Traditional portfolios are faced with the prospects of depressed expected returns in the coming years, as implied by current stretched valuations of stocks, and near record low rates and credit spreads for bonds. Our recently released paper – Return Stacking: Strategies for Overcoming a Low Return Environment – co-authored by Rodrigo and our good friend Corey Hoffstein, shows how investors may materially improve their chances of success by allocating to uncorrelated managers that may offer more ‘bang for your buck’ and free up valuable ‘portfolio real-estate’. Fielding questions from the ‘Twittersphere’ as well as our live audience, this episode covers:
- The pitfalls of emulating large institutions with limited portfolio agility and mandate flexibility
- Stellar returns and recency bias – why so many investors remain anchored to the ‘60/40 portfolio’
- Why stocks and bonds are structurally not designed to thrive in high inflation and/or low growth environments
- How loose fiscal policy, layered atop highly expansive monetary policy, strengthens the case for persistent inflation
- A trip down portfolio theory memory lane
- Risk transformation and financial alchemy
- Leverage aversion – concentrated bets vs capital efficient diversified return streams
- Structural diversification, tracking error and absolute returns
- Return stacking as a form of liability hedging for advisors
- Finding structural edges and tilting the odds in one’s favor
The team also discussed the importance of separating the underlying components of any strategy, not only across asset-classes, but also beta, alpha, styles, and tilts, in order to use them as building blocks to create tailored portfolios with desired exposures.
There’s also an “Easter Egg” where Adam discusses the results of a forthcoming paper on the shockingly large potential benefits of trade and fee netting in multi-strategy products.
Thank you for watching and listening. See you next week.
This is “ReSolve’s Riffs” – live on YouTube every Friday afternoon 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.
