[00:00:41]Adam Butler: Welcome to another episode of ReSolve Riffs. This is one of your hosts, Adam Butler. I’m the Chief Investment Officer of ReSolve Asset Management. Today we are thrilled to have Ben Reeves, the Chief Investment Officer of Wealthsimple join us. Ben’s journey in asset management started at Bridgewater before he transitioned to Wealthsimple, where he has been instrumental in its growth into one of Canada’s largest wealth management platforms.

In this episode, we delve into Ben’s unique career path, the role of private investments in diversified portfolios, and the behavioral aspects of investing. We also explore how Wealthsimple is pushing the envelope in robo-advisory services with innovative access to alternative investment strategies. Do not miss this insightful conversation.

Here you go.

Backgrounder

[00:01:27]Rodrigo Gordillo: Right, Ben, welcome to the ReSolve Riffs podcast. It’s been a long time coming.

[00:01:32]Ben Reeves: Yeah, that’s what, we’ve been talking a long time. Happy to be able to do this finally. This is great.

[00:01:37]Rodrigo Gordillo: Yeah. Yeah. I’m really looking forward to this one. So, everybody’s heard anything that they need to know in the intro of this podcast. So, why don’t we kind of let you have a bit of a shot at your background, just kind of like your career journey, so that we can let the audience know who they’re talking to.

[00:01:57]Ben Reeves: Sure. Yeah. So it’s been like, I guess everybody, it’s been a journey. So I think, I started, it made me start going back to college. I thought I was going to go, I was always interested in markets, thought I was going to go major in Econ. I took a couple of classes and I thought they were just not captivating or not interesting.

And I ended up studying history of ideas and said, so I did a bit of philosophy of religion in college. Like what’s the, what was a good, what were the ideas that everybody thought made sense, most profound, in life, and how did that change over time, and, you know, very, very impractical major, but something I was just sort of deeply fascinated with at the time, and sort of spent a few years studying that, but obviously like, almost unemployable out of that, right? Like you can kind of think, you can think it’s actually about that. That’s sort of all you leave college with.

And so I went to a startup where we were, this was early 2000, so we are doing, helping companies figure out what do you do with the internet to, you know, how do you change your business for the internet? We did okay for a couple of years, and then the dot com crash hit, and we were sort of sold for parts to IBM. And that was like my foundational corporate experiences. Things are going great, and then, you know, you see the crash in the 2000s. After that, I went to grad school at U Chicago, studied public policy and business. Sort of wanted to go back to the things I was interested in in high school. So, you know, learn the econ again, do some quant training and so on.

I spent a few years at McKinsey and then shifted to Bridgewater Associates, which is a big hedge fund in Connecticut, and I started out doing an investing role. I took the class for, you know, it’s a little old, but took the class for like a new analyst, reported to a 23 year old for a while, and did asset allocation research for institutional investors, and then shifted over to working in the portfolio construction group where we were applying risk controls to the systematic strategies on a daily basis, which, you know, Bridgewater was great. It was, I think I learned a ton there, both about investing, and also like, how do you run an investing organization in a really precise way, a high quality way? How do you think about client service? You know, a lot of really, sort of really great mentors there. And they have really figured out a lot.

But towards the end of my tenure, my kidneys failed. It was a sort of a health crisis and I ended up needing to take a couple of years off. I couldn’t do Bridgewater anymore. It’s a pretty intense place. Like, you know, couldn’t pull 12 hour days anymore. But one of my friends had, was an early employee at Wealthsimple, which is a, you know, at the time, a pretty small startup, based in Canada, and a robo-advisor.

And he said, I know you only have a couple hours a day, but can you come in and help us figure out investing? And it seemed really fun. We had always talked about that at Bridgewater, you know, how do you, wouldn’t it be cool if we had a robo-advisor, and we could really do it, give people high quality investment management at scale. Then as my strength returned, I was able to grow my role at WealthSimple over time, and I’ve been at WealthSimple about five or six years now, and basically do everything, investing it for WealthSimple. So a lot of communication, we set up our own funds, we, you know, asset allocation. And then, it’s also really fun to work with really great technologists and designers to create product experiences that try to reflect the essence of investing or the, the essence of long-term investing and compounding to our clients.

[00:05:48]Adam Butler: It sounds like you and I would be of an age, because I remember going through that whole dot com with a startup and, you know, guys coming to the office with bags of gold for you to build on the most basic website. And my wife was in the internet group at Boston Consulting Group at the same time. And so we were just absolutely flat out for a couple of years. And then I actually transitioned to IBM. Did you ever work at IBM then when they sold off or…

[00:06:18]Ben Reeves: I did. I worked for the, right there for a little bit. The big corporate life was not for me, but I worked there for a little bit.

[00:06:25]Adam Butler: Yeah, that was a, that was definitely an experience, but that whole experience into that dot com peak was pretty, pretty wild. A lot of lessons learned on the other side of that too.

[00:06:37]Ben Reeves: But you know…

[00:06:37]Adam Butler: So…

[00:06:38]Ben Reeves: … everything was totally brand new and it was, you know, the world was wide open, and a lot of things we’re talking about ended up being the right things. It was just the valuations made it a pretty difficult cycle for all of us to go through.

[00:06:51]Adam Butler: Yeah. And I remember during the year I was at the startup, we went from about 80 people to 180 people. And when I finally left, they were down to 12.

[00:07:02]Ben Reeves: Yeah, we were, I think we were about half our size when we were acquired, and it’s brutal to see that happen to people.

[00:07:10]Adam Butler: Yeah, that was, it was bonkers. Hard segue here, but I know that, or my sense is that at Wealthsimple, you guys have, you’re trying to implement many of the sort of diversification/free lunch principles that you would have learned, obviously had hammered into you at Bridgewater, and then espoused in other roles. And that my understanding is as a first step, you guys have tried to sort of move into the privates space. And I’m just curious, what was your thinking as you sort of looked across the alternate alternatives landscape, or just thinking, how does it land on, we should try privates first, then? How did you move in that direction?

[00:07:58]Ben Reeves: Yeah. So how we think about, how do we think about investing in general? We start with just from a point of service. We want to help our clients grow and compound wealth. And that is pretty clear hierarchy. Like the thing you need to do for most of our clients, 30s, 40s is save and put your money at risk in a reasonable way. And then we have a base portfolio that is, it’s like very CAPM and conventional, but a little bit tilted towards risk parity principles. We have a little gold, a little more geographic diversification, some more Sharpe ratio efficient equities, a bit more bonds, for asset class diversification. But that’s also a difficult thing for people to understand, right? Like it’s just a pattern of returns and it plays itself out over time. And then, so I look for other ways where I can offer better diversification or better returns into portfolios.

And then, and so I think that then, I have a choice. I can do quantitative strategies that I think do offer good diversification, maybe a little harder to understand, or I can offer private assets, where you still do get either alpha potentially, or a differentiated return stream. Like, we offer private credit. I think that is diversifying. And that seemed like a way that you can, in a way that makes sense to people, offer a bit more diversification, a bit higher expected return. Like private credit, I’m just making loans to mid-sized companies. That makes all the sense in the world, and it seemed like a pretty good place to start in, getting people comfortable with privates, alternatives and portfolios that might be a bit more resilient, or bit more likely to compound.

[00:09:37]Adam Butler: On the portfolio design front for Wealthsimple, I mean, we obviously have a wealth book ourselves. We deal with advisors who run primarily retail wealth books. So we’re constantly dealing with this kind of Pareto frontier of how can I maximize portfolio efficiency, at some tracking error that people can accept.

Have you done any quantitative modeling or sort of general thinking on what kind of tracking your constraints and the type of tracking error that people are willing to tolerate? I’m sure you’ve sort of tried some stuff and gotten feedback from people. What have you learned in that journey?

[00:10:21]Ben Reeves: It’s tough because it’s so outcome-dependent, right? Like people love the track. They’d love the track here March, 2020 or, you know, end of 2018, but you know, don’t love it and, you know, now, right? Like, when you have the North American stocks you’re doing, are doing super well. I, my sense is it’s highly, highly individual.

So you have people who are benchmarking themselves to North American stocks, who ask you questions about why you’re deviating from North American stocks. And I think you either need to have a good one-on-one relationship with them so you can talk them through the trade-offs, or you need to offer them the thing that they’re going to benchmark themselves to, because back to the hierarchy of the most important thing is. Safe. Put your money at risk in a reasonable way, and then start improving the Sharpe ratio and that range of outcomes that you get over time. But then we have a lot of clients who are just saying, I trust you, you know, help me put, put your money at risk. We ended up with about a 2% tracking, our target, we know it’s, which is a lot relative to a lot of other portfolios, and I, I think that works for a lot of clients. But then it’s just highly, highly, variable and individual.

[00:11:37]Adam Butler: What’s the 2 percent tracking error too?

[00:11:40]Ben Reeves: So…

[00:11:40]Adam Butler: What do you guys hold up as a quality emotional benchmark for most clients,

[00:11:45]Ben Reeves: …we made a reference portfolio that is, sort of try to track towards the median of like the average mutual fund in Canada. And then we checked it against a typical robo-portfolio or asset allocation ETF. And it’s some representation of that. It’s just a way to represent expectations.

[00:12:06]Adam Butler: It’s just a weird, it’s well, not weird. It’s a bit more complicated if you’re not in the U.S. because you’ve got to kind of, especially in Canada, you know, Canadians, they’ll reference Toronto stocks or Canadian stocks if Canadian stocks are doing really well, and then they’ll reference U.S. equities if U.S. equities are doing really well, so it’s their…

[00:12:30]Rodrigo Gordillo: Always a moving target.

[00:12:31]Adam Butler: … tends to change over time, do you not find?

[00:12:34]Ben Reeves: I do find it. It’s that set of clients who are really watching the portfolio on a, you know, even, you know, three, five year basis, right? Like that’s, you don’t learn much over that kind of a time period. But you do find some clients doing that. I think most of our clients, and the issue I usually face with most of our clients is, more risky assets are a good bet to outperform cash.

Like that was the big deal two years ago, right? And I spent most of a year, year and a half just talking to people about, I know cash is yielding 4% or 5%. Their equities are a good bet to outperform Stick with it when things seem bad. Like, that kind of basic advice. And then, and what we see is, we don’t see so much performance chasing, but we see people just not investing their savings when things feel scary and then waiting for things to feel better.

And I think that, just like, put your money at risk in a reasonable way and try to compound. If I look at our, we have brokerage clients and we have managed clients. If I look at the outcomes between the two, just the fact that our managed clients are putting their money at risk and compounding, gives very, very different wealth outcomes for them.

I know our brokerage clients, some of them are trading actively for fun, like maybe different objectives, but even if you look at say our flows, relative to ETF flows, people are getting in and out. The real advantage is just put your money at risk over time.

[00:14:06]Rodrigo Gordillo: And I imagine because of all that, Ben, that you’re seeing better returns in the managed portion rather than the DIY portion of WealthSimple.

[00:14:17]Ben Reeves: Yeah, it’s night and day. I get it. I do a little regression of the DIY returns, and it’s a lot of TSX. It’s a lot of, it’s not a factor model. It’s just like, I just do a simple regression of like TSX, SPY and NASDAQ actually explains most of the returns. Not even the factors. They explain a lot of returns and you get a huge negative alpha, a little bit more in risk. But it’s basically, sort of attempts at market timing or struggles with ideal generation so you take too much idiosyncratic risk.

[00:14:54]Rodrigo Gordillo: Now, as you said, a lot of this can be, it’s always interesting when you have a platform like WealthSimple where you really have built the business on portfolio management, right? But then you have this side gig of DIYers. I mean, is there a lot of crossover between the two where you see like 90 percent of assets in the managed and then 10 percent of assets in the casino?

[00:15:14]Ben Reeves: Yeah, you see people wanting to do play money, or I want to take play money, you scratch this itch, or I believe in this company. And then you see, and then within our DIY, we see some people who are just investing in ETFs and trying to compound, and then other people who are sort of in between, and trying to do both, or trying to do market timing strategies and so on. And then the, obviously because the active strategies have so much more, evolve, and your ETF compounders, that sort of overwhelms the returns of everybody else.

[00:15:44]Rodrigo Gordillo: Right. And so, can I just shift back to the privacy? Cause I think a lot of this tracking error, volatility, risk taking, you know, trying to take risks in order to do better than cash, one of the things that I think I’ve been fighting for many years on the private side is this feeling that the private issuers are cheating, right? Like they are, they get to hide behind a volatility blanket, a dampening blanket that none of us get.

[00:16:14]Ben Reeves: Yeah. Yeah.

[00:16:14]Rodrigo Gordillo: We don’t get to play in the same way, and you know, I’m throwing my hair, my arms up and saying, you guys are taking more risks to leave or play, but in reality, there’s obviously a behavioral advantage, right?

It is what it is. There’s no other way to really, or at least we haven’t figured out a solid way to understand pricing on the private side, on a day-to-day basis. So do you find that behaviorally, people, you guys haven’t launched this yet, but is that part of your idea here on the private side, that it’s going to allow you to add diversification without having a lot of people freaking out. Like, is that the main driver here?

[00:16:51]Ben Reeves: So the driver, it’s more, you start from like, let me offer a better portfolio. And then I think there are behavioral, or there’s kind of their behavioral trade-offs, I think. For example, for, but like, when we describe what private credit is, we will say, we made an index of, we do liquid index indices. We try to add in the missing vol and say that this is the role in the portfolio, to try to get a sense of the underlying risk. Private equity, same thing. We take small caps. We add in the, it’s like the excess volatility mystery, right? We add that back in and say, this is the impact on your portfolio.

[00:17:33]Rodrigo Gordillo: Okay. You guys are actually making, striving to provide some sort of transparency into the process.

[00:17:41]Ben Reeves: Yeah, we try to provide some transparency, but also like, the problem investors do have and why there’s a behavioral advantage to privates, is that there is too much volatility relative to the journey you’re on, or your probability of being successful. So, there probably are advantages to that.

But I guess there, you have to think about it both ways, right? So there are, there is a lack of marketing, but there’s also a lot of fear about giving up liquidity. And you know, clients are saying it’s your 40 year retirement portfolio. I’m scared of putting 10 percent into something illiquid. And so, That’s equally a behavioral issue as the lack of marketing. And so you try to sort of educate on both sides.

[00:18:29]Rodrigo Gordillo: And that’s an interesting topic. I think listeners are going to want to know how you handle all the issues in privates, especially as markets get more and more illiquid, more panicky. You know, on the private side, I’ve seen a lot of investment advisors in the U.S. and Canada really concentrate that 10 percent that you speak of, they’ll concentrate in like one provider, and kind of say that they have diversified exposure to privates, and we’re seeing a lot of privates take really scary moves, at least to the one, us watching from outside, where certain holdings, they’re not able to pay their yield. And so they’re going out and borrowing in order to be able to then meet their covenants. How are you guys seeing that in the space right now, and how do you manage that level of risk in the current cycle?

[00:19:24]Ben Reeves: Yeah. So I think first thing is, we set up our vehicles, is like asset class exposure. So we have the Wealthsimple Private Equity Fund, and you know, we can then allocate, we only have one manager in there now, but the manager we chose is LGT. They’re an endowment. We’re getting an endowment portfolio like that, and they are principal investors in it. So we start out with 300, 400 companies, it should be able to give you asset class exposure. We’re not doing a, you know, here’s your typical drawdown fund with 10 platforms and a lot of idiosyncratic risk.

So we, we try to manage it both with alignment because the, I think privates really are the deep end. And a lot of investors and advisors aren’t really set up to underwrite a private manager well, right? You need to do a lot of diligence, make sure they’re honest, do your background checks, keep monitoring them. So we try to make sure that we’re highly diversified and that we do get good alignment so that, and the people managing the money also have their skin in the game.

Their net worth is also in the product. So I think those are probably the ways that we deal with it, diversify, make sure your alignment, and then make sure you’re doing real professional due diligence, and then finally just do the real modeling, so you’re sizing it appropriately, right? Like I was talking about, add back the volatility, make sure you have a framework for how your portfolio should perform, and that’s sort of the combination of things we do.

[00:20:53]Rodrigo Gordillo: Yeah. Well, you’re not putting an optimizer and getting a 40 percent allocation of privates because they’re so low vol.

[00:20:59]Ben Reeves: We’re adding, yeah, it’s we’re, like, levered small caps is private equity.

[00:21:05]Adam Butler: And so what percentage of the portfolio is in privates for kind of a standard autopilot Wealthsimple mandate?

[00:21:16]Ben Reeves: Right now it’s all bespoke, because privates are so new and we want people to make sure they’re comfortable. They will go to us for advice and we, but we’ll give a range and then try to show the impact, and then that’ll vary based on the asset class. So, I’m more comfortable putting more, if for your typical 60/40, more private credit in there, if it’s senior secured. It will, it can be diversifying to bonds and stocks. Then, adding a bunch of private equity where you’re at, or you’re adding actual volatility to a client that’s asking you to manage their risk for you. So it really depends on the risk level and then also your, your comfort with privates, and also the, any liquidity strains that you have.

[00:22:03]Rodrigo Gordillo: Right. So, let’s move on to other areas of diversification, or lack thereof. When I look at robo-advisors, and I think you guys are at the leading edge of trying to be more to risk parity than others. I …

[00:22:18]Ben Reeves: Yeah.

[00:22:19]Rodrigo Gordillo: … when you look at Vanguard and all those, you’re still seeing a traditional 60/40. When you’re doing market cap weighted and you’re making that decision to allocate to those, what you’re really allocating to is very concentrated positions in, you know, the mag seven at this point, right, and especially when you’re doing the U.S.. How do you guys manage that if at all? Is there a way, like, have you guys figured out a way to kind of either mitigate, or maybe even add to them? What do you guys do with concentration there?

[00:22:53]Ben Reeves: So I think there are two ways you deal with it, like always as an investment manager. You do portfolio construction and you do communication and both are probably equally important. Communication is probably more important. Portfolio construction, we try to, we allocate to some defensive equities.

We do more geographic diversification. We do more asset class diversification. It’s a relatively straightforward thing if you’re not trying to market time, or do tactical. That’s, those are pretty straightforward, pretty solid ways to diversify and improve your Sharpe ratio. And then in terms of communication, we do a lot of education about, I’ve done a series this year on what does the equity market cycle look like? Like, what does it look like over eight years? What’s can you expect over that cycle, and also, what is this thing called an equity market super-cycle? What does that mean? Where are we in it? And a lot of the pitfalls I see people falling into with that stuff is, you’re saying there is this thing of a super-cycle, therefore you’re doomed, right? Which is not the case, right? Late cycle, you can do really, really well for a long period of time, but try to provide that level of transparency and historical context, but in a way that’s very, very highly digestible.

[00:24:08]Adam Butler: Hold on now. Let’s maybe, can you say a little bit more about this super-cycle concept, because I think we’re, Rod and I are both familiar with the concept. Is this sort of the Ray Dalio’s long-term credit cycle, or is this a spinoff of that, or something completely different?

[00:24:27]Ben Reeves: It’s more just taking the observation of, there have been huge secular bull markets, huge secular bear markets, and just educating on the fact that that has been a thing that’s happened. So ‘68 to ‘82, ‘82 to 2000, right? 2000 where we call it 2012 – 13, and then, and the current one, just so you know, that that’s a thing. That’s all I’m trying to do. I’m not even saying that here’s the, there’s a little bit of interior logic, but here’s how it works, but more just because a lot of our clients, right? You’ve always had a …, you’ve been investing…

[00:25:00]Adam Butler: Yeah, right.

[00:25:01]Ben Reeves: … know, just that is, I think, hugely helpful.

[00:25:05]Rodrigo Gordillo: And so you’re, it’s more of a simple message for the retail people that you’re dealing with, but you are, do you see a lot of open clicks on those types of emails?

[00:25:14]Ben Reeves: Yeah, they do. They, the secret sauce is, I work with a great writer who doesn’t know much about investing, but he’s willing to ask all the questions until he understands, which makes what we do so much better, what I produce so much better than I would otherwise.

[00:25:33]Rodrigo Gordillo: You’re getting your hands dirty on the content as well?

[00:25:37]Ben Reeves: I have a monthly letter series that I write to clients that we try to like, we have other writers doing more content, but we try to do one thing a month that we think is really high quality, that educates on a concept that we think is really important, just with the idea of service.

[00:25:54]Rodrigo Gordillo: Oh, good for you. Okay. And you’re using, so you have a writer that doesn’t have any experience and you just say, you give him an outline, he tries it out and then asks a bunch of questions.

[00:26:03]Ben Reeves: Yeah. Yeah.

[00:26:05]Rodrigo Gordillo: We have not found any success in getting outside writers and asking questions. We’ll have to pick your brain on how to do that later.

[00:26:12]Ben Reeves: Well, I just write it and then he just, it’s more writer/editor, as opposed, we tried that way with the writing and then as you probably saw, I try to fill in ideas that don’t make sense, or they try to fill in their own things, but if you’re just answering questions and making sure it’s accurate, like, that’s what we do.

[00:26:31]Rodrigo Gordillo: Yeah. Because I think communicating that tracking error that you speak of is very tough. We talked offline about how even CPPIB is getting a lot of flack for not performing as well as Mag7, right? So it’s not just retail that’s pulling their hair out. It’s everybody.

[00:26:48]Ben Reeves: Yeah, I know retirement, like why not all stocks for, you know, all the way through retirement? Like, it feels like it’s very much the narrative’s to support a price.

[00:26:58]Rodrigo Gordillo: Not even all stocks, right? Like I think I should write a letter just saying, okay, you want me to invest in equities. You want all stocks to weight. You actually want the Mag7, but if we want to outperform, we should actually overweight the Mag7, and then see what they reply. It’s just, it’s such a difficult thing to do when you have this level of momentum with the largest companies in the U.S. making all the returns. There really is, I don’t see a way an active manager can reliably outperform without over-weighting those things. Do you?

[00:27:33]Ben Reeves: Not right now. No, it’s, I think the way you can outperform, like what you’re doing, portable alpha, you can probably outperform. I think you have good odds of outperforming, but if you’re trying to pick the right stocks, no, it’s a, especially if you’re doing a limited tracking error on trying to outperform over a few years, like, it’s extremely difficult.

[00:27:57]Adam Butler: I think one of the most difficult periods for prudent investment management that we’ve seen in a while. I mean, to be fair, really since kind of 2016, 2017, Most of the time it’s been a little bit like that where you’ve got this really heavy concentration in U.S. indices where U.S. indices now on a cap-weighted basis are kind of in the 60 percent of total market cap range, right, after 15 or 20 years, well, 15 years of pretty profound outperformance of both U.S. equities and U.S. dollar, relative to most of the other major currencies.

And then at the tip of the U.S. equity sphere, you’ve got these, you know, whether it’s 7 or 10 or 15 stocks that represent just a massive proportion of both total capital and total index vol, it’s just really difficult that the trade-off between diversification, prudence, and tracking error to this concentrated benchmark that is just outperforming everything by a large margin, that’s a really difficult tightrope to walk.

[00:29:13]Ben Reeves: Yeah, I think it is. And then the companies are, that are concentrated, they’re doing really well. They’re great companies. The earnings have been really solid…

[00:29:22]Adam Butler: Yeah.

[00:29:23]Ben Reeves: … that maybe you’re a few questions right now about the AI CapEx story. Does it continue? But it’s, they’re not obviously at like 40 times earnings or, you know, it’s not that terrible at this point. And that’s where I think you have to go back to, or we go back to our framework of let’s put your money at risk. We’ll counsel you about performance chasing, but the most important thing is let’s get you in a portfolio that you’re comfortable with, and then investors learn by mistakes, right?

I know that’s how I learned. And, you know, if you’re earlier in your career and you, if you performance chase now, it can work out for a while. Probably not a great long-term strategy. And you’d sort of, I think one of the things you learn as investment managers, you’re just like, wrong all the time. You learn to diversify, and people generally need to learn, just experience that for themselves. So you can provide as much context and help as you can. And then things happen and hopefully, they’ll still be compounding and stay in the game and stay invested.

[00:30:27]Rodrigo Gordillo: Sorry to interrupt, but I did want to take a quick second to remind listeners that while we do absolutely love providing our audience with world class guests and weekly investment insights, we wanted to remind you that we actually do our best work outside of this podcast. And we try to do this by providing cutting edge, globally diversified, and systematic investment strategies that are designed to be broadly non correlated to traditional equity and bond portfolios.

So we actually manage private and public funds. As well as bespoke separately managed accounts for investors that seek the potential to smooth out portfolio returns in the long run. So if you do want to see that theory that we’ve been talking about put into practice, please do go ahead and check us out at www. investresolve. com. Now back to the podcast

[00:31:09]Adam Butler: O,

[00:31:11]Rodrigo Gordillo: so Ben, just, I want to talk a little bit more about portfolio construction, but in the context of how you’re using privates, and when you look, when you think about privates, how do you decompose that? Do you, do you assume a level of leverage is embedded in those, in those privates already? And what, what multiple do you ascribe it?

[00:31:29]Ben Reeves: Uh, so we know our funds, so we know how they’re, how they’re structured. Um, for, uh, for our private credit fund, we like, there, there is leverage in there. We can model it and we just, we just model that volatility. Uh, and then we use sort of Both just try to add that ball into a back test to see what happened, but also use an all weather framework for private credit, where it’s going to be growthy, you’ve got a little bit of downside protection, uh, It’s a little bit more ambiguous for inflation than what I like is the discount rate hedge, which we really don’t get in most portfolios, right? Underwrite it with the leverage. You have a similar return to equity. Uh, you get that profile, you know, it can be helpful for a portfolio. Um, and then for, uh, for private equity, it’s more, we, we found, uh, we, we looked at the underlying, uh, earnings volatility. Like made that it’s basically small value is what you get for the underlying earnings volatility added that vol back. Uh, and that gives us a reasonable proxy for saying, yeah, it’s not really diversifying, right? Uh, that’s a reasonable proxy for the risk addition in the portfolio. And then it, it still has the environmental flaws. It’s very growthy, not great inflation exposure, and then, you know, not great discount rate exposure, which we’re seeing, like, it just plays out much more slowly in privates, right?

Like with, with, a hangover, all the assets they can’t sell now, that is a lot of the discount rate exposure sort of, you know, they’re trying to wait it out, I guess.

[00:33:04]Rodrigo Gordillo: right. In our other podcast, the Get Stacked Investment Podcast, we talk about all things capital efficiency and return stacking. Corey had a theory where, this is Corey Hoffstein, um, where he said, you know, a lot of allocators that allocate to private equity, they’re actually, Moving forward, moving toward better portfolio construction and using capital efficiency in a sneaky way where they’re allocating to the private equity sleeves so that they can get in a little bit of more leverage so that they can bump up their bonds and other alternatives without sacrificing the return to equity, which I thought was really insightful.

And, you know, maybe it’s not true across the board, but, uh, it certainly seems, uh, that some people are going to take advantage of that. And, uh, that’s why I was asking whether you guys thought about it that way.

[00:33:54]Ben Reeves: I guess that I never thought about it that way, but that that does make sense. We are taking down the, you’re taking it out of equity or that changes the overall volatility, overall volatility and the contribution you’re getting from equity. Uh, and that gives, that does give more room. Uh, and it’s also a way you can. Add leverage in a way that, uh, is a little bit easier or more palatable from a tracking our perspective,

[00:34:17]Rodrigo Gordillo: Yeah, yeah,

[00:34:18]Ben Reeves: because you can make an argument there. You probably see in the papers, like if you leveraged your basic portfolio, 20 percent of your retirement outcomes get better. It’s just that it’s a

[00:34:27]Rodrigo Gordillo: Well, it’s

[00:34:27]Ben Reeves: on another way to get there.

[00:34:29]Rodrigo Gordillo: Cliff Ass paper, I don’t know how long ago, 15 years ago, maybe 10 15 years ago, where he says why not lever up to 60 40 and then compares it against the S& P. It shows clear, well, up until 2022. Um, You know, it’s a, it’s a better portfolio because you’re able to create proper levels of more diversity while maintaining the same level of risk and actually increasing your return.

So it’s just from that perspective, you know, we talk about risk parity all the time. A lot of people just start with, Hey, it’s a more diversified portfolio, right? We started the conversation saying that you add a little bit of gold, add a little bit of. And that’s kind of risk paired tilting towards risk parity.

But the next step for risk parity is removing those leverage constraints, right? And assuming you, you find an optimal weights, uh, optimal portfolio, then the next best thing you could do, because oftentimes what happens, you get a better Sharpe ratio, but your absolute return may go way down. And so increasing that exposure and unlocking that diversification, um, seems like something that makes infinite sense. Uh, how are you, how are you dealing with that reality? I, I’ve spoken to, to Nima, um, in your firm. I’ve spoken to you. I know you don’t think about it, but how do you deal with that within the constraints of retail, within the regulatory constraints of a robo? I’d be curious to know where your, where your mind’s at there.

[00:35:49]Ben Reeves: So in portfolio construction, we use long bonds. We use gold. Those are just risky things. Long bonds are not a super sharp ratio efficient way to get exposure. But if all your risk is in stocks, it helps, right? As you know. And then I think what we want to do with the portfolio is, is now that we do have the ability to allocate to alternatives, that, um, that is a way that we can start looking at adding leverage, um, for clients who understand it and you understand you’re going to get different pattern of returns.

Um, and then, you know, that opens up a lot of different strategies. Uh, for most of our clients, we can’t talk to or go through additional suitability, we’re constrained from adding leverage. Um, Which I think makes sense if you’re a regulator and you’re thinking about that people are now allocated to three times levered NASDAQ, right?

You know, which is what you

[00:36:39]Rodrigo Gordillo: Yeah, that’s where their minds at.

[00:36:41]Ben Reeves: They just like don’t quite get the leverage can be a diversifying tool or a risk reducing tool. Um, or, you know, we, you know, all the arguments, right? Like same, um, uh, same risk of stocks, higher expected return. Um, I think then they’re generally open to those kinds of discussions.

It’s just a process to get them through to, so they sort of understand the impact on client portfolios. They’re coming from a good place. It’s just, uh, you know, very traditional way of thinking about investment management. Yeah.

[00:37:12]Rodrigo Gordillo: Well, I mean the traditional way and thinking about investment management chapter one of every finance book is the efficient frontier in the capital market line. So it just blows my mind that regulators have a tough time going back to tradition. I think we want them to go back to tradition. difference being that we now have technologies that allow us to provide that leverage to retail in a relatively simple way. I mean, look, the, the rule changes both in the US and in Canada recently should open up a lot of opportunities for this. Um, so, you know, hopefully we can get closer and closer to that optimal portfolio.

[00:37:47]Ben Reeves: think in leverage management, like allocating alternatives is much easier than allocating alternatives, but also sort of the deep end for, you know, if you’re an individual investor trying to roll futures, you might run into problems or size, you know, size of positions appropriately. Um, so yeah, so products like yours are a great way you can get that in a, uh, in a controlled way.

[00:38:07]Rodrigo Gordillo: So we were having, uh, Adam, uh, Corey, uh, myself and a bunch of other people on Twitter. We’re actually having an interesting discussion about what, what, what optimal allocations, um, What the optimal location should be for a portfolio. And what I came out of the people that think in very simple, similar ways, coming out with very different belief systems about weighting asset allocation.

And by the way, this is me, this is, um, and, and when it comes to, you got your, you got what you’re, you’re kind of pushing the envelope here on the robo.

[00:38:43]Ben Reeves: Yeah.

[00:38:44]Rodrigo Gordillo: As you mentioned, this is highly personalized. So everybody, you know, you’re trying to get the best for the most for your portfolio. If you had your rudders and you can do whatever you wanted to do and assume that it’s going to be a widely successful and people are going to adopt the allocation.

Are you closer to where you are right now at Weathsimple, or are you closer to risk paired? Like how do you, how do you think is an optimal portfolio for your family?

[00:39:09]Ben Reeves: So, uh, my family is close, much closer to risk parity. I think where I would, might differ from, uh, Uh, from a standard risk parity is I think that, uh, your sharpe ratio for growth, the assets might be higher than your sharpe ratio for defensive assets. Uh, and if you have a long enough time horizon, you might think about that. Um, cause you know, with risk parity, there is that there’s a, you know, your first move is the most efficient, most important one that your next one’s most, and then there’s this like big. range of, of allocations in the middle where you’re, you’re pretty efficient. You’re, you know, about a 0. 6 or so sharp ratio. Um, and I would probably tilt more towards growth, the assets, then, then sort of your, your textbook risk parity. Where did you end up?

[00:39:55]Rodrigo Gordillo: Well, well, I’m still, I think this is an evolving thing because I, I was very, you know, strong convictions loosely held. I had some strong convictions in, in that exchange. Um, but I’m, I’m rethinking a lot of it, you know, cause you gotta, it’s about, then it becomes about beliefs, right? Risk parity believes that the Sharpe ratio for all assets are That, um, that equities, bonds and commodities, broadly speaking, and tips are all going to return the same.

[00:40:23]Adam Butler: Um,

[00:40:24]Rodrigo Gordillo: So you put them together, smooth out the returns. You’re going to get the same outcome. And then it’s about, well, what do I have more confidence in? Do I have more confidence in the equity risk premium term premium, the, the, uh, commodity role, you know, is gold going to be there in a real way?

And I think at this point, what I’ve come to understand is there’s a lot about beliefs, You know, you could add Bitcoin there. Talk about belief systems that are almost religious. You know, those who love gold will say absolutely gold is crushed it. And, you know, but is there an empirical basis for gold continuing to have that level of return above, uh, the risk free rate as we’ve seen in the last 30 years?

I don’t know. Um, so I’m still kind of debating, which I certainly love the, um, In, in lieu of, I certainly believe in equity in, in bonds and in maybe in lieu or in, in, uh, addition to gold and commodities, I really of course love trend following and carry. Um, those are two things that I’d strongly believe in that could act as a good offset for inflation regimes, uh, instead of just going simple, uh, tips and whatnot.

The weightings of those, you know, again, I think it’s risk parity first. Preparation for prediction and then starting to tilt based on on your own belief systems. That’s where i’m at right now

[00:41:43]Ben Reeves: I think that that’s, that’s probably a good, that’s a good starting point. Uh, the other thing that, uh, I, I personally put alpha in my own portfolio and I think it’s, it’s useful. You have to make sure you know what you’re doing and you have access, right? So that’s obviously, you know, that you’re trying to build that. Um, and I think the other thing I do is I, I look for just diversifying income that I think is pretty uncorrelated, like life settlements are interesting. Certain asset backed lending is interesting where Like I was talking about before, you’re, you’re helping your discount rate exposure. Uh, so other things that the risk parity framework didn’t really think about that, I think.

So, so where are these other assets that are out there and available now? Where do they fit in?

[00:42:26]Rodrigo Gordillo: How about you Adam?.

that exchange is fairly interesting has uh, because I know you’re I feel like you’re more like screw equities and bonds. Let’s go straight up to carry. What are your thoughts there?

[00:42:39]Adam Butler: Yeah, I mean, I’ve got, my allocation is basically exclusively to privates, not privates, alts. So, um, You know, carry trends, seasonality, relative value. Um, I’ve got definitely a larger allocation than most to, uh, physical gold bullion. Um, and I mean, it’s weird as asset managers too, because we already have a large beta to our own strategies and to cyclical forces. So, um, you know, I probably hold a larger slug than most in cash. But I would definitely lean more heavily toward dynamic global adaptive strategies than to static allocations to risky assets. Um, no, especially now, you know, take my views on equities with the largest, with a full hand full of salt. But, uh, I mean, we’re at the largest allocation to equities as a percent of total household wealth. Now, and you know, if I look across the landscape of, well, admittedly fairly poor predictors over intermediate timeframes for, for forward equity returns, but the best one that I’ve seen as a function of the percentage of total household wealth wealth, that’s inequities versus bonds, where we’re at the peak now, which is pretty substantial evidence that Returns to equities over the sort of next 10 to 15 years are likely to be below average. And we’ve had a nice pickup in rates. So, you know, from an equity bond standpoint, I’d be a little bit more inclined to be more bond heavy than equity heavy here. But yeah, I mean, I just don’t really, at this point, I haven’t seen a cheap equity market in 15 years and we may not see one in my lifetime. And, you know, I don’t really care about tracking errors.

So

[00:44:34]Rodrigo Gordillo: So

[00:44:35]Adam Butler: It’s more accurate

[00:44:37]Rodrigo Gordillo: So that’s the um, one of the things that came up in those, in that dialogue was, you know, I was saying how commodities in gold at worst can be a, a, it returns as much as cash. So zero real return ratio zero at worst. And if you’re making room in your portfolio and your equity bond portfolio in order to To fit them in, it may be a problem, but if you’re stacking them on top, right?

If you’re able to leave it, it’s a, it’s a, it’s a zero cost hedge. It was the argument that I made and somebody came back and said, well, it really isn’t because you’re actually adding volatility and invariance, and that variance is going to affect your, your compound rate of return to which I replied back that.

There is a rebalancing premium that you also extract from having diversified assets in there. So I don’t know, this is, this is a point that also Chris Schindler has made. Have you put any thought into, into that, uh, Ben?

[00:45:31]Ben Reeves: Rebalancing premium. Yeah, I mean, I,

[00:45:34]Rodrigo Gordillo: No, more on like, uh, you know, commodities and gold being both, I’ll get an answer to both, but the, the idea that gold and commodities may be a zero cost, um, hedge for inflation.

[00:45:47]Ben Reeves: uh, yeah, I buy that commodities and gold are a, it’s not zero cost, but low cost hedge towards inflation. If you’re doing it in a, uh, in a leverage way, um, like gold is, I think clearly has a lot of uses and times where you really want it, right? And then that kind of plays into the rebalancing premium, right?

Where, uh, if you get big monetary inflation, if you get a crisis, these are times when gold, Okay. I mean, gold’s really useful. Uh, I also think it’s a little underappreciated just in terms of the geopolitical risk that we’re running into now, right. Where it, it’s not in our models, right? But, you know, gold can be a really helpful thing in conflicts.

It, it can, uh, it’s outside of a lot of institutional, uh, arrangements. So I, you know, I think it has that, it has that value there. Um, and then likewise with, uh, with commodities, um, I think you can put it into a model, but also if you. Like if you do see potential conflicts out there, uh, and you do see a fight for resources coming, um, that’s something that hasn’t really happened in a, I don’t know, you know, 70 years. Uh, but that’s certainly possible, right? And, and, and as you get more, a more conflicted world, de globalizing world, uh, it’s also helpful for that scenario.

[00:47:10]Rodrigo Gordillo: You have any thoughts on that, Adam?

[00:47:11]Adam Butler: I mean, I think that gold has a positive premium. Um, I think commodities, if run properly, can have a positive premium. Rebalancing or diversification premium. Uh, I think gold is a great standalone. I’m a little bit less sold on commodities. I think you, you probably want to have a little bit of an allocation to, uh, rebalance diversified commodities, and then also, uh, allocate via trend and carry, um, and maybe seasonality. But, you know, all these around the edges, the hard thing is that kind of 80 percent of the time, both historically and probably if I look forward, you’ve got equities and bonds are both going to deliver kind of around their average.

And then you’ve got this sort of 20 percent situation where through some conspiracy of geopolitical risk or conflict. Or fiscal, fiscal profligacy, we could have major tail outcomes where equities and bonds both suffer profoundly together and gold and commodities and other types of all it’s really skyrocket. So it’s hard to model that out in an optimizer. It’s hard to put a pin in what those distributions look like and what those probabilities look like. But I probably skew a little bit more on the concern side than your average person. So, you know for that reason I skew a little bit more towards those more, uh, diversified or resilient asset classes

[00:48:43]Rodrigo Gordillo: Well, it’s interesting to see when you look at how often commodities do deliver for you during inflation regimes. It’s, it’s a, it’s a factor of how, how often in hyperinflation or high inflation shocks happen. So historically, I think AHL did one analysis in 1926 to last year where they showed that commodities performed 20 percent of the time, right?

When there was a big inflation push. Um, and the rest of the time you’re just sitting there. Just dragging the portfolio. Uh, obviously over a full cycle, you’re good to go. It actually added value, it added diversity. And then they did the compar, the comparison with trend where it seemed to provide the same level of, uh, protection.

But in this case, you’re also providing a positive risk premium during the other 80 percent of the years. Right? So obviously I tilt towards trend as a, as an inflation hedger, you can stick to long term. Um, but I like the idea of also having commodities and gold as the first responder. Right. Cause oftentimes you might be offside and if there’s a massive, it’s something like we saw in 2020, like the, the energy complex did a lot better than any trend strategy.

Right. So having a little bit of first responders there just to kind of get you through and not enough where you’re going to lose faith in a 15 year period where commodities are flatlining. That, that to me makes a lot of sense. So I’m, uh, you know, I’m writing all this down in my, uh, I’m dead now, what book that my wife gave me.

So, know, um, and this is me, this is me trying to use you guys as a soundboard to make sure that my, uh, my logic is tight.

[00:50:19]Ben Reeves: I think as a, as an investment manager, you have the equity market exposure you’re talking about. And that, that also, that depends on certain political arrangements still. And, and, you know, I think inflation is a lot of times a political phenomenon. Uh, so it’s, there’s not a signal in there for, you know, there’s not a quantitative signal on that for you, but it’s, uh, I think something to consider.

[00:50:43]Adam Butler: Definitely

[00:50:45]Rodrigo Gordillo: Well, I mean, I think we’ve covered that. I, you know, hopefully, uh, the masses move more and more towards that optimal more towards that risk parity portfolio and, uh, WealthSimple finds that signal and starts giving them more of what they need. Uh, or though I am, uh, doubtful that that’ll ever happen.

[00:51:06]Ben Reeves: Honestly, my mantra.

[00:51:07]Rodrigo Gordillo: game pops out there, you know.

[00:51:08]Ben Reeves: Yeah. No, just put your money at risk in a reasonable way. There’s a risk premium for owning financial assets. Like if you can start there and get people to do that, I’m pretty happy that if you can make your Sharpe ratio better or get your range of outcomes better, all the better for you.

[00:51:24]Rodrigo Gordillo: Okay. So, so Ben, before we leave, is there any way that people can find you? Find your musings? You say you have a monthly one. That’d be interesting for, for everybody here to look into. Um, where can we find you?

[00:51:37]Ben Reeves: Uh, just through Wealthsimple, you have to go register for Wealthsimple.com and you get the newsletter. I have a Twitter account, but zero tweets. So I’m a sort of hard to follow on there.

[00:51:49]Rodrigo Gordillo: Oh, okay. You’re, you’re extracting all the knowledge

[00:51:52]Ben Reeves: I watch you

[00:51:53]Rodrigo Gordillo: keeping quiet.

[00:51:54]Ben Reeves: Bye. I

[00:51:57]Rodrigo Gordillo: Amazing. Okay. Any, any other parting words, Ben, before we head out?

[00:52:01]Ben Reeves: do have LinkedIn. I post things there from time to time. So that’s another way. Um,

[00:52:05]Rodrigo Gordillo: Okay. I think that’s good.

[00:52:07]Ben Reeves: Thanks so much guys. It’s been, um, it’s been a blast talking. Yeah.

[00:52:19]Adam Butler: about, I mean, I think there’s just a lot of common, um, beliefs and knowledge and, you know, ways of viewing the world. So it’s, it’s always interesting to see how people in different roles with similar belief systems, but different sets of constraints, uh, express those belief systems in the most optimal way they know how, so that’s great.

[00:52:40]Rodrigo Gordillo: And nobody’s more shocked than me about talking. When I started thinking about talking to robo advisor heads that I expected a completely different investment framework than where you and Nima and your team actually come from, right? So it is incredibly refreshing to learn that, you know, thoughtful people are at the helm for the largest robo advisor in Canada.

That’s, that’s an amazing thing, actually. Again, Canada CPP teachers and WealthSimple leading the way. Well

[00:53:11]Ben Reeves: All underperforming the index, but we’re leading the way. Yeah. Yeah.

[00:53:15]Rodrigo Gordillo: Well, you know. Relative, not relative.

[00:53:17]Adam Butler: That should be a badge of honor right now and before the index, honestly,

[00:53:21]Rodrigo Gordillo: As Meb Faber said.

[00:53:24]Adam Butler: say you’re both a prudent investor and you’re outperforming the index at this point.

[00:53:28]Rodrigo Gordillo: Meb Faber said it’s a, it’s a bear market in diversification. That, that should, that should be

[00:53:35]Ben Reeves: that was great.

[00:53:36]Rodrigo Gordillo: awesome. Okay, gentlemen. Well, thank you so much. Both of you.

[00:53:39]Adam Butler: Thank you.

[00:53:41]Rodrigo Gordillo: Thanks, Ben. And, um, we will, uh, we’ll try to get you back on here next year to see how the things on the, on the private side have gone.

[00:53:48]Ben Reeves: That’d be great. Thanks guys.

[00:53:49]Rodrigo Gordillo: Sorry to interrupt, but I did want to take a quick second to remind our listeners that, the team works really hard on these podcasts. We spent a lot of hours trying to get the right guests and we do a lot of prep work to make sure that we’re asking the right questions. So if you do have a second, just do hit that subscribe button, hit that like button, and share with friends if you find what we’re doing useful.