Navigating ICAPM: Goals and Risk Management

In today’s episode, we unpack how rigorous research translates into actionable strategies for wealth management. Ben and Mark are joined by Peter Mladina, Executive Director of Portfolio Research at Northern Trust Wealth Management and professor at UCLA. With an impressive body of published work and practical innovations like his goals-based asset allocation software, Peter offers a unique perspective on bridging the gap between theory and practice. The conversation delves into foundational topics like asset allocation and factor models, with a special focus on practical applications of research in wealth management. Peter shares insights from his research, including intriguing findings on factor investing and joint tests of market efficiency. From real estate investment trusts to the nuances of the Intertemporal Capital Asset Pricing Model (ICAPM), the discussion covers how these concepts can directly inform financial planning and portfolio construction. Tune in to explore the intersection of academic insight and everyday financial decision-making!

Key Points From This Episode:

(0:00:17) Introducing Peter Mladina and his wealth management research.

(0:04:00) Theoretical and practical shortcomings of Markowitz's Modern Portfolio Theory (MPT).

(0:05:24) How the Capital Asset Pricing Model (CAPM) resolves MPT’s shortcomings, and how the Intertemporal CAPM (ICAPM) resolves the CAPM and MPT’s shortcomings.

(0:10:16) Key distinctions between an optimal ICAPM portfolio and an optimal CAPM portfolio.

(0:15:33) Allocating between liability hedge assets and risky assets, and when it’s sensible for individual investors to try to fully hedge consumption liabilities.

(0:20:14) The role of Monte Carlo simulation and human capital in building ICAPM portfolios.

(0:24:15) Steps for practitioners starting with ICAPM and how to advise their clients.

(0:37:18) Insights from Peter’s papers on factor models: why common risk factors should explain returns across most asset classes.

(0:40:11) The value of looking at asset classes through a factor lens.

(0:41:54) Main factors Peter uses in his research and observations on the zoo of factors.

(0:46:23) Takeaways from Peter’s paper on real estate (and why he doesn’t like it that much).

(0:56:45) Unpacking hedge fund returns and factor models and Yale’s endowment performance.

(01:02:44) Peter’s research on traded portfolios and jointly testing factor models and manager performance.

(01:07:14) How Peter defines success, both professionally and personally.

Links From Today’s Episode:

Meet with PWL Capital: https://calendly.com/d/3vm-t2j-h3p

Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582. Rational Reminder Website — https://rationalreminder.ca/ 

Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/

Rational Reminder on X — https://x.com/RationalRemindRational Reminder on TikTok — www.tiktok.com/@rationalreminder

Rational Reminder on YouTube — https://www.youtube.com/channel/

Rational Reminder Email — info@rationalreminder.caBenjamin Felix — https://pwlcapital.com/our-team/

Benjamin on X — https://x.com/benjaminwfelix

Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/

Cameron Passmore — https://pwlcapital.com/our-team/

Cameron on X — https://x.com/CameronPassmore

Cameron on LinkedIn — https://www.linkedin.com/in/cameronpassmore/

Mark McGrath on LinkedIn — https://www.linkedin.com/in/markmcgrathcfp/ Mark McGrath on X — https://x.com/MarkMcGrathCFP

Peter Mladina on LinkedIn — https://www.linkedin.com/in/peter-mladina-177194125/

Peter Mladina on SSRN — https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=890472

Northern Trust — https://www.northerntrust.com/

Episode 169: John Cochrane — https://rationalreminder.ca/podcast/169

Papers From Today’s Episode: 

‘Real Estate Betas and the Implications for Asset Allocation’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3134732 ‘An ICAPM Framework for Asset Allocation’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4319731

‘An ICAPM for Goals-Based Investing’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4943241

'Portfolios for Long-Term Investors' — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3790823

‘Yale's Endowment Returns: Manager Skill or Risk Exposure?’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2959074