Sébastien Page on Smart Asset Allocation

concept of expected returns versus expected risk. As it turns out, it's easier to predict risk than it is to predict returns. I don't know what else I can say about this other than if you are an asset allocator, a wealth manager, anybody who's thinking about managing assets over the next ten, twenty thirty years, then you're gonna find this to be an absolutely fascinating conversation. So, with no further ado, my interview of Sebastian Page of tiro Price. This is Masters

in Business with Barry Ridholts on Bloomberg Radio. My extra special guest this week is Sebastian Page. He is the head of Global multi Assets at tiro Price. His group runs about three hundred and sixty three billion dollars of the total one point three trillion that tiro Price has under management. He is the author of Beyond Diversification, What Every Investor Needs to Know About Asset Allocation and co author of Factor Investing an Asset Allocation Sebastian Page. Welcome

to Bloomberg. Thank you, Barry, Thank you for inviting me. I've been looking forward to speaking with you since March. You were quite literally the very first show. The pandemic led us to have to reschedule, and we'll talk a little bit about the pandemic later, but I want to dive in to your your job, your head of Global multi Assets, which is a huge role. Tell us a little bit about your day to day responsibilities. You know, it's the perfect job for me. I absolutely love it.

Running a large global investment organization, in this case over three hundred and sixty billion and a u M over

two hundred different portfolios. It involves not only, of course, investment oversight, staying on top of capital markets, consuming vast amounts of research and so on, but also running the business, setting a strategic vision, making sure it's executed well, recruiting and developing talent, managing product development projects, and also I'm a member of Hero's management committee, where I'm representing our division and helping manage our entire firms. So the job

is very broad, and I learned in something every day. Verry, I know, you run your own successful company and you're a thought leader, so I'm guessing it's it's a very broad set of responsibilities too, So in that sense, running an investment division in a large but agile company is probably not that different. You know, It's funny when I discuss what I do with relatives. They're so impressed by two billion dollars and I always laugh and have to explain, no, no,

you don't understand. Two billion dollars is nothing. Big shops are running hundreds of billions and trillions of dollars. So given the size of the assets you manage, how do you think about multi assets? What? What's the thought process like when you're assembling an investment posture. Are you thinking about stock picking or different sectors or global regions? How does a multi asset portfolio come together? It's all about putting all the capabilities of the FIR together in one

neat package or vehicle for different clients. So we put together capabilities across tactical asset allocation, think about decisions to tilt the portfolios with a six to eighteen month horizon to take advantage of relative valuation opportunities, but also strategic asset allocation, constructing the portfolio for the long run, trading off returns against risk, positioning the portfolio for structural advantages, structural alpha's, and also security selection that we typically source

in the funds of funds format so will allocate to underlying key ro price building blocks. So most of what we do is to put all these capabilities together and then customize their in different ways for different types of investors. So you're also on the asset Allocation committee, which is responsible for tactical investment decisions, and you remember the firm's target date franchise, which is a whole different animal, and the broader management committee at large. How do all these

very very different pieces fit together. It sounds like you have a lot of different roles to juggle. Yeah, our Asset Allocation Committee is responsible for tactical assocation decisions. That's all we do. On that committee. We're bring together some of our most senior investors from equities, fixed income, and multi asset and As I mentioned Verry, we take a

six to eighteen month horizon. We typically meet once a month and we're very much focused on relative valuation opportunities, but we also take into account macro think business cycle, monetary policy, the fundamental I think earnings projections and the like, as well as technical I think closed momentum sentiment. So evaluations are main driver of decisions, but ideally we want to take positions where all these factors aligned. So that's

for the asset allocation committee. As you mentioned, I'm also a member of the management committee. That committee is chaired by our CEO, and it's responsible for managing the entire firm of seven thousand plus employees across sixteen countries. You know, the entire one trillion in a u M if you will, they're on that committee. I need to take my multi asset hat off and put the tyro price hat on. And you know, we meet for at least two hours

every week. We interact with our board, We set the strategic direction for the firm, and we manage execution that part of my job. There has been a fantastic learning opportunity for me. So you mentioned earlier strategic allocation and you just we're discussing tactical allocation. For the listener who may not be deep into asset management, explain the difference

between the two. So, tactical asset allocation, the way we define it is about taking advantage of primarily relative valuation opportunities. And the time horizon is perhaps a medium time horizon if you think about six to eighteen months, So it's not day to day day trading, if you will, big macro bats. It's more about leaning against the wind and looking for situations where valuations are at extreme and other factors give you confidence that you can take advantage of

those dislocations. That's what we mean by tactical asset allocation. It's not what I would call gun slinging. It's more about incrementally taking advantage of those opportunities in markets. Strategic asset allocation, very is broader, and it's about how do you construct a portfolio for a given investor or a given institution for the long run. And the lots of questions are being asked these days about whether the sixty forty is dead, for example, that's a typical strategic asset

allocation question. Should we hold alternative assets in the portfolio. That's also a strategic asset allocation question, and very the biggest question of them all for strategic as allocation is how much stocks should I hold versus bonds for the long run. So those are the differences in the way we define tactical and strategic. M quite interesting, you know.

I can't help but notice tro Price obviously a very large organization, but you spent the early parts of your career at State Street and Pimco, also two giant organizations. What are the advantages and the challenges of working in such large firms? Oh, good question. You know, I can't speak a lot to small firms because, as you said, I spent most of my career at very large firms. But let's start with what I would say is one of the most underestimated advantages of being at a large firm.

Large company, those that are successful over time, that know how to innovate and take risks, have some advantages over startups. It's you know, it's not like startups they called the risks and large companies are sleepy giants waiting to get disrupted. Disrupted. That's a cliche to me that it ignores how successful large companies really operate. So I've been lucky enough to work at fantastic companies where have been put in positions to essentially run startup in shit. It's but with two

very big advantages. Number One, resources usually in the form of headcount and brand and marketing support. And second, you know, better career support that that I would have gotten at a startup for example. Now, I don't want to diminish the role of startups in our economy, but sometimes people think of big companies versus startups in black and white terms, and it really is not like that in terms of innovation.

But you know that being said, the main disadvantage is what you would expect, right, no matter how agile large companies are, no matter how successful, you'll always face frictions involved with managing change inside large organizations. You know that there's this tired analogy that it's harder to to turn

a supertanker than a jet ski. You know, it takes a tremendous amount of leadership and political savvy and with a bologies to ill en mosque power points uh in order to align people inside large organizations and move large organizations. And I'm still working on getting better at this, but to me, the advantages of working at successful large organizations

outweigh the disadvantages for me. So so working at a at a large company is a high risk adjusted return proposition, high sharp ratio if you will, to use UH an investment term. But but the trade office, I'll never be a billionaire founder. But but that's okay, that's okay with me. You know a little secret. Most of us are never going to be billionaire founders. But we'll hold that myth off to the side. One one last question about allocations.

So within the asset allocation committee, is the firm's target date fund practice. I have this horrible bias thinking that that is the easiest gig in the world. You set a target date, you do almost nothing going forward. It kind of runs itself over thirty forty years. Disabuse me of that understanding. It's very hard for non investment professionals to determine their own asset allocation right, and with the d C Defined Contribution system in the United States, that's

essentially what we've asked people to do. We've asked them to take control of their investments and their asset allocation decisions. So I was talking with the financial advisors recently, and you know he put it that way. He said, asking non investment professionals to manage their investment is a big ask. Do we ask people to perform their own surgeries? No,

we ask a surgeon. So the target date fund has the advantage of apping people to the most important decision, which is the stock versus bonds decision, based on how far they are away from retirement. And if you read my book Berry, you'll find that there's a lot of science and research and practice and judgment involved in calibrating those targeted funds to meet the needs of the different

populations inside these different plans. So people who are putting it putting money aside for retirement, and the calibration takes into account your risk tolerance, and it is I agree with you. It is in a sense a not a pilot solution because it will change your stock bond mix automatically as you age. You'll have to targeted fund manager select the underlying building blocks, monitor those, and add other capabilities like the ones I was mentioning earlier on tactical

asset allocations. So it's meant to be an easy solution for investors inside of the seed plans. So if you take that lens, it's not that surprising that they've become the default option of choice. Quite quite interesting. So Sebastian, let's talk a little bit about asset allocation. You mentioned the portfolio. It's been pronounced dead I don't know a

dozen times over the last decade. But with rates under one percent and zero not too far off in the future, maybe this time is the time where the portfolio really is dead. What do you think about that traditional asset allocation mix very these days? And that's the perfect question to ask an asset allocator if you want a long answer, it's a really important and well discussed question. Let me start with the conclusion this sixty forty portfolio is not bad,

but it needs to be improved. I have three main concerns with the sixty and the first one is really obvious, is that the sixty provides a specific risk profile, and not everybody should have that risk profile. So it is too generic if you think about it as blanket advice. Depending on how far you are from retirement. For example, earlier we're talking about target date funds, you should probably have a different mix between stocks and bonds. People need

to account for their risk tolerance. You know, the question how much stocks should I own is often, especially these days, probably more than you think. I talk about this in my book. But if you look at target date strategies, someone who's fifteen years from retirement save fifty years old, uh, we think should hold about their portfolios in stock and retirement.

The equity weight it's still about fifty. And this is because you know, longevity says or longevity risk is an important factor, and it says, you know, even at retirement, you can expect to live for another thirty years, so you want your money to last. So that's kind of the first thing to say about the sixty forty. Let's just all realize that it's very generic advice in terms of the stock bond mix. Second, really important risk is

not stable over time. Think about it this way. On a rolling one year basis, if I calculate the volatility of a sixty forty portfolio, depending on the environment, I can get as much as volatility or as little as five percent volatility. So that's for the same asset mix can look very aggressive when markets are volatile, and it can look very conservative in quiet times. Our industry is evolving towards more dynamic risk management. To stabilize risk, I

think target risk rather than target allocations. And thirty two at sixty your question, very captain, markets have change. Interest rates are now post COVID Hunter basis points lower than they were before COVID, and that's about a fifty drop relative to their level at the beginning of the year. So this means that for the same expected return, people need to take more risk. But let me first it this way. In order to hope to achieve the same expected return, people need to take more risk. Uh So

it's not just the search for yield anymore. It's the search for return. The Barclay Zagg has a yield of you know, say one point two, which it's especially zero after inflation. And our solution team has done a study and they found that in order to reach a six expected return. Now there are lots of assumptions here, depends which asset classes you pick, it depends how you model

forward returns. But roughly speaking, giving current rate levels, you actually need about in stocks if you want to reach for a six expected return going forward. And to make things worse, bonds no longer diversify stocks as much as they did in the past. So maybe the answer to the question how much stocks UH should I hold? Again, as I mentioned earlier, is often more than than you think.

But I understand the spirit of the question is more about the role of traditional asset classes, right stocks, bonds, beers burgers, simple stuff. So my views at the portfolio again, it's not dead, but if that's the risk level you're shooting, you're shooting for it needs to be optimized. And in my book I present some model portfolios and we have shifted twelve percent of the allocation from bonds to low

volatility alternatives. We have a five percent allocation to a risk premium or factor strategy if you will, the volatility premium, and there's also a dedicated long bond allocation of three to four The other thing we did in that model portfolio is that within equities, you can swap five of your stocks traditional long only stocks to risk manage or defensive equities. There are different ways of doing that. Those are a lot of those are not available on advisor platforms,

for example, and some of them integrate integrate dynamic risk management. So, as I said Verry, if you want to get an assallocation and an assallocator, talking asked them about the whether it's dead. The bottom line is that you know it's fairly generic advice. You have to calibrate this for risk. You have to count for changing risk over time capital markets have changed, or your expectations from the sixty change, and ultimately I think you can re optimize it with

these different solutions that just mentioned. So let's stick with the role of bonds within that beer and burger portfolio. We know that they're diversifier, but not as much as they used to be. We know that they produce yields, but really not enough in real terms. There's still the element of fixed income as the volatility dampener versus equity or is that no longer the case? What are your thoughts about that bonds and treasuries in particular can still

dampen volatility in your portfolio. But I have to say that these days, if you ask asset allocators what keeps them up at my a number of them will say, and I'll include myself, the worry that treasuries, with the exception of the very long data treasuries have lost most of their rustation benefits. And I'll give you an example. The US equity market had a draw down of nine in September. During that drawn on, the Treasuries index actually lost fifteen basis points over that time period. The zero

bound limits upside for treasuries. And this very is simple math. Right, you can't go up during a shock when stocks are selling off a lot more than your duration times the amount by which races can go down. Duration times to change in rates. And look at German boons during COVID, Right, they only went up two in Q one. Meanwhile, the

Germany stock index was down. So maybe maybe treasuries can dampen volatility, but they don't really hedge your risk in the sense of rallying when you're incurring really large losses on star, so you have to look for alternatives you can extend duration. And if you look at the long treasuries index during Q one, it was up, but again I yield approached zero even in the long end, gains of that magnitude become unlikely my views, you have about

one more good big crisis in long treasuries. Uh. If you will, then you have to start thinking, Okay, if I can't diversify, if I can't get the hedging from treasuries, where am I going to get it. The simplest way of doing that is to buy foot options from stocks, but that can be really expensive. You have to pay for it. With treasuries in a normal environment, at least you get a positive yield. I mentioned earlier the possibility of dynamically managing your risk. I think this is becoming

more important for asset allocators and for our industry. For example, what's so called managed volatility strategies or defense as macro strategies. Some of those strategies can pick up the slack from treasuries going forward. You can consider absolute return strategies, adding those to your portfolio because they allow for short positions, which can be very effective hedges. Or look at other diversifiers. This is usually the answer people will give you. Very

treasuries don't diversify as much. Look at gold, uh, I don't know. Gold can trade like a risk asset in the short run. At least look at investment grade bonds. They still have default risk. Low interest rate currencies like the Japanese end may help. They tend to rally when stocks sell off, but you have to ask what the expected return on currencies. It can be quite low. So when all else failed, you can either accept higher exposure to laws going forward, or reduce or reoptimize your equity

exposure giving your risk tolerance. And I mentioned allocating to risk managed equity solutions for example, Barry. When I this question brings to mind a story I have in my book. When I worked at State three, I had a really great mentor, and I talked about him in the book. He had a fairly dry sense of humor, and one day was in his office complaining about my career. You know, I was saying my career was not going the way

I wanted it to go. And he looked at me and he was getting impatient, and he asked, Sebastian, do you know the secret to happiness in life? So I've got to the edge of my seat. Do you know what he said, Barry? He said, the secret to happiness in life is to lower your expectations. So with rates at the zero bound, the bottom line is that investors have to lower their expectations for forward returns on both stocks and bonds, and for how much treasuries can rally

when stocks are selling off. Quite interesting. Last question on asset allocation and diversification. We've been waiting for a long time to see when investments outside of the US will begin to pay off. They've lagged for the better part of a decade. Um when are we going to see the benefits of global diversification or or has the law

of mean reversion been repealed. Yeah, that's a really good question, because non U S stocks have underperformed for a long time, and this is an example of where relative valuation has not worked in terms of reversion towards the mean because other factors have not lined up. But let's think about the usual disclaimer. I'm sure you tell that to all your clients. Very past returns aren't indicative of future returns. That's a generic statement that I talk a lot about

in my book. But I show that over safe five or tenure horizons, relative returns and valuations tend to mean reverts. So it's possible that going forward, non US markets could outperform.

I believe that from a long term perspective, emerging markets in particular position for higher growth than the rest of the world, given where there are in their business cycles, and given their demographics, and if you want to get a little bit more tactical in an economic recovery, economies that are more levered like Europe, for example, that have

more cychnical exposures could outperform the other ways. So that's one way to think about this is that let's just look forward when we try to answer that question as opposed to backwards. And if we look forward, history says the likelihood of mean reversion given where we are UH could be sart high. Second, you know, there's just more breath. There's more opportunities for alpha and global portfolios compared to portfolios that are concentrated in the US, especially with the

current environment with the fangs dominating the US market. There are more than fourteen thousand companies that are included in the MSc I All Country World IMPACTX, so more than just those nine or ten in the US that seems to be driving returns this year, right, which leads to better opportunities for alpha for stock pickers, for those that

know how to do that well. So you have the advantage of relative valuation and looking forward relative to backwards, and the breath of investment opportunities working in your favor. Quite quite interesting. Let's talk a little bit about some of the research and writing you do. Not only have you written two books, but you've co authored a number of award winning papers for the Journal of Portfolio Management and for the Financial Analysts Journal. Tell us a bit

about how and why you write. You spend an awful lot of time putting out well regarded research. What's the motivation? My motivation in particular for the book was to build a bridge between investment research, academic research, and the practice of investment with a focus on asset allocation decisions. So I reviewed over two hundred papers. I integrated some insights from my colleagues at Tyro Price as well as from

my own twenty years in the business. And one thing I wanted to do very with this book was make it accessible without sacrificing the rigor. An author I had in mind when I started writing is Malcolm Gladwell. You know how he takes deep research and makes it interesting and accessible. I want to write something like that for asset allocation. And you know, you could say finances in my DNA. I have absolute passion for it, and working on this book, I wouldn't call it work at all.

It's what I do, it's how I think, and I had this desire to put it all together in an organized way. Going from forecasting return, forecasting risks, and then constructing portfolios. That's how I've divided the three sections in the book. So let's talk a little bit about some of the problems of forecasting, especially things like fat tails, black swans, and other financial disasters. How does the finance

industry think about fat tails? Do we pay enough attention to these hundred year floods that seem to come along despite their name, every ten years or so. Yeah, those are interesting statistics, very and I actually have a chapter where I talk about those probabilities and how they compare in real life versus mathematical models that rely on a normal distribution. Look, the issue of fat tales is actually a really well known issue, but I would argue we

don't pay enough attention to it. I would say many quantitative analysts, especially when they backdest strategies like risk factor premium for example, don't really account properly for fat tales. Someone once told me that the only people capable of generating a sharp ratio of three point oh so three point o return to risk ratio were either Bernie made Off or quantitative analysts running back tests. And in the book, I have a great example for this. It's from Andrew Low.

He's a professor r at M I T. And there's a fascinating case study on the issue of fat tales in the paper he wrote in the earlier two thousand's. His studies based on monthly data from January December, and he simulates an investment strategy that requires no investment skill whatsoever. Okay, no analysis, no foresight, no judgment. The strategy is so

simple a monkey could do it. But despite this simplicity, in Angrelo's fac tests, the strategy doubles the sharp ratio of the SNP five hundred from point nine eight to one point nine four, so double the risk adjusted return. It only has six negative months compared to thirty six for the SNP five hundred. And here I'm going to quote Angelo because he sets it up nicely. He writes, by all accounts, this is an enormously successful hedge fund with a track record that would be the envy of

most asset managers. Then he reveals what the strategy is, and this is where we illustrate fat tail risks. Can you guess Bury what the strategy is? Well, I was going to say, like a leverage S and P fund, but the lack of monthly drawdowns kind of moved me away from that. What's the strategy? So in this simulation, all he does is just sell out of the money put options on the S and P five hundred, so essentially he sells insurance. The strategy is just to load

up on tail risks. And it just so happened that in the nineties you didn't really get called on those short put options. But what it is is picking up

pennies in front of a team roller. And when you look at many risk premia or how our industry thinks about liquidity risks for example, book or carry strategies, or even how we construct allocations to credit in our portfolios, a lot of those strategies return streams, if you will, are short an option, and that is embedded tail risk that our industry ought to pay more attention to and find better ways to model. So I have a couple of chapters on that in the book The Black Swans,

if you will. So since you mentioned Malcolm Gladwell, I remember a piece he wrote, I want to say, early two thousands about tail risk, and he has on one side of the trade. I think it was Victor Niederhofer who was on the other side of that tail risk trade and now seemed to lab as the buyer of puts, which was money losing until for for years and years and years until the bulldozer comes along in two thousands, and so the writer of puts were minting money all

through the until the dot com collapse takes place. Then the buyer of puts becomes the big winner. And the draw downs were so catastrophic that they completely wipe out not only all the games for the previous decade, but they pretty much bankrupt the writer of puts that whole time.

Am I portraying that more or less correctly? Yeah? And it's a good example because it's extreme and it's directly using nonlinear instruments like put But the issue of fat tails is broader than that, right, It's the behavior of markets. It's how we think about so called carry strategy, it's how we think about credit, it's how we think about liquidity,

risk and portfolios. And you know, even you and I very so far in this podcast of talked a lot about volatility, but really when we think about forecasting risk, constructing portfolio, we really ought to talk about exposure to loss, which when you have options like in the example you describe is obviously different from your volatility, and in my Andrew Loo example, exposure to loss is obviously different from volatility. And I'm not claiming this is not something that our

industry knows. We just ought to have the right tools and the right approaches and the right way of thinking about those exposures. And it's not just hedging or put options. It's a lot of aspects of financial markets. Quite interesting. Let's talk a little bit about the future of investing. You've done a decent amount of research on active versus passive and about the entire debate that's grown up around it. Tell us about your findings are good, Susan and Barry.

I saw you wrote a good article about active verse passive where you show that passive is not taken over the world when you measure the assets size correctly, and you talk about your approach where it's a place for both active and passive. So I'm with you on that, broadly speaking, passive creating opportunities for active. And in my book,

I have an example about this. I talked about when e t s trade around a theme with high volume and how when that happens, all the constituents in the e t F start moving together irrespective of fundamentals, so I show those correlations spikes. This creates opportunities for stock pickers, So I show examples where, for example, regulators were going after drug pricing practices and people were selling the healthcare ts dragging down companies UH that have nothing to do

with drug pricing, like medical equipment or contact lenses. So those are good examples of when people, UH stockpickers would have had opportunities to buy temporarily undervalued companies because they're just they're just being dragged down with et F trading. But they're also good examples of when people, for example, sold financials because of lower rates, but companies with positive duration like reads, which used to be part of financials, would sell off as well. So it's like throwing the

baby out with the bathwater. And the original paper on this we titled it the Revenge of the Stockpickers. Look, I just don't think we should look at average results for active managers. We need to look at how skilled active management is done, those that can add value at consistent, replicable philosophy and process depth of resources to do that. And I'm at all saying that there's no place for passive. It's not a black and white answer. In my mind.

There's a place for both active and passive in markets, as I saw in the article Europe. And remember you know passive ultimately it doesn't work if you don't have active managers setting prices. Quite quite interesting, Let's talk a little bit about risk appetite here we are, it's the end of the year. Were recording this a few days before Christmas, and it appears that risk appetite is very high.

SPACs have gone postal, I p o s are are doing really well, robin Hood traders are you know, I know it's not a lot of capital, but it's certainly a lot of mind share. Anecdotally, it seems like this younger generation is really embracing risk. What do you think this means in the current environment. It certainly creates fragility in markets. The puzzling thing is that risk capited at the moment seems high, but in pockets of the markets, rather than say a systemic issue as in prior crises.

So pockets of the markets like the one you mentioned, facts Ibo, robin Hood, some technology companies. But if you look at it, we have a composite indicator where we put together a bunch of variables on surveys to get investor sentiment as well as positioning. That composite indicator is

only slightly above medium. And you also still have the proverbial and I hesitate to use the term, but cash on the sidelines in the sense that there's seven hundred billion extra a u M in money market accounts versus what we had pre COVID, So what's happening. Why are pockets of the market showing fragility. I mean, we've flooded the markets with liquidity, and we had at one point year over year growth on money supply. That's basically the

biggest jump in the data set that I have. And I've seen estimates for stimulus measures between fiscal and monetary globally as high as twenty five trillion, depending how you measure it. But that's a tremendous amount of liquidity. So it will create pockets of speculation, but I don't see

it at this point as a systemic issue for markets. Ultimately, very in our portfolios right now, we're neutral between stocks and bonds, and we're taking advantage of relative valuations on the recovery trade with long positions, for example in small caps, and we've started to lean into value, and we have some credit exposures, for example in loans which benefit from rising rates. So yes, sentiment is high. Their pockets of fragility in the market, not a systemic issue in my

mind at the moment. Quite interesting. We mentioned value a little bit. Let's let's talk about value. Is the value trade dead? Is it just that growth has done so much better than value um not only during the pandemic but the past decade. When do we see some sort of catch up of value towards growth or not? Does it just never happen? You know, you're really asking all the hot button questions for asset allocators, right the role of bonds going forward is the dead value? Growth is

the other one. And in our assocation committee we debated all the time. I don't think value is dead. In fact, in the medium term you could see rotate, you know, the rotation that's started with vaccine news continue during the economic recovery. But then it's clear still to me that growth has some secular which I think long term advantages.

UM growth stocks do well in low rate environments, and there's clearly a sector advantage with technology disruption being more tilted or oriented uh in in in growth stocks and in the growth style versus value. But the other reason I would say value is not dead. There's a tactical opportunity here because we're entering an economic recovery. But also if you step back and you think in a capitalist system, companies evolve and reinvent themselves, banks and make money in

low rate environments. Think of those that have thriving wealth management businesses or trading. For example, energy companies, which are also a big component of value stocks, can move and are moving to sustainable energy models and and so on. So I don't think value is dead Barry, And you know, if we look beyond traditional value, look at some other factors. Small cap value has been on a tear. The Russell two thousand exploded in the second half of this year.

I think it's substantially outperformed the S and P five. So maybe the concept of factor investing and value investing is going to be around it in the future. What are your thoughts. Well, we're an interesting position right now because if you look at academic studies, a good time to buy is when both value and momentum degree So to your point, we started getting really unexpected news on the vaccine, like effectiveness and updates some production capacity we're

not priced in. I was looking at probabilities produced by the group called the super Forecasters, and the forecast was chance that we get million doses before March. So coin toss Feiser came out with their news and to illustrate how that was not priced in, that probability immediately jumped to eighty eight and now it's at So that has helped those small cap value sectors performed well. They're still cheap on a relative basis to other parts of the

stock market. So you have agreement between positive momentum and attractive valuation, which historically across markets is a good time to buy into the asset class. Now add to that

the macro factor. You can check the macro box too, because we're in a recovery from a fairly drastic shock, but you can think that there is a fair amount of pent up demand in the economy and that you over year comfortables will be showing substantial growth and small gaps and value tend to be the asset classes of choice during an economic recovery, so check that box too, and then you can, to a certain extent check the

sentiment and technicals box as well. So the starts are starting to align at the sixth to eight horizon for the recovery trade. However, it's really going to be a bumpy ride. And as we're recording this webcast Barrier, we're getting some worrisome news about how devastating this new way of the virus is while we're waiting for the vaccine to be deployed, including mutations, travel restrictions, and so on. So it's the fact that the destination is pretty clear,

but the path to get there is treacherous. So you bring up so many interesting points I have to ask you about. One is the combination of momentum and value, combining the two. My friend Wes Gray at Alpha Architects has written about combining momentum and value. The returns are spectacular, but the volatility he describes as just so horrific. Even God couldn't manage that portfolio. Um. Eventually, clients would just screen bloody murder because the drawdowns are so brutal. How

do you deal with things like that? Obviously that's an extreme but how do you deal with the drawdowns and the volatility. I know it's the price of admission for performance, but clients have a really hard time living through those periods where you know you're underperforming, and sometimes if you've been a global value investor, significantly underperforming. Yeah, let me give you a kind of pity answer, but I think it's important, and then a more philosophical answer. The kind

of immediate answer is, look, implementation matters as well. If you make a statement like when value and momentum agree it's a good time to buy, and you design a strategy to take advantage of that, the strategy that you actually design and the way you implement that broad concept can lead to vastly different exposure to loss and vastly different performance over time. So it's a broad statement where implementation and risk management practices matter quite a bit. So

that's very few of my pity answer. But philosophically, if I need someone in an elevator and you give me thirty seconds to give investment advice between floors two and four, I'm going to say stay invested for the long run and stay diversified. So those are probably the two most generic pieces of investment advice, but I think they're important

where it gets complicated. Uh is Again in terms of implementation, diversification means different things depending on what you have on the menu, what you diversify across, and depending on which market environment you look at. The big theme in my book is that diversification, you know, between risk assets, it actually works really well when markets are rallying, which is if you think about it when you don't want it, and it really doesn't work when markets are crashing, as

we've seen this year in q Won during COVID. So while this is generic, I think important advice again the implementation of how you divers find the title of my book is beyond diversification. What you do beyond that matters

quite a lot. But if you look over time, staying invested is probably the most important of the two pieces of advice, because over time, if you can weather exposure to loss, especially in the low rate environment where you're not going to get anything out of bonds anyways, if your time horizon is long enough, it will pay off.

So there's investor psychology in there. And I'm guessing a lot of financial advisors are listening to your podcasts and they're probably throwing their phones on the wall at me, right now, because if you're a financial advisor, investors psychologies what you have to deal with with your clients and day today, and your role is essentially to tell them not to sell in March and if anything, to add back to risk assets. I'm not making light of investor psychology.

It is quite important factor, especially for financial advisors that deal with clients you know, day today. So we've talked about hamburgers and beer. We've talked about stocks and bonds. We haven't talked about private assets like venture capital or private equity, or structured notes or any of the other non publicly traded items that are out there. What are your views, given lowered expected returns for stocks and lowered expected returns for bonds, what are your views on these

various private, not publicly traded assets. Within asset allocation and the world of diversification, private assets can have a role in many of folios, but there are not a free lunch, and many investors think of private assets as a free lunch, private equity in particular. This is fascinating. But if you ask me, uh, in the context of what I mentioned earlier that I wrote my book in part to bring academic finance into the industry into the practice of asset allocation.

If you ask me where academic research and investment practice disagree the most, the biggest chasm in our industry between the two, I'll tell you it's on the performance of private assets over time. And you see a lot of numbers that suggest that private equity outperforms public equity. Buy a lot both an absolute and in a risk adjusted basis.

And then if you dig into academic research where people will actually scrub the data and they remove zombie valuations from the database and the account properly for survivorship bias and reporting bias, and the account properly for the timing of cash flows coming in and out, you start uncovering a completely different story. There's an academics done a lot

of research on that. I quote him in my book is then as Ludovic Value Book, and he shows in some of his papers that actually private equity over long periods of time can actually underperform public equities. Now, there's a wide range uh within private equity and it depends who you invest with. But it's it's a fascinating it's a it's a gigantic chasm between industry and academic research. The takeaway talk about this in my book it is that it's not it's just not a free launch. You

need to account for the risk properly. You can earn a liquidity premium, but it is like shorting an option to a certain extent, if you will and if you have the right approach to it. Uh, there's there's nothing wrong with private assets and private equity. They're just not the free lunch investors are making an amount to be and I think your investors have just have to be careful when they think about those types of investments because

they're not as transparent as public markets. Right, clearly not as transparent. You bring up two really interesting points about private equity. One is the liquidity premium. You're looking for a bigger payout in exchange for locking up your capital for a longer period of time. But there's also the selection process. Go back just a couple of decades, there were a few hundred private equity firms. Now I think the last number is something like eleven thousand private equity funds.

How is an individual investor or even an institution supposed to make at decision about where to allocate capital to? Which private equity firm yeah, you know, you have to be really careful in their advisors that specialize in that to taking the investors side, or consultants for example that can help institutional investors. Individual investors have to be extra

careful and work with their financial advisors. I think you really have to not just jump in based on the Google search, if you will, because really an asset class, this is an asset class where the top quartile can be very different from the bottom quartile, probably even more than in public markets. I do think that the factors for success in those markets resemble the factors for success

and active management in public markets. Depth of resources, replicability of a proven process, us a philosophy that is consistent over time, experience, and so on. So you want to look for those factors as well. Huh, quite interesting. I have a couple of more questions on asset allocation and

investing in general. I kind of ran past the fact that you sit on a committee for the Institute for Quantitative Research, and I just wanted to get your thoughts on the rise of quantitative investing, which has become so popular along with factor based investing and generally the use of high powered computers and algorithms, tell us a little bit about your views on quant I like active versus passive, there's a place for both quantitative and fundamental, and in

the case of quant versus fundamental, the intersection of both

is what fascinates me. And if you set aside applications in high frequency trading, for example, where really the technology is the advantage and the researches the advantage, and you go to what we do, which is tactical assallocation, strategic asset allocation, or even for stock pickers in general, you know, you fundamentals matter, and experience matters, and if you're able to bring together quantitative insights with data and judgment and experience,

I think you can get a more robust investment process in a lot of cases. Look, I just want to be clear. There's a place for systematic quantitative strategies to stand alone. There's a place for fundamental stock picking, for example, but there's a in between as a tremendous amount that

our industry can do bringing both together. And I dedicate a lot of my book about this, and Barry there's a story at the beginning of the book about a quantitative research conference that I was sitting at several years ago when a fundamental investor basically raised their hand and asked a pretty rude question amongst quantitative peers or investors, and he basically said, you know, your models for forecasting returns are not valid because they're basically garbage in, and

if you use a portfolio optimization model, it's going to be garbage out. So why use quantitative methods at all? And I'll always remember the presenter was a well regarded thought leader, someone who's traveled academia and practice. I always remember what he answered. His answer. It stayed with me and I've used it over time. He looked at the presenter and he was clearly he just landed his clearly

jet lacks a little bit patient. He looked at the presenter and he said, if you don't, and this was more reply to the garbage in, garbage out or so called guy Goo critique. So if you don't think you can forecast expected returns, you shouldn't be an investment business.

And the point is that investing is about forecasting. When we invest, no matter what, we make a judgment about the future, in the way we allocate our portfolio, in the way we position our portfolio, so there are quite a few chapters in my book that are about how do you use a quantitative process. We were just talking about value and momentum and when both agree, how do you use data and insights like that but make them

relevant for the current more kind environment. And in that intersection you can create a replicable process where there's room

for judgment, and uh, you can succeed as an investor. So, Barry, I'm pontificating a lot, but this is a question that I've thought about while writing my book and throughout my career because in a sense, like I've straddled bottom up and top down investing, I've also straddled quantitative and fundamental investing, especially over the last five to ten years of my career.

Very interesting, there was something in one of your writings I don't remember which that I made a note I have to ask you about because it's so counterintuitive, and it's the longer the stream of historical investment data, the better true or false. I'm going to say falls just to be a bit controversial that the real answer would be just not always of academics like to go back to the early nineteen hundreds right to create robust data sets.

But if you think about it, the data back then, I don't know, you know, we didn't have computers, we didn't have cars. People use like a horse and buggy to get around. So many financial advisors, for example, will think about investment policy statements or strategic asset allocations for their clients based on long term data on return and risk,

and they'll average across different risk regimes um well. First of all, in the book, I show that higher frequency, shorter term data are more predictive of risk going forward than the longer term data, just from a risk forecasting perspective. The other issue is that the fluctuation in sector weights within asset classes make it such that if I use in my model old data from the SMP five data from a long time ago, I'm looking at a different

sector composition. For example, right technology sector in the SMP five has been really really on stable from five of the index. It actually reached in during dot Com, then it declined back to fifteen in two thousand five and now stands at So you're really not looking at the same asset class. If you use this to do a strategic asset allocation, you're basically modeling risk. The risk of an asset class that no longer exists, and there are

other examples of that. Even in bonds, the duration of the index has changed, Right, The weight of high quality bonds has decreased from two as a share of corporates, and the weight that riskier bonds has changed, the duration of the Bloomberg Barkley's as has increased, Right, it was four and a half years back in two thousand five, now it's six seven years. Didn't the SMP break out

communications from technology? Also, if I'm remembering correctly, within that sector, they kind of cleaved it into Yes, the sector weights change over time, and even the classification and which stocks are included in the index. Emerging markets are another really good example. Emerging market used to be very much commodity dependent cyclical factors and financials. Emerging markets now have become

a lot more high tech than they used to. You have some large tech platform companies like you have in the US in China for example. So I guess the point trying to make is that historical data is useful, but it's not always the case that the longer your

data set, the better for your financial risk modeling. And one way to get around this is to you is factor models, And here I'm talking about looking at how the asset classes are composed, what the asset classes look right now based on the current factor exposures, and then backfill the historical data for those factors. So I guess what I'm saying is there are different ways of addressing this issue. But you know, is more data always better

than than more recent or more relevant data? The answers know. And part of this also comes down to risk regimes. Right you you can forecast the type of regime you think you're going to be in and then sample data from a similar regime in history. For example, I know we only have you for a limited amount of time. I only have you for another ten minutes. So let's jump to our favorite questions that we ask all of our guests, called our speed round, and we'll start with streaming.

Tell us what you're watching on either Netflix or Amazon Prime, or what podcast you might be listening to. What's keeping you entertained during lockdown? I love that question. I mean, my answer is not going to be very original right now, but I just finished Queen's Gambit, which I thought was excellent. And the other one is my son. He's thirteen, and um, he'd never watch the Lost series and I've never I've never watched it either, So we've just started from the beginning.

We're in season two of the Lost series, which is a an older show, but we're really enjoying enjoying it, so Buried. No, no spoilers, please, I haven't seen any of it, so, uh, you don't have to worry about spoilers from me. You mentioned one of your mentors earlier in your career. Tell us who helped to shape your career, who gave you guidance as to both, um, how your jobs progressed and your own investment philosophy. Let me named two mentors. First, my father. I talked about him in

my book. He was a finance professor for forty years. I even took a couple of his classes. Second mentor was Mark Kritzman. He is CEO of Wyndham Capital. He also teaches finance at the m I T. And there's a story I like to tell about the early days of my collaboration with Mark Kritzman. Back before the year two thousand, I didn't speak much English. I grew up Canadian,

and I interviewed with Mark for research internship. I don't think it was a good interview, except that I'd read every single paper he had published up to that point and fought and still think he's a genius. But he was reluctant. You know, he had access to the best students from the best universities in the US, but he was pressured into uh this interview by my professor. And he also had a business relationship with Mark and with

State Street. And I'll just say that I learned years later, over a glass of wine that Mark had pushed back really hard from taking me on as a research intern. Apparently he had said, and I quote, I don't care if he's free, because we didn't. I was. I was writing my thesis for my master's degree, so I wasn't There was no uh pain salary involved. Apparently it said, I don't care if he's free. My time is not free.

H This was This was over a glass of wine a few years later at the time, though back then all I got was a call from State Street UH in Montreal saying, Hey, Mark kn't wait to wait to work with you. He's very excited that you're going to come to Boston. Ultimately, I did this research project for him as an intern, and he ended up mentoring me for over ten years and we've co authored a lot of papers together. I like to say, basically everything I

know about quant finance and assocation I've learned from Mark. Huh. Quite quite interesting. Let's talk about books. Tell us some of your favorites and what are you reading right now? Okay, So I love to read. That's it's very hard to answer when you read, you know, fifty plus books a year. I generally read about business, philosophy, some history, psychology, sports. I just I read nonfiction. I love memoirs and biography. Uh. And I was told I knew you might ask that question,

so I I prepared a few books by category. I know I'm cheating, but business, I would say. A recent book i've read is The Right of a Lifetime by Bob iger uh X, CEO of Disney. Excellent, very well written, lots of business wisdom, sports sports memoirs. This is an older one open by Andre Agassi, and even if you're going into tennis, it's just a fantastic book to read. Another one, maybe less well known, is by an ultra runner, and even if you're not into ultra running, is worth reading.

The book is titled North by Scott Jerich and it's about how he broke the record for running through the entire appellash Appellachian trail on the East Coast. Another one that's good is Can't Hurt Me by David Goggin's If you want motivation help, there's a book called Why We Sleep that I recommend for everybody to realize how important sleep is. Productivity. Deep Work by Cal Newport's is one of the best books on time management I've ever read.

Un philosophy or dealing with change an uncertainty. I would say anything on stoicism is interesting. Books by Ryan Holiday, like The Obstacle is the Way, Stillness is the Key. Those are excellent books. Entertainment, entertaining, business Story is Bad, the book about There No Nos Bad Blood was fantastic, and just finished Billion Dollar Loser about We Work, which is also a fascinating story. So Barry, you asked for one, I gave nine or ten apologies for that. No, not

at all. Everybody loves loves those answers. Um, it's it's I think that's people's favorite question. Let's talk about recent college graduates who are interested in a career in asset allocation or wealth management. What sort of advice would you give them? But this is mostly advice I've gotten from Mark Chritsman mentioned him earlier. First, always look to build your human capital, and by that I mean your network

of industry contacts. You could be your publications and journals, your retritation and the conference circuit could be your education credentials for example, the cf A charter. Anything that differentiates you from your peers and that ultimately no one can take away from. It's your own human capital. Second, I

would tell people starting their careers stay close to revenues. Uh. In a lot of jobs it means staying in front of clients, but it might also an investment management mean to stay close to investment decision making, but stay close to revenues because your role in the value chain will be more motivating and more obvious. The other one I

would say is sometimes this underestimated emphasized communication. When you move from being a student to working in the real world, you move from from an environment where it's it's basically a meritocracy. Right. You study hard, you get good grades, but but in corporate life, collaboration, teamwork are really really essential. So maybe as a student your success is from your

own intellectual merit and how hard you study. On the job, you'll realize that even for the most technical of roles, maybe about just as half of your success, maybe more is determined by how well you communicate. Because in corporate life, collaboration and teamwork are so essential to success, especially in side large organizations. So don't neglect communication. Uh. Lastly, I would say, just your just your perspective. Talked about the

secret to happiness in life earlier. Lower your expectations. I think managing your expectations is important, not getting worried about short term setbacks. Just look at the long term trend and make decisions based on the long term trend in your career, not short term setbacks. And last one, I will say, take care of yourself. You know, all the advice you can give people starting your careers, I think that's the that's the most important one. Diet, exercise, sleep,

All these things reinforce each other. It's like a virtuous circle. You can't you can't take one away, right, Well, you'll have more energy to exercise, exercise, you'll sleep better, sleep better, you'll have more self discipline. With your diet. The next day you get the idea. It's a virtuous circle. And if you get these three right or you know, close enough. No one's perfect. Uh And you know, but diet, exercise, sleep, reinforce each other. Take care of yourself. Don't wait for motivation.

Just just build habits. It's much easier to do things well when you when it's a habit, as opposed to waiting for motivation, which is very fickle. There's another book, very I'm gonna cheat. I'm going to add another book, The Power of Habits Charles do H. I think it's worth reading. Very interesting. And our final question, what do you know about the world of investing today that you wish you knew twenty or so years ago when you were first getting started. I would mention some of the

takeaways from my book. Quantitative methods work best when used with a healthy dose of qualitative judgment. That's something I've learned over time. I wish I'd realized earlier. Risk is easier to forecast than returns, and this has tremendous investment implications. When in doubt, it pays to stay invested for the long run. You will think of my elevator pitch, stay invested,

stay diversified. Diversification works very well when you don't need it, and not so well when you actually need it during crashes, and if you're an investor, you really need to take that into account. And lastly, in markets, you really need to expect the unexpected. Things change very quickly in markets, and we've us been through such an environment quite quite fascinating. Thank you Sebastian for being so generous with your time.

We have been speaking with Sebastian Page. He is the head of multi asset investing at tro Price, where his group runs about three hundred and sixty billion dollars. If you enjoy this conversation, well check out any of our previous I don't know, I'll call it four hundred interviews we've done over the past seven years or so. You can find that at iTunes, Spotify, wherever you feed your podcast fix. We love your comments, feedback and suggestions. Write to us at m IB podcast at Bloomberg dot net.

You can give us a review on Apple iTunes. Sign up for the daily reads I write every day at d Halts dot com. Check out my weekly column on Bloomberg dot com Slash Opinion follow me on Twitter at rid Halts. I would be remiss if I did not thank the crack team of professionals who helped me put together this conversation each week. Maroufal is my audio engineer. Tracy Walsh is our project manager. Michael Boyle is my producer. Michael Batnick is my head of research. I'm Barry Ridults.

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