Michael White, CFA, Portfolio Manager, Multi-Asset Strategies at Picton Mahoney Asset Management joins Pierre Daillie to discuss how taking a multi-asset/multi-strategy approach to diversification - using alternative strategies that don’t rely on stock and bond markets rallying - can potentially help diversify the risks that investors are taking in the market and enhance the quality of returns in portfolios.
[00:00:01] Pierre Daillie: Hello, and welcome to the Insight is Capital podcast. I’m Pierre Daillie, managing editor of AdvisorAnalyst.com. Joining us today is Michael White, portfolio manager for multi-asset strategies at Picton Mahoney Asset Management, to talk about how investors can fortify their portfolios.
Michael is responsible for Picton Mahoney’s multi-asset strategies. His previous investment work experience includes AGF Investments where he was lead portfolio manager of their asset allocation mandates.
Active in the industry since 1996, Michael has had many roles, including Director of Institutional Equity Sales at Scotia Capital, lead manager of the Scotia Canadian Small Cap fund at Scotia Cassels Investment Council, and co-chair of the CIO Compliance Committee, as well as portfolio manager for the small-cap, mid-cap and ethical categories at Strategic Nova Funds Management.
He is a CFA charter holder and has a BA in history with finance and economics from Western University.
[00:01:00] Speaker 2: This is the Insight is Capital podcast. The views and opinions expressed in this broadcast are those of the individual guests and do not necessarily reflect the official policy or position of AdvisorAnalyst.com or of our guests. This broadcast is meant to be for informational purposes only. Nothing discussed in this broadcast is intended to be considered as advice.
[00:01:19] Pierre Daillie: Mike, welcome to the show. It’s great to have you.
[00:01:22] Michael White: Thanks Pierre. I’m really looking forward to it.
[00:01:25] Pierre Daillie: So Mike, before we get to talking, tell us about your role your background, and why did you join Picton Mahoney Asset Management?
[00:01:34] Michael White: Sure. I’d love to background wise, I started my career as the alluded almost 25 years ago, silver anniversary is coming up so soon to match my hair. I started at a-
[00:01:45] Pierre Daillie: I couldn’t tell [laughs].
[00:01:47] Michael White: … [laughs] I started my career as a boutique investment counseling firm where many of our clients were established high net worth, ultra high net worth families estates, trusts and foundations. One of those clients had, you know, established capital and was an interesting experience being my first in the industry that these were very wealthy clients.
But the message was always loud and clear, make me money, but don’t ever lose it. A lot of these clients didn’t really have the means or the skills to necessarily make back losses versus many investors who are, working through a career or working life and then could potentially make back losses.
So that was hardwired for me just that approach to building portfolios that achieved not just a return objective, but a risk objective as well, getting that investor, to the suite hereafter and for many of these investors, again, their horizon was infinite, so a capital preservation mandate was always very important.
So that always stuck with me and through the iterations of my career, whether I was managing, small cap mutual funds, working at a capital markets desk or now for the last 10 plus years, running asset allocation mandates or portfolio construction approach all of that experience has been really valuable to me because no matter how different those roles have been it’s always that focus on the client that I think I, I bring to my endeavor.
And you know, we do a lot in this industry, creating products advertising those products and having that sense of fiduciary duty to me. You, you might as well not bother with the product or the approach, unless you’re really focusing on the client and and their ultimate objectives at the end of the day.
What brought me to Picton Mahoney you know, obviously Picton was a very well revered shot. I put a call in to Dave Picton and Dave asked me, "What do you want to do?" It wasn’t, what are you good at? What are you capable of? What do you want to do? And I said more than anything, I wanna talk to clients.
I really wanna be able to explain to clients what it is that I do as a portfolio manager, why I do it, and ultimately how it would benefit the client at the end of the day. And I think that created a simpatico where, the role I have is not just as a portfolio manager, but as a spokesperson for the firm.
I speak to portfolio construction as a means to an end. Whereas, you a lot of people are really just talking about product in the industry. We speak about it a lot more philosophically, but that philosophy is ultimately put into practice with building portfolios that are very well diversified and, again, seeking an objective that the end investor could have in mind.
So my role here is a unique one in that I do get to talk to a lot of client constituents. But I think that really appeals to, my greatest sensibility in the industry which is that fiduciary duty.
[00:04:41] Pierre Daillie: So you mentioned portfolio construction. Can you explain the portfolio construction framework at Picton Mahoney Asset Management and why it’s unique from others?
[00:04:52] Michael White: Sure. I think you know, that term portfolio construction seems fairly intuitive when you hear it. It’s all about building a portfolio, cobbling together your favorite return streams and, trusting that those return streams will get you to your investment objective. But frankly, there’s so much more to it than that.
We think a lot about the quality of return, not just the quantity of return, I.e. The number is always front and center for people. And I don’t think enough people think hard enough about the risk it takes to get that return. We are volatility managers, it’s our expertise to hone in on the volatility in a portfolio and think about some of those higher orders to getting your return.
What kind of unintended consequences you’re building into a portfolio. And when we think long and hard about that endeavor and when it’s the basis of everything that we do building portfolios starts to have much more meaning to it.
So I would say that, this portfolio construction framework was born about four or five years ago, where we started to acknowledge that the model for a diversified return, I.e. the balanced portfolio was really starting to suffer some challenges.
And for the most part, I think it’s an acknowledgement that fixed income as an asset class is challenged to produce return. As interest rates got lower and lower, those returns, got narrower and narrower. And when you look back at a 30 or 40 year history for a balanced investor, fixed income has been a massive tailwind and a diversification to the portfolio as well.
So we had to think about, what could we bring to a portfolio that could achieve some diversification not necessarily throw fixed income out of the mix. It’s still a viable asset class in many ways, but this notion of painting with two colors, the Harry Markowitz you know, the efficient frontier of just stocks and bonds in a portfolio that is now seemingly a very naive approach.
So for us portfolio construction is really stripping everything bare, starting with a blank slate understanding and building a bigger opportunity set for investments and where most people think about assets and what kind of market risks they wanna take, we also wanna compliment the assets with new strategies that are less dependent or potentially not dependent at all on the direction of markets.
And when you can and add those strategies to a portfolio that can not only enhance return, but also help diversify the risk that investors are taking in the market. So for us, it’s about assets, strategies and diversification. A better diversification of assets, strategies that help enhance return and mitigate risk and the diversification is the bow that basically ties it all together.
[00:07:40] Pierre Daillie: I liked, I liked the way that you coined the 60/40 portfolio as a naive portfolio. And certainly has had the benefit of 40 years of interest rate tailwinds with rates falling for that entire duration.
[00:07:58] Michael White: Yeah.
[00:07:58] Pierre Daillie: And now that we seem to be at historical lows it’s anyone’s guess as to when and how far rates, begin a reversal-
[00:08:08] Michael White: Yeah.
[00:08:09] Pierre Daillie: … of any kind. But it’s definitely introducing a lot of uncertainty and volatility into the market. And so, uh, speaking of improving portfolios or fortifying portfolios versus maintaining a naive allocation to stocks and bonds, how is the fortified portfolio construction framework applied in your strategies?
[00:08:38] Michael White: It’s the backbone of our strategies, frankly. Again, as I said it’s about creating a much bigger opportunity set, but bringing much more skill and manager skill to the mix. So a great example, as you alluded you know, painting with two color stocks and bonds, what we hear typically from advisor clients is that fixed income is challenged.
I need a new fixed income approach whether that is a direct fixed income strategy which we manage or an alternative two fixed income, something that produces a lower volatility return that has a lot of, bond-like characteristics. And we’re happy to facilitate those conversations and, um, and show investors what we do in those domains.
But I think that again, kind of narrowing in on the tree rather than looking at the forest is missing a bigger opportunity set. So for me as a multi-asset multi strategy manager I can help create more diversification benefit than simply trying to plug the hole in the dike by fixing fixed income.
We bring a lot more diversification benefit to a portfolio by layering in, strategies that are really correlated to the market. And when you can do that, I think, the goal in portfolio construction is to create an outcome, a portfolio where the results, the whole is greater than the sum of the parts.
And for an advisor client, they’re very interested in putting the parts of the portfolio together. I kind of use the analogy of you know, buying and mixing ingredients whereas, here we’ve got the cake sitting in the window. So in a multi-asset multi-strategy portfolio for us, we’d like to think that we’ve created the complete portfolio.
And from that perspective you know, it acts as a one ticket solution for the advisor and investor alike. But again it’s, it’s really a keen focus on building in diversification benefit that is not just by name that we can measure it, we can manage it and and tell that story to clients.
And for those clients that are engaged in this portfolio, construction or fortification process it’s been very eye opening. Some of these conversations have been very fruitful and advisors are not only using it as a compliment to what they do, but in many cases, a core approach as well.
[00:10:53] Pierre Daillie: Absolutely. I, I think there’s a sort of patent misperception about the term balanced next to the word portfolio. And [laughs], there’s, there seems to be, there’s, first of all, we’ve had 40 years of what most advisors believe is a balanced portfolio, 60, 40 mixture stocks and bonds. But in fact, 60 40 stocks and bonds looks more like 90% plus equity risk.
[00:11:27] Pierre Daillie: Because of the correlation and because of the, uh, the way that markets behave bonds do bonds have historically provided significant you know, or worth while ballast and yield to a portfolio through difficult periods. But, but, but to call that strategy a balanced asset allocation is not correct-
[00:11:53] Michael White: That’s-
[00:11:53] Pierre Daillie: … when you compare and contrast between balanced portfolio and balanced asset allocation.
[00:12:00] Pierre Daillie: It seems to be a widely held misperception. What challenges do you think investors portfolios are facing in the current environment?
[00:12:11] Michael White: I think it is just that, that you alluded to Pierre that there is, an acceptance of the, kind of a habit formed portfolio where, you know, yes, bonds are challenged to produce the return that people wanna see out of their portfolio, but they have all of this equity risk that’s built up.
And frankly, what we see in a lot of model portfolios that are out there for investors is you know, a lot of unintended risks and a lot of unintended risks that pin on that interest rate dynamic. When we analyze the typical balanced model, a lot of unintended consequences have crept in over the years.
And chief among them would be that in an effort to replace income that has been lost because interest rates are so low, a lot of people have built in dividend payers and dividend growers into their equity sleeve. And in many ways the equity sleeve is now highly correlated to the bond market.
Most Canadian equity sleeves that we see in model portfolios have a greater sensitivity to interest rates than they do their sensitivity to equities at large, which is bizarre, you you’ve basically taken-
… an apple and turned it into an orange.
[00:13:16] Michael White: And second to that, in a, in a, in a further effort to create yield in a portfolio, investors have taken on more credit risk. So they’re reaching out the curve in terms of risk on high yield and credit, private debt emerging market debt, some other sort of structured product that has a yield or a coupon to it. And there’s credit risk there.
The tailwind has been massive, vis-a-vis quantitative easing. The fed came in and rescued the high yield market when COVID hit and credit is functioning fairly well. Credit spreads are very tight, credit spreads being that cushion of safety there’s very little room for error. And if they listen to our fixed income strategy, it speaks very acutely to that.
So that’s the second risk in these portfolios. And then I guess, third and much more subtle is that when we analyze these portfolios, they really have no diversification benefit from other asset classes like commodities. And in our portfolio construction framework, we have analyzed and defined the role for lots of different asset classes in a portfolio inclusive of energy, industrial metals, precious metals and grains.
And in the typical balanced model out there, there is little or no, and sometimes a negative sensitivity to the diversification benefit from commodities. Now, again, for us, this is not about making a call on the price of corn or the price of gold. You know, we’re not as interested in the fundamentals of any given commodity per se, but more historically what role can commodities as an asset class play in a portfolio to achieve some diversification.
So a lot of commodities are sensitive to economic growth, energy and industrial metals would be sensitive to economic growth. A lot of commodities can also provide another benefit as an inflation hedge. So precious metals, grains, energy also act as an inflation hedge.
And again, in a world where we’ve had this tailwind of interest rates and really no talk of inflation until very recently that’s a blind spot in a portfolio. So this balanced model is balanced, yes, but diversified no. We think there’s a lot more opportunity-
… to, you rethink the building blocks of a portfolio. And in our, in our world, in our products, we have a broader strategic asset allocation consisting of nine asset classes each with a role to play in a portfolio. They are risk weighted so we’re not really relying on any one thing to pull the weight just as you mentioned, how, 90% of the risk in a balanced portfolio is equities.
That, that diversification is already apparent in what we have as a strategic allocation to our multi strategy portfolios. So yeah, we’ve, we’ve really shaken the tree on this view. The naive view keeps working for people though, but again, if you peek under the hood, much of that is really, um, more equities pulling the weight, which means more volatility for the balance investor.
And that’s really not what the balance investor is in for, especially as they get older and deeper into their investment horizon.
[00:16:18] Pierre Daillie: Yeah. It’s interesting that, you should say peeking under the hood. We’ve had markets come to all time highs or close to it. But underneath the hood much of the market has actually sold off.
[00:16:35] Pierre Daillie: There’s a significant percentage of stocks that are down 20% or more underneath it. And, you know, it’s not apparent to everyone that the stock market has been driven by a small percentage of names.
Again, you peeking under the hood really reveals what’s actually going on or looking behind the curtain.
[00:16:59] Michael White: That’s especially a risk when-
[00:17:01] Pierre Daillie: Yeah.
[00:17:01] Michael White: … if you consider how much money has gone into, the passive product the index level ETF, because it just means more and more weight, more and more allocation is going to the larger, winning stocks in an index. But you’re absolutely right. I read an analogy many years ago that a bear market top is almost like a feather.
And if you imagine the spine of a feather being the index, each little tine of that feather is a stock that is falling and, bear markets of down 20% you realize that when a bear market is in full swing, more than half of stocks have already corrected 20% by that point.
So you’re right, it’s a bit of a tenuous prospect today. And again, I think a lot of investors would be wise to understand not just chasing the winners, but understanding what the, what the plumbing looks like in the market today. It’s not as pretty as one would think, just looking at the broad index.
[00:17:53] Pierre Daillie: Absolutely. Um, Mike, how are you positioning your strategies in the face of these challenges?
[00:18:01] Michael White: Yeah. It’s… I think one of the things that most people expect and desire of a portfolio manager is to be tactical, make timely decisions and assertive decisions. Most of our funds have the potential and opportunity to be tactical. My multi-asset fund that exists in a, as a mutual fund, lives in a tactical balanced category.
And the more I look at that category, the more I realize it’s not very tactical at all. There are a few funds that are, sort of structurally overweight equities, but most of those funds look like a typical balance fund that are very interest rate sensitive.
So when I say tactical, I don’t mean, swinging the portfolio around day to day, week to week but really making informed and decisive decisions on a probability weighted basis. So part of our process has a nod to the economic cycle.
We try to understand where we are in an economic cycle at any moment in time. We do that on a probability weighted basis. So we’re not basically-
… making an all in bet. And based on, pretty obvious things like leading indicators employment, et cetera some of the market indicators as well, we will make a probability weighted assessment of where we are on the economic cycle. Today, most of that probability is in a slowing growth sort of phase of the economic cycle.
Again, I think that would be fairly intuitive for people. But what that means in a portfolio is that we’re gonna own, or at least lean into a few different asset classes more so that we would have a year ago when we were in the early stages of an economic cycle and the inflation trade was working. You had energy, industrial metals, emerging market equities.
Those were the asset classes that really provide a good risk adjusted return in the early part of a cycle. Now that you’re later or in a more mature slowing growth phase of the cycle, you wanna focus a little bit more on quality, developed market equities over emerging market equities, trim back a lot of that inflation exposure.
Again, not to say that they will not produce returns in a portfolio, but the ease of those returns is not as great as they would be earlier in the cycle. You’d focus a little more on higher quality credit rather than merging market or high yield debt, for instance.
You know, all these are little sort of tweaks and adjustments at the margin, but for us you know, wholesale asset allocation shifts are really not what we’re interested in doing, because again, if we’re focused on diversification and trying to achieve a good quality of return over a cycle and over an investor’s horizon making those decisive calls might make you a hero, but you’re often, you know-
… too far to one side of the boat as it were, and that’s not the kind of exposure we intend to take for investors, and it’s really not the definition of diversification either.
[00:20:51] Pierre Daillie: Yeah. There’s an extremely high probability that making any sort of directional call or taking any sort of particular vector in the market could easily go against you.
[00:21:04] Michael White: I’ve seen it happen dozens of times in my career, frankly.
[00:21:07] Michael White: And I’ve lived through that experience where, an epic call will be right for a year. But the investment management graveyard is, chalk full of tombstones of people that were hot for a year.
[00:21:21] Pierre Daillie: Yeah. Hard to let go. It’s, It is.
… one of the sort of classic behavioral mistakes that happens-
… is the, hanging onto the old bias.
[00:21:31] Pierre Daillie: So, uh, how are alt strategies expressed in investors portfolios?
[00:21:36] Michael White: Today, uh, very little, the alts I would say are-
[00:21:40] Pierre Daillie: Yeah.
[00:21:40] Michael White: … are quite new to the Canadian investor landscape. We’ve heard about them for many years. Here at Picton Mahoney we’ve been anticipating the introduction of alts for many years as well. And <we were highly engaged in the regulatory process to bring alts to the Canadian public. And we applaud it, frankly, because it is-
[00:21:57] Pierre Daillie: Yeah.
[00:21:57] Michael White: … democratizing the opportunity set for every investor. Previously alternative strategies, alternative assets were, almost uniquely the domain of institutional investors or high net worth investors. So democratizing this approach to earning return is, is great news, but it comes with education.
Stats that I’ve seen would hold, the average Canadian investor has significantly less than 5% of their portfolio in alternatives. Ultra high net worth investors are still below 5%, but a little above the average. And what we see typically, and again when I talk to advisors is a focus on alternative assets.
So oftentimes people wanna own something that they haven’t owned before. And it’s usually something like infrastructure or a real estate fund or private equity or private debt. And those are all viable asset classes in and of themselves. But again, when you look under the hood, you’ll start to understand that things like real estate and infrastructure and private debt and private equity are all the same interest rate trade.
The cost of money makes these asset classes function. And in many cases, there are a lot less liquid than public market investments so they appear to be less volatile because their price is not getting market to market-
… on a day to day basis, the way stocks and bonds would. So we have to really think about, what we’re introducing to the portfolio, whether it’s further compounding the risk of more interest rate sensitivity or, having an assumption that something is a low volatility asset, just because it’s quiet in terms of its pricing.
When we want to engage with advisors on behalf of their investors about, how much alternatives should be part of a portfolio again, it’s, it’s a unique conversation almost every time, but when you frame it in a big picture, you know, endowments, pensions, all the big institutions that I’m talking about previously, you often see an allocation to alternatives ad or through 50%.
And, people often assume that’s only because they have long time horizon and they can afford to own forests and other esoteric things. But, it, it’s more that portfolio construction approach that alternatives can provide diversification differentiated return streams that are less dependent on, the direction of traditional asset markets.
And that’s why these, more sophisticated institutional investors have been using alternatives for gosh, 20, 30 years. And it all kicked off in earnest with the Yale Endowment back in 1985 going hard away from the Markowitz model. So yeah, for us the conversation is, uh, is, an open one with advisor clients.
We’d like to know what they feel is lacking in their portfolio. It’s a discovery process. And when we go through the, that exercise of trying to show where some of those unintended risks may be the conversation on alternatives gets significantly easier from there.
Again, many people would come to us today and say, I just need to earn more return from a fixed income sleeve, and we’ve got solutions for that. But when you think about the fixed income problem, it’s a portfolio problem. And when we can crack open the whole portfolio and understand what’s going on it leads to much more fruitful conversations and much more meaningful allocations to alternatives.
[00:25:22] Pierre Daillie: Yeah. I tend to be in full agreement with you that, you the introduction of alts into the Canadian marketplace has really meant that there has to be a renewed focus on learning about the new instruments that are available, the new solutions that are available in the marketplace. Speaking of which Mike, where can investors learn more about multi asset strategies and Picton Mahoney Asset Management?
[00:25:53] Michael White: Yeah first off would be our website pictonmahoney.com. There is a wealth of information there. There’s a dedicated tap called resources where you’ll find anything from manager insights, videos, commentaries, thought pieces. A lot of those thought pieces reflect research that has actually come from our portfolio construction research and the white paper that we published a couple years ago.
So a lot of the material is more educational in nature and focused on portfolio construction. And we launched a portfolio construction consultation service, which is the kind of epitome of where we wanted to get within our multi asset and multi strategy team.
I’ve always thought of asset allocation as a service, much more than a product, and that’s exactly what we’re trying to do for investors. So with my esteemed colleague, Robert Wilson, who I know you’ve interviewed we’re in great partnership on trying to engage with advisors on those conversations where you open up the portfolio, understand where those unintended consequences or unintended risks may be.
Not just a return seeking objective, but a diversification exercise, all that work that Robert and PCCS does is basically built off the same research backbone that came from the multi asset and multi strategy group.
So it, it’s a great integration of capability and it’s not, again, not just putting out Picton Mahoney’s expertise as a product but as a service, and I’m very proud to be a part of that as well.
[00:27:21] Pierre Daillie: I Think that would be a valuable introduction to all that you’re doing at Picton Mahoney Asset Management. And Michael, thank you so much for your time and your valuable insight. It’s been a pleasure to talk to you.
[00:27:36] Michael White: Thanks so much Pierre. I really appreciate the opportunity. Look forward to chatting again. [silence].
Listen on The Move:
For more insights, please visit Picton Mahoney Asset Management - Insights.
Copyright © AdvisorAnalyst.com