Aoifinn Devitt on What Really Builds Resilient Portfolios | Allocator | Ep.33
Summary
Market Outlook: The guest frames a more volatile, macro-driven regime and emphasizes resilience, diversification, and steady execution over reacting to sensational narratives.
Private Credit: Positioned as income and deflation-hedge exposure with manager skill potential, but she highlights concentration risks (e.g., software, niche businesses), due diligence gaps, and valuation opacity.
Hedge Funds: Long memories of fees, gates, and disappointments create a higher bar; strategies must clearly earn fees, match liquidity promises, and avoid repackaged, trendy labels.
US Megacap Tech: Concentration risk around names like NVDA and the MAG7 raises equity volatility; she advocates dollar-cost averaging and diversification by cap, sector, and geography rather than timing.
Bonds and 60-40: The bond-equity correlation shift challenges the classic 60-40 Portfolio; bonds are viewed mainly as a deflation hedge and partial diversifier, not a robust return engine.
Commodities and Gold: She sees nuanced inflation-hedge roles, favors moderate allocations (e.g., sub-5% for Gold), notes drivers like central banks and Chinese demand, and warns about volatility (especially silver) and product-structure gaps.
Digital Assets: The team avoided recommending Digital Assets/Bitcoin due to insufficient analyzability and unclear scenario behavior, viewing it more as high-octane risk than a reliable hedge.
Portfolio Models: The Endowment Model still works for those with access and liquidity tolerance; a Total Portfolio approach and better governance/incentives help avoid siloed, misaligned risk-taking.
Transcript
[music] find a way to ex develop your own voice in this respect [music] because there will be many jobs you do where you no one cares about that voice and that's fine because that is a necessary right [music] of passage I'd say but but do develop that voice too because there will come a time when you will be that voice will be needed [music] in terms of um you leading a a unit or you having to get on CNBC or or you being asked to do something and and you should be the person that can say yes to [music] that because you have something to say. >> Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences, [music] their successes, and their failures. Imagine no more. [music] Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world, so you can take your manager due diligence or investment career [music] to the next level. Before we begin today's conversation, remember to keep two things in mind. All the discussion we will have about [music] investment performance is about the past and past performance does not guarantee or even infer anything about future performance. Also understand that there's a significant risk of financial loss with all investment [music] strategies and you need to request and understand the specific risks from the investment manager about their product before you make investment [music] decisions. Here's your host, veteran hedge fund manager Neils Kstrop Larson. Welcome or welcome back to another conversation in our series of episodes that focuses on markets and investing from a global macro perspective. [music] This is a series that I not only find incredibly interesting as well as intellectually challenging, but also very important given where we are in [music] the global economy and the geopolitical cycle. We want to dig deep into the minds of some of the most prominent experts to help us better understand what [music] this new global macrodriven world may look like. We want to explore their perspectives on a [music] host of game-changing issues and hopefully dig out nuances in their work through meaningful [music] conversations. Please enjoy today's episode hosted by Alan Dunn. Thanks for the introduction, Neils. Today I'm delighted to be joined by Ethan Devit. Ethan is managing director of global wealth at Manetta. Manetta is a $43 billion US registered investment adviser which uh provides investment advice to family offices and high net worth individuals. Ethan has been in the markets uh many years now at this stage an extensive career as a CIO at the public pension side and at the um RAIA side. Earlier in her career, she had her own hedge fund investment advisory business, Clar Capital, and she has her own podcast as well. So, Ethan, great to have you on today. >> Thank you very much. Thank you for inviting me. >> Not at all. So, uh you'll be a pro at this given extensive, uh podcasting experience. So, um delighted to have the opportunity to chat and give a sense of your uh background, but we always like to hear how you got interested in economics, markets, and investing in the first place. >> Yes. Well, I actually started out as a lawyer. I studied law at Trinity and loved everything about the the the old history nature of the case law, loved the writing, just love the really the intellectual challenge of that. And I certainly saw myself as having a career in law, but my first entry point into law was as a corporate lawyer in a New York firm. So having all of that adjacent work around the workings and plumbings of commerce and finance made me very hungry to get to know what that plumbing was all about and actually to make the leap over into finance. So I spent four years working as a corporate lawyer, two years in New York, two years in Hong Kong. That really I think moved from the the the zone of using precedent for everything which was the case in New York. there was always a contract that written previously that you could draw upon to really being um I'd say quite entrepreneurial in Asia because there generally was not a precin for anything. So there had to be uh kind of drafting from you know fundamental bottomup principles when it came to some of the work I was doing with companies across Indonesia, Singapore etc. So I got really into the co the coldface of finance then and that was what prompted me to make the leap which I did have to do via an MBA. When I say have to do, it was tremendous fun at INSEAD and a very broad and rich experience and I still have many many friends from that year but I'd say um it was easier not to be pigeonholed as a lawyer with legal capability or in-house council having done the broader MBA started in investment banking and then uh investment consulting and that's how I made myself to the way way to the allocator side. >> Good stuff. as you say, you've done um the full gamut from investment consulting to hedge fund advisory and and you've been um on the uh I suppose on the public side as as well as on the kind of the highetworked I mean taking that as maybe the starting point obviously you've built portfolios done asset allocation for a range of different types of portfolios um I mean how does that influence how you think about portfolio constructions now in in in your current role >> it's interesting when I made the move to private wealth I expected to be really entering a very different world, a very different set of instruments, set of even language being used. And I will be honest, I had low expectations just in terms of the type of products that would be available, the higher fees that we'd be paying and perhaps um I was expecting to be dumbed down to a lot of the time by product providers because that was my experience. There would be one set of materials for the institutional investors and another set for the retail investors or the high net worth investors. My experience was actually quite different. I found that there are many similarities in how institutions and individuals approach the investment puzzle and um there are some key differences as well. Obviously the taxation consequences for an individual are different. So we need to look at different paths. But in terms of portfolio construction, we really start with resilience. You and I both grew up in in Ireland and I say in my case I started in ' 70s and it was not a a flourishing nation at that time. Um I think we were definitely um not not a wealthy country and I think that does affect the psychology with which you approach investing. For me it's about capital preservation resilience. It's not to the point of having no risk on the portfolio but it is about having a fairly low tolerance for loss and having started in the institutional investing arena at Cambridge Associates that was often charities endowments. Um again, you know, perhaps they had a a spending policy and they were being well funded from their their donors, but they still certainly wanted to be there in perpetuity. So, we have to think about preservation in public funds. That has always been top of mind has been preserving this essential fund for beneficiaries down the line. And when it comes to individuals, we're really speaking about the same thing. It's about resilience preservation. there may not be the same say active need for invest investment income from a high net worth individual. They may have other sources of income. They may not have to run their portfolio for cash flow necessarily. That was something we did have to do in many of the public funds that I worked with and I think increasingly public funds will have to do is run have a cash flow component of that portfolio. That's a little less the case for individuals high net worth and equally individuals are kind of often going to have their own proclivities in terms of what they want to invest in or don't want to invest in. You may find 80 year olds who never want to invest in a bond again or you may find somebody else who for whom impact and purpose is at the forefront. So a very diverse basket I'd say of objectives in the work I do now. So is it fair to say I mean we're seeing the institutionalization of private wealth or would that be too far to to describe it? >> I'd say to a degree where if institutionalization means the um entering of offerings that have been available to institutions for some time. I think that is certainly the case that's been grabbing headlines in terms of the say the progress of private equity private credit providers into that field. I'd say that is a vexed area that we can discuss it in more detail in any way you like. But I'd say the timing is of nothing if not awkward certainly given how some of these strategies are performing just at this time. We do often not make the same mistakes but we make different mistakes when we try to open up private markets to a broader set of stakeholders and and potential investors. I I would suggest there's some other mistakes being made right now. Um, but in terms of institutionalization, if that means lower, fairer fees, I'd say we're we're at the beginnings of that. Um, we're not at the end yet, but we certainly have seen signs of that. And in terms of sophistication of that conversation, yes, there is a more sophisticated dialogue happening in private wealth and it's high time and that's a good thing. >> Absolutely. So as you say, I mean, we're at an interesting juncture here, both in terms of the alternative markets and alternative assets and how they're performing, but I guess more broadly, I mean, you talked about the 1970s growing up in Ireland, and yeah, as you say, Ireland wasn't a wealthy place back then, but you know, the world has been through many cycles since then. We've obviously in in the 2000s, we had a global financial crisis. You know, you know, after that, equities have pretty much been one way ever since. At the same time, you know, since co, we've had the war in Ukraine. We're now in the midst of another war. It feels like we're into a new macro regime of greater volatility, more uncertainty. So, how does all that come together in your thinking about asset allocation looking ahead for the next few years? >> That's a great question. I'd say again, but getting back to history and how our psychology affects us. Um I think also we are shaped by our early formative career years and I spent some of those years in emerging markets um on the ground in Indonesia. I'd also as a student spent time in Moscow and both of those times I felt it was something about my perhaps the mag a magnetism that I seemed to attract chaos in terms of the backdrop at these different places that I went to. There was chaos in Moscow when I was there. There was chaos in Jakarta when I was there. And what I noticed was there was always this divergence between the media sound bite around what was happening on the street and what I was seeing happening on the street. So it was generally less extreme, less sensationalist, less noteworthy um the day-to-day life that I was experiencing. And that dichotomy has always sat with me. So essentially it has always convinced me not to necessarily believe the hype, not to believe the extremes, to look for the detail, get on the ground, get the detail. Well, that has informed how I think about many of these market highs, market lows, doomer scenarios or um you some of the absolutist beliefs that often are attached to to market prognostication. So, uh yes, how do I translate that into a portfolio context? Well, generally it's by trying not to be um too either too concentrated um not to become um too thematic in a portfolio to always maintain the kind of the the somewhat pedestrian broad-based exposures that are in place. Um to be try to keep emotion out of the execution side um be be steady um provide an even keel and obviously always make sense of the complexity for clients and try to make sense of the complexity. That's a lot of what I've been doing for 20 years is sitting with investment committees to really help them navigate this maelstrm of complexity jargon and quite quite frankly fearful um newsful out there and help them translate that into their portfolio and whether that's an individual or a pension fund panel of a public fund I think there is a need to make sense of this um in terms of then asset allocation so that will clearly dictate quite a diverse and again getting back to the formative years having started at Cambridge Associates, you know, the kind of endowment style portfolio construction approach that rebalances often that is is well diversified by sector, by cap size, by country, those are really in my DNA. >> Yeah, fair enough. I mean the the endowment um approach endowment style approach or even you know the Yale model was much loaded for a long time and I suppose I don't know if it's fair to say it's coming under more criticism certainly more scrutiny of late in terms of actually what you know what were the underlying drivers I mean there's a few different elements to that obviously having alternatives and private markets was a key component having an equity bias and I guess all of that has served people well I mean from from I suppose from kind of a high level. Do you think that endement model that Yale model is still as as as compelling as it was before? >> I'd say as a as a model in its kind of was base terms. Um, every model deserves scrutiny and yes, you always need to look at the unintended bets or and or perhaps the bets that are not being given credit to um that have been implicit in that and where the returns have actually come from. I saw this quite acutely during the 2016 Brexit phase in the UK. Many of the public funds had a windfall thanks to sterling weakening and that wasn't due to investment acumen. It was due to simply being in the right currency at the the wrong time arguably for that currency the right time for your portfolio. Um so it was um so that that that is is you important to always parse that. I do believe that diversification is in the endowment style makes sense when you can tolerate the liquidity and you have the the knowledge to and the connections and the access to get proper exposure and those things are all critical. They're not a given. Um there is a select few that will have that kind of access um and therefore the ability to build a portfolio that genuinely is in the top quartile and can stay there as opposed to simply kind of scattershot approach. So I wouldn't say there's one sizefits-all. I think we have to be very dynamic in terms of how we think different asset classes are going to evolve. For example, venture capital, private equity, these are clearly evolving. Um, you know, do you want to be necessarily with the same players you would have been 15, 20 years ago? Doubtful. So having that kind of open mind, but in increasingly especially as we see the contraction of public markets, there will be, I believe, a need to get exposure to private markets. I am passionate about the need to get money into local projects and to provide spark capital and fuel for some of the innovative ideas that are coming out of university pipelines for example and that will all have to be achieved through private means private plumbing to get there. >> I mean you touched on private markets it's been a buzzword for a while and private credit in particular and now as we've come into this year you know certainly been something of a change of sentiment around private credit. Um I mean one thing that struck me is this idea that a lot of private credit had exposure still continue to have exposure to software stocks. So I mean on the one hand private credit could be positioned as an alternative even as a diversifier to your equity bucket but in reality you're picking up exposure to kind of high growth e you know um equity type exposure. So how diversifying is it? I mean, you know, if you were speaking to a public pension or a or a board, how would you be explaining how to think about the appropriate role of say something like private credit in a portfolio? >> Well, that's something I've been doing for many years is using private credit and explaining it and as I said, it has had a more critical role in some portfolios than others according to the portfolio's need for cash flow. So, you always see credit, private credit as a diversifier primarily. We would see credit as some form of a deflation hedge in a portfolio not an inflation hedge which you have elsewhere. It is also a source of income importantly in the case of private credit and that that cash flow piece which you need to offset really the total return orientation that a portfolio might have. We also see it as a way of getting exposure to investment skill as it's true that there has been a tremendous amount of skill um and alpha generation moving into the private segment whether that's on the equity side or the credit side. So getting exposure to this kind of esoteric strategies as well whether that be just other contractualbased cash flows that are credit like structured credit etc. you are getting exposure to that skill piece of the individual that is steering that that's um there obviously has to be the same principles apply to any new asset class in terms of diversification having a a good ensuring that the basket is diversified that you're diversified by manager that you trust that you're you're in a manager that is taking the right precautions around due diligence fraud checks etc what we have seen and I think this is where again the formative years having been at Goldman Sachs around um 2000 and the kind of bursting of the TMT bubble seeing a tremendous amount of business plans really just go up in smoke in terms of their projections around customer retention, revenue growth and margin expansion. This really just disintegrated rapidly in a in a course of days. So when you know that a business model can really can go up and smoke like that, you always have to maintain that skepticism regarding the and it's interesting because some of that kind of uh drinking of Kool-Aid or that hype belief which we tend to associate with private e with equity and maybe private equity, public equity and we've seen it very clearly in the credit side um that this type of business model I've seen boutique gym chains being backed with private credit um that I know myself were going out of business in my hometown. So I think you know there has to be that kind of a reality check with a lot of private e private credit um thesis. >> Good stuff. I mean the other big um theme that that has um you read about so much in the asset allocation and particularly the public space uh is total portfolio approach um and this shift away from strategic asset allocation to TPA and what that might mean. Is that something you're embracing? Do you think it's something very different to the old approach and um should investors be be trying to emulate TPA? I guess >> I suppose if TPA is a different approach, it's because it's addressing some of the problems that had arisen in the traditional asset allocation buckets and those problems shouldn't have arisen but they they maybe came about because there was a siloed approach happening. When I worked as CIO at a public fund in Chicago, I was the one and only investing professional on that fund. I was the CIO and I was also the only investment professional. So you have to by definition have a holistic approach when that is the case. There is no siloing. There is no being responsible just for your piece of the portfolio. You always have to think of the portfolio as an orchestra being played together when the outcome is the goal and you all the different instruments have to contribute to to getting to that outcome. So I would think that a holistic approach is something that any senior allocator should always have had whether you call it TPA or not. You always need to be thinking in that way. So if it had be kind of grown into a beast in terms of asset allocation that was not um had led to the wrong set of incentives and and the wrong the lack of holistic thinking then reverting to that is um is is intuitive. I I do think it does involve then having to restructure say incentives um and also even how governance works at these institutions and that for example just looking at CalPERS and that the changes there right now that that that that the restructuring a lot of that is brought about by really having to tame let's say the um the the beast if you call it that that had developed with with the traditional bucket model. Yeah, absolutely. No, I mean it does sound more like addressing the uh problems of the past, but at the same time, is there something do you think for private wealth or individual investors to learn from the approach? Are there shortcomings in the kind of traditional approach do you see in private wealth that that can learn something from TPA? >> I would say I I've learned a lot from Brian Portoi who is the author of shaping wealth and he speaks a lot about what is the goal. The goal is funded contentment and that's a very holistic basic goal that we all have. We want to fund our our needs at a certain point. So if that is the ultimate goal, very few private wealth clients will ever be wondering about their individual buckets. They won't be obsessed with their bond exposure versus their equity exposure. They are wondering about the ultimate outcome. Um and as Brian expresses it very well is am I going to be okay and will I have enough? And I think if we strip it back to that very basic need and that's really what we are serving our clients. We are helping them ensure that they have enough and that they're going to be okay and that's why we steer their portfolio through markets as we do. That's a course is a total portfolio approach. >> I mean one of the um big topics since we've had the um this move into this decade and more volatility and rising rates has been the change in the correlation between bonds and equities. So obviously with the 60/40 portfolio the main stay of uh many uh portfolios and and many kind of I suppose multiasset funds are basically a derivative of that 60/40 portfolio. Obviously we had inflation in uh 202122 for the first time in a long time a shift in the bond equity correlation a lot of people in saying 6040 is dead we need a new model 40 3030 or whatever it is um what's your perspective on that >> very interesting um developments I suppose and what I'm actually focusing right now when I look at bonds and equities is I am somewhat perplexed by the ongoing low move index the low set volatility in fixed income compared with the increasing volatility we're seeing in equities Particularly as equities get more concentrated. We would have thought that traditionally bond investors are more of the the concern the concerned group and that might have more worry and more concern about say cracks emerging in the consumer confidence in the consumer demand picture. Meanwhile public fixed income we're seeing this very low spreads low volatility. So again what is that saying about the behavior of bonds and equities? Maybe some of the stress in bonds has moved into the private credit arena as you already mentioned. So every set of asset classes needs to be rethought and reanalyzed and reunderwritten based on the changing macro backdrop as well as the changing investor sentiment and use case. So I'd say the idea that bonds and equities are always a nice hedge that probably is is yesterday's news and it has been so um I'd say even going back to in the co era and in 2022 when we saw both operate in in sync again and having catastrophic effects across many portfolios. So I say need to think about bonds as I mentioned before as a deflation hedge some balanced not a great source of income but some income but ultimately a diversifier some um risk um you some protective effect in a portfolio but not a great source of return equities the return engine um but you know to think about ultimately diversifying that equity exposure so that you have a wellbalanced portfolio that is resilient at its core and all weather and firing on all cylinders. Yeah. And I mean we had this kind of growth of bond alternative strategies you know I suppose pre-COVID when interest rates were very low. Uh and now investors are grappling with that view of well what should I have in my portfolio for diversification if bonds are going to be less reliable diversifiers. How do you think about that? >> Yes we saw this at the Chicago police. We did see a lot of those absolute return strategies really hit the skids I'd say. um when really they should investors should have just been exposed to core fixed income that would have been ultimately the the best place to be you know especially as we were in that kind of a downward interest rate cycle. So I'd say that where we we think about bonds is be veryware wary of new fangled innovations when it comes to uh to investing. um we yeah I think about I look across all sectors and look at where innovation is prized and one of my personal interests is looking at psychological safety and how that leads to performance innovation etc and what I have found is that that there really isn't a great demand for huge amount of innovation within asset management and probably rightly so because we've seen so much of this innovation um end in tears when it comes to new instruments uh leverage or complexity etc. So when it comes to to bonds, I am quite skeptical of some of the innovation there is there's so little to be extracted in many cases through through bond trading that um to to get too cute about that can can be a problem. Where do you get the diversification in the portfolio? Therefore, well certainly across equities there are many ways to get diversification even within an equity portfolio, but that's where the diversification into other alternatives, real estate, infrastructure, real assets, uh obviously bonds themselves. Um but you really get it across the whole portfolio. You don't rely on just bonds for that. >> Yeah. I mean you've mentioned um the role of bonds as a deflation hedge a couple of times which is interesting because I haven't heard much about deflation for a while. Obviously the last few years we you know we had the inflation spike and then much more I suppose concern about that. But you know we've had I suppose rapid progress on AI and a lot more uh debate around that. And we had recently this uh Catrini report kind of outlining a kind of a doomsday scenario which was inherently quite a deflationary scenario. So do you think this is something that is going to come on the radar much more now from a portfolio construction perspective of thinking about different possible views of the world that maybe we could see strong disinflationary forces coming back in in in the years ahead? Yeah, that's the interesting I suppose the the toggle we've been doing between the deflationary thesis which is I always traced back to to Kathy Wood and her innovation and this the idea that you know we are seeing this um this ultimate that this gig economy and and you know Moore's law and various other things occurring in technology that is leading to this deflationary impact and certainly we were seeing that in in in effect before co and then we've had the co we've had the tariffs we've had supply chains demand pull inflation all kinds of of draws and it's very complex the inflation picture and I think being able to parse it in in a way that is um is going to give us one path is almost impossible. I think there will always be these competing forces. Some will come to the four at different times. I have not been a believer in the thesis that tariffs are not inflationary because what I've seen as the big unknown is the transmission effect. So we've had tariffs on the one hand. It isn't a switch that is flipped that ultimately leads to inflation down the line. There is are going to be so many ways of cushioning that blow for the consumer until they ultimately have to pay the price that I don't think we can say that the transmission effect is instant. So yes, we I think we do need to look at both competing forces of inflation and deflation and to see when um to to build a portfolio that has protections embedded against either scenario. Very good. Um I mean we've talked about kind of the the shifting macro regime. We've talked about you know um 6040. I mean the other big topic that is uh put forward as a risk is concentration. you know, we've got the the US as an an unusually large part of the global global index and then within the US obviously high concentration with the mag seven and the high growth technology stocks as you say like often there's a lot of hysteria about things but you you don't necessarily get get carried away with that and there are conflicting views on this on the one hand people say you know the last time we saw this kind of concentration it ended badly but equally you know I was reading something that we saw this kind of concentration back in the early you know 1930s or something if you had diversified then it would have been a bad outcome. So how do you think about you know something that could be a risk but but but has a has a kind of maybe an economic rationale to it. Again getting back to the the mantra of places I've been trained and uh Cambridge Associates it was leverage and concentration those were the two big risk factors that just through every cycle worthy and I think people have added other name other abbreviations to that but those two are are just and I will always have a structural bias personally against leverage but when it comes to um because I've seen the the the dangers I suppose of how that can really amplify risk on a portfolio and when it comes to concentration I some concentration is um we've seen some very successful managers with highly concentrated portfolios when it is well managed when those that concentration is um going in has been knowing knowingly undertaken and the due diligence has been done that that is a risk that has been conscious on the part of the portfolio manager. What is occurring in markets today is that equity markets particularly US markets have become so concentrated relative to the rest of the world that um any mainstream allocator and say outside the US is probably not going to have a portfolio that looks anything like the benchmark that they're using. The benchmark will be more concentrated if it's market cap weighted. So I think also questioning whether we're using the right benchmark and therefore penalizing managers in the wrong way. But when it comes to concentration, I believe that we have not fully underwritten what a current portfolio equity portfolio looks like. Given how we've had some extremely fast runups in market caps of companies such as Nvidia, other members of the MAG7, the fact that individual stocks like that now dwarf whole country indices is um is [clears throat] something that is just going to look very different according to how your equity portfolio is um is made up. There will be days when individual stocks fall by 10%. We've seen them fall by 20% just in the last cycle and if you have a concentrated exposure to those names, you need to have a stronger stomach essentially for that equity portfolio. How do we address that in private wealth? We always dollar cost average into a portfolio. We don't try to be too tactical about timing markets. We will encourage um diversification by cap size, by sector, by by by geography. and that at least provides some kind of insulation from that sharp volatility. But we are coaching clients to expect their equity portfolio to look more volatile going forwards. But also recognize that there are very few other places that they can be. >> Okay. Interesting. So it's not necessarily an argument against passive and and for active. I mean for a long time the view being advocated to passive sorry to private investors was don't look at active managers. the vast majority of active managers underperform and you can get a very strong and and well diversified portfolio with a passive index. That mantra still holds you think? >> Well, we would be concerned about passive is that you're really getting exactly the exposure to this um to to this volatility that I mentioned because of the concentration essentially passive is is al is al is going to be replicated the index. So the the concern it fits for >> that's what I'm saying. Are you saying just stick with the volatility and I mean it it's it's not necessarily a bad thing, but it's just going to be more volatile. >> No, we we we do think it is because it because the volatility is increasing, we need think that needs to be rethought in terms of how equity markets are are thought about and that could be a sizing factor. That doesn't necessarily have to mean you go from passive to active. I I also would share the skepticism around active management's ability to perform persistently and would suggest that it's become even more difficult to be an active manager today particularly with this concentration. Again maybe the benchmark is wrong but equally we do need to be even more assiduous about checking and verifying that active managers are in fact earning their fee at a minimum and uh and earning their keep otherwise in a portfolio. So um we are we was even more u assertive than other in terms of ensuring that private manager that that active managers have a roles but they do have a role it's just not not everywhere. >> Yeah. No fair enough. I mean you touched on different uh benchmarks. What about different kind of factors or styles? I mean even without going into the hedge fund side or the alternatives yet but even um different styles style approaches factor approaches you know in terms of quality or value etc are they kind of building blocks that you use and think about when building portfolios >> I tend to think that those are somewhat artificial building blocks we've seen them come out of the consulting uh vortex I suppose in the in the US and other consulting framework and the issue with them is when you look at a style map you can see that some a label it needs to be dynamically updated from time to time and that a label no longer applies. So if it gives some kind of false assurance of having a broad-based factor exposure and you can see that actually managers are kind of closet growth or where there's supposed to be value or there they're closet midcap or there supposed to be small cap. So I think there it's very difficult to put a label on that. I do believe in having broad-based exposure across those factors recognizing that man that individual stocks will will move in and out of factor indices. I think it's critical to have the right benchmark as I mentioned otherwise we will const just have a manager constantly explaining um how they diverge or they will either be you congratulating themselves for outperforming a non-demanding benchmark if their portfolio actually looks somewhat different. So again some of these labels perhaps need a dusting off and a rethinking or redefining but having a broad-based exposure to me means having broad-based exposure across those factors. That may mean that momentum factors in there for for one time. Um, and quality again a bit of a a controversial topic and to to call anything quality. What is my definition of quality? What is the technical definition of quality? And again, is that going to be a disappointment if the client is actually looking at a headline index performance and finding that their quality portfolio has really [music] been quite defensive and um are not particularly exciting. [music] I mean we touched a little bit on on public uh versus private um but I mean there is this kind of broader debate about you know um the needs for alternative sources of return whether that's public versus private or traditional versus alternative um you know and sometimes these labels can be misconstrued you know something could be private but it's not necessarily uh alternative or it's not necessarily diversifying >> I mean in in terms of how you categorize and label asset classes or think about that I mean have you a framework is it public private is it traditional non-traditional alternative what's your kind of um lens for kind of looking across the asset classes and categorizing them >> we do use the traditional categories because that tends to be easiest to understand it goes into a model it's it looks nice in a pie chart otherwise you'd have an infinite number of slices if you were to to get to down to to minutiae but I I've always liked the outcomebased approach to investing um not so much the risk budget risk buckets because I again I think risk is very difficult to define and definitively say this is that risk or this is going to be that risk. I think there are so many um that really a matrix of risks within any investment. So that that can be too artificial. But in terms of outcome, what is the outcome? Again this gets best to the holistic total portfolio approach. If the outcome is resilience, protection, capital protection, if the outcome is inflation and participation, if the outcome is income, then you can deliver a portfolio according to those outcomes. So yes, we would use the traditional buckets, but we will look underneath in terms of where is that source of return and where are we making unintended bets, where are we actually maybe seeing some correlation that is not otherwise there. We always think about this propensity for volatility washing. I think has been the popular term that private assets have been seen as being almost insulated from volatility simply because they haven't been measured at the same time frame as a public asset. We have to be very skeptical about that and I think having been in markets for many cycles um as I'm sure those of us who have come to a certain age have been we have I think already developed that kind of skepticism muscle or that ability to trust but verify when it comes to um to assertions of portfolios been untainted by by market developments or whatever. So I think the ability to to really dig into that and and not necessarily take these asurances at face value, that's the critical piece of parsing what goes into a private or public portfolio. >> And is that outcomebased perspective? Is that then apply to all of the indiv individual asset classes in the sense that bonds are for income and for deflation protection, equities are for growth, and private credit is for some other outcome. Is that how you think about it? that's at least how they are assigned um in terms of outcome but then when we actually get to well how are they actually behaving that is a different part of the inquiry so we have to cons continuously re-underwrite or reaffirm that they are delivering that outcome um and we can see this right now with private credit say and infrastructure real estate not delivering perhaps the yield that they might have been designed to do that will then necessitate either an increase or a reassignment within those buckets into maybe a distribution asset us or just thinking differently. So not you obviously you said you said it but you don't forget it. >> And we've seen stronger performance from hedge funds in the last number of years and um I was just at a hedge fun conference a lot of positivity around the space. People quite optimistic about um the growth trajectory but also I guess we're in a more volatile environment. There's more dispersion. There's more macro themes. So in theory more opportunities I mean would you share that perspective or where do you see hedge funds fitting in portfolios? >> I started my investment career working on hedge funds. So I always like to say I've kind of seen the good, the bad and the ugly. I've seen them rise from around about over 20 years from being you know musthaves in a portfolio to um being uh I think the source of of some anxiety pain portfolio losses. I'd say memories are particularly long when it comes to hedge funds. Maybe it's that the label has never been shaken of of the actual hedge fund label. Maybe that that needs to to go away and has needed to go away for many many years. But because that the memories are long, I think you do find particularly in private wealth investors that have no interest in in hedge fund exposure maybe because there was one or two black eyes suffered whether it's in the in 07 the quant crash or or there has been an illquidity event or a a gating of a fund um and then high fees have eroded returns. So I think that those memories are very long when it comes to individuals and when it comes to institutions similarly we've seen that bucket really go away or be dispersed elsewhere and even if we look in say the local authority side and there nine buckets that will be coming out of their their new pooling initiatives I don't see hedge funds where they naturally fit there so there will be um probably be be scattered among whether it's absolute return funds or um some of the private credit allocations but so I say do are they coming back maybe I I'd say we have to look at them just as skeptically as ever in terms of do they earn their keep, where are the fees, um where is there a mismatch between assets and liabilities, will they deliver the liquidity they profess to? And I'd say there is a higher bar to clear now than ever because of these memories being long as I mentioned. >> And when you say the label hedge funds, is that the idea that they are a hedge or or what do you mean by that? >> Just the entire bucket of hedge funds if anything is classified as a hedge fund. investor say well that's I don't invest in hedge funds or I never invested never again um since 07 so I say that those that that type of a strate it's always been a questionable label that it has been really just an underlying pool of very different strategies all of whom have the same legal structure perhaps same fee structure but very different exposures >> and I mean you've worked on the consulting side uh before and in the US at least the consultants have been quite strong advocates for hedge fund strategies for CTA for macro. I mean, we've seen the growth of ideas like um risk mitigation strategies. So, having a a dedicated sleeve in your portfolio for to to to mitigate risk for I I guess for the for the more extreme outcomes in markets. Uh you've had kind of labels crisis risk offset all of this stuff. I mean um it sounds like you are somewhat skeptical of that. >> It's funny. I haven't heard about those risk mitigation buckets now for I say probably close to 10 years. Uh, so that probably says how long I've been in this business. But the what I always laughed at for them is they were really um a combination of some treasuries and uh some some CTA type funds and and there was a lot of cash as well. If I recall, they were quite expensive solutions for what they were underneath. And then the the ultimate question is did they do what they said on the tin? Did they actually work well in the case of a of a risk? And I think the answer was not always. So they were profoundly disappointing I'd say as a general set of offerings. Yes, there were some that were exceptions and I know that that some have you that there was I believe some kind of equity option strategies often rolled up into them. Um and so I'd say yes I am skeptical um of any kind of repackaging of solutions whether it's portfolio insurance or anything else. I've also seen the same product be marketed under very different labels according to where the zeitgeist was moving. what was the next trendy thing and again that has to be a cause for skepticism and when it came to say a new asset class like digital assets Bitcoin on the private wealth side we were quite slow to ever recommend that we were providing education a kind of a wait and see approach that might not have been popular with clients who wish to to to dppel in these but the reason we could not recommend them was we could not analyze them if if we don't know how asset class like this is likely to perform in a different scenario IO is we cannot do scenario analysis. This cannot be part of our portfolio that we recommend. So in a good that because Bitcoin we've seen it move from being is it a a diversifier of currency? Is it a is it an is it a hedge? Um or is it just a very uh high octane way to get risk on? >> Yeah. Interesting. I mean the the other one that has come back obviously is gold. I mean, gold was in in competition with Bitcoin for a while, it felt like, on that kind of um safe haven type asset. Um, obviously, gold's had a fantastic role for for people of late. It was a great run. Um, and commodities more generally, I guess, have become more interesting. Obviously, you know, you've been in the market through the full cycles. You'll remember when commodities didn't appear in portfolios, then they did, then they didn't, and now they're coming back. So gold and commodities are they back as as core allocations again do you think? >> Again that's the beauty of having many cycles. You have this the same conversation kind of you know history not repeating but rhyming and uh we we have had this conversation you know 10 years ago perhaps about the use commodities 20 years ago about the use institutions and commodities. A couple of core truths have have applied the entire time. One is that you holding the physical is complicated expensive and um not for everyone. And second is you know this idea of the uh the the divorce perhaps between the underlying commodity prices and some of the stocks or the products that are tied to that. Um sometimes there is a complete handinhand correlation. Other times there's a real dispersion and you you don't know what you're necessarily getting. I think the idea of this being the inflation hedge has been a complex assertion. There has been maybe um yes steady state inflation hedge normal inflationary times. there has been reasonable participation when it comes to the shock inflation it hasn't protected that that well so I think that that's another and then now gold looking at the different factors driving gold whether that's the technical factors the Chinese retail buyer at the margin central banks around the world um whether it's the concern around fiscal budget deficits and concern about that that I'd say that that pieces for buying gold is a way to hedge the rest of the portfolio but again this I'd suggest it is not done it is done in a in a in moderate way that something like that is not more than 5% of a portfolio that it is is done in a diversified basket approach as opposed to the metal itself. And then when we go outside gold that is in itself volatile but also something like silver is far more volatile as we can see from the the movements this defining year for methals last year well it was really defined the beginning of this year by just how volatile those methals were. So again, I'd bet to that knowing what you buy and knowing what you're getting into in terms of volatility, that's where that would I think I'm quite comfortable owning say an equity manager that owns gold as part of and some managers do this as part of their way to create a a resilient well- diversified portfolio, but actual naked exposure to to a commodity like that, I think is um is probably too problematic for most investors. you've touched on kind of this the long-term cycles, how they rhyme at times, how not um how we have these long-term trajectories for different asset classes and and how I guess sentiment shifts over time as well and and you know even the regulators can you know at times you know on the pension side encouraged everybody into bonds and it felt like it that was of low yields now the current thing is you know in the UK encouraging people into private markets you know in the US you've got the democratization of alts and you wonder is this the right time for for that as well. I'm also you know conscious that you know you know we've both been in markets for you know same kind of period three three and a half decades. It's been that the the the the globalized world of equity markets. Okay, we've had bare markets but you know by and large it's been a very favorable period that has gone on and on and and the last 15 years has been very favorable indeed. I mean, do you do you worry about that we could see a period at some point which seems hard to imagine like a 15 20 year period like 1966 to 82 or even the depression. You know it people look at history for these episodes and and think that they are just you know things that happened in the past won't be repeated. But as part of your portfolio construction uh process when you're thinking about resilience, when you're thinking about all of that, how do you kind of balance that kind of perspective of staying grounded, don't overreact to the hype, but at the same time keep this risk in your mind that things might get bad beyond our expectations at some point. >> So I firmly believe we need to look at the macro backdrop. We need to pay attention to the factors that are affecting the managers in where we we work. In terms of looking at um recent what are the key drivers of many market actors, we know that greed is a is a huge part of that. Looking at some of the behavioral biases that we actually think about are more relevant for individual managers, individual clients sometimes are actually very relevant at an institutional level because these behavioral biases are affecting the market actors. So when we think about as I said greed, the incentives, the idea of recency bias, this bias that this can never happen to me, these are all the the behavioral flaws that the financial actors are, I think, are going to be riddled by. And we can see this in the recent book 1929 where the focus was not only on the um the the actors behind the crash but also on their own kind of personality foibless their their insecurities their desire and we've seen this again in some of the uh political scandals that have embroiled um many of the financial actors is these are driven by the desire to to feel valued the desire to feel that you belong. So this is a little bit of a profound deviation into behavioral style which I think is why we have to be very alert to being told what we want to hear as investors because um we are essentially being given a false assurance. So if we can detect these false assurances this false um as investors and be very alert to that I think that's how we can let our portfolios operate without that degree of hype. um a as to whether I am concerned about a portfolio um hitting uh you know very very bad patch I don't believe we're headed to a big kind of 1929 type depression style. I think we we have now not not only enough diversity in the underlying assets and asset classes we can invest in that there will be a way to generate some income with all of that. We know our portfolios are not all stacked on black. And equally then just in terms of the the backdrop in which we operate, we know now since the last crisis that we have institutions that are ready, armed and able to step in as shock absorbers and to cushion those blows. So I'm not confident that we will essentially avoid all um damage and all market downturns, but I do believe that we have a more of an orchestration behind the scenes to ensure that we don't hit something really devastating. Now, in terms of the catrini research, to bring that up in terms of whether there could be that kind of a dystopian development, again, I'm not a believer in extremes. I'm not a believer in doom cycles or in um in extreme positive or extreme negative. I think actually the the hundreds of podcasts I've sat on the other side of the mic up has really instilled that in me is that just that that real diversity of human experience, the diversity of highs and lows, the fact that they happen to everyone. That type of a normalization of a life that is made up of highs and lows has led me to be a lot more middle of the road I suppose in terms of how I see outcomes and um and that's why a portfolio I tend not to get uh carried away. >> Yeah. No, fair enough. Um I mean you touched on kind of behavioral challenges, you touched on kind of how various assets and strategies are are represented um and misrepresented and and obviously you know if you're um building portfolios the asset allocation is only one part of the equation then you have to either you know buy securities or allocate to external managers and I know you had your own um advisory business earlier in your career focused on manager selection manager analysis I mean what do you think are the key you know challenges behavior real challenges I guess when it comes to uh selecting uh external managers. Well, clearly one has to look at all the the usual metrics in terms of performance and analyze that in terms of the the key behavioral challenge with the manager is that one falls in love with the manager metaphorically speaking and doesn't want to is it's difficult to fire that manager and that is I think we know well reported is that it's easy you hiring and firing it's it's the actual termination that is the challenging piece whether that's a desire not to to you know to to crystallize a loss or to admit you were wrong or or or just just to have that conflict because there is some conflict inherent in a termination discussion. Um I'd say that that is a muscle that you build over time. Um and I think it's it's never easy. Nobody ever likes to be that manager. But equally, if there is better dialogue um from that manager from the outset, hopefully it won't come as such a shock if that if these kind of things are not cliff edge type divevestatures, but they are are really are telegraphed well over time. So I say that is the one behavioral side. Um and another thing is just not um necessarily doing that piggybacking which is again another dangerous behavioral thing is believing that some other peer of yours has done the due diligence for you. When I started my consulting career it was around about the time of maid off and actually I was the beneficiary of some quite broken damaged portfolios that had been damaged by exposure to maid off and we were then charged at rehabilitating that. So I suppose in in a kind of odd way it became um it became became a of a winning strategy for me to kind of swoop in and and helped to repair portfolios but clearly the maid off's problem was a piggybacking problem. It was a slipshod due diligence on the part of allocators and that kind of slipshot due diligence is happening everywhere not just by allocators but particularly in the private se in the private credit sector and that's where we're seeing the the cockroaches emerge as we're seeing >> yeah interesting I mean it feels like um you know the due diligence processes the RFPs that they've become lengthier and lengthier but at the same time you know is it just um you know people are still make errors or things get through Is it just people ticking boxes or processes too rigid or how does that how do you kind of reconcile what seems to be even lengthier due diligence processes but maybe delivering less true insight? >> It's interesting it's maybe because I studied as a lawyer but we in law you have a case law you'll always have the case note in the beginning which will kind of shorten kind of the executive summary what the bottom line up front tell me what I need to know >> and that has been always my preferred approach to communication. I have an aversion to data dumps which are perhaps decided to be maybe provide security or to provide cover for recommendation but ultimately tell us nothing at all. Um I also have an aversion to macro analysis that is kind of a theoretical and academic in nature and has no actual relation to the portfolio. I always ask the question what so what you've told me all this so what does that mean for my portfolio? Do I have too much US dollar exposure? Should I reduce that? Do I need to pivot towards more income towards more inflation protection? This is the so what that needs to be done. So when it comes to due diligence RFPs, I agree. I think that is getting completely out of control just as um board packs equally. We have got out of control and taken on a life of their own as they've reached the hundreds of pages. Um because ultimately this is now with AI probably going to get even worse. Um AI has generated the RFPs. AI is probably reading the RFPs. So, we're going to be in this this loop of um boilerplate to boilerplate, algorithm to algorithm with no actual human in the loop suggesting that maybe this is not exactly what I need to know. What I used to do at Chicago Police, the CIO, is I would um create the RFPs with kind of I wouldn't say they're Easter eggs hidden, but they were um at least questions in the RFP that was very specific to our own situation because we had a fairly unique situation with a very low funding, poor cash flow situation there. I would say, well, how can we why looking at the rest of our portfolio? Why does your solution fit this in particular? And that I think was was kind of a great way for me to separate wheat from chaff because so few RFPs ever answered that question. Um or if they did answer it, it was answered with more boilerplate. So just that little bit of effort up front to actually address the client's actual problem, I think um is probably just a little bit of a a kind of a hint as to how to to get through that process. But equally, and this is an issue for finding a job, it's an issue for finding a manager. The the problem now with volume and with sifting through the volume, how is that going to be circumvented through building networks and cultivating that network if you're a manager with an allocator way before you know what that allocator needs and really being sensitive to solving that allocator's problem, making their life easier, making their job easier, and getting them to where they need to get to. Just before we wrap up and get towards the end, I want to get your perspective on kind of decision-making processes because I know you mentioned you know being the sole investment uh person in your role in Chicago uh which makes things quite easy in some senses. There's no endless I guess um uh debate and and and committees but equally you've been part of much bigger organizations and now I guess you observe how you know in in individual investors as well or family offices make decisions. I mean what's the best optimal investment process do you think that harnesses collective wisdom but kind of doesn't um allow for kind of group think >> I suppose I would come back to investment committee construction and um pension fund committee construction when it comes to decision-m because that ultimately if you have a well diversified um well-trained committee um that will hopefully avoid group think in that case um I do think when it comes to investment teams um having teams that cycle through different areas and are not necessarily wedded to their own. I think lateral thinking is a great skill that is where we will ultimately overcome the machines with our ability to draw connections to be creative. That's again something that law really teaches you because you're looking at you're applying case law in a different but analogous situation. So you're not necessarily getting exactly the same set of facts. So the ability and this gets to again looking beneath the hood of strategies and finding well what is really driving that strategy that is a form of lateral thinking because you may have to combine two disciplines in in getting to the root of that. So that decision-m is is key having um the the the tools I mentioned before around the ability to to verify to test your decisions. Somebody I I love who does this Mark Steed he's the CIO at the Arizona public fund employees scheme. He's been there for many years. um he is a a great innovative thinker when it comes to getting his team to um to really to learn how to be better forecasters because he actually gathers collates their forecasts and then we'll go back to them at the end of a period with the outcomes and get them to verify whether those forecasts came to be. I think that is the kind of training of that muscle so that we ensure that we become better risk takers, better forecasters. >> Very good. Well, we always like to ask our guests uh before we wrap up about their I suppose advice for people um coming into investing and into the markets. Obviously, you had a um background in law before you moved into um doing an MBA and then into markets, which by all accounts listening to you today, you it feels like you feel the benefit of it. But if you were to um kind of advise people who are starting off in their careers about things to do, things to read, what would it be? Well, first of all, um don't overlook just how absolutely fascinating this field is. It is always changing. It is affecting our lives dayto-day, the prices we pay, the the taxes we pay, um and affecting, you know, the the worries that we bear when we think about the the current geopolitical scene. This is this is exercising every aspect of our life and the finance touches all of this. So, I'd say, you know, first of all, realize what you're missing if you don't know about it. And I think I didn't know about it as a law student. It didn't touch my life. It only entered my life when I started working in the corporate law field. So, anyone who's already kind of got onto that bandwagon and realized how interesting it is, I'd say keep reading, keep creating, be um be be your and if if you can't find uh a way to express yourself, find a way. Start a blog, start a a video platform, find a way to ex develop your own voice and respect because there will be many jobs you do where you no one cares about that voice. And that's fine because that is a necessary right of passage I'd say in finance to go go through the the the hoops of of learning the skills and being an apprentice and learning from from elsewhere. But but do develop that voice too because there will come a time when you will be that voice will be needed in terms of um you leading a a unit or you having to get on CNBC or or you being asked to do something and you should be the person that can say yes to that because you have something to say. >> Very good. Well um you mentioned CNBC. I know you appear appear there from time to time. So people can follow your work at Manetta and I guess on CNBC and uh and obviously you have your own um 50 faces podcast as well. So Ethan, thanks very much for coming on today. It's been great speaking to you. Um and from all of us here at Top Traders Unplugged. Uh stay tuned for more content. We'll be back soon. >> Thanks for listening to Top [music] Traders Unplugged. If you feel you learned something of value from today's episode, the best way to stay updated is to go on over to iTunes [music] and subscribe to the show so that you'll be sure to get all the new episodes as they're released. We have some amazing guests lined up for you. And to ensure our show continues [music] to grow, please leave us an honest rating and review in iTunes. It only takes a minute and it's the best way to show us you love the podcast. We'll see you next time on Top Traders Unplugged.
Aoifinn Devitt on What Really Builds Resilient Portfolios | Allocator | Ep.33
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Transcript
[music] find a way to ex develop your own voice in this respect [music] because there will be many jobs you do where you no one cares about that voice and that's fine because that is a necessary right [music] of passage I'd say but but do develop that voice too because there will come a time when you will be that voice will be needed [music] in terms of um you leading a a unit or you having to get on CNBC or or you being asked to do something and and you should be the person that can say yes to [music] that because you have something to say. >> Imagine spending an hour with the world's greatest traders. Imagine learning from their experiences, [music] their successes, and their failures. Imagine no more. [music] Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world, so you can take your manager due diligence or investment career [music] to the next level. Before we begin today's conversation, remember to keep two things in mind. All the discussion we will have about [music] investment performance is about the past and past performance does not guarantee or even infer anything about future performance. Also understand that there's a significant risk of financial loss with all investment [music] strategies and you need to request and understand the specific risks from the investment manager about their product before you make investment [music] decisions. Here's your host, veteran hedge fund manager Neils Kstrop Larson. Welcome or welcome back to another conversation in our series of episodes that focuses on markets and investing from a global macro perspective. [music] This is a series that I not only find incredibly interesting as well as intellectually challenging, but also very important given where we are in [music] the global economy and the geopolitical cycle. We want to dig deep into the minds of some of the most prominent experts to help us better understand what [music] this new global macrodriven world may look like. We want to explore their perspectives on a [music] host of game-changing issues and hopefully dig out nuances in their work through meaningful [music] conversations. Please enjoy today's episode hosted by Alan Dunn. Thanks for the introduction, Neils. Today I'm delighted to be joined by Ethan Devit. Ethan is managing director of global wealth at Manetta. Manetta is a $43 billion US registered investment adviser which uh provides investment advice to family offices and high net worth individuals. Ethan has been in the markets uh many years now at this stage an extensive career as a CIO at the public pension side and at the um RAIA side. Earlier in her career, she had her own hedge fund investment advisory business, Clar Capital, and she has her own podcast as well. So, Ethan, great to have you on today. >> Thank you very much. Thank you for inviting me. >> Not at all. So, uh you'll be a pro at this given extensive, uh podcasting experience. So, um delighted to have the opportunity to chat and give a sense of your uh background, but we always like to hear how you got interested in economics, markets, and investing in the first place. >> Yes. Well, I actually started out as a lawyer. I studied law at Trinity and loved everything about the the the old history nature of the case law, loved the writing, just love the really the intellectual challenge of that. And I certainly saw myself as having a career in law, but my first entry point into law was as a corporate lawyer in a New York firm. So having all of that adjacent work around the workings and plumbings of commerce and finance made me very hungry to get to know what that plumbing was all about and actually to make the leap over into finance. So I spent four years working as a corporate lawyer, two years in New York, two years in Hong Kong. That really I think moved from the the the zone of using precedent for everything which was the case in New York. there was always a contract that written previously that you could draw upon to really being um I'd say quite entrepreneurial in Asia because there generally was not a precin for anything. So there had to be uh kind of drafting from you know fundamental bottomup principles when it came to some of the work I was doing with companies across Indonesia, Singapore etc. So I got really into the co the coldface of finance then and that was what prompted me to make the leap which I did have to do via an MBA. When I say have to do, it was tremendous fun at INSEAD and a very broad and rich experience and I still have many many friends from that year but I'd say um it was easier not to be pigeonholed as a lawyer with legal capability or in-house council having done the broader MBA started in investment banking and then uh investment consulting and that's how I made myself to the way way to the allocator side. >> Good stuff. as you say, you've done um the full gamut from investment consulting to hedge fund advisory and and you've been um on the uh I suppose on the public side as as well as on the kind of the highetworked I mean taking that as maybe the starting point obviously you've built portfolios done asset allocation for a range of different types of portfolios um I mean how does that influence how you think about portfolio constructions now in in in your current role >> it's interesting when I made the move to private wealth I expected to be really entering a very different world, a very different set of instruments, set of even language being used. And I will be honest, I had low expectations just in terms of the type of products that would be available, the higher fees that we'd be paying and perhaps um I was expecting to be dumbed down to a lot of the time by product providers because that was my experience. There would be one set of materials for the institutional investors and another set for the retail investors or the high net worth investors. My experience was actually quite different. I found that there are many similarities in how institutions and individuals approach the investment puzzle and um there are some key differences as well. Obviously the taxation consequences for an individual are different. So we need to look at different paths. But in terms of portfolio construction, we really start with resilience. You and I both grew up in in Ireland and I say in my case I started in ' 70s and it was not a a flourishing nation at that time. Um I think we were definitely um not not a wealthy country and I think that does affect the psychology with which you approach investing. For me it's about capital preservation resilience. It's not to the point of having no risk on the portfolio but it is about having a fairly low tolerance for loss and having started in the institutional investing arena at Cambridge Associates that was often charities endowments. Um again, you know, perhaps they had a a spending policy and they were being well funded from their their donors, but they still certainly wanted to be there in perpetuity. So, we have to think about preservation in public funds. That has always been top of mind has been preserving this essential fund for beneficiaries down the line. And when it comes to individuals, we're really speaking about the same thing. It's about resilience preservation. there may not be the same say active need for invest investment income from a high net worth individual. They may have other sources of income. They may not have to run their portfolio for cash flow necessarily. That was something we did have to do in many of the public funds that I worked with and I think increasingly public funds will have to do is run have a cash flow component of that portfolio. That's a little less the case for individuals high net worth and equally individuals are kind of often going to have their own proclivities in terms of what they want to invest in or don't want to invest in. You may find 80 year olds who never want to invest in a bond again or you may find somebody else who for whom impact and purpose is at the forefront. So a very diverse basket I'd say of objectives in the work I do now. So is it fair to say I mean we're seeing the institutionalization of private wealth or would that be too far to to describe it? >> I'd say to a degree where if institutionalization means the um entering of offerings that have been available to institutions for some time. I think that is certainly the case that's been grabbing headlines in terms of the say the progress of private equity private credit providers into that field. I'd say that is a vexed area that we can discuss it in more detail in any way you like. But I'd say the timing is of nothing if not awkward certainly given how some of these strategies are performing just at this time. We do often not make the same mistakes but we make different mistakes when we try to open up private markets to a broader set of stakeholders and and potential investors. I I would suggest there's some other mistakes being made right now. Um, but in terms of institutionalization, if that means lower, fairer fees, I'd say we're we're at the beginnings of that. Um, we're not at the end yet, but we certainly have seen signs of that. And in terms of sophistication of that conversation, yes, there is a more sophisticated dialogue happening in private wealth and it's high time and that's a good thing. >> Absolutely. So as you say, I mean, we're at an interesting juncture here, both in terms of the alternative markets and alternative assets and how they're performing, but I guess more broadly, I mean, you talked about the 1970s growing up in Ireland, and yeah, as you say, Ireland wasn't a wealthy place back then, but you know, the world has been through many cycles since then. We've obviously in in the 2000s, we had a global financial crisis. You know, you know, after that, equities have pretty much been one way ever since. At the same time, you know, since co, we've had the war in Ukraine. We're now in the midst of another war. It feels like we're into a new macro regime of greater volatility, more uncertainty. So, how does all that come together in your thinking about asset allocation looking ahead for the next few years? >> That's a great question. I'd say again, but getting back to history and how our psychology affects us. Um I think also we are shaped by our early formative career years and I spent some of those years in emerging markets um on the ground in Indonesia. I'd also as a student spent time in Moscow and both of those times I felt it was something about my perhaps the mag a magnetism that I seemed to attract chaos in terms of the backdrop at these different places that I went to. There was chaos in Moscow when I was there. There was chaos in Jakarta when I was there. And what I noticed was there was always this divergence between the media sound bite around what was happening on the street and what I was seeing happening on the street. So it was generally less extreme, less sensationalist, less noteworthy um the day-to-day life that I was experiencing. And that dichotomy has always sat with me. So essentially it has always convinced me not to necessarily believe the hype, not to believe the extremes, to look for the detail, get on the ground, get the detail. Well, that has informed how I think about many of these market highs, market lows, doomer scenarios or um you some of the absolutist beliefs that often are attached to to market prognostication. So, uh yes, how do I translate that into a portfolio context? Well, generally it's by trying not to be um too either too concentrated um not to become um too thematic in a portfolio to always maintain the kind of the the somewhat pedestrian broad-based exposures that are in place. Um to be try to keep emotion out of the execution side um be be steady um provide an even keel and obviously always make sense of the complexity for clients and try to make sense of the complexity. That's a lot of what I've been doing for 20 years is sitting with investment committees to really help them navigate this maelstrm of complexity jargon and quite quite frankly fearful um newsful out there and help them translate that into their portfolio and whether that's an individual or a pension fund panel of a public fund I think there is a need to make sense of this um in terms of then asset allocation so that will clearly dictate quite a diverse and again getting back to the formative years having started at Cambridge Associates, you know, the kind of endowment style portfolio construction approach that rebalances often that is is well diversified by sector, by cap size, by country, those are really in my DNA. >> Yeah, fair enough. I mean the the endowment um approach endowment style approach or even you know the Yale model was much loaded for a long time and I suppose I don't know if it's fair to say it's coming under more criticism certainly more scrutiny of late in terms of actually what you know what were the underlying drivers I mean there's a few different elements to that obviously having alternatives and private markets was a key component having an equity bias and I guess all of that has served people well I mean from from I suppose from kind of a high level. Do you think that endement model that Yale model is still as as as compelling as it was before? >> I'd say as a as a model in its kind of was base terms. Um, every model deserves scrutiny and yes, you always need to look at the unintended bets or and or perhaps the bets that are not being given credit to um that have been implicit in that and where the returns have actually come from. I saw this quite acutely during the 2016 Brexit phase in the UK. Many of the public funds had a windfall thanks to sterling weakening and that wasn't due to investment acumen. It was due to simply being in the right currency at the the wrong time arguably for that currency the right time for your portfolio. Um so it was um so that that that is is you important to always parse that. I do believe that diversification is in the endowment style makes sense when you can tolerate the liquidity and you have the the knowledge to and the connections and the access to get proper exposure and those things are all critical. They're not a given. Um there is a select few that will have that kind of access um and therefore the ability to build a portfolio that genuinely is in the top quartile and can stay there as opposed to simply kind of scattershot approach. So I wouldn't say there's one sizefits-all. I think we have to be very dynamic in terms of how we think different asset classes are going to evolve. For example, venture capital, private equity, these are clearly evolving. Um, you know, do you want to be necessarily with the same players you would have been 15, 20 years ago? Doubtful. So having that kind of open mind, but in increasingly especially as we see the contraction of public markets, there will be, I believe, a need to get exposure to private markets. I am passionate about the need to get money into local projects and to provide spark capital and fuel for some of the innovative ideas that are coming out of university pipelines for example and that will all have to be achieved through private means private plumbing to get there. >> I mean you touched on private markets it's been a buzzword for a while and private credit in particular and now as we've come into this year you know certainly been something of a change of sentiment around private credit. Um I mean one thing that struck me is this idea that a lot of private credit had exposure still continue to have exposure to software stocks. So I mean on the one hand private credit could be positioned as an alternative even as a diversifier to your equity bucket but in reality you're picking up exposure to kind of high growth e you know um equity type exposure. So how diversifying is it? I mean, you know, if you were speaking to a public pension or a or a board, how would you be explaining how to think about the appropriate role of say something like private credit in a portfolio? >> Well, that's something I've been doing for many years is using private credit and explaining it and as I said, it has had a more critical role in some portfolios than others according to the portfolio's need for cash flow. So, you always see credit, private credit as a diversifier primarily. We would see credit as some form of a deflation hedge in a portfolio not an inflation hedge which you have elsewhere. It is also a source of income importantly in the case of private credit and that that cash flow piece which you need to offset really the total return orientation that a portfolio might have. We also see it as a way of getting exposure to investment skill as it's true that there has been a tremendous amount of skill um and alpha generation moving into the private segment whether that's on the equity side or the credit side. So getting exposure to this kind of esoteric strategies as well whether that be just other contractualbased cash flows that are credit like structured credit etc. you are getting exposure to that skill piece of the individual that is steering that that's um there obviously has to be the same principles apply to any new asset class in terms of diversification having a a good ensuring that the basket is diversified that you're diversified by manager that you trust that you're you're in a manager that is taking the right precautions around due diligence fraud checks etc what we have seen and I think this is where again the formative years having been at Goldman Sachs around um 2000 and the kind of bursting of the TMT bubble seeing a tremendous amount of business plans really just go up in smoke in terms of their projections around customer retention, revenue growth and margin expansion. This really just disintegrated rapidly in a in a course of days. So when you know that a business model can really can go up and smoke like that, you always have to maintain that skepticism regarding the and it's interesting because some of that kind of uh drinking of Kool-Aid or that hype belief which we tend to associate with private e with equity and maybe private equity, public equity and we've seen it very clearly in the credit side um that this type of business model I've seen boutique gym chains being backed with private credit um that I know myself were going out of business in my hometown. So I think you know there has to be that kind of a reality check with a lot of private e private credit um thesis. >> Good stuff. I mean the other big um theme that that has um you read about so much in the asset allocation and particularly the public space uh is total portfolio approach um and this shift away from strategic asset allocation to TPA and what that might mean. Is that something you're embracing? Do you think it's something very different to the old approach and um should investors be be trying to emulate TPA? I guess >> I suppose if TPA is a different approach, it's because it's addressing some of the problems that had arisen in the traditional asset allocation buckets and those problems shouldn't have arisen but they they maybe came about because there was a siloed approach happening. When I worked as CIO at a public fund in Chicago, I was the one and only investing professional on that fund. I was the CIO and I was also the only investment professional. So you have to by definition have a holistic approach when that is the case. There is no siloing. There is no being responsible just for your piece of the portfolio. You always have to think of the portfolio as an orchestra being played together when the outcome is the goal and you all the different instruments have to contribute to to getting to that outcome. So I would think that a holistic approach is something that any senior allocator should always have had whether you call it TPA or not. You always need to be thinking in that way. So if it had be kind of grown into a beast in terms of asset allocation that was not um had led to the wrong set of incentives and and the wrong the lack of holistic thinking then reverting to that is um is is intuitive. I I do think it does involve then having to restructure say incentives um and also even how governance works at these institutions and that for example just looking at CalPERS and that the changes there right now that that that that the restructuring a lot of that is brought about by really having to tame let's say the um the the beast if you call it that that had developed with with the traditional bucket model. Yeah, absolutely. No, I mean it does sound more like addressing the uh problems of the past, but at the same time, is there something do you think for private wealth or individual investors to learn from the approach? Are there shortcomings in the kind of traditional approach do you see in private wealth that that can learn something from TPA? >> I would say I I've learned a lot from Brian Portoi who is the author of shaping wealth and he speaks a lot about what is the goal. The goal is funded contentment and that's a very holistic basic goal that we all have. We want to fund our our needs at a certain point. So if that is the ultimate goal, very few private wealth clients will ever be wondering about their individual buckets. They won't be obsessed with their bond exposure versus their equity exposure. They are wondering about the ultimate outcome. Um and as Brian expresses it very well is am I going to be okay and will I have enough? And I think if we strip it back to that very basic need and that's really what we are serving our clients. We are helping them ensure that they have enough and that they're going to be okay and that's why we steer their portfolio through markets as we do. That's a course is a total portfolio approach. >> I mean one of the um big topics since we've had the um this move into this decade and more volatility and rising rates has been the change in the correlation between bonds and equities. So obviously with the 60/40 portfolio the main stay of uh many uh portfolios and and many kind of I suppose multiasset funds are basically a derivative of that 60/40 portfolio. Obviously we had inflation in uh 202122 for the first time in a long time a shift in the bond equity correlation a lot of people in saying 6040 is dead we need a new model 40 3030 or whatever it is um what's your perspective on that >> very interesting um developments I suppose and what I'm actually focusing right now when I look at bonds and equities is I am somewhat perplexed by the ongoing low move index the low set volatility in fixed income compared with the increasing volatility we're seeing in equities Particularly as equities get more concentrated. We would have thought that traditionally bond investors are more of the the concern the concerned group and that might have more worry and more concern about say cracks emerging in the consumer confidence in the consumer demand picture. Meanwhile public fixed income we're seeing this very low spreads low volatility. So again what is that saying about the behavior of bonds and equities? Maybe some of the stress in bonds has moved into the private credit arena as you already mentioned. So every set of asset classes needs to be rethought and reanalyzed and reunderwritten based on the changing macro backdrop as well as the changing investor sentiment and use case. So I'd say the idea that bonds and equities are always a nice hedge that probably is is yesterday's news and it has been so um I'd say even going back to in the co era and in 2022 when we saw both operate in in sync again and having catastrophic effects across many portfolios. So I say need to think about bonds as I mentioned before as a deflation hedge some balanced not a great source of income but some income but ultimately a diversifier some um risk um you some protective effect in a portfolio but not a great source of return equities the return engine um but you know to think about ultimately diversifying that equity exposure so that you have a wellbalanced portfolio that is resilient at its core and all weather and firing on all cylinders. Yeah. And I mean we had this kind of growth of bond alternative strategies you know I suppose pre-COVID when interest rates were very low. Uh and now investors are grappling with that view of well what should I have in my portfolio for diversification if bonds are going to be less reliable diversifiers. How do you think about that? >> Yes we saw this at the Chicago police. We did see a lot of those absolute return strategies really hit the skids I'd say. um when really they should investors should have just been exposed to core fixed income that would have been ultimately the the best place to be you know especially as we were in that kind of a downward interest rate cycle. So I'd say that where we we think about bonds is be veryware wary of new fangled innovations when it comes to uh to investing. um we yeah I think about I look across all sectors and look at where innovation is prized and one of my personal interests is looking at psychological safety and how that leads to performance innovation etc and what I have found is that that there really isn't a great demand for huge amount of innovation within asset management and probably rightly so because we've seen so much of this innovation um end in tears when it comes to new instruments uh leverage or complexity etc. So when it comes to to bonds, I am quite skeptical of some of the innovation there is there's so little to be extracted in many cases through through bond trading that um to to get too cute about that can can be a problem. Where do you get the diversification in the portfolio? Therefore, well certainly across equities there are many ways to get diversification even within an equity portfolio, but that's where the diversification into other alternatives, real estate, infrastructure, real assets, uh obviously bonds themselves. Um but you really get it across the whole portfolio. You don't rely on just bonds for that. >> Yeah. I mean you've mentioned um the role of bonds as a deflation hedge a couple of times which is interesting because I haven't heard much about deflation for a while. Obviously the last few years we you know we had the inflation spike and then much more I suppose concern about that. But you know we've had I suppose rapid progress on AI and a lot more uh debate around that. And we had recently this uh Catrini report kind of outlining a kind of a doomsday scenario which was inherently quite a deflationary scenario. So do you think this is something that is going to come on the radar much more now from a portfolio construction perspective of thinking about different possible views of the world that maybe we could see strong disinflationary forces coming back in in in the years ahead? Yeah, that's the interesting I suppose the the toggle we've been doing between the deflationary thesis which is I always traced back to to Kathy Wood and her innovation and this the idea that you know we are seeing this um this ultimate that this gig economy and and you know Moore's law and various other things occurring in technology that is leading to this deflationary impact and certainly we were seeing that in in in effect before co and then we've had the co we've had the tariffs we've had supply chains demand pull inflation all kinds of of draws and it's very complex the inflation picture and I think being able to parse it in in a way that is um is going to give us one path is almost impossible. I think there will always be these competing forces. Some will come to the four at different times. I have not been a believer in the thesis that tariffs are not inflationary because what I've seen as the big unknown is the transmission effect. So we've had tariffs on the one hand. It isn't a switch that is flipped that ultimately leads to inflation down the line. There is are going to be so many ways of cushioning that blow for the consumer until they ultimately have to pay the price that I don't think we can say that the transmission effect is instant. So yes, we I think we do need to look at both competing forces of inflation and deflation and to see when um to to build a portfolio that has protections embedded against either scenario. Very good. Um I mean we've talked about kind of the the shifting macro regime. We've talked about you know um 6040. I mean the other big topic that is uh put forward as a risk is concentration. you know, we've got the the US as an an unusually large part of the global global index and then within the US obviously high concentration with the mag seven and the high growth technology stocks as you say like often there's a lot of hysteria about things but you you don't necessarily get get carried away with that and there are conflicting views on this on the one hand people say you know the last time we saw this kind of concentration it ended badly but equally you know I was reading something that we saw this kind of concentration back in the early you know 1930s or something if you had diversified then it would have been a bad outcome. So how do you think about you know something that could be a risk but but but has a has a kind of maybe an economic rationale to it. Again getting back to the the mantra of places I've been trained and uh Cambridge Associates it was leverage and concentration those were the two big risk factors that just through every cycle worthy and I think people have added other name other abbreviations to that but those two are are just and I will always have a structural bias personally against leverage but when it comes to um because I've seen the the the dangers I suppose of how that can really amplify risk on a portfolio and when it comes to concentration I some concentration is um we've seen some very successful managers with highly concentrated portfolios when it is well managed when those that concentration is um going in has been knowing knowingly undertaken and the due diligence has been done that that is a risk that has been conscious on the part of the portfolio manager. What is occurring in markets today is that equity markets particularly US markets have become so concentrated relative to the rest of the world that um any mainstream allocator and say outside the US is probably not going to have a portfolio that looks anything like the benchmark that they're using. The benchmark will be more concentrated if it's market cap weighted. So I think also questioning whether we're using the right benchmark and therefore penalizing managers in the wrong way. But when it comes to concentration, I believe that we have not fully underwritten what a current portfolio equity portfolio looks like. Given how we've had some extremely fast runups in market caps of companies such as Nvidia, other members of the MAG7, the fact that individual stocks like that now dwarf whole country indices is um is [clears throat] something that is just going to look very different according to how your equity portfolio is um is made up. There will be days when individual stocks fall by 10%. We've seen them fall by 20% just in the last cycle and if you have a concentrated exposure to those names, you need to have a stronger stomach essentially for that equity portfolio. How do we address that in private wealth? We always dollar cost average into a portfolio. We don't try to be too tactical about timing markets. We will encourage um diversification by cap size, by sector, by by by geography. and that at least provides some kind of insulation from that sharp volatility. But we are coaching clients to expect their equity portfolio to look more volatile going forwards. But also recognize that there are very few other places that they can be. >> Okay. Interesting. So it's not necessarily an argument against passive and and for active. I mean for a long time the view being advocated to passive sorry to private investors was don't look at active managers. the vast majority of active managers underperform and you can get a very strong and and well diversified portfolio with a passive index. That mantra still holds you think? >> Well, we would be concerned about passive is that you're really getting exactly the exposure to this um to to this volatility that I mentioned because of the concentration essentially passive is is al is al is going to be replicated the index. So the the concern it fits for >> that's what I'm saying. Are you saying just stick with the volatility and I mean it it's it's not necessarily a bad thing, but it's just going to be more volatile. >> No, we we we do think it is because it because the volatility is increasing, we need think that needs to be rethought in terms of how equity markets are are thought about and that could be a sizing factor. That doesn't necessarily have to mean you go from passive to active. I I also would share the skepticism around active management's ability to perform persistently and would suggest that it's become even more difficult to be an active manager today particularly with this concentration. Again maybe the benchmark is wrong but equally we do need to be even more assiduous about checking and verifying that active managers are in fact earning their fee at a minimum and uh and earning their keep otherwise in a portfolio. So um we are we was even more u assertive than other in terms of ensuring that private manager that that active managers have a roles but they do have a role it's just not not everywhere. >> Yeah. No fair enough. I mean you touched on different uh benchmarks. What about different kind of factors or styles? I mean even without going into the hedge fund side or the alternatives yet but even um different styles style approaches factor approaches you know in terms of quality or value etc are they kind of building blocks that you use and think about when building portfolios >> I tend to think that those are somewhat artificial building blocks we've seen them come out of the consulting uh vortex I suppose in the in the US and other consulting framework and the issue with them is when you look at a style map you can see that some a label it needs to be dynamically updated from time to time and that a label no longer applies. So if it gives some kind of false assurance of having a broad-based factor exposure and you can see that actually managers are kind of closet growth or where there's supposed to be value or there they're closet midcap or there supposed to be small cap. So I think there it's very difficult to put a label on that. I do believe in having broad-based exposure across those factors recognizing that man that individual stocks will will move in and out of factor indices. I think it's critical to have the right benchmark as I mentioned otherwise we will const just have a manager constantly explaining um how they diverge or they will either be you congratulating themselves for outperforming a non-demanding benchmark if their portfolio actually looks somewhat different. So again some of these labels perhaps need a dusting off and a rethinking or redefining but having a broad-based exposure to me means having broad-based exposure across those factors. That may mean that momentum factors in there for for one time. Um, and quality again a bit of a a controversial topic and to to call anything quality. What is my definition of quality? What is the technical definition of quality? And again, is that going to be a disappointment if the client is actually looking at a headline index performance and finding that their quality portfolio has really [music] been quite defensive and um are not particularly exciting. [music] I mean we touched a little bit on on public uh versus private um but I mean there is this kind of broader debate about you know um the needs for alternative sources of return whether that's public versus private or traditional versus alternative um you know and sometimes these labels can be misconstrued you know something could be private but it's not necessarily uh alternative or it's not necessarily diversifying >> I mean in in terms of how you categorize and label asset classes or think about that I mean have you a framework is it public private is it traditional non-traditional alternative what's your kind of um lens for kind of looking across the asset classes and categorizing them >> we do use the traditional categories because that tends to be easiest to understand it goes into a model it's it looks nice in a pie chart otherwise you'd have an infinite number of slices if you were to to get to down to to minutiae but I I've always liked the outcomebased approach to investing um not so much the risk budget risk buckets because I again I think risk is very difficult to define and definitively say this is that risk or this is going to be that risk. I think there are so many um that really a matrix of risks within any investment. So that that can be too artificial. But in terms of outcome, what is the outcome? Again this gets best to the holistic total portfolio approach. If the outcome is resilience, protection, capital protection, if the outcome is inflation and participation, if the outcome is income, then you can deliver a portfolio according to those outcomes. So yes, we would use the traditional buckets, but we will look underneath in terms of where is that source of return and where are we making unintended bets, where are we actually maybe seeing some correlation that is not otherwise there. We always think about this propensity for volatility washing. I think has been the popular term that private assets have been seen as being almost insulated from volatility simply because they haven't been measured at the same time frame as a public asset. We have to be very skeptical about that and I think having been in markets for many cycles um as I'm sure those of us who have come to a certain age have been we have I think already developed that kind of skepticism muscle or that ability to trust but verify when it comes to um to assertions of portfolios been untainted by by market developments or whatever. So I think the ability to to really dig into that and and not necessarily take these asurances at face value, that's the critical piece of parsing what goes into a private or public portfolio. >> And is that outcomebased perspective? Is that then apply to all of the indiv individual asset classes in the sense that bonds are for income and for deflation protection, equities are for growth, and private credit is for some other outcome. Is that how you think about it? that's at least how they are assigned um in terms of outcome but then when we actually get to well how are they actually behaving that is a different part of the inquiry so we have to cons continuously re-underwrite or reaffirm that they are delivering that outcome um and we can see this right now with private credit say and infrastructure real estate not delivering perhaps the yield that they might have been designed to do that will then necessitate either an increase or a reassignment within those buckets into maybe a distribution asset us or just thinking differently. So not you obviously you said you said it but you don't forget it. >> And we've seen stronger performance from hedge funds in the last number of years and um I was just at a hedge fun conference a lot of positivity around the space. People quite optimistic about um the growth trajectory but also I guess we're in a more volatile environment. There's more dispersion. There's more macro themes. So in theory more opportunities I mean would you share that perspective or where do you see hedge funds fitting in portfolios? >> I started my investment career working on hedge funds. So I always like to say I've kind of seen the good, the bad and the ugly. I've seen them rise from around about over 20 years from being you know musthaves in a portfolio to um being uh I think the source of of some anxiety pain portfolio losses. I'd say memories are particularly long when it comes to hedge funds. Maybe it's that the label has never been shaken of of the actual hedge fund label. Maybe that that needs to to go away and has needed to go away for many many years. But because that the memories are long, I think you do find particularly in private wealth investors that have no interest in in hedge fund exposure maybe because there was one or two black eyes suffered whether it's in the in 07 the quant crash or or there has been an illquidity event or a a gating of a fund um and then high fees have eroded returns. So I think that those memories are very long when it comes to individuals and when it comes to institutions similarly we've seen that bucket really go away or be dispersed elsewhere and even if we look in say the local authority side and there nine buckets that will be coming out of their their new pooling initiatives I don't see hedge funds where they naturally fit there so there will be um probably be be scattered among whether it's absolute return funds or um some of the private credit allocations but so I say do are they coming back maybe I I'd say we have to look at them just as skeptically as ever in terms of do they earn their keep, where are the fees, um where is there a mismatch between assets and liabilities, will they deliver the liquidity they profess to? And I'd say there is a higher bar to clear now than ever because of these memories being long as I mentioned. >> And when you say the label hedge funds, is that the idea that they are a hedge or or what do you mean by that? >> Just the entire bucket of hedge funds if anything is classified as a hedge fund. investor say well that's I don't invest in hedge funds or I never invested never again um since 07 so I say that those that that type of a strate it's always been a questionable label that it has been really just an underlying pool of very different strategies all of whom have the same legal structure perhaps same fee structure but very different exposures >> and I mean you've worked on the consulting side uh before and in the US at least the consultants have been quite strong advocates for hedge fund strategies for CTA for macro. I mean, we've seen the growth of ideas like um risk mitigation strategies. So, having a a dedicated sleeve in your portfolio for to to to mitigate risk for I I guess for the for the more extreme outcomes in markets. Uh you've had kind of labels crisis risk offset all of this stuff. I mean um it sounds like you are somewhat skeptical of that. >> It's funny. I haven't heard about those risk mitigation buckets now for I say probably close to 10 years. Uh, so that probably says how long I've been in this business. But the what I always laughed at for them is they were really um a combination of some treasuries and uh some some CTA type funds and and there was a lot of cash as well. If I recall, they were quite expensive solutions for what they were underneath. And then the the ultimate question is did they do what they said on the tin? Did they actually work well in the case of a of a risk? And I think the answer was not always. So they were profoundly disappointing I'd say as a general set of offerings. Yes, there were some that were exceptions and I know that that some have you that there was I believe some kind of equity option strategies often rolled up into them. Um and so I'd say yes I am skeptical um of any kind of repackaging of solutions whether it's portfolio insurance or anything else. I've also seen the same product be marketed under very different labels according to where the zeitgeist was moving. what was the next trendy thing and again that has to be a cause for skepticism and when it came to say a new asset class like digital assets Bitcoin on the private wealth side we were quite slow to ever recommend that we were providing education a kind of a wait and see approach that might not have been popular with clients who wish to to to dppel in these but the reason we could not recommend them was we could not analyze them if if we don't know how asset class like this is likely to perform in a different scenario IO is we cannot do scenario analysis. This cannot be part of our portfolio that we recommend. So in a good that because Bitcoin we've seen it move from being is it a a diversifier of currency? Is it a is it an is it a hedge? Um or is it just a very uh high octane way to get risk on? >> Yeah. Interesting. I mean the the other one that has come back obviously is gold. I mean, gold was in in competition with Bitcoin for a while, it felt like, on that kind of um safe haven type asset. Um, obviously, gold's had a fantastic role for for people of late. It was a great run. Um, and commodities more generally, I guess, have become more interesting. Obviously, you know, you've been in the market through the full cycles. You'll remember when commodities didn't appear in portfolios, then they did, then they didn't, and now they're coming back. So gold and commodities are they back as as core allocations again do you think? >> Again that's the beauty of having many cycles. You have this the same conversation kind of you know history not repeating but rhyming and uh we we have had this conversation you know 10 years ago perhaps about the use commodities 20 years ago about the use institutions and commodities. A couple of core truths have have applied the entire time. One is that you holding the physical is complicated expensive and um not for everyone. And second is you know this idea of the uh the the divorce perhaps between the underlying commodity prices and some of the stocks or the products that are tied to that. Um sometimes there is a complete handinhand correlation. Other times there's a real dispersion and you you don't know what you're necessarily getting. I think the idea of this being the inflation hedge has been a complex assertion. There has been maybe um yes steady state inflation hedge normal inflationary times. there has been reasonable participation when it comes to the shock inflation it hasn't protected that that well so I think that that's another and then now gold looking at the different factors driving gold whether that's the technical factors the Chinese retail buyer at the margin central banks around the world um whether it's the concern around fiscal budget deficits and concern about that that I'd say that that pieces for buying gold is a way to hedge the rest of the portfolio but again this I'd suggest it is not done it is done in a in a in moderate way that something like that is not more than 5% of a portfolio that it is is done in a diversified basket approach as opposed to the metal itself. And then when we go outside gold that is in itself volatile but also something like silver is far more volatile as we can see from the the movements this defining year for methals last year well it was really defined the beginning of this year by just how volatile those methals were. So again, I'd bet to that knowing what you buy and knowing what you're getting into in terms of volatility, that's where that would I think I'm quite comfortable owning say an equity manager that owns gold as part of and some managers do this as part of their way to create a a resilient well- diversified portfolio, but actual naked exposure to to a commodity like that, I think is um is probably too problematic for most investors. you've touched on kind of this the long-term cycles, how they rhyme at times, how not um how we have these long-term trajectories for different asset classes and and how I guess sentiment shifts over time as well and and you know even the regulators can you know at times you know on the pension side encouraged everybody into bonds and it felt like it that was of low yields now the current thing is you know in the UK encouraging people into private markets you know in the US you've got the democratization of alts and you wonder is this the right time for for that as well. I'm also you know conscious that you know you know we've both been in markets for you know same kind of period three three and a half decades. It's been that the the the the globalized world of equity markets. Okay, we've had bare markets but you know by and large it's been a very favorable period that has gone on and on and and the last 15 years has been very favorable indeed. I mean, do you do you worry about that we could see a period at some point which seems hard to imagine like a 15 20 year period like 1966 to 82 or even the depression. You know it people look at history for these episodes and and think that they are just you know things that happened in the past won't be repeated. But as part of your portfolio construction uh process when you're thinking about resilience, when you're thinking about all of that, how do you kind of balance that kind of perspective of staying grounded, don't overreact to the hype, but at the same time keep this risk in your mind that things might get bad beyond our expectations at some point. >> So I firmly believe we need to look at the macro backdrop. We need to pay attention to the factors that are affecting the managers in where we we work. In terms of looking at um recent what are the key drivers of many market actors, we know that greed is a is a huge part of that. Looking at some of the behavioral biases that we actually think about are more relevant for individual managers, individual clients sometimes are actually very relevant at an institutional level because these behavioral biases are affecting the market actors. So when we think about as I said greed, the incentives, the idea of recency bias, this bias that this can never happen to me, these are all the the behavioral flaws that the financial actors are, I think, are going to be riddled by. And we can see this in the recent book 1929 where the focus was not only on the um the the actors behind the crash but also on their own kind of personality foibless their their insecurities their desire and we've seen this again in some of the uh political scandals that have embroiled um many of the financial actors is these are driven by the desire to to feel valued the desire to feel that you belong. So this is a little bit of a profound deviation into behavioral style which I think is why we have to be very alert to being told what we want to hear as investors because um we are essentially being given a false assurance. So if we can detect these false assurances this false um as investors and be very alert to that I think that's how we can let our portfolios operate without that degree of hype. um a as to whether I am concerned about a portfolio um hitting uh you know very very bad patch I don't believe we're headed to a big kind of 1929 type depression style. I think we we have now not not only enough diversity in the underlying assets and asset classes we can invest in that there will be a way to generate some income with all of that. We know our portfolios are not all stacked on black. And equally then just in terms of the the backdrop in which we operate, we know now since the last crisis that we have institutions that are ready, armed and able to step in as shock absorbers and to cushion those blows. So I'm not confident that we will essentially avoid all um damage and all market downturns, but I do believe that we have a more of an orchestration behind the scenes to ensure that we don't hit something really devastating. Now, in terms of the catrini research, to bring that up in terms of whether there could be that kind of a dystopian development, again, I'm not a believer in extremes. I'm not a believer in doom cycles or in um in extreme positive or extreme negative. I think actually the the hundreds of podcasts I've sat on the other side of the mic up has really instilled that in me is that just that that real diversity of human experience, the diversity of highs and lows, the fact that they happen to everyone. That type of a normalization of a life that is made up of highs and lows has led me to be a lot more middle of the road I suppose in terms of how I see outcomes and um and that's why a portfolio I tend not to get uh carried away. >> Yeah. No, fair enough. Um I mean you touched on kind of behavioral challenges, you touched on kind of how various assets and strategies are are represented um and misrepresented and and obviously you know if you're um building portfolios the asset allocation is only one part of the equation then you have to either you know buy securities or allocate to external managers and I know you had your own um advisory business earlier in your career focused on manager selection manager analysis I mean what do you think are the key you know challenges behavior real challenges I guess when it comes to uh selecting uh external managers. Well, clearly one has to look at all the the usual metrics in terms of performance and analyze that in terms of the the key behavioral challenge with the manager is that one falls in love with the manager metaphorically speaking and doesn't want to is it's difficult to fire that manager and that is I think we know well reported is that it's easy you hiring and firing it's it's the actual termination that is the challenging piece whether that's a desire not to to you know to to crystallize a loss or to admit you were wrong or or or just just to have that conflict because there is some conflict inherent in a termination discussion. Um I'd say that that is a muscle that you build over time. Um and I think it's it's never easy. Nobody ever likes to be that manager. But equally, if there is better dialogue um from that manager from the outset, hopefully it won't come as such a shock if that if these kind of things are not cliff edge type divevestatures, but they are are really are telegraphed well over time. So I say that is the one behavioral side. Um and another thing is just not um necessarily doing that piggybacking which is again another dangerous behavioral thing is believing that some other peer of yours has done the due diligence for you. When I started my consulting career it was around about the time of maid off and actually I was the beneficiary of some quite broken damaged portfolios that had been damaged by exposure to maid off and we were then charged at rehabilitating that. So I suppose in in a kind of odd way it became um it became became a of a winning strategy for me to kind of swoop in and and helped to repair portfolios but clearly the maid off's problem was a piggybacking problem. It was a slipshod due diligence on the part of allocators and that kind of slipshot due diligence is happening everywhere not just by allocators but particularly in the private se in the private credit sector and that's where we're seeing the the cockroaches emerge as we're seeing >> yeah interesting I mean it feels like um you know the due diligence processes the RFPs that they've become lengthier and lengthier but at the same time you know is it just um you know people are still make errors or things get through Is it just people ticking boxes or processes too rigid or how does that how do you kind of reconcile what seems to be even lengthier due diligence processes but maybe delivering less true insight? >> It's interesting it's maybe because I studied as a lawyer but we in law you have a case law you'll always have the case note in the beginning which will kind of shorten kind of the executive summary what the bottom line up front tell me what I need to know >> and that has been always my preferred approach to communication. I have an aversion to data dumps which are perhaps decided to be maybe provide security or to provide cover for recommendation but ultimately tell us nothing at all. Um I also have an aversion to macro analysis that is kind of a theoretical and academic in nature and has no actual relation to the portfolio. I always ask the question what so what you've told me all this so what does that mean for my portfolio? Do I have too much US dollar exposure? Should I reduce that? Do I need to pivot towards more income towards more inflation protection? This is the so what that needs to be done. So when it comes to due diligence RFPs, I agree. I think that is getting completely out of control just as um board packs equally. We have got out of control and taken on a life of their own as they've reached the hundreds of pages. Um because ultimately this is now with AI probably going to get even worse. Um AI has generated the RFPs. AI is probably reading the RFPs. So, we're going to be in this this loop of um boilerplate to boilerplate, algorithm to algorithm with no actual human in the loop suggesting that maybe this is not exactly what I need to know. What I used to do at Chicago Police, the CIO, is I would um create the RFPs with kind of I wouldn't say they're Easter eggs hidden, but they were um at least questions in the RFP that was very specific to our own situation because we had a fairly unique situation with a very low funding, poor cash flow situation there. I would say, well, how can we why looking at the rest of our portfolio? Why does your solution fit this in particular? And that I think was was kind of a great way for me to separate wheat from chaff because so few RFPs ever answered that question. Um or if they did answer it, it was answered with more boilerplate. So just that little bit of effort up front to actually address the client's actual problem, I think um is probably just a little bit of a a kind of a hint as to how to to get through that process. But equally, and this is an issue for finding a job, it's an issue for finding a manager. The the problem now with volume and with sifting through the volume, how is that going to be circumvented through building networks and cultivating that network if you're a manager with an allocator way before you know what that allocator needs and really being sensitive to solving that allocator's problem, making their life easier, making their job easier, and getting them to where they need to get to. Just before we wrap up and get towards the end, I want to get your perspective on kind of decision-making processes because I know you mentioned you know being the sole investment uh person in your role in Chicago uh which makes things quite easy in some senses. There's no endless I guess um uh debate and and and committees but equally you've been part of much bigger organizations and now I guess you observe how you know in in individual investors as well or family offices make decisions. I mean what's the best optimal investment process do you think that harnesses collective wisdom but kind of doesn't um allow for kind of group think >> I suppose I would come back to investment committee construction and um pension fund committee construction when it comes to decision-m because that ultimately if you have a well diversified um well-trained committee um that will hopefully avoid group think in that case um I do think when it comes to investment teams um having teams that cycle through different areas and are not necessarily wedded to their own. I think lateral thinking is a great skill that is where we will ultimately overcome the machines with our ability to draw connections to be creative. That's again something that law really teaches you because you're looking at you're applying case law in a different but analogous situation. So you're not necessarily getting exactly the same set of facts. So the ability and this gets to again looking beneath the hood of strategies and finding well what is really driving that strategy that is a form of lateral thinking because you may have to combine two disciplines in in getting to the root of that. So that decision-m is is key having um the the the tools I mentioned before around the ability to to verify to test your decisions. Somebody I I love who does this Mark Steed he's the CIO at the Arizona public fund employees scheme. He's been there for many years. um he is a a great innovative thinker when it comes to getting his team to um to really to learn how to be better forecasters because he actually gathers collates their forecasts and then we'll go back to them at the end of a period with the outcomes and get them to verify whether those forecasts came to be. I think that is the kind of training of that muscle so that we ensure that we become better risk takers, better forecasters. >> Very good. Well, we always like to ask our guests uh before we wrap up about their I suppose advice for people um coming into investing and into the markets. Obviously, you had a um background in law before you moved into um doing an MBA and then into markets, which by all accounts listening to you today, you it feels like you feel the benefit of it. But if you were to um kind of advise people who are starting off in their careers about things to do, things to read, what would it be? Well, first of all, um don't overlook just how absolutely fascinating this field is. It is always changing. It is affecting our lives dayto-day, the prices we pay, the the taxes we pay, um and affecting, you know, the the worries that we bear when we think about the the current geopolitical scene. This is this is exercising every aspect of our life and the finance touches all of this. So, I'd say, you know, first of all, realize what you're missing if you don't know about it. And I think I didn't know about it as a law student. It didn't touch my life. It only entered my life when I started working in the corporate law field. So, anyone who's already kind of got onto that bandwagon and realized how interesting it is, I'd say keep reading, keep creating, be um be be your and if if you can't find uh a way to express yourself, find a way. Start a blog, start a a video platform, find a way to ex develop your own voice and respect because there will be many jobs you do where you no one cares about that voice. And that's fine because that is a necessary right of passage I'd say in finance to go go through the the the hoops of of learning the skills and being an apprentice and learning from from elsewhere. But but do develop that voice too because there will come a time when you will be that voice will be needed in terms of um you leading a a unit or you having to get on CNBC or or you being asked to do something and you should be the person that can say yes to that because you have something to say. >> Very good. Well um you mentioned CNBC. I know you appear appear there from time to time. So people can follow your work at Manetta and I guess on CNBC and uh and obviously you have your own um 50 faces podcast as well. So Ethan, thanks very much for coming on today. It's been great speaking to you. Um and from all of us here at Top Traders Unplugged. Uh stay tuned for more content. We'll be back soon. >> Thanks for listening to Top [music] Traders Unplugged. If you feel you learned something of value from today's episode, the best way to stay updated is to go on over to iTunes [music] and subscribe to the show so that you'll be sure to get all the new episodes as they're released. We have some amazing guests lined up for you. And to ensure our show continues [music] to grow, please leave us an honest rating and review in iTunes. It only takes a minute and it's the best way to show us you love the podcast. We'll see you next time on Top Traders Unplugged.