WEBVTT - Sébastien Page on Smart Asset Allocation 0:00:02.240 --> 0:00:06.760 This is Masters in Business with Barry Ridholts on Bloomberg Radio. 0:00:07.160 --> 0:00:10.280 This week on the podcast, I have an extra special guest. 0:00:10.960 --> 0:00:13.440 His name is Sebastian Page. He is the head of 0:00:13.560 --> 0:00:18.960 multi asset investing at investing giant hero Price. They run 0:00:19.000 --> 0:00:22.560 about one point three trillion dollars. He runs about three 0:00:22.600 --> 0:00:25.520 hundred and sixty billion of it. This really is a 0:00:25.560 --> 0:00:31.240 master class on asset allocation, diversification, risk management, and the 0:00:31.360 --> 0:00:37.120 concept of expected returns versus expected risk. As it turns out, 0:00:37.280 --> 0:00:41.480 it's easier to predict risk than it is to predict returns. 0:00:42.040 --> 0:00:43.800 I don't know what else I can say about this 0:00:43.920 --> 0:00:48.440 other than if you are an asset allocator, a wealth manager, 0:00:48.840 --> 0:00:53.960 anybody who's thinking about managing assets over the next ten, 0:00:54.080 --> 0:00:57.200 twenty thirty years, then you're gonna find this to be 0:00:57.240 --> 0:01:02.000 an absolutely fascinating conversation. So, with no further ado, my 0:01:02.160 --> 0:01:07.880 interview of Sebastian Page of tiro Price. This is Masters 0:01:07.920 --> 0:01:12.360 in Business with Barry Ridholts on Bloomberg Radio. My extra 0:01:12.440 --> 0:01:15.800 special guest this week is Sebastian Page. He is the 0:01:15.840 --> 0:01:19.880 head of Global multi Assets at tiro Price. His group 0:01:19.959 --> 0:01:23.800 runs about three hundred and sixty three billion dollars of 0:01:23.840 --> 0:01:27.520 the total one point three trillion that tiro Price has 0:01:27.600 --> 0:01:32.160 under management. He is the author of Beyond Diversification, What 0:01:32.319 --> 0:01:36.399 Every Investor Needs to Know About Asset Allocation and co 0:01:36.600 --> 0:01:41.800 author of Factor Investing an Asset Allocation Sebastian Page. Welcome 0:01:42.040 --> 0:01:45.040 to Bloomberg. Thank you, Barry, Thank you for inviting me. 0:01:45.319 --> 0:01:48.080 I've been looking forward to speaking with you since March. 0:01:48.640 --> 0:01:53.000 You were quite literally the very first show. The pandemic 0:01:53.120 --> 0:01:56.160 led us to have to reschedule, and we'll talk a 0:01:56.240 --> 0:01:58.800 little bit about the pandemic later, but I want to 0:01:58.880 --> 0:02:03.080 dive in to your your job, your head of Global 0:02:03.280 --> 0:02:06.560 multi Assets, which is a huge role. Tell us a 0:02:06.640 --> 0:02:10.320 little bit about your day to day responsibilities. You know, 0:02:10.520 --> 0:02:14.000 it's the perfect job for me. I absolutely love it. 0:02:14.400 --> 0:02:20.040 Running a large global investment organization, in this case over 0:02:20.160 --> 0:02:23.120 three hundred and sixty billion and a u M over 0:02:23.200 --> 0:02:28.040 two hundred different portfolios. It involves not only, of course, 0:02:28.160 --> 0:02:32.160 investment oversight, staying on top of capital markets, consuming vast 0:02:32.200 --> 0:02:36.160 amounts of research and so on, but also running the business, 0:02:36.200 --> 0:02:41.359 setting a strategic vision, making sure it's executed well, recruiting 0:02:41.440 --> 0:02:47.959 and developing talent, managing product development projects, and also I'm 0:02:48.000 --> 0:02:52.160 a member of Hero's management committee, where I'm representing our 0:02:52.240 --> 0:02:57.600 division and helping manage our entire firms. So the job 0:02:57.760 --> 0:03:02.480 is very broad, and I learned in something every day. Verry, 0:03:02.560 --> 0:03:05.799 I know, you run your own successful company and you're 0:03:05.800 --> 0:03:08.839 a thought leader, so I'm guessing it's it's a very 0:03:08.880 --> 0:03:13.160 broad set of responsibilities too, So in that sense, running 0:03:13.200 --> 0:03:17.040 an investment division in a large but agile company is 0:03:17.120 --> 0:03:20.200 probably not that different. You know, It's funny when I 0:03:20.240 --> 0:03:23.919 discuss what I do with relatives. They're so impressed by 0:03:24.040 --> 0:03:27.920 two billion dollars and I always laugh and have to explain, no, no, 0:03:27.960 --> 0:03:32.600 you don't understand. Two billion dollars is nothing. Big shops 0:03:32.600 --> 0:03:36.280 are running hundreds of billions and trillions of dollars. So 0:03:36.560 --> 0:03:40.360 given the size of the assets you manage, how do 0:03:40.400 --> 0:03:43.600 you think about multi assets? What? What's the thought process 0:03:43.680 --> 0:03:48.160 like when you're assembling an investment posture. Are you thinking 0:03:48.200 --> 0:03:52.200 about stock picking or different sectors or global regions? How 0:03:52.320 --> 0:03:57.480 does a multi asset portfolio come together? It's all about 0:03:57.520 --> 0:04:01.600 putting all the capabilities of the FIR together in one 0:04:01.720 --> 0:04:07.800 neat package or vehicle for different clients. So we put 0:04:07.880 --> 0:04:15.160 together capabilities across tactical asset allocation, think about decisions to 0:04:15.440 --> 0:04:19.360 tilt the portfolios with a six to eighteen month horizon 0:04:19.480 --> 0:04:24.800 to take advantage of relative valuation opportunities, but also strategic 0:04:25.279 --> 0:04:30.719 asset allocation, constructing the portfolio for the long run, trading 0:04:30.760 --> 0:04:37.760 off returns against risk, positioning the portfolio for structural advantages, 0:04:37.839 --> 0:04:45.040 structural alpha's, and also security selection that we typically source 0:04:45.120 --> 0:04:48.480 in the funds of funds format so will allocate to 0:04:48.880 --> 0:04:53.880 underlying key ro price building blocks. So most of what 0:04:53.960 --> 0:04:58.280 we do is to put all these capabilities together and 0:04:58.360 --> 0:05:03.400 then customize their in different ways for different types of investors. 0:05:03.440 --> 0:05:07.320 So you're also on the asset Allocation committee, which is 0:05:07.360 --> 0:05:11.960 responsible for tactical investment decisions, and you remember the firm's 0:05:12.000 --> 0:05:15.320 target date franchise, which is a whole different animal, and 0:05:15.480 --> 0:05:19.720 the broader management committee at large. How do all these 0:05:19.960 --> 0:05:24.279 very very different pieces fit together. It sounds like you 0:05:24.360 --> 0:05:28.320 have a lot of different roles to juggle. Yeah, our 0:05:28.440 --> 0:05:33.760 Asset Allocation Committee is responsible for tactical assocation decisions. That's 0:05:33.880 --> 0:05:38.359 all we do. On that committee. We're bring together some 0:05:38.480 --> 0:05:42.320 of our most senior investors from equities, fixed income, and 0:05:42.880 --> 0:05:46.520 multi asset and As I mentioned Verry, we take a 0:05:46.600 --> 0:05:49.839 six to eighteen month horizon. We typically meet once a 0:05:49.920 --> 0:05:53.839 month and we're very much focused on relative valuation opportunities, 0:05:54.440 --> 0:05:58.880 but we also take into account macro think business cycle, 0:05:59.000 --> 0:06:03.960 monetary policy, the fundamental I think earnings projections and the like, 0:06:04.560 --> 0:06:08.760 as well as technical I think closed momentum sentiment. So 0:06:08.839 --> 0:06:12.600 evaluations are main driver of decisions, but ideally we want 0:06:12.640 --> 0:06:16.160 to take positions where all these factors aligned. So that's 0:06:16.200 --> 0:06:19.760 for the asset allocation committee. As you mentioned, I'm also 0:06:19.839 --> 0:06:22.880 a member of the management committee. That committee is chaired 0:06:22.880 --> 0:06:26.960 by our CEO, and it's responsible for managing the entire 0:06:27.040 --> 0:06:31.760 firm of seven thousand plus employees across sixteen countries. You know, 0:06:31.800 --> 0:06:35.320 the entire one trillion in a u M if you will, 0:06:35.920 --> 0:06:39.600 they're on that committee. I need to take my multi 0:06:39.640 --> 0:06:43.400 asset hat off and put the tyro price hat on. 0:06:44.320 --> 0:06:46.440 And you know, we meet for at least two hours 0:06:46.480 --> 0:06:49.680 every week. We interact with our board, We set the 0:06:49.760 --> 0:06:54.480 strategic direction for the firm, and we manage execution that 0:06:54.680 --> 0:06:57.520 part of my job. There has been a fantastic learning 0:06:57.520 --> 0:07:02.400 opportunity for me. So you mentioned earlier strategic allocation and 0:07:02.720 --> 0:07:07.240 you just we're discussing tactical allocation. For the listener who 0:07:07.279 --> 0:07:11.640 may not be deep into asset management, explain the difference 0:07:11.680 --> 0:07:15.280 between the two. So, tactical asset allocation, the way we 0:07:15.480 --> 0:07:23.040 define it is about taking advantage of primarily relative valuation opportunities. 0:07:23.320 --> 0:07:27.160 And the time horizon is perhaps a medium time horizon 0:07:27.360 --> 0:07:30.560 if you think about six to eighteen months, So it's 0:07:30.600 --> 0:07:34.080 not day to day day trading, if you will, big 0:07:34.120 --> 0:07:38.840 macro bats. It's more about leaning against the wind and 0:07:38.960 --> 0:07:43.640 looking for situations where valuations are at extreme and other 0:07:43.760 --> 0:07:48.560 factors give you confidence that you can take advantage of 0:07:48.600 --> 0:07:54.080 those dislocations. That's what we mean by tactical asset allocation. 0:07:54.880 --> 0:07:57.320 It's not what I would call gun slinging. It's more 0:07:57.360 --> 0:08:03.440 about incrementally taking advantage of those opportunities in markets. Strategic 0:08:03.560 --> 0:08:07.600 asset allocation, very is broader, and it's about how do 0:08:07.640 --> 0:08:12.800 you construct a portfolio for a given investor or a 0:08:12.880 --> 0:08:17.320 given institution for the long run. And the lots of 0:08:17.400 --> 0:08:19.920 questions are being asked these days about whether the sixty 0:08:20.000 --> 0:08:24.600 forty is dead, for example, that's a typical strategic asset 0:08:24.640 --> 0:08:29.680 allocation question. Should we hold alternative assets in the portfolio. 0:08:29.880 --> 0:08:34.480 That's also a strategic asset allocation question, and very the 0:08:34.520 --> 0:08:38.000 biggest question of them all for strategic as allocation is 0:08:38.440 --> 0:08:42.640 how much stocks should I hold versus bonds for the 0:08:42.720 --> 0:08:46.480 long run. So those are the differences in the way 0:08:46.520 --> 0:08:51.280 we define tactical and strategic. M quite interesting, you know. 0:08:51.360 --> 0:08:54.600 I can't help but notice tro Price obviously a very 0:08:54.679 --> 0:08:58.040 large organization, but you spent the early parts of your 0:08:58.080 --> 0:09:04.200 career at State Street and Pimco, also two giant organizations. 0:09:04.240 --> 0:09:08.520 What are the advantages and the challenges of working in 0:09:08.640 --> 0:09:11.839 such large firms? Oh, good question. You know, I can't 0:09:11.880 --> 0:09:14.640 speak a lot to small firms because, as you said, 0:09:14.679 --> 0:09:17.680 I spent most of my career at very large firms. 0:09:17.720 --> 0:09:21.000 But let's start with what I would say is one 0:09:21.000 --> 0:09:26.600 of the most underestimated advantages of being at a large firm. 0:09:27.080 --> 0:09:31.040 Large company, those that are successful over time, that know 0:09:31.240 --> 0:09:38.160 how to innovate and take risks, have some advantages over startups. 0:09:38.840 --> 0:09:41.400 It's you know, it's not like startups they called the 0:09:41.520 --> 0:09:46.680 risks and large companies are sleepy giants waiting to get disrupted. Disrupted. 0:09:47.640 --> 0:09:50.479 That's a cliche to me that it ignores how successful 0:09:50.559 --> 0:09:54.079 large companies really operate. So I've been lucky enough to 0:09:54.120 --> 0:09:57.240 work at fantastic companies where have been put in positions 0:09:57.640 --> 0:10:01.920 to essentially run startup in shit. It's but with two 0:10:02.120 --> 0:10:06.720 very big advantages. Number One, resources usually in the form 0:10:06.800 --> 0:10:12.760 of headcount and brand and marketing support. And second, you know, 0:10:12.880 --> 0:10:16.120 better career support that that I would have gotten at 0:10:16.120 --> 0:10:20.000 a startup for example. Now, I don't want to diminish 0:10:20.000 --> 0:10:23.120 the role of startups in our economy, but sometimes people 0:10:23.200 --> 0:10:27.439 think of big companies versus startups in black and white terms, 0:10:27.480 --> 0:10:31.319 and it really is not like that in terms of innovation. 0:10:31.640 --> 0:10:34.440 But you know that being said, the main disadvantage is 0:10:34.480 --> 0:10:37.920 what you would expect, right, no matter how agile large 0:10:37.960 --> 0:10:43.680 companies are, no matter how successful, you'll always face frictions 0:10:43.720 --> 0:10:48.559 involved with managing change inside large organizations. You know that 0:10:48.960 --> 0:10:52.600 there's this tired analogy that it's harder to to turn 0:10:52.640 --> 0:10:55.640 a supertanker than a jet ski. You know, it takes 0:10:55.640 --> 0:10:59.600 a tremendous amount of leadership and political savvy and with 0:10:59.720 --> 0:11:03.280 a bologies to ill en mosque power points uh in 0:11:03.400 --> 0:11:08.840 order to align people inside large organizations and move large organizations. 0:11:08.880 --> 0:11:11.440 And I'm still working on getting better at this, but 0:11:11.600 --> 0:11:18.240 to me, the advantages of working at successful large organizations 0:11:18.240 --> 0:11:23.040 outweigh the disadvantages for me. So so working at a 0:11:23.040 --> 0:11:27.520 at a large company is a high risk adjusted return proposition, 0:11:28.040 --> 0:11:31.319 high sharp ratio if you will, to use UH an 0:11:31.320 --> 0:11:34.080 investment term. But but the trade office, I'll never be 0:11:34.160 --> 0:11:37.400 a billionaire founder. But but that's okay, that's okay with me. 0:11:38.120 --> 0:11:40.199 You know a little secret. Most of us are never 0:11:40.240 --> 0:11:43.400 going to be billionaire founders. But we'll hold that myth 0:11:43.480 --> 0:11:48.720 off to the side. One one last question about allocations. 0:11:48.760 --> 0:11:54.319 So within the asset allocation committee, is the firm's target 0:11:54.520 --> 0:11:59.720 date fund practice. I have this horrible bias thinking that 0:11:59.720 --> 0:12:03.520 that is the easiest gig in the world. You set 0:12:03.520 --> 0:12:07.000 a target date, you do almost nothing going forward. It 0:12:07.080 --> 0:12:11.120 kind of runs itself over thirty forty years. Disabuse me 0:12:11.559 --> 0:12:17.240 of that understanding. It's very hard for non investment professionals 0:12:17.760 --> 0:12:23.400 to determine their own asset allocation right, and with the 0:12:23.520 --> 0:12:28.120 d C Defined Contribution system in the United States, that's 0:12:28.280 --> 0:12:32.000 essentially what we've asked people to do. We've asked them 0:12:32.000 --> 0:12:37.440 to take control of their investments and their asset allocation decisions. 0:12:38.000 --> 0:12:41.679 So I was talking with the financial advisors recently, and 0:12:41.880 --> 0:12:43.959 you know he put it that way. He said, asking 0:12:44.000 --> 0:12:48.240 non investment professionals to manage their investment is a big ask. 0:12:48.360 --> 0:12:52.160 Do we ask people to perform their own surgeries? No, 0:12:52.360 --> 0:12:56.920 we ask a surgeon. So the target date fund has 0:12:57.000 --> 0:13:02.920 the advantage of apping people to the most important decision, 0:13:03.240 --> 0:13:08.400 which is the stock versus bonds decision, based on how 0:13:08.480 --> 0:13:13.640 far they are away from retirement. And if you read 0:13:13.720 --> 0:13:16.240 my book Berry, you'll find that there's a lot of 0:13:16.320 --> 0:13:22.400 science and research and practice and judgment involved in calibrating 0:13:22.440 --> 0:13:26.400 those targeted funds to meet the needs of the different 0:13:26.440 --> 0:13:31.199 populations inside these different plans. So people who are putting 0:13:31.200 --> 0:13:35.959 it putting money aside for retirement, and the calibration takes 0:13:36.000 --> 0:13:40.160 into account your risk tolerance, and it is I agree 0:13:40.200 --> 0:13:42.120 with you. It is in a sense a not a 0:13:42.240 --> 0:13:46.160 pilot solution because it will change your stock bond mix 0:13:46.440 --> 0:13:50.440 automatically as you age. You'll have to targeted fund manager 0:13:51.000 --> 0:13:56.320 select the underlying building blocks, monitor those, and add other 0:13:56.400 --> 0:13:59.800 capabilities like the ones I was mentioning earlier on tactical 0:14:00.360 --> 0:14:05.160 asset allocations. So it's meant to be an easy solution 0:14:05.880 --> 0:14:09.680 for investors inside of the seed plans. So if you 0:14:09.720 --> 0:14:12.240 take that lens, it's not that surprising that they've become 0:14:12.280 --> 0:14:17.280 the default option of choice. Quite quite interesting. So Sebastian, 0:14:17.360 --> 0:14:21.400 let's talk a little bit about asset allocation. You mentioned 0:14:21.400 --> 0:14:25.920 the portfolio. It's been pronounced dead I don't know a 0:14:26.000 --> 0:14:30.160 dozen times over the last decade. But with rates under 0:14:30.200 --> 0:14:33.560 one percent and zero not too far off in the future, 0:14:34.440 --> 0:14:39.360 maybe this time is the time where the portfolio really 0:14:39.520 --> 0:14:43.640 is dead. What do you think about that traditional asset 0:14:43.680 --> 0:14:48.400 allocation mix very these days? And that's the perfect question 0:14:48.520 --> 0:14:52.640 to ask an asset allocator if you want a long answer, 0:14:53.080 --> 0:14:57.880 it's a really important and well discussed question. Let me 0:14:58.040 --> 0:15:01.960 start with the conclusion this sixty forty portfolio is not bad, 0:15:02.400 --> 0:15:06.000 but it needs to be improved. I have three main 0:15:06.160 --> 0:15:12.040 concerns with the sixty and the first one is really obvious, 0:15:12.360 --> 0:15:17.920 is that the sixty provides a specific risk profile, and 0:15:18.000 --> 0:15:21.600 not everybody should have that risk profile. So it is 0:15:21.680 --> 0:15:25.760 too generic if you think about it as blanket advice. 0:15:25.840 --> 0:15:29.240 Depending on how far you are from retirement. For example, 0:15:29.280 --> 0:15:32.840 earlier we're talking about target date funds, you should probably 0:15:32.880 --> 0:15:36.480 have a different mix between stocks and bonds. People need 0:15:36.560 --> 0:15:39.920 to account for their risk tolerance. You know, the question 0:15:39.960 --> 0:15:45.560 how much stocks should I own is often, especially these days, 0:15:45.600 --> 0:15:49.280 probably more than you think. I talk about this in 0:15:49.360 --> 0:15:51.880 my book. But if you look at target date strategies, 0:15:52.400 --> 0:15:57.760 someone who's fifteen years from retirement save fifty years old, uh, 0:15:57.960 --> 0:16:02.680 we think should hold about their portfolios in stock and retirement. 0:16:02.760 --> 0:16:06.040 The equity weight it's still about fifty. And this is 0:16:06.120 --> 0:16:12.520 because you know, longevity says or longevity risk is an 0:16:12.560 --> 0:16:17.040 important factor, and it says, you know, even at retirement, 0:16:17.040 --> 0:16:21.560 you can expect to live for another thirty years, so 0:16:21.680 --> 0:16:24.600 you want your money to last. So that's kind of 0:16:24.640 --> 0:16:27.280 the first thing to say about the sixty forty. Let's 0:16:27.320 --> 0:16:30.720 just all realize that it's very generic advice in terms 0:16:30.720 --> 0:16:34.520 of the stock bond mix. Second, really important risk is 0:16:34.560 --> 0:16:38.920 not stable over time. Think about it this way. On 0:16:38.960 --> 0:16:42.760 a rolling one year basis, if I calculate the volatility 0:16:42.760 --> 0:16:47.240 of a sixty forty portfolio, depending on the environment, I 0:16:47.240 --> 0:16:51.120 can get as much as volatility or as little as 0:16:51.200 --> 0:16:56.440 five percent volatility. So that's for the same asset mix 0:16:57.000 --> 0:17:00.120 can look very aggressive when markets are volatile, and it 0:17:00.200 --> 0:17:05.040 can look very conservative in quiet times. Our industry is 0:17:05.240 --> 0:17:10.760 evolving towards more dynamic risk management. To stabilize risk, I 0:17:10.760 --> 0:17:16.560 think target risk rather than target allocations. And thirty two 0:17:16.560 --> 0:17:20.760 at sixty your question, very captain, markets have change. Interest 0:17:20.840 --> 0:17:24.880 rates are now post COVID Hunter basis points lower than 0:17:24.880 --> 0:17:28.399 they were before COVID, and that's about a fifty drop 0:17:28.640 --> 0:17:31.520 relative to their level at the beginning of the year. 0:17:31.880 --> 0:17:35.119 So this means that for the same expected return, people 0:17:35.119 --> 0:17:38.359 need to take more risk. But let me first it 0:17:38.480 --> 0:17:42.720 this way. In order to hope to achieve the same 0:17:42.720 --> 0:17:46.720 expected return, people need to take more risk. Uh So 0:17:46.880 --> 0:17:49.040 it's not just the search for yield anymore. It's the 0:17:49.119 --> 0:17:52.080 search for return. The Barclay Zagg has a yield of 0:17:52.640 --> 0:17:56.240 you know, say one point two, which it's especially zero 0:17:56.320 --> 0:17:59.960 after inflation. And our solution team has done a study 0:18:00.440 --> 0:18:03.840 and they found that in order to reach a six 0:18:04.520 --> 0:18:07.600 expected return. Now there are lots of assumptions here, depends 0:18:07.600 --> 0:18:10.479 which asset classes you pick, it depends how you model 0:18:11.000 --> 0:18:16.760 forward returns. But roughly speaking, giving current rate levels, you 0:18:16.800 --> 0:18:20.399 actually need about in stocks if you want to reach 0:18:20.440 --> 0:18:24.760 for a six expected return going forward. And to make 0:18:25.119 --> 0:18:29.680 things worse, bonds no longer diversify stocks as much as 0:18:29.720 --> 0:18:32.680 they did in the past. So maybe the answer to 0:18:32.720 --> 0:18:37.119 the question how much stocks UH should I hold? Again, 0:18:37.119 --> 0:18:39.880 as I mentioned earlier, is often more than than you think. 0:18:39.880 --> 0:18:43.320 But I understand the spirit of the question is more 0:18:43.320 --> 0:18:47.800 about the role of traditional asset classes, right stocks, bonds, 0:18:47.920 --> 0:18:54.040 beers burgers, simple stuff. So my views at the portfolio again, 0:18:54.080 --> 0:18:57.159 it's not dead, but if that's the risk level you're shooting, 0:18:57.280 --> 0:19:01.919 you're shooting for it needs to be optimized. And in 0:19:01.960 --> 0:19:05.639 my book I present some model portfolios and we have 0:19:06.320 --> 0:19:10.520 shifted twelve percent of the allocation from bonds to low 0:19:10.560 --> 0:19:14.800 volatility alternatives. We have a five percent allocation to a 0:19:14.920 --> 0:19:18.920 risk premium or factor strategy if you will, the volatility premium, 0:19:18.960 --> 0:19:22.280 and there's also a dedicated long bond allocation of three 0:19:22.320 --> 0:19:25.040 to four The other thing we did in that model 0:19:25.080 --> 0:19:29.520 portfolio is that within equities, you can swap five of 0:19:29.560 --> 0:19:33.919 your stocks traditional long only stocks to risk manage or 0:19:34.040 --> 0:19:38.040 defensive equities. There are different ways of doing that. Those 0:19:38.040 --> 0:19:41.200 are a lot of those are not available on advisor platforms, 0:19:41.240 --> 0:19:46.520 for example, and some of them integrate integrate dynamic risk management. So, 0:19:47.080 --> 0:19:48.760 as I said Verry, if you want to get an 0:19:48.800 --> 0:19:53.359 assallocation and an assallocator, talking asked them about the whether 0:19:53.400 --> 0:19:56.280 it's dead. The bottom line is that you know it's 0:19:56.320 --> 0:19:59.800 fairly generic advice. You have to calibrate this for risk. 0:20:00.000 --> 0:20:03.760 You have to count for changing risk over time capital 0:20:03.800 --> 0:20:07.280 markets have changed, or your expectations from the sixty change, 0:20:07.359 --> 0:20:09.919 and ultimately I think you can re optimize it with 0:20:10.000 --> 0:20:13.159 these different solutions that just mentioned. So let's stick with 0:20:13.240 --> 0:20:17.800 the role of bonds within that beer and burger portfolio. 0:20:18.200 --> 0:20:21.399 We know that they're diversifier, but not as much as 0:20:21.480 --> 0:20:25.600 they used to be. We know that they produce yields, 0:20:25.640 --> 0:20:29.520 but really not enough in real terms. There's still the 0:20:29.560 --> 0:20:34.600 element of fixed income as the volatility dampener versus equity 0:20:34.720 --> 0:20:36.560 or is that no longer the case? What are your 0:20:36.560 --> 0:20:40.400 thoughts about that bonds and treasuries in particular can still 0:20:40.480 --> 0:20:44.320 dampen volatility in your portfolio. But I have to say 0:20:44.359 --> 0:20:48.080 that these days, if you ask asset allocators what keeps 0:20:48.119 --> 0:20:51.000 them up at my a number of them will say, 0:20:51.040 --> 0:20:56.080 and I'll include myself, the worry that treasuries, with the 0:20:56.119 --> 0:20:59.480 exception of the very long data treasuries have lost most 0:20:59.520 --> 0:21:02.480 of their rustation benefits. And I'll give you an example. 0:21:02.880 --> 0:21:05.840 The US equity market had a draw down of nine 0:21:06.520 --> 0:21:11.480 in September. During that drawn on, the Treasuries index actually 0:21:11.520 --> 0:21:16.680 lost fifteen basis points over that time period. The zero 0:21:16.800 --> 0:21:22.320 bound limits upside for treasuries. And this very is simple math. Right, 0:21:22.440 --> 0:21:26.160 you can't go up during a shock when stocks are 0:21:26.200 --> 0:21:31.240 selling off a lot more than your duration times the 0:21:31.280 --> 0:21:35.119 amount by which races can go down. Duration times to 0:21:35.359 --> 0:21:40.200 change in rates. And look at German boons during COVID, Right, 0:21:40.240 --> 0:21:44.600 they only went up two in Q one. Meanwhile, the 0:21:44.680 --> 0:21:51.199 Germany stock index was down. So maybe maybe treasuries can 0:21:51.280 --> 0:21:54.399 dampen volatility, but they don't really hedge your risk in 0:21:54.440 --> 0:21:58.760 the sense of rallying when you're incurring really large losses 0:21:59.280 --> 0:22:02.399 on star, so you have to look for alternatives you 0:22:02.400 --> 0:22:07.200 can extend duration. And if you look at the long 0:22:07.280 --> 0:22:12.520 treasuries index during Q one, it was up, but again 0:22:12.560 --> 0:22:16.679 I yield approached zero even in the long end, gains 0:22:16.720 --> 0:22:20.600 of that magnitude become unlikely my views, you have about 0:22:20.640 --> 0:22:25.760 one more good big crisis in long treasuries. Uh. If 0:22:25.800 --> 0:22:28.639 you will, then you have to start thinking, Okay, if 0:22:28.680 --> 0:22:33.080 I can't diversify, if I can't get the hedging from treasuries, 0:22:33.160 --> 0:22:35.840 where am I going to get it. The simplest way 0:22:35.840 --> 0:22:39.080 of doing that is to buy foot options from stocks, 0:22:39.200 --> 0:22:41.520 but that can be really expensive. You have to pay 0:22:41.560 --> 0:22:45.760 for it. With treasuries in a normal environment, at least 0:22:45.760 --> 0:22:49.199 you get a positive yield. I mentioned earlier the possibility 0:22:49.240 --> 0:22:52.160 of dynamically managing your risk. I think this is becoming 0:22:52.640 --> 0:22:56.760 more important for asset allocators and for our industry. For example, 0:22:56.760 --> 0:23:01.400 what's so called managed volatility strategies or defense as macro strategies. 0:23:02.440 --> 0:23:05.320 Some of those strategies can pick up the slack from 0:23:05.400 --> 0:23:11.320 treasuries going forward. You can consider absolute return strategies, adding 0:23:11.359 --> 0:23:14.439 those to your portfolio because they allow for short positions, 0:23:14.480 --> 0:23:19.440 which can be very effective hedges. Or look at other diversifiers. 0:23:19.520 --> 0:23:22.240 This is usually the answer people will give you. Very 0:23:22.359 --> 0:23:27.000 treasuries don't diversify as much. Look at gold, uh, I 0:23:27.040 --> 0:23:29.560 don't know. Gold can trade like a risk asset in 0:23:29.600 --> 0:23:32.840 the short run. At least look at investment grade bonds. 0:23:32.960 --> 0:23:36.879 They still have default risk. Low interest rate currencies like 0:23:36.920 --> 0:23:39.520 the Japanese end may help. They tend to rally when 0:23:39.600 --> 0:23:42.359 stocks sell off, but you have to ask what the 0:23:42.400 --> 0:23:46.199 expected return on currencies. It can be quite low. So 0:23:46.280 --> 0:23:49.920 when all else failed, you can either accept higher exposure 0:23:49.960 --> 0:23:53.719 to laws going forward, or reduce or reoptimize your equity 0:23:53.760 --> 0:23:57.159 exposure giving your risk tolerance. And I mentioned allocating to 0:23:57.280 --> 0:24:03.360 risk managed equity solutions for example, Barry. When I this 0:24:03.440 --> 0:24:07.160 question brings to mind a story I have in my book. 0:24:07.160 --> 0:24:09.159 When I worked at State three, I had a really 0:24:09.200 --> 0:24:11.600 great mentor, and I talked about him in the book. 0:24:11.600 --> 0:24:15.400 He had a fairly dry sense of humor, and one 0:24:15.440 --> 0:24:19.000 day was in his office complaining about my career. You know, 0:24:19.119 --> 0:24:20.880 I was saying my career was not going the way 0:24:20.960 --> 0:24:23.480 I wanted it to go. And he looked at me 0:24:24.400 --> 0:24:29.720 and he was getting impatient, and he asked, Sebastian, do 0:24:29.800 --> 0:24:34.760 you know the secret to happiness in life? So I've 0:24:34.800 --> 0:24:36.399 got to the edge of my seat. Do you know 0:24:36.440 --> 0:24:41.359 what he said, Barry? He said, the secret to happiness 0:24:41.400 --> 0:24:46.200 in life is to lower your expectations. So with rates 0:24:46.240 --> 0:24:50.399 at the zero bound, the bottom line is that investors 0:24:50.440 --> 0:24:54.639 have to lower their expectations for forward returns on both 0:24:54.640 --> 0:24:58.560 stocks and bonds, and for how much treasuries can rally 0:24:58.720 --> 0:25:03.600 when stocks are selling off. Quite interesting. Last question on 0:25:03.720 --> 0:25:09.080 asset allocation and diversification. We've been waiting for a long 0:25:09.160 --> 0:25:14.040 time to see when investments outside of the US will 0:25:14.080 --> 0:25:16.920 begin to pay off. They've lagged for the better part 0:25:16.920 --> 0:25:19.920 of a decade. Um when are we going to see 0:25:19.960 --> 0:25:25.680 the benefits of global diversification or or has the law 0:25:25.800 --> 0:25:29.840 of mean reversion been repealed. Yeah, that's a really good question, 0:25:29.920 --> 0:25:35.040 because non U S stocks have underperformed for a long time, 0:25:35.640 --> 0:25:40.040 and this is an example of where relative valuation has 0:25:40.160 --> 0:25:43.719 not worked in terms of reversion towards the mean because 0:25:43.840 --> 0:25:48.840 other factors have not lined up. But let's think about 0:25:48.880 --> 0:25:51.920 the usual disclaimer. I'm sure you tell that to all 0:25:51.960 --> 0:25:56.200 your clients. Very past returns aren't indicative of future returns. 0:25:56.680 --> 0:25:59.560 That's a generic statement that I talk a lot about 0:25:59.640 --> 0:26:03.040 in my book. But I show that over safe five 0:26:03.160 --> 0:26:09.200 or tenure horizons, relative returns and valuations tend to mean reverts. 0:26:09.240 --> 0:26:13.560 So it's possible that going forward, non US markets could outperform. 0:26:13.680 --> 0:26:17.480 I believe that from a long term perspective, emerging markets 0:26:17.520 --> 0:26:21.199 in particular position for higher growth than the rest of 0:26:21.240 --> 0:26:24.840 the world, given where there are in their business cycles, 0:26:25.000 --> 0:26:27.879 and given their demographics, and if you want to get 0:26:27.920 --> 0:26:34.160 a little bit more tactical in an economic recovery, economies 0:26:34.200 --> 0:26:38.480 that are more levered like Europe, for example, that have 0:26:38.640 --> 0:26:44.080 more cychnical exposures could outperform the other ways. So that's 0:26:44.200 --> 0:26:46.280 one way to think about this is that let's just 0:26:46.359 --> 0:26:49.400 look forward when we try to answer that question as 0:26:49.440 --> 0:26:54.520 opposed to backwards. And if we look forward, history says 0:26:54.760 --> 0:26:58.679 the likelihood of mean reversion given where we are UH 0:26:58.840 --> 0:27:03.200 could be sart high. Second, you know, there's just more breath. 0:27:03.400 --> 0:27:07.399 There's more opportunities for alpha and global portfolios compared to 0:27:07.440 --> 0:27:11.000 portfolios that are concentrated in the US, especially with the 0:27:11.040 --> 0:27:16.000 current environment with the fangs dominating the US market. There 0:27:16.000 --> 0:27:19.240 are more than fourteen thousand companies that are included in 0:27:19.359 --> 0:27:23.400 the MSc I All Country World IMPACTX, so more than 0:27:23.440 --> 0:27:26.200 just those nine or ten in the US that seems 0:27:26.240 --> 0:27:29.040 to be driving returns this year, right, which leads to 0:27:29.560 --> 0:27:33.359 better opportunities for alpha for stock pickers, for those that 0:27:33.480 --> 0:27:36.840 know how to do that well. So you have the 0:27:36.880 --> 0:27:41.440 advantage of relative valuation and looking forward relative to backwards, 0:27:41.480 --> 0:27:45.199 and the breath of investment opportunities working in your favor. 0:27:45.480 --> 0:27:48.639 Quite quite interesting. Let's talk a little bit about some 0:27:48.720 --> 0:27:51.320 of the research and writing you do. Not only have 0:27:51.440 --> 0:27:54.800 you written two books, but you've co authored a number 0:27:54.840 --> 0:27:58.800 of award winning papers for the Journal of Portfolio Management 0:27:58.920 --> 0:28:03.160