Chris Schindler - The Art of Wealth Creation: Insider Tips from Veteran Portfolio Manager
Dec 1, 2023
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Chris Schindler, veteran portfolio manager and ex Toronto Teachers Pension Plan Managing Director, discusses risk parity, portfolio construction, systematic investment strategies, the importance of diversification, and the evolving economic climate. They also explore the significance of model building, bond yields, currency hedging, and emerging trends in private equity and alternatives. The interview provides insights into the challenges and opportunities in investing, advantages for smaller investors, and strategies for balanced portfolios. It concludes with recommendations for other podcast episodes.
Constructing a balanced portfolio with stocks, bonds, and commodities can offer advantages like protection against inflation and diversification of risks.
Constraints to consider when constructing a balanced portfolio include limited access to cheap leverage, capacity issues for larger investors, and liquidity contractions during market downturns.
Focusing on risk rather than solely on returns leads to better portfolio outcomes, and understanding the risk budget is key in effective portfolio construction.
Deep dives
The advantages of a balanced portfolio
Building a balanced portfolio that includes stocks, bonds, and commodities can offer several advantages. Such a portfolio can protect against inflation and provide diversification against stock and bond risks. By equalizing the risk among these assets, it can achieve higher risk-adjusted returns and have lower drawdowns compared to an equity-centric portfolio. This approach reduces the risk of blowing up and better aligns with long-term investment goals.
Constraints on portfolio construction
While constructing a balanced portfolio may seem straightforward, there are several constraints to consider. Access to cheap leverage has historically been a hurdle, making it challenging for retail and smaller investors. Capacity is another constraint, as larger pension plans may struggle to find enough commodities to hedge their stock and bond exposures. Additionally, asset correlations and liquidity become issues during liquidity contractions, like the one experienced in March 2020. Lastly, there is a need for institutional sophistication when implementing these strategies.
The importance of focusing on risk
When constructing a portfolio, focusing on risk rather than solely on returns can lead to better outcomes. Risk is a more stable and predictable aspect of investing compared to returns, which are challenging to forecast accurately. By starting with a risk-based approach and then seeking alpha opportunities, investors can improve their risk-adjusted returns.
The role of risk in portfolio construction
Risk has a crucial role to play in portfolio construction. It helps define the starting point of a portfolio and allows for the inclusion of appropriate diversifiers. Traditional views of portfolio construction often focus on returns, but a risk-based approach can lead to more stable and reliable outcomes. Understanding the risk budget and then seeking to maximize expected return within that risk framework is a key principle of effective portfolio construction.
The Challenge of Achieving Required Returns
In this podcast episode, the challenge of achieving the required returns in a risk parity portfolio is discussed. The speaker emphasizes that the current economic environment and high prices have led to lower expected returns across various asset classes. With bond yields at a low level, risk parity portfolios are not likely to hit the required return targets. While raising leverage can help to an extent, there is a limit before expected returns begin to decline. Therefore, additional strategies and edges need to be added to the portfolio to reach the desired return target.
Currency Exposure and the Role of FX Hedging
The podcast also explores the importance of currency exposure and the role of FX hedging in portfolio management. The speaker highlights that currency exposure has a cost and risk, and it is crucial to manage and hedge these exposures appropriately. Failure to hedge currency exposures can result in significant volatility and negatively impact the portfolio's overall risk and return profile. Additionally, the podcast emphasizes the need to consider currency hedging as a strategic decision, taking into account the risk budget, leverage, and impact on the portfolio's sharp ratio. It is cautioned that building a portfolio solely based on negative correlations between currencies and equities can be a risky strategy, as correlation can be unstable and difficult to predict.
Investment Mastery: Risk Parity, Portfolio Construction, and Systematic Investment Strategies for the everyday investor.
In this video, Rodrigo Gordillo, President & Portfolio Manager of ReSolve Asset Management Global does a review of a 2020 interview with veteran portfolio manager and ex Toronto Teachers Pension Plan Managing Director, Chris Schindler, to add important commentary around the discussion on the principles of asset management, exploring risk parity, portfolio construction and systematic investing strategies. He also adds color around how market dynamics have changed since the initial interview and delves deep to help investors understand the evolution of investment strategies within this evolving economic climate and the necessity of a diversified investment approach over conventional equity-centered portfolios. Also, gain insights into the significance of diversification, the effectiveness of model building, and various investment pitfalls. Learn why bond yields, present discount rates, and currency hedging matter, and get a grip on emerging trends in private equity, alternatives, and other asset classes.
This is "ReSolve's Riffs" – published 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 Inc.
*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.
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