Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: This week on the podcast, I have an extra special guest.
Speaker 1: His name is Sebastian Page. He is the head of
Speaker 1: multi asset investing at investing giant hero Price. They run
Speaker 1: about one point three trillion dollars. He runs about three
Speaker 1: hundred and sixty billion of it. This really is a
Speaker 1: master class on asset allocation, diversification, risk management, and the
Speaker 1: concept of expected returns versus expected risk. As it turns out,
Speaker 1: it's easier to predict risk than it is to predict returns.
Speaker 1: I don't know what else I can say about this
Speaker 1: other than if you are an asset allocator, a wealth manager,
Speaker 1: anybody who's thinking about managing assets over the next ten,
Speaker 1: twenty thirty years, then you're gonna find this to be
Speaker 1: an absolutely fascinating conversation. So, with no further ado, my
Speaker 1: interview of Sebastian Page of tiro Price. This is Masters
Speaker 1: in Business with Barry Ridholts on Bloomberg Radio. My extra
Speaker 1: special guest this week is Sebastian Page. He is the
Speaker 1: head of Global multi Assets at tiro Price. His group
Speaker 1: runs about three hundred and sixty three billion dollars of
Speaker 1: the total one point three trillion that tiro Price has
Speaker 1: under management. He is the author of Beyond Diversification, What
Speaker 1: Every Investor Needs to Know About Asset Allocation and co
Speaker 1: author of Factor Investing an Asset Allocation Sebastian Page. Welcome
Speaker 1: to Bloomberg. Thank you, Barry, Thank you for inviting me.
Speaker 1: I've been looking forward to speaking with you since March.
Speaker 1: You were quite literally the very first show. The pandemic
Speaker 1: led us to have to reschedule, and we'll talk a
Speaker 1: little bit about the pandemic later, but I want to
Speaker 1: dive in to your your job, your head of Global
Speaker 1: multi Assets, which is a huge role. Tell us a
Speaker 1: little bit about your day to day responsibilities. You know,
Speaker 1: it's the perfect job for me. I absolutely love it.
Speaker 1: Running a large global investment organization, in this case over
Speaker 1: three hundred and sixty billion and a u M over
Speaker 1: two hundred different portfolios. It involves not only, of course,
Speaker 1: investment oversight, staying on top of capital markets, consuming vast
Speaker 1: amounts of research and so on, but also running the business,
Speaker 1: setting a strategic vision, making sure it's executed well, recruiting
Speaker 1: and developing talent, managing product development projects, and also I'm
Speaker 1: a member of Hero's management committee, where I'm representing our
Speaker 1: division and helping manage our entire firms. So the job
Speaker 1: is very broad, and I learned in something every day. Verry,
Speaker 1: I know, you run your own successful company and you're
Speaker 1: a thought leader, so I'm guessing it's it's a very
Speaker 1: broad set of responsibilities too, So in that sense, running
Speaker 1: an investment division in a large but agile company is
Speaker 1: probably not that different. You know, It's funny when I
Speaker 1: discuss what I do with relatives. They're so impressed by
Speaker 1: two billion dollars and I always laugh and have to explain, no, no,
Speaker 1: you don't understand. Two billion dollars is nothing. Big shops
Speaker 1: are running hundreds of billions and trillions of dollars. So
Speaker 1: given the size of the assets you manage, how do
Speaker 1: you think about multi assets? What? What's the thought process
Speaker 1: like when you're assembling an investment posture. Are you thinking
Speaker 1: about stock picking or different sectors or global regions? How
Speaker 1: does a multi asset portfolio come together? It's all about
Speaker 1: putting all the capabilities of the FIR together in one
Speaker 1: neat package or vehicle for different clients. So we put
Speaker 1: together capabilities across tactical asset allocation, think about decisions to
Speaker 1: tilt the portfolios with a six to eighteen month horizon
Speaker 1: to take advantage of relative valuation opportunities, but also strategic
Speaker 1: asset allocation, constructing the portfolio for the long run, trading
Speaker 1: off returns against risk, positioning the portfolio for structural advantages,
Speaker 1: structural alpha's, and also security selection that we typically source
Speaker 1: in the funds of funds format so will allocate to
Speaker 1: underlying key ro price building blocks. So most of what
Speaker 1: we do is to put all these capabilities together and
Speaker 1: then customize their in different ways for different types of investors.
Speaker 1: So you're also on the asset Allocation committee, which is
Speaker 1: responsible for tactical investment decisions, and you remember the firm's
Speaker 1: target date franchise, which is a whole different animal, and
Speaker 1: the broader management committee at large. How do all these
Speaker 1: very very different pieces fit together. It sounds like you
Speaker 1: have a lot of different roles to juggle. Yeah, our
Speaker 1: Asset Allocation Committee is responsible for tactical assocation decisions. That's
Speaker 1: all we do. On that committee. We're bring together some
Speaker 1: of our most senior investors from equities, fixed income, and
Speaker 1: multi asset and As I mentioned Verry, we take a
Speaker 1: six to eighteen month horizon. We typically meet once a
Speaker 1: month and we're very much focused on relative valuation opportunities,
Speaker 1: but we also take into account macro think business cycle,
Speaker 1: monetary policy, the fundamental I think earnings projections and the like,
Speaker 1: as well as technical I think closed momentum sentiment. So
Speaker 1: evaluations are main driver of decisions, but ideally we want
Speaker 1: to take positions where all these factors aligned. So that's
Speaker 1: for the asset allocation committee. As you mentioned, I'm also
Speaker 1: a member of the management committee. That committee is chaired
Speaker 1: by our CEO, and it's responsible for managing the entire
Speaker 1: firm of seven thousand plus employees across sixteen countries. You know,
Speaker 1: the entire one trillion in a u M if you will,
Speaker 1: they're on that committee. I need to take my multi
Speaker 1: asset hat off and put the tyro price hat on.
Speaker 1: And you know, we meet for at least two hours
Speaker 1: every week. We interact with our board, We set the
Speaker 1: strategic direction for the firm, and we manage execution that
Speaker 1: part of my job. There has been a fantastic learning
Speaker 1: opportunity for me. So you mentioned earlier strategic allocation and
Speaker 1: you just we're discussing tactical allocation. For the listener who
Speaker 1: may not be deep into asset management, explain the difference
Speaker 1: between the two. So, tactical asset allocation, the way we
Speaker 1: define it is about taking advantage of primarily relative valuation opportunities.
Speaker 1: And the time horizon is perhaps a medium time horizon
Speaker 1: if you think about six to eighteen months, So it's
Speaker 1: not day to day day trading, if you will, big
Speaker 1: macro bats. It's more about leaning against the wind and
Speaker 1: looking for situations where valuations are at extreme and other
Speaker 1: factors give you confidence that you can take advantage of
Speaker 1: those dislocations. That's what we mean by tactical asset allocation.
Speaker 1: It's not what I would call gun slinging. It's more
Speaker 1: about incrementally taking advantage of those opportunities in markets. Strategic
Speaker 1: asset allocation, very is broader, and it's about how do
Speaker 1: you construct a portfolio for a given investor or a
Speaker 1: given institution for the long run. And the lots of
Speaker 1: questions are being asked these days about whether the sixty
Speaker 1: forty is dead, for example, that's a typical strategic asset
Speaker 1: allocation question. Should we hold alternative assets in the portfolio.
Speaker 1: That's also a strategic asset allocation question, and very the
Speaker 1: biggest question of them all for strategic as allocation is
Speaker 1: how much stocks should I hold versus bonds for the
Speaker 1: long run. So those are the differences in the way
Speaker 1: we define tactical and strategic. M quite interesting, you know.
Speaker 1: I can't help but notice tro Price obviously a very
Speaker 1: large organization, but you spent the early parts of your
Speaker 1: career at State Street and Pimco, also two giant organizations.
Speaker 1: What are the advantages and the challenges of working in
Speaker 1: such large firms? Oh, good question. You know, I can't
Speaker 1: speak a lot to small firms because, as you said,
Speaker 1: I spent most of my career at very large firms.
Speaker 1: But let's start with what I would say is one
Speaker 1: of the most underestimated advantages of being at a large firm.
Speaker 1: Large company, those that are successful over time, that know
Speaker 1: how to innovate and take risks, have some advantages over startups.
Speaker 1: It's you know, it's not like startups they called the
Speaker 1: risks and large companies are sleepy giants waiting to get disrupted. Disrupted.
Speaker 1: That's a cliche to me that it ignores how successful
Speaker 1: large companies really operate. So I've been lucky enough to
Speaker 1: work at fantastic companies where have been put in positions
Speaker 1: to essentially run startup in shit. It's but with two
Speaker 1: very big advantages. Number One, resources usually in the form
Speaker 1: of headcount and brand and marketing support. And second, you know,
Speaker 1: better career support that that I would have gotten at
Speaker 1: a startup for example. Now, I don't want to diminish
Speaker 1: the role of startups in our economy, but sometimes people
Speaker 1: think of big companies versus startups in black and white terms,
Speaker 1: and it really is not like that in terms of innovation.
Speaker 1: But you know that being said, the main disadvantage is
Speaker 1: what you would expect, right, no matter how agile large
Speaker 1: companies are, no matter how successful, you'll always face frictions
Speaker 1: involved with managing change inside large organizations. You know that
Speaker 1: there's this tired analogy that it's harder to to turn
Speaker 1: a supertanker than a jet ski. You know, it takes
Speaker 1: a tremendous amount of leadership and political savvy and with
Speaker 1: a bologies to ill en mosque power points uh in
Speaker 1: order to align people inside large organizations and move large organizations.
Speaker 1: And I'm still working on getting better at this, but
Speaker 1: to me, the advantages of working at successful large organizations
Speaker 1: outweigh the disadvantages for me. So so working at a
Speaker 1: at a large company is a high risk adjusted return proposition,
Speaker 1: high sharp ratio if you will, to use UH an
Speaker 1: investment term. But but the trade office, I'll never be
Speaker 1: a billionaire founder. But but that's okay, that's okay with me.
Speaker 1: You know a little secret. Most of us are never
Speaker 1: going to be billionaire founders. But we'll hold that myth
Speaker 1: off to the side. One one last question about allocations.
Speaker 1: So within the asset allocation committee, is the firm's target
Speaker 1: date fund practice. I have this horrible bias thinking that
Speaker 1: that is the easiest gig in the world. You set
Speaker 1: a target date, you do almost nothing going forward. It
Speaker 1: kind of runs itself over thirty forty years. Disabuse me
Speaker 1: of that understanding. It's very hard for non investment professionals
Speaker 1: to determine their own asset allocation right, and with the
Speaker 1: d C Defined Contribution system in the United States, that's
Speaker 1: essentially what we've asked people to do. We've asked them
Speaker 1: to take control of their investments and their asset allocation decisions.
Speaker 1: So I was talking with the financial advisors recently, and
Speaker 1: you know he put it that way. He said, asking
Speaker 1: non investment professionals to manage their investment is a big ask.
Speaker 1: Do we ask people to perform their own surgeries? No,
Speaker 1: we ask a surgeon. So the target date fund has
Speaker 1: the advantage of apping people to the most important decision,
Speaker 1: which is the stock versus bonds decision, based on how
Speaker 1: far they are away from retirement. And if you read
Speaker 1: my book Berry, you'll find that there's a lot of
Speaker 1: science and research and practice and judgment involved in calibrating
Speaker 1: those targeted funds to meet the needs of the different
Speaker 1: populations inside these different plans. So people who are putting
Speaker 1: it putting money aside for retirement, and the calibration takes
Speaker 1: into account your risk tolerance, and it is I agree
Speaker 1: with you. It is in a sense a not a
Speaker 1: pilot solution because it will change your stock bond mix
Speaker 1: automatically as you age. You'll have to targeted fund manager
Speaker 1: select the underlying building blocks, monitor those, and add other
Speaker 1: capabilities like the ones I was mentioning earlier on tactical
Speaker 1: asset allocations. So it's meant to be an easy solution
Speaker 1: for investors inside of the seed plans. So if you
Speaker 1: take that lens, it's not that surprising that they've become
Speaker 1: the default option of choice. Quite quite interesting. So Sebastian,
Speaker 1: let's talk a little bit about asset allocation. You mentioned
Speaker 1: the portfolio. It's been pronounced dead I don't know a
Speaker 1: dozen times over the last decade. But with rates under
Speaker 1: one percent and zero not too far off in the future,
Speaker 1: maybe this time is the time where the portfolio really
Speaker 1: is dead. What do you think about that traditional asset
Speaker 1: allocation mix very these days? And that's the perfect question
Speaker 1: to ask an asset allocator if you want a long answer,
Speaker 1: it's a really important and well discussed question. Let me
Speaker 1: start with the conclusion this sixty forty portfolio is not bad,
Speaker 1: but it needs to be improved. I have three main
Speaker 1: concerns with the sixty and the first one is really obvious,
Speaker 1: is that the sixty provides a specific risk profile, and
Speaker 1: not everybody should have that risk profile. So it is
Speaker 1: too generic if you think about it as blanket advice.
Speaker 1: Depending on how far you are from retirement. For example,
Speaker 1: earlier we're talking about target date funds, you should probably
Speaker 1: have a different mix between stocks and bonds. People need
Speaker 1: to account for their risk tolerance. You know, the question
Speaker 1: how much stocks should I own is often, especially these days,
Speaker 1: probably more than you think. I talk about this in
Speaker 1: my book. But if you look at target date strategies,
Speaker 1: someone who's fifteen years from retirement save fifty years old, uh,
Speaker 1: we think should hold about their portfolios in stock and retirement.
Speaker 1: The equity weight it's still about fifty. And this is
Speaker 1: because you know, longevity says or longevity risk is an
Speaker 1: important factor, and it says, you know, even at retirement,
Speaker 1: you can expect to live for another thirty years, so
Speaker 1: you want your money to last. So that's kind of
Speaker 1: the first thing to say about the sixty forty. Let's
Speaker 1: just all realize that it's very generic advice in terms
Speaker 1: of the stock bond mix. Second, really important risk is
Speaker 1: not stable over time. Think about it this way. On
Speaker 1: a rolling one year basis, if I calculate the volatility
Speaker 1: of a sixty forty portfolio, depending on the environment, I
Speaker 1: can get as much as volatility or as little as
Speaker 1: five percent volatility. So that's for the same asset mix
Speaker 1: can look very aggressive when markets are volatile, and it
Speaker 1: can look very conservative in quiet times. Our industry is
Speaker 1: evolving towards more dynamic risk management. To stabilize risk, I
Speaker 1: think target risk rather than target allocations. And thirty two
Speaker 1: at sixty your question, very captain, markets have change. Interest
Speaker 1: rates are now post COVID Hunter basis points lower than
Speaker 1: they were before COVID, and that's about a fifty drop
Speaker 1: relative to their level at the beginning of the year.
Speaker 1: So this means that for the same expected return, people
Speaker 1: need to take more risk. But let me first it
Speaker 1: this way. In order to hope to achieve the same
Speaker 1: expected return, people need to take more risk. Uh So
Speaker 1: it's not just the search for yield anymore. It's the
Speaker 1: search for return. The Barclay Zagg has a yield of
Speaker 1: you know, say one point two, which it's especially zero
Speaker 1: after inflation. And our solution team has done a study
Speaker 1: and they found that in order to reach a six
Speaker 1: expected return. Now there are lots of assumptions here, depends
Speaker 1: which asset classes you pick, it depends how you model
Speaker 1: forward returns. But roughly speaking, giving current rate levels, you
Speaker 1: actually need about in stocks if you want to reach
Speaker 1: for a six expected return going forward. And to make
Speaker 1: things worse, bonds no longer diversify stocks as much as
Speaker 1: they did in the past. So maybe the answer to
Speaker 1: the question how much stocks UH should I hold? Again,
Speaker 1: as I mentioned earlier, is often more than than you think.
Speaker 1: But I understand the spirit of the question is more
Speaker 1: about the role of traditional asset classes, right stocks, bonds,
Speaker 1: beers burgers, simple stuff. So my views at the portfolio again,
Speaker 1: it's not dead, but if that's the risk level you're shooting,
Speaker 1: you're shooting for it needs to be optimized. And in
Speaker 1: my book I present some model portfolios and we have
Speaker 1: shifted twelve percent of the allocation from bonds to low
Speaker 1: volatility alternatives. We have a five percent allocation to a
Speaker 1: risk premium or factor strategy if you will, the volatility premium,
Speaker 1: and there's also a dedicated long bond allocation of three
Speaker 1: to four The other thing we did in that model
Speaker 1: portfolio is that within equities, you can swap five of
Speaker 1: your stocks traditional long only stocks to risk manage or
Speaker 1: defensive equities. There are different ways of doing that. Those
Speaker 1: are a lot of those are not available on advisor platforms,
Speaker 1: for example, and some of them integrate integrate dynamic risk management. So,
Speaker 1: as I said Verry, if you want to get an
Speaker 1: assallocation and an assallocator, talking asked them about the whether
Speaker 1: it's dead. The bottom line is that you know it's
Speaker 1: fairly generic advice. You have to calibrate this for risk.
Speaker 1: You have to count for changing risk over time capital
Speaker 1: markets have changed, or your expectations from the sixty change,
Speaker 1: and ultimately I think you can re optimize it with
Speaker 1: these different solutions that just mentioned. So let's stick with
Speaker 1: the role of bonds within that beer and burger portfolio.
Speaker 1: We know that they're diversifier, but not as much as
Speaker 1: they used to be. We know that they produce yields,
Speaker 1: but really not enough in real terms. There's still the
Speaker 1: element of fixed income as the volatility dampener versus equity
Speaker 1: or is that no longer the case? What are your
Speaker 1: thoughts about that bonds and treasuries in particular can still
Speaker 1: dampen volatility in your portfolio. But I have to say
Speaker 1: that these days, if you ask asset allocators what keeps
Speaker 1: them up at my a number of them will say,
Speaker 1: and I'll include myself, the worry that treasuries, with the
Speaker 1: exception of the very long data treasuries have lost most
Speaker 1: of their rustation benefits. And I'll give you an example.
Speaker 1: The US equity market had a draw down of nine
Speaker 1: in September. During that drawn on, the Treasuries index actually
Speaker 1: lost fifteen basis points over that time period. The zero
Speaker 1: bound limits upside for treasuries. And this very is simple math. Right,
Speaker 1: you can't go up during a shock when stocks are
Speaker 1: selling off a lot more than your duration times the
Speaker 1: amount by which races can go down. Duration times to
Speaker 1: change in rates. And look at German boons during COVID, Right,
Speaker 1: they only went up two in Q one. Meanwhile, the
Speaker 1: Germany stock index was down. So maybe maybe treasuries can
Speaker 1: dampen volatility, but they don't really hedge your risk in
Speaker 1: the sense of rallying when you're incurring really large losses
Speaker 1: on star, so you have to look for alternatives you
Speaker 1: can extend duration. And if you look at the long
Speaker 1: treasuries index during Q one, it was up, but again
Speaker 1: I yield approached zero even in the long end, gains
Speaker 1: of that magnitude become unlikely my views, you have about
Speaker 1: one more good big crisis in long treasuries. Uh. If
Speaker 1: you will, then you have to start thinking, Okay, if
Speaker 1: I can't diversify, if I can't get the hedging from treasuries,
Speaker 1: where am I going to get it. The simplest way
Speaker 1: of doing that is to buy foot options from stocks,
Speaker 1: but that can be really expensive. You have to pay
Speaker 1: for it. With treasuries in a normal environment, at least
Speaker 1: you get a positive yield. I mentioned earlier the possibility
Speaker 1: of dynamically managing your risk. I think this is becoming
Speaker 1: more important for asset allocators and for our industry. For example,
Speaker 1: what's so called managed volatility strategies or defense as macro strategies.
Speaker 1: Some of those strategies can pick up the slack from
Speaker 1: treasuries going forward. You can consider absolute return strategies, adding
Speaker 1: those to your portfolio because they allow for short positions,
Speaker 1: which can be very effective hedges. Or look at other diversifiers.
Speaker 1: This is usually the answer people will give you. Very
Speaker 1: treasuries don't diversify as much. Look at gold, uh, I
Speaker 1: don't know. Gold can trade like a risk asset in
Speaker 1: the short run. At least look at investment grade bonds.
Speaker 1: They still have default risk. Low interest rate currencies like
Speaker 1: the Japanese end may help. They tend to rally when
Speaker 1: stocks sell off, but you have to ask what the
Speaker 1: expected return on currencies. It can be quite low. So
Speaker 1: when all else failed, you can either accept higher exposure
Speaker 1: to laws going forward, or reduce or reoptimize your equity
Speaker 1: exposure giving your risk tolerance. And I mentioned allocating to
Speaker 1: risk managed equity solutions for example, Barry. When I this
Speaker 1: question brings to mind a story I have in my book.
Speaker 1: When I worked at State three, I had a really
Speaker 1: great mentor, and I talked about him in the book.
Speaker 1: He had a fairly dry sense of humor, and one
Speaker 1: day was in his office complaining about my career. You know,
Speaker 1: I was saying my career was not going the way
Speaker 1: I wanted it to go. And he looked at me
Speaker 1: and he was getting impatient, and he asked, Sebastian, do
Speaker 1: you know the secret to happiness in life? So I've
Speaker 1: got to the edge of my seat. Do you know
Speaker 1: what he said, Barry? He said, the secret to happiness
Speaker 1: in life is to lower your expectations. So with rates
Speaker 1: at the zero bound, the bottom line is that investors
Speaker 1: have to lower their expectations for forward returns on both
Speaker 1: stocks and bonds, and for how much treasuries can rally
Speaker 1: when stocks are selling off. Quite interesting. Last question on
Speaker 1: asset allocation and diversification. We've been waiting for a long
Speaker 1: time to see when investments outside of the US will
Speaker 1: begin to pay off. They've lagged for the better part
Speaker 1: of a decade. Um when are we going to see
Speaker 1: the benefits of global diversification or or has the law
Speaker 1: of mean reversion been repealed. Yeah, that's a really good question,
Speaker 1: because non U S stocks have underperformed for a long time,
Speaker 1: and this is an example of where relative valuation has
Speaker 1: not worked in terms of reversion towards the mean because
Speaker 1: other factors have not lined up. But let's think about
Speaker 1: the usual disclaimer. I'm sure you tell that to all
Speaker 1: your clients. Very past returns aren't indicative of future returns.
Speaker 1: That's a generic statement that I talk a lot about
Speaker 1: in my book. But I show that over safe five
Speaker 1: or tenure horizons, relative returns and valuations tend to mean reverts.
Speaker 1: So it's possible that going forward, non US markets could outperform.
Speaker 1: I believe that from a long term perspective, emerging markets
Speaker 1: in particular position for higher growth than the rest of
Speaker 1: the world, given where there are in their business cycles,
Speaker 1: and given their demographics, and if you want to get
Speaker 1: a little bit more tactical in an economic recovery, economies
Speaker 1: that are more levered like Europe, for example, that have
Speaker 1: more cychnical exposures could outperform the other ways. So that's
Speaker 1: one way to think about this is that let's just
Speaker 1: look forward when we try to answer that question as
Speaker 1: opposed to backwards. And if we look forward, history says
Speaker 1: the likelihood of mean reversion given where we are UH
Speaker 1: could be sart high. Second, you know, there's just more breath.
Speaker 1: There's more opportunities for alpha and global portfolios compared to
Speaker 1: portfolios that are concentrated in the US, especially with the
Speaker 1: current environment with the fangs dominating the US market. There
Speaker 1: are more than fourteen thousand companies that are included in
Speaker 1: the MSc I All Country World IMPACTX, so more than
Speaker 1: just those nine or ten in the US that seems
Speaker 1: to be driving returns this year, right, which leads to
Speaker 1: better opportunities for alpha for stock pickers, for those that
Speaker 1: know how to do that well. So you have the
Speaker 1: advantage of relative valuation and looking forward relative to backwards,
Speaker 1: and the breath of investment opportunities working in your favor.
Speaker 1: Quite quite interesting. Let's talk a little bit about some
Speaker 1: of the research and writing you do. Not only have
Speaker 1: you written two books, but you've co authored a number
Speaker 1: of award winning papers for the Journal of Portfolio Management
Speaker 1: and for the Financial Analysts Journal. Tell us a bit
Speaker 1: about how and why you write. You spend an awful
Speaker 1: lot of time putting out well regarded research. What's the motivation?
Speaker 1: My motivation in particular for the book was to build
Speaker 1: a bridge between investment research, academic research, and the practice
Speaker 1: of investment with a focus on asset allocation decisions. So
Speaker 1: I reviewed over two hundred papers. I integrated some insights
Speaker 1: from my colleagues at Tyro Price as well as from
Speaker 1: my own twenty years in the business. And one thing
Speaker 1: I wanted to do very with this book was make
Speaker 1: it accessible without sacrificing the rigor. An author I had
Speaker 1: in mind when I started writing is Malcolm Gladwell. You
Speaker 1: know how he takes deep research and makes it interesting
Speaker 1: and accessible. I want to write something like that for
Speaker 1: asset allocation. And you know, you could say finances in
Speaker 1: my DNA. I have absolute passion for it, and working
Speaker 1: on this book, I wouldn't call it work at all.
Speaker 1: It's what I do, it's how I think, and I
Speaker 1: had this desire to put it all together in an
Speaker 1: organized way. Going from forecasting return, forecasting risks, and then
Speaker 1: constructing portfolios. That's how I've divided the three sections in
Speaker 1: the book. So let's talk a little bit about some
Speaker 1: of the problems of forecasting, especially things like fat tails,
Speaker 1: black swans, and other financial disasters. How does the finance
Speaker 1: industry think about fat tails? Do we pay enough attention
Speaker 1: to these hundred year floods that seem to come along
Speaker 1: despite their name, every ten years or so. Yeah, those
Speaker 1: are interesting statistics, very and I actually have a chapter
Speaker 1: where I talk about those probabilities and how they compare
Speaker 1: in real life versus mathematical models that rely on a
Speaker 1: normal distribution. Look, the issue of fat tales is actually
Speaker 1: a really well known issue, but I would argue we
Speaker 1: don't pay enough attention to it. I would say many
Speaker 1: quantitative analysts, especially when they backdest strategies like risk factor
Speaker 1: premium for example, don't really account properly for fat tales.
Speaker 1: Someone once told me that the only people capable of
Speaker 1: generating a sharp ratio of three point oh so three
Speaker 1: point o return to risk ratio were either Bernie made
Speaker 1: Off or quantitative analysts running back tests. And in the book,
Speaker 1: I have a great example for this. It's from Andrew Low.
Speaker 1: He's a professor r at M I T. And there's
Speaker 1: a fascinating case study on the issue of fat tales
Speaker 1: in the paper he wrote in the earlier two thousand's.
Speaker 1: His studies based on monthly data from January December, and
Speaker 1: he simulates an investment strategy that requires no investment skill whatsoever. Okay,
Speaker 1: no analysis, no foresight, no judgment. The strategy is so
Speaker 1: simple a monkey could do it. But despite this simplicity,
Speaker 1: in Angrelo's fac tests, the strategy doubles the sharp ratio
Speaker 1: of the SNP five hundred from point nine eight to
Speaker 1: one point nine four, so double the risk adjusted return.
Speaker 1: It only has six negative months compared to thirty six
Speaker 1: for the SNP five hundred. And here I'm going to
Speaker 1: quote Angelo because he sets it up nicely. He writes,
Speaker 1: by all accounts, this is an enormously successful hedge fund
Speaker 1: with a track record that would be the envy of
Speaker 1: most asset managers. Then he reveals what the strategy is,
Speaker 1: and this is where we illustrate fat tail risks. Can
Speaker 1: you guess Bury what the strategy is? Well, I was
Speaker 1: going to say, like a leverage S and P fund,
Speaker 1: but the lack of monthly drawdowns kind of moved me
Speaker 1: away from that. What's the strategy? So in this simulation,
Speaker 1: all he does is just sell out of the money
Speaker 1: put options on the S and P five hundred, so
Speaker 1: essentially he sells insurance. The strategy is just to load
Speaker 1: up on tail risks. And it just so happened that
Speaker 1: in the nineties you didn't really get called on those
Speaker 1: short put options. But what it is is picking up
Speaker 1: pennies in front of a team roller. And when you
Speaker 1: look at many risk premia or how our industry thinks
Speaker 1: about liquidity risks for example, book or carry strategies, or
Speaker 1: even how we construct allocations to credit in our portfolios,
Speaker 1: a lot of those strategies return streams, if you will,
Speaker 1: are short an option, and that is embedded tail risk
Speaker 1: that our industry ought to pay more attention to and
Speaker 1: find better ways to model. So I have a couple
Speaker 1: of chapters on that in the book The Black Swans,
Speaker 1: if you will. So since you mentioned Malcolm Gladwell, I
Speaker 1: remember a piece he wrote, I want to say, early
Speaker 1: two thousands about tail risk, and he has on one
Speaker 1: side of the trade. I think it was Victor Niederhofer
Speaker 1: who was on the other side of that tail risk
Speaker 1: trade and now seemed to lab as the buyer of puts,
Speaker 1: which was money losing until for for years and years
Speaker 1: and years until the bulldozer comes along in two thousands,
Speaker 1: and so the writer of puts were minting money all
Speaker 1: through the until the dot com collapse takes place. Then
Speaker 1: the buyer of puts becomes the big winner. And the
Speaker 1: draw downs were so catastrophic that they completely wipe out
Speaker 1: not only all the games for the previous decade, but
Speaker 1: they pretty much bankrupt the writer of puts that whole time.
Speaker 1: Am I portraying that more or less correctly? Yeah? And
Speaker 1: it's a good example because it's extreme and it's directly
Speaker 1: using nonlinear instruments like put But the issue of fat
Speaker 1: tails is broader than that, right, It's the behavior of markets.
Speaker 1: It's how we think about so called carry strategy, it's
Speaker 1: how we think about credit, it's how we think about liquidity,
Speaker 1: risk and portfolios. And you know, even you and I
Speaker 1: very so far in this podcast of talked a lot
Speaker 1: about volatility, but really when we think about forecasting risk,
Speaker 1: constructing portfolio, we really ought to talk about exposure to loss,
Speaker 1: which when you have options like in the example you
Speaker 1: describe is obviously different from your volatility, and in my
Speaker 1: Andrew Loo example, exposure to loss is obviously different from volatility.
Speaker 1: And I'm not claiming this is not something that our
Speaker 1: industry knows. We just ought to have the right tools
Speaker 1: and the right approaches and the right way of thinking
Speaker 1: about those exposures. And it's not just hedging or put options.
Speaker 1: It's a lot of aspects of financial markets. Quite interesting.
Speaker 1: Let's talk a little bit about the future of investing.
Speaker 1: You've done a decent amount of research on active versus
Speaker 1: passive and about the entire debate that's grown up around it.
Speaker 1: Tell us about your findings are good, Susan and Barry.
Speaker 1: I saw you wrote a good article about active verse
Speaker 1: passive where you show that passive is not taken over
Speaker 1: the world when you measure the assets size correctly, and
Speaker 1: you talk about your approach where it's a place for
Speaker 1: both active and passive. So I'm with you on that,
Speaker 1: broadly speaking, passive creating opportunities for active. And in my book,
Speaker 1: I have an example about this. I talked about when
Speaker 1: e t s trade around a theme with high volume
Speaker 1: and how when that happens, all the constituents in the
Speaker 1: e t F start moving together irrespective of fundamentals, so
Speaker 1: I show those correlations spikes. This creates opportunities for stock pickers,
Speaker 1: So I show examples where, for example, regulators were going
Speaker 1: after drug pricing practices and people were selling the healthcare
Speaker 1: ts dragging down companies UH that have nothing to do
Speaker 1: with drug pricing, like medical equipment or contact lenses. So
Speaker 1: those are good examples of when people, UH stockpickers would
Speaker 1: have had opportunities to buy temporarily undervalued companies because they're
Speaker 1: just they're just being dragged down with et F trading.
Speaker 1: But they're also good examples of when people, for example,
Speaker 1: sold financials because of lower rates, but companies with positive
Speaker 1: duration like reads, which used to be part of financials,
Speaker 1: would sell off as well. So it's like throwing the
Speaker 1: baby out with the bathwater. And the original paper on
Speaker 1: this we titled it the Revenge of the Stockpickers. Look,
Speaker 1: I just don't think we should look at average results
Speaker 1: for active managers. We need to look at how skilled
Speaker 1: active management is done, those that can add value at consistent,
Speaker 1: replicable philosophy and process depth of resources to do that.
Speaker 1: And I'm at all saying that there's no place for passive.
Speaker 1: It's not a black and white answer. In my mind.
Speaker 1: There's a place for both active and passive in markets,
Speaker 1: as I saw in the article Europe. And remember you
Speaker 1: know passive ultimately it doesn't work if you don't have
Speaker 1: active managers setting prices. Quite quite interesting, Let's talk a
Speaker 1: little bit about risk appetite here we are, it's the
Speaker 1: end of the year. Were recording this a few days
Speaker 1: before Christmas, and it appears that risk appetite is very high.
Speaker 1: SPACs have gone postal, I p o s are are
Speaker 1: doing really well, robin Hood traders are you know, I
Speaker 1: know it's not a lot of capital, but it's certainly
Speaker 1: a lot of mind share. Anecdotally, it seems like this
Speaker 1: younger generation is really embracing risk. What do you think
Speaker 1: this means in the current environment. It certainly creates fragility
Speaker 1: in markets. The puzzling thing is that risk capited at
Speaker 1: the moment seems high, but in pockets of the markets,
Speaker 1: rather than say a systemic issue as in prior crises.
Speaker 1: So pockets of the markets like the one you mentioned,
Speaker 1: facts Ibo, robin Hood, some technology companies. But if you
Speaker 1: look at it, we have a composite indicator where we
Speaker 1: put together a bunch of variables on surveys to get
Speaker 1: investor sentiment as well as positioning. That composite indicator is
Speaker 1: only slightly above medium. And you also still have the
Speaker 1: proverbial and I hesitate to use the term, but cash
Speaker 1: on the sidelines in the sense that there's seven hundred
Speaker 1: billion extra a u M in money market accounts versus
Speaker 1: what we had pre COVID, So what's happening. Why are
Speaker 1: pockets of the market showing fragility. I mean, we've flooded
Speaker 1: the markets with liquidity, and we had at one point
Speaker 1: year over year growth on money supply. That's basically the
Speaker 1: biggest jump in the data set that I have. And
Speaker 1: I've seen estimates for stimulus measures between fiscal and monetary
Speaker 1: globally as high as twenty five trillion, depending how you
Speaker 1: measure it. But that's a tremendous amount of liquidity. So
Speaker 1: it will create pockets of speculation, but I don't see
Speaker 1: it at this point as a systemic issue for markets. Ultimately,
Speaker 1: very in our portfolios right now, we're neutral between stocks
Speaker 1: and bonds, and we're taking advantage of relative valuations on
Speaker 1: the recovery trade with long positions, for example in small caps,
Speaker 1: and we've started to lean into value, and we have
Speaker 1: some credit exposures, for example in loans which benefit from
Speaker 1: rising rates. So yes, sentiment is high. Their pockets of
Speaker 1: fragility in the market, not a systemic issue in my
Speaker 1: mind at the moment. Quite interesting. We mentioned value a
Speaker 1: little bit. Let's let's talk about value. Is the value
Speaker 1: trade dead? Is it just that growth has done so
Speaker 1: much better than value um not only during the pandemic
Speaker 1: but the past decade. When do we see some sort
Speaker 1: of catch up of value towards growth or not? Does
Speaker 1: it just never happen? You know, you're really asking all
Speaker 1: the hot button questions for asset allocators, right the role
Speaker 1: of bonds going forward is the dead value? Growth is
Speaker 1: the other one. And in our assocation committee we debated
Speaker 1: all the time. I don't think value is dead. In fact,
Speaker 1: in the medium term you could see rotate, you know,
Speaker 1: the rotation that's started with vaccine news continue during the
Speaker 1: economic recovery. But then it's clear still to me that
Speaker 1: growth has some secular which I think long term advantages.
Speaker 1: UM growth stocks do well in low rate environments, and
Speaker 1: there's clearly a sector advantage with technology disruption being more
Speaker 1: tilted or oriented uh in in in growth stocks and
Speaker 1: in the growth style versus value. But the other reason
Speaker 1: I would say value is not dead. There's a tactical
Speaker 1: opportunity here because we're entering an economic recovery. But also
Speaker 1: if you step back and you think in a capitalist system,
Speaker 1: companies evolve and reinvent themselves, banks and make money in
Speaker 1: low rate environments. Think of those that have thriving wealth
Speaker 1: management businesses or trading. For example, energy companies, which are
Speaker 1: also a big component of value stocks, can move and
Speaker 1: are moving to sustainable energy models and and so on.
Speaker 1: So I don't think value is dead Barry, And you know,
Speaker 1: if we look beyond traditional value, look at some other factors.
Speaker 1: Small cap value has been on a tear. The Russell
Speaker 1: two thousand exploded in the second half of this year.
Speaker 1: I think it's substantially outperformed the S and P five.
Speaker 1: So maybe the concept of factor investing and value investing
Speaker 1: is going to be around it in the future. What
Speaker 1: are your thoughts. Well, we're an interesting position right now
Speaker 1: because if you look at academic studies, a good time
Speaker 1: to buy is when both value and momentum degree So
Speaker 1: to your point, we started getting really unexpected news on
Speaker 1: the vaccine, like effectiveness and updates some production capacity we're
Speaker 1: not priced in. I was looking at probabilities produced by
Speaker 1: the group called the super Forecasters, and the forecast was
Speaker 1: chance that we get million doses before March. So coin
Speaker 1: toss Feiser came out with their news and to illustrate
Speaker 1: how that was not priced in, that probability immediately jumped
Speaker 1: to eighty eight and now it's at So that has
Speaker 1: helped those small cap value sectors performed well. They're still
Speaker 1: cheap on a relative basis to other parts of the
Speaker 1: stock market. So you have agreement between positive momentum and
Speaker 1: attractive valuation, which historically across markets is a good time
Speaker 1: to buy into the asset class. Now add to that
Speaker 1: the macro factor. You can check the macro box too,
Speaker 1: because we're in a recovery from a fairly drastic shock,
Speaker 1: but you can think that there is a fair amount
Speaker 1: of pent up demand in the economy and that you
Speaker 1: over year comfortables will be showing substantial growth and small
Speaker 1: gaps and value tend to be the asset classes of
Speaker 1: choice during an economic recovery, so check that box too,
Speaker 1: and then you can, to a certain extent check the
Speaker 1: sentiment and technicals box as well. So the starts are
Speaker 1: starting to align at the sixth to eight horizon for
Speaker 1: the recovery trade. However, it's really going to be a
Speaker 1: bumpy ride. And as we're recording this webcast Barrier, we're
Speaker 1: getting some worrisome news about how devastating this new way
Speaker 1: of the virus is while we're waiting for the vaccine
Speaker 1: to be deployed, including mutations, travel restrictions, and so on.
Speaker 1: So it's the fact that the destination is pretty clear,
Speaker 1: but the path to get there is treacherous. So you
Speaker 1: bring up so many interesting points I have to ask
Speaker 1: you about. One is the combination of momentum and value,
Speaker 1: combining the two. My friend Wes Gray at Alpha Architects
Speaker 1: has written about combining momentum and value. The returns are spectacular,
Speaker 1: but the volatility he describes as just so horrific. Even
Speaker 1: God couldn't manage that portfolio. Um. Eventually, clients would just
Speaker 1: screen bloody murder because the drawdowns are so brutal. How
Speaker 1: do you deal with things like that? Obviously that's an
Speaker 1: extreme but how do you deal with the drawdowns and
Speaker 1: the volatility. I know it's the price of admission for performance,
Speaker 1: but clients have a really hard time living through those
Speaker 1: periods where you know you're underperforming, and sometimes if you've
Speaker 1: been a global value investor, significantly underperforming. Yeah, let me
Speaker 1: give you a kind of pity answer, but I think
Speaker 1: it's important, and then a more philosophical answer. The kind
Speaker 1: of immediate answer is, look, implementation matters as well. If
Speaker 1: you make a statement like when value and momentum agree
Speaker 1: it's a good time to buy, and you design a
Speaker 1: strategy to take advantage of that, the strategy that you
Speaker 1: actually design and the way you implement that broad concept
Speaker 1: can lead to vastly different exposure to loss and vastly
Speaker 1: different performance over time. So it's a broad statement where
Speaker 1: implementation and risk management practices matter quite a bit. So
Speaker 1: that's very few of my pity answer. But philosophically, if
Speaker 1: I need someone in an elevator and you give me
Speaker 1: thirty seconds to give investment advice between floors two and four,
Speaker 1: I'm going to say stay invested for the long run
Speaker 1: and stay diversified. So those are probably the two most
Speaker 1: generic pieces of investment advice, but I think they're important
Speaker 1: where it gets complicated. Uh is Again in terms of implementation,
Speaker 1: diversification means different things depending on what you have on
Speaker 1: the menu, what you diversify across, and depending on which
Speaker 1: market environment you look at. The big theme in my
Speaker 1: book is that diversification, you know, between risk assets, it
Speaker 1: actually works really well when markets are rallying, which is
Speaker 1: if you think about it when you don't want it,
Speaker 1: and it really doesn't work when markets are crashing, as
Speaker 1: we've seen this year in q Won during COVID. So
Speaker 1: while this is generic, I think important advice again the
Speaker 1: implementation of how you divers find the title of my
Speaker 1: book is beyond diversification. What you do beyond that matters
Speaker 1: quite a lot. But if you look over time, staying
Speaker 1: invested is probably the most important of the two pieces
Speaker 1: of advice, because over time, if you can weather exposure
Speaker 1: to loss, especially in the low rate environment where you're
Speaker 1: not going to get anything out of bonds anyways, if
Speaker 1: your time horizon is long enough, it will pay off.
Speaker 1: So there's investor psychology in there. And I'm guessing a
Speaker 1: lot of financial advisors are listening to your podcasts and
Speaker 1: they're probably throwing their phones on the wall at me,
Speaker 1: right now, because if you're a financial advisor, investors psychologies
Speaker 1: what you have to deal with with your clients and
Speaker 1: day today, and your role is essentially to tell them
Speaker 1: not to sell in March and if anything, to add
Speaker 1: back to risk assets. I'm not making light of investor psychology.
Speaker 1: It is quite important factor, especially for financial advisors that
Speaker 1: deal with clients you know, day today. So we've talked
Speaker 1: about hamburgers and beer. We've talked about stocks and bonds.
Speaker 1: We haven't talked about private assets like venture capital or
Speaker 1: private equity, or structured notes or any of the other
Speaker 1: non publicly traded items that are out there. What are
Speaker 1: your views, given lowered expected returns for stocks and lowered
Speaker 1: expected returns for bonds, what are your views on these
Speaker 1: various private, not publicly traded assets. Within asset allocation and
Speaker 1: the world of diversification, private assets can have a role
Speaker 1: in many of folios, but there are not a free lunch,
Speaker 1: and many investors think of private assets as a free lunch,
Speaker 1: private equity in particular. This is fascinating. But if you
Speaker 1: ask me, uh, in the context of what I mentioned
Speaker 1: earlier that I wrote my book in part to bring
Speaker 1: academic finance into the industry into the practice of asset allocation.
Speaker 1: If you ask me where academic research and investment practice
Speaker 1: disagree the most, the biggest chasm in our industry between
Speaker 1: the two, I'll tell you it's on the performance of
Speaker 1: private assets over time. And you see a lot of
Speaker 1: numbers that suggest that private equity outperforms public equity. Buy
Speaker 1: a lot both an absolute and in a risk adjusted basis.
Speaker 1: And then if you dig into academic research where people
Speaker 1: will actually scrub the data and they remove zombie valuations
Speaker 1: from the database and the account properly for survivorship bias
Speaker 1: and reporting bias, and the account properly for the timing
Speaker 1: of cash flows coming in and out, you start uncovering
Speaker 1: a completely different story. There's an academics done a lot
Speaker 1: of research on that. I quote him in my book
Speaker 1: is then as Ludovic Value Book, and he shows in
Speaker 1: some of his papers that actually private equity over long
Speaker 1: periods of time can actually underperform public equities. Now, there's
Speaker 1: a wide range uh within private equity and it depends
Speaker 1: who you invest with. But it's it's a fascinating it's
Speaker 1: a it's a gigantic chasm between industry and academic research.
Speaker 1: The takeaway talk about this in my book it is
Speaker 1: that it's not it's just not a free launch. You
Speaker 1: need to account for the risk properly. You can earn
Speaker 1: a liquidity premium, but it is like shorting an option
Speaker 1: to a certain extent, if you will and if you
Speaker 1: have the right approach to it. Uh, there's there's nothing
Speaker 1: wrong with private assets and private equity. They're just not
Speaker 1: the free lunch investors are making an amount to be
Speaker 1: and I think your investors have just have to be
Speaker 1: careful when they think about those types of investments because
Speaker 1: they're not as transparent as public markets. Right, clearly not
Speaker 1: as transparent. You bring up two really interesting points about
Speaker 1: private equity. One is the liquidity premium. You're looking for
Speaker 1: a bigger payout in exchange for locking up your capital
Speaker 1: for a longer period of time. But there's also the
Speaker 1: selection process. Go back just a couple of decades, there
Speaker 1: were a few hundred private equity firms. Now I think
Speaker 1: the last number is something like eleven thousand private equity funds.
Speaker 1: How is an individual investor or even an institution supposed
Speaker 1: to make at decision about where to allocate capital to?
Speaker 1: Which private equity firm yeah, you know, you have to
Speaker 1: be really careful in their advisors that specialize in that
Speaker 1: to taking the investors side, or consultants for example that
Speaker 1: can help institutional investors. Individual investors have to be extra
Speaker 1: careful and work with their financial advisors. I think you
Speaker 1: really have to not just jump in based on the
Speaker 1: Google search, if you will, because really an asset class,
Speaker 1: this is an asset class where the top quartile can
Speaker 1: be very different from the bottom quartile, probably even more
Speaker 1: than in public markets. I do think that the factors
Speaker 1: for success in those markets resemble the factors for success
Speaker 1: and active management in public markets. Depth of resources, replicability
Speaker 1: of a proven process, us a philosophy that is consistent
Speaker 1: over time, experience, and so on. So you want to
Speaker 1: look for those factors as well. Huh, quite interesting. I
Speaker 1: have a couple of more questions on asset allocation and
Speaker 1: investing in general. I kind of ran past the fact
Speaker 1: that you sit on a committee for the Institute for
Speaker 1: Quantitative Research, and I just wanted to get your thoughts
Speaker 1: on the rise of quantitative investing, which has become so
Speaker 1: popular along with factor based investing and generally the use
Speaker 1: of high powered computers and algorithms, tell us a little
Speaker 1: bit about your views on quant I like active versus passive,
Speaker 1: there's a place for both quantitative and fundamental, and in
Speaker 1: the case of quant versus fundamental, the intersection of both
Speaker 1: is what fascinates me. And if you set aside applications
Speaker 1: in high frequency trading, for example, where really the technology
Speaker 1: is the advantage and the researches the advantage, and you
Speaker 1: go to what we do, which is tactical assallocation, strategic
Speaker 1: asset allocation, or even for stock pickers in general, you know,
Speaker 1: you fundamentals matter, and experience matters, and if you're able
Speaker 1: to bring together quantitative insights with data and judgment and experience,
Speaker 1: I think you can get a more robust investment process
Speaker 1: in a lot of cases. Look, I just want to
Speaker 1: be clear. There's a place for systematic quantitative strategies to
Speaker 1: stand alone. There's a place for fundamental stock picking, for example,
Speaker 1: but there's a in between as a tremendous amount that
Speaker 1: our industry can do bringing both together. And I dedicate
Speaker 1: a lot of my book about this, and Barry there's
Speaker 1: a story at the beginning of the book about a
Speaker 1: quantitative research conference that I was sitting at several years
Speaker 1: ago when a fundamental investor basically raised their hand and
Speaker 1: asked a pretty rude question amongst quantitative peers or investors,
Speaker 1: and he basically said, you know, your models for forecasting
Speaker 1: returns are not valid because they're basically garbage in, and
Speaker 1: if you use a portfolio optimization model, it's going to
Speaker 1: be garbage out. So why use quantitative methods at all?
Speaker 1: And I'll always remember the presenter was a well regarded
Speaker 1: thought leader, someone who's traveled academia and practice. I always
Speaker 1: remember what he answered. His answer. It stayed with me
Speaker 1: and I've used it over time. He looked at the
Speaker 1: presenter and he was clearly he just landed his clearly
Speaker 1: jet lacks a little bit patient. He looked at the
Speaker 1: presenter and he said, if you don't, and this was
Speaker 1: more reply to the garbage in, garbage out or so
Speaker 1: called guy Goo critique. So if you don't think you
Speaker 1: can forecast expected returns, you shouldn't be an investment business.
Speaker 1: And the point is that investing is about forecasting. When
Speaker 1: we invest, no matter what, we make a judgment about
Speaker 1: the future, in the way we allocate our portfolio, in
Speaker 1: the way we position our portfolio, so there are quite
Speaker 1: a few chapters in my book that are about how
Speaker 1: do you use a quantitative process. We were just talking
Speaker 1: about value and momentum and when both agree, how do
Speaker 1: you use data and insights like that but make them
Speaker 1: relevant for the current more kind environment. And in that
Speaker 1: intersection you can create a replicable process where there's room
Speaker 1: for judgment, and uh, you can succeed as an investor. So, Barry,
Speaker 1: I'm pontificating a lot, but this is a question that
Speaker 1: I've thought about while writing my book and throughout my
Speaker 1: career because in a sense, like I've straddled bottom up
Speaker 1: and top down investing, I've also straddled quantitative and fundamental investing,
Speaker 1: especially over the last five to ten years of my career.
Speaker 1: Very interesting, there was something in one of your writings
Speaker 1: I don't remember which that I made a note I
Speaker 1: have to ask you about because it's so counterintuitive, and
Speaker 1: it's the longer the stream of historical investment data, the
Speaker 1: better true or false. I'm going to say falls just
Speaker 1: to be a bit controversial that the real answer would
Speaker 1: be just not always of academics like to go back
Speaker 1: to the early nineteen hundreds right to create robust data sets.
Speaker 1: But if you think about it, the data back then,
Speaker 1: I don't know, you know, we didn't have computers, we
Speaker 1: didn't have cars. People use like a horse and buggy
Speaker 1: to get around. So many financial advisors, for example, will
Speaker 1: think about investment policy statements or strategic asset allocations for
Speaker 1: their clients based on long term data on return and risk,
Speaker 1: and they'll average across different risk regimes um well. First
Speaker 1: of all, in the book, I show that higher frequency,
Speaker 1: shorter term data are more predictive of risk going forward
Speaker 1: than the longer term data, just from a risk forecasting perspective.
Speaker 1: The other issue is that the fluctuation in sector weights
Speaker 1: within asset classes make it such that if I use
Speaker 1: in my model old data from the SMP five data
Speaker 1: from a long time ago, I'm looking at a different
Speaker 1: sector composition. For example, right technology sector in the SMP
Speaker 1: five has been really really on stable from five of
Speaker 1: the index. It actually reached in during dot Com, then
Speaker 1: it declined back to fifteen in two thousand five and
Speaker 1: now stands at So you're really not looking at the
Speaker 1: same asset class. If you use this to do a
Speaker 1: strategic asset allocation, you're basically modeling risk. The risk of
Speaker 1: an asset class that no longer exists, and there are
Speaker 1: other examples of that. Even in bonds, the duration of
Speaker 1: the index has changed, Right, The weight of high quality
Speaker 1: bonds has decreased from two as a share of corporates,
Speaker 1: and the weight that riskier bonds has changed, the duration
Speaker 1: of the Bloomberg Barkley's as has increased, Right, it was
Speaker 1: four and a half years back in two thousand five,
Speaker 1: now it's six seven years. Didn't the SMP break out
Speaker 1: communications from technology? Also, if I'm remembering correctly, within that sector,
Speaker 1: they kind of cleaved it into Yes, the sector weights
Speaker 1: change over time, and even the classification and which stocks
Speaker 1: are included in the index. Emerging markets are another really
Speaker 1: good example. Emerging market used to be very much commodity
Speaker 1: dependent cyclical factors and financials. Emerging markets now have become
Speaker 1: a lot more high tech than they used to. You
Speaker 1: have some large tech platform companies like you have in
Speaker 1: the US in China for example. So I guess the
Speaker 1: point trying to make is that historical data is useful,
Speaker 1: but it's not always the case that the longer your
Speaker 1: data set, the better for your financial risk modeling. And
Speaker 1: one way to get around this is to you is
Speaker 1: factor models, And here I'm talking about looking at how
Speaker 1: the asset classes are composed, what the asset classes look
Speaker 1: right now based on the current factor exposures, and then
Speaker 1: backfill the historical data for those factors. So I guess
Speaker 1: what I'm saying is there are different ways of addressing
Speaker 1: this issue. But you know, is more data always better
Speaker 1: than than more recent or more relevant data? The answers know.
Speaker 1: And part of this also comes down to risk regimes.
Speaker 1: Right you you can forecast the type of regime you
Speaker 1: think you're going to be in and then sample data
Speaker 1: from a similar regime in history. For example, I know
Speaker 1: we only have you for a limited amount of time.
Speaker 1: I only have you for another ten minutes. So let's
Speaker 1: jump to our favorite questions that we ask all of
Speaker 1: our guests, called our speed round, and we'll start with streaming.
Speaker 1: Tell us what you're watching on either Netflix or Amazon Prime,
Speaker 1: or what podcast you might be listening to. What's keeping
Speaker 1: you entertained during lockdown? I love that question. I mean,
Speaker 1: my answer is not going to be very original right now,
Speaker 1: but I just finished Queen's Gambit, which I thought was excellent.
Speaker 1: And the other one is my son. He's thirteen, and um,
Speaker 1: he'd never watch the Lost series and I've never I've
Speaker 1: never watched it either, So we've just started from the beginning.
Speaker 1: We're in season two of the Lost series, which is
Speaker 1: a an older show, but we're really enjoying enjoying it,
Speaker 1: so Buried. No, no spoilers, please, I haven't seen any
Speaker 1: of it, so, uh, you don't have to worry about
Speaker 1: spoilers from me. You mentioned one of your mentors earlier
Speaker 1: in your career. Tell us who helped to shape your career,
Speaker 1: who gave you guidance as to both, um, how your
Speaker 1: jobs progressed and your own investment philosophy. Let me named
Speaker 1: two mentors. First, my father. I talked about him in
Speaker 1: my book. He was a finance professor for forty years.
Speaker 1: I even took a couple of his classes. Second mentor
Speaker 1: was Mark Kritzman. He is CEO of Wyndham Capital. He
Speaker 1: also teaches finance at the m I T. And there's
Speaker 1: a story I like to tell about the early days
Speaker 1: of my collaboration with Mark Kritzman. Back before the year
Speaker 1: two thousand, I didn't speak much English. I grew up Canadian,
Speaker 1: and I interviewed with Mark for research internship. I don't
Speaker 1: think it was a good interview, except that I'd read
Speaker 1: every single paper he had published up to that point
Speaker 1: and fought and still think he's a genius. But he
Speaker 1: was reluctant. You know, he had access to the best
Speaker 1: students from the best universities in the US, but he
Speaker 1: was pressured into uh this interview by my professor. And
Speaker 1: he also had a business relationship with Mark and with
Speaker 1: State Street. And I'll just say that I learned years later,
Speaker 1: over a glass of wine that Mark had pushed back
Speaker 1: really hard from taking me on as a research intern.
Speaker 1: Apparently he had said, and I quote, I don't care
Speaker 1: if he's free, because we didn't. I was. I was
Speaker 1: writing my thesis for my master's degree, so I wasn't
Speaker 1: There was no uh pain salary involved. Apparently it said,
Speaker 1: I don't care if he's free. My time is not free.
Speaker 1: H This was This was over a glass of wine
Speaker 1: a few years later at the time, though back then
Speaker 1: all I got was a call from State Street UH
Speaker 1: in Montreal saying, Hey, Mark kn't wait to wait to
Speaker 1: work with you. He's very excited that you're going to
Speaker 1: come to Boston. Ultimately, I did this research project for
Speaker 1: him as an intern, and he ended up mentoring me
Speaker 1: for over ten years and we've co authored a lot
Speaker 1: of papers together. I like to say, basically everything I
Speaker 1: know about quant finance and assocation I've learned from Mark. Huh.
Speaker 1: Quite quite interesting. Let's talk about books. Tell us some
Speaker 1: of your favorites and what are you reading right now? Okay,
Speaker 1: So I love to read. That's it's very hard to
Speaker 1: answer when you read, you know, fifty plus books a year.
Speaker 1: I generally read about business, philosophy, some history, psychology, sports.
Speaker 1: I just I read nonfiction. I love memoirs and biography. Uh.
Speaker 1: And I was told I knew you might ask that question,
Speaker 1: so I I prepared a few books by category. I
Speaker 1: know I'm cheating, but business, I would say. A recent
Speaker 1: book i've read is The Right of a Lifetime by
Speaker 1: Bob iger uh X, CEO of Disney. Excellent, very well written,
Speaker 1: lots of business wisdom, sports sports memoirs. This is an
Speaker 1: older one open by Andre Agassi, and even if you're
Speaker 1: going into tennis, it's just a fantastic book to read.
Speaker 1: Another one, maybe less well known, is by an ultra runner,
Speaker 1: and even if you're not into ultra running, is worth reading.
Speaker 1: The book is titled North by Scott Jerich and it's
Speaker 1: about how he broke the record for running through the
Speaker 1: entire appellash Appellachian trail on the East Coast. Another one
Speaker 1: that's good is Can't Hurt Me by David Goggin's If
Speaker 1: you want motivation help, there's a book called Why We
Speaker 1: Sleep that I recommend for everybody to realize how important
Speaker 1: sleep is. Productivity. Deep Work by Cal Newport's is one
Speaker 1: of the best books on time management I've ever read.
Speaker 1: Un philosophy or dealing with change an uncertainty. I would
Speaker 1: say anything on stoicism is interesting. Books by Ryan Holiday,
Speaker 1: like The Obstacle is the Way, Stillness is the Key.
Speaker 1: Those are excellent books. Entertainment, entertaining, business Story is Bad,
Speaker 1: the book about There No Nos Bad Blood was fantastic,
Speaker 1: and just finished Billion Dollar Loser about We Work, which
Speaker 1: is also a fascinating story. So Barry, you asked for one,
Speaker 1: I gave nine or ten apologies for that. No, not
Speaker 1: at all. Everybody loves loves those answers. Um, it's it's
Speaker 1: I think that's people's favorite question. Let's talk about recent
Speaker 1: college graduates who are interested in a career in asset
Speaker 1: allocation or wealth management. What sort of advice would you
Speaker 1: give them? But this is mostly advice I've gotten from
Speaker 1: Mark Chritsman mentioned him earlier. First, always look to build
Speaker 1: your human capital, and by that I mean your network
Speaker 1: of industry contacts. You could be your publications and journals,
Speaker 1: your retritation and the conference circuit could be your education
Speaker 1: credentials for example, the cf A charter. Anything that differentiates
Speaker 1: you from your peers and that ultimately no one can
Speaker 1: take away from. It's your own human capital. Second, I
Speaker 1: would tell people starting their careers stay close to revenues. Uh.
Speaker 1: In a lot of jobs it means staying in front
Speaker 1: of clients, but it might also an investment management mean
Speaker 1: to stay close to investment decision making, but stay close
Speaker 1: to revenues because your role in the value chain will
Speaker 1: be more motivating and more obvious. The other one I
Speaker 1: would say is sometimes this underestimated emphasized communication. When you
Speaker 1: move from being a student to working in the real world,
Speaker 1: you move from from an environment where it's it's basically
Speaker 1: a meritocracy. Right. You study hard, you get good grades,
Speaker 1: but but in corporate life, collaboration, teamwork are really really essential.
Speaker 1: So maybe as a student your success is from your
Speaker 1: own intellectual merit and how hard you study. On the job,
Speaker 1: you'll realize that even for the most technical of roles,
Speaker 1: maybe about just as half of your success, maybe more
Speaker 1: is determined by how well you communicate. Because in corporate life,
Speaker 1: collaboration and teamwork are so essential to success, especially in
Speaker 1: side large organizations. So don't neglect communication. Uh. Lastly, I
Speaker 1: would say, just your just your perspective. Talked about the
Speaker 1: secret to happiness in life earlier. Lower your expectations. I
Speaker 1: think managing your expectations is important, not getting worried about
Speaker 1: short term setbacks. Just look at the long term trend
Speaker 1: and make decisions based on the long term trend in
Speaker 1: your career, not short term setbacks. And last one, I
Speaker 1: will say, take care of yourself. You know, all the
Speaker 1: advice you can give people starting your careers, I think
Speaker 1: that's the that's the most important one. Diet, exercise, sleep,
Speaker 1: All these things reinforce each other. It's like a virtuous circle.
Speaker 1: You can't you can't take one away, right, Well, you'll
Speaker 1: have more energy to exercise, exercise, you'll sleep better, sleep better,
Speaker 1: you'll have more self discipline. With your diet. The next
Speaker 1: day you get the idea. It's a virtuous circle. And
Speaker 1: if you get these three right or you know, close enough.
Speaker 1: No one's perfect. Uh And you know, but diet, exercise, sleep,
Speaker 1: reinforce each other. Take care of yourself. Don't wait for motivation.
Speaker 1: Just just build habits. It's much easier to do things
Speaker 1: well when you when it's a habit, as opposed to
Speaker 1: waiting for motivation, which is very fickle. There's another book,
Speaker 1: very I'm gonna cheat. I'm going to add another book,
Speaker 1: The Power of Habits Charles do H. I think it's
Speaker 1: worth reading. Very interesting. And our final question, what do
Speaker 1: you know about the world of investing today that you
Speaker 1: wish you knew twenty or so years ago when you
Speaker 1: were first getting started. I would mention some of the
Speaker 1: takeaways from my book. Quantitative methods work best when used
Speaker 1: with a healthy dose of qualitative judgment. That's something I've
Speaker 1: learned over time. I wish I'd realized earlier. Risk is
Speaker 1: easier to forecast than returns, and this has tremendous investment implications.
Speaker 1: When in doubt, it pays to stay invested for the
Speaker 1: long run. You will think of my elevator pitch, stay invested,
Speaker 1: stay diversified. Diversification works very well when you don't need it,
Speaker 1: and not so well when you actually need it during crashes,
Speaker 1: and if you're an investor, you really need to take
Speaker 1: that into account. And lastly, in markets, you really need
Speaker 1: to expect the unexpected. Things change very quickly in markets,
Speaker 1: and we've us been through such an environment quite quite fascinating.
Speaker 1: Thank you Sebastian for being so generous with your time.
Speaker 1: We have been speaking with Sebastian Page. He is the
Speaker 1: head of multi asset investing at tro Price, where his
Speaker 1: group runs about three hundred and sixty billion dollars. If
Speaker 1: you enjoy this conversation, well check out any of our
Speaker 1: previous I don't know, I'll call it four hundred interviews
Speaker 1: we've done over the past seven years or so. You
Speaker 1: can find that at iTunes, Spotify, wherever you feed your
Speaker 1: podcast fix. We love your comments, feedback and suggestions. Write
Speaker 1: to us at m IB podcast at Bloomberg dot net.
Speaker 1: You can give us a review on Apple iTunes. Sign
Speaker 1: up for the daily reads I write every day at
Speaker 1: d Halts dot com. Check out my weekly column on
Speaker 1: Bloomberg dot com Slash Opinion follow me on Twitter at
Speaker 1: rid Halts. I would be remiss if I did not
Speaker 1: thank the crack team of professionals who helped me put
Speaker 1: together this conversation each week. Maroufal is my audio engineer.
Speaker 1: Tracy Walsh is our project manager. Michael Boyle is my producer.
Speaker 1: Michael Batnick is my head of research. I'm Barry Ridults.
Speaker 1: You've been listening to Masters in Business on Bloomberg Radio