and then investors learn by mistakes, right? I know that's, that's how I learned. And, you know, if you're earlier in your career and you, if you performance chase now, it can work out for a while, probably not a great long term strategy. And you'd sort of, you know, I think one of the things you learn as investment managers, you're, just, like, wrong all the time. You learn to diversify, and people generally need to learn, just experience that for themselves.
So you can provide as much context and help as you can. And then, you know, things happen and, hopefully, they'll still be compounding and stay in the game and stay invested.
Hello and welcome to another episode of Resolve Riffs. I'm one of the hosts, Adam Butler. I'm the Chief Investment Officer of Resolve Asset Management. This week we interview Ben Reeves, who's the Chief Investment Officer at Wealthsimple, Canada's largest robo advisor. And Ben started his career at Bridgewater. It really shows in how he has structured Wealthsimple's investment offering. They've really prioritized diversification in a way that you don't find at many other robo advisors.
And you rarely find with traditional investment advisors. And as part of their rollout of their sort of diversification category, they started with private investments, private credit, private equity, and they've taken a really thoughtful approach to how they both select managers and structure the offering for a robo advisor, primarily retail oriented platform. We also get into what their vision is for rolling out more diversified strategies over the next six to 12 months.
branching out into the more sort of hedge fund style, strategies, maybe market neutral, managed futures in a return stacking context, perhaps. So lots of great grist for the mill here. We really enjoyed the conversation and I think you will too.
right, Ben, welcome to the resolve riffs podcast. it's been a long time coming.
Yeah, that's what we've been talking a long time. Happy to be able to do this finally. This is great.
Yeah. Yeah. I'm really looking forward to this one. So, you know, everybody's heard anything that they need to know in the intro of this podcast. So, you know, why don't you, why don't we kind of let you have a bit of a shot at your background, just kind of like your, your, your career journey so that we can let the audience know who they're talking to.
Sure. Yeah. So it's, it's been like, I guess everybody, it's been a journey. so I think, I started, it made me start going back to college. I thought I was going to go, I was always interested in markets, thought I was going to go major in econ. I took a couple of classes and I thought they were just not captivating or not interesting. And I ended up studying history of ideas and said, so I did a bit of philosophy of religion, in college.
Like what's the, what was a good, what were the ideas that everybody thought made sense most profound in life? And how did that change over time? and, and, you know, very, very impractical major, but something I was just sort of deeply fascinated with at the time and sort of spent a few years studying that. But obviously like almost unemployable out of that, right? Like you can kind of think, you can think it's actually about that. That's sort of all you leave college with.
and so I went to a, I went to a startup where we were, this was early 2000. So we are doing helping companies figure out, you know, what do you do with the internet to, you know, how do you change your business for the internet? we did okay for a couple of years. and then. The dot com crash hit and we were sort of sold for parts to IBM. And that was, that was like my foundational, corporate experiences. Things are going great. And then, you know, you see the, see the crash in the two thousands.
after that, I went to grad school at UChicago, studied public policy and business. Sort of wanted to go back to the things I was interested in in high school. So, you know, learn the econ again, you know, do it, do some quant training and so on. I spent a few years at McKinsey, and then shifted to Bridgewater Associates, which is a big hedge fund in Connecticut in a, I started out doing an investing role.
it took the class for, You know, it's a little old, but took the class for like a new analyst, reported to a 23 year old for a while, and did asset allocation research for institutional investors. and then shifted over to working in the portfolio construction group where we were applying risk controls to the systematic strategies on a, on a daily basis. which, you know, Bridgewater was, was great. It was, I think I learned a ton there both about investing.
And also like, how do you run an investing organization in a really, in a really precise way, a high quality way? How do you think about client service? You know, a lot of really, sort of really great mentors there. And they have really figured out a lot. But towards the end of my tenure, I, I, my kidneys fail. It was a sort of a health crisis and, I ended up needing to take a couple of years off. I couldn't do Bridgewater anymore. It's a pretty intense place.
Like, you know, Couldn't pull 12 hour days anymore. but one of my friends had, had, was an early employee at Wealthsimple, which is a, you know, at the time, a pretty small startup, based in Canada and, and a robo advisor. And he said, you know, I know you only have a couple hours a day, but can you come in and help us figure out investing? And it seemed really fun.
We had always talked about that at Bridgewater, you know, how do you, wouldn't it be cool if we had a robo advisor and, you know, and, and we could really, you know, do it. Give people high quality investment management at scale. then as a, as my strength return, I was able to grow my role at WealthSimple over time, and I've been WealthSimple about five or six years now. and basically do everything, investing it for WealthSimple. So a lot of communication, we set up our own funds.
we, you know, asset allocation. And then, it's also really fun to work with really great technologists and designers, to, to create product experiences that, you know, Try to reflect sort of the essence of investing or the, the essence of long-term investing and compounding to, to our clients.
It sounds like you and I would be, would be of an age because, I remember going through that whole dot com with a startup and, You know, guys coming to the office with bags of gold for you to build on the most basic website. And, my wife was in the internet group at Boston consulting group at the same time. And so we were just absolutely. Flat out for a couple of years. And then I actually transitioned to IBM. Did you ever work at IBM then when they, when they sold off or,
I did. I worked for the right there for a little bit. The big corporate life was not, was not for me, but, but I, I worked there for a little bit,
yeah, yeah, that was a, that was definitely an experience, but that whole experience into that. com peak was pretty, pretty wild. A lot, a lot of lessons learned on the other side of that too. But,
you know,
so
everything was totally brand new and it was, you know, the world was, the world was wide open and a lot of things we're talking about ended up being the right things. It was just the valuations made it a pretty difficult cycle for all of us to go through.
Yeah. And I remember during the year I was at the startup, we went from about 80 people to 180 people. And when I finally left, they were down to 12.
Yeah, we were, I think we were about half our size when we were, when we were acquired is, is it's, and it's brutal to see that happen to people.
Yeah, that was, it was bonkers. Um, hard segue here, but I know that, or my, my sense is that at Wealthsimple, you guys have, you're trying to implement. Many of the sort of, diversification, free lunch principles that you would have learned, obviously had hammered into you at Bridgewater and then, espoused in other roles. And that my understanding is as a first step, you guys have tried to sort of move into the privates space.
And I'm just curious, what was your thinking as you, you know, as you sort of looked across the alternate alternatives landscape or just thinking how does it land on, we should try privates first, then. How did you move in that direction?
Yeah. So how we think about, How do we think about investing in general? We, we start with just from a point of service. We want to help our clients grow and compound wealth. And that is pretty clear hierarchy. Like the thing you need to do for most of our clients, 30s, 40s is save and put your money at risk in a reasonable way. and then we have a base portfolio that is. It's like very CAPM and conventional, but a little bit tilted towards risk parity principles.
We have a little goal, a little more geographic diversification, some more sharp ratio efficient equities, a bit more, bonds for asset class diversification. but that's also a difficult thing for people to understand, right? Like it's just a pattern of returns and it plays itself out over time. and then, so I look for other ways where I can offer better diversification or better returns into portfolios. And then, and so I think that then I, I have a choice.
I can do, quantitative strategies that I think do offer good diversification, maybe a little harder to understand, or I can offer private assets where, you, you still do get either alpha potentially, or a differentiated return stream, like we offer private credit. I think that's. That is diversifying. and that seemed like a way that you can, in a way that makes sense to people, offer a bit more diversification, a bit higher expected return.
Like private credit, I'm just making loans to mid sized companies. That makes all the sense in the world. and it seemed like a pretty good place to start in, in getting people comfortable with privates alternatives and portfolios that might be a bit more resilient or bit more likely to compound.
On the portfolio design front for WealthSupport, I mean, we obviously have, a wealth book ourselves. We deal with, advisors who run primarily retail wealth books. So we're constantly dealing with this kind of Pareto frontier of how can I maximize portfolio efficiency? At some, you know, tracking error that people can accept.
Have you done any quantitative modeling or sort of general thinking on what kind of tracking your constraints, and the type of tracking error that people, are willing to tolerate? I'm sure you've sort of tried some stuff and gotten feedback from people. What have you learned in that journey?
it's tough because it's so outcome dependent, right? Like people love the track. They'd love the track here March, 2020 or, you know, end of 2018, but you know, don't love it and, you know. Now, right? Like where, where you have the North American stocks you're doing, are doing super well. I, my sense is it's highly, highly individual. so you have people who are benchmarking themselves to North American stocks to ask you questions about why you're deviating from North American stocks.
And I think you, you either need to have a good one on one relationship with them so you can talk them through the trade offs, or you need to offer them the thing that they're going to benchmark themselves to, because back to the hierarchy of the most important thing is safe, put your money at risk in a reasonable way. and then, you know, and then start improving the sharpe ratio and your, You know, that range of outcomes that you get over time.
but then we have a lot of clients who are just saying, I trust you, you know, help me put, put your money at risk. we ended up with about a 2 percent tracking our target. we know it's, which is a lot relative to a lot of, a lot of other portfolios. and I, I think that works for a lot of clients, but then it's, it's just highly, highly, variable and, and individual.
What's the 2 percent tracking error too?
So
what do you guys hold up as a, as a quality emotional benchmark for most clients,
we made a reference portfolio that is. sort of try to track towards the median of like the average mutual fund in Canada. And then we checked it against, sort of like a, a typical robo portfolio or asset allocation ETF. And it's some representation of, of that. It's just a way to represent expectations.
it's just a weird, it's well, not weird. It's, it's a bit more complicated if you're not in the U S because you've got to kind of, especially in Canada, you know, Canada's Canadians, they'll reference Toronto stocks or Canadian stocks. If Canadian stocks are doing really well, and then they'll reference U. S. equities. If U. S. equities are doing really well, so it's their,
Always a moving target.
tends to change over time. Do you not find?
I, yeah, I, I do find it. It's, it's, it's that set of clients who are really watching the portfolio on a, you know, even, you know, three, five year basis, right? Like that's, You don't learn much over that kind of a time period. but you do find some clients doing that. I think Most of our clients, and the issue I usually face with most of our clients is more, risky assets are a good bet to outperform cash. Like that was the big deal two years ago. Right?
And I spent, you know, most of a year, year and a half just talking to people about, I know cash is yielding four or 5%. Their equities are a good bet to outperform, stick with it when things seem bad. Like that, that kind of basic advice. And then, and what we see is, not, we, we don't see so much performance chasing, but we see people just not investing their savings when things feel scary and then waiting for things to feel better.
and, I think that, that'd just like put your money at risk in a reasonable way and try to compound, if I look at our, our, our, We have, you know, we have brokerage clients and we have managed clients. If I look at the outcomes between the two, just the fact that our managed clients are putting their money at risk and compounding, like gives very, very different wealth outcomes for them.
I know our brokerage clients, some of them are training actively for fun, like maybe different, you know, different objectives. but even if you look at say our flows relative to ETF flows, people are getting in and out. the real advantage is just put your money at risk over time.
And I imagine because of all that, Ben, that you're seeing better returns in the managed portion rather than the, DIY portion of WealthSimple.
Yeah, it's, it's night and day. I get it. I do a little regression of the DIY returns and, it's, it's a lot of TSX. It's a lot of, it's not a factor model. It's just like, I just do a simple regression of like TSX, SPY and NASDAQ actually explains most of the returns, not even the factors. they explain a lot of returns and you get a huge negative alpha. a little bit more in risk.
But it's basically, it's basically like sort of attempts at market timing or struggles with ideal generation so you take too much idiosyncratic risk.
Now, as you said, a lot of this can be, it's, it's always interesting when you have a platform like WealthSimple where you, you really have built the business on, on portfolio management. Right. But then you have this side gig of DIYers. I mean, is there a lot of crossover between the two where you see like 90 percent of assets in the managed and then 10 percent of assets in the casino?
Yeah, you see people wanting to do play money or I want to take play money. You scratch this itch or I believe in this company. and then you see, and then within our DIY, we see some people who are just investing in ETFs and trying to compound and then other people who are, sort of in between and, and, and trying to do both or, or trying to do market timing strategies and so on.
And then the, the, obviously because, because the active strategies have so much more evolve and your ETF compounders that sort of overwhelms the returns of everybody else.
Right. And so, so like, can I just shift back to the privacy? Cause I think a lot of this backing error, volatility, risk taking, you know, take, trying to take risks in order to do better than cash. One of the things that I think I've been fighting for many years on the private side is this feeling that. You know, the private, issuers are cheating, right? Like they are, they get to hide behind a volatility blanket, a dampening blanket that none of us get
Yeah. Yeah.
We don't get to, we don't get to play in the same way. and you know, I'm throwing my hair, my arms up and saying, you guys are taking more risks to leave or play, but in reality, There's obviously a behavioral advantage, right? It is what it is. There's no other way to really, or at least we haven't figured out a solid way to understand pricing on the private side on a day to day basis.
So do you find that, that behaviorally people, you guys haven't launched this yet, but is that part of your Your idea here on the private side that it's going to allow you to add diversification without having a lot of, people freaking out. Like, is that the main driver here?
so the, the, the driver, it's more, you start from like, let me offer a better portfolio. And then I think there, there are behavioral it, or there's kind of their behavioral trade offs, I think. so. But for example, for, but like, when we describe what private credit is, we will say like, we made an index of like, we do liquid index indices. We try to add in the missing ball and say that this is the role in the portfolio to try to get a sense of the underlying risk, private equity. Same thing.
We take small caps. We add, you know, we add in the, you know, it's like the excess volatility mystery, right? We add that back in and say, this is the, you know, this is the impact on your, on your portfolio. So
Okay. You guys are actually making, striving to provide some sort of, transparency into the process.
Yeah, we try to provide some transparency, but also like, the problem investors do have and why there's a behavioral advantage to privates is, is that there is too much volatility relative to The journey you're on or, you know, your probability of being successful. so, so I, you know, I, there probably are advantages to that. but I guess there, you have to think about it both ways, right? so there are, there is a lack of marketing, but there's also a lot of fear about giving up liquidity.
and you know, clients are saying it's, it's your 40 year retirement portfolio. I'm scared of putting 10 percent into something illiquid. and so. That's equally a behavioral issue as the, as the lack of marking. And so you try to sort of educate on both sides.
And that's an interesting topic. I think listeners are going to want to know how you handle all the issues in privates, especially as markets get more and more illiquid, more panicky.
You know, on the private side, I've seen a lot of investment advisors in the US and Canada really concentrate that 10 percent that you speak of, they'll concentrate in like one provider and, and kind of, you know, say that they're, you know, They have diversified, exposure to privates and we're seeing a lot of privates take really scary moves, at least to the one, us watching from, from outside, you know, where, where certain, Certain holdings, they're not able to pay their yield.
And so they're going out and borrowing in order to be able to then meet their covenants. how are you guys seeing that in the space right now? And how do you manage that level of risk, in, in the current cycle?
Yeah. So I think first thing is we set up our vehicles is like asset class exposure. So we have the Wealthsimple Private Equity Fund, and you know, we can then allocate, we only have one manager in there now, but the manager we chose is LGT. They're an endowment. We're getting, an endowment portfolio like that, and they are principal investors in it. So, and that, so we start out with 300, 400 companies, it should be able to give you asset class exposure.
we're not doing a, you know, here's your typical drawdown fund with 10 platforms and a lot of idiosyncratic risk. So we, we try to manage it both with alignment because the, I think privates really are the deep end. And a lot of investors and advisors aren't really set up to underwrite a private manager well, right? You need to do a lot of diligence, make sure they're honest, do your background checks, keep monitoring them.
so we, we try to make sure that we're highly diversified and that we do get good alignment so that, and the people managing the money also have their skin in the game. Their net worth is also, in the product. so I think those are probably the, the, ways that we deal with it, diversify, make sure your alignment and then make sure you're doing real professional due diligence. and then finally just do the real modeling. So you're sizing it appropriately, right?
Like, like I was talking about, add back the volatility, make sure you, you know, you have a framework for how your portfolio should, should, perform. and that's sort of the combination of things we do.
Yeah. Well, you're not putting an optimizer and getting a 40 percent allocation of privates because they're so low ball.
we're adding, yeah, it's where like levered small caps is, is, is private equity.
And so what percentage of the portfolio is in privates for kind of a, standard autopilot, well, simple mandate.
Right now it's all bespoke because privates are so new and we want people to make sure they're comfortable. they, they will go to us for advice and we, but we'll give a range and then try to show the, show the impact. and then that'll vary based on the asset class. So, I'm more comfortable putting more, If for your typical 6040 more private credit in there, if it's senior secured, it will, it can be diversifying to bonds and stocks.
then, you know, adding a bunch of private equity where you're at, or you're adding actual volatility to a client that's asking you to manage their, you know, manage their risk, for you. So it really depends on the risk level and then also your, your comfort with privates, and also the, any liquidity strains that you have.
Right. So, let's move on to other areas of diversification, or lack thereof. when I look at robo advisors, and I think you guys are at the bleeding edge of trying to be more to risk parity than others. I
Yeah.
when you look Vanguard and all those, you're still seeing a traditional 60 40. there's, When you're when you're doing market cap weighted and you're making that decision to allocate to those what you're really Allocating to is very concentrated positions in you know, the mag seven at this point, right and especially when you're doing the US How do you guys manage that if at all? Is there a way like have you guys figured out a way to kind of you know?
Either mitigate or maybe even add to them like what what do you guys do with with concentration there?
So I think. There are two ways you deal with it, like always as an investment manager, you do portfolio construction and you do communication and both are probably equally equally important. Communication is probably more important. portfolio construction, we try to, we allocate to some defensive equities. We do more geographic diversification. We do more asset class diversification.
It's a relatively straightforward thing if you're not trying to, if you're not trying to market time or do tactical, like that's, those are pretty straightforward. Pretty solid ways to diversify and improve your sharpe ratio. and then in terms of communication, we do a lot of education about, I've done a series this year on what does the equity market cycle look like? Like, what does it look like over eight years? What's, you know, what can you expect over that cycle?
and also what, like, what is this thing called an equity market supercycle? What does that mean? Where are we in it? and. A lot of the pitfall I see people falling into with that stuff is you're saying there is this thing of a super cycle, therefore you're doomed, right? Which is not the case, right? Late cycle, you can do really, really well for a long period of time but try to provide that level of transparency and historical context, but in a way that's very, very highly digestible.
hold on now. Let's maybe, can you say a little bit more about this super cycle concept? Because, I think we're Rod and I are both familiar with the concept. Is this sort of the Ray Dalio's long term credit cycle, or is this a spin off of that or something completely different?
it's, it's more just taking the observation of. You know, there have been huge secular bull markets, huge secular bear markets, and just educating on the fact that that has been a thing that's happened. So 68 to 82, 82 to 2000, right? 2000 where we call it 2012, 13, and then, and the current one, just so you know, that that's a thing. That's all I'm trying to do.
I'm not even saying that here's the, there's a little bit of interior logic, but here, here's how it works, but more just because a lot of our clients, right? You've always had a FedPay, you've been investing
Yeah, right.
know, just that is, I think, hugely helpful.
And so you're, it's, it's more of a simple message for the retail people that you're, that you're dealing with, but you are, do you see a lot of open clicks on those types of emails?
Yeah, they do. They, the, the, the secret sauce is, I work with a great writer who doesn't know much about investing. but he's willing to ask all the questions until he understands, which makes what we do so much better. What I, what I produce so much better than I would otherwise.
you're getting your hands dirty on, on the content as well?
I have a monthly letter series that I, that I write to clients that we try to like, we have, we have other writers doing more content, but we try to do one thing a month that we think is really high quality, that educates on a concept that we think is really important just with the idea of, of service.
Oh, good for you. Okay. And you're using, so you have a writer that doesn't have any experience and you just say, You give him an outline, he tries it out and then asks a bunch of questions.
Yeah. Yeah.
we have not found any success in getting outside writers and asking questions. We'll have to pick your brain on how to do that later.
Well, I just write it and then he just, it's more writer, editor, as opposed, we tried, we tried that way with the writing and then as you probably saw, I try to fill in ideas that don't. You know, it don't make sense, or they try to fill in their own things. but if you're just answering questions and making sure it's accurate, like that, like that's what we do.
Yeah. Cause I think communicating that tracking error that you speak of is very tough. We talked offline about how even CPP IB is getting a lot of flack for not performing as well as Mag7, right? So it's not just retail. That's. That's pulling their hair out. It's everybody.
Yeah, I know retirement, like why not all, why not all stocks for, you know, all the way through retirement? Like it, it, it feels like it's very much the narratives to support a price
not even all stocks, right? Like I think I should write a letter just saying, okay, you want me to invest in equities. You want all stocks to wait. You actually want the mag seven, but if we want to outperform, we should actually overweight. You know, the mag seven and then see what they reply. It's just, it's such a difficult thing to do when you have this level of momentum with the largest companies in the U S making all the returns. there really is.
I don't see a way an active manager can reliably outperform without overweighting those things. Do you?
Not right now. No, it's, I think the way you can outperform, like what you're doing, portable alpha, you can probably outperform. I think You have a good odd of outperforming, but if you're trying to pick the right stocks, you know, no, it's a, it's a, especially if you're doing, if you're doing a limited tracking error on a, trying to outperform over a few years, like it's extremely difficult.
I think one of the most difficult periods for prudent investment management that we've seen in a while. I mean, to be fair, really since kind of 2016, 2017, Most of the time it's been a little bit like that where you've got this really heavy concentration in U. S. indices where U. S. indices now on a cap weighted basis are kind of in the 60 percent of total market cap range, right?
After 15 or 20 years, well, 15 years of pretty profound outperformance of both U. S. equities and U. S. dollar relative to most of the other major currencies.
And then at the, at the, the tip of the U. S. equity sphere, you've got these, you know, whether it's 7 or 10 or 15 stocks that represent just a massive proportion of both total capital and total index vol, you know, it's, it's just really difficult that the, the trade off between, you know, Diversification, prudence, and tracking error to this concentrated benchmark that is just outperforming everything by a large margin, that's a really difficult tightrope to walk.
Yeah, I think it, I think it is. And then the, the companies are, that are concentrated, they're doing really well. They're great companies. The earnings have been really solid
Yeah.
that maybe you're a few questions right now about the AI CapEx story. Does it continue? but it's, they're not obviously at like 40 times earnings or, you know, it's not, it's not that terrible, at this point. and that's where I think you have to go back to, or we, we go back to our framework of. Let's put your money at risk. we'll counsel you about performance chasing.
but the most important thing is let's get you in a portfolio that you're, that you're comfortable, comfortable with, and then investors learn by mistakes, right? I know that's, that's how I learned. And, and, you know, if you're earlier in your career and you, if you performance chase now, it can work out for a while, Probably not a great long term strategy. And you'd sort of, you know, I think one of the things you learn as investment managers, you're, you're just like wrong all the time.
You learn to diversify, and people generally need to learn, just experience that for themselves. So you can provide as much context and help as you can. And then. You know, things happen and, you know, hopefully, they'll still be compounding and stay in the game and, and stay invested.
O,
so Ben, just, I want to talk a little bit more about portfolio construction, but in the context of how you're using privates, and when you look, when you think about privates, how do you decompose that? Do you, do you assume a level of leverage is embedded in those, in those privates already? And what, what multiple do you ascribe it?
so we know our funds, so we know how they're, how they're structured. for, for our private credit fund, we like, there, there is leverage in there. We can model it and we just, we just model that volatility.
and then we use sort of Both just try to add that ball into a back test to see what happened, but also use an all weather framework for private credit, where it's going to be growthy, you've got a little bit of downside protection, It's a little bit more ambiguous for inflation than what I like is the discount rate hedge, which we really don't get in most portfolios, right? Underwrite it with the leverage. You have a similar return to equity.
you get that profile, you know, it can be helpful for a portfolio. and then for, for private equity, it's more, we, we found, we, we looked at the underlying, earnings volatility. Like made that it's basically small value is what you get for the underlying earnings volatility added that vol back. and that gives us a reasonable proxy for saying, yeah, it's not really diversifying, right? that's a reasonable proxy for the risk addition in the portfolio.
And then it, it still has the environmental flaws. It's very growthy, not great inflation exposure, and then, you know, not great discount rate exposure, which we're seeing, like, it just plays out much more slowly in privates, right? Like with, with, a hangover, all the assets they can't sell now, that is a lot of the discount rate exposure sort of, you know, they're trying to wait it out, I guess.
right. In our other podcast, the Get Stacked Investment Podcast, we talk about all things capital efficiency and return stacking.
Corey had a theory where, this is Corey Hoffstein, where he said, you know, a lot of allocators that allocate to private equity, they're actually, Moving forward, moving toward better portfolio construction and using capital efficiency in a sneaky way where they're allocating to the private equity sleeves so that they can get in a little bit of more leverage so that they can bump up their bonds and other alternatives without sacrificing the return to equity, which I thought was really
insightful. And, you know, maybe it's not true across the board, but, it certainly seems, that some people are going to take advantage of that. And, that's why I was asking whether you guys thought about it that way.
I guess that I never thought about it that way, but that that does make sense. We are taking down the, you're taking it out of equity or that changes the overall volatility, overall volatility and the contribution you're getting from equity. and that gives, that does give more room. and it's also a way you can. Add leverage in a way that, is a little bit easier or more palatable from a tracking our perspective,
Yeah, yeah,
because you can make an argument there. You probably see in the papers, like if you leveraged your basic portfolio, 20 percent of your retirement outcomes get better. It's just that it's a
Well, it's
on another way to get there.
Cliff Ass paper, I don't know how long ago, 15 years ago, maybe 10 15 years ago, where he says why not lever up to 60 40 and then compares it against the S& P. It shows clear, well, up until 2022. You know, it's a, it's a better portfolio because you're able to create proper levels of more diversity while maintaining the same level of risk and actually increasing your return. So it's just from that perspective, you know, we talk about risk parity all the time.
A lot of people just start with, Hey, it's a more diversified portfolio, right? We started the conversation saying that you add a little bit of gold, add a little bit of. And that's kind of risk paired tilting towards risk parity. But the next step for risk parity is removing those leverage constraints, right?
And assuming you, you find an optimal weights, optimal portfolio, then the next best thing you could do, because oftentimes what happens, you get a better Sharpe ratio, but your absolute return may go way down. And so increasing that exposure and unlocking that diversification, seems like something that makes infinite sense. how are you, how are you dealing with that reality? I, I've spoken to, to Nima, in your firm. I've spoken to you.
I know you don't think about it, but how do you deal with that within the constraints of retail, within the regulatory constraints of a robo? I'd be curious to know where your, where your mind's at there.
So in portfolio construction, we use long bonds. We use gold. Those are just risky things. Long bonds are not a super sharp ratio efficient way to get exposure. But if all your risk is in stocks, it helps, right? As you know.
And then I think what we want to do with the portfolio is, is now that we do have the ability to allocate to alternatives, that, that is a way that we can start looking at adding leverage, for clients who understand it and you understand you're going to get different pattern of returns. and then, you know, that opens up a lot of different strategies. for most of our clients, we can't talk to or go through additional suitability, we're constrained from adding leverage.
Which I think makes sense if you're a regulator and you're thinking about that people are now allocated to three times levered NASDAQ, right? You know, which is what you
Yeah, that's where their minds at.
They just like don't quite get the leverage can be a diversifying tool or a risk reducing tool. or, you know, we, you know, all the arguments, right? Like same, same risk of stocks, higher expected return. I think then they're generally open to those kinds of discussions. It's just a process to get them through to, so they sort of understand the impact on client portfolios. They're coming from a good place. It's just, you know, very traditional way of thinking about investment management. Yeah.
Well, I mean the traditional way and thinking about investment management chapter one of every finance book is the efficient frontier in the capital market line. So it just blows my mind that regulators have a tough time going back to tradition. I think we want them to go back to tradition. difference being that we now have technologies that allow us to provide that leverage to retail in a relatively simple way.
I mean, look, the, the rule changes both in the US and in Canada recently should open up a lot of opportunities for this. so, you know, hopefully we can get closer and closer to that optimal portfolio.
think in leverage management, like allocating alternatives is much easier than allocating alternatives, but also sort of the deep end for, you know, if you're an individual investor trying to roll futures, you might run into problems or size, you know, size of positions appropriately. so yeah, so products like yours are a great way you can get that in a, in a controlled way.
So we were having, Adam, Corey, myself and a bunch of other people on Twitter. We're actually having an interesting discussion about what, what, what optimal allocations, What the optimal location should be for a portfolio. And what I came out of the people that think in very simple, similar ways, coming out with very different belief systems about weighting asset allocation.
And by the way, this is me, this is, and, and when it comes to, you got your, you got what you're, you're kind of pushing the envelope here on the robo.
Yeah.
As you mentioned, this is highly personalized. So everybody, you know, you're trying to get the best for the most for your portfolio. If you had your rudders and you can do whatever you wanted to do and assume that it's going to be a widely successful and people are going to adopt the allocation. Are you closer to where you are right now at Weathsimple, or are you closer to risk paired? Like how do you, how do you think is an optimal portfolio for your family?
So, my family is close, much closer to risk parity. I think where I would, might differ from, from a standard risk parity is I think that, your sharpe ratio for growth, the assets might be higher than your sharpe ratio for defensive assets. and if you have a long enough time horizon, you might think about that. cause you know, with risk parity, there is that there's a, you know, your first move is the most efficient, most important one that your next one's most, and then there's this like big.
range of, of allocations in the middle where you're, you're pretty efficient. You're, you know, about a 0. 6 or so sharp ratio. and I would probably tilt more towards growth, the assets, then, then sort of your, your textbook risk parity. Where did you end up?
Well, well, I'm still, I think this is an evolving thing because I, I was very, you know, strong convictions loosely held. I had some strong convictions in, in that exchange. but I'm, I'm rethinking a lot of it, you know, cause you gotta, it's about, then it becomes about beliefs, right? Risk parity believes that the Sharpe ratio for all assets are That, that equities, bonds and commodities, broadly speaking, and tips are all going to return the same.
So you put them together, smooth out the returns. You're going to get the same outcome. And then it's about, well, what do I have more confidence in? Do I have more confidence in the equity risk premium term premium, the, the, commodity role, you know, is gold going to be there in a real way? And I think at this point, what I've come to understand is there's a lot about beliefs, You know, you could add Bitcoin there. Talk about belief systems that are almost religious.
You know, those who love gold will say absolutely gold is crushed it. And, you know, but is there an empirical basis for gold continuing to have that level of return above, the risk free rate as we've seen in the last 30 years? I don't know. so I'm still kind of debating, which I certainly love the, In, in lieu of, I certainly believe in equity in, in bonds and in maybe in lieu or in, in, addition to gold and commodities, I really of course love trend following and carry.
those are two things that I'd strongly believe in that could act as a good offset for inflation regimes, instead of just going simple, tips and whatnot. The weightings of those, you know, again, I think it's risk parity first. Preparation for prediction and then starting to tilt based on on your own belief systems. That's where i'm at right now
I think that that's, that's probably a good, that's a good starting point. the other thing that, I, I personally put alpha in my own portfolio and I think it's, it's useful. You have to make sure you know what you're doing and you have access, right? So that's obviously, you know, that you're trying to build that. and I think the other thing I do is I, I look for just diversifying income that I think is pretty uncorrelated, like life settlements are interesting.
Certain asset backed lending is interesting where Like I was talking about before, you're, you're helping your discount rate exposure. so other things that the risk parity framework didn't really think about that, I think. So, so where are these other assets that are out there and available now? Where do they fit in?
How about you Adam?. that exchange is fairly interesting has because I know you're I feel like you're more like screw equities and bonds. Let's go straight up to carry. What are your thoughts there?
Yeah, I mean, I've got, my allocation is basically exclusively to privates, not privates, alts. So, You know, carry trends, seasonality, relative value. I've got definitely a larger allocation than most to, physical gold bullion. and I mean, it's weird as asset managers too, because we already have a large beta to our own strategies and to cyclical forces. So, you know, I probably hold a larger slug than most in cash.
But I would definitely lean more heavily toward dynamic global adaptive strategies than to static allocations to risky assets. no, especially now, you know, take my views on equities with the largest, with a full hand full of salt. But, I mean, we're at the largest allocation to equities as a percent of total household wealth.
Now, and you know, if I look across the landscape of, well, admittedly fairly poor predictors over intermediate timeframes for, for forward equity returns, but the best one that I've seen as a function of the percentage of total household wealth wealth, that's inequities versus bonds, where we're at the peak now, which is pretty substantial evidence that Returns to equities over the sort of next 10 to 15 years are likely to be below average. And we've had a nice pickup in rates.
So, you know, from an equity bond standpoint, I'd be a little bit more inclined to be more bond heavy than equity heavy here. But yeah, I mean, I just don't really, at this point, I haven't seen a cheap equity market in 15 years and we may not see one in my lifetime. And, you know, I don't really care about tracking errors. So
So
It's more accurate
So that's the one of the things that came up in those, in that dialogue was, you know, I was saying how commodities in gold at worst can be a, a, it returns as much as cash. So zero real return ratio zero at worst. And if you're making room in your portfolio and your equity bond portfolio in order to To fit them in, it may be a problem, but if you're stacking them on top, right? If you're able to leave it, it's a, it's a, it's a zero cost hedge.
It was the argument that I made and somebody came back and said, well, it really isn't because you're actually adding volatility and invariance, and that variance is going to affect your, your compound rate of return to which I replied back that. There is a rebalancing premium that you also extract from having diversified assets in there. So I don't know, this is, this is a point that also Chris Schindler has made. Have you put any thought into, into that, Ben?
Rebalancing premium. Yeah, I mean, I,
No, more on like, you know, commodities and gold being both, I'll get an answer to both, but the, the idea that gold and commodities may be a zero cost, hedge for inflation.
yeah, I buy that commodities and gold are a, it's not zero cost, but low cost hedge towards inflation. If you're doing it in a, in a leverage way, like gold is, I think clearly has a lot of uses and times where you really want it, right? And then that kind of plays into the rebalancing premium, right? Where, if you get big monetary inflation, if you get a crisis, these are times when gold, Okay. I mean, gold's really useful.
I also think it's a little underappreciated just in terms of the geopolitical risk that we're running into now, right. Where it, it's not in our models, right? But, you know, gold can be a really helpful thing in conflicts. It, it can, it's outside of a lot of institutional, arrangements. So I, you know, I think it has that, it has that value there. and then likewise with, with commodities, I think you can put it into a model, but also if you.
Like if you do see potential conflicts out there, and you do see a fight for resources coming, that's something that hasn't really happened in a, I don't know, you know, 70 years. but that's certainly possible, right? And, and, and as you get more, a more conflicted world, de globalizing world, it's also helpful for that scenario.
You have any thoughts on that, Adam?
I mean, I think that gold has a positive premium. I think commodities, if run properly, can have a positive premium. Rebalancing or diversification premium. I think gold is a great standalone. I'm a little bit less sold on commodities. I think you, you probably want to have a little bit of an allocation to, rebalance diversified commodities, and then also, allocate via trend and carry, and maybe seasonality.
But, you know, all these around the edges, the hard thing is that kind of 80 percent of the time, both historically and probably if I look forward, you've got equities and bonds are both going to deliver kind of around their average. And then you've got this sort of 20 percent situation where through some conspiracy of geopolitical risk or conflict.
Or fiscal, fiscal profligacy, we could have major tail outcomes where equities and bonds both suffer profoundly together and gold and commodities and other types of all it's really skyrocket. So it's hard to model that out in an optimizer. It's hard to put a pin in what those distributions look like and what those probabilities look like. But I probably skew a little bit more on the concern side than your average person.
So, you know for that reason I skew a little bit more towards those more, diversified or resilient asset classes
Well, it's interesting to see when you look at how often commodities do deliver for you during inflation regimes. It's, it's a, it's a factor of how, how often in hyperinflation or high inflation shocks happen. So historically, I think AHL did one analysis in 1926 to last year where they showed that commodities performed 20 percent of the time, right? When there was a big inflation push. and the rest of the time you're just sitting there. Just dragging the portfolio.
obviously over a full cycle, you're good to go. It actually added value, it added diversity. And then they did the compar, the comparison with trend where it seemed to provide the same level of, protection. But in this case, you're also providing a positive risk premium during the other 80 percent of the years. Right? So obviously I tilt towards trend as a, as an inflation hedger, you can stick to long term. but I like the idea of also having commodities and gold as the first responder. Right.
Cause oftentimes you might be offside and if there's a massive, it's something like we saw in 2020, like the, the energy complex did a lot better than any trend strategy. Right. So having a little bit of first responders there just to kind of get you through and not enough where you're going to lose faith in a 15 year period where commodities are flatlining. That, that to me makes a lot of sense. So I'm, you know, I'm writing all this down in my, I'm dead now, what book that my wife gave me.
So, know, and this is me, this is me trying to use you guys as a soundboard to make sure that my, my logic is tight.
I think as a, as an investment manager, you have the equity market exposure you're talking about. And that, that also, that depends on certain political arrangements still. And, and, you know, I think inflation is a lot of times a political phenomenon. so it's, there's not a signal in there for, you know, there's not a quantitative signal on that for you, but it's, I think something to consider.
Definitely
Well, I mean, I think we've covered that. I, you know, hopefully, the masses move more and more towards that optimal more towards that risk parity portfolio and, WealthSimple finds that signal and starts giving them more of what they need. or though I am, doubtful that that'll ever happen.
Honestly, my mantra.
game pops out there, you know.
Yeah. No, just put your money at risk in a reasonable way. There's a risk premium for owning financial assets. Like if you can start there and get people to do that, I'm pretty happy that if you can make your Sharpe ratio better or get your range of outcomes better, all the better for you.
Okay. So, so Ben, before we leave, is there any way that people can find you? Find your musings? You say you have a monthly one. That'd be interesting for, for everybody here to look into. where can we find you?
just through Wealthsimple, you have to go register for Wealthsimple. com and you get the newsletter. I have a Twitter account, but zero tweets. So I'm a sort of hard to follow on there.
Oh, okay. You're, you're extracting all the knowledge
I watch you
keeping quiet.
Bye. I
Amazing. Okay. Any, any other parting words, Ben, before we head out?
do have LinkedIn. I post things there from time to time. So that's another way.
Okay. I think that's good.
Thanks so much guys. It's been, it's been a blast talking. Yeah.
about, I mean, I think there's just a lot of common, beliefs and knowledge and, you know, ways of viewing the world. So it's, it's always interesting to see how people in different roles with similar belief systems, but different sets of constraints, express those belief systems in the most optimal way they know how, so that's great.
And nobody's more shocked than me about talking. When I started thinking about talking to robo advisor heads that I expected a completely different investment framework than where you and Nima and your team actually come from, right? So it is incredibly refreshing to learn that, you know, thoughtful people are at the helm for the largest robo advisor in Canada. That's, that's an amazing thing, actually. Again, Canada CPP teachers and WealthSimple leading the way. Well
All underperforming the index, but we're leading the way. Yeah. Yeah.
Well, you know. Relative, not relative.
That should be a badge of honor right now and before the index, honestly,
As Meb Faber said.
say you're both a prudent investor and you're outperforming the index at this point.
Meb Faber said it's a, it's a bear market in diversification. That, that should, that should be
that was great.
awesome. Okay, gentlemen. Well, thank you so much. Both of you.
Thank you.
Thanks, Ben. And, we will, we'll try to get you back on here next year to see how the things on the, on the private side have gone.
That'd be great. Thanks guys.