The Rational Reminder Podcast Antti Ilmanen: The Building Blocks of Long-Run Returns (EP.202)
01:09:32
Historical vs. Forward-Looking Estimates
- Historical data provides the best estimate of expected returns if premia are constant.
- If premia vary, forward-looking estimates are often more useful than long-term averages.
Weighting Historical vs. Market-Implied Returns
- Time-varying expected returns favor forward-looking data. This is true for bonds and some assets like real estate.
Current Expected Returns
- U.S. equity yields suggest a 3% real return, significantly down from 10% forty years ago. This decline implies borrowed returns from the future.
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Introduction
00:00 • 2min
The Rational Reminder Podcast - What's Up With That?
02:17 • 2min
Can Long Term Historical Data Be Misleading?
04:05 • 2min
How Much Weight Do You Give to the Historical Data Forward?
05:48 • 3min
How Low Ore Expected Returns Will Materialize?
08:43 • 3min
Are Bonds Dead as an Investment?
11:37 • 3min
Is There an Expected Credit Premium for Corporate Bonds?
14:46 • 2min
Commodity Premium - What Is It?
16:37 • 4min
Private Equity
20:26 • 2min
Are Real Estate's Expected Returns Coming Down?
22:42 • 5min
How Does the Low Expected Return Environment Impact Required Savings Rate?
27:57 • 4min
Why Growth Stocks Are Performing So Poorly?
31:34 • 2min
The Relationship Between Value and Growth Has Increased
33:12 • 2min
Equity Market Beta in Value Strategy?
34:53 • 2min
Is the Expected Value Premium Constant or Time Variable?
37:03 • 3min
What Is the Difference Between Trenton Following and Momentum Trading?
39:53 • 2min
The Benefits of Trend Following in Equity Market Drawdowns
41:31 • 4min
What Is the Difference Between Value and Carry?
45:56 • 4min
How Important Is It to Be Long Short?
50:11 • 5min
Where Is the Line Between Alternative Risk Primia and Alpha?
54:44 • 2min
Investing Strategies During Periods of Poor Performance?
56:42 • 4min
Should Investors Be Morpy Conscious in a Low Expected Return World?
01:00:13 • 2min
The Premier Bad Habit That Investors Shouldn't Avoid
01:02:34 • 2min
How to Become a Better Investor?
01:04:19 • 5min
To carry on the trend of amazing guests on the show, today we welcome Antti Ilmanen. Antti is the co-head of the Portfolio Solutions Group at AQR, and the author of a couple of really impactful books that we highly recommend. His most recent is Investing Amid Low Expected Returns, and in today's chat, we get to hear all about the ideas contained in its pages, and the most important moments in his career that have shaped his philosophy. Antti received his PhD in Finance from the University of Chicago and has had a long career of working with high profile names that you might recognize from past episodes of this podcast. Our guest talks about the need for cultivating your patience in relation to your investment portfolio and shares many other great pieces of practical advice that you can implement today. We delve into some bad investment habits that Antti noted in his book and also touch on the usefulness of bonds, illiquid assets, trend following, and much more. Be sure to tune in today to hear all that this great mind has to offer.
Key Points From This Episode:
- The power and limitations of using historical data for calculating expected returns. [0:04:17]
- Balancing historical data with market-implied expected returns. [0:07:47]
- Antti comments on shifting into higher expected return equity markets. [0:11:37]
- The role of bonds in revenue generation and why to not give up on them completely. [0:13:00]
- Locating the roots of the positive premium that Antti associates with bonds. [0:16:35]
- The effect of illiquid assets on expected returns. [0:19:44]
- Why recent historical returns in real estate are not indicative of future expected returns. [0:23:40]
- The response from institutional investors to lower expected returns. [0:26:09]
- Situating value's current dip in a broader historical picture. [0:29:57]
- Some comments on the recent performance of rates, growth, and value. [0:33:39]
- Today's expected value returns in comparison with other points in history. [0:37:19]
- Antti unpacks the idea of trend following and its performance during the most recent crash. [0:39:53]
- Defining the defensive style premium and its relation to quality. [0:41:26]
- Antti differentiates carry and value strategies from each other. [0:45:55]
- An explanation of the importance of being 'long-short' to capturing the premium. [0:51:24]
- Locating the difference between alternative risk premia and alpha. [0:55:31]
- Practical tips for investors to wait out periods of poor performance. [0:57:45]
- The need for investors to be more fee-conscious in today's, low-return world. [1:01:35]
- Antti shares about what he calls the investor's 'premier bad habit'. [1:02:33]
- The impact of Ken French on Antti's career and philosophy. [1:05:29]
- How Antti defines success at this point in his life and the priority he gives to balance. [1:07:33]