaker 1: and I think your investors have just have to be

751
00:53:19,840 --> 00:53:22,279
Speaker 1: careful when they think about those types of investments because

752
00:53:22,280 --> 00:53:25,400
Speaker 1: they're not as transparent as public markets. Right, clearly not

753
00:53:25,480 --> 00:53:28,759
Speaker 1: as transparent. You bring up two really interesting points about

754
00:53:28,800 --> 00:53:33,759
Speaker 1: private equity. One is the liquidity premium. You're looking for

755
00:53:33,880 --> 00:53:38,320
Speaker 1: a bigger payout in exchange for locking up your capital

756
00:53:38,360 --> 00:53:43,279
Speaker 1: for a longer period of time. But there's also the

757
00:53:43,320 --> 00:53:47,239
Speaker 1: selection process. Go back just a couple of decades, there

758
00:53:47,239 --> 00:53:50,399
Speaker 1: were a few hundred private equity firms. Now I think

759
00:53:50,440 --> 00:53:54,320
Speaker 1: the last number is something like eleven thousand private equity funds.

760
00:53:54,400 --> 00:53:59,360
Speaker 1: How is an individual investor or even an institution supposed

761
00:53:59,400 --> 00:54:04,520
Speaker 1: to make at decision about where to allocate capital to?

762
00:54:04,640 --> 00:54:07,520
Speaker 1: Which private equity firm yeah, you know, you have to

763
00:54:07,560 --> 00:54:11,160
Speaker 1: be really careful in their advisors that specialize in that

764
00:54:11,400 --> 00:54:15,200
Speaker 1: to taking the investors side, or consultants for example that

765
00:54:15,239 --> 00:54:20,200
Speaker 1: can help institutional investors. Individual investors have to be extra

766
00:54:20,239 --> 00:54:23,920
Speaker 1: careful and work with their financial advisors. I think you

767
00:54:24,120 --> 00:54:29,799
Speaker 1: really have to not just jump in based on the

768
00:54:29,840 --> 00:54:34,800
Speaker 1: Google search, if you will, because really an asset class,

769
00:54:34,920 --> 00:54:37,399
Speaker 1: this is an asset class where the top quartile can

770
00:54:37,440 --> 00:54:41,879
Speaker 1: be very different from the bottom quartile, probably even more

771
00:54:41,960 --> 00:54:46,280
Speaker 1: than in public markets. I do think that the factors

772
00:54:46,320 --> 00:54:50,600
Speaker 1: for success in those markets resemble the factors for success

773
00:54:50,640 --> 00:54:58,080
Speaker 1: and active management in public markets. Depth of resources, replicability

774
00:54:58,280 --> 00:55:04,959
Speaker 1: of a proven process, us a philosophy that is consistent

775
00:55:05,360 --> 00:55:09,560
Speaker 1: over time, experience, and so on. So you want to

776
00:55:09,560 --> 00:55:13,080
Speaker 1: look for those factors as well. Huh, quite interesting. I

777
00:55:13,120 --> 00:55:17,759
Speaker 1: have a couple of more questions on asset allocation and

778
00:55:17,800 --> 00:55:21,240
Speaker 1: investing in general. I kind of ran past the fact

779
00:55:21,719 --> 00:55:25,880
Speaker 1: that you sit on a committee for the Institute for

780
00:55:26,000 --> 00:55:30,200
Speaker 1: Quantitative Research, and I just wanted to get your thoughts

781
00:55:30,400 --> 00:55:35,080
Speaker 1: on the rise of quantitative investing, which has become so

782
00:55:35,239 --> 00:55:39,520
Speaker 1: popular along with factor based investing and generally the use

783
00:55:39,600 --> 00:55:43,640
Speaker 1: of high powered computers and algorithms, tell us a little

784
00:55:43,640 --> 00:55:48,280
Speaker 1: bit about your views on quant I like active versus passive,

785
00:55:48,360 --> 00:55:53,440
Speaker 1: there's a place for both quantitative and fundamental, and in

786
00:55:53,480 --> 00:55:57,880
Speaker 1: the case of quant versus fundamental, the intersection of both

787
00:55:58,200 --> 00:56:04,320
Speaker 1: is what fascinates me. And if you set aside applications

788
00:56:04,440 --> 00:56:09,200
Speaker 1: in high frequency trading, for example, where really the technology

789
00:56:09,640 --> 00:56:13,360
Speaker 1: is the advantage and the researches the advantage, and you

790
00:56:13,440 --> 00:56:17,879
Speaker 1: go to what we do, which is tactical assallocation, strategic

791
00:56:17,920 --> 00:56:22,640
Speaker 1: asset allocation, or even for stock pickers in general, you know,

792
00:56:22,760 --> 00:56:31,840
Speaker 1: you fundamentals matter, and experience matters, and if you're able

793
00:56:31,960 --> 00:56:41,400
Speaker 1: to bring together quantitative insights with data and judgment and experience,

794
00:56:42,320 --> 00:56:45,640
Speaker 1: I think you can get a more robust investment process

795
00:56:45,680 --> 00:56:48,360
Speaker 1: in a lot of cases. Look, I just want to

796
00:56:48,360 --> 00:56:51,920
Speaker 1: be clear. There's a place for systematic quantitative strategies to

797
00:56:52,040 --> 00:56:56,640
Speaker 1: stand alone. There's a place for fundamental stock picking, for example,

798
00:56:57,080 --> 00:57:00,520
Speaker 1: but there's a in between as a tremendous amount that

799
00:57:00,640 --> 00:57:04,400
Speaker 1: our industry can do bringing both together. And I dedicate

800
00:57:05,120 --> 00:57:09,799
Speaker 1: a lot of my book about this, and Barry there's

801
00:57:09,840 --> 00:57:13,160
Speaker 1: a story at the beginning of the book about a

802
00:57:13,239 --> 00:57:17,160
Speaker 1: quantitative research conference that I was sitting at several years

803
00:57:17,200 --> 00:57:22,840
Speaker 1: ago when a fundamental investor basically raised their hand and

804
00:57:23,000 --> 00:57:29,600
Speaker 1: asked a pretty rude question amongst quantitative peers or investors,

805
00:57:29,840 --> 00:57:33,760
Speaker 1: and he basically said, you know, your models for forecasting

806
00:57:33,880 --> 00:57:40,880
Speaker 1: returns are not valid because they're basically garbage in, and

807
00:57:41,080 --> 00:57:45,320
Speaker 1: if you use a portfolio optimization model, it's going to

808
00:57:45,400 --> 00:57:51,040
Speaker 1: be garbage out. So why use quantitative methods at all?

809
00:57:52,240 --> 00:57:57,000
Speaker 1: And I'll always remember the presenter was a well regarded

810
00:57:57,280 --> 00:58:02,240
Speaker 1: thought leader, someone who's traveled academia and practice. I always

811
00:58:02,320 --> 00:58:05,560
Speaker 1: remember what he answered. His answer. It stayed with me

812
00:58:05,600 --> 00:58:08,800
Speaker 1: and I've used it over time. He looked at the

813
00:58:08,840 --> 00:58:12,160
Speaker 1: presenter and he was clearly he just landed his clearly

814
00:58:12,240 --> 00:58:14,280
Speaker 1: jet lacks a little bit patient. He looked at the

815
00:58:14,360 --> 00:58:17,400
Speaker 1: presenter and he said, if you don't, and this was

816
00:58:17,480 --> 00:58:20,480
Speaker 1: more reply to the garbage in, garbage out or so

817
00:58:20,600 --> 00:58:23,240
Speaker 1: called guy Goo critique. So if you don't think you

818
00:58:23,280 --> 00:58:29,040
Speaker 1: can forecast expected returns, you shouldn't be an investment business.

819
00:58:30,120 --> 00:58:34,439
Speaker 1: And the point is that investing is about forecasting. When

820
00:58:34,440 --> 00:58:37,640
Speaker 1: we invest, no matter what, we make a judgment about

821
00:58:37,680 --> 00:58:40,520
Speaker 1: the future, in the way we allocate our portfolio, in

822
00:58:40,560 --> 00:58:44,200
Speaker 1: the way we position our portfolio, so there are quite

823
00:58:44,200 --> 00:58:46,560
Speaker 1: a few chapters in my book that are about how

824
00:58:46,600 --> 00:58:49,520
Speaker 1: do you use a quantitative process. We were just talking

825
00:58:49,560 --> 00:58:53,720
Speaker 1: about value and momentum and when both agree, how do

826
00:58:53,720 --> 00:58:57,360
Speaker 1: you use data and insights like that but make them

827
00:58:57,400 --> 00:59:02,400
Speaker 1: relevant for the current more kind environment. And in that

828
00:59:02,520 --> 00:59:07,280
Speaker 1: intersection you can create a replicable process where there's room

829
00:59:07,360 --> 00:59:13,760
Speaker 1: for judgment, and uh, you can succeed as an investor. So, Barry,

830
00:59:13,840 --> 00:59:16,520
Speaker 1: I'm pontificating a lot, but this is a question that

831
00:59:16,560 --> 00:59:20,280
Speaker 1: I've thought about while writing my book and throughout my

832
00:59:20,440 --> 00:59:24,720
Speaker 1: career because in a sense, like I've straddled bottom up

833
00:59:24,760 --> 00:59:29,600
Speaker 1: and top down investing, I've also straddled quantitative and fundamental investing,

834
00:59:29,720 --> 00:59:33,040
Speaker 1: especially over the last five to ten years of my career.

835
00:59:33,840 --> 00:59:37,760
Speaker 1: Very interesting, there was something in one of your writings

836
00:59:37,800 --> 00:59:40,600
Speaker 1: I don't remember which that I made a note I

837
00:59:40,680 --> 00:59:44,400
Speaker 1: have to ask you about because it's so counterintuitive, and

838
00:59:44,520 --> 00:59:49,040
Speaker 1: it's the longer the stream of historical investment data, the

839
00:59:49,120 --> 00:59:54,560
Speaker 1: better true or false. I'm going to say falls just

840
00:59:54,680 --> 00:59:58,080
Speaker 1: to be a bit controversial that the real answer would

841
00:59:58,080 --> 01:00:02,400
Speaker 1: be just not always of academics like to go back

842
01:00:02,440 --> 01:00:08,600
Speaker 1: to the early nineteen hundreds right to create robust data sets.

843
01:00:08,600 --> 01:00:11,200
Speaker 1: But if you think about it, the data back then,

844
01:00:12,360 --> 01:00:14,920
Speaker 1: I don't know, you know, we didn't have computers, we

845
01:00:14,920 --> 01:00:17,720
Speaker 1: didn't have cars. People use like a horse and buggy

846
01:00:17,800 --> 01:00:24,000
Speaker 1: to get around. So many financial advisors, for example, will

847
01:00:24,000 --> 01:00:28,240
Speaker 1: think about investment policy statements or strategic asset allocations for

848
01:00:28,320 --> 01:00:32,720
Speaker 1: their clients based on long term data on return and risk,

849
01:00:32,760 --> 01:00:38,040
Speaker 1: and they'll average across different risk regimes um well. First

850
01:00:38,040 --> 01:00:42,080
Speaker 1: of all, in the book, I show that higher frequency,

851
01:00:42,720 --> 01:00:47,240
Speaker 1: shorter term data are more predictive of risk going forward

852
01:00:48,040 --> 01:00:52,560
Speaker 1: than the longer term data, just from a risk forecasting perspective.

853
01:00:53,320 --> 01:00:57,440
Speaker 1: The other issue is that the fluctuation in sector weights

854
01:00:58,160 --> 01:01:01,840
Speaker 1: within asset classes make it such that if I use

855
01:01:02,800 --> 01:01:06,320
Speaker 1: in my model old data from the SMP five data

856
01:01:06,360 --> 01:01:08,600
Speaker 1: from a long time ago, I'm looking at a different

857
01:01:08,640 --> 01:01:12,439
Speaker 1: sector composition. For example, right technology sector in the SMP

858
01:01:12,560 --> 01:01:16,200
Speaker 1: five has been really really on stable from five of

859
01:01:16,240 --> 01:01:21,400
Speaker 1: the index. It actually reached in during dot Com, then

860
01:01:21,400 --> 01:01:24,960
Speaker 1: it declined back to fifteen in two thousand five and

861
01:01:25,040 --> 01:01:29,080
Speaker 1: now stands at So you're really not looking at the

862
01:01:29,120 --> 01:01:32,120
Speaker 1: same asset class. If you use this to do a

863
01:01:32,200 --> 01:01:36,440
Speaker 1: strategic asset allocation, you're basically modeling risk. The risk of

864
01:01:36,440 --> 01:01:39,760
Speaker 1: an asset class that no longer exists, and there are

865
01:01:39,760 --> 01:01:42,600
Speaker 1: other examples of that. Even in bonds, the duration of

866
01:01:42,640 --> 01:01:47,520
Speaker 1: the index has changed, Right, The weight of high quality

867
01:01:47,560 --> 01:01:53,560
Speaker 1: bonds has decreased from two as a share of corporates,

868
01:01:53,600 --> 01:01:57,040
Speaker 1: and the weight that riskier bonds has changed, the duration

869
01:01:57,120 --> 01:02:02,560
Speaker 1: of the Bloomberg Barkley's as has increased, Right, it was

870
01:02:02,600 --> 01:02:05,040
Speaker 1: four and a half years back in two thousand five,

871
01:02:05,960 --> 01:02:09,360
Speaker 1: now it's six seven years. Didn't the SMP break out

872
01:02:09,520 --> 01:02:14,960
Speaker 1: communications from technology? Also, if I'm remembering correctly, within that sector,

873
01:02:15,480 --> 01:02:18,680
Speaker 1: they kind of cleaved it into Yes, the sector weights

874
01:02:18,800 --> 01:02:22,920
Speaker 1: change over time, and even the classification and which stocks

875
01:02:22,920 --> 01:02:26,560
Speaker 1: are included in the index. Emerging markets are another really

876
01:02:26,560 --> 01:02:30,160
Speaker 1: good example. Emerging market used to be very much commodity

877
01:02:30,240 --> 01:02:35,920
Speaker 1: dependent cyclical factors and financials. Emerging markets now have become

878
01:02:36,080 --> 01:02:38,200
Speaker 1: a lot more high tech than they used to. You

879
01:02:38,240 --> 01:02:41,600
Speaker 1: have some large tech platform companies like you have in

880
01:02:41,640 --> 01:02:45,400
Speaker 1: the US in China for example. So I guess the

881
01:02:45,680 --> 01:02:50,120
Speaker 1: point trying to make is that historical data is useful,

882
01:02:50,280 --> 01:02:53,480
Speaker 1: but it's not always the case that the longer your

883
01:02:53,560 --> 01:02:57,760
Speaker 1: data set, the better for your financial risk modeling. And

884
01:02:57,920 --> 01:03:00,200
Speaker 1: one way to get around this is to you is

885
01:03:00,560 --> 01:03:03,640
Speaker 1: factor models, And here I'm talking about looking at how

886
01:03:04,520 --> 01:03:10,240
Speaker 1: the asset classes are composed, what the asset classes look

887
01:03:10,400 --> 01:03:14,040
Speaker 1: right now based on the current factor exposures, and then

888
01:03:14,080 --> 01:03:19,680
Speaker 1: backfill the historical data for those factors. So I guess

889
01:03:19,680 --> 01:03:22,120
Speaker 1: what I'm saying is there are different ways of addressing

890
01:03:22,160 --> 01:03:26,400
Speaker 1: this issue. But you know, is more data always better

891
01:03:26,480 --> 01:03:31,280
Speaker 1: than than more recent or more relevant data? The answers know.

892
01:03:31,720 --> 01:03:34,760
Speaker 1: And part of this also comes down to risk regimes.

893
01:03:34,840 --> 01:03:37,760
Speaker 1: Right you you can forecast the type of regime you

894
01:03:37,920 --> 01:03:40,480
Speaker 1: think you're going to be in and then sample data

895
01:03:40,560 --> 01:03:43,960
Speaker 1: from a similar regime in history. For example, I know

896
01:03:44,080 --> 01:03:46,480
Speaker 1: we only have you for a limited amount of time.

897
01:03:46,520 --> 01:03:49,000
Speaker 1: I only have you for another ten minutes. So let's

898
01:03:49,040 --> 01:03:51,960
Speaker 1: jump to our favorite questions that we ask all of

899
01:03:51,960 --> 01:03:56,680
Speaker 1: our guests, called our speed round, and we'll start with streaming.

900
01:03:56,760 --> 01:03:59,880
Speaker 1: Tell us what you're watching on either Netflix or Amazon Prime,

901
01:04:00,400 --> 01:04:03,120
Speaker 1: or what podcast you might be listening to. What's keeping

902
01:04:03,160 --> 01:04:07,880
Speaker 1: you entertained during lockdown? I love that question. I mean,

903
01:04:07,920 --> 01:04:10,640
Speaker 1: my answer is not going to be very original right now,

904
01:04:10,680 --> 01:04:14,760
Speaker 1: but I just finished Queen's Gambit, which I thought was excellent.

905
01:04:15,680 --> 01:04:20,960
Speaker 1: And the other one is my son. He's thirteen, and um,

906
01:04:21,200 --> 01:04:26,480
Speaker 1: he'd never watch the Lost series and I've never I've

907
01:04:26,520 --> 01:04:29,560
Speaker 1: never watched it either, So we've just started from the beginning.

908
01:04:30,360 --> 01:04:33,560
Speaker 1: We're in season two of the Lost series, which is

909
01:04:33,600 --> 01:04:37,480
Speaker 1: a an older show, but we're really enjoying enjoying it,

910
01:04:37,560 --> 01:04:41,800
Speaker 1: so Buried. No, no spoilers, please, I haven't seen any

911
01:04:41,840 --> 01:04:43,880
Speaker 1: of it, so, uh, you don't have to worry about

912
01:04:43,880 --> 01:04:47,360
Speaker 1: spoilers from me. You mentioned one of your mentors earlier

913
01:04:47,400 --> 01:04:51,120
Speaker 1: in your career. Tell us who helped to shape your career,

914
01:04:51,640 --> 01:04:55,800
Speaker 1: who gave you guidance as to both, um, how your

915
01:04:55,880 --> 01:05:00,280
Speaker 1: jobs progressed and your own investment philosophy. Let me named

916
01:05:00,280 --> 01:05:03,720
Speaker 1: two mentors. First, my father. I talked about him in

917
01:05:03,760 --> 01:05:07,120
Speaker 1: my book. He was a finance professor for forty years.

918
01:05:07,760 --> 01:05:12,200
Speaker 1: I even took a couple of his classes. Second mentor

919
01:05:12,400 --> 01:05:17,320
Speaker 1: was Mark Kritzman. He is CEO of Wyndham Capital. He

920
01:05:17,400 --> 01:05:22,280
Speaker 1: also teaches finance at the m I T. And there's

921
01:05:22,320 --> 01:05:24,360
Speaker 1: a story I like to tell about the early days

922
01:05:24,400 --> 01:05:28,280
Speaker 1: of my collaboration with Mark Kritzman. Back before the year

923
01:05:28,320 --> 01:05:32,000
Speaker 1: two thousand, I didn't speak much English. I grew up Canadian,

924
01:05:32,280 --> 01:05:36,280
Speaker 1: and I interviewed with Mark for research internship. I don't

925
01:05:36,280 --> 01:05:39,200
Speaker 1: think it was a good interview, except that I'd read

926
01:05:39,240 --> 01:05:42,240
Speaker 1: every single paper he had published up to that point

927
01:05:42,360 --> 01:05:46,480
Speaker 1: and fought and still think he's a genius. But he

928
01:05:46,600 --> 01:05:48,880
Speaker 1: was reluctant. You know, he had access to the best

929
01:05:48,880 --> 01:05:52,240
Speaker 1: students from the best universities in the US, but he

930
01:05:52,320 --> 01:05:57,240
Speaker 1: was pressured into uh this interview by my professor. And

931
01:05:57,440 --> 01:05:59,840
Speaker 1: he also had a business relationship with Mark and with

932
01:06:00,120 --> 01:06:04,600
Speaker 1: State Street. And I'll just say that I learned years later,

933
01:06:04,680 --> 01:06:07,960
Speaker 1: over a glass of wine that Mark had pushed back

934
01:06:08,040 --> 01:06:11,360
Speaker 1: really hard from taking me on as a research intern.

935
01:06:11,440 --> 01:06:14,160
Speaker 1: Apparently he had said, and I quote, I don't care

936
01:06:14,200 --> 01:06:17,760
Speaker 1: if he's free, because we didn't. I was. I was

937
01:06:17,760 --> 01:06:20,880
Speaker 1: writing my thesis for my master's degree, so I wasn't

938
01:06:21,000 --> 01:06:25,200
Speaker 1: There was no uh pain salary involved. Apparently it said,

939
01:06:25,280 --> 01:06:27,920
Speaker 1: I don't care if he's free. My time is not free.

940
01:06:28,560 --> 01:06:30,520
Speaker 1: H This was This was over a glass of wine

941
01:06:30,560 --> 01:06:33,040
Speaker 1: a few years later at the time, though back then

942
01:06:33,080 --> 01:06:35,560
Speaker 1: all I got was a call from State Street UH

943
01:06:35,640 --> 01:06:38,640
Speaker 1: in Montreal saying, Hey, Mark kn't wait to wait to

944
01:06:38,680 --> 01:06:40,720
Speaker 1: work with you. He's very excited that you're going to

945
01:06:40,880 --> 01:06:46,000
Speaker 1: come to Boston. Ultimately, I did this research project for

946
01:06:46,080 --> 01:06:48,280
Speaker 1: him as an intern, and he ended up mentoring me

947
01:06:48,360 --> 01:06:51,160
Speaker 1: for over ten years and we've co authored a lot

948
01:06:51,160 --> 01:06:55,400
Speaker 1: of papers together. I like to say, basically everything I

949
01:06:55,440 --> 01:06:58,800
Speaker 1: know about quant finance and assocation I've learned from Mark. Huh.

950
01:06:59,000 --> 01:07:02,320
Speaker 1: Quite quite interesting. Let's talk about books. Tell us some

951
01:07:02,400 --> 01:07:05,760
Speaker 1: of your favorites and what are you reading right now? Okay,

952
01:07:05,760 --> 01:07:09,439
Speaker 1: So I love to read. That's it's very hard to

953
01:07:09,520 --> 01:07:13,720
Speaker 1: answer when you read, you know, fifty plus books a year.

954
01:07:13,840 --> 01:07:19,000
Speaker 1: I generally read about business, philosophy, some history, psychology, sports.

955
01:07:19,240 --> 01:07:25,040
Speaker 1: I just I read nonfiction. I love memoirs and biography. Uh.

956
01:07:25,080 --> 01:07:28,960
Speaker 1: And I was told I knew you might ask that question,

957
01:07:29,440 --> 01:07:32,720
Speaker 1: so I I prepared a few books by category. I

958
01:07:32,760 --> 01:07:36,960
Speaker 1: know I'm cheating, but business, I would say. A recent

959
01:07:37,000 --> 01:07:39,280
Speaker 1: book i've read is The Right of a Lifetime by

960
01:07:39,440 --> 01:07:45,400
Speaker 1: Bob iger uh X, CEO of Disney. Excellent, very well written,

961
01:07:45,480 --> 01:07:50,840
Speaker 1: lots of business wisdom, sports sports memoirs. This is an

962
01:07:50,840 --> 01:07:54,840
Speaker 1: older one open by Andre Agassi, and even if you're

963
01:07:54,840 --> 01:07:58,360
Speaker 1: going into tennis, it's just a fantastic book to read.

964
01:07:59,080 --> 01:08:04,120
Speaker 1: Another one, maybe less well known, is by an ultra runner,

965
01:08:04,280 --> 01:08:07,520
Speaker 1: and even if you're not into ultra running, is worth reading.

966
01:08:08,000 --> 01:08:13,400
Speaker 1: The book is titled North by Scott Jerich and it's

967
01:08:13,440 --> 01:08:18,479
Speaker 1: about how he broke the record for running through the

968
01:08:18,720 --> 01:08:23,320
Speaker 1: entire appellash Appellachian trail on the East Coast. Another one

969
01:08:23,320 --> 01:08:26,280
Speaker 1: that's good is Can't Hurt Me by David Goggin's If

970
01:08:26,320 --> 01:08:30,120
Speaker 1: you want motivation help, there's a book called Why We

971
01:08:30,200 --> 01:08:34,280
Speaker 1: Sleep that I recommend for everybody to realize how important

972
01:08:34,320 --> 01:08:41,160
Speaker 1: sleep is. Productivity. Deep Work by Cal Newport's is one

973
01:08:41,200 --> 01:08:44,080
Speaker 1: of the best books on time management I've ever read.

974
01:08:45,080 --> 01:08:48,840
Speaker 1: Un philosophy or dealing with change an uncertainty. I would

975
01:08:48,840 --> 01:08:53,439
Speaker 1: say anything on stoicism is interesting. Books by Ryan Holiday,

976
01:08:53,479 --> 01:08:56,040
Speaker 1: like The Obstacle is the Way, Stillness is the Key.

977
01:08:56,080 --> 01:09:00,479
Speaker 1: Those are excellent books. Entertainment, entertaining, business Story is Bad,

978
01:09:00,560 --> 01:09:03,760
Speaker 1: the book about There No Nos Bad Blood was fantastic,

979
01:09:04,439 --> 01:09:08,559
Speaker 1: and just finished Billion Dollar Loser about We Work, which

980
01:09:08,600 --> 01:09:12,160
Speaker 1: is also a fascinating story. So Barry, you asked for one,

981
01:09:12,400 --> 01:09:15,960
Speaker 1: I gave nine or ten apologies for that. No, not

982
01:09:16,040 --> 01:09:19,320
Speaker 1: at all. Everybody loves loves those answers. Um, it's it's

983
01:09:19,880 --> 01:09:23,599
Speaker 1: I think that's people's favorite question. Let's talk about recent

984
01:09:23,640 --> 01:09:27,280
Speaker 1: college graduates who are interested in a career in asset

985
01:09:27,320 --> 01:09:30,720
Speaker 1: allocation or wealth management. What sort of advice would you

986
01:09:30,760 --> 01:09:33,840
Speaker 1: give them? But this is mostly advice I've gotten from

987
01:09:33,840 --> 01:09:37,759
Speaker 1: Mark Chritsman mentioned him earlier. First, always look to build

988
01:09:37,800 --> 01:09:41,120
Speaker 1: your human capital, and by that I mean your network

989
01:09:41,360 --> 01:09:45,800
Speaker 1: of industry contacts. You could be your publications and journals,

990
01:09:45,840 --> 01:09:49,760
Speaker 1: your retritation and the conference circuit could be your education

991
01:09:49,840 --> 01:09:55,160
Speaker 1: credentials for example, the cf A charter. Anything that differentiates

992
01:09:55,200 --> 01:09:59,160
Speaker 1: you from your peers and that ultimately no one can

993
01:09:59,160 --> 01:10:03,560
Speaker 1: take away from. It's your own human capital. Second, I

994
01:10:03,640 --> 01:10:08,840
Speaker 1: would tell people starting their careers stay close to revenues. Uh.

995
01:10:08,920 --> 01:10:11,160
Speaker 1: In a lot of jobs it means staying in front

996
01:10:11,200 --> 01:10:15,559
Speaker 1: of clients, but it might also an investment management mean

997
01:10:15,720 --> 01:10:19,719
Speaker 1: to stay close to investment decision making, but stay close

998
01:10:19,760 --> 01:10:22,599
Speaker 1: to revenues because your role in the value chain will

999
01:10:22,640 --> 01:10:27,680
Speaker 1: be more motivating and more obvious. The other one I

1000
01:10:27,720 --> 01:10:33,479
Speaker 1: would say is sometimes this underestimated emphasized communication. When you

1001
01:10:33,600 --> 01:10:38,559
Speaker 1: move from being a student to working in the real world,

1002
01:10:38,920 --> 01:10:42,000
Speaker 1: you move from from an environment where it's it's basically

1003
01:10:42,040 --> 01:10:44,880
Speaker 1: a meritocracy. Right. You study hard, you get good grades,

1004
01:10:45,640 --> 01:10:52,000
Speaker 1: but but in corporate life, collaboration, teamwork are really really essential.

1005
01:10:52,320 --> 01:10:57,960
Speaker 1: So maybe as a student your success is from your

1006
01:10:57,960 --> 01:11:01,960
Speaker 1: own intellectual merit and how hard you study. On the job,

1007
01:11:02,560 --> 01:11:05,400
Speaker 1: you'll realize that even for the most technical of roles,

1008
01:11:06,520 --> 01:11:10,840
Speaker 1: maybe about just as half of your success, maybe more

1009
01:11:11,160 --> 01:11:16,080
Speaker 1: is determined by how well you communicate. Because in corporate life,

1010
01:11:16,120 --> 01:11:19,439
Speaker 1: collaboration and teamwork are so essential to success, especially in

1011
01:11:20,080 --> 01:11:25,920
Speaker 1: side large organizations. So don't neglect communication. Uh. Lastly, I

1012
01:11:25,920 --> 01:11:29,920
Speaker 1: would say, just your just your perspective. Talked about the

1013
01:11:29,960 --> 01:11:34,120
Speaker 1: secret to happiness in life earlier. Lower your expectations. I

1014
01:11:34,160 --> 01:11:39,599
Speaker 1: think managing your expectations is important, not getting worried about

1015
01:11:39,800 --> 01:11:43,719
Speaker 1: short term setbacks. Just look at the long term trend

1016
01:11:44,439 --> 01:11:47,880
Speaker 1: and make decisions based on the long term trend in

1017
01:11:47,920 --> 01:11:52,559
Speaker 1: your career, not short term setbacks. And last one, I

1018
01:11:52,560 --> 01:11:54,880
Speaker 1: will say, take care of yourself. You know, all the

1019
01:11:54,920 --> 01:11:59,040
Speaker 1: advice you can give people starting your careers, I think

1020
01:11:59,080 --> 01:12:02,960
Speaker 1: that's the that's the most important one. Diet, exercise, sleep,

1021
01:12:03,040 --> 01:12:06,799
Speaker 1: All these things reinforce each other. It's like a virtuous circle.

1022
01:12:06,880 --> 01:12:10,400
Speaker 1: You can't you can't take one away, right, Well, you'll

1023
01:12:10,439 --> 01:12:15,280
Speaker 1: have more energy to exercise, exercise, you'll sleep better, sleep better,

1024
01:12:15,400 --> 01:12:18,120
Speaker 1: you'll have more self discipline. With your diet. The next

1025
01:12:18,200 --> 01:12:21,400
Speaker 1: day you get the idea. It's a virtuous circle. And

1026
01:12:21,800 --> 01:12:25,000
Speaker 1: if you get these three right or you know, close enough.

1027
01:12:25,040 --> 01:12:30,679
Speaker 1: No one's perfect. Uh And you know, but diet, exercise, sleep,

1028
01:12:31,000 --> 01:12:34,600
Speaker 1: reinforce each other. Take care of yourself. Don't wait for motivation.

1029
01:12:35,280 --> 01:12:39,200
Speaker 1: Just just build habits. It's much easier to do things

1030
01:12:39,240 --> 01:12:41,760
Speaker 1: well when you when it's a habit, as opposed to

1031
01:12:41,800 --> 01:12:44,960
Speaker 1: waiting for motivation, which is very fickle. There's another book,

1032
01:12:45,080 --> 01:12:47,080
Speaker 1: very I'm gonna cheat. I'm going to add another book,

1033
01:12:47,400 --> 01:12:50,960
Speaker 1: The Power of Habits Charles do H. I think it's

1034
01:12:51,040 --> 01:12:55,040
Speaker 1: worth reading. Very interesting. And our final question, what do

1035
01:12:55,080 --> 01:12:57,680
Speaker 1: you know about the world of investing today that you

1036
01:12:57,760 --> 01:13:00,559
Speaker 1: wish you knew twenty or so years ago when you

1037
01:13:00,600 --> 01:13:03,240
Speaker 1: were first getting started. I would mention some of the

1038
01:13:03,280 --> 01:13:08,320
Speaker 1: takeaways from my book. Quantitative methods work best when used

1039
01:13:08,479 --> 01:13:13,439
Speaker 1: with a healthy dose of qualitative judgment. That's something I've

1040
01:13:13,520 --> 01:13:19,120
Speaker 1: learned over time. I wish I'd realized earlier. Risk is

1041
01:13:19,200 --> 01:13:24,680
Speaker 1: easier to forecast than returns, and this has tremendous investment implications.

1042
01:13:26,400 --> 01:13:29,240
Speaker 1: When in doubt, it pays to stay invested for the

1043
01:13:29,320 --> 01:13:32,719
Speaker 1: long run. You will think of my elevator pitch, stay invested,

1044
01:13:32,720 --> 01:13:39,280
Speaker 1: stay diversified. Diversification works very well when you don't need it,

1045
01:13:39,320 --> 01:13:44,000
Speaker 1: and not so well when you actually need it during crashes,

1046
01:13:44,800 --> 01:13:47,120
Speaker 1: and if you're an investor, you really need to take

1047
01:13:47,160 --> 01:13:53,679
Speaker 1: that into account. And lastly, in markets, you really need

1048
01:13:53,720 --> 01:13:59,360
Speaker 1: to expect the unexpected. Things change very quickly in markets,

1049
01:13:59,360 --> 01:14:03,960
Speaker 1: and we've us been through such an environment quite quite fascinating.

1050
01:14:04,520 --> 01:14:07,160
Speaker 1: Thank you Sebastian for being so generous with your time.

1051
01:14:07,640 --> 01:14:10,599
Speaker 1: We have been speaking with Sebastian Page. He is the

1052
01:14:10,600 --> 01:14:15,320
Speaker 1: head of multi asset investing at tro Price, where his

1053
01:14:15,439 --> 01:14:20,000
Speaker 1: group runs about three hundred and sixty billion dollars. If

1054
01:14:20,040 --> 01:14:22,920
Speaker 1: you enjoy this conversation, well check out any of our

1055
01:14:22,960 --> 01:14:26,000
Speaker 1: previous I don't know, I'll call it four hundred interviews

1056
01:14:26,040 --> 01:14:28,680
Speaker 1: we've done over the past seven years or so. You

1057
01:14:28,720 --> 01:14:32,760
Speaker 1: can find that at iTunes, Spotify, wherever you feed your

1058
01:14:32,800 --> 01:14:38,479
Speaker 1: podcast fix. We love your comments, feedback and suggestions. Write

1059
01:14:38,479 --> 01:14:42,200
Speaker 1: to us at m IB podcast at Bloomberg dot net.

1060
01:14:42,479 --> 01:14:46,000
Speaker 1: You can give us a review on Apple iTunes. Sign

1061
01:14:46,120 --> 01:14:48,840
Speaker 1: up for the daily reads I write every day at

1062
01:14:49,040 --> 01:14:52,200
Speaker 1: d Halts dot com. Check out my weekly column on

1063
01:14:52,360 --> 01:14:56,120
Speaker 1: Bloomberg dot com Slash Opinion follow me on Twitter at

1064
01:14:56,200 --> 01:14:58,640
Speaker 1: rid Halts. I would be remiss if I did not

1065
01:14:58,760 --> 01:15:01,519
Speaker 1: thank the crack team of professionals who helped me put

1066
01:15:01,600 --> 01:15:06,640
Speaker 1: together this conversation each week. Maroufal is my audio engineer.

1067
01:15:06,800 --> 01:15:11,080
Speaker 1: Tracy Walsh is our project manager. Michael Boyle is my producer.

1068
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Speaker 1: Michael Batnick is my head of research. I'm Barry Ridults.

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Speaker 1: You've been listening to Masters in Business on Bloomberg Radio