Eric Crittenden, Standpoint Asset Management – The Market Owes You Nothing | #389
Feb 9, 2022
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Eric Crittenden, Chief Investment Officer of Standpoint Asset Management, discusses the potential impact of inflation on portfolios and the benefits of trend following. They also explore navigating the nightmare scenario of poorly performing stocks and bonds, the effectiveness of diversification and trend following strategies, successful portfolio diversification, the importance of having a written plan for investing, and the guest's recent interests and book donations.
Diversification is crucial in investment portfolios to navigate different market environments and potential impact of inflation.
Managed futures can serve as a tactical neutralizer in portfolios, providing a potential hedge against bear markets without frequent rebalancing.
Understanding market dynamics and having realistic expectations are essential, as markets do not owe consistent returns and require aligning investment strategy with market realities.
Deep dives
Global Macro Investing and the Importance of Diversification
This podcast episode delves into the world of global macro investing and emphasizes the significance of diversification in investment portfolios. The guest, Eric Kritman, discusses the potential impact of inflation on investors' portfolios and highlights the importance of having a strategy that can adapt to different market environments. He shares his approach of combining trend-following and global equity beta to create an optimal portfolio that aims to compound at a reasonable rate while mitigating risk. Kritman also emphasizes the importance of not having unrealistic expectations from the market, as it is not designed to deliver consistent and smooth returns.
The Role of Managed Futures in Portfolio Allocation
The podcast explores the role of managed futures in portfolio allocation and how it can enhance risk management. The guest explains that managed futures can serve as a tactical neutralizer or market neutral approach in a portfolio, providing a potential hedge against bear markets or turbulent market conditions. By incorporating trend-following strategies and diversifying across liquid markets, managed futures can help offset downside risk in dedicated equity exposure without the need for frequent rebalancing. This approach allows investors to capture the risk premium offered by hedgers and diversify their portfolios without generating excessive turnover or transaction costs.
Preparing for Different Market Environments
The discussion highlights the importance of preparing for different market environments, particularly the potential for stagflation and the need to consider unconventional outcomes. The guest explains that having exposure to real assets, such as commodities and tangible goods, could be valuable in an environment where traditional equities and bonds may not perform well. The podcast emphasizes the significance of diversifying beyond the core asset classes and considering alternative investments that have the potential to provide returns in different market conditions.
Understanding the Nature of Financial Markets
The episode emphasizes the need to understand the nature of financial markets and set realistic expectations. The guest stresses that markets owe investors nothing and do not exist to deliver consistent and predetermined returns. Instead, they serve as capital formation and risk transfer markets, allowing participants to buy and sell securities based on supply and demand. The podcast underlines the importance of building a portfolio that aligns with market dynamics, rather than expecting the market to conform to specific investment goals or desires. It encourages investors to focus on building a durable and reliable investment strategy that can navigate various market environments.
Capital efficiency and trading long and short
One of the main points highlighted in the podcast is the importance of understanding the markets you are trading and being open-minded about trading both long and short positions. The speaker argues against the mistake of solely focusing on long-only positions in commodities due to their past performance. They emphasize the need to consider potential outcomes, such as a scenario where inflation increases but commodities don't perform well. In this case, being able to short assets like bonds becomes an interesting strategy that many investors often overlook. The ability to short assets can provide valuable diversification and risk management, even though it is often perceived as unconventional.
The benefits of an all-weather approach and utilizing futures
The podcast explores the concept of an all-weather investment solution by combining multiple sectors, time zones, and time frames with global equities. The speaker highlights the importance of leveraging the capital efficiency provided by futures contracts, which allow for the blending of uncorrelated returns from different sectors. By using futures, the speaker explains how they can leverage their capital efficiently, allocating only a fraction of their investment to run their futures program. This approach frees up additional capital to invest in global equities, which have been shown to be one of the best diversifiers to their macro program according to historical data analysis. The speaker emphasizes the benefits of this approach, which not only provides more effective risk management but also helps deliver a smoother investment experience.
Our guest today is Eric Crittenden, Chief Investment Officer of Standpoint Asset Management, an investment firm focused on bringing all-weather portfolio solutions to US investors.
In today’s episode, we’re talking with one of the true systematic investors out there. We start by discussing the potential impact of inflation on investors’ portfolios. Then Eric shares what led him to start a new firm focused on giving people what they need in a format they want – a mix of trend following and global equity beta. We touch on diversification and why Eric’s a true believer in trend following.
To listen to Eric’s first appearance on the podcast, click here
To listen to Eric’s second appearance on the podcast, click here
Today’s episode is sponsored by The Idea Farm. The Idea Farm gives you access to over $100,000 worth of investing research, the kind usually read by only the world’s largest institutions, funds, and money managers. Join today and get access to quarterly CAPE ratios, an excel quant backtester and the entire research library.
