Depth & Breadth: Constructing portfolios for a world of short and volatile market cycles

[00:00:00] Pierre Daillie: Welcome to the Insight is Capital podcast. I’m Pierre Daillie Managing Editor at AdvisorAnalyst.com. 2022 has been a volatile year for markets, marked by what appears to be stickier than previously thought inflation, the result of supply shocks in a very tight labor market as well as other after effects of the pandemic, plus, of course, the war in Ukraine. With investors reeling over losses in both stock and bond prices this year, we thought now would be a good time to catch up with Robert Wilson, Vice President, Head of Portfolio Construction Consultation Service at Picton Mahoney to get the lay of the markets and discuss asset allocation and portfolio construction.

[00:00:42] Disclaimer Annoucement: This is the Insight is Capital podcast.

The views and opinions expressed in this podcast 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.

[00:01:01] Pierre Daillie: Robert, welcome. It’s great to have you.

[00:01:03] Robert Wilson: Thanks Pierre. Great to see you again.

[00:01:05] Pierre Daillie: Picton Mahoney just wrapped up their roadshow across Canada. It’s a good time to hit the road with all the uncertainty in the markets. Robert, let’s first talk about Picton Mahoney’s macro-outlook.

[00:01:17] Robert Wilson: Great. Yeah. I think, uh, it’s important to think about the backdrop because it, it has a big impact in terms of the decisions you wanna make in constructing a portfolio and, and putting the pieces together. Specifically right now, I think what’s important to understand is that, um, there’s a good reason to say that goods inflation is gonna come off over the next few months in a, in a meaningful way. And what I think investors need to look to though isn’t just, you know, what the impact is in terms of the feds raising rates, and, uh, you know, bringing this inflation down, but what are, what are the long-term ramifications of this inflationary pressure? And so, what’s really interesting is, you know, we can be so anchored to our recent experience.

So, the past few decades, the way cycles have worked, inflation flares up, the fed kicks into gear, and then, uh, it brings it under control and we get a nice 10 years of, uh, of steady growth and low inflation. Nice long cycles. It’s fun to be an investor. Stocks and bonds do great.

But if you look further back, I-it’s not always the case that you get these long cycles? There’s been, uh, periods where inflation’s been a bit stickier. And the cycles are more like four and a half, uh, five years long. There’s more volatility. The risk adjusted returns on sure-sale assets are not as strong. So, the, the, the concern we think investors need to be aware of is that what happens wh-when the FED eventually does take their foot off the break, right? So if they beat this inflation down and maybe we go through a recession. What happens after that? And, and we believe that the inflation’s gonna be stickier so as soon as the foot comes off the break, that inflation’s gonna flare right back up again. And so we’re gonna have these shorter cycles. We’re gonna have higher volatility. Uh, the risk adjusted returns on sure-sale assets are gonna be lower.

And so what that requires isn’t just a tactical adjustment to the current environment, but actually adjusting your strategic asset allocation for the next decade and fixing the mix.

It’s been quite

a year obviously. I’m really glad that we’re having this conversation because it’s been a long time since investors experienced both stock and bond prices falling at the same time.

I

think for investors, there’s a couple things to think about, right? The first is, you know, this is a year that, you know, uh, none of us have experienced a year like this before, right? The analogies you’re going back to, people are talking about the 1930s in terms of, uh, this kind of a year for a 60/40 portfolio. So, one, uh, you’re a chef not a magician, right? So you gotta deal with the ingredients the market gives you, but what you also need to recognize is that you have more ingredients available to you today than you ever did before, right?

So, one of the, the key things that my team has seen, you know, consulting with advisors across Canada, working with them on portfolio construction, is there are a lot of investors in Canada that actually have very concentrated risk in their portfolio. And the reason for that is they’ve got a good depth of diversification. So they own stocks and bonds a bunch of different ways. But they actually have relatively poor breadth of diversification. There’s entire asset classes and strategies missing from their portfolio.

So, if you think-

Right.

… about bailing out the portfolio, if the goal really is how do I help this investor achieve their goal with the greatest possible certainty, and stick with their financial plan? Well, the way you do that is you find as many investments as possible that are gonna deliver a long-term return greater than cash, but don’t have shared underlying sources of risk, right? And so what that means in practical terms is you need to find strategies and asset classes that are less sensitive to interest rates, that are less sensitive to the level and direction of the equity market.

[00:04:50] Pierre Daillie: Very interesting. So, Robert, you guys just came off your road show and it must’ve been, I’m guessing it must’ve been great to have some, some face-to-face interactions again, get back to, uh, y-you know, seeing advisors. And while you were on the road and, and during your daily interactions with advisors, what did you hear from them?

[00:05:12] Robert Wilson: Yeah, you know, it was, uh, it was a broad mix. So, I, I actually had some very interesting conversations that stuck with me. So the first one I’ll share with you was, uh, after a presentation, uh, a branch manager pulled me aside; lar-large office, very successful office, and what he explained me was look, over the past three weeks, we, we’ve almost been frozen. The transaction level in the branch, 80% lower than what we’re typically used to. And a lot of that is going to cash NGICs. And I found that in a mix we see the flows, like 10 of top 20 best selling ETFs in Canada last month were either ultra short term or high interest savings account ETFs, right? So, people are kinda taking their-

Right.

… money to the sideline. And the challenge with that is, it’s not a l- it’s not a long term strategy, right? After inflation, after taxes, every year, you’re just gonna full, fall further behind. And we saw the same thing in 2020, right? There were huge flows in the mark- money market funds in the first half of the year and then the TSX returned over 30% through mid-2020 to mid-2021.

So, one thing to think about is, you know, if there is a problem in the portfolio and one of the problems has been this year that conservative portfolios have sold off just as much as more aggressive ones. You’re down double digits kinda regardless of the asset mix. If you’ve just got broad diversified global exposure, but the, the challenge is, okay. How can I either re-risk my portfolio, or maintain my risk level while fixing that concentration risk, right? And so, that’s where you gotta look to alternative strategies.

We had some fantastic conversations about the difference between, uh, categorizing these strategies based on their goal, their use case in the portfolio. I think it’s an important conversation because the name of a fund or the name of an alternative asset class, and there’s dozens of alternative asset classes and strategies, doesn’t tell you a whole lot about what it’s gonna do, right?

Right.

You, you kinda need to look through it and understand, you know, uh, what role it’s gonna play in a portfolio. So what we did to help advisors, and what we shared through this roadshow, was our new, uh, proprietary quantitative framework for classifying alternative strategies, uh, based on, uh, based on the goal in the portfolio. So, at a very high level th-there’s two buckets. You’ve got enhancers and you’ve got diversifiers, right?

Right.

So the enhancers, what those are, they’re strategies that are gonna give you exposure to the same risks that are in traditional portfolios, but seek to deliver a better outcome. So your enhancers might be return amplifiers, trying to get you higher volume return. They might be risk mitigators, trying to cut the downside, uh, for your clients. The characteristics of those strategies: They’re gonna have moderate to high correlation to traditional assets; they’re gonna have moderate to high beta to those assets. So they’re not gonna give a huge amount of diversification but I th- they may give you some. But really what they’re gonna do is seek to modify the return structure, uh, to make it more favorable, using the, the tools available to alternative investors.

So a classic example of a return amplifier would be like a 1/30/30 equity strategy, or private equity fund. And a classic example of a risk mitigator would be like a long term equity fund that only has maybe like a .5 or .6, uh, beta, right? So it’s, it’s, uh, partially-

Right.

… partially long. Um, but what we focused on with th- with this, uh, roadshow and we think the opportunity for investors is diversifiers. So that’s the other high level category. What you’re talking about there are strategies that have low sensitivity to the risks that are traditional portfolios. So these are gonna have zero to low correlation to traditional assets. They’re gonna have zero to low beta to those assets. And what they’re gonna do is they’re gonna provide you a return stream that’s an excess of cash, but that is not loaded up on the same source of underlying risk that’s in the rest of your portfolio.

So, the challenge is, these strategies can be difficult to identify, but if you can find a strategy where you’ve got conviction in the manager, or in the asset class, uh, that it will provide return over cash over time and that that return is not dependent particularly on interest rates at equity market movements. That is a very high value thing you could bring to the portfolio.

So then it gets into this idea around implementation. Okay, what do you actually do? Well, what you need to do is you need to understand your current situation, right? So, what is my most concentrated source of risk? You then need to dial that risk back. But you don’t dial it back to put in the cash for short-term bonds which is what we’ve been seeing in the flows ’cause you won’t make enough money. You dial it back and you reallocate it into these diversifying strategies that are gonna, uh, deliver the return in excess of cash. And if you’re able to do that, that will go a long way to helping the client achieve their financial goal with greater certainty, and it’ll go a long way to making their financial plan easier to stick with because the likelihood of large draw downs will be decreased, and the likelihood that they’ll go through multiyear periods with negative or zero returns will also be, uh, decreased if you do it in a thoughtful, uh, way.

[00:10:11] Pierre Daillie: To your point, the bottom line here is to implement strategies in your portfolios that smooth the ride and the diversifiers obviously, uh, are, that’s their purpose. Robert, one comment that I wanted to make was that, you know, you guys have been, uh, really highlighting for many years, uh, at least as far back as I can remember, you’ve been actively, you know, telling advisors and investors that, that, you know, having a 60/40 portfolio is the equivalent of 90% exposure to equities. And, you know, it really came to pass this year, didn’t it? I mean, all this time, you know, where you had this, this discussion around the 60/40 blend of stocks and bonds, and how it actually has 90% equity exposure. I mean, from a risk standpoint, um, that risk was interest rate risk, wasn’t

[00:11:05] Robert Wilson: it?

Yeah. So, this is what’s so interesting is that, uh, you know, as an advisor you’re in the business of allocating dollars for your clients. They bring you a check, you deposit in the account, and y-you put it to work. But actually you’re not allocating dollars, you’re allocating risk, okay?

Right.

The problem is, across the industry we don’t necessarily have the tools to measure that risk effectively. Uh, most advisory practices won’t have a risk factor model in place from their portfolio. If you think about it that way, allocating dollars to manage risk, it’s kinda like trying to measure how tall someone is by measuring the length of their shadow. You should be just measuring the height directly.

[laughs].

Right? It-

Yeah.

… it’s an important point. And so, when I look at what’s the difference between a typical Canadian’s portfolio versus an institutional investor, it just starts from the fact that it’s allocating dollars instead of risk. That’s why the institutions are 30, 40% alternatives, is they understand how concentrated the risks in their portfolio, and they understand the need to diversify that risk so that they can achieve their goal more consistently.

What’s great though is that with technology and the investments that firms like ours have made to make these tools accessible to the advisory community, there’s no reason you can’t have a risk-factor model for your portfolio. There’s no reason you can’t understand where the risk is coming from; make sure that’s intentional, make sure that’s scaled appropriately, identify those concentrated sources of risk, and then come up with a game plan to mitigate or diversify that risk.

And so, it’s a great time to be an advisor. Like, with these tools you can add so much value for an investor and you can differentiate your practice, right? Five to 10 years from now this stuff will be table steaks, but right now it’s a differentiator. And so if you can apply it thoughtfully, um, this will meaningfully improve the kinds of conversations you’re having with prospects, right? You can talk to them about your risk management framework. And ask them about how their current advisor’s managing risk. And if they aren’t taking that similar sophisticated approach and taking advantage of the tools that are available, well, you’ll have really have set yourself apart.

So, I think it’s, it’s real- it, it couldn’t be more important, right? Uh, you need to look through the funds, you need to look through the individual holdings, understand the underlying sources of risk, and once you do that, you know, it really simplifies things, and it makes it a lot easier to think about how the building blocks can fit together cohesively.

That was eloquent.

I think you can tell the, the passion I have for the topic and how important it is. And so, no one really makes a change unless they’re dissatisfied with their situation, so there’s a huge opportunity for advisors to educate clients that there’s a better way to do things, right? And those clients will be receptive to that message because-

Right.

… they might be feeling a little bit dissatisfied right now. So, uh, you know, uh, it, it’s, uh, it’s a fantastic time to be an advisor. It’s a fantastic time to, you know, be de-deploying alternative strategies and assets and, um, and doing good work, uh, for, for, for clients and prospects.

[00:14:03] Pierre Daillie: I think a lot of investors in the last decade or longer have implemented a lot of beta in their portfolios. They’ve implemented a lot of indexing, you know, to get the representation in markets, but, so at the same time is that was attractive as you said earlier for, for a good 10 year stretch or longer, now, it’s sort of counter. As the market goes down, if you’re heavily invested in beta, you know, your, your assets go down along with the market, congruent with the market’s ups and downs. Having a low or zero beta s-strategy, uh, counters the effects of moving with the market so that you get that diversifier there, which is what people were hoping for traditionally from their bond holdings. And then having low correlation or z-z- you know, zero or low correlation strategies, uh, in your portfolio that, that remain zero or low, that’s the key, right? Because we’ve seen a lot of variability and correlations.

People expected bonds to be a ballast to equities but they didn’t get it this year. This year both equities and bonds are down, in fact, bonds are probably down even more than equities, uh, in some cases. So that was totally unexpected.

[00:15:11] Robert Wilson: If you just go back to why is an investor hiring an advisor? It’s ’cause they believe it’s gonna help them achieve their goal with greater certainty. You’re gonna get me to the, the, to the finish line here, right? If your whole portfolio is passive funds or just, you know, tag-along beta funds where most of the return is coming from the market, which is what you see if you have a portfolio without any alternatives really. What you’re saying is: The success of my goal is then dependent on what the market does.

And the problem is these investor bowls, they’re too important to leave it up to that. So, what you can do is you can say, "Okay. I need that stuff because over the long run stocks are gonna go up, bonds are gonna generate an income. These are important building blocks to my portfolio. But they can’t be the only building blocks. I can’t just leave it up to the level of the market." And so that’s where these alternatives become key.

Now, in terms of it being newer, new to the retail investor, right? In Canada, we only got to liquid all framework in 2019, which is what made these broadly available.

Right.

But a lot of these strategies have been around for decades and decades, right? So if we think about strategies that have, are good diversifiers and are uncorrelated, they’re typically either absolute return or event driven strategies, right?

So, event driven, the classic example is merger arbitrage. Uh, we manage arbitrage funds here at Picton Mahoney. You know, people have been doing that style of investing for 50 years now, right? And you’re earning a defined risk premium. You’re investing c- the equities of companies that a- that are gonna be, uh, that a deal’s been announced that they’re gonna be acquired, right? And so those companies stock trade at a discount to the price a deal’s gonna close at because there’s a chance the deal may not come to fruition, right? But that risk, that risk is unrelated to the equity market; it’s unrelated to the level of direction of interest rates. So if you could earn that return, which is, uh, typically meaningfully an excess of cash, it’s an attractive return, um, that is a good diversifier for a portfolio.

And so what’s great there is, if you do the quantitative analysis which is what my group focuses on, it’s gonna show you zero to now beta, zero to now sensitivity to rates, actually likes rising short terms rates, it actually improves the return potential of strategy, uh, but the actual fundamental approach also qualitatively makes sense. Of course that approach would be a diversifying return stream unrelated to the market-

Right.

… because of the company specific risks. So, you want that matchup between, um, a qualitative reason why it should be a differentiated diversified return stream, as well as having the qualitative metrics say, "Okay, yeah, this is a diversifier."

And speaking to

[00:17:48] Pierre Daillie: event driven, I think the, the, the name alone, if you really stop and think about it, it identifies the silo, y-you know, of having a siloed strategy that is separate from whatever’s going on day-to-day in the market, in the broader market, whatever’s day-to-day going on in the bond market depending on what, what strategy, um, you know, we’re talking about, whether it’s merger arbitrage or, or credit. And, and so, so if you have these independently placed silos in your portfolio, they behave I-independent

[00:18:19] Robert Wilson: of the market.

It’s, it’s really important, right? Like if you’re a credited investor today, if you wanna make capital gains, you’re counting on a rebound. You need spreads of time where you need rates to come down. If you’re an event driven credit investor, you don’t need that, right? You just need to be-

Yeah.

… a skillful team, you need to do the FREDs of your accounting, look at these, um, situations, and find a situation where the price of a bond’s gonna go up a couple points. And so if you can do that consistently and repeatedly, you can generate very attractive returns in this fixed income market, equity-like returns, uh, with bond-like risk. And so, um, you know, it-it’s important if you think about, uh, and advisor and doing, manage your due diligence, one of the challenges is you’ve got a lot of responsibilities, and only limited amount of time. So you gotta think, where should I actually spend my time, and invest my time budget on due diligence?

And if you’re investing all that time budget looking at traditional strategies where 90 or 95% of the risk can be explained by the market, it’s a relatively poor time investment, right? Much better off investing that time, identifying skilled managers, who are delivering return streams that are differentiated, that are actually gonna make an impact at the portfolio of construction level, and allow the portfolio the potential to perform well across a much broader range of economic and market scenario.

Yeah,

[00:19:42] Pierre Daillie: and the key here, I think the key just to, to bring up an important point, um, is that these diversifiers that we’re talking about, they not only provide, uh, you know, differently behaving, low correlation, uh, assets to a portfolio, uh, and strategies, I mean, um, they also provide an incremental return. That’s, that’s really the key here is not, you’re not just, uh, like for example, an inverse S&P 500, uh, ETF, you know, would have a correlation of -1 and, you know, when the S&P 500’s down 10%, the inverse is up 10% and vise versa when the I- when the index is up 10%, the inverse is down 10.

Yeah,

[00:20:30] Robert Wilson: that, that-

Um, so when, you know, when

[00:20:31] Pierre Daillie: you have that one for one cor- that one for one negative correlation, all it does is mitigate, you know, you’ll, you’ll end up with a straight line. Uh, uh, you know, of s- of course not withstanding the, uh, the daily resets. Um [laughs], right? It’s not-

Yeah, we’re not…

[00:20:46] Robert Wilson: Yeah, we’re not talking about buying-

Yeah.

… insurance, right? Insurance has a negative expected return, right? So we’re not talking about buying insurance here. Uh, and if you actually were to, to plot a chart of the standalone like quality of return, so how much return per either risk relative to diversification benefit against stocks, and you were to look at traditional asset classes, the ones that have like really negative correlation, they have pretty poor risk adjusted returns associated with them, and there’s a reason for that. So-

Right.

… what I think you wanna think about as a advisor is, what strategies can I buy that are the sweet spot? And by that, I mean they’re gonna do three things. The first is, they’re gonna deliver a return in excess of cash with a reasonable about of risk, uh, tied to that. Okay? So you get an attractive standalone risk adjusted return. Secondly, they’re gonna deliver a moderate to large diversification benefit to traditional assets. So, we’re not saying they’re gonna be negatively correlated, right? It’s not an inverses ETF, you’re not buying, uh, insurance. But it’s gonna be less sensitive to those risks and really, you know, let’s say half the time it’s t- uh, stocks are down, maybe it’s up, half the time they’re down, maybe it’s down too. But that, that’s a meaningful benefit.

So, uh, attractive standalone return, good diversification benefit against traditional assets, but also, step three and this one’s really important: Good diversification benefit against the other diversifiers that you own, right? In any given market sell off-

Right and that’s, that’s where

[00:22:14] Pierre Daillie: it potentially gets, that’s… Sorry. I di- I didn’t mean to interrupt you.

No.

That’s where it potentially gets complicated is that, is that y-you do need to do a fair bit of analysis, um, to make sure that not only are your diversifiers, uh, having, uh, the intended, uh, uh, impact on the, the broader part of the portfolio, the core portfolio, but they’re now having a negative impact on each other.

[00:22:40] Robert Wilson: Yeah. It’s, it’s really important, you dis- you don’t wanna be duplicating risks, right? You wanna-

Yeah.

… you wanna be really adding as many return streams in excess of cash that are independent from one another. And so, there’s two ways to do it, right? You can either build it or you can buy it, right? So build it, you’re selecting individual strategies, you’re assembling them together, thinking about the weightings, uh, buy it. You know, uh, managers, uh, uh, will put together a product for you, right? Like we have our absolute alpha, uh, lineup. Uh, those strategies assemble three different, um, strategies that are diversifiers from their lineup and they thoughtfully combine them into one product. And when you do that, there’s some additional stuff you could do to create value for an investor.

So the first thing is you can think about how am I gonna weight these strategies, right? And so you can use a, a weighting schema that’s related to the, the risk of each strategy. And that’ll provide a more consistent return. The second thing is because you can recognize the diversification benefit between the strategies, you actually size your trades a little bit larger and target a higher return, right? Making it a strategy that actually is suitable for equity replacement without giving up, uh, too much return to the portfolio. Um, the third thing is, because you’ve got that, uh, additional return potential, um, from sizing the trades larger, you can actually buy some insurance, right, put some tail risk hedges on the portfolio, while stopping very attractive overall return, and that’s gonna help you in the worst possible months.

So, uh, when you think about it, you, you can build it, uh, you can buy it, either approach is good. That’s what my team is doing day in, day out, right? We help you understand your current portfolio. We build a risk factor model of your portfolio so you can see, "Okay, here are my risk res- don’t just how much risk I’m taking, where is it coming from? Is my risk concentrated? Are my risks intentionally scaled appropriately?"

Once you understand the current situation, you can identify one: Where should I be sourcing funds to build this alternative allocation, like, should it be coming from equities, should it come from, from fixed income? And number two is, okay, what kind of strategies to action would have a high diversification benefit for my portfolio? Do I need commodities? Do I need event driven? Do I need absolute return? Like, what’s gonna actually, uh, you know, fix the mix for my clients?

And it’s important because with all this cash building up in the portfolios and the flows, at some point, people are gonna re-risk, and when they re-risk-

Right.

… they’re gonna have a really important decision to make. Do I re-risk by just buying more of the largest source of risk already in my portfolio and just make it more concentrated? So I just buy more stocks. Or, do I re-risk in a diversified way? So I add more stocks, but I also add more high return strategies that aren’t dependent on the stock market. And so I think that’s a really important question to think about and I think that’s a great game plan an advisor can take to a client is, you know, when it comes time to re-risk, let’s re-risk in a diversified way, and-

Right.

… that way, if another year like 2022 comes along, you’ll be able to handle it much better.

[00:25:30] Pierre Daillie: Looking at, at, you know, just thinking about portfolios and, and, uh, you know, sort of clarifying things, I think, I think the, you know, the long-term constant position of a portfolio should continue to own equities, right? And, and because, you know, that’s the single, uh, you know, that’s probably the, the most single and constant, uh, source of wealth creation in our economy, in our markets. Um, the part that’s variable, the part that can change or should be changed from time to time, depending on the cycle or the regime, is the bond, is the, uh, the bond allocations. Um, but it’s difficult, I think, I think right now, you know, people are looking at the bond, the bond side of the portfolio and they’re thinking, well, it didn’t do what it was supposed to do this year, and, and for, for obvious reasons. Um, but that seems to be the place where a lot of assets will shift from.

And, and is that the natural place where, where assets should shift from in order to, uh, get into some diversifiers, or, uh, I mean, aside from shortening duration on, on the bond side, uh, you know, there’s been a lot of talk about just shortening, shortening the, uh, the duration of bonds, um, st- you know, seeing as yields are, are, uh, higher. Um, there’s a certain amount of safety in doing that. But that’s sort of the low, the very low hanging fruit. It’s, it’s, it’s also not necessarily, it, it’s not necessarily a good long term decision.

I think the, the, y-you know, as, as we both know, the, the worst thing you can try to do is time the market, and, and, you know, in terms of getting out and then thinking that you’re gonna get in, get back in and re-risk at the right time also. That’s also very big behavioral risk. And what I’m getting at I guess just to sort of, um, come to a conclusion is that, is that what, what y- what you’re helping advisors to understand and, and to implement in their model portfolios is a way of investing that’s going to stabilize, uh, not only the portfolio and smooth, smooth the ride over the long-term, um, a-and you’re not making a call on the market because that’s, you know, it’s impossible, uh, you know, to make precise calls on the market, but what you are doing is making a call on uncertainty. And that call on uncertainty is basically that there are so many moving parts in the market, um, how can you position your portfolios so that no matter what happens, no matter what comes at us, um-

Yeah.

… you’re not fa- you’re not faced with a panic decision because parts of your portfolio have suffered immensely, um, because other parts of your portfolio, other, uh, uh, components of your portfolio have provided the, the ballast.

[00:28:22] Robert Wilson: Yeah, uh, no, I think y- there was a lot to that, Pierre but y-y-you hit, hit on a bit something I think was just crucial, right, which is this idea that investing is supposed to be easy. If you’re bullish, you buy more stocks.

[laughs].

If you bear it, more cashing over bonds.

Yeah.

The problem is we live in a world of uncertainty. And that uncertainty-

Right.

… sometimes is very high, like right now, sometimes it’s a bit lower. And so that’s why we have a diversified portfolio. And so if you think about it, how much value is your strategic asset allocation adding to your client, compared to just a broad reference portfolio of stocks and bonds? And the answer is, it should be a lot. You should be adding a lot of value just by having a better long term strategic allocation.

And what I mean by that is that you’ve got a better breadth of diversification. You have more assets and more strategies at work than just stocks and bonds. And if you do that, you have such a big headstart in terms of the likelihood that the plan will be easy to stick with as well as the likelihood the plan’s gonna be successful if you do it properly.

With that headstart, then the years that you get a tactical calls, right, you’ll be a hero, but you won’t be a complete dog in the years that you get them wrong ’cause you’ve got this persistent headstart for a better long-term-

Right.

… strategic mix. And so, it starts with that. It s- it starts with saying okay. I have more tools available to me now than I did five years ago. I can get very broad exposure to asset classes with the plethora of ETFs, and now I have ready access to alternative strategies through liquid alts, and firms like Picton Mahoney, um, I can actually build, you know, an int- institutional grade strategic asset allocation. And if you do that, and you combine it with high quality building blocks, and you’re thoughtful about the position sizing, you can have a very good outcome for your clients.

And so, it, it, it, when you’re asset… Oh, does it come from stocks, does it come from bonds? Well, the answer is, it depends. A lot of the money that we’ve seen go into diversifiers has to go into the bonds in the past couple year ’cause of how low rates have been, but you also wanna think about stocks, especially when you think about high net worth Canadians. So, a lot of high net worth Canadians, the kind of stocks they own are these blue chip defensive style stocks. They want to own stocks, but they don’t wanna lose as much money when the stock market closes down.

If you actually analyze those types of stocks, the most defensive sectors and the most defensive styles, like factor exposures, are both more rate sensitive than the broad market, right? So you get this funny situation where perhaps someone executed that playbook that you kinda talked to in your comment of bringing down their fixed income duration, but their overall portfolio is not under rate duration because they’ve got a ton of rate sensitivity-

Right.

… coming from these defensive equities. So in that case, if you really want to fix the mix, if your goal was to have, you know, be less reliant on the level of rates to protect against selloffs, less reliant on government bonds to protect against selloffs, you need to not just take from the fixed income side to be able to resize, you actually need to take from the equity side too.

And so what’s important there then, ’cause you don’t wanna compromise the overall return potential of the portfolio. So you don’t buy one of these stable diversifiers, you know, with 2% or 3% evolved. That makes a great bond replacement, you find a-

Right.

… diversifier that’s actually taking a good, you know, five, 7% evolve, and can deliver a means of return to your portfolio. That’s a great replacement for equities. And the great thing is, both of those options are available. There’s a wide range of products, um, so you can build your diversification really both from the equity side as well as from the, uh, fixed income side.

Wow. Very

[00:32:02] Pierre Daillie: interesting and, uh, definitely very interesting times we’re in. What are some examples of diversifiers in Picton Mahoney’s strategies?

[00:32:09] Robert Wilson: Yeah, so if you look at our, our fund lineup, we’ve really got three separate unique sources of alpha, or uncorrelated return. Okay. So we’ve put in an equity team that manages the market mutual strategy. That’s gonna have a beta of near zero, plus or minus a .1, the return really is gonna come from their stock selection skill rather than the level of direction of markets. The second is we have, uh, an event driven credit team. They manage our special situations fund. There, they’re using hedges, uh, to reduce the sensitivity to market risk and profiting from identifying opportunities within specific companies.

So, typically some sort of event has been announced or there’s a likelihood that a bond will get taken out and they’ll do the work on that company, identify where the capital structure of the opportunity lies, place a trade in the bond and look to make a couple points in capital gains. So that’s great because that’s a way that you can generate capital gains in the bond market without just depending on a, a rebound in credit spreads or interest rates.

And then finally, we have another equity team that does merger arbitrage investing. They manage our arbitrage, arbitrage plus funds. And we talked a little bit about how that strategy, uh, can be a great diversifier, um, earlier in the call. And so, when investors are looking to assemble, uh, a portfolio, uh, uh, of diversifiers to compliment their traditional assets, we have a number of boxes to, to choose from depending on the specific outcome you need for the client, but we also put it all together.

So, you don’t have to build it yourself, you can also just buy it. We have our absolute alpha strategy. Uh, there we combine those three portfolio management teams into a single product, and the idea is that way you don’t have to, to pick and choose and try and, uh, identify which one maybe would be the most attractive over the next year or six months, you could simply have the nice diversified basket of all three.

Robert,

[00:33:57] Pierre Daillie: thank you, um, thank you so much for your incredibly valuable time and your insight. Where can advisors find you?

[00:34:06] Robert Wilson: Great, yeah. So we’re, we’re on the web. It’s www.pictonmahoney.com and if you’re interested to hear more of the, the content from the roadshow, uh, reach out. The sales team contact’s all on there. They’re happy to connect you with, uh, you know, key followups or recordings. We think it’s a really important time to be thinking about, uh, the next few years and starting to put the plan in place for investors. I tell them navigate, you know, a world of shorter cycles and, uh, inflation that may be flaring up, uh, uh, again from time to time.

Thank you, Robert.

Thanks, Pierre.