Episode 206

full
Published on:

19th Jul 2024

Ben Reeves: From Bridgewater to Wealthsimple: Institutional investing Through a Robo Advisor

In this episode, the ReSolve team chats with Ben Reeves, a seasoned financial professional with a wealth of experience in portfolio construction and investment strategies. Ben shares his journey from working at Bridgewater to facing a health crisis, and eventually joining Wealthsimple. The conversation delves into the intricacies of allocation research, portfolio design, and the challenges and opportunities in the private investment space.

Topics Discussed

• Ben's transition from institutional investors to portfolio construction and his learnings from Bridgewater

• The impact of a health crisis on Ben's career and his shift to Wealthsimple

• The essence of long-term investing and the importance of putting money at risk in a reasonable way

• The exploration of privates as a first step in diversifying investment portfolios

• The challenge of tracking error constraints in portfolio design and how Wealthsimple navigates this

• The behavioral advantage of privates and the fear of giving up liquidity

• The difficulty for active managers to reliably outperform without overweighting certain sectors

• The role of gold and commodities in diversifying portfolios and mitigating risk

• The importance of putting money at risk in a reasonable way and avoiding performance chasing

• The potential of leverage as a diversifying tool or a risk-reducing tool

• The constraints and considerations in adding leverage to portfolios

• The personalization of portfolio construction and the shift towards risk parity

This episode provides a deep dive into the world of portfolio construction, the role of privates in diversifying portfolios, and the challenges of tracking error constraints. Ben Reeves offers valuable insights from his experience at Wealthsimple and Bridgewater, making this a must-listen for anyone interested in investment strategies and portfolio design.

This is “ReSolve’s Riffs” – published on YouTube Friday afternoons to debate the most relevant investment topics of the day, hosted by Adam Butler, Mike Philbrick and Rodrigo Gordillo of ReSolve Global* and Richard Laterman of ReSolve Asset Management.

*ReSolve Global refers to ReSolve Asset Management SEZC (Cayman) which is registered with the Commodity Futures Trading Commission as a commodity trading advisor and commodity pool operator. This registration is administered through the National Futures Association (“NFA”). Further, ReSolve Global is a registered person with the Cayman Islands Monetary Authority.

Transcript
Ben Reeves:

and then investors learn by mistakes, right?

2

:

I know that's, that's how I learned.

3

:

And, you know, if you're earlier in

your career and you, if you performance

4

:

chase now, it can work out for a while,

probably not a great long term strategy.

5

:

And you'd sort of, you know, I

think one of the things you learn

6

:

as investment managers, you're,

just, like, wrong all the time.

7

:

You learn to diversify, and people

generally need to learn, just

8

:

experience that for themselves.

9

:

So you can provide as much

context and help as you can.

10

:

And then, you know, things happen and,

hopefully, they'll still be compounding

11

:

and stay in the game and stay invested.

12

:

Adam Butler: Hello and welcome to

another episode of Resolve Riffs.

13

:

I'm one of the hosts, Adam Butler.

14

:

I'm the Chief Investment Officer

of Resolve Asset Management.

15

:

This week we interview Ben

Reeves, who's the Chief Investment

16

:

Officer at Wealthsimple,

Canada's largest robo advisor.

17

:

And Ben started his career at Bridgewater.

18

:

It really shows in how he has structured

Wealthsimple's investment offering.

19

:

They've really prioritized

diversification in a way that you

20

:

don't find at many other robo advisors.

21

:

And you rarely find with

traditional investment advisors.

22

:

And as part of their rollout of their

sort of diversification category, they

23

:

started with private investments, private

credit, private equity, and they've

24

:

taken a really thoughtful approach

to how they both select managers and

25

:

structure the offering for a robo advisor,

primarily retail oriented platform.

26

:

We also get into what their vision

is for rolling out more diversified

27

:

strategies over the next six to 12 months.

28

:

branching out into the more sort of

hedge fund style, strategies, maybe

29

:

market neutral, managed futures in

a return stacking context, perhaps.

30

:

So lots of great grist for the mill here.

31

:

We really enjoyed the conversation

and I think you will too.

32

:

Rodrigo Gordillo: right, Ben,

welcome to the resolve riffs podcast.

33

:

it's been a long time coming.

34

:

Ben Reeves: Yeah, that's what

we've been talking a long time.

35

:

Happy to be able to do this finally.

36

:

This is great.

37

:

Rodrigo Gordillo: Yeah.

38

:

Yeah.

39

:

I'm really looking forward to this one.

40

:

So, you know, everybody's heard

anything that they need to know

41

:

in the intro of this podcast.

42

:

So, you know, why don't you, why

don't we kind of let you have a

43

:

bit of a shot at your background,

just kind of like your, your, your

44

:

career journey so that we can let the

audience know who they're talking to.

45

:

Ben Reeves: Sure.

46

:

Yeah.

47

:

So it's, it's been like, I guess

everybody, it's been a journey.

48

:

so I think, I started, it made

me start going back to college.

49

:

I thought I was going to go, I was

always interested in markets, thought

50

:

I was going to go major in econ.

51

:

I took a couple of classes and

I thought they were just not

52

:

captivating or not interesting.

53

:

And I ended up studying history of

ideas and said, so I did a bit of

54

:

philosophy of religion, in college.

55

:

Like what's the, what was a good, what

were the ideas that everybody thought

56

:

made sense most profound in life?

57

:

And how did that change over time?

58

:

and, and, you know, very, very impractical

major, but something I was just sort of

59

:

deeply fascinated with at the time and

sort of spent a few years studying that.

60

:

But obviously like almost

unemployable out of that, right?

61

:

Like you can kind of think, you

can think it's actually about that.

62

:

That's sort of all you leave college with.

63

:

and so I went to a, I went to a startup

where we were, this was early:

64

:

So we are doing helping companies figure

out, you know, what do you do with

65

:

the internet to, you know, how do you

change your business for the internet?

66

:

we did okay for a couple of years.

67

:

and then.

68

:

The dot com crash hit and we were

sort of sold for parts to IBM.

69

:

And that was, that was like my

foundational, corporate experiences.

70

:

Things are going great.

71

:

And then, you know, you see the,

see the crash in the two thousands.

72

:

after that, I went to grad

school at UChicago, studied

73

:

public policy and business.

74

:

Sort of wanted to go back to the things

I was interested in in high school.

75

:

So, you know, learn the econ

again, you know, do it, do

76

:

some quant training and so on.

77

:

I spent a few years at McKinsey, and then

shifted to Bridgewater Associates, which

78

:

is a big hedge fund in Connecticut in a,

I started out doing an investing role.

79

:

it took the class for, You know, it's a

little old, but took the class for like

80

:

a new analyst, reported to a 23 year old

for a while, and did asset allocation

81

:

research for institutional investors.

82

:

and then shifted over to working in the

portfolio construction group where we were

83

:

applying risk controls to the systematic

strategies on a, on a daily basis.

84

:

which, you know,

Bridgewater was, was great.

85

:

It was, I think I learned a

ton there both about investing.

86

:

And also like, how do you run an

investing organization in a really, in a

87

:

really precise way, a high quality way?

88

:

How do you think about client service?

89

:

You know, a lot of really, sort

of really great mentors there.

90

:

And they have really figured out a lot.

91

:

But towards the end of my

tenure, I, I, my kidneys fail.

92

:

It was a sort of a health

crisis and, I ended up needing

93

:

to take a couple of years off.

94

:

I couldn't do Bridgewater anymore.

95

:

It's a pretty intense place.

96

:

Like, you know, Couldn't

pull 12 hour days anymore.

97

:

but one of my friends had, had, was

an early employee at Wealthsimple,

98

:

which is a, you know, at the time,

a pretty small startup, based in

99

:

Canada and, and a robo advisor.

100

:

And he said, you know, I know you only

have a couple hours a day, but can you

101

:

come in and help us figure out investing?

102

:

And it seemed really fun.

103

:

We had always talked about that at

Bridgewater, you know, how do you,

104

:

wouldn't it be cool if we had a

robo advisor and, you know, and, and

105

:

we could really, you know, do it.

106

:

Give people high quality

investment management at scale.

107

:

then as a, as my strength return, I was

able to grow my role at WealthSimple

108

:

over time, and I've been WealthSimple

about five or six years now.

109

:

and basically do everything,

investing it for WealthSimple.

110

:

So a lot of communication,

we set up our own funds.

111

:

we, you know, asset allocation.

112

:

And then, it's also really fun to

work with really great technologists

113

:

and designers, to, to create product

experiences that, you know, Try to reflect

114

:

sort of the essence of investing or

the, the essence of long-term investing

115

:

and compounding to, to our clients.

116

:

Adam Butler: It sounds like you and I

would be, would be of an age because,

117

:

I remember going through that whole dot

com with a startup and, You know, guys

118

:

coming to the office with bags of gold for

you to build on the most basic website.

119

:

And, my wife was in the internet group at

Boston consulting group at the same time.

120

:

And so we were just absolutely.

121

:

Flat out for a couple of years.

122

:

And then I actually transitioned to IBM.

123

:

Did you ever work at IBM then

when they, when they sold off or,

124

:

Ben Reeves: I did.

125

:

I worked for the right

there for a little bit.

126

:

The big corporate life was not,

was not for me, but, but I, I

127

:

worked there for a little bit,

128

:

Adam Butler: yeah, yeah, that was a,

that was definitely an experience,

129

:

but that whole experience into that.

130

:

com peak was pretty, pretty wild.

131

:

A lot, a lot of lessons learned

on the other side of that too.

132

:

But,

133

:

Ben Reeves: you know,

134

:

Adam Butler: so

135

:

Ben Reeves: everything was totally

brand new and it was, you know, the

136

:

world was, the world was wide open

and a lot of things we're talking

137

:

about ended up being the right things.

138

:

It was just the valuations made

it a pretty difficult cycle

139

:

for all of us to go through.

140

:

Adam Butler: Yeah.

141

:

And I remember during the year I

was at the startup, we went from

142

:

about 80 people to 180 people.

143

:

And when I finally left,

they were down to 12.

144

:

Ben Reeves: Yeah, we were, I think we

were about half our size when we were,

145

:

when we were acquired is, is it's, and

it's brutal to see that happen to people.

146

:

Adam Butler: Yeah, that

was, it was bonkers.

147

:

Um, hard segue here, but I know that, or

my, my sense is that at Wealthsimple, you

148

:

guys have, you're trying to implement.

149

:

Many of the sort of, diversification,

free lunch principles that you

150

:

would have learned, obviously had

hammered into you at Bridgewater

151

:

and then, espoused in other roles.

152

:

And that my understanding is as a

first step, you guys have tried to

153

:

sort of move into the privates space.

154

:

And I'm just curious, what was your

thinking as you, you know, as you

155

:

sort of looked across the alternate

alternatives landscape or just

156

:

thinking how does it land on, we

should try privates first, then.

157

:

How did you move in that direction?

158

:

Ben Reeves: Yeah.

159

:

So how we think about, How do we

think about investing in general?

160

:

We, we start with just

from a point of service.

161

:

We want to help our clients

grow and compound wealth.

162

:

And that is pretty clear hierarchy.

163

:

Like the thing you need to do for most

of our clients, 30s, 40s is save and put

164

:

your money at risk in a reasonable way.

165

:

and then we have a base portfolio that is.

166

:

It's like very CAPM and

conventional, but a little bit tilted

167

:

towards risk parity principles.

168

:

We have a little goal, a little

more geographic diversification,

169

:

some more sharp ratio efficient

equities, a bit more, bonds for

170

:

asset class diversification.

171

:

but that's also a difficult thing

for people to understand, right?

172

:

Like it's just a pattern of returns

and it plays itself out over time.

173

:

and then, so I look for other ways

where I can offer better diversification

174

:

or better returns into portfolios.

175

:

And then, and so I think

that then I, I have a choice.

176

:

I can do, quantitative strategies that

I think do offer good diversification,

177

:

maybe a little harder to understand,

or I can offer private assets where,

178

:

you, you still do get either alpha

potentially, or a differentiated return

179

:

stream, like we offer private credit.

180

:

I think that's.

181

:

That is diversifying.

182

:

and that seemed like a way that you can,

in a way that makes sense to people,

183

:

offer a bit more diversification,

a bit higher expected return.

184

:

Like private credit, I'm just

making loans to mid sized companies.

185

:

That makes all the sense in the world.

186

:

and it seemed like a pretty good

place to start in, in getting people

187

:

comfortable with privates alternatives

and portfolios that might be a bit more

188

:

resilient or bit more likely to compound.

189

:

Adam Butler: On the portfolio design

front for WealthSupport, I mean, we

190

:

obviously have, a wealth book ourselves.

191

:

We deal with, advisors who run

primarily retail wealth books.

192

:

So we're constantly dealing with

this kind of Pareto frontier of how

193

:

can I maximize portfolio efficiency?

194

:

At some, you know, tracking

error that people can accept.

195

:

Have you done any quantitative modeling

or sort of general thinking on what

196

:

kind of tracking your constraints,

and the type of tracking error that

197

:

people, are willing to tolerate?

198

:

I'm sure you've sort of tried some

stuff and gotten feedback from people.

199

:

What have you learned in that journey?

200

:

Ben Reeves: it's tough because

it's so outcome dependent, right?

201

:

Like people love the track.

202

:

They'd love the track here March, 2020

or, you know, end of:

203

:

know, don't love it and, you know.

204

:

Now, right?

205

:

Like where, where you have the

North American stocks you're

206

:

doing, are doing super well.

207

:

I, my sense is it's

highly, highly individual.

208

:

so you have people who are benchmarking

themselves to North American stocks

209

:

to ask you questions about why you're

deviating from North American stocks.

210

:

And I think you, you either need to have

a good one on one relationship with them

211

:

so you can talk them through the trade

offs, or you need to offer them the thing

212

:

that they're going to benchmark themselves

to, because back to the hierarchy of

213

:

the most important thing is safe, put

your money at risk in a reasonable way.

214

:

and then, you know, and then

start improving the sharpe ratio

215

:

and your, You know, that range of

outcomes that you get over time.

216

:

but then we have a lot of clients who

are just saying, I trust you, you know,

217

:

help me put, put your money at risk.

218

:

we ended up with about a 2

percent tracking our target.

219

:

we know it's, which is a lot relative

to a lot of, a lot of other portfolios.

220

:

and I, I think that works for a lot of

clients, but then it's, it's just highly,

221

:

highly, variable and, and individual.

222

:

Adam Butler: What's the 2

percent tracking error too?

223

:

Ben Reeves: So

224

:

Adam Butler: what do you guys hold

up as a, as a quality emotional

225

:

benchmark for most clients,

226

:

Ben Reeves: we made a

reference portfolio that is.

227

:

sort of try to track towards the median

of like the average mutual fund in Canada.

228

:

And then we checked it against,

sort of like a, a typical robo

229

:

portfolio or asset allocation ETF.

230

:

And it's some representation of, of that.

231

:

It's just a way to represent expectations.

232

:

Adam Butler: it's just a

weird, it's well, not weird.

233

:

It's, it's a bit more complicated

if you're not in the U S because

234

:

you've got to kind of, especially

in Canada, you know, Canada's

235

:

Canadians, they'll reference

Toronto stocks or Canadian stocks.

236

:

If Canadian stocks are doing really

well, and then they'll reference U.

237

:

S.

238

:

equities.

239

:

If U.

240

:

S.

241

:

equities are doing really

well, so it's their,

242

:

Rodrigo Gordillo: Always a moving target.

243

:

Adam Butler: tends to change over time.

244

:

Do you not find?

245

:

Ben Reeves: I, yeah, I, I do find it.

246

:

It's, it's, it's that set of clients

who are really watching the portfolio

247

:

on a, you know, even, you know,

three, five year basis, right?

248

:

Like that's, You don't learn much

over that kind of a time period.

249

:

but you do find some clients doing that.

250

:

I think Most of our clients, and the

issue I usually face with most of

251

:

our clients is more, risky assets

are a good bet to outperform cash.

252

:

Like that was the big deal two years ago.

253

:

Right?

254

:

And I spent, you know, most of a year,

year and a half just talking to people

255

:

about, I know cash is yielding four or 5%.

256

:

Their equities are a good

bet to outperform, stick

257

:

with it when things seem bad.

258

:

Like that, that kind of basic advice.

259

:

And then, and what we see is, not, we,

we don't see so much performance chasing,

260

:

but we see people just not investing

their savings when things feel scary and

261

:

then waiting for things to feel better.

262

:

and, I think that, that'd just like put

your money at risk in a reasonable way and

263

:

try to compound, if I look at our, our,

our, We have, you know, we have brokerage

264

:

clients and we have managed clients.

265

:

If I look at the outcomes between the

two, just the fact that our managed

266

:

clients are putting their money at risk

and compounding, like gives very, very

267

:

different wealth outcomes for them.

268

:

I know our brokerage clients, some of them

are training actively for fun, like maybe

269

:

different, you know, different objectives.

270

:

but even if you look at say our

flows relative to ETF flows,

271

:

people are getting in and out.

272

:

the real advantage is just put

your money at risk over time.

273

:

Rodrigo Gordillo: And I imagine because of

all that, Ben, that you're seeing better

274

:

returns in the managed portion rather

than the, DIY portion of WealthSimple.

275

:

Ben Reeves: Yeah, it's,

it's night and day.

276

:

I get it.

277

:

I do a little regression of the DIY

returns and, it's, it's a lot of TSX.

278

:

It's a lot of, it's not a factor model.

279

:

It's just like, I just do a simple

regression of like TSX, SPY and

280

:

NASDAQ actually explains most of

the returns, not even the factors.

281

:

they explain a lot of returns and

you get a huge negative alpha.

282

:

a little bit more in risk.

283

:

But it's basically, it's basically

like sort of attempts at market timing

284

:

or struggles with ideal generation so

you take too much idiosyncratic risk.

285

:

Rodrigo Gordillo: Now, as you said,

a lot of this can be, it's, it's

286

:

always interesting when you have

a platform like WealthSimple where

287

:

you, you really have built the

business on, on portfolio management.

288

:

Right.

289

:

But then you have this side gig of DIYers.

290

:

I mean, is there a lot of crossover

between the two where you see like 90

291

:

percent of assets in the managed and

then 10 percent of assets in the casino?

292

:

Ben Reeves: Yeah, you see

people wanting to do play money

293

:

or I want to take play money.

294

:

You scratch this itch or

I believe in this company.

295

:

and then you see, and then within

our DIY, we see some people who are

296

:

just investing in ETFs and trying to

compound and then other people who

297

:

are, sort of in between and, and, and

trying to do both or, or trying to do

298

:

market timing strategies and so on.

299

:

And then the, the, obviously because,

because the active strategies have

300

:

so much more evolve and your ETF

compounders that sort of overwhelms

301

:

the returns of everybody else.

302

:

Rodrigo Gordillo: Right.

303

:

And so, so like, can I just

shift back to the privacy?

304

:

Cause I think a lot of this backing

error, volatility, risk taking, you

305

:

know, take, trying to take risks

in order to do better than cash.

306

:

One of the things that I think I've

been fighting for many years on the

307

:

private side is this feeling that.

308

:

You know, the private,

issuers are cheating, right?

309

:

Like they are, they get to hide

behind a volatility blanket, a

310

:

dampening blanket that none of us get

311

:

Ben Reeves: Yeah.

312

:

Yeah.

313

:

Rodrigo Gordillo: We don't get to,

we don't get to play in the same way.

314

:

and you know, I'm throwing my hair,

my arms up and saying, you guys are

315

:

taking more risks to leave or play,

but in reality, There's obviously

316

:

a behavioral advantage, right?

317

:

It is what it is.

318

:

There's no other way to really, or

at least we haven't figured out a

319

:

solid way to understand pricing on the

private side on a day to day basis.

320

:

So do you find that, that behaviorally

people, you guys haven't launched

321

:

this yet, but is that part of your

Your idea here on the private side

322

:

that it's going to allow you to

add diversification without having

323

:

a lot of, people freaking out.

324

:

Like, is that the main driver here?

325

:

Ben Reeves: so the, the, the driver,

it's more, you start from like,

326

:

let me offer a better portfolio.

327

:

And then I think there, there are

behavioral it, or there's kind of

328

:

their behavioral trade offs, I think.

329

:

so.

330

:

But for example, for, but like, when

we describe what private credit is,

331

:

we will say like, we made an index

of like, we do liquid index indices.

332

:

We try to add in the missing ball

and say that this is the role in the

333

:

portfolio to try to get a sense of

the underlying risk, private equity.

334

:

Same thing.

335

:

We take small caps.

336

:

We add, you know, we add in the,

you know, it's like the excess

337

:

volatility mystery, right?

338

:

We add that back in and say, this

is the, you know, this is the

339

:

impact on your, on your portfolio.

340

:

So

341

:

Rodrigo Gordillo: Okay.

342

:

You guys are actually making,

striving to provide some sort of,

343

:

transparency into the process.

344

:

Ben Reeves: Yeah, we try to provide some

transparency, but also like, the problem

345

:

investors do have and why there's a

behavioral advantage to privates is, is

346

:

that there is too much volatility relative

to The journey you're on or, you know,

347

:

your probability of being successful.

348

:

so, so I, you know, I, there

probably are advantages to that.

349

:

but I guess there, you have to

think about it both ways, right?

350

:

so there are, there is a lack of

marketing, but there's also a lot

351

:

of fear about giving up liquidity.

352

:

and you know, clients are saying it's,

it's your 40 year retirement portfolio.

353

:

I'm scared of putting 10

percent into something illiquid.

354

:

and so.

355

:

That's equally a behavioral issue

as the, as the lack of marking.

356

:

And so you try to sort

of educate on both sides.

357

:

Rodrigo Gordillo: And

that's an interesting topic.

358

:

I think listeners are going to want

to know how you handle all the issues

359

:

in privates, especially as markets get

more and more illiquid, more panicky.

360

:

You know, on the private side, I've seen

a lot of investment advisors in the US and

361

:

Canada really concentrate that 10 percent

that you speak of, they'll concentrate in

362

:

like one provider and, and kind of, you

know, say that they're, you know, They

363

:

have diversified, exposure to privates

and we're seeing a lot of privates take

364

:

really scary moves, at least to the one,

us watching from, from outside, you know,

365

:

where, where certain, Certain holdings,

they're not able to pay their yield.

366

:

And so they're going out and

borrowing in order to be able

367

:

to then meet their covenants.

368

:

how are you guys seeing

that in the space right now?

369

:

And how do you manage that level

of risk, in, in the current cycle?

370

:

Ben Reeves: Yeah.

371

:

So I think first thing is we set up our

vehicles is like asset class exposure.

372

:

So we have the Wealthsimple Private Equity

Fund, and you know, we can then allocate,

373

:

we only have one manager in there

now, but the manager we chose is LGT.

374

:

They're an endowment.

375

:

We're getting, an endowment

portfolio like that, and they

376

:

are principal investors in it.

377

:

So, and that, so we start out with

300, 400 companies, it should be able

378

:

to give you asset class exposure.

379

:

we're not doing a, you know, here's

your typical drawdown fund with 10

380

:

platforms and a lot of idiosyncratic risk.

381

:

So we, we try to manage it both

with alignment because the, I think

382

:

privates really are the deep end.

383

:

And a lot of investors and advisors

aren't really set up to underwrite

384

:

a private manager well, right?

385

:

You need to do a lot of diligence,

make sure they're honest, do your

386

:

background checks, keep monitoring them.

387

:

so we, we try to make sure that

we're highly diversified and that

388

:

we do get good alignment so that,

and the people managing the money

389

:

also have their skin in the game.

390

:

Their net worth is also, in the product.

391

:

so I think those are probably the,

the, ways that we deal with it,

392

:

diversify, make sure your alignment

and then make sure you're doing

393

:

real professional due diligence.

394

:

and then finally just

do the real modeling.

395

:

So you're sizing it appropriately, right?

396

:

Like, like I was talking about, add

back the volatility, make sure you,

397

:

you know, you have a framework for how

your portfolio should, should, perform.

398

:

and that's sort of the

combination of things we do.

399

:

Rodrigo Gordillo: Yeah.

400

:

Well, you're not putting an optimizer

and getting a 40 percent allocation of

401

:

privates because they're so low ball.

402

:

Ben Reeves: we're adding, yeah,

it's where like levered small

403

:

caps is, is, is private equity.

404

:

Adam Butler: And so what percentage of the

portfolio is in privates for kind of a,

405

:

standard autopilot, well, simple mandate.

406

:

Ben Reeves: Right now it's all bespoke

because privates are so new and we want

407

:

people to make sure they're comfortable.

408

:

they, they will go to us for advice

and we, but we'll give a range and

409

:

then try to show the, show the impact.

410

:

and then that'll vary

based on the asset class.

411

:

So, I'm more comfortable putting

more, If for your typical:

412

:

private credit in there, if it's

senior secured, it will, it can be

413

:

diversifying to bonds and stocks.

414

:

then, you know, adding a bunch of

private equity where you're at, or

415

:

you're adding actual volatility to a

client that's asking you to manage their,

416

:

you know, manage their risk, for you.

417

:

So it really depends on the risk

level and then also your, your

418

:

comfort with privates, and also the,

any liquidity strains that you have.

419

:

Rodrigo Gordillo: Right.

420

:

So, let's move on to other areas of

diversification, or lack thereof.

421

:

when I look at robo advisors,

and I think you guys are at the

422

:

bleeding edge of trying to be

more to risk parity than others.

423

:

I

424

:

Ben Reeves: Yeah.

425

:

Rodrigo Gordillo: when you look

Vanguard and all those, you're

426

:

still seeing a traditional 60 40.

427

:

there's, When you're when you're doing

market cap weighted and you're making

428

:

that decision to allocate to those what

you're really Allocating to is very

429

:

concentrated positions in you know,

the mag seven at this point, right and

430

:

especially when you're doing the US

How do you guys manage that if at all?

431

:

Is there a way like have you guys

figured out a way to kind of you know?

432

:

Either mitigate or maybe even add

to them like what what do you guys

433

:

do with with concentration there?

434

:

Ben Reeves: So I think.

435

:

There are two ways you deal with it,

like always as an investment manager,

436

:

you do portfolio construction and

you do communication and both are

437

:

probably equally equally important.

438

:

Communication is probably more important.

439

:

portfolio construction, we try to, we

allocate to some defensive equities.

440

:

We do more geographic diversification.

441

:

We do more asset class diversification.

442

:

It's a relatively straightforward thing

if you're not trying to, if you're not

443

:

trying to market time or do tactical, like

that's, those are pretty straightforward.

444

:

Pretty solid ways to diversify

and improve your sharpe ratio.

445

:

and then in terms of communication,

we do a lot of education about, I've

446

:

done a series this year on what does

the equity market cycle look like?

447

:

Like, what does it look

like over eight years?

448

:

What's, you know, what can

you expect over that cycle?

449

:

and also what, like, what is this thing

called an equity market supercycle?

450

:

What does that mean?

451

:

Where are we in it?

452

:

and.

453

:

A lot of the pitfall I see people

falling into with that stuff is you're

454

:

saying there is this thing of a super

cycle, therefore you're doomed, right?

455

:

Which is not the case, right?

456

:

Late cycle, you can do really, really

well for a long period of time but try

457

:

to provide that level of transparency

and historical context, but in a way

458

:

that's very, very highly digestible.

459

:

Adam Butler: hold on now.

460

:

Let's maybe, can you say a little bit

more about this super cycle concept?

461

:

Because, I think we're Rod and I

are both familiar with the concept.

462

:

Is this sort of the Ray Dalio's long term

credit cycle, or is this a spin off of

463

:

that or something completely different?

464

:

Ben Reeves: it's, it's more

just taking the observation of.

465

:

You know, there have been huge secular

bull markets, huge secular bear markets,

466

:

and just educating on the fact that

that has been a thing that's happened.

467

:

So 68 to 82, 82 to 2000, right?

468

:

2000 where we call it 2012, 13,

and then, and the current one, just

469

:

so you know, that that's a thing.

470

:

That's all I'm trying to do.

471

:

I'm not even saying that here's the,

there's a little bit of interior logic,

472

:

but here, here's how it works, but more

just because a lot of our clients, right?

473

:

You've always had a FedPay,

you've been investing

474

:

Adam Butler: Yeah, right.

475

:

Ben Reeves: know, just that

is, I think, hugely helpful.

476

:

Rodrigo Gordillo: And so you're,

it's, it's more of a simple message

477

:

for the retail people that you're,

that you're dealing with, but

478

:

you are, do you see a lot of open

clicks on those types of emails?

479

:

Ben Reeves: Yeah, they do.

480

:

They, the, the, the secret sauce

is, I work with a great writer who

481

:

doesn't know much about investing.

482

:

but he's willing to ask all the

questions until he understands, which

483

:

makes what we do so much better.

484

:

What I, what I produce so much

better than I would otherwise.

485

:

Rodrigo Gordillo: you're getting your

hands dirty on, on the content as well?

486

:

Ben Reeves: I have a monthly letter series

that I, that I write to clients that

487

:

we try to like, we have, we have other

writers doing more content, but we try

488

:

to do one thing a month that we think is

really high quality, that educates on a

489

:

concept that we think is really important

just with the idea of, of service.

490

:

Rodrigo Gordillo: Oh, good for you.

491

:

Okay.

492

:

And you're using, so you have

a writer that doesn't have any

493

:

experience and you just say, You

give him an outline, he tries it out

494

:

and then asks a bunch of questions.

495

:

Ben Reeves: Yeah.

496

:

Yeah.

497

:

Rodrigo Gordillo: we have not found

any success in getting outside

498

:

writers and asking questions.

499

:

We'll have to pick your brain

on how to do that later.

500

:

Ben Reeves: Well, I just write it and

then he just, it's more writer, editor,

501

:

as opposed, we tried, we tried that way

with the writing and then as you probably

502

:

saw, I try to fill in ideas that don't.

503

:

You know, it don't make sense, or

they try to fill in their own things.

504

:

but if you're just answering questions

and making sure it's accurate, like that,

505

:

like that's what we do.

506

:

Rodrigo Gordillo: Yeah.

507

:

Cause I think communicating that tracking

error that you speak of is very tough.

508

:

We talked offline about how even CPP

IB is getting a lot of flack for not

509

:

performing as well as Mag7, right?

510

:

So it's not just retail.

511

:

That's.

512

:

That's pulling their hair out.

513

:

It's everybody.

514

:

Ben Reeves: Yeah, I know retirement, like

why not all, why not all stocks for, you

515

:

know, all the way through retirement?

516

:

Like it, it, it feels like it's very

much the narratives to support a price

517

:

Rodrigo Gordillo: not

even all stocks, right?

518

:

Like I think I should write a

letter just saying, okay, you

519

:

want me to invest in equities.

520

:

You want all stocks to wait.

521

:

You actually want the mag seven,

but if we want to outperform,

522

:

we should actually overweight.

523

:

You know, the mag seven and

then see what they reply.

524

:

It's just, it's such a difficult thing

to do when you have this level of

525

:

momentum with the largest companies

in the U S making all the returns.

526

:

there really is.

527

:

I don't see a way an active

manager can reliably outperform

528

:

without overweighting those things.

529

:

Do you?

530

:

Ben Reeves: Not right now.

531

:

No, it's, I think the way

you can outperform, like what

532

:

you're doing, portable alpha,

you can probably outperform.

533

:

I think You have a good odd of

outperforming, but if you're trying to

534

:

pick the right stocks, you know, no, it's

a, it's a, especially if you're doing,

535

:

if you're doing a limited tracking error

on a, trying to outperform over a few

536

:

years, like it's extremely difficult.

537

:

Adam Butler: I think one of the most

difficult periods for prudent investment

538

:

management that we've seen in a while.

539

:

I mean, to be fair, really since kind of

:

540

:

a little bit like that where you've got

this really heavy concentration in U.

541

:

S.

542

:

indices where U.

543

:

S.

544

:

indices now on a cap weighted

basis are kind of in the 60 percent

545

:

of total market cap range, right?

546

:

After 15 or 20 years, well, 15 years of

pretty profound outperformance of both U.

547

:

S.

548

:

equities and U.

549

:

S.

550

:

dollar relative to most of

the other major currencies.

551

:

And then at the, at the, the tip of the U.

552

:

S.

553

:

equity sphere, you've got these, you

know, whether it's 7 or 10 or 15 stocks

554

:

that represent just a massive proportion

of both total capital and total index

555

:

vol, you know, it's, it's just really

difficult that the, the trade off between,

556

:

you know, Diversification, prudence,

and tracking error to this concentrated

557

:

benchmark that is just outperforming

everything by a large margin, that's

558

:

a really difficult tightrope to walk.

559

:

Ben Reeves: Yeah, I

think it, I think it is.

560

:

And then the, the companies are, that are

concentrated, they're doing really well.

561

:

They're great companies.

562

:

The earnings have been really solid

563

:

Adam Butler: Yeah.

564

:

Ben Reeves: that maybe you're

a few questions right now

565

:

about the AI CapEx story.

566

:

Does it continue?

567

:

but it's, they're not obviously at like

40 times earnings or, you know, it's not,

568

:

it's not that terrible, at this point.

569

:

and that's where I think you

have to go back to, or we, we

570

:

go back to our framework of.

571

:

Let's put your money at risk.

572

:

we'll counsel you about

performance chasing.

573

:

but the most important thing is let's

get you in a portfolio that you're, that

574

:

you're comfortable, comfortable with, and

then investors learn by mistakes, right?

575

:

I know that's, that's how I learned.

576

:

And, and, you know, if you're earlier in

your career and you, if you performance

577

:

chase now, it can work out for a while,

Probably not a great long term strategy.

578

:

And you'd sort of, you know, I

think one of the things you learn

579

:

as investment managers, you're,

you're just like wrong all the time.

580

:

You learn to diversify, and people

generally need to learn, just

581

:

experience that for themselves.

582

:

So you can provide as much

context and help as you can.

583

:

And then.

584

:

You know, things happen and, you

know, hopefully, they'll still

585

:

be compounding and stay in the

game and, and stay invested.

586

:

Adam Butler: O,

587

:

Rodrigo Gordillo: so Ben, just, I

want to talk a little bit more about

588

:

portfolio construction, but in the

context of how you're using privates,

589

:

and when you look, when you think about

privates, how do you decompose that?

590

:

Do you, do you assume a level of

leverage is embedded in those,

591

:

in those privates already?

592

:

And what, what multiple do you ascribe it?

593

:

Ben Reeves: so we know our funds, so we

know how they're, how they're structured.

594

:

for, for our private credit fund, we

like, there, there is leverage in there.

595

:

We can model it and we just,

we just model that volatility.

596

:

and then we use sort of Both just try

to add that ball into a back test to

597

:

see what happened, but also use an all

weather framework for private credit,

598

:

where it's going to be growthy, you've

got a little bit of downside protection,

599

:

It's a little bit more ambiguous for

inflation than what I like is the

600

:

discount rate hedge, which we really

don't get in most portfolios, right?

601

:

Underwrite it with the leverage.

602

:

You have a similar return to equity.

603

:

you get that profile, you know,

it can be helpful for a portfolio.

604

:

and then for, for private equity, it's

more, we, we found, we, we looked at

605

:

the underlying, earnings volatility.

606

:

Like made that it's basically small

value is what you get for the underlying

607

:

earnings volatility added that vol back.

608

:

and that gives us a reasonable

proxy for saying, yeah, it's

609

:

not really diversifying, right?

610

:

that's a reasonable proxy for the

risk addition in the portfolio.

611

:

And then it, it still has

the environmental flaws.

612

:

It's very growthy, not great inflation

exposure, and then, you know, not

613

:

great discount rate exposure, which

we're seeing, like, it just plays out

614

:

much more slowly in privates, right?

615

:

Like with, with, a hangover, all

the assets they can't sell now,

616

:

that is a lot of the discount rate

exposure sort of, you know, they're

617

:

trying to wait it out, I guess.

618

:

Rodrigo Gordillo: right.

619

:

In our other podcast, the Get

Stacked Investment Podcast, we

620

:

talk about all things capital

efficiency and return stacking.

621

:

Corey had a theory where, this is Corey

Hoffstein, where he said, you know,

622

:

a lot of allocators that allocate to

private equity, they're actually, Moving

623

:

forward, moving toward better portfolio

construction and using capital efficiency

624

:

in a sneaky way where they're allocating

to the private equity sleeves so that

625

:

they can get in a little bit of more

leverage so that they can bump up their

626

:

bonds and other alternatives without

sacrificing the return to equity,

627

:

which I thought was really insightful.

628

:

And, you know, maybe it's not

true across the board, but, it

629

:

certainly seems, that some people

are going to take advantage of that.

630

:

And, that's why I was asking whether

you guys thought about it that way.

631

:

Ben Reeves: I guess that I

never thought about it that way,

632

:

but that that does make sense.

633

:

We are taking down the, you're taking it

out of equity or that changes the overall

634

:

volatility, overall volatility and the

contribution you're getting from equity.

635

:

and that gives, that does give more room.

636

:

and it's also a way you can.

637

:

Add leverage in a way that, is a

little bit easier or more palatable

638

:

from a tracking our perspective,

639

:

Rodrigo Gordillo: Yeah, yeah,

640

:

Ben Reeves: because you

can make an argument there.

641

:

You probably see in the papers,

like if you leveraged your basic

642

:

portfolio, 20 percent of your

retirement outcomes get better.

643

:

It's just that it's a

644

:

Rodrigo Gordillo: Well, it's

645

:

Ben Reeves: on another way to get there.

646

:

Rodrigo Gordillo: Cliff Ass paper,

I don't know how long ago, 15 years

647

:

ago, maybe 10 15 years ago, where he

says why not lever up to 60 40 and

648

:

then compares it against the S& P.

649

:

It shows clear, well, up until 2022.

650

:

You know, it's a, it's a better

portfolio because you're able to create

651

:

proper levels of more diversity while

maintaining the same level of risk

652

:

and actually increasing your return.

653

:

So it's just from that

perspective, you know, we talk

654

:

about risk parity all the time.

655

:

A lot of people just start with, Hey,

it's a more diversified portfolio, right?

656

:

We started the conversation

saying that you add a little bit

657

:

of gold, add a little bit of.

658

:

And that's kind of risk paired

tilting towards risk parity.

659

:

But the next step for risk

parity is removing those

660

:

leverage constraints, right?

661

:

And assuming you, you find an optimal

weights, optimal portfolio, then

662

:

the next best thing you could do,

because oftentimes what happens, you

663

:

get a better Sharpe ratio, but your

absolute return may go way down.

664

:

And so increasing that exposure and

unlocking that diversification, seems

665

:

like something that makes infinite sense.

666

:

how are you, how are you

dealing with that reality?

667

:

I, I've spoken to, to Nima, in your firm.

668

:

I've spoken to you.

669

:

I know you don't think about it, but

how do you deal with that within the

670

:

constraints of retail, within the

regulatory constraints of a robo?

671

:

I'd be curious to know where

your, where your mind's at there.

672

:

Ben Reeves: So in portfolio

construction, we use long bonds.

673

:

We use gold.

674

:

Those are just risky things.

675

:

Long bonds are not a super sharp

ratio efficient way to get exposure.

676

:

But if all your risk is in

stocks, it helps, right?

677

:

As you know.

678

:

And then I think what we want to do

with the portfolio is, is now that

679

:

we do have the ability to allocate

to alternatives, that, that is a way

680

:

that we can start looking at adding

leverage, for clients who understand

681

:

it and you understand you're going

to get different pattern of returns.

682

:

and then, you know, that opens

up a lot of different strategies.

683

:

for most of our clients, we can't talk

to or go through additional suitability,

684

:

we're constrained from adding leverage.

685

:

Which I think makes sense if you're

a regulator and you're thinking about

686

:

that people are now allocated to

three times levered NASDAQ, right?

687

:

You know, which is what you

688

:

Rodrigo Gordillo: Yeah,

that's where their minds at.

689

:

Ben Reeves: They just like don't quite

get the leverage can be a diversifying

690

:

tool or a risk reducing tool.

691

:

or, you know, we, you know,

all the arguments, right?

692

:

Like same, same risk of

stocks, higher expected return.

693

:

I think then they're generally

open to those kinds of discussions.

694

:

It's just a process to get them

through to, so they sort of understand

695

:

the impact on client portfolios.

696

:

They're coming from a good place.

697

:

It's just, you know, very traditional way

of thinking about investment management.

698

:

Yeah.

699

:

Rodrigo Gordillo: Well, I mean the

traditional way and thinking about

700

:

investment management chapter one of

every finance book is the efficient

701

:

frontier in the capital market line.

702

:

So it just blows my mind that regulators

have a tough time going back to tradition.

703

:

I think we want them to

go back to tradition.

704

:

difference being that we now have

technologies that allow us to

705

:

provide that leverage to retail

in a relatively simple way.

706

:

I mean, look, the, the rule changes both

in the US and in Canada recently should

707

:

open up a lot of opportunities for this.

708

:

so, you know, hopefully we can get closer

and closer to that optimal portfolio.

709

:

Ben Reeves: think in leverage management,

like allocating alternatives is much

710

:

easier than allocating alternatives,

but also sort of the deep end for,

711

:

you know, if you're an individual

investor trying to roll futures, you

712

:

might run into problems or size, you

know, size of positions appropriately.

713

:

so yeah, so products like yours

are a great way you can get

714

:

that in a, in a controlled way.

715

:

Rodrigo Gordillo: So we were

having, Adam, Corey, myself and a

716

:

bunch of other people on Twitter.

717

:

We're actually having an interesting

discussion about what, what, what

718

:

optimal allocations, What the optimal

location should be for a portfolio.

719

:

And what I came out of the people that

think in very simple, similar ways,

720

:

coming out with very different belief

systems about weighting asset allocation.

721

:

And by the way, this is me, this is,

and, and when it comes to, you got your,

722

:

you got what you're, you're kind of

pushing the envelope here on the robo.

723

:

Ben Reeves: Yeah.

724

:

Rodrigo Gordillo: As you mentioned,

this is highly personalized.

725

:

So everybody, you know, you're

trying to get the best for

726

:

the most for your portfolio.

727

:

If you had your rudders and you can do

whatever you wanted to do and assume that

728

:

it's going to be a widely successful and

people are going to adopt the allocation.

729

:

Are you closer to where you are

right now at Weathsimple, or

730

:

are you closer to risk paired?

731

:

Like how do you, how do you think is

an optimal portfolio for your family?

732

:

Ben Reeves: So, my family is

close, much closer to risk parity.

733

:

I think where I would, might differ

from, from a standard risk parity is

734

:

I think that, your sharpe ratio for

growth, the assets might be higher than

735

:

your sharpe ratio for defensive assets.

736

:

and if you have a long enough time

horizon, you might think about that.

737

:

cause you know, with risk parity,

there is that there's a, you know,

738

:

your first move is the most efficient,

most important one that your next one's

739

:

most, and then there's this like big.

740

:

range of, of allocations in the middle

where you're, you're pretty efficient.

741

:

You're, you know, about a 0.

742

:

6 or so sharp ratio.

743

:

and I would probably tilt more towards

growth, the assets, then, then sort

744

:

of your, your textbook risk parity.

745

:

Where did you end up?

746

:

Rodrigo Gordillo: Well, well, I'm

still, I think this is an evolving

747

:

thing because I, I was very, you

know, strong convictions loosely held.

748

:

I had some strong convictions

in, in that exchange.

749

:

but I'm, I'm rethinking a lot of it,

you know, cause you gotta, it's about,

750

:

then it becomes about beliefs, right?

751

:

Risk parity believes that the Sharpe ratio

for all assets are That, that equities,

752

:

bonds and commodities, broadly speaking,

and tips are all going to return the same.

753

:

So you put them together,

smooth out the returns.

754

:

You're going to get the same outcome.

755

:

And then it's about, well, what

do I have more confidence in?

756

:

Do I have more confidence in the

equity risk premium term premium,

757

:

the, the, commodity role, you know, is

gold going to be there in a real way?

758

:

And I think at this point, what

I've come to understand is there's

759

:

a lot about beliefs, You know,

you could add Bitcoin there.

760

:

Talk about belief systems

that are almost religious.

761

:

You know, those who love gold will

say absolutely gold is crushed it.

762

:

And, you know, but is there an empirical

basis for gold continuing to have that

763

:

level of return above, the risk free

rate as we've seen in the last 30 years?

764

:

I don't know.

765

:

so I'm still kind of debating, which I

certainly love the, In, in lieu of, I

766

:

certainly believe in equity in, in bonds

and in maybe in lieu or in, in, addition

767

:

to gold and commodities, I really of

course love trend following and carry.

768

:

those are two things that I'd strongly

believe in that could act as a good

769

:

offset for inflation regimes, instead

of just going simple, tips and whatnot.

770

:

The weightings of those, you know,

again, I think it's risk parity first.

771

:

Preparation for prediction and

then starting to tilt based

772

:

on on your own belief systems.

773

:

That's where i'm at right now

774

:

Ben Reeves: I think that

that's, that's probably a good,

775

:

that's a good starting point.

776

:

the other thing that, I, I personally

put alpha in my own portfolio

777

:

and I think it's, it's useful.

778

:

You have to make sure you know what

you're doing and you have access, right?

779

:

So that's obviously, you know,

that you're trying to build that.

780

:

and I think the other thing I do is

I, I look for just diversifying income

781

:

that I think is pretty uncorrelated,

like life settlements are interesting.

782

:

Certain asset backed lending

is interesting where Like I was

783

:

talking about before, you're, you're

helping your discount rate exposure.

784

:

so other things that the risk

parity framework didn't really

785

:

think about that, I think.

786

:

So, so where are these other assets

that are out there and available now?

787

:

Where do they fit in?

788

:

Rodrigo Gordillo: How about you Adam?.

789

:

that exchange is fairly interesting has

because I know you're I feel like you're

790

:

more like screw equities and bonds.

791

:

Let's go straight up to carry.

792

:

What are your thoughts there?

793

:

Adam Butler: Yeah, I mean, I've got,

my allocation is basically exclusively

794

:

to privates, not privates, alts.

795

:

So, You know, carry trends,

seasonality, relative value.

796

:

I've got definitely a larger allocation

than most to, physical gold bullion.

797

:

and I mean, it's weird as asset

managers too, because we already

798

:

have a large beta to our own

strategies and to cyclical forces.

799

:

So, you know, I probably hold a

larger slug than most in cash.

800

:

But I would definitely lean more

heavily toward dynamic global

801

:

adaptive strategies than to static

allocations to risky assets.

802

:

no, especially now, you know, take my

views on equities with the largest,

803

:

with a full hand full of salt.

804

:

But, I mean, we're at the largest

allocation to equities as a

805

:

percent of total household wealth.

806

:

Now, and you know, if I look across the

landscape of, well, admittedly fairly poor

807

:

predictors over intermediate timeframes

for, for forward equity returns, but the

808

:

best one that I've seen as a function of

the percentage of total household wealth

809

:

wealth, that's inequities versus bonds,

where we're at the peak now, which is

810

:

pretty substantial evidence that Returns

to equities over the sort of next 10 to

811

:

15 years are likely to be below average.

812

:

And we've had a nice pickup in rates.

813

:

So, you know, from an equity bond

standpoint, I'd be a little bit

814

:

more inclined to be more bond

heavy than equity heavy here.

815

:

But yeah, I mean, I just don't really,

at this point, I haven't seen a

816

:

cheap equity market in 15 years and

we may not see one in my lifetime.

817

:

And, you know, I don't really

care about tracking errors.

818

:

So

819

:

Rodrigo Gordillo: So

820

:

Adam Butler: It's more accurate

821

:

Rodrigo Gordillo: So that's the one

of the things that came up in those,

822

:

in that dialogue was, you know, I was

saying how commodities in gold at worst

823

:

can be a, a, it returns as much as cash.

824

:

So zero real return ratio zero at worst.

825

:

And if you're making room in your

portfolio and your equity bond

826

:

portfolio in order to To fit them

in, it may be a problem, but if

827

:

you're stacking them on top, right?

828

:

If you're able to leave it, it's

a, it's a, it's a zero cost hedge.

829

:

It was the argument that I made and

somebody came back and said, well, it

830

:

really isn't because you're actually

adding volatility and invariance,

831

:

and that variance is going to

affect your, your compound rate of

832

:

return to which I replied back that.

833

:

There is a rebalancing premium

that you also extract from having

834

:

diversified assets in there.

835

:

So I don't know, this is, this is a

point that also Chris Schindler has made.

836

:

Have you put any thought

into, into that, Ben?

837

:

Ben Reeves: Rebalancing premium.

838

:

Yeah, I mean, I,

839

:

Rodrigo Gordillo: No, more on like, you

know, commodities and gold being both,

840

:

I'll get an answer to both, but the,

the idea that gold and commodities may

841

:

be a zero cost, hedge for inflation.

842

:

Ben Reeves: yeah, I buy that commodities

and gold are a, it's not zero cost,

843

:

but low cost hedge towards inflation.

844

:

If you're doing it in a, in a

leverage way, like gold is, I think

845

:

clearly has a lot of uses and times

where you really want it, right?

846

:

And then that kind of plays into

the rebalancing premium, right?

847

:

Where, if you get big monetary

inflation, if you get a crisis,

848

:

these are times when gold, Okay.

849

:

I mean, gold's really useful.

850

:

I also think it's a little

underappreciated just in terms

851

:

of the geopolitical risk that

we're running into now, right.

852

:

Where it, it's not in our models, right?

853

:

But, you know, gold can be a

really helpful thing in conflicts.

854

:

It, it can, it's outside of a lot

of institutional, arrangements.

855

:

So I, you know, I think it has

that, it has that value there.

856

:

and then likewise with, with

commodities, I think you can put

857

:

it into a model, but also if you.

858

:

Like if you do see potential conflicts

out there, and you do see a fight for

859

:

resources coming, that's something

that hasn't really happened in a,

860

:

I don't know, you know, 70 years.

861

:

but that's certainly possible, right?

862

:

And, and, and as you get more, a more

conflicted world, de globalizing world,

863

:

it's also helpful for that scenario.

864

:

Rodrigo Gordillo: You have

any thoughts on that, Adam?

865

:

Adam Butler: I mean, I think

that gold has a positive premium.

866

:

I think commodities, if run properly,

can have a positive premium.

867

:

Rebalancing or diversification premium.

868

:

I think gold is a great standalone.

869

:

I'm a little bit less sold on commodities.

870

:

I think you, you probably want to

have a little bit of an allocation

871

:

to, rebalance diversified commodities,

and then also, allocate via trend

872

:

and carry, and maybe seasonality.

873

:

But, you know, all these around the

edges, the hard thing is that kind of 80

874

:

percent of the time, both historically

and probably if I look forward, you've

875

:

got equities and bonds are both going

to deliver kind of around their average.

876

:

And then you've got this sort

of 20 percent situation where

877

:

through some conspiracy of

geopolitical risk or conflict.

878

:

Or fiscal, fiscal profligacy, we could

have major tail outcomes where equities

879

:

and bonds both suffer profoundly together

and gold and commodities and other

880

:

types of all it's really skyrocket.

881

:

So it's hard to model

that out in an optimizer.

882

:

It's hard to put a pin in what

those distributions look like and

883

:

what those probabilities look like.

884

:

But I probably skew a little bit more on

the concern side than your average person.

885

:

So, you know for that reason I skew

a little bit more towards those more,

886

:

diversified or resilient asset classes

887

:

Rodrigo Gordillo: Well, it's

interesting to see when you look

888

:

at how often commodities do deliver

for you during inflation regimes.

889

:

It's, it's a, it's a factor of

how, how often in hyperinflation

890

:

or high inflation shocks happen.

891

:

So historically, I think AHL did one

analysis in:

892

:

they showed that commodities performed

20 percent of the time, right?

893

:

When there was a big inflation push.

894

:

and the rest of the time

you're just sitting there.

895

:

Just dragging the portfolio.

896

:

obviously over a full

cycle, you're good to go.

897

:

It actually added value,

it added diversity.

898

:

And then they did the compar, the

comparison with trend where it seemed to

899

:

provide the same level of, protection.

900

:

But in this case, you're also providing

a positive risk premium during

901

:

the other 80 percent of the years.

902

:

Right?

903

:

So obviously I tilt towards trend

as a, as an inflation hedger,

904

:

you can stick to long term.

905

:

but I like the idea of also

having commodities and gold

906

:

as the first responder.

907

:

Right.

908

:

Cause oftentimes you might be

offside and if there's a massive,

909

:

it's something like we saw in 2020,

like the, the energy complex did a

910

:

lot better than any trend strategy.

911

:

Right.

912

:

So having a little bit of first

responders there just to kind of get

913

:

you through and not enough where you're

going to lose faith in a 15 year period

914

:

where commodities are flatlining.

915

:

That, that to me makes a lot of sense.

916

:

So I'm, you know, I'm writing all

this down in my, I'm dead now,

917

:

what book that my wife gave me.

918

:

So, know, and this is me, this is me

trying to use you guys as a soundboard

919

:

to make sure that my, my logic is tight.

920

:

Ben Reeves: I think as a, as an

investment manager, you have the equity

921

:

market exposure you're talking about.

922

:

And that, that also, that depends on

certain political arrangements still.

923

:

And, and, you know, I think inflation is

a lot of times a political phenomenon.

924

:

so it's, there's not a signal in

there for, you know, there's not a

925

:

quantitative signal on that for you,

but it's, I think something to consider.

926

:

Adam Butler: Definitely

927

:

Rodrigo Gordillo: Well, I mean,

I think we've covered that.

928

:

I, you know, hopefully, the masses move

more and more towards that optimal more

929

:

towards that risk parity portfolio and,

WealthSimple finds that signal and starts

930

:

giving them more of what they need.

931

:

or though I am, doubtful

that that'll ever happen.

932

:

Ben Reeves: Honestly, my mantra.

933

:

Rodrigo Gordillo: game

pops out there, you know.

934

:

Ben Reeves: Yeah.

935

:

No, just put your money at

risk in a reasonable way.

936

:

There's a risk premium for

owning financial assets.

937

:

Like if you can start there and get

people to do that, I'm pretty happy

938

:

that if you can make your Sharpe ratio

better or get your range of outcomes

939

:

better, all the better for you.

940

:

Rodrigo Gordillo: Okay.

941

:

So, so Ben, before we leave, is there

any way that people can find you?

942

:

Find your musings?

943

:

You say you have a monthly one.

944

:

That'd be interesting for, for

everybody here to look into.

945

:

where can we find you?

946

:

Ben Reeves: just through Wealthsimple,

you have to go register for Wealthsimple.

947

:

com and you get the newsletter.

948

:

I have a Twitter account, but zero tweets.

949

:

So I'm a sort of hard to follow on there.

950

:

Rodrigo Gordillo: Oh, okay.

951

:

You're, you're extracting

all the knowledge

952

:

Ben Reeves: I watch you

953

:

Rodrigo Gordillo: keeping quiet.

954

:

Ben Reeves: Bye.

955

:

I

956

:

Rodrigo Gordillo: Amazing.

957

:

Okay.

958

:

Any, any other parting words,

Ben, before we head out?

959

:

Ben Reeves: do have LinkedIn.

960

:

I post things there from time to time.

961

:

So that's another way.

962

:

Rodrigo Gordillo: Okay.

963

:

I think that's good.

964

:

Ben Reeves: Thanks so much guys.

965

:

It's been, it's been a blast talking.

966

:

Yeah.

967

:

Adam Butler: about, I mean, I

think there's just a lot of common,

968

:

beliefs and knowledge and, you

know, ways of viewing the world.

969

:

So it's, it's always interesting to

see how people in different roles with

970

:

similar belief systems, but different

sets of constraints, express those

971

:

belief systems in the most optimal

way they know how, so that's great.

972

:

Rodrigo Gordillo: And nobody's

more shocked than me about talking.

973

:

When I started thinking about talking

to robo advisor heads that I expected

974

:

a completely different investment

framework than where you and Nima and

975

:

your team actually come from, right?

976

:

So it is incredibly refreshing to

learn that, you know, thoughtful

977

:

people are at the helm for the

largest robo advisor in Canada.

978

:

That's, that's an amazing thing, actually.

979

:

Again, Canada CPP teachers and

WealthSimple leading the way.

980

:

Well

981

:

Ben Reeves: All underperforming the

index, but we're leading the way.

982

:

Yeah.

983

:

Yeah.

984

:

Rodrigo Gordillo: Well, you know.

985

:

Relative, not relative.

986

:

Adam Butler: That should be a

badge of honor right now and

987

:

before the index, honestly,

988

:

Rodrigo Gordillo: As Meb Faber said.

989

:

Adam Butler: say you're both

a prudent investor and you're

990

:

outperforming the index at this point.

991

:

Rodrigo Gordillo: Meb Faber said it's a,

it's a bear market in diversification.

992

:

That, that should, that should be

993

:

Ben Reeves: that was great.

994

:

Rodrigo Gordillo: awesome.

995

:

Okay, gentlemen.

996

:

Well, thank you so much.

997

:

Both of you.

998

:

Adam Butler: Thank you.

999

:

Rodrigo Gordillo: Thanks, Ben.

:

00:51:07,645 --> 00:51:11,785

And, we will, we'll try to get you back

on here next year to see how the things

:

00:51:11,785 --> 00:51:13,125

on the, on the private side have gone.

:

00:51:13,680 --> 00:51:14,180

Ben Reeves: That'd be great.

:

00:51:14,290 --> 00:51:14,810

Thanks guys.

Next Episode All Episodes Previous Episode

Listen for free

Show artwork for Resolve Riffs Investment Podcast

About the Podcast

Resolve Riffs Investment Podcast
Welcome to ReSolve Riffs Investment Podcast, hosted by the team at ReSolve Global*, where evidence inspires confidence.
These podcasts will dig deep to uncover investment truths and life hacks you won’t find in the mainstream media, covering topics that appeal to left-brained robots, right-brained poets and everyone in between. In this show we interview deep thinkers in the world of quantitative finance such as Larry Swedroe, Meb Faber and many more, all with the goal of helping you reach excellence. Welcome to the journey.


*ReSolve Global refers to ReSolve Asset Management SEZC (Cayman) which is registered with the Commodity Futures Trading Commission as a commodity trading advisor and commodity pool operator. This registration is administered through the National Futures Association (“NFA”). Further, ReSolve Global is a registered person with the Cayman Islands Monetary Authority.