The transcript from this week’s, MiB: Sébastien Page, T. Rowe Price, is below.
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VOICEOVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, I have an extra special guest. His name is Sebastien Page, he is the head of multi-asset investing — at investing giant T. Rowe Price. They run about $1.3 trillion, he runs about $360 billion of it. This really is a master class on asset allocation, diversification, risk management, and the concept of expected returns versus expected risk. As it turns out, it’s easier to predict risk than it is to predict returns. I don’t know what else I can say about this other than if you are an asset allocator, a wealth manager, anybody who’s thinking about managing assets over the next 10, 20, 30 years, then you are going to find this to be an absolutely fascinating conversation.
So with no further ado, my interview of Sebastien Page of T. Rowe Price.
VOICEOVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: My extra special guest this week is Sebastien Page, he is the head of global multi-assets at T. Rowe Price. His group runs of about $363 billion of the total $1.3 trillion that T. Rowe Price has under management. He is the author of “Beyond Diversification, What Every Investor Needs to Know About Asset Allocation” and co-author of “Factor Investing in Asset Allocation” Sebastien Page, welcome to Bloomberg.
SEBASTIEN PAGE, HEAD OF GLOBAL MULTIASSETS, T. ROWE PRICE: Thank you, Barry. Thank you for inviting me.
RITHOLTZ: I’ve been looking forward to speaking with you since March. You were, quite literally, the very first show the pandemic led us to have to reschedule and we will talk a little bit about the pandemic later, but I want to dive in to your job. You are head of global multi-assets, which is a huge role, tell us a little bit about your day-to-day responsibilities.
PAGE: You know, it’s a perfect job for me. I absolutely love it. Running a large global investment organization, in this case, over $360 billion in AUM, over 200 different portfolios. It involves not only, of course, investment oversight staying on top of capital markets, consuming vast amounts of research and so on, but also running the business setting a strategic vision, making sure it’s executed well, recruiting and developing talent, managing product development projects, and also, I’m a member of T Rowe’s management committee where I’m representing our division and helping manage our entire firm.
So the job is very broad and I learn something every day.
Barry, I know you run your own successful company and you are a thought leader, so I’m guessing it’s a very broad set of responsibilities, too, so in that sense, running an investment division in a large but agile company is probably not that different.
RITHOLTZ: You know, it’s funny when I discuss what I do with relatives, they are so impressed by $2 billion and I always laugh and have to explain, no, no, you don’t understand, $2 billion is nothing, big shops are running hundreds of billions and trillions of dollars.
So given the size of the assets you manage, how do you think about multi-assets? What was the thought process like when you’re assembling an investment posture, are you thinking about stockpicking or different sectors or global regions, how does a multi-asset portfolio come together?
PAGE: It’s all about putting all the capabilities of the firm together in one neat package or vehicle for different clients. So we put together capabilities across tactical asset allocation, think about decisions to tilt the portfolios with a 6 to 18 month horizon to take advantage of relative valuation opportunities, but also strategic asset allocation, constructing the portfolio for the long run, trading off returns against risks, positioning the portfolio for structural advantages, structural alphas and also security selection that we typically source in a funds to funds format.
So we will allocate to underlying T. Rowe Price building blocks. So most of what we do is to put all these capabilities together and then customize them in different ways for different types of investors.
RITHOLTZ: So you’re also on the asset allocation committee which is responsible for tactical investment decisions and you remember the firm’s target date franchise which is a whole different animal and the broader management committee at large. How do all these very, very different pieces fit together? It sounds like you have a lot of different roles to juggle?
PAGE: Yes, our asset allocation committee is responsible for tactical asset allocation decisions, that’s all we do on that committee. We bring together some of our most senior investors from equities, fixed income, and multi-asset, and as I mentioned, Barry, we take a six to 18 month horizon, we typically meet once a month and we are very much focused on relative valuation opportunities.
But we also take into account macro, think business cycle, monetary policy, fundamental, think earnings projections and the like as well as technical, think flows, momentum, sentiment, so valuations are a main driver of decisions but ideally we want to take positions where all these factors align. So that’s for the asset allocation committee.
As you mentioned, I’m also a member of the management committee, that committee’s chaired by our CEO and it is responsible for managing the entire firm of 7000+ employees across 16 countries, you know, the entire $1 trillion in AUM, if you will.
There on that committee, I need to take my multi-asset hat off and put the T. Rowe Price hat on, and we meet for at least two hours every week, we interact with our board, we set the strategic direction for the firm and we manage execution.
That part of my job, Barry, has been a fantastic learning opportunity for me.
RITHOLTZ: So you mentioned earlier strategic allocation and you just were discussing tactical allocation. For the listener who may not be deep into asset management, explain the difference between the two.
PAGE: So tactical asset allocation, the way we define it is about taking advantage of primarily relative valuation opportunities and the time horizon is perhaps a medium time horizon if you think about 6 to 18 months. So it’s not day today day trading if you will, big macro bets, it’s more about leaning against the wind and looking for situations where valuations are an extreme and other factors give you confidence that you can take advantage of those dislocations.
That’s what we mean by tactical asset allocation, it’s not what I would call gunslinging, it’s more about incrementally taking advantage of those opportunities in markets. Strategic asset allocation, Barry, is broader and it’s about how do you construct a portfolio for a given investor or a given institution for the long run. And a lot of questions are being asked these days about whether the 6040 is dead for example, that is a typical strategic asset allocation question. Should we hold alternative assets in the portfolio? That’s also a strategic asset allocation question.
And Barry, the biggest question of them all for strategic asset allocation is how much stocks should I hold versus bonds for the long run.
So those are the differences in the way we define tactical and strategic.
RITHOLTZ: Quite interesting. You know, I can’t help but notice, T. Rowe Price obviously very large organization, but you spent the early parts of your career at State Street and PIMCO, also two giant organizations, what are the advantages and the challenges of working in such large farms?
PAGE: Good question. You know, I can’t speak a lot to small firms, because as you said, I spent most of my career at very large firms but let’s start with what I would say is one of the most underestimated advantages of being at a large firm, large-companies, those that are successful over time that know how to innovate and take risks have some advantages over startups. It’s not like startups they call the risks and large companies are sleepy giants waiting to get disrupted, that’s a cliché to me that it ignores how successful large companies really operate.
So I’ve been lucky enough to work at fantastic companies where I’ve been put in positions to essentially run startup initiatives with two very big advantages. Number one, resources, usually in the form of headcounts and brand and marketing support and second, you know, better career support than I would’ve gotten at a startup for example.
Now I don’t want to diminish the role of startups in our economy but sometimes people think of big companies versus startups in black and white terms and it really is not like that in terms of innovation.
But that being said, the main disadvantages what you would expect right, no matter how agile large companies are, no matter how successful, you will always face frictions involved with managing change inside large organizations.
Theirs is this tired analogy that it’s harder to turn a supertanker than a jet ski, you know, it takes a tremendous amount of leadership and political savvy and with apologies to (inaudible) power points, in order to align people inside large organizations and move large organizations, and I’m still working on getting better at this, but to me, the advantages of working at successful large organizations outweigh the disadvantages, for me.
So working at a large company is a high risk-adjusted return proposition, or high Sharpe ratio, if you will, to use…
RITHOLTZ: Right.
PAGE: … an investment term. But the trade-off is I’ll never be a billionaire founder, but that’s okay, that’s okay with me.
RITHOLTZ: I will let you know a little secret, most of us are never going to be billionaire founders, but we will hold that myth off to the side.
One last question about allocations. So within the asset allocation committee is the firm’s target date fund practice, I have this horrible bias thinking that that is the easiest gig in the world, you set a target date, you do almost nothing, going forward it kind of runs itself over 30, 40 years, disabuse me of that understanding.
PAGE: You know, it’s very hard for non-investment professionals to determine their own asset allocation, right? And with the DC, defined contribution system in the United States, that’s essentially what we asked people to do, we’ve asked them to take control of their investments and their asset allocation decisions.
So I was talking with a financial adviser recently and he put it that way, he said asking non investment professionals to manage their investment is a big ask, do we ask people to perform their own surgeries, no, we ask a surgeon.
So the target date fund has the advantage of mapping people to the most important decision which is the stocks versus bonds decision based on how far they are away from retirement and if you read my book, Barry, you’ll find that there’s a lot of science and research and practice and judgment involved in calibrating those target date funds to meet the needs of the different populations inside these different plans, so people who are putting it — putting money aside for retirement and the calibration takes into account your risk tolerance and it is, I agree with you, it is in a sense, an autopilot solution because it will change your stock bond mix automatically as you age, you have the target date fund manager select the underlying building blocks, monitor those and add other capabilities like the ones I was mentioning earlier on tactical asset allocation.
So it’s meant to be an easy solution for investors inside of DC plans.
So if you take that lens, it is not that surprising that they become the default option of choice.
RITHOLTZ: Quite interesting.
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RITHOLTZ: So Sebastien, let’s talk a little bit about asset allocation. You mentioned the 60/40 portfolio, it’s been pronounced dead I don’t know a dozen times over the last decade, but with rates under one percent and zero not too far off in the future, maybe this time is the time where the 6040 portfolio really is dead, what you think about that traditional asset allocation mix?
PAGE: Barry, these days, that is the perfect question to ask an asset allocator if you want a long answer.
RITHOLTZ: (LAUGHTER)
PAGE: It’s a really important and well-discussed question.
Let me start with the conclusion, the 6040 portfolio is not dead but it needs to be improved. I have three main concerns with the 6040 and the first one is really obvious, is that the 6040 provides a specific risk profile and not everybody should have that risk profile. So it is too generic if you think about it as blanket advice depending on how far you are from retirement, for example, earlier we’re talking about target date funds, you should probably have a different mix between stocks and bonds, people need to account for their risk tolerance.
You know the question how much stocks should I own is often especially these days probably more than you think. I talk about this in my book, but if you look at target date strategies someone who is 15 years from retirement, say 50 years old, we think should hold about 80 percent of their portfolios in stock and at retirement the equity weight is still about 55 percent and this is because longevity says or longevity risk is an important factor and it said you know even at retirement he can expect to live for another 20, 25, 30 years, so you want your money to last.
So that’s kind of the first thing to say about the 6040, let’s just all realize that it’s very generic advice in terms of the stock bond mix.
Second, really important, risk is not stable over time, think about it this way, on a rolling one year basis, if I calculate the volatility of the 6040 portfolio depending on the environment I can get as much as 20 percent volatility or as little as 5 percent volatility. So that for the same asset mix, 6040 can look very aggressive when markets are volatile and they can look very conservative in quiet times. Our industry is evolving towards more dynamic risk management to stabilize risk, think target risk rather than target allocation.
And the third issue of the 6040, to your question, Barry, capital markets change, interest rates are now post Covid 100 basis points lower than they were before Covid and that’s about a 50 percent drop relative to their level at the beginning of the year.
So this means that for the same expected return, people need to take more risk, or let me refer to it this way, in order to hope to achieve the same expected returns, people need to take more risk, so it’s not just the search for yield anymore, it’s the search for returns, the Barclays Ag has the yield of you know say one 1.2 percent, you know, it’s essentially zero after inflation and our solutions team has done a study and they found that in order to reach a six percent expected return, now there are lots of assumptions here, depends which asset classes you pick, it depends on how you model forward returns, but roughly speaking given current rate levels, you actually need about 80 percent in stocks if you want to reach for six percent expected return going forward.
And to make things worse, bonds no longer diversify stocks as much as they did in the past so maybe the answer to the question how much the stock should I hold again as I mentioned earlier is often more than you think. But I understand the spirit of the 6040 question, it is more about the role of traditional asset classes, right? Stocks, bonds, beers, burgers, simple stuff.
So my view is that the 6040 portfolio, again, it is not dead, but if that is the risk level you’re shorting — you are shooting for, it needs to be re-optimized, and in my book, I present a model portfolios and we have shifted 12 percent of the allocation from bonds to low volatility alternatives, we have a five percent allocation to risk premium or factor strategy, if you will, the volatility premium and there is also a dedicated long bond allocation of three percent to four percent.
The other thing we did in that model portfolio is that within equities you can swap five percent to 10 percent of your stocks traditional long only stocks to risk managed or defensive equities, there are different ways of doing that, those are — a lot of those are now available on advisor platforms for example in some of them integrate dynamic risk management.
So as I said Barry, if you want to get an asset allocator talking – and ask them about the 6040 and whether it’s dead, t the bottom line is that you know it’s fairly generic advice, you have to calibrate this for risk, you have to count for changing risk over time and capital markets have changed, so your expectations from the 6040 change and ultimately I think you can reoptimize it with the different solutions I just mentioned.
RITHOLTZ: So let’s stick with the role of bonds within that beer and burger portfolio we know that they are a diversifier but not as much as they used to be. We know that they produce yields but really not enough in real terms.
There’s still the elements of fixed income as the volatility dampener versus equity or is that no longer the case, what are your thoughts about that?
PAGE: Bonds and treasuries in particular can still dampen volatility in your portfolio but I have to say that these days, if you asked asset allocators what keeps them up at night, a number of them will say and I’ll include myself, the worry that treasuries with the exception of the very long dated treasuries have lost most of their diversification benefits and I will give you an example.
The U.S. equity market had a drawdown of nine percent in September of 2020, during that run on the treasuries index actually lost 50 basis points over that time period, the zero bound limits upside for treasuries and this, Barry, is simple math, right?
You can’t go up during a shock when stocks are selling off a lot more than your duration times the amount by which rates can go down, duration times the change in rate.
And look at German bunds during Covid, right? The only went up two percent in Q1….
RITHOLTZ: Right.
PAGE: …2020, meanwhile the Germany stock index was down 25 percent. So maybe treasuries can dampen volatility but they don’t really hedge your risk in a sense of rallying when you’re incurring really large losses on stocks.
So you have to look for alternatives, you can extend duration and if you look at the long treasuries index during Q1 of 2020, it was up 20 percent, but again as yield approach zero even in the long end, gains of that magnitude become unlikely. Might usually have about one more good — big crisis in long treasuries, if you will.
Then you have to start thinking, okay, if I can’t diversify, if I can’t get the hedging from treasuries, where am I going to get it? The simplest way of doing that is to buy put options on stocks, but that can be really expensive, you have to pay for it…
RITHOLTZ: Yes. Yes.
PAGE: With treasuries in a normal environment, at least you get a positive yield. I mentioned earlier the possibility of dynamically managing your risk, I think this is becoming more important for asset allocators and for our industry for example with so-called managed volatility strategies or defensive macro strategies, some of those strategies can pick up the slack from treasuries going forward.
You can consider absolute return strategies, adding those to your portfolio because they allow for short positions which can be very effective hedges or look at other diversifiers, this is usually the answer people will give you, Barry, treasuries don’t diversify as much, look at gold. I don’t know, gold can trade like a risk asset in the short run at least, look at investment grade bonds, they still have default risk, low interest rate currencies like the Japanese yen may help, they tend to rally when stocks selloff but you have to ask what the expected return on currencies, it can be quite low.
So when all else fails, you can either accept higher exposure to loss going forward or reduce or reoptimize your equity exposure given your risk tolerance, and I mentioned allocating to risk managed equity solutions for example.
Barry, when I — this question brings to mind a story I have in my book. When I worked at State Street, I had a really great mentor and I talk about him in the book. He had a fairly dry sense of humor and one day, I was in his office complaining about my career and I’m saying my career is not going the way I wanted it to go. And he looked at me and he was getting impatient and he asked, “Sebastien, do you know the secret to happiness in life?”
So I got to the edge of my seat. You know what he said, Barry?
RITHOLTZ: Go ahead.
PAGE: He said “The secret to happiness in life is to lower your expectations” so with rates at the zero bound, the bottom line is that investors have to lower their expectations for forward returns on both stocks and bonds and for how much treasuries can rally when stocks are selling off.
RITHOLTZ: Quite interesting. Last question on asset allocation and diversification. We’ve been waiting for a long time to see you when investments outside of the US will begin to pay off, they lagged for the better part of the decade, when are we going to see the benefits of global diversification or has the law of mean reversion been repealed?
PAGE: Yes, that is a really good question because non-US stocks have underperformed for a long time and this is an example of where relative valuation has not worked in terms of reversion towards the mean because other factors have not lined up.
But let’s think about the usual disclaimer, I’m sure you tell that to all your clients, Barry. Past returns are indicative of future returns, it’s a generic statement that I talk a lot about in my book, but I show that over, say, five or ten year horizons, relative returns and valuations tend to mean revert.
So it’s possible that going forward, non-US markets could outperform.
I believe that from a long-term perspective, emerging markets in particular are positioned for higher growth than the rest of the world given where they are in their business cycles and given their demographics.
And if you want to get a little bit more tactical in an economic recovery, economies that are more levered like Europe, for example that have more cyclical exposures could outperform.
The other way, so that is one way to think about this is that let’s just look forward when we try to answer that question as opposed to backwards and if we look forward, history says the likelihood of mean reversion given where we are could be fairly high.
Second, you know, there’s just more breadth, there’s more opportunities for alpha in global portfolios compared to portfolios are concentrated in the U.S. especially with the current environment, with the FANGs dominating the US market there are more than 14,000 companies that are included in the MSCI all country world index.
RITHOLTZ: So more than just those nine or 10 in the US that seem to be driving returns this year?
PAGE: Right, which leads to better opportunities for alpha for stock pickers for those that know how to do that well. So you have the advantage of relative valuation and looking forward relative to backwards and the breath of investment opportunities working in your favor.
RITHOLTZ: Quite interesting. Let’s talk a little bit about some of the research and writing you do. Not only have you written two books but you’ve co-authored a number of award-winning papers for the Journal of Portfolio Management and for the Financial Analysts Journal, tell us a bit about how and why you write.
You spend an awful lot of time putting out well-regarded research, what’s the motivation?
PAGE: My motivation in particular for the book was to build a bridge between investment research, academic research and the practice of investment with a focus on asset allocation decisions.
So I reviewed over 200 papers, I integrated some insight from my colleagues at T. Rowe Price as well as from my own 20 years in the business. And one thing I wanted to do, Barry, with this book was make it accessible without sacrificing the rigor.
An author had in mind when I started writing is Malcolm Gladwell, you know how he takes deep research and makes it interesting and accessible?
RITHOLTZ: Sure.
PAGE: I wanted to write something like that for asset allocation, and you know you could say finance is in my DNA, I have absolute passion for it, and working on this book, I wouldn’t call it work at all. It’s what I do, it’s how I think and I had this desire to put it all together in an organized way going from forecasting return, forecasting risks and then constructing portfolio, that’s how I have divided the three sections in the book.
RITHOLTZ: So let’s talk a little bit about some of the problems of forecasting especially things like fat tails, black swans and other financial disasters, how does the finance industry think about fat tails, do we pay enough attention to these hundred year floods that seem to come along despite their name every 10 years or so?
PAGE: Those are interesting statistics, Barry, and I actually have a chapter where I talk about those probabilities and how they compare in real life versus mathematical models that rely on a normal distribution.
Look, the issue of fat tails is actually a really well known issue, but I would argue we don’t pay enough attention to it. I would say many quantitative analysts especially when they back test strategies like risk factor premium for example don’t really account properly for fat tails.
Someone once told me that the only people capable of generating a Sharpe ratio of 3.0 so three-point all return to risk ratio were either Bernie Madoff for quantitative analysts running back tests.
And in the book and have a great example for this, it’s from Andrew Lowe he’s a professor at MIT…
RITHOLTZ: Sure.
PAGE: And there’s a fascinating case study on the issue of fat tails in a paper he wrote in the early 2000s. His study is based on monthly data from January ’92 to December ’99 and he simulates an investment strategy that requires no investment skill whatsoever, okay? No analysis, no foresight, no judgment.
The strategy is so simple a monkey could do it. But despite the simplicity in Andrew Lowe’s back test, the strategy doubles the Sharpe ratio of the S&P 500 from 0.98 to 1.94 so double the risk-adjusted return, it only has six negative months compared to 36 for the S&P 500.
And here I’m going to quote Andrew Lowe o because he sets it up nicely, he writes, “By all accounts, this is an enormously successful hedge fund with a track record that would be the envy of most asset managers.” When he reveals what the strategy is in this is where we illustrate fat tail risk, can you guess, Barry, what the strategy is?
RITHOLTZ: Well, I was going to say like a leveraged S&P fund but the lack of monthly drawdowns kind of moved me away from that. What’s the strategy?
PAGE: So in the simulation all he does is just sell out of the money put options on the S&P 500, so essentially he sells insurance, the strategy is just to load up on tail risk and it just so happened that in the 90s you didn’t really get called on those short put options.
RITHOLTZ: Wow.
PAGE: But what it is is picking up pennies in front of the steamroller and when you look at many risk premia or how our industry thinks about liquidity risk for example or carry strategies or even how we construct allocations to credit in our portfolios, a lot of those strategies, return streams if you will, are short an option and that is embedded tail risk that our industry ought to pay more attention to and find better ways to model.
So I have a couple chapters on that in the book, the black swans if you will.
RITHOLTZ: So since you mentioned Malcolm Gladwell, I remember a piece he wrote, I want to say early 2000s about tail risk and he has on one side of the trade I think it was Victor Niederhoffer who was on the other side of that tail risk trade, and Nassim Taleb as the buyer of ports which was money-losing until for years and years and years until the bulldozer comes along in 2000. And so the writer of puts were minting money all through the 1990s until the dotcom collapse takes place then the buyer of puts becomes the big winner and the drawdowns were so catastrophic that they completely wipe out not only all the gains for the previous decade but they pretty much bankrupts the writer of puts that whole time, am I portraying that more or less correctly?
PAGE: Yes, and it’s a good example because it’s extreme and it’s directly using nonlinear instruments like put, but the issue of fat tails is broader than that, right? It’s the behavior of markets, it’s how we think about so-called carry strategy, it is how we think about credit, it’s how we think about liquidity risk and portfolios.
And you know even you and I, Barry, so far in this podcast, have talked a lot about volatility but really, when we think about forecasting risk constructing portfolio, we really ought to talk about exposure to loss, which when you have options like an example you described is obviously different from your volatility.
And in my Andrew Lowe example, exposure to losses obviously different from volatility. And I am not claiming this is not something that our industry knows, we just ought to have the right tools and the right approaches and the right way of thinking about those exposures. And it’s not just hedging or put options, it’s a lot of aspects of financial markets.
RITHOLTZ: Quite interesting, let’s talk a little bit about the future of investing, you’ve done a decent amount of research on active versus passive and about the entire debate that’s going up around it, tell us about your findings.
PAGE: Good question and, Barry, I saw you wrote a good article about active versus passive where you show that passive has not taken over the world when you measure the asset size correctly and you talk about your approach, whether it is place for both active and passive, so I’m with you on that.
Broadly speaking, passive create opportunities for active, and in my book, I have an example about this, I talk about when ETFs trade around a theme with high volume and how when that happens all the constituents in the ETF start moving together irrespective of fundamentals. So I show those correlations spikes.
This creates opportunities for stock pickers. So I show examples where for example regulators were going after drug pricing practices and people were selling the healthcare ETF dragging down companies that have nothing to do with drug pricing like medical equipment or contact lenses.
RITHOLTZ: Right.
PAGE: So those are good examples of when people, stock pickers would’ve had opportunities to buy temporarily undervalued companies because they’re just this is being dragged down with ETF training, they’re also good examples of when people for example sold financials because of lower rates but companies with positive duration like REITs which used to be part of financials would sell off as well.
It’s like throwing the baby out with the bathwater, in the original paper on this, we titled it “The Revenge Of The Stock Pickers” look, I just don’t think we should look at average results for active managers, we need to look at how skilled active management is done, those that can add value, it’s consistent, replicable philosophy and process, depth of resources to do that, and I’m not at all saying that there’s no place for passive, it’s not a black-and-white answer in my mind, there’s place for both active and passive in markets as I saw in the article you wrote.
And remember, you know, passive ultimately doesn’t work if you don’t have active manager setting prices.
RITHOLTZ: Quite interesting, let’s talk a little bit about risk appetite, here we are, it’s the end of the year, we recording this a few days before Christmas and it appears that risk appetite is very high, SPACs have gone postal, IPOs or are doing really well, Robin Hood traders are you know I know it’s not a lot of capital, but it’s certainly a lot of mind share, anecdotally it seems like this younger generation is really embracing risk, what do you think this means?
PAGE: In the current environment, it certainly creates fragility in markets. The puzzling thing is that risk appetite at the moment seems high but in pockets of the markets rather than say a systemic issue as in prior crises.
RITHOLTZ: Right.
PAGE: So pockets of the market like the one you mentioned, SPACs, IPO, Robin Hood technology companies, but if you look at it so we had a composite indicator where we put together a bunch of variables on surveys to get investor sentiment as well as positioning, that composite indicator is only slightly above medium.
And you also still have the proverbial and I hesitate to use the term, but cash on the sidelines in the sense that there’s 700 billion extra AUM in money market accounts versus what we had pre Covid. So what’s happening, why are pockets of the market showing fragility?
I mean we flooded the markets with liquidity, we had at one point 30 percent year-over-year growth in money supply, that’s basically the biggest chomp in the data set that I have and I have seen estimates for stimulus measures between fiscal and monetary globally as high as 25 trillion depending how you measure it, but that’s a tremendous amount of liquidity, so it will create pockets of speculation. But I don’t see it at this point as a systemic issue for markets.
Ultimately, Barry, in our portfolios right now, we’re neutral between stocks and bonds and we’re taking advantage of relative valuations on the recovery trade with long positions for example in small caps and we started to lean into value and we have some credit exposures for example in loans which benefit from rising rates.
So yes, sentiment is high, there are pockets of fragility in the market, not a systemic issue in my mind at the moment.
RITHOLTZ: Quite interesting. We mentioned value a little bit. Let let’s talk about value. Is the value trade dead, is it just that growth has done so much better than value not only during the pandemic but the past decade, when do we see some sort of a catch-up of value towards growth or not? Does it just never happened?
PAGE: You know, you’re really asking all that hot button questions for asset allocators…
RITHOLTZ: (LAUGHTER)
PAGE: Right? The role of bonds going forward is the 6040 dead — value growth in the other one, and in our asset allocation committee, we debated all the time. I don’t think value is dead, in fact in the medium term, you could see rotate — you know, the rotation that started with vaccine news continue during the economic recovery, but then it’s clear still to me that growth has some secular which think long-term advantages, growth stocks do well in low rate environments and there’s clearly a sector advantage with technology disruption being more tilted or oriented in growth stocks and in the growth style versus value.
But the other reason I would say values not dead, there is a tactical opportunities here because we’re entering an economic recovery, but also if you step back and you think in a capitalist system, companies evolve and reinvent themselves. Banks can make money in the low rate environment, think of those that have thriving wealth management businesses are trading for example. Energy companies which are also a big component of value stocks can move and are moving to new sustainable energy models at and so on so I don’t think value is dead, Barry.
RITHOLTZ: And, you know, if we look beyond traditional value, look at some other factors, small-cap value has been on a tear, the Russell 2000 exploded in the second half of this year, I think it’s substantially outperformed the S&P 500, so maybe the concept of factor investing and value investing is going to be around in the future. What are your thoughts?
PAGE: Well, we’re in an interesting position right now because if you look at academic studies, a good time to buy is when both value and momentum agree. So to your point, we started getting really unexpected news on the back seem like 95 percent effectiveness and updates on production capacity were not priced in.
I was looking at probability produced by the group called the Superforecasters and the forecast was 50 percent chance that we get 21 million doses before March 2021, so coin toss. Pfizer came out with their news and to illustrate how that was not priced in, that probability immediately jumped to 88 and now it is at 99 percent, so that has helped those small-cap value sectors perform well, they’re still cheap on a relative basis to other parts of the stock market.
So you have agreement between positive momentum and attractive valuation which historically across markets is a good time to buy into the asset class. Now add to that the macro factor, you can check the macro box, too, because we’re in the recovery from a fairly drastic shock, but you can think that there is a fair amount of pent-up demand in the economy and that year-over-year comparables will be showing substantial growth and small caps and value tend to be the asset classes of choice during an economic recovery.
So check that box, too, and then you can, to a certain extent, check the sentiment and technicals box as well. So the stars are starting to align at the 6 to 18 month horizon for the recovery trade, however it’s really going to be a bumpy ride and as we’re recording this webcast, Barry, we’re getting some worry some news about how devastating this new wave of the virus is while we’re waiting for the vaccine to be deployed including mutations travel restrictions and so on.
So it’s the fact that the destinations pretty clear but the past to get there is treacherous.
RITHOLTZ: So you bring up so many interesting points I have to ask you about, one is the combination of momentum in value. Combining the two m– my friend Wes Gray at Alpha Architects has written about combining momentum and value, the returns are spectacular but the volatility he describes as just so horrific even God couldn’t manage that portfolio. Eventually clients would just scream bloody murder because the drawdowns are so brutal. How do you deal with things like that? Obviously that’s an extreme but how do you deal with the drawdowns and the volatility?
I know it’s the price of admission for performance but clients have a really hard time living through those periods where you know, you are underperforming and sometimes, if you’ve been a global value investor, significantly underperforming.
PAGE: Yes, let to me give you a kind of pithy answer but I think it’s important and then a more philosophical answer. The kind of immediate answer is look implementation matters as well, if you make a statement like when value and momentum agree it’s a good time to buy and you design a strategy to take advantage of that, the strategy you actually design and the way you implement that broad concept can lead to vastly different exposure to loss and vastly different performance over time.
So it’s a broad statement where implementation and risk management practices matter quite a bit.
So that is, Barry, if you will, my pithy answer, but philosophically, if I meet someone in an elevator and you give me 30 seconds to give investment advice between floors two and four, I’m going to say stay invested for the long run and stay diversified.
So those are probably the two most generic pieces of investment advice, but I think they are important. Where it gets complicated is again in terms of implementation, diversification means different things depending on what you have on the menu, what you diversify across, and depending on which market environment you look at, the big theme in my book is that diversification, you know, between risk assets, it actually works really well when markets are rallying, which is if you think about it when you don’t want it and it really doesn’t work when markets are crashing as we’ve seen this during Q1 during Covid.
So while this is generic, I think important advice, again the implementation of how you diversify and the title of my book is “Beyond Diversification” what you do beyond that matters quite a lot.
But if you look over time, staying invested is probably the most important of the two pieces of advice because over time, if you can weather exposure to loss especially in the low rate environment where you’re not going to get anything out of bonds anyways…
RITHOLTZ: Right.
PAGE: If your time horizon is long enough, it will pay off. So there’s investor psychology in there and I’m guessing a lot of financial advisors are listening to your podcast and they’re probably throwing their phones on the wall at me right now …
RITHOLTZ: (LAUGHTER)
PAGE: Because, if you’re a financial advisor, investor psychology is what you have to deal with with your clients day-to-day …
RITHOLTZ: Sure.
PAGE: And your role is essentially to tell them not to sell in March of 2020.
RITHOLTZ: Right.
PAGE: And if anything to add back to risk assets, and then making light of investor psychology is quite an important factor especially for financial advisors that deal with clients you know day to day.
RITHOLTZ: So we talked about hamburgers and beer, we’ve talked about stocks and bonds, we haven’t talked about private assets like venture capital or private equity or structured notes or any of the other non-publicly traded items that are out there. What are your views given lowered expected returns for stocks and lowered expected returns for bonds, what are your views on these various private not publicly traded assets within asset allocation and the world of diversification?
PAGE: Private assets can have a role in many portfolios but they are not a free lunch and many investors think of private assets as a free lunch, private equity in particular.
This is fascinating, but if you ask me in the context of what I mentioned earlier that I wrote my book in part to bring academic finance into the industry, into the practice of asset allocation, if you ask me where academic research and investment practice disagree the most, the biggest chasm in our industry between the two I’ll tell you it’s on the performance of private assets over time. And you see a lot of numbers that suggest that private equity outperforms public equity by a lot both in absolute and in a risk-adjusted basis, and then if you dig into academic research where people actually scrub the data and they remove zombie valuations from the database and they account properly for survivorship bias and reporting bias and they account properly for the timing of cash flows coming in and out, you start uncovering a completely different story.
There’s an academic that has done a lot of research on that I quote him in my book, his name is Ludovic Phalippou, and he shows in some of his papers that actually private equity over long periods of time can actually underperform public equities. How there is a wide range …
RITHOLTZ: Sure.
PAGE: Within private equity and it depends who you invest with, but it’s a fascinating – it’s a gigantic chasm between industry and academic research.
The take away, I talk about this in my book is that it’s not just not a free lunch, you need to account for the risk properly, you can earn a liquidity premium, but it is like shorting an option to a certain extent, if you will, and if you have the right approach to it, there’s nothing wrong with private assets and private equity, they are just not the free lunch that investors are making them out to be and I think your investors had to have to be careful when they think about those types of investments because they are not as transparent as public markets.
RITHOLTZ: Right, clearly not as transparent. You bring up to really interesting points about private equity. One is the illiquidity premium, you’re looking for a bigger payout in exchange for locking up your capital for a longer period of time, but there’s also the selection process, go back just a couple of decades there were a few hundred private equity firms. Now I think the last number is something like 11,000 private equity funds, how is an individual investor or even an institution supposed to make that decision about where to allocate capital to which private equity firm.
PAGE: Yes, you know, you have to be really careful and there are advisors that specialize in that the taking investor side or consultants for example that can help institutional investors. Individual investors have to be extra careful and work with their financial advisors, I think you really have to not just jump in based on the Google search, if you will.
RITHOLTZ: Right.
PAGE: Because as an asset class — this is an asset class for the top quartile can be very different from the bottom quartile probably even more than in public markets, I do think that the factors for success in those markets resemble the factors for success in active management in public markets and depth of resources, replicability of a proven process, a philosophy that is consistent over time,and experience and so on so you want to look for those factors as well.
RITHOLTZ: Quite interesting, I have a couple more questions on asset allocation and investing in general. I kind of ran past the fact that you sit on a committee for the Institute for quantitative research and I just wanted to get your thoughts on the rise of quantitative investing which has become so popular along with factor-based investing and generally the use of high-powered computers and algorithms. Tell us a little bit about your views on quant.
PAGE: Like active versus passive, there is a place for both quantitative and fundamental and in the case of quant versus fundamental, the intersection of boat is what fascinates me.
And if you set aside applications in high-frequency trading for example were really the technology is the advantage and the research is the advantage and you go to what we do which is tactical asset allocation, strategic asset allocation or even for stock pickers in general, you know, you — fundamentals matter and experience matters, and if you are able to bring together quantitative insights with data and judgment and experience, I think you can get a more robust investment process in a lot of cases.
Look, I just want to be clear, there is a place for systematic quantitative strategy as a standalone, there is a place for fundamental stockpicking for example. So there is a true — in between, is a tremendous amount that our industry can do bringing both together and I dedicate a lot of my book about this.
And, Barry, there’s a story at the beginning of the book about the quantitative research conference that I was sitting at several years ago when a fundamental investor basically raised their hand and asked a pretty rude question amongst quantitative peers or investors, and he basically said you know your models for forecasting returns are not valid because they’re basically garbage in and if you use a portfolio optimization model, it is going to be garbage out, so why use quantitative methods at all?
And I’ll always remember the presenter was a well-regarded thought leader, someone who straddled academia and practice, I will always remember what he answered. His answer it stayed with me and I’ve used it over time. He looked at the presenter and he was clearly, he just landed, it’s clearly jetlag, so a little bit impatient, he looked at the presenter and he said, if you don’t and it was more a reply to the garbage in garbage out our so-called GIGO critique, if you don’t think you can forecast expected returns, you should be in investment business and the point is that investing is about forecasting, when we invest the matter what, we make a judgment about the future in the way we allocate our portfolio in the way we position our portfolio, so there are quite a few chapters of my book that are about how to use the quantitative process where we’re just talking about value and momentum and when both agree.
How do you use data and insights like that but make them relevant for the current market environment?
And in that intersection, you can create a replicable process where there is room for judgment and you can succeed as an investor.
So Barry, I’m pontificating a lot but this is a question that I have thought about while writing my book and throughout my career because in a sense, like I have straddled bottom-up and top-down investing, I have also straddled quantitative and fundamental investing especially over the last 5 to 10 years of my career.
RITHOLTZ: Very interesting, there was something in one of your writings I don’t remember which that I made a note I have to ask you about close it’s so counterintuitive and it’s the longer the stream of historical investment data, the better. True or false?
PAGE: I’m going to say false just to be a bit controversial. The real answer would be just not always.
RITHOLTZ: Okay.
PAGE: Look, academics like to go back to the early 1900s, right? To create robust data sets, but if you think about it, the data back then I don’t know you know we didn’t have computers, we didn’t have cars, people use like a horse and buggy to get around.
So many financial advisers for example will think about investment policy statements or strategic asset allocations for their clients based on the long-term data on return and risk and they will average across different risk regimes.
Well first of all, in the book, I show that higher frequency shorter-term data are more predictive of risk going forward than the longer-term data just from a risk forecasting perspective.
The other issue is that the fluctuation in sector weight within asset classes make it such that if I used in my model all the data from the S&P 500 or data from a long time ago, I’m looking at a different sector composition, for example, right? Technology sector in the S&P 500 has been really, really unstable, from five percent of the index, it actually reached 29 percent in 99 during Dotcom, then it declined back to 15 in 2005 and now stands at 21 percent. So you’re really not looking at the same asset class if you use this to do a strategic asset allocation. You are basically modeling risk — the risk of an asset class that no longer exists.
And there are other examples of that even in bonds, the duration of the index has changed, right? The weight of high quality bonds has decreased from 21 percent to two percent of the share of corporates and the way the riskier bonds have changed, the duration of the Bloomberg — Barclays has increased, right? It was four and a half years back in 2005 and now it’s six or seven years.
RITHOLTZ: Didn’t the S&P breakout communications from technology also if I’m remembering correctly within that sector, they kind of cleaved it in two?
PAGE: Yes, so sector weights changed over time and even the classification and it which stocks are included in the index, emerging markets are another really good example, emerging markets used to be very much commodity-dependent cyclical factors and financials, emerging markets now have become a lot more high-tech than they used to, you have some large tech platform companies like you have in the US and China for example. So I guess the point I’m trying to make is that historical data is useful but it’s not always the case that the longer your data set, the better for your financial risk modeling.
And one way to get around this is to use factor models and here I’m talking about looking at how the asset classes are composed with the asset classes look right now based on the current factor exposures and then backfill the historical data for those factors.
So I guess what I’m saying is there different ways of addressing this issue but you know is more data always better than more recent or more relevant data? The answer is no and part of this also comes down to risk regimes, right?
You can forecast the type of regime you think you’re going to be in and then sample data from a similar regime in history, for example.
RITHOLTZ: I know we only have you for a limited amount of time, I only have you for another 10 minutes, so let’s jump to our favorite questions that we ask all of our guests, we call it our speed round and web will start with streaming.
Tell us what you’re watching on either Netflix or Amazon prime or what podcast you might be listening to, what’s keeping you entertained during lockdown?
PAGE: I love that question, I mean my answer is not going to be very original right now but I just finished “Queen’s Gambit” which I thought was excellent…
RITHOLTZ: That was really good.
PAGE: And the other one is my son is 13 and never watched the “Lost” series and I have never watched it either so we just started from the beginning. We’re in season two of the “Lost” series which is that an older show but we really enjoy — enjoying it so, Barry, no spoilers please.
RITHOLTZ: All right, I haven’t seen any of it so you don’t have to worry about spoilers for me.
You mentioned one of your mentors early in your career, tell us who helped to shape your career, who gave you guidance as to both on how your jobs progress and your own investment philosophy?
PAGE: Let me name two mentors, first my father, I talked about him in my book, he was a finance professor for 40 years, I even took a couple of his classes.
Second mentor was Mark Kritzman, he is CEO of Windham Capital, he also teaches finance at the MIT. And there’s a story I like to tell about the early days of my collaboration with Mark Kritzman, back in — before the year 2000, I didn’t speak much English, I grew up French Canadian and I interviewed with Mark for a research internship, I don’t think it was a good interview except that I’ve read every single paper he had published up to that point and thought and still think he’s a genius.
But he was reluctant, you know, he had access to the best students from the best universities in the U.S. but he was pressured into this interview by my professor and he also had a business relationship with Mark and with State Street.
And I’ll just say that I learned years later over a glass of wine that Mark had pushed back really hard from taking me on as a research intern, apparently he said and I quote “I don’t care if he’s free” because we didn’t I was I was writing my thesis for my Masters degree, so I wasn’t — there was no salary involved.
Apparently, he said, “I don’t care if he’s free, my time is not free” this was over a glass of wine a few years later.
At the time though back then all I got was a call from State Street in Montréal saying, Hey, Mark can’t wait to work with you, he is very excited that you’re going to come to Boston. Ultimately, I did this research project for him as an intern and he ended up mentoring me for over 10 years and we co-authored a lot of papers together.
I like to say basically everything I know about quant finance and asset allocation, I have learned from Mark.
RITHOLTZ: Quite interesting. Let’s talk about books tell us some of your favorites and what are you reading right now?
PAGE: Okay so I love to read, that is very hard to answer when you read 50 plus books a year, I generally read about business, philosophy, some history psychology sports, I read nonfiction I love memoirs and biography, and I was told — I knew you might ask that question so I prepared a few books by category. And I know I’m cheating but business I would say recent book I read is “The Ride of a Lifetime” by Bob Iger, ex-CEO of Disney, excellent, very well written, lots of business wisdom.
Sports, sports memoirs, this is an older one, “Open” by Andre Agassi and even …
RITHOLTZ: So good.
PAGE: If you are not into tennis, it’s just a fantastic book to read.
Another one maybe less well-known is by an ultra runner and even if you’re not into ultra running, is worth reading the book is titled “North” by Scott Jurek and it’s about how he broke the record for running through the entire Appalachian trail on the East Coast.
Another one that is good is “Can’t Hurt Me” by David Goggins if you want motivation.
Help, there’s a book called “Why We Sleep” that I recommend for everybody to realize how important sleep is.
Productivity, “Deep Work” by Cal Newport is one of the best books on time management I’ve ever read.
On philosophy or dealing with change and uncertainty I would say anything on stoicism is interesting books by Ryan Holliday like The Obstacle Is The Way” “Stillness is The Key” those are excellent books.
Entertainment, entertaining business stories, the book about Theranos, “Bad Blood” was fantastic and just finished “Billion-Dollar Loser” about WeWork which is also a fascinating story.
So, Barry, you asked for one, I gave nine or 10, apologies for that.
RITHOLTZ: No, not at all everybody loves those answers, it’s — I think that’s peoples favorite question.
Let’s talk about recent college graduates who are interested in a career in asset allocation or wealth management, what sort of advice would you give them?
PAGE: So this is mostly advice I got from Mark Kritzman, I mentioned him earlier. First, always look to build your human capital and by that I mean your network of industry contacts could be your publications and journals your reputation on a conference circuit, could be your education credentials, for example, the CFA charter, anything that differentiates you from your peers and that ultimately no one can take away from you, it’s your own human capital.
Second I would tell people starting their careers, stay close to revenues, in a lot of jobs, it means staying in front of clients but it might also investment management mean to stay close to investment decision-making, but stay close to revenues because your role in the value chain will be more motivating and more obvious.
The other one I would say sometimes is underestimated, emphasize communication. When you move from being a student to working in the real world, you move from an environment where it is to be a meritocracy, right? You study hard, you get good grades, but in corporate life, collaboration teamwork are really, really essential.
So maybe as a student 90 percent 95 percent of your success is from your own intellectual merit and how hard you study, on the job you’ll realize that even for the most technical of roles, maybe about half of your success maybe more is determined by how well you communicate. Because in corporate life collaboration and teamwork are so essential to success especially inside large organization.
So don’t neglect communication.
Lastly, I would say adjust your — adjust your perspective, talk about the secret to happiness in life earlier and lower your expectations, I think managing your expectations is important, not getting worried about short-term setbacks just look at the long-term trend and make decisions based on the long-term trend in your career, not short-term setbacks. And last one I will say, take care of yourself, of all the advice you can give people starting their careers I think that’s the most important one, diet, exercise, sleep, all these things reinforce each other like a virtuous circle, you can’t can take one away, right?
Eat well, you’ll have more energy to exercise, exercise you will sleep better, sleep better you will have more self-discipline with your diet the next day, you get the idea it’s a virtuous circle and if you get these three right or you know, close enough, no one is perfect and, you know, but diet, exercise, sleep, reinforce each other take care of yourself don’t wait for motivation, just build habits.
It’s much easier to do things well when it’s a habit as opposed to waiting for motivation which is very fickle.
There is another book, Barry, I’m going to cheat and I’m going to add another book, “The Power of Habits” by Charles Duhigg, I think is worth reading.
RITHOLTZ: Very interesting. And our final question what you know about the world of investing today that you wish you knew 20 or so years ago when you were first getting started?
PAGE: I would mention some of the takeaways from my book, quantitative methods work best when used with a healthy dose of qualitative judgment, that’s something I’ve learned over time, I wish I’d realized earlier. Risk is easier to forecast then returns and this has tremendous investment implications.
When in doubt, it pays to stay invested for the long run, think of my elevator pitch, stay invested, stay diversified. Diversification works very well when you don’t need it than not so well when you actually need it during crashes and if you’re an investor, you really need to take that into account.
And lastly in markets, you really need to expect the unexpected, things change very quickly in markets and we’ve just been through such an environment.
RITHOLTZ: Quite fascinating. Thank you, Sebastien for being so generous with your time.
We have been speaking with Sebastien Page, he is the head of multi-asset investing at T. Rowe Price where his group runs about $360 billion.
If you enjoyed this conversation, well check out any of our previous I don’t know, call it 400 interviews we’ve done over the past seven years or so. You can find that at iTunes Spotify where ever you feed your podcast fix. We love your comments, feedback and suggestions, write to us at MIBPodcast@Bloomberg.net, you can give us a review on Apple iTunes, sign up for the daily reads I write every day at Ritholtz.com, check out my weekly column on Bloomberg.com/opinion, follow me on Twitter @Ritholtz.
I would be remiss if I did not thank the crack team of professionals who help me put together this conversation each week. Maruful is my audio engineer, Tracy Walsh is our project manager, Michael Boyle is my producer, Michael Batnick is my head of research.
I’m Barry Ritholtz, you’ve been listening to Masters in Business on Bloomberg Radio.
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