Speaker 1: This is mesters in Business with Very Results on Bloomberg Radio.
Speaker 1: This week on the podcast, I have an extra special guest.
Speaker 1: Auntie Elmanin is a QRS co head of the Portfolio
Speaker 1: Solutions Group. He is the author of a new book,
Speaker 1: Investing amid Low expected Returns, making the most when the
Speaker 1: markets offer the least. He has an incredible CV full
Speaker 1: of all sorts of awards and has worked at all
Speaker 1: sorts of places like Salomon Brothers and Brevin Howard before
Speaker 1: ending up at a q R. If you're at all
Speaker 1: interested in value investing, factor investing, understanding how you're starting
Speaker 1: condition leads to future returns that might be better or
Speaker 1: worse than historical averages, you're gonna find this to absolutely
Speaker 1: be a master class in investing. I found it absolutely fascinating,
Speaker 1: and I think you will as well. With no further ado,
Speaker 1: my conversation with a u RS Auntie Elmanen. Welcome to Bloomberg. Thanks, Perry.
Speaker 1: I'm really looking forward to this same here. So so first,
Speaker 1: I found the book to be quite fascinating, very in depth,
Speaker 1: and you managed to take some of the more technical
Speaker 1: arcana and make it very understandable. Will circle back with that.
Speaker 1: Let's let's start just by talking about your career. You
Speaker 1: you began as a sang Central Bank portfolio manager in Finland.
Speaker 1: So yeah, my really first stroke of luck, I think,
Speaker 1: was getting that job. Before that, I had been nerdy
Speaker 1: kid with interesting esoteric things like royal family trees or
Speaker 1: or track and field statistic, not trading, and when I
Speaker 1: was studying in university economics, I did not really get
Speaker 1: the passion. The passion came when I went to invest
Speaker 1: the country's foreign exchange reserves there and it was it
Speaker 1: was very much global government bond markets, so thinking about
Speaker 1: macro picture. I never never then then or later had
Speaker 1: I don't know much much interested on a single stock picking,
Speaker 1: so so think thinking of the big picture. And there
Speaker 1: were some lovely, lovely things like I was there in
Speaker 1: the October eighty seven crash and saw two year yields
Speaker 1: falling in one one overnight from nine and a half
Speaker 1: percent to seven and a half percent. You don't see
Speaker 1: those movements, yeah absolutely, Yeah. So so anyway, so that
Speaker 1: was that was That was a great, great learning experience.
Speaker 1: And and then my second related stroke of luckworse that
Speaker 1: Professor ten French came there. Yeah, he came to educate
Speaker 1: nine and sort of what we were doing, what we
Speaker 1: should be doing, and and I was an enthusiastic kid there.
Speaker 1: Well by that time, I was already almost twenty eight
Speaker 1: and and he when I was expressing some interest about
Speaker 1: studying in the US, he was only, you should do
Speaker 1: it soon. You have yourself old enough to do that.
Speaker 1: And and and a few months later I was. I
Speaker 1: was in the US. And it was so lucky in
Speaker 1: my life because because that year I met then H.
Speaker 1: Cliff Asnest and John lou who later founded uh a
Speaker 1: q R so as my fellow students. I met my
Speaker 1: wife there. She was NBA student from Germany. And it
Speaker 1: would have left a few months later University of Chicago, Chicago.
Speaker 1: So all of this, all of this luck sort of
Speaker 1: was related to my wonderful first jobs. And Gean Farmer
Speaker 1: teachers there and his research partners Can French. Yeah, both
Speaker 1: both Cliff, actually all three, Cliff, John and I. We
Speaker 1: we had Farmer and French as our dissertation chairman. And
Speaker 1: and that's a small source of pride, a little little intimidating.
Speaker 1: So so you go from Chicago, is that how you
Speaker 1: ended up at Salmon Brothers? Yeah? So that that relationship
Speaker 1: actually already started when I was a portfolio manager, right funnily,
Speaker 1: in effectually like one of these Michael Lewis's la spoke
Speaker 1: as good guys was one of my sales sales context. Yeah,
Speaker 1: he didn't have many good guys, but one was anyway.
Speaker 1: So so and and and I got to know people
Speaker 1: like Marty Leebovitz before I went to Chicago, and I
Speaker 1: think he helped. He may have again had a hand
Speaker 1: hand somewhere there. And so when I finished my studies,
Speaker 1: it was pretty clear that I wasn't sort of academic enough.
Speaker 1: I wanted to go to either by side or sales side.
Speaker 1: I even talked to them ge some Ware, Cliff and
Speaker 1: John Ware didn't go there. Uh sort of thought from
Speaker 1: my eighties experience ad by side, this dust the wrong
Speaker 1: choice anyway. So so I then went to Salomon Brothers,
Speaker 1: did bond research for a couple of years on yield
Speaker 1: curve strategies, then moved to Europe. That was always a
Speaker 1: deal with my wife to um to be a bond
Speaker 1: strategist at Salomon for for many years, initially very discretionary,
Speaker 1: but gradually becoming more and more systematic. And uh, and
Speaker 1: eventually turned from this customer oriented role to prop trading
Speaker 1: for a while and then her gender up Brevan Howard. Yes,
Speaker 1: so I think that from from these times when I
Speaker 1: was strategist, I was talking to my two great people,
Speaker 1: but like you know, earlier on some LTCM and then
Speaker 1: various other people and including Alan who came actually from
Speaker 1: Salomon and so somewhere all three he sort of invited
Speaker 1: me to try to be a mini cliff Uh systematic
Speaker 1: systematic trader with a small team there at Brevan Howard,
Speaker 1: which was in some sense great, but it is sort
Speaker 1: of a misfit because it's a very discretionary place, and
Speaker 1: so trying to do systematic in that environment was harder,
Speaker 1: and I think none of us were doing extremely well,
Speaker 1: none of us were doing extremely badly, but it just
Speaker 1: it just didn't become a um it's not a great
Speaker 1: third yeah yeah, yeah, but it was. It was. On
Speaker 1: the other hand, it was just a great place well
Speaker 1: first to try it. But the second thing is that
Speaker 1: when two thousand and eight came along, it was one
Speaker 1: of the few places that we're making money, so it
Speaker 1: was a very comfortable vantage point for for that environment.
Speaker 1: How did you go from being a Mini clif firstness
Speaker 1: to a Maxi Cliff first. Yeah, so so, um, I
Speaker 1: had stopped that systematic trading, but I had been talking
Speaker 1: with those guys often possibly um. Joining It was a
Speaker 1: matter also of them opening European office because that's where
Speaker 1: I was physically and so so so that that was
Speaker 1: a coaching. It also helped that I was I basically
Speaker 1: decided to write this book expected returns, and when I
Speaker 1: when I wrote it, I asked Cliff to write the
Speaker 1: foreword for it. And and by the way, like if
Speaker 1: you if you looked like check some time the first
Speaker 1: words he has there, like it was, I was sweating
Speaker 1: when I read read that. Um, it's just by telling
Speaker 1: that first time I met Anti, I thought he was
Speaker 1: insane and I was right so so so that that
Speaker 1: that was a little stressful, but it turns it out
Speaker 1: very nice. But anyway, so that experience reminded I think
Speaker 1: both of us how aligned our thinking is based on
Speaker 1: this common common background, and that's somehow I think motivated
Speaker 1: them to I think them to offer, and me to
Speaker 1: me to say yes yes to uh to the idea
Speaker 1: of joining them. Really, what I would think is getting
Speaker 1: to my natural home, and it happened in twenty eleven,
Speaker 1: so you've been there for more than a decade. You're
Speaker 1: now cohord of Portfolio Solutions. What is that role like?
Speaker 1: What's your what's your day to day work like at
Speaker 1: a QR Capital. Yeah, so the Portfolio Solutions group advice
Speaker 1: is mainly institutional clients on all kinds of challenges that
Speaker 1: they haven't thinking about expect it, returns, portfolio construction, risk management, etcetera.
Speaker 1: And then in addition, we write lots of papers, I
Speaker 1: speak in many conferences. And then in addition to that,
Speaker 1: I've had a hand in designing and improving some of
Speaker 1: our strategies, especially related to style premium. That was something
Speaker 1: I was quite passionate about when I joined. And and
Speaker 1: by now i'm co head. The guy who has collaborated
Speaker 1: very closely with me, Dan Bill alone has taken more
Speaker 1: and more over the day to day running of the thing.
Speaker 1: And I, you know, I took time to write a
Speaker 1: second book recently and now I'm talking about it. And
Speaker 1: I think, with with with my age, I'm happy to
Speaker 1: sort of moved part time status. I think so. In
Speaker 1: the book, Cliff Fastness again does the introduction and he says,
Speaker 1: you overshare a great characteristic for someone research, but he
Speaker 1: sometimes says he's afraid you're gonna feel the secret sauce.
Speaker 1: So what explain over sharing of financial research? Yeah, so
Speaker 1: this is this is related to all of us having
Speaker 1: this University of Chicago experience where where we were really
Speaker 1: taught the value of being open and and putting your
Speaker 1: research out there for public scrutiny too, to improve it
Speaker 1: and to educate. But of course there are possible downsides
Speaker 1: to that, and and and that has been always always
Speaker 1: a question. So so I'm not and we are not
Speaker 1: writing about all the proprietary proprietary strategies that we have,
Speaker 1: but we are talking quite openly about some things like
Speaker 1: against styles, factory investing, alternatively premium things that are relatively
Speaker 1: widely known. And I have this I don't know, Yeah,
Speaker 1: I'm sort of leaning that way of being too transparent
Speaker 1: and and and then somebody may have to control me
Speaker 1: a little. So so let's just talk a little bit
Speaker 1: about um. Two of the key themes in the book.
Speaker 1: The first is alpha. It's the holy grail but also
Speaker 1: allusive and costly explain. Alpha is something we all aspire for,
Speaker 1: but in reality the evidence is very limited that that
Speaker 1: most investors can deliver alpha. Moreover, there's there's a lot
Speaker 1: of good research by others and us showing that much
Speaker 1: what people think is alpha can be explained by either
Speaker 1: you know, heads funds running, taking on lots of equity
Speaker 1: correlation or then correlation to these various styles that are
Speaker 1: not quite quite market better. But it's it's certainly not
Speaker 1: pure alpha either. So somehow this type of demystifying, I
Speaker 1: think is helpful. But it's it's clear that investors tend
Speaker 1: to be managers and investors tend to be over confident
Speaker 1: in their ability to find that. So I'm glad you
Speaker 1: brought that up, because there's another bullet points in the
Speaker 1: last chapter the book which strikes me. Let me let
Speaker 1: me read it. Quote discipline, humility and patience UM as
Speaker 1: a key to invest in success. That sounds more like
Speaker 1: behavioral finance than factor investment. Yeah. Yeah. So one other founder,
Speaker 1: David Cabilt, he's he's always had this very good point
Speaker 1: that good investment results require good investment strategies and good
Speaker 1: investors and and so we wrote the paper together almost
Speaker 1: a decade to go on bad habits and good practices
Speaker 1: and and really think thinking about those things, and it
Speaker 1: does definitely get to behavior our advices in general, I
Speaker 1: think behavioral finance literature focus is way too much on
Speaker 1: how you can exploit other people's mistakes as opposed to
Speaker 1: looking in the mirror and reducing your your own own mistakes.
Speaker 1: So really, really quite interesting. So so let's talk a
Speaker 1: little bit about UM. Some of the concepts about expected
Speaker 1: returns UM you mentioned in the beginning of the book,
Speaker 1: lower asset yields and richer asset prices have pulled forward
Speaker 1: future returns. In other words, a lot of the games
Speaker 1: we've seen in the twenty tens and our guess twenty
Speaker 1: one and twenty two weren't so much based on that
Speaker 1: multiple and of earnings, but future multiples that were pulled forward.
Speaker 1: And so that time period explain that it's always good
Speaker 1: to think of starting deals and valuations sort of as
Speaker 1: two sides of the same coin. So starting deals of
Speaker 1: all major assets were coming down in last decade and
Speaker 1: last decades actually several decades. So something that I try
Speaker 1: to make investors see that, Uh, they naturally think of
Speaker 1: this way this way also of expected returns with bonds,
Speaker 1: but when they think of equities or housing they sort
Speaker 1: look at the rear view mirror and think of historical
Speaker 1: libraries returns that can be distorted by this returning or
Speaker 1: cheapening quite a lot. So I think it's helpful to
Speaker 1: think that all of these long only investments are priced
Speaker 1: by thinking of expected cast flows discounted by a common
Speaker 1: discount right to risk less part and some varius as
Speaker 1: a specific premier. And now when this common discount rate
Speaker 1: has been at all time lows and was coming down
Speaker 1: for a decades, so that was making everything expensive. At
Speaker 1: the same time, whatever happened to the expected cast flows
Speaker 1: and other premium and so that that situation has gotten
Speaker 1: us to this sort of everything bubble less. Some some
Speaker 1: saying I think it's a bubble is a bit wrong
Speaker 1: word there in the sense that there is a fundamental
Speaker 1: story behind it. The low real yields that were influencing
Speaker 1: all kinds of investments makes a lot of sense. You
Speaker 1: wrote this book in one or at least finished it
Speaker 1: in and you describe in the book what you see
Speaker 1: as an unquote investment winter ahead. I have to say
Speaker 1: that seems pretty president considering since you handed the book
Speaker 1: in to be published last year, markets have pretty much
Speaker 1: done nothing but roll over and head south in two.
Speaker 1: Was this just lucky timing or were you a little president?
Speaker 1: I'll put it largely too lucky timing. But so the story,
Speaker 1: I was always saying that we know that we've got
Speaker 1: these low expected returns given those low starting deals. And
Speaker 1: and by the way, related to what you're saying, I
Speaker 1: really like another statement, we borrowed returns from the future
Speaker 1: when we were when we were capitalizing everything at those
Speaker 1: expensive levels, and so that locked in low future returns.
Speaker 1: We just didn't know whether that's gonna materialized through slow
Speaker 1: pain staying in this low expected return world, or fast
Speaker 1: pain cheapening. And so then in the in the book
Speaker 1: I was I was saying that I don't really have
Speaker 1: a strong view on this one. But but in conclusions
Speaker 1: I did put there that that it just seems that
Speaker 1: stars are aligning for some fast pain. And it wasn't
Speaker 1: just the high valuations, but there was a catalyst. There
Speaker 1: was this basically inflation problem was seemingly getting as close
Speaker 1: to the day when FED finally has to make some
Speaker 1: hard choices, and so so so that I got got right.
Speaker 1: But but I would say that I was really lucky
Speaker 1: because I could have written in six months earlier, and
Speaker 1: in general I've had other market timing calls. I'm not
Speaker 1: famous for being good at market. I mean I don't
Speaker 1: know anybody who is. There are no old gold market
Speaker 1: timers in France Billionaire list. There's there's old in this bowl,
Speaker 1: but there's not both. Um, let's let's talk a little
Speaker 1: bit about the pushback to low expected returns, you know,
Speaker 1: following the financial crisis and the FED cutting rates economy
Speaker 1: and the market starts recovering late two thousand nine and
Speaker 1: then two thousand and ten, and we kept hearing from
Speaker 1: a lot of different value corners. Hey, everything is richly priced.
Speaker 1: Bonds are the most expensive they've been in thirty years.
Speaker 1: Stocks are pricy, lower your return expectations. But yet the
Speaker 1: tens sore returns and equities and bonds close to double
Speaker 1: historical averages. How do we explain why that advice took
Speaker 1: so long before it started to work. So I think
Speaker 1: there is a fair risk that we anybody who was
Speaker 1: talking like that, he's thought that's the boy who cried
Speaker 1: wolf and Lucy losing credibility then by this time, and
Speaker 1: I think that would be said because I think sometimes
Speaker 1: it's going to really work, and this year really looks
Speaker 1: like it can be can be that sometime. And I
Speaker 1: felt always somewhat good that we were at least we
Speaker 1: were not pushing for we were not predicting me and
Speaker 1: reverting valuations that we have made things work. We were
Speaker 1: saying it, let's be really humble about any market timing
Speaker 1: use of this stuff. But low starting heels do anchor
Speaker 1: expected returns lower. But it's true that and and what
Speaker 1: we saw then in that in that decade, that rich
Speaker 1: things can get richer, and that doesn't take quite a
Speaker 1: long time. And so actually my favorite quote is to
Speaker 1: think about what happened to SMP five shielder p that
Speaker 1: went from mildly above historical average too empty to double
Speaker 1: and wildly above average forty in ten years time. And
Speaker 1: that type of thing gives you well, basically seven percent
Speaker 1: annual returns pro rated then and so so that's the
Speaker 1: key reason. And something similar happened. Real yels on bonds
Speaker 1: were already low, they went even lower. Um rental heels
Speaker 1: on equities, credit spread, anything you look at had basically
Speaker 1: tail winds from from these following years, and that repricing
Speaker 1: then gave high returns. And that there's a danger that
Speaker 1: people then look at the rear view mirror and become
Speaker 1: complacent just at the wrong time. So so let's talk
Speaker 1: a little bit about that. How significant was the ultra
Speaker 1: low rates of the Fell reserve to making all of
Speaker 1: these different asset classes richly valued and continuing to generate
Speaker 1: strong returns right up until the FED started raising rates.
Speaker 1: So I think so short term what happened this year
Speaker 1: was really there was a catalyst of inflation and FED tightening.
Speaker 1: But the long term story was always always about valuations
Speaker 1: and and the important thing, as I said, is related
Speaker 1: to this common part low real deals. And should we
Speaker 1: blame FED for that or should be blaming somehow greedy investors.
Speaker 1: I buy more the stories that there was this fundamental
Speaker 1: fundamental effects, most importantly proper probably savings glad excess savings
Speaker 1: coming from pension savers. Also another story is that that
Speaker 1: when when the wealthy we're getting a bigger share of
Speaker 1: the pie, their savings rates are higher. There are there
Speaker 1: are research on both fronts which which sort of explain
Speaker 1: why we've gotten this exceptional savings clot which was then
Speaker 1: pushing all assets yields lower and and creating this and
Speaker 1: fed them. Investors were basically then responding to that situation
Speaker 1: rather than driving it. Now, we heard a lot about
Speaker 1: the savings clout from then chairman Ben Bernanke in the
Speaker 1: early two thousand's. Is this savings clot qualitatively different than
Speaker 1: what we saw two decades ago? Yeah, it's it's it's
Speaker 1: it's the same idea. So always when you think of
Speaker 1: real years, you think that, okay, there's a there's either
Speaker 1: an issue with investments or savings, and it's it's a
Speaker 1: balance between those two. And he was highlighting that this
Speaker 1: probably is more coming from the savings side, and then
Speaker 1: he was symphasized this is the this is a China
Speaker 1: and and often often emerging market foreign reserves, those those
Speaker 1: types of excess savings where sort the culprit for the
Speaker 1: conundrum in two thousand five or whatever it was. And
Speaker 1: and I think that that story still has some legs,
Speaker 1: but sort of the key culprit then became demographics and
Speaker 1: retirement savers And the latest story now we center in
Speaker 1: the sort of one percent. So so the flip side
Speaker 1: of that, if there's a savings glut, meaning a big
Speaker 1: uptick in demand for that paper, does that also suggest
Speaker 1: we have a dearth of high quality sovereign paper of
Speaker 1: bonds issued by countries like the US or the UK,
Speaker 1: or is it just whatever. The existing supply of paper
Speaker 1: is what, Liz, And it's the demand that has spiked. Yeah,
Speaker 1: I think the demand has been driving things and and
Speaker 1: and well, the supply has been there like there's there's
Speaker 1: there's been plenty of plenty of supply as well to
Speaker 1: to cater for it, and and really really given the
Speaker 1: need for the to to cover public deficits and so on.
Speaker 1: But again, I think I think if one thinks of
Speaker 1: what what sort of started this among fundamental forces, I
Speaker 1: choose to go with that savings plat That's my best
Speaker 1: reading of the literaty and it makes some sense. So
Speaker 1: you wrote the prior book a decade ago, two thousand
Speaker 1: and eleven, just expected returns in the decade between that
Speaker 1: book in this book, What have we all learned? What
Speaker 1: what has the markets taught us? And how did you
Speaker 1: work that into the new book? Well? I like that.
Speaker 1: I like the basic framework still still in the book.
Speaker 1: But I think certainly it was a terrible decade for
Speaker 1: all kinds of contrarian strategies and and I have become
Speaker 1: even more humble. It's sort of funny that I I
Speaker 1: wrote my dissertation four the years ago in duration timing,
Speaker 1: and I've thought about all kinds of market time. Every
Speaker 1: decade I become more humble about about the endeavor. And
Speaker 1: yet even as I told at the end of this
Speaker 1: latest book, I'm still mentioning star start aligning. And it
Speaker 1: might be so, so the temptation is there. But I
Speaker 1: think the main point I want to say is I
Speaker 1: think what we should really try to think of investing
Speaker 1: as a strategic effort good diversification and so as opposed
Speaker 1: to some great tactical timing, because that doesn't do too well.
Speaker 1: So I think I think that would be and part partly,
Speaker 1: you know, relearned through the difficulty of contrarian timing strategies.
Speaker 1: Then then another thing, which which was very important in
Speaker 1: this decade, was there was a growing interest in these
Speaker 1: diversifying return sources. But I think by now the most
Speaker 1: popular one is related to a liquid investments, whereas my
Speaker 1: favorites where then and are still now more liquid strategies
Speaker 1: Vario style, premium value investing, trend following, and so on
Speaker 1: and so so. One of the interesting things to talk
Speaker 1: about in the book is that we continue to find
Speaker 1: more data, and not just the decade of data that
Speaker 1: went by, but historical data, old data going back to
Speaker 1: the eighteen hundreds. I have to ask, where is this
Speaker 1: do we call it ancient? Where is this nineteenth century
Speaker 1: data coming from? And how can you apply it to
Speaker 1: investing in the twenty one cent Yeah. So the first
Speaker 1: point is that we accrue out of sample new experience
Speaker 1: so slowly that that that it's sort of pain painful
Speaker 1: to do to do that waiting, and and therefore it
Speaker 1: is helpful supplementary source to get some old data. Most
Speaker 1: really studies were done with datas in nineteen sixties to nineties,
Speaker 1: and then it was extended to beginning of CRISP data
Speaker 1: six and now we've had people going further back and
Speaker 1: and I am so I haven't been one of those
Speaker 1: in the archives, but but I'm one of those looking
Speaker 1: at that that data and studying it critically and and
Speaker 1: seeing what what we can learn from there, mainly whether
Speaker 1: you whether you get similar patterns. I do love it
Speaker 1: when I find that some strategies have worked persistently over
Speaker 1: different centuries, pervasively across different countries and asset classes and
Speaker 1: robust with different specifications. So that makes me more confident.
Speaker 1: But I do I have recognized And that's something I
Speaker 1: say in the book as well, that that when people
Speaker 1: see my hundred and two hundred years of data there
Speaker 1: some just roll their eyes and and and why is that? Why?
Speaker 1: Why do why do I care about two hundred years
Speaker 1: of data? I really care about last three years with
Speaker 1: my old portfolio. Well, obviously that's a very specific example set.
Speaker 1: You want to go away beyond that. But it raises
Speaker 1: people rolling their eyes, raise the question how reliable is
Speaker 1: that data? How accurate is it? Can we have confidence
Speaker 1: that it's been cleanly assembled because the technology of the
Speaker 1: eighteen hundreds a little more manual than today. All fair,
Speaker 1: So I'll just I'll just say, well, first I said,
Speaker 1: you just do the best you can, and I think
Speaker 1: so there's some value in the data. But the problem
Speaker 1: there are data problems, There are investability questions. Even if
Speaker 1: the data verified, maybe you couldn't do for in diversification
Speaker 1: or something like well, actually before first maybe you could.
Speaker 1: That was pretty international era. Um, and then there's a
Speaker 1: whole criticism that the world has structurally changed and that
Speaker 1: creating sim has more bite the further back you go. So,
Speaker 1: I think for all these reasons we should be skeptical,
Speaker 1: but I still like it as a supplementary evidence, not
Speaker 1: as main motivation for anything. So you mentioned the versification earlier.
Speaker 1: In the last section of the book, you write an
Speaker 1: owed to diversification. Tell us about that. Sure, I do
Speaker 1: think you know it's a cliche, but diversification is pretty
Speaker 1: close to a free lunch, and it is a wonderful,
Speaker 1: wonderful aid to improving portfolios. I think it's much easier
Speaker 1: to improve your risk ad justed returns through good risk
Speaker 1: diversification than by getting somehow greater insights in one particular strategy.
Speaker 1: So and and so I write, I write about it
Speaker 1: both both. I don't know that the simple maths about
Speaker 1: it how you can double double sharp ratios with foreign
Speaker 1: uncorrelated strategies, and then remind us it's really difficult to
Speaker 1: find for uncorrelated strategies in long only world. You may
Speaker 1: have to get too long short world to take advance
Speaker 1: at each of those types of opportunities. And then I'm
Speaker 1: the flip side of that. I am saying that diversification
Speaker 1: has got some critics. Of course, there's diversification or the
Speaker 1: or or that diversification fails when most needed and so,
Speaker 1: and I think I can counter those to some extent,
Speaker 1: but I think there are challenges that good frisk diversification
Speaker 1: often then requires you to use some shorting and leverage,
Speaker 1: and there are limits to how much people want to
Speaker 1: do that. There's unconventionality issues. And then this's this what
Speaker 1: what we've highlighted in reacent Yes, that you sort of
Speaker 1: inherently you lack stories and and so it's it's it's
Speaker 1: very sort of math oriented or or algebra oriental type
Speaker 1: of thing as opposed to great stories, which which drive
Speaker 1: most investment passions. Right, that makes a lot of sense.
Speaker 1: You mentioned free launch. You talk about rebalancing arguably another
Speaker 1: free launch. Tell us your thoughts on rebalancing. Yeah, So rebalancing,
Speaker 1: I think is a way of ensuring that you can
Speaker 1: retain your risk targets and you can retain your diversification.
Speaker 1: So I think of it primarily has that there's a
Speaker 1: follow up question whether you whether you can get better
Speaker 1: returns and then how you do it and so and
Speaker 1: I talk a little lightly. I think I wouldn't be
Speaker 1: too strict and rebalancing I think like one one good
Speaker 1: idea is to be somewhat lazy with rebalancing strategy. So
Speaker 1: let me hear something like that or or maybe four
Speaker 1: times a year, but part of the portfolio, so you're everything,
Speaker 1: you don't you you don't get so um dependent on
Speaker 1: when you did it your year, So that that type
Speaker 1: of thing. But but basically, if you if you are
Speaker 1: a little lazy or patient with rebalancing, you let the
Speaker 1: near to momentum play out and you might get closer
Speaker 1: to the time when there's mean reversion advantages. So so
Speaker 1: you're trying to play a little bit these advantages that
Speaker 1: tend to be in financial markets with momentum mean reversion.
Speaker 1: So let's talk a little bit about low expected returns.
Speaker 1: We we already talked about the impacts on FED rates.
Speaker 1: What else goes into driving valuation factors that can lower
Speaker 1: future expected returns. It really depends on what rise on
Speaker 1: we talk about. So monetary policy macro conditions are very
Speaker 1: important for short term but I think I I'd like
Speaker 1: to focus in my focused in the book mainly on
Speaker 1: long term expected returns and then its terms being five, five,
Speaker 1: five to ten years something like that. And yeah, it's
Speaker 1: interesting if you go even further than sort of valuations
Speaker 1: even don't matter, so everything is gets diluted, and then
Speaker 1: you have to think about what's some theoretical long grand return.
Speaker 1: But so so for for ten years ahead, then starting
Speaker 1: ITAs and valuations are essential and and again so I
Speaker 1: think those those are very helpful anchor for thinking about
Speaker 1: those returns. Even though you can get this very ugly
Speaker 1: uh forecast. There ares like what happened in the last
Speaker 1: last decade. But when such setting happens, then it pretty
Speaker 1: much stores problems for the future. So like last decade,
Speaker 1: as it's rich and it's just ment at all, you
Speaker 1: are going to have even more problems in in in
Speaker 1: those future returns. And I think the only way you
Speaker 1: can sort of solve the low expected return problem here
Speaker 1: is at least for risky assets, is that there would
Speaker 1: be this much faster growth, this techno optimism that you
Speaker 1: some quarters and there there could be, but we've had
Speaker 1: we've had wonderful technological advance this last hundred years and
Speaker 1: and two per cent reial growth is pretty much as
Speaker 1: good as it gets. And that's the interesting thing because
Speaker 1: you're talk in the book about very often mom and
Speaker 1: pop investors individual investors tend to confuse uh GDP growth
Speaker 1: with expected returns. Academically, we know there's almost no correlation
Speaker 1: between the two, is there. It's surprising that whether you
Speaker 1: look at our time in one country or you look
Speaker 1: at across countries, the relation is very modest. And my
Speaker 1: my favorite poster boy on that one is China, which
Speaker 1: had this thirty years of very fast for equity investors,
Speaker 1: it was a really sorry story. Yeah no, it was
Speaker 1: a lost opportunity. If you piled into China, you missed
Speaker 1: a lot of opportunity elsewhere in the world. It's quite
Speaker 1: quite amazing, and there are some stories why that's why
Speaker 1: that's the case, Like basically, one on one logic is
Speaker 1: a GDP growth doesn't capture how the pie is shared
Speaker 1: between corporates and so on. And there's there's a different
Speaker 1: sector compositions. There's there's public versus an unlisted sectors, all
Speaker 1: all kinds of questions like this that can then mechanically
Speaker 1: explain why this happens. But it is. It's it's a
Speaker 1: it's a weird result and it's understandable, and I think
Speaker 1: it commonly motivates people to look for those fast growing
Speaker 1: countries and taking it for granted that that's a good investment.
Speaker 1: So when we're thinking about various asset classes, how does
Speaker 1: cash work into that allocation strategy? Is that a legitimate
Speaker 1: as at class or is it just a drug on
Speaker 1: future returns except for years like well even in two Again,
Speaker 1: in relative sense, cash is of course doing fine, but
Speaker 1: real real returning cashes whatever minus pipers and it just
Speaker 1: happens to be better than even more rice various results.
Speaker 1: And so so I think one one interesting uh thing
Speaker 1: is that you sort of you need to have some
Speaker 1: market timing ability, I think, to make cash useful and
Speaker 1: use it almost as an option. And and then it
Speaker 1: matters whether you have got um some interesting yield levels.
Speaker 1: Twenty years ago you had that three or four percent
Speaker 1: three or return. Cash not not around in this situation.
Speaker 1: So I do think that the main story with cash
Speaker 1: c is, like you said, there's there's there's something about
Speaker 1: the dragon. It dilutes. It's not a great diversify or
Speaker 1: dilutesive performance. It would be good if you have got
Speaker 1: some great market timing skills, but let's be humble about it.
Speaker 1: Often I'd even say that cash may be best used
Speaker 1: as a basically on on the other side, like you
Speaker 1: want to use it for leverage for some long shot strategies,
Speaker 1: and so that may be a helpful answer what you
Speaker 1: do with that In the book, I like the way
Speaker 1: you describe certain investor types based on their future liabilities.
Speaker 1: So pensions endow minds to find benefit plans. You point
Speaker 1: out that they're particularly sensitive to low expected returns. Tell
Speaker 1: us what makes them so susceptible? Is it the future
Speaker 1: liability as they have? Why is merely the concept of
Speaker 1: lower expected returns so problematic for them? Yeah? Well, I
Speaker 1: think it is. It is for any investor, But if
Speaker 1: you have made some commitments for the future, then it
Speaker 1: is maybe more legally binding, and and that that makes
Speaker 1: it tougher than for somebody who can who can basically
Speaker 1: adjust expectations um or or try to just live through
Speaker 1: these things without without recognizing the low expected return until
Speaker 1: until somewhere far into the future. So so let's talk
Speaker 1: about for into the future, how long should we expect
Speaker 1: lower returns for? Is this a question of quarters or
Speaker 1: or years and decades? Is the cyclical? Does it eventually
Speaker 1: turn out? And tell us a little bit about duration
Speaker 1: of expected returns? Sure? So the main story of the
Speaker 1: book is about those low starting years, and therefore we
Speaker 1: are talking of long run story. Then I'll sort of
Speaker 1: turn into more speculative pandit here by thinking about the
Speaker 1: current situation soon where I do think that we are
Speaker 1: now in this fast pain situation where we will probably
Speaker 1: get more where we will surely get more monetary policy tightening.
Speaker 1: And I suspect that the latest latest market positive positive
Speaker 1: is on yels is maybe way too optimistic. I think
Speaker 1: I think you will need you will need more tightening
Speaker 1: to control inflation. And again this is this is a
Speaker 1: speculative talk here. So I think fast pain will be
Speaker 1: with us for various risky assets, but I think there
Speaker 1: will be a limit to it because of the structural forces.
Speaker 1: I refer to the savings. But but but I think that's
Speaker 1: not going away anytime soon, and therefore there's going to
Speaker 1: be a lead on how far heels can rise, and
Speaker 1: that and basically those bond deals they have been underwriting
Speaker 1: high valuations and all other on stocks and real estates
Speaker 1: and so on and and and those rising yields have
Speaker 1: been very important in cheapening those other asset classes. And
Speaker 1: so I think there's going to be more pain on
Speaker 1: that front, but not too much. I don't think we
Speaker 1: will get so much higher yields and cheaper asset valuations
Speaker 1: that we would sort of solve the long run problem
Speaker 1: of low expected It turns we will. We will still
Speaker 1: get some pain, but but well, I think the slow
Speaker 1: pain will be with us quite a long time. So
Speaker 1: so let me see if I can explain that. If
Speaker 1: I if I understand that we've had a savings glot
Speaker 1: that has put a cap on interest rates, which means
Speaker 1: that the cost of capital has been very low, and
Speaker 1: therefore that allowed us to speculate in real estate inequity,
Speaker 1: and that allowed valuations to go high. And what's going
Speaker 1: to determine how much those multiples compress is how high
Speaker 1: rates end up going up? Am I oversimplifying that? I
Speaker 1: know that? Is? That is right? And again we have
Speaker 1: got now the cyclical situation where where basically the inflation
Speaker 1: problem forced finally central banks to to act quite aggressively
Speaker 1: then on well anyway, on on the interest right front.
Speaker 1: And and then how much more they have to do
Speaker 1: is going to be important in the near term. But
Speaker 1: I just don't see your scenario where they would race
Speaker 1: rate so much that we would get back to the
Speaker 1: kind of four or five uh expected real return from
Speaker 1: sixty portfolios which used to be there. We are about
Speaker 1: half of that nowadays. We've come from the lows, but
Speaker 1: we are still like, let's say sixty two percent three
Speaker 1: yels roughly the number as opposed to the four plus
Speaker 1: long run. So so we're recording this the first week
Speaker 1: of July. The FED has already raised seventy five basis
Speaker 1: points on top of their previous fifty basis points for
Speaker 1: a while. The consensus is that the end of July,
Speaker 1: I think it's the seven meeting seemed to be seventy
Speaker 1: five basis points. Uh. It sounds like fears of recession
Speaker 1: might drive that down to fifty basis points. But clearly
Speaker 1: there's no consensus there yet. How far do you think
Speaker 1: the Fed's going to go in tightening and do we
Speaker 1: run the risk there were behind the curve in one
Speaker 1: all running the risk that they're getting ahead of themselves.
Speaker 1: And two yeah, First, just a qualifier here that that
Speaker 1: nobody knows. Nobody knows and and and we don't trade
Speaker 1: on my views. We don't like this is this is uh,
Speaker 1: that's that's important, and it is it's incredibly difficult. But
Speaker 1: but yeah, we we certainly do think about those those
Speaker 1: social attempts. And my I'm pretty much in a letty
Speaker 1: Larry Summers came there thinking that it's very hard to
Speaker 1: get immaculate disinflation here and and and you will need FED.
Speaker 1: FED needs to do more to get that inflation into control.
Speaker 1: And if it does, either if it acts more or
Speaker 1: financial markets dropping up, then then there's going to be
Speaker 1: some pretty bad outcomes too risky assets. Without that, I
Speaker 1: think we are we are going to continue to have
Speaker 1: that inflation problem. There's a there's a narrow path how
Speaker 1: it could go in a more benign way, and market
Speaker 1: seems to be clutching that straw right now. So what
Speaker 1: would make you change your mind? Mine? What would lead
Speaker 1: you to say, oh, I've been too cautious about future
Speaker 1: expected returns, and because A, B and C happened, I
Speaker 1: think we could get a little more confident. Yeah, so,
Speaker 1: I think the long horizon estimates are very difficult to change.
Speaker 1: The starting yields are are heavy anchor, so I think
Speaker 1: it would be it would really require the growth environment
Speaker 1: to change. Again, I mentioned earlier technological progress, those types
Speaker 1: of things, So short term anything can happen. But but
Speaker 1: but somehow you have to have this type of idea
Speaker 1: of the greater internet usage globally and all all kinds
Speaker 1: of technological progresses moving us from the two percent to
Speaker 1: three or four, which is hard to do, hard to do,
Speaker 1: has not happened, right, And then you mentioned earlier the cheapening.
Speaker 1: If stocks got much cheaper, that could potentially change the
Speaker 1: starting valuation. But do we really think that's a likely Probably, yeah,
Speaker 1: I I would be surprised that we would get that
Speaker 1: much cheaper. And again, the economic logic I have is
Speaker 1: there the savings somehow that that basically really ills are
Speaker 1: not going to allow that we have to I don't know,
Speaker 1: fragile economy, too, fragile financial markets to to allow that
Speaker 1: much step in we would we might be talking of
Speaker 1: further further market force and that and that that seems
Speaker 1: pretty unlikely from at least with the state of the
Speaker 1: world today. Obviously that can change any any time. That
Speaker 1: that's really that's really quite interesting. So let's talk about
Speaker 1: some things that seem relatively cheap. Cliff Fastness in the
Speaker 1: forward of the book wrote quote value premium seems record
Speaker 1: cheap today, that was the end of one. Is value
Speaker 1: premiums still cheap today? Value premium is still very cheap.
Speaker 1: And it's been a lovely year in the sense that
Speaker 1: we have had positive returns, and yet the value spread,
Speaker 1: this forward looking measure of how cheap value stocks have
Speaker 1: versus growth stocks, has remained wide. And part partly it
Speaker 1: is that you get some pullbacks like we have recently
Speaker 1: recently gotten, but also we are basically rotating into new
Speaker 1: value stocks and growth stocks, and and and the fundamentals
Speaker 1: have actually further had sort of favorable um developments favoring
Speaker 1: values stocks versus growth stocks. So for all these reasons,
Speaker 1: we see that value stocks the way we tend to
Speaker 1: trade them are as cheap or even cheaper than they
Speaker 1: were at the worst times during the dot com bubble.
Speaker 1: And it is important to just distinct with sen Cree
Speaker 1: wrote about this in a in a blog recently that
Speaker 1: that dot com bubble was very much about tech versus
Speaker 1: others and and across sectors. We haven't got into the
Speaker 1: new heighst but we tend to focus on within industry
Speaker 1: um stock selection in our value strategies. And with that,
Speaker 1: the key story of this recent bubble was really markets
Speaker 1: favoring these disruptive, profitless growth companies within every sector, and
Speaker 1: that opportunity remains still very wide. And we we love
Speaker 1: seeing like pretty good performing behind us and then then
Speaker 1: very good runway because those values spreads remained quite right.
Speaker 1: And in the US, I've noticed that small cap value
Speaker 1: has done much better than the larger cap companies and
Speaker 1: then emerging market small cap value. Last I looked, it
Speaker 1: might have even been green for the year, might have
Speaker 1: been positive returns for the year. Why are small cap
Speaker 1: doing so well on the value spaces here? Well, it
Speaker 1: often happens, like you just you just get bigger movements
Speaker 1: in good and bad on the small caps than large caps.
Speaker 1: So so I mentioned the quote from Cliff he's a
Speaker 1: big character. What what's it like working with him? It's
Speaker 1: mainly it's great though if you had him with us
Speaker 1: here on the studio, I think you wouldn't hear much
Speaker 1: of me. And and that's just as well, because he
Speaker 1: is he's uh, he's faster on his feet than he's
Speaker 1: he's with here. So so that's that's in everybody's benefit.
Speaker 1: But it so seriously, it does help that our investment thinking,
Speaker 1: investment beliefs are so similar. So I I really rarely
Speaker 1: have got any any any wish to second guess anything
Speaker 1: he says or does, so so that's great. And then
Speaker 1: most importantly, I do love his ethical antenna and this
Speaker 1: kind of truth telling obsession that he has. I mean
Speaker 1: sometimes there's there are overshoots there, but it's really it's
Speaker 1: it's it's a reason for me why I love it
Speaker 1: to work in a q R more than in any
Speaker 1: other place in financially because of Cliff. You know, usually
Speaker 1: you get a guy who's quantitatively oriented, you tend not
Speaker 1: to get that sort of articulate nous and you also
Speaker 1: tend not to get that sort of um sense of humor,
Speaker 1: which is very very specific to him. He's a very
Speaker 1: funny guy. He's yeah, and and and a bit mixed
Speaker 1: feelings because there's no way to beat him one of
Speaker 1: those things. But that's okay, that's very funny. Um. So
Speaker 1: so let's talk a little bit about the things that
Speaker 1: have changed since you wrote this this book. Um, what's
Speaker 1: going on in the current market. Is it just confirming
Speaker 1: what your expectations were for for future returns? Tell us
Speaker 1: a little bit about how two has now that it's
Speaker 1: half over, How has this impacted um the general premise
Speaker 1: of of the book. Yeah, I think overall, I feel
Speaker 1: totally blessed that that we got The book came out
Speaker 1: at the time when when markets were roughly acting the
Speaker 1: way the title was saying, talking about low expected it
Speaker 1: as we've got low realized returns of that. That sounds
Speaker 1: sounds great. And it also turns out that some of
Speaker 1: our strategies, value strategy trend following these types of strategies
Speaker 1: are doing very well. So so I'm getting like great,
Speaker 1: great response. But of course things have some some things
Speaker 1: have happened as expected related to inflation, central bank tightening.
Speaker 1: But then I had no idea of what you know,
Speaker 1: the geopolitics Russia Russia, U train or or the greater
Speaker 1: split we have between us we are and China and
Speaker 1: so and so, and I don't have I don't have
Speaker 1: great insights to this for us. When I think of
Speaker 1: the longer unexpected returns, the key stories that assets have
Speaker 1: cheapened as one would one would have expected in this situation,
Speaker 1: and and the question is whether there's going to be more.
Speaker 1: I think it's it is interesting that we've had we've
Speaker 1: seen the biggest moves in bonds smaller moves. When I
Speaker 1: think of yield heel space, not not price space, but
Speaker 1: in heal space, equity yields have written uh more, and
Speaker 1: then illiquidy heals have risen so far very little, And
Speaker 1: of course there is a smoothing effect, and so that's
Speaker 1: a but. But I do expect that there's going to
Speaker 1: be an issue. I I saw in March when when
Speaker 1: equities didn't instantly respond to rising years, it reminded me
Speaker 1: of Wiley Coyoity running running over that Cliffland, sort of
Speaker 1: waiting for gravity to hit and and I think something
Speaker 1: like that maybe still happening with the private tesseets, that
Speaker 1: they are sort of waiting, waiting to price things. So
Speaker 1: so let's talk a little bit about that. There's been
Speaker 1: a lot of discussion about private markets and and the
Speaker 1: illequidity premium they get. Um, what what are your thoughts
Speaker 1: on there? Should should now untraded assets get an eloquently premium? Yeah,
Speaker 1: so I've written a lot about it, Cliff of course,
Speaker 1: uh also, and and and more and more weatily on this,
Speaker 1: and I think it is it's dangerous that people I
Speaker 1: think too automatically that if I invest in a liquid investments,
Speaker 1: I'm going to earn an illiquidity premium. I think after
Speaker 1: equity premium. That's probably the second most confident statement people
Speaker 1: would have on longer expectators, and data doesn't really support it.
Speaker 1: So we've done lots of empirical evidence on this, and
Speaker 1: so the logic why why the data is then so
Speaker 1: maybe disappointing is I think that that people somehow confused.
Speaker 1: They think that UM that the I liquidity is the
Speaker 1: only important feature. So so yes, I think it is
Speaker 1: fair to require liquidity premium for locking your money for
Speaker 1: ten years. But then there's this other characteristics lack characteristic,
Speaker 1: lack of market market, the smoothing service service as I
Speaker 1: call it, and that may totally offset the amount of
Speaker 1: access return that you get. So if there's a two
Speaker 1: or three percent require liquidity premium for for looking money UM,
Speaker 1: we might accept the same return for public and private
Speaker 1: equities UM because with the private equities you don't get
Speaker 1: the great que actility that you see. Now. You also
Speaker 1: show a chart in the book that that shows how
Speaker 1: the bottom third of um I liquid markets have you know,
Speaker 1: by definition, they're underperforming the top third, but that gap
Speaker 1: has just been widening and it seems like, in addition
Speaker 1: to whatever I liquidly premium are in private markets, there
Speaker 1: also seems to be a pre substantial I don't know
Speaker 1: if I want to call this quality factor, but the
Speaker 1: best of the liquid investments seem to really dramatically outperform
Speaker 1: the bottom. That spread is much bigger than we might
Speaker 1: have anticipated otherwise. So so, apart from thinking about illiquids overall,
Speaker 1: one of these great selling points there is is why
Speaker 1: this person between our performers and under performers. And to me,
Speaker 1: that's such a lovely example of investor over confidence that
Speaker 1: when people see this this person, they think, oh, the
Speaker 1: upside is for me, the downside is for someone else.
Speaker 1: And so so clearly this opportunity involves some risk as well,
Speaker 1: and and and it is. It's it's just somehow that
Speaker 1: that industry doesn't seem to have anybody getting that that downside.
Speaker 1: So sorry, I I do think that some investors have
Speaker 1: got a decent claim to expect to get those top
Speaker 1: quarter alright, let's say, top half half managers. But but
Speaker 1: for others, I think it's it's somehow it's better to
Speaker 1: just think that, okay, if we get the industry level
Speaker 1: returns that's that's reasonable. So Will Rogers used to always
Speaker 1: advise people only by staffs that go up. If they
Speaker 1: don't go up, don't buy them. Does the same thing
Speaker 1: apply to private markets? Only invest in private markets that
Speaker 1: I'll perform. If they don't now perform, stay away from Yeah,
Speaker 1: it's only example. Hindsight is great, but but it is
Speaker 1: so I would say just positively there. Historically, in particularly
Speaker 1: if we look at private equity, it has a great
Speaker 1: thirty thirty five year history of outperforming smp I five
Speaker 1: foundered by by three percent or something like that. And
Speaker 1: that's after five six percent fees. That gross alpha is
Speaker 1: just mind boggling in some sense. But but looking ahead, um,
Speaker 1: we should be much more com cautious because the gap
Speaker 1: has already been much narrower the last fifteen years, and
Speaker 1: it seems to be narrower because the money was flowing
Speaker 1: in because of the popularization of the Yale model. Since then,
Speaker 1: the forward looking opportunity has been much narrower, and realized
Speaker 1: opportunity has been much more, much more modest, and the
Speaker 1: fees are the good old fees. So I think next
Speaker 1: decade will be more disappointed. And when we look back
Speaker 1: to the early days of that our performance there were
Speaker 1: a tiny fraction of the number of funds. Then what
Speaker 1: is it like ten thousand private equity funds there used
Speaker 1: to be there, used to be numbered in hundreds, not thousands. Yeah. Yeah,
Speaker 1: the same as as the HENE fund and the venture
Speaker 1: capital worlds. Success has attracted a lot of capital, which
Speaker 1: leads to other performance. Yeah. And one further thing is
Speaker 1: that these questions were already relevant a few years ago. Um,
Speaker 1: but private equity did very well the last few years.
Speaker 1: And uh, and I saw Dan Rasmussen wrote quite nicely,
Speaker 1: so recognized. I mean, that's that's rare and probably when
Speaker 1: somebody does it sort of um post mortem on my mistake.
Speaker 1: That's what he did there, And he said he got
Speaker 1: it sort of wrong because, um, because they private equity,
Speaker 1: like hedge funds and especially venture capital, we're pushing a
Speaker 1: lot into the growth sector. And that worked very well
Speaker 1: for a few years. And I think to the extent
Speaker 1: that we write about the value versus growth, that benefit
Speaker 1: will turn into disadvantage I think in the coming years.
Speaker 1: And so it's really interesting. We haven't talked about a
Speaker 1: couple of other um alternatives, credit spreads, commodities, what else
Speaker 1: are you thinking about in the old space. Yeah, I
Speaker 1: think commodities is the most most interesting case, and so
Speaker 1: I bet a double positive story on that one. The
Speaker 1: first one is the obvious one that when we look
Speaker 1: for inflation hedging investments, they are pretty much the best.
Speaker 1: There is also most portfolios that invest most constituents of
Speaker 1: anybody's portfolio stock spons and so on day, they have
Speaker 1: got this inflationary deals that was helpful for a long time,
Speaker 1: but not recently. And so if you want to have
Speaker 1: a pretty neutral portfolio, you should have some some allocation
Speaker 1: to commodities. Then the second point is that many investors
Speaker 1: things that you don't earn a positive long run reward
Speaker 1: and commodities, but the data says otherwise. Basically, really yeah,
Speaker 1: diversified combination of commodity futures has earned something like three
Speaker 1: four percent long run reward. And that's it's it's a
Speaker 1: weird thing, and I focused on it in the commodities
Speaker 1: sector telling that it's part of it is related to
Speaker 1: commodity role maybe, but but important part is related to
Speaker 1: diversification returns. Basically, this is getting very big. But let
Speaker 1: me just try commodities on a single single commodity basis
Speaker 1: have got thirty percent molatility, which means that that that
Speaker 1: type of volatility hurts compound returns a lot. And and
Speaker 1: when you combine lowly correlated commodities together, you can reduce
Speaker 1: that volatility roughly half it, half it, and you can
Speaker 1: get this volatility drag much smaller, and so forth. If if,
Speaker 1: as the evidence suggests that a single commodity has pretty
Speaker 1: much not outperformed cash in the long run, portfolio of
Speaker 1: them has done it because of this saving on this
Speaker 1: volatility drag thanks to diversification. So it's a basket of
Speaker 1: energy and industrial metals and precious metals and food stuff
Speaker 1: and lots of yes and lots of single ones of them,
Speaker 1: and so again you get you commodities. You know, these
Speaker 1: types of effects happen in any investment on your equities,
Speaker 1: on your bonds and so on. It just doesn't matter
Speaker 1: so much with them because the correlations tend to be higher,
Speaker 1: or volatilities lower. Commodities have got this glorious combination of
Speaker 1: high high volatility and local relation that makes this really
Speaker 1: matter very very interesting. Let's talk about E. S g um.
Speaker 1: There have been some estimates that it's now over twenty
Speaker 1: trillion dollars. You talk a little bit about UM E
Speaker 1: S G investing, tell us about your thoughts. Yeah, so
Speaker 1: it is clearly growing force and and I would argue
Speaker 1: also largely a force for good. But expected return impact
Speaker 1: is debatable. And so Cliff Roath already a blog a
Speaker 1: few years ago highlighting this simple logic that well, one
Speaker 1: logic is that constraints always should have a cost. But
Speaker 1: another logic is it, if you want to be virtuous
Speaker 1: and you want to raise the discount rates for sinful companies,
Speaker 1: well you do that by maybe investing let's less in them,
Speaker 1: or even in some cases you could you could short them,
Speaker 1: and so um, if you do that and you raise
Speaker 1: their discount rate, you also raised that discount rate. This
Speaker 1: flip side of expected return makes the more charted. Yeah,
Speaker 1: so somebody else who is willing to basically buy the
Speaker 1: sinful companies, then we'll earn higher return. So that is
Speaker 1: pretty much the long run story that should happen. UM
Speaker 1: when when investors really like something for non monetary reasons,
Speaker 1: and that includes E S G, then the I think
Speaker 1: the reasonable counter argument is that we may be in
Speaker 1: a transition phase here where where we are getting the repricing.
Speaker 1: How do we get to those higher these countries. Well,
Speaker 1: we get it basically by making those those companies cheaper.
Speaker 1: And then we can debate now whether we are in
Speaker 1: early innings or late innings on on that that question.
Speaker 1: So so so in the long run, I think there
Speaker 1: will be some cost, and I think most investors who
Speaker 1: are sc on oriented should be willing to take some
Speaker 1: cost as a flip side of their virtuous investing. But
Speaker 1: but in between they might get sort of the win
Speaker 1: win outcome that day. So now you weren't getting the
Speaker 1: win when outcome in the past six months, especially if
Speaker 1: you were low carb and low oil any of the
Speaker 1: energy stacks have just on spectacle in the past year.
Speaker 1: Is that going to be the long run trade off?
Speaker 1: Is that if you're staying away from some of these,
Speaker 1: you take a chance that there's a big move up
Speaker 1: in a sector that you've reduced your exposure to. Yeah,
Speaker 1: I that that that possibility always exists, and now we
Speaker 1: now that we had it, I think it is gonna
Speaker 1: raise more discussions in some organizations than um how to
Speaker 1: deal with any financial trade of friends. I must say
Speaker 1: that in Europe, I think that investors will largely um
Speaker 1: stay with their E s G beliefs, and there's not
Speaker 1: going to be a question if they if they think
Speaker 1: they there's there's some financial of course that's okay. In
Speaker 1: US there's more doubts, and it has become such a
Speaker 1: political issue that it's going to be I think harder.
Speaker 1: Just I I everything or anything I can say on
Speaker 1: this one, I think is that is that there was
Speaker 1: a sort of easy travel towards more E s C
Speaker 1: for the last few years, and now I think we
Speaker 1: are we are in a in a world where it's
Speaker 1: going to be harder. I think the trade the still
Speaker 1: the same, but it's going to be more jagged going ahead,
Speaker 1: and maybe especially so in the US. And and before
Speaker 1: I get to my favorite questions, I gotta throw a
Speaker 1: curveball at you, Cliff, ask this mentioned you like to
Speaker 1: go in a hundred and twenty degree sauna and then
Speaker 1: jump out and roll around in the snow. Is this
Speaker 1: a Finland finish sort of thing? Tell us tell us
Speaker 1: about your heat and cold habits. That is, that is
Speaker 1: exactly what we do for cheap fun. And sadly there
Speaker 1: are a few opportunities with the global warming. But but yeah,
Speaker 1: so so how hot does the sauna get I was
Speaker 1: thinking whether you're talking fire in you know, we are
Speaker 1: talking with centigrade. Now we do go go closet degrees. No, no,
Speaker 1: we go to degrees centigrade. Yeah. Yeah, so that's like
Speaker 1: a hundred sixty eight. You'll do the translation there. I
Speaker 1: think of you know, the I do my father and
Speaker 1: height and closing that. But still eighty degrees is very
Speaker 1: you're just that's very warm. It's it's it's nice, nice
Speaker 1: to sweat that. And then when you jump into the snow,
Speaker 1: it's not a little bit of a shock to the
Speaker 1: system or or you go to um, you know, call out,
Speaker 1: you go into I see what that shows. That's that's
Speaker 1: even better. But that's that's that's hard. But yeah, no,
Speaker 1: it's it's uh, it's great fun when you can really
Speaker 1: do that. Quite interesting. All right, So let's jump to
Speaker 1: our favorite questions that we ask all of our guests,
Speaker 1: starting with what have you been streaming these days? Tell
Speaker 1: us about your favorite whatever kept you entertained during the
Speaker 1: pandemic or whatever podcast you listened to. Sure, sure, yeah,
Speaker 1: I thought about these in recent months when I have
Speaker 1: heard you ask these questions. And by the way, I've
Speaker 1: gotten some good tips I got, I got the Leboro
Speaker 1: and called my agent the friends once and some Israeli
Speaker 1: shows in from here. So yeah, that's why I ask it,
Speaker 1: because you know, I get to speak to people who
Speaker 1: have interesting sensibilit it is, I want to hear what
Speaker 1: they're seeing and here. Yeah, well so so as the
Speaker 1: first non obvious or non interesting answer, I think, like recently,
Speaker 1: I think we better call soul looking forward to the
Speaker 1: to the last few episodes. But so that's that's been great,
Speaker 1: but I thought that I'd rather highlight than some less
Speaker 1: well known older theories. So my favorites I think in
Speaker 1: the last ten years where sort of slow burn, um,
Speaker 1: the Americans the Russian Spies that that that one or
Speaker 1: or rectify it was a story from southern US, and
Speaker 1: and just just I think I think lovely stories got
Speaker 1: to take time for those. And likewise theny podcasts, um,
Speaker 1: I listen a lot to history and so beyond beyond investing,
Speaker 1: and I'll just leave well on near investing, I would
Speaker 1: say Tim Harford's um Cautionary Tales is fun, and and
Speaker 1: Zingalis and Bethany McLean Capitalism task got very thoughtful topics.
Speaker 1: So I think they are, they are good at but
Speaker 1: I love in his history area. I love Dan Carlin,
Speaker 1: Mike Duncan, Patrick Wiman and this British show called The
Speaker 1: Rest is History, which just always makes me laugh. So
Speaker 1: so that's a good that's good. That's a very interesting list. Um,
Speaker 1: let's talk about some of the mentors who helped to
Speaker 1: shape your career. Sure, so obviously I told the dissertation chairman,
Speaker 1: Farmer and French. So they've been very influential in many ways.
Speaker 1: But but I would especially then highlight Marty lebe of
Speaker 1: it so before, during, and after Salomony yea so and
Speaker 1: he's he's such a such a mention that it's it is,
Speaker 1: it's wonderful to have known him for the case. Uh
Speaker 1: what about books? What are some of your favorites and
Speaker 1: what are you reading right now? Yeah? So I am
Speaker 1: a voracious reader, lots of investing fiction, non fictional, all
Speaker 1: kinds of things. Um, I thought I will highlight from fiction.
Speaker 1: Um really big one, Hillary Mantell's trilogy on Thomas Cromwell
Speaker 1: Wolf Wolf Hall. I was thinking, I think maybe I
Speaker 1: heard in or You're so also the three Body problem
Speaker 1: very different to sci fi, the Chinese one so I
Speaker 1: guess that was great, and then on on on nonfiction. Um,
Speaker 1: I think the most impressive book I read in the
Speaker 1: last couple of years was Joe Henrich is the Weirdest
Speaker 1: People in the World. So this is this is weird?
Speaker 1: Is uh? Western educated? Uh, it's rich, democratic, and it's
Speaker 1: basically telling telling how different the people who are most
Speaker 1: often studied in various psychological studies, the Western University students,
Speaker 1: how different they are from most cultures. And then it's
Speaker 1: explaining why things went that way, and it's it's it's
Speaker 1: both parts of the story are very interesting. But but
Speaker 1: again a very long book, really really intriguing. Yeah, and currently, um,
Speaker 1: Zach Carter, I think, is your author of the book
Speaker 1: on Cain's Price Price Price of Peace. Good. That's a
Speaker 1: good that's pretty good. Lust what sort of advice would
Speaker 1: you give to a recent college graduate who is interested
Speaker 1: in a career in either investing finance value quantitative investing.
Speaker 1: How would you advise them? I'll go with the old
Speaker 1: fashioned I think, don't sacrifice your ethics. That integrity matters.
Speaker 1: M hmm. But that's really good advice. And and our
Speaker 1: final question, what do you know about the world of
Speaker 1: investing today that you wish you knew thirty years so
Speaker 1: years ago when you were first getting started. I thought,
Speaker 1: I'll say this lightly, that bond deals can go negative.
Speaker 1: You know, I didn't expect that to happen. But the
Speaker 1: funny thing is that I thought that, really I would
Speaker 1: have then expected that to coincide with barish equity markets,
Speaker 1: but into any tenls, it actually happened with with with
Speaker 1: a big bullmarket. So it wasn't that that equities um
Speaker 1: pushed equity weakness pushed bond deals down, but it was
Speaker 1: that low bond deals pushed equities up. So courseality went
Speaker 1: that way, and and that's surprising. So I think that's
Speaker 1: that's that's one. And then another serious, serious point is
Speaker 1: is how important and how hard patience is. So so
Speaker 1: with all of these ideas I talk about these longer strategies,
Speaker 1: and you just it doesn't matter too much if you
Speaker 1: don't have the stickiness. So I think one has to
Speaker 1: really calibrate one's investment to the amount of patients one
Speaker 1: one can reasonably expect to have. Huh, really really intriguing.
Speaker 1: We have been speaking with Auntie il Nannen, co head
Speaker 1: of Portfolio Solutions at a qu are. If you enjoy
Speaker 1: this conversation, well, check out any of our previous four
Speaker 1: hundred or so podcasts. You can find those at iTunes, Spotify,
Speaker 1: wherever you get your favorite podcasts. We love your comments,
Speaker 1: feedback and suggestions right to us at m IB podcast
Speaker 1: at Bloomberg dot net. You can sign up for my
Speaker 1: daily reading list at Rid Halts dot com. Follow me
Speaker 1: on Twitter at Rid Halts. I would be remiss if
Speaker 1: I did not thank the crack team that helps put
Speaker 1: these conversations together each week. Justin Milliner is my audio engineer.
Speaker 1: Atico val Bron is my project manager. Sean Russo is
Speaker 1: my head of research. Paris Ward is my producer. I'm
Speaker 1: Barry Ritolts. You've been listening to Masters in Business on
Speaker 1: Bloomberg Radio